Income Tax Appellate Tribunal - Ahmedabad
Special Prints Ltd.,, Surat vs Department Of Income Tax on 29 August, 2012
1
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH - AHMEDABAD
(BEFORE SHRI D. K. TYAGI, JM AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.3012/Ahd/2004
A. Y.: 2001-02
The A. C. I. T., Circle-4, Surat, Vs M/s. Special Prints Ltd.,
Room No.216, Aayakar Bhavan, Garden Mill Complex,
Majura Gate, Surat 395 001 Sahara Gate, Surat 395 010
P. A. No. AADCS 4561 J
(Appellant) (Respondent)
Appellant by Shri B. K. S. Pandya, Sr. DR
Respondent by Shri J. P. Shah, AR
Date of hearing: 29-08-2012
Date of pronouncement: 26-10-2012
ORDER
PER A. MOHAN ALANKAMONY: This appeal of the Revenue is directed against the impugned order of the learned CIT (A)-III, Surat in Appeal No. CAS III/6/04-05 dated 28.7.2004. The relevant assessment year is 2001-02.
2. The Revenue has raised four grounds in an illustrative and narrative manner. Ground Nos.3 & 4 being general in nature and therefore do not survive for adjudication. In the remaining grounds, the issues raised by the Revenue are reformulated as under:
2(1) that the CIT (A) erred in allowing the set off of Long Term Capital Loss [LTCL] incurred by the assessee on the sale of 12,00,000 1% Cumulative Convertible Preference Shares [CCPS] of M/s. Garden Finmark Limited against the Short Term Capital Gains [STCG] on sale of plant and machinery; & (2) that the CIT (A) erred in not considering the alternative stand of the AO for valuing 1% CCPS at book value i.e., Rs.46.27 rather than its transaction value of Rs.6.25 which was based on valuation report which was void ab initio.
3. Briefly stated, the facts of the issues are as under:
3.1 The assessee was engaged in the business of dyeing and printing of clothes and purchase and sale of yarn. During the year under dispute, the assessee had sold its plant and machinery for a consideration of Rs.8,95,06,858/- as against the WDV of Rs.2,58,14,238/- to another group of company, namely, M/s. Garden Silk Mills Limited and on account of such transaction, the assessee had earned STCG of Rs.6,36,92,620/-. During the same year, the assessee had transacted another transaction with another group concern, viz., M/s. S.P.S. Silks Limited to whom it had sold 12,00,000 1% CCPS of M/s. Garden Finmark Ltd at Rs.6.25 per share. Those shares were in fact allotted to the assessee by M/s. Garden Finmark Ltd on 21.3.1997 at Rs.45/share [Rs.10/share as face value + Rs.35/share as premium). Through this transaction, the assessee had incurred LTCL of Rs.6,43,81,967/- and set off of the same against STCG earned on account of sale of plant & machinery at Rs.6,36,92,620/-.3
3.2 During the course of assessment proceedings, the assessee was required to furnish the details with regard to the names and addresses of the directors of Garden Finmark Ltd, S.P.S Silks Ltd and also the shareholders, holding more than 10% shares in the above mentioned companies from the F.Ys. 1996-97 to 2000-01, the details of diligence which was followed for fixing purchase price of shares and the reasons for outright sale of sales at a low price, P & L account, balance sheet etc., 3.3 It was the case of the AO that even though the assessee had furnished all the details as called for except the original minutes recorded relating to purchase of 1% CCPS, but, furnished certified copy of extract of Board's resolution in the matter. However, the AO took a stand that in the absence of original minute registers of Garden Finmark Ltd and SPS Silks Limited, it was not possible to ascertain the sequence of events of Board Meetings and, accordingly, came to the conclusion that the assessee had tried to hide necessary evidences which were required for verification of transaction with regard to sale of 1% CCPS. To justify his stand, the AO took shelter in the rulings of various courts wherein it has been held that "if the best evidence is not produced for verification of transactions, the adverse inference can be drawn against the person who withholds such evidences."
3.4 After taking into account the details and explanation submitted by the assessee, quoting extensively various case laws 4 and also for the reasons recorded therein, the AO came to the conclusion that -
"(On page 20) 7. In the result, I am satisfied that to sell the 1% cumulative convertible preference share to SPS Silk Ltd., is colourable device of the assessee to defeat the interest of the revenue and such device deserves to be rejected. Accordingly, the claim of long term capital loss of Rs.6,36,92,624 is disallowed."
3.5 Aggrieved, the assessee took up the issue before the learned CIT (A) for relief. After due consideration of the lengthy and comprehensive submissions of the assessee's authorized representative, careful perusal of the elaborate discussion made by the AO in his impugned assessment order as well as his remand report and also taking into cognizance of the rejoinder of the assessee to the remand report, the CIT (A) had justified the assessee's claim. The relevant portions of the findings recorded by the CIT (A), for appreciation of facts, are extracted as under:
"4.29............................................................................... ...............From the perusal of the facts, it is found that M/s. Garden Finmark Ltd purchased 49,91,400 equity shares of M/s Garden Finance Ltd in the FY 1995-96 for a value of Rs.6,96,64,408/-. As a result of amalgamation between M/s. Garden Finance Ltd & M/s. Garden Silk Mills Ltd on the basis of approval obtained from Hon'ble Gujarat High Court dated 1.7.1998, M/s. Garden Finmark Ltd was allotted 999320 quoted shares of M/s. Garden Silk Mills Ltd of the value of Rs.6,97,53,216/-.
4.30. while going through the submissions as made by the Ld. A R during the appellate proceedings, it is found that he has filed all the necessary details regarding purchase of shares of M/s. Garden Finmark Ltd and the same has been 5 discussed in detail from page Nos.15 to 18 of this order. Further, it has been stated by the ld. AR that these details were filed before the AO also during the assessment proceedings. In this submission, the ld. AR has given all the details about the PE ratios of some leading finance companies for the months from February 1995 to May 1995, the details of weighted average profits, the capitalization factor adopted to arrive at the PE ratio and final working to arrive at the purchase value of the shares of M/s. Garden Finmark Ltd. These details have been thoroughly examined by me.
It is seen that while arriving at the purchase value of per share the correct figure of average profit as pointed out by the AO at Rs.37192633/- was taken and according to that working, the value per share (based upon the earning) of M/s Garden Finance Ltd was arrived at Rs.65.89. The fair value per equity share was finally calculated by the appellant company at Rs.56.56 per share by giving 25% weight-age to break-up value of the share and 75% weight- age to the value of share computed on the basis of yield method (the detailed working has been shown on page Nos. A 14 of PB 1 as submitted by the appellant company and a discussion about that has already been made on page nos. 17 and 18 of this order). It has been emphatically pointed out by the ld. A R of the appellant company that against above valuation per share (after accepting the mistake of taking average profit at Rs.6,64,42,766/- instead of Rs.3,71,92,663/-) of Rs.56.56 per share, the purchase price per share of the appellant company was at Rs.45 per share (Rs.10 face value plus Rs.35 premium) i.e., less than the market value and, therefore, the finding of the AO in this regard was totally unfounded. The Ld. A R has also submitted the details of PE ratios of 10 leading finance companies for the period between April 1995 to May 1995 (details are given on page No.17 of this order) and on that basis worked out the average PE ratio at 19.93 and, accordingly, adopted a capitalization factor of 5 based upon the formula of EPS (earning per share) = 1/capitalization factor. On the basis of above working, thus, it is seen that 6 the observation of the AO that capitalization factor of 5 was taken by the appellant company without assigning any reasons, is found factually and technically incorrect and untenable.
4.31. Regarding the valuation of sale price of shares of M/s. Garden Finmark Ltd, the ld. A R of the appellant company has again made detailed submissions before me during the appellate proceedings and the same have been discussed in great detail on page nos. 18 to 24 of this order. After going through these submissions, it is found that these contain the details as to what were the PE ratios of some of the leading finance companies between March 2000 to June 2000 (details are given on page nos. 22 and 23 of this order), what was the business status of such finance companies in the market, what was the market value of shares of such companies (as these were listed at Bombay Stock Exchange) and after keeping in view all such factors and also taking into account the financial and business status of M/s. Garden Finmark Ltd, the value of its share was worked out / arrived at. The ld. AR of the appellant company had also filed the market quotation in the case of equity shares of M/s. Garden Silk Mills Ltd based upon the trading activities of Bombay Stock Exchange for the period from 1.2.2000 to 30.6.2000.
As per the ld. A R vide his reply dated 13.7.2004, if the valuation of shares of M/s. Garden Finmark Ltd is computed on the basis of market rate (net worth asset method) keeping in view its total asset holdings of 999320 shares of M/s. Garden Silk Mills Ltd whose market value had come down to Rs.67,95,376/- as against its book value of Rs.6,97,53,216/- as on 31.3.2000, even then there is no much material difference in per share sale value found quoted at Bombay Stock Exchange if compared with the sale value per share arrived at by M/s C. C Chowksi & Co. It has been further pointed out by the ld. A R that the market value shares of M/s. Garden Finmark Ltd would get influenced by the market worth of shares of M/s. Garden Silk Mills Ltd and the reduction in the value of share of M/s. Garden Finmark 7 Ltd. was on account of reduction in the market value of shares of M/s. Garden Silk Mills Ltd which was in the range of Rs.6.00 to Rs.7.00 as quoted at Bombay Stock Exchange at the time of sale of 1% CCP Shares of M/s. Garden Finmark Ltd.
After going through these details, it is found that the market value of the share of M/s. Garden Silk Mills Ltd was ranging between Rs.8.20 (on 1.2.2000) to Rs.6.15 (on 30.6.2000). On the date of sale transactions of shares of M/s. Garden Finmark Ltd i.e., on 15.6.2000, the average market price of share of M/s. Garden Silk Mills Ltd as per Bombay Stock Exchange was at Rs.6.68/share (taking average of high and low quoted prices of its share). As per the valuation report of by M/s C. C. Chowksi & Co by applying various methods and also keeping various factors in mind, the appellant company was advised to take sale value of the share of M/s. Garden Finmark Ltd between Rs.6 to Rs.6.50. It is found that finally the appellant company had adopted the sale value of shares of M/s. Garden Finmark Ltd at Rs.6.25 per share. After scrutinizing the above mentioned details, it is found that there is no material difference between the valuation of share as arrived at by the valuer of the appellant company i.e., M/s C. C. Chowksi & Co in the case of shares of M/s. Garden Finmark Ltd and market value found quoted at Bombay Stock Exchange in the case of shares of M/s. Garden Silk Mills Ltd which are the only main assets of M/s. Garden Finmark Ltd. This has clearly proved that there was no under-valuation in the sale price of shares of M/s. Garden Finmark Ltd and the finding of the AO in this regard is based on conjectures and surmises and hereby rejected out-rightly. It is also found from the details submitted by the ld. A R that the sale of shares took place on 15.6.2000 and the entire payment of Rs.75 lacs was received by it by way of cheque immediately after that.
4.32. Regarding the AO's observation that while arriving at the value of shares at the time of selling these shares, no significance in terms of value was attached to 'convertibility 8 option' which would have given 'controlling right' to the appellant company on the date of conversion of 1% CCP shares into equity shares, it has been replied by the ld. A R that in the valuation report the said factor has been considered by its valuer M/s C.C. Chowksi & Co. The relevant portion of the valuation report in this regard has been quoted on page Nos.19 and 20 of this order. After the perusal of the valuation report, it is seen that the valuer M/s C.C. Chowksi & Co have considered this aspect and at the cost of repetition, the relevant finding is further quoted as under:
'Although the CCP shares carry an option to convert them into equity shares, their holders do not enjoy the same rights as holders of equity shares of the company. Hence, the value of equity shares of M/s. GFL would have to be appropriately discounted to arrive at the value of CCP shares.' 4.33. The valuer further tampered the valuation by exercise of judicious discretion and judgment taking into account several factors such as quality and integrity of the management, present and prospective competition, yield on comparable securities etc., which according to them (the valuers) were not evident from the face of its balance sheet, but, would strongly influence the worth of shares. Here, it is pertinent to mention that 1% of CCP Shares were fully paid at the time of their allotment to the appellant company. To arrive at the above referred method of valuation, the valuers have strongly relied upon the findings of Hon'ble Supreme Court of India in the case of A.R. Krishnamurthy and others v. CIT 176 ITR 417 (the relevant portion of the valuation report including the finding of the Hon'ble court in above referred case has been mentioned on page 20 of this order).
The Hon'ble Supreme Court in the above case with due approval, quoted the findings of Viscount Simon, in Gold Coast Selection ltd v. Humphery (1949) 17 ITR (Supp) 19,26 as under:-
9"Valuation is an art, not exact science.
Mathematical certainty is not demanded, nor indeed is possible.' In view of the above referred facts and finding of Hon'ble Supreme Court of India, it is seen that 'convertibility option' in the case of 1% - CCP Shares has been taken into account and, thus, the observation of the AO is found unacceptable.
4.34. With regard to the observation of the AO that the appellant company was not facing any financial crisis and there was no need to sell these shares of M/s. Garden Finmark Ltd at such a low price, I have examined the submissions as made by the ld. AR (as referred on page Nos. 25 & 26 of this order) and find that its business activities in terms of turnover/profit earning and finally its overall financial status were on decline year after year. Its cash in hand and at bank position deteriorated from Rs.3,16,37,509/- as on 31.3.2000 to Rs.2,22,60,167/- as on 31.3.2001 and the balance of Rs.2,22,60,167/- was only after sale of plant and machinery and investment aggregating to Rs.9,70,42,513/-. It is, further, seen that out of its balance of Rs.2,22,60,167/- /- as on 31.3.2001 a sum of Rs.1,34,87,200/- comprised of fixed deposit in the form of excise duty margins, imported yarn landing charges and imported yarn NRC margins etc, deposited in various banks on account of the order of Hon'ble Gujarat High Court and were not available in the form of liquid cash to run its business activities. In this way, it is seen that there was hardly any cash liquidity (as per balance sheet) available with the appellant company to run its business. In view of the above discussed facts, I hold that the observation as made by the AO in this regard was not based on true facts about the business of the appellant company and, therefore, the same is not acceptable.
4.35. After the sale of shares of M/s GFL these were immediately transferred in the name of M/s. SPS Silks Ltd (as verified from the 'Register of Members' of the appellant 10 company and that of M/s. SPS Silks Ltd) and the sale consideration was also received immediately by it through cheques. In this way, it is seen that whatever transaction of sales taken place, these were found duly reflected in the books of accounts of sellers and buyers.
4.36. In response to AO's final finding in the assessment order that sale of 1% CCP shares to M/s. SPS Silks Ltd is a colourable devise adopted by the appellant company to defeat the interest of the revenue and such devise deserves to be rejected, the ld. AR besides filing various details in support of his contention also cited various case laws in support of his arguments (case laws of findings of the Hon'ble Courts are mentioned on page nos. 31 to 33 of this order) including the landmark decision of Hon'ble Supreme Court of India in the case of Union of India and Anr v. Azadi Bachao Andolan 263 ITR 706 (SC) on which he relied upon very heavily. It has been submitted by the ld AR that the AO has assumed that the appellant company had made deliberate attempt to reduce its incidence of tax beyond the parameters of tax planning which, in fact, smacks off tax avoidance by resorting to questionable methods. The AO by relying on the decision of the Hon'ble Supreme Court in the case of Mc. Dowell v. Commercial Tax Officer has accordingly disallowed the claim of loss as made by the appellant company against the short term capital gain. In this context, it has been submitted by the ld. AR that the decision in the case of Mc. Dowell & Co has been reviewed by the Hon'ble Supreme Court in the case of Union of India & Anr v. Azadi Bachao Andolan, 263 ITR 706 (SC) and, therefore, the conclusion arrived at by the AO by relying upon the decision of Mc. Dowell must be read and understood in the background of the later decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra). In this regard, it may be recalled that their Lordships have approved the decision of Hon'ble Gujarat High Court in the case of Banyan & Berry v. CIT, 222 ITR 831 and also the decision of Hon'ble Madras High Court in the case of M.V. Valliapan v. ITO. In the case of Azadi Bachao Andolan, it has been held that the ratio as laid down in the 11 case of Duke of West Minister is very much alive and kicking in the country of its birth and as far as this country is concerned, the observations of Shah J in the case of CIT v. Raman 67 ITR 11 (SC) are very much relevant even today.
In the case of Banyan & Berry v. CIT, the Hon'ble Gujarat High Court has held that the facts and circumstances which lead to Mc. Dowell's decision leave us in no doubt that the principle enunciated in that case has not affected the freedom of citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection within the framework of law, unless the same fall in the category of colourable devise which may properly be called a devise or dubious method. According to their Lordships, each and every case which results in reduction of tax liability cannot be treated as tax avoidance transaction, requiring application of the principles laid down in the case of Mc. Dowell & Co., 4.37. After the perusal of the order of the AO, it appears that he has not properly analyzed the nature of transaction carried out by the appellant company and also failed to properly consider the Supreme Court's decision in the case of Azadi Bachao Andolan (supra). In this case, the Hon'ble Supreme Court of India has discussed all the old case laws as quoted by the AO in his assessment order including Ramsay v. IRC, IRC v. Burma Oil Co. Ltd etc. The Hon'ble Court had also quoted the decision of Lord Sumner in the case of IRC v. Fisher's Executors as under:
'My Lords,...................................................................incurs blame.' Similarly Lord Tomlin in the case of IRC v. Duke of Westminister has held as below:
'Every man..................................................................increased tax.' j 12 4.38. The Hon'ble Supreme Court has observed in the case of Azadi Bachao Andolan that Chinnappa Reddy J dismissed the observations of J.C. Shah J. in Raman & Co 67 ITR 11 (SC) based on Westminster case and Fisher's Executors case in the case of Mc. Dowell & Co by saying 'We think that the time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah J and similar observations made elsewhere', it does not appear that the rest of the Ld. Judges of the Constitutional Bench contributed to this radical thinking. Speaking for the majority, Ranganath Mishra J (as he then was) says in Mc. Dowells case (supra) as under:
'Tax planning may be legitimate, provided it is within the framework of law. Colourable devises cannot be part of tax planning and it is wrong to encourage or entertain the belief that is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.' 4.39. The Hon'ble Supreme Court in the case of Azadi Bachao Andolan has observed that the basic presumption made in the judgment of Chinnappa Reddy J in Mc. Dowell's case that the principle in Duke of Westminster's case has been departed from subsequently by the House of Lords in England, with respect, is not correct. For the purpose, the Hon'ble Supreme Court has referred to the decision of Craven v. White, 3 All Er. 495 and the observation of Lord Kieth of Kinkel who has observed on the cases of Ramsay, Burmah Oil and Furniss case as follows:
"The principle ..........................................of the Income and Corporation Taxes Act, 1970 (pg. No.755, 756A-B)"
3.6 Extensively quoting and extracting the rulings of the Hon'ble Supreme Court in the cases of (i) Mc. Dowell and Co., (ii) the 13 ratio of Madras High Court in the case of M.V. Valliappan v. ITO (iii) Hon'ble Gujarat High Court's decision in the case of Banyan & Berry (222 ITR 831); (iv) Mathuram Agrawal v. State of MP (1999) 8 SCC 667; (v) Bank of Chettinad Ltd v. CIT (1940) 8 ITR 522 (PC), the CIT (A) has observed thus:
"4.46. After viewing in the light of various observations of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan and references made to various case laws and also having regard to various details as submitted by the appellant company and discussed by me in this order on earlier pages, I am of the view that though the appellant company has reduced its tax liability to zero but since the same is not against any provision of law, existing at the relevant point of time, the transaction relating to sale of 1% - CCP shares to M/s SPS Silks Ltd was carried out as per the provisions of the I. T. Act and the same cannot be rejected by treating the same as sham or bogus. The advantage which the appellant company has acquired cannot be considered to be artificial and there is no question of any colourable devise adopted by the appellant company as held by the AO and, therefore, the setting off of long term capital loss incurred on account of sale of 1% CCP shares of M/s Garden Finmark Limited is allowed against the short term capital gains. In this way, the grounds of appeal nos. 1 to 5 as taken by the appellant are allowed."
3.7 Aggrieved, the Revenue has come up with the present appeal. During the course of hearing, it was submitted that the CIT (A) had grossly erred in allowing the assessee to set off of LTCL incurred by the assessee on the sale of 12,00,000 1% CCPS out of total holding of 15,36,650 CCPS of Garden Finmark Ltd against STCG on the sale of plant and machinery, particularly as:
(a) The twin transaction i.e., sale of 1% CCPS made at a huge loss and sale of plant and machinery at a huge profit had taken place in the intra-group companies (Garden Mill Group) pertaining of a colourable devise detrimental to the interest of revenue;14
(b) 1536650 1% CCPS of Garden Finmark Ltd were purchased in the year 1997 at Rs.45/share [Rs.10 face value + Rs.35 premium] with a clear intention to acquire more than 75% controlling stake on their conversion in 2007, but, were sold at Rs.6.25/share only without assigning any value to the most valuable right in respect of more than 75% controlling stake which alone was the consideration to buy shares @ Rs.45/share. For, otherwise, on investment of Rs.45/share, return on investment works out only to 0.22% per annum;
(c) the assessee possessed 1536650 1% CCPS but chose to sell only 12,00,000 CCPS just to nullify the STCG on sale of plant and machinery of Rs.6,36,92,620/- as against the loss on sale of CCPS of Rs.6,43,81,967/- in order to avoid tax on STCG;
(d) the assessee did not sell the whole stock of 1536650 CCPS.
Had the assessee actually faced liquidity constraint, it would have sold all the 1536650 CCPS and not restricted sale only to 1200000 shares keeping 336650 CCPS in hand;
(e) the sale transaction in respect of CCPS was completed between intra-group companies with the shares ultimately reaching in the hands of Shri Prafulbhai Shah (main person of the group) and his associates, thus, no effort to fetch higher price from the public at large was made;
(f) the original minute book was not produced, though called for which would have thrown light on the modus operandi of the transaction;
(g) that a copy of the Accounting Standard - 13 (AS-13) of the Institute of Chartered Accountants of India [which requires valuation of long term investment (unquoted) at cost] was submitted with the remand report to the CIT (A), who had, however, not clarified in his order the reasons for not valuing long term investment (unquoted) at cost;
(h) valuation at market price defying AS 13 and 'going concern concept' was allowed only in case of dissolution of partnership concerns and for defunct companies;
15(i) the valuation report of the Chartered Accountant was replete with mistakes and infirmities as brought out in the assessment order and remand report submitted to the CIT (A);
(j) observation of the CIT (A) that the transaction was well recorded in the books of the account is not at all warranted as the same was never disputed. In fact, in the case of colourable transactions, such steps cannot be omitted so as to give them a semblance of genuineness;
(k) no due diligence report (a note explaining steps taken to get highest price) was submitted by the assessee though called for so as to throw light on the circumstances which forced the assessee to sell CCPS having more than 75% controlling stake in Garden Finmark Ltd at a much discounted price;
Relies on the finding of the Hon'ble earlier Bench of the Tribunal in the case of ACIT v. Affection Investment Limited dated: 1.9.2003
(l) that the CIT (A) had erred in not considering the alternative contention of the AO as mentioned in the assessment order for valuing 1% CCPS at book value i.e., rather than its transaction value of Rs.6.25 which was based on valuation report which was void ab initio;
3.8 In conclusion, it was submitted that the learned CIT (A) had grossly erred in allowing the set-off of LTCL incurred by the assessee on sale of 12 lakhs 1% CCPS out of total holding of 1536650 CCPS of M/s. Garden Finmark Ltd against the STCG on sale of plant and machinery. To strengthen his arguments, the learned D R had furnished during the course of hearing, two voluminous paper books which, inter alia, containing the copies of (i) share-holding pattern of Garden Silk Mills Ltd, Finmark Ltd, SPS Silk 16 Ltd, Special Prints Ltd as on 31.3.2000. 31.3.2001 respectively; (ii) Final accounts of Garden Silk Mills Ltd, Finmark Ltd, SPS Silk Ltd, Special Prints Ltd as on 31.3.2000. 31.3.2001 respectively; (iii) abstract of minute book etc., On the other hand, the learned A R reiterated more or less what has been submitted before the first appellate authority. Further, it was submitted that the learned CIT (A), after analyzing the issue in depth and also in a comprehensive manner, came to the conclusion that the learned AO was not justified in denying the assessee's claim of LTCL of Rs.6.36 crores. It was, therefore, argued that since the impugned order of the ld. CIT (A) has not suffered from any infirmity, and therefore deserves to be upheld.
4. We have carefully considered the rival submissions and diligently perused the materials on record before us and the findings of the learned AO and the learned CIT (A).
4.1 It is apparent that during the year under consideration, the assessee sold its fixed assets (plant and machinery) to Garden Silk Mills Limited (GSML) belonged to Garden group for Rs.8.95 crores, the WDV of which was Rs.2.58 crores whereby earned STCG of Rs.6,36,92,624/-. Also during the same year, it had incurred a LTCL of Rs.6.43 crores for the sale of 12 lakhs 1% of redeemable CPS of Garden Finmark Limited [GFL] to SSP Silk Limited [SSPSL] which was incidentally belonged to same group, namely Garden group.
4.2 During the course of assessment proceedings, the AO had called for certain details such as, the name of shares sold, name 17 and addresses of the directors of GFL, name and addresses of shareholders of the assessee as well as GFL, the basis of fixing sale price of the share, diligence followed by the assessee for purchase and sale of shares etc., The above request of the AO, according to the assessee, was duly complied with. Subsequently, the AO was apprised of the cause for cut down in its business operation, discontinuation of its yarn activity from 1.4.2003, the procedure followed for fixing the price of GFC and also copy of abstract of Minutes Book of the Board meeting held on 9.6.2000.
4.3 After considering the various details such as copies of abstract of minutes book, registers of transfers, rate of each transaction, annual accounts of GFC for the financial periods ended 31.3.1994 to 31.3.2002 etc., the AO had, however, concluded the assessment of the assessee, treating the above transaction of sale of shares of GFL as colourable devise of the assessee to defeat the interest of the revenue and thus, disallowed, the LTCL of Rs.6.36 crores, for the reasons elaborately recorded in his impugned order under dispute.
4.4 We shall now proceed to analyze the reasons set-out by the learned AO by treating the entire transaction as a colourable devise and the reasoning of the learned CIT (A) in reversing the findings of the learned AO in a chronological order in the following paragraphs:
4.5 The AO had pointed out that the assessee had not submitted any documents/original records regarding due diligence 18 carried out at the time of purchase of those shares and that the minute register was also not produced which could have had thrown light on the sequence of events and details of board's meeting in this regard etc., Moreover, the assessee had stated that the sale price had been based on the report of the Chartered Accountant, the Valuer, who had stated that shares may be sold in price range of Rs.6 - 6.50 per share. This has been disputed by the AO that the valuer's report suffers from various defects, namely, the valuer had not taken into account the value related to convertibility option available to assessee which according to the assessee was the most valuable factor while purchasing these shares. Actually, these shares were purchased by the assessee considering only this valuable 'convertibility right'; that the valuer had carried out valuation on the basis of intrinsic worth of the net asset, but this was not correct system of valuation for an on going company as this method is used mainly for companies under going liquidation which is not the present case. Further, he had disputed that the valuer had taken these 1% CCPS as equivalent to equity shares and value has been computed for 1586650 shares in stead of 50000 equity shares. The valuer had also failed to consider the fact that it is the equity shares for which earning per share is to be computed as 1% CCPS are those shares for which earning does not matter as they have to be paid only 1% of their face value i.e., 10 paise per share. So earning capacity of equity share should have been taken into account. Further, P/E ratio of 5 has been taken and when it was convenient to assessee it was taken at 10 (in the case of Garden Finance Ltd). Further, the valuer, without assigning any reason and basis, had adopted P/E ratio of 5.19
The average P/E ratios of shares quoted at Bombay Stock Exchange [BSE] at that point of time were in the range of 10 to 15. If the earning per share is computed for 50000 shares it comes to Rs.37.58 and value of shares to 187.90 per share taking P/E ratio of 5 only. He had also quoted the report of ICAI on 'study on share valuation' in support of his stand that the Valuer had prepared the valuation report on valuation for determining the fair value and not the fair market value.
4.6 This has been refuted by the learned AR that the AO by making above referred observation had contradicted his earlier statement that convertible option was not considered by the valuer while determining the value of shares of GFL. It was claimed that it was, after keeping in view the convertibility factor; the number of shares were taken at 1586650.
4.7 On a perusal of the impugned order of the learned CIT (A) on the above issue, it has been observed that it has been dealt with by him. The reasons recorded by him are extracted as under:
"4.13........................................I have gone through the valuation report and the relevant portion with regard to valuation of share is quoted below:
"Net asset value methods (book value and intrinsic value):
This method requires a valuation of all tangible assets of the firm, and a deduction for liabilities. This method is appropriate only in situations where the business is not expected to be a 'going concern', or in which asset values are critical to the entity's operations (as in the case of investment companies). This method is rarely used for valuing a going concern since it does not consider the future earning capacity of the assets.20
However, the net asset position plays the role in giving an assurance that the returns would be maintained.
At Ann.(Annexure) A, we have computed the value of the equity shares of GFL, on a diluted basis, based on the book value of its assets and liabilities as at 31st March, 2000. On this basis, the value per equity share of Rs.10 works out to Rs.46.27.
After adjusting the net assets value as on 31.3.00 on account of the diminution in the value of investments in the equity shares of Garden Silk Mills Ltd (based on the weighted average market price of the share for the last 6 months ended 31st May, 2000) the value per share of Rs.10 fully paid up based on the intrinsic worth of net assets works out to Rs.7.79 as shown at Ann.A. If one were to give a 75% weight-age to the value based on intrinsic worth of net assets and a 25% weight-age to the value based on book value of net assets, the value per equity share of GFL based on net assets would work out to Rs.17.41.
Profit earning method:
Under this method, value of shares of a company is arrived at by capitalizing its future maintainable profits by an appropriate Price Earning Ratio. In the present circumstances, as the past profits of the company, as tabulated at Ann. (Annexure) B, have shown a declining trend, we have considered it reasonable to apply weights of 1, 2 & 3 to the profits for the years 1997-98, 1998-99 and 1999-2000 respectively, to arrive at the future maintainable profits.
Considering all the relevant factors in respect of the business, past track record of revenues and profits, nature of business and industry, quality of assets and so on, in our opinion it would be appropriate and reasonable to apply a capitalization rate of 20%, corresponding to a PE ratio of 5, in the present case. Applying the PE ratio of 5 to the weighted average profits for the 3 years ended 31.3.00, the value per share of Rs.10 fully paid up works out to Rs.5.92 as shown at Ann. (Annexure) B'.
On the basis of above referred facts, it is seen that the valuer of the appellant company has advised it to sell the 1536650 - 1% CCP Shares of Rs.10/- each fully paid up of M/s GFL in the range of Rs.6 to Rs.6.50 per share."21
4.8 With regard to the AO's observation that while arriving at the value of shares, P/E ratio of 5 has been taken and when it was convenient to the assessee, the same was taken at 10 in the case of GFL etc., it was hotly contested by the learned A R. The reasons advanced by him are as under:
"The stand of the AO that average PE ratio of shares quoted as BSE at that point of time were in the range of 15 to 20 was factually incorrect statement. The company had sold its shares in GFL on 15.6.2000. The company submits herewith financial data of PE ratios of the Finance Companies listed on BSE like Bajaj Auto Finance Ltd.,..........................gathered from web-site of Capital Line 2000 On a perusal of the said financial date, it will be observed that closing PE ratio of the said companies in and around June, 2000 were as under:
Name of company Month Closing PE
ratio
Bajaj Auto Finance Ltd June, 2000 02.47
Birla Century Finance Ltd June, 2000 05.91
Daga Leasing & Finance Ltd., March, 2000 07.50
Birla Global Finance Ltd June, 2000 03.45
Arihant Capital Market Ltd June, 2000 04.12
IIT Capital Services Ltd June, 2000 00.00
Nucleus Securities Ltd April 2000 04.91
Onida Finance Ltd., April 2000 00.00
Reliance Capital Ltd June, 2000 16.50
Talia Financial Services Ltd June, 2000 00.00
Total 44.86
Average PE 4.86
Ratio
On a perusal of the above data, it will be observed that average closing PE ratio of the companies listed on BSE around June 2000, wherein the company has sold for the shares of GFL was 4.86 and, therefore, statement made by the AO that the average P/E ratio of shares quoted at BSE at that point of time were in the range of 15 to 20 was without any basis and, therefore, is to be rejected. The company, therefore, submits that the AO has therefore arbitrarily 22 change the figure of P/E to justify his argument and to prove non- genuineness of the transaction"
[Refer: Para 4.12 of CIT's order]."
4.9 With regard to the learned AO's observation that the assessee had not produced minutes registers in its own case and that of SSP Silks Ltd and in the absence of which, it was alleged by the AO, the correct sequence of events relating to transactions could not be verified etc., the learned AR had repudiated the AO's allegation by asserting that the assessee had duly produced the minutes of the assessee relating to the sale of plants and machineries and purchase and sale of shares wherever those were relevant for verification of such transactions. It was further stated by the learned AR that the details of group companies like SSP Silk Ltd, original register of GFL, SPS Silks Ltd were directly called by the AO from those companies and, therefore, the observation of the AO was factually incorrect and without any basis. It was, further, vouched that whatever information called for with regard to purchase and sale of shares of GFL were made available for the AO's verification.
4.10 In respect the AO's observation that the assessee was not suffering from any liquidity crisis and the receipt of Rs.75 lakhs on sale of 12 lakhs shares would not have mitigated its obligations as its liquidity position was very sound at it was showing in its balance sheet the cash and bank balance at Rs.2.22 crores, the learned A R had strongly denied the AO's assertion. The learned A R has submitted that the assessee's over all financial position had deteriorated from Rs.3.16 crores as on 31.3.2000 to Rs.2.22 crores as on 31.3.2001 and the balance of Rs.2.22 crores was only after the 23 sale of plant and machinery and investment, aggregating to Rs.9.7 crores. It was, further, submitted that out of its balance of Rs.2.22 crores as on 31.3.2001, a sum of Rs.l.34 crores comprised of excise duty margin lying with Bank of Baroda at Rs.69 lakhs per the order of the Hon'ble Gujarat High Court and also Rs.1,80,000/- on account of non-refundable deposit and the balance as imported yarn land charges lying with various banks as per the order of the Hon'ble High Court. During the same period, it was submitted that due to sluggish textile business condition, the assessee's core business of fabric processing and yarn sale business was under tremendous pressure and the margins were squeezed. The assessee had the lot of financial constraints and it was badly required to move out of unproductive investments and to raise liquidity to continue its business. It was therefore decided by the assessee not only to liquidate its investment in shares as and when it found an opportunity to do so but also to liquidate its investments in plants and machinery which were not paying off. Thus, it was reiterated that the financial position of the assessee at that relevant time was not at all sound contrary to the AO's assertion.
4.11 It is more appropriate to mention the findings of the learned CIT (A) on this issue. The findings of the CIT (A) are extracted as under (at the cost of repetition):
"4.34............................. I have examined the submissions as made by the ld. AR (as referred on page Nos. 25 & 26 of this order) and find that its business activities in terms of turnover/profit earning and finally its overall financial status were on decline year after year. Its cash in hand and at bank position deteriorated from Rs.3,16,37,509/- as on 31.3.2000 to Rs.2,22,60,167/- as on 31.3.2001 and the balance of Rs.2,22,60,167/- was only after sale of plant and machinery and 24 investment aggregating to Rs.9,70,42,513/-. It is, further, seen that out of its balance of Rs.2,22,60,167/- /- as on 31.3.2001 a sum of Rs.1,34,87,200/- comprised of fixed deposit in the form of excise duty margins, imported yarn landing charges and imported yarn NRC margins etc, deposited in various banks on account of the order of Hon'ble Gujarat High Court and were not available in the form of liquid cash to run its business activities. In this way, it is seen that there was hardly any cash liquidity (as per balance sheet) available with the appellant company to run its business. In view of the above discussed facts, I hold that the observation as made by the AO in this regard was not based on true facts about the business of the appellant company and, therefore, the same is not acceptable."
4.12 The AO had by quoting various judicial pronouncements, especially the ruling of the Supreme Court in the case of Mc. Dowell & Co. Ltd v. Commercial Tax Officer (1986) 3 SCC 230 and in particular the findings of Mr. Justice Chinnappa Reddy, observed as under:
"It is clear in this case that the assessee has carried out transaction which has no commercial (business) purpose apart from the avoidance of liability of tax as held in the case of Dawson. This inserted step is to be disregarded and the Court is to look at the end result for the taxing it in accordance with the provisions of taxing statutes."
4.13 Countering the AO's observation, the submission made by the learned AR's is extracted as under [Refer: page 27 -29 of CIT (A) order]:
"As regards..........attention is invited to decision of the Supreme Court in the case of Azadi Bachao Andolan (263 ITR 706) in which the Court has discussed the meaning of the terms 'sham' and 'devise' and ultimately held that its earlier decision in McDowell Co. Ltd's case (154 ITR 148 - SC) cannot be interpreted so as to lay down that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive.
The court concurred with the majority view in McDowell's case (pg. 754 of the decision reproduced below) which laid down that 25 tax planning may be legitimate provided it is within the framework of law; that colourable devices cannot be part of tax planning; that it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods and that it is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
However, the court did not concur with the views of Chinnappa Reddy J in the aforesaid judgment. J Reddy in the case had observed that (reproduced on page 754).
'In our view the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether a provision should be construed liberally or principally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.' Their Lordships in Azadi's case observed that (pg. 755 of the judgment) 'We are afraid that we are unable to read or comprehend the majority judgment in Mc.Dowell as having endorsed this extreme view of Chinnappa Reddy J. which in our considered opinion, actually militates against the observations of the majority of the Judges which we have just extracted from the leading judgment of Ranganath Misra J (as he then was)'.
The Hon'ble Court while dealing with the issue of tax avoidance at page 758 of the decision referred to the decision of the Madras High Court in the case of M V Valliappan (170 ITR 238) which is reproduced herewith 'We may in this connection usefully refer to the judgment of Madras High Court in M V Valliappan and others v. ITO which has rightly concluded that the decision in McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law; which has the effect of reducing the tax burden of the assessee, must be look upon with disfavour. Though the Madras High court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corp. Ltd., and did not have the benefit of the House of Lord's 26 pronouncement in Craven, the view taken by the Madras High Court appears to be correct and we are inclined to agree with it.' The Hon'ble Supreme Court at page 759 also referred to the decision of the Gujarat High Court in the case of Banyan and Berry (222 ITR 831) where while referring to McDowell, the Gujarat High Court observed:
'The Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the Act; an inference which unfortunately in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case (1985) 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.' The Hon'ble Supreme Court agreed with the views expressed by the Madras and Gujarat High Courts and stated on page 759 of its judgment that 'This accords without own view of the matter'. The Supreme Court also dealt with the meaning of the word 'sham' and 'device' on page 761 of the decision as under:
'Though the words 'sham' and 'device' were loosely used in connection with the incorporation under the Mauritius law, we deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catchall phrases to defeat or nullify the effect of a legal situation'.
As regards to the reference of the ld. AO on the Supreme Court decision in the case of McDowell, the company reiterates its submission made in earlier paras and places reliance on the observation of Supreme Court in the case of Union of India v. Azadi Bachao Andolan 263 ITR 706 (SC)/ 132 Taxman 273 wherein the Hon'ble Supreme Court held as under:27
'We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the notional interests, as perceived by the respondents."
In conclusion, it was submitted that as held by the Supreme Court, a transaction which is valid cannot be disregarded merely because such transaction has reduced the tax liability of the assessee."
4.14 After considering all the aspects namely, the AO's observations, his remand report, the rebuttal of the assessee as well as the lengthy submissions of the learned AR coupled with various case laws, chiefly, the rulings laid down by the Hon'ble Supreme Court cited supra, the learned CIT (A) had arrived at a conclusion that 'though the appellant company has reduced its tax liability to zero but since the same is not against any provision of law, existing at the relevant point of time, the transaction relating to sale 1% - CCP Shares to M/s SPS Silks Ltd was carried out as per the provisions of the I. T. Act and the same cannot be rejected by treating the same as sham or bogus. The advantage which the appellant company has acquired cannot be considered to be artificial and there is no question of any colourable device adopted by the appellant company as held by the AO and therefore the setting off of long term capital loss incurred on account of sale of 1% CCP Shares of M/s. Garden Finmark Limited is allowed against the short term capital gain.." During the course of hearing before us, the learned D R had placed strong reliance on the ruling of the Hon'ble Bombay High Court in the case of Killick Nixon Limited v. DCIT reported in (2012) 20 Taxmann.com 703 (Bom).
284.15 In Killick Nixon Limited case, the issue, among others, before the Hon'ble Court, was that the assessee had transferred certain land to the bank as the assessee's case was that it was done to discharge its liability as a guarantor for loan advanced by bank to a company EG which failed to pay back to bank. The assessee contended that the AO ought to have allowed the entire consideration as a business loss incurred in the course of carrying on of business of providing guarantees. The CIT (A) had rejected the said ground by holding that the assessee did not carry out activity of providing guarantee to bank in normal course of its business and no commission income from guarantee business was shown in any of earlier years. On appeal, the Tribunal had held that though memorandum of association of the assessee did in its object clause, provide for doing business of giving guarantees, it had not even once in last 50 years of its existence issued any guarantee etc. The twin question raised by the assessee before the Hon'ble Court was, namely:
(i) Whether the fact that it had not done business of providing guarantee earlier will prohibit it from providing guarantees during the relevant assessment year? &
(ii) Whether since the Tribunal had not considered evidence filed by the assessee before rejecting assessee's claim of business loss, matter was to be remanded to Tribunal for fresh consideration?
4.16 After due consideration of the facts, the Hon'ble Court made the following observations:
"The Supreme Court in the Vodafone International Holdings B.V v. Union of India (2012) 204 Taxman 408/ 17 Taxmann.com 202 (SC) makes it very 29 clear that a colorable device cannot be a part of tax planning. Therefore where a transaction is sham and not genuine as in the instant case then it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. In the instant case the purchase and sale of shares so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. Therefore, authorities came to a finding that the same was not genuine..."
4.17 We have, with due respects, perused the ruling of the Hon'ble Court (supra) wherein the Court has come to a conclusion that "15..............In the present case, the purchase and sale of shares, so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. Therefore authorities came to a finding that the same was not genuine........".
4.18 However, in the present case under consideration, the AO took a stand that "7. In the result, I am satisfied that to sell the 1% cumulative convertible preference share to SPS Silks Ltd is colourable device of the assessee to defeat the interest of the revenue and such device deserves to be rejected...."
4.19 On the other hand, the learned CIT (A) took a contradictory stand to that of the learned AO. The ld. CIT (A) had in his wisdom observed that (at the cost of repetition) "4.46. After viewing in the light of various observations of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan and references made to various case laws and also having regard to various details as submitted by the appellant company and discussed by me in this order on earlier pages, I am of the view that though the appellant company has reduced its tax liability to zero, but, since the same is not against any provision of law, existing at the relevant point of time, the transaction relating to sale of 1% - CCP Shares to 30 M/s SPS Silk Ltd was carried out as per the provisions of the I. T. Act and the same cannot be rejected treating the same as sham or bogus....."
4.20 Thus, in the above cited case, the Hon'ble Court (supra) had vouched that 'the purchase and sale of shares so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham' whereas in the present case under consideration, the learned AO took a view that the alleged transaction of the assessee was a colourable devise whereas the learned CIT (A) had taken a divergent view that it cannot be treated 'as sham or bogus'.
4.21 In view of the fact that in the present case the authorities below have taken divergent views on the same issue as discussed above, we are of the firm view that the case law relied on by the Revenue is clearly distinguishable.
4.22 Incidentally, an identical issue to that of the present one had cropped up before the Hon'ble High Court of Punjab & Haryana in the case of Porrits & Spencer (Asia) Limited v. CIT reported in (2010) 231 CTR (P&H) 294: (2010) 190 Taxman 174: (2010) 37 DTR
297. 4.23 The issue before the Hon'ble Court, briefly, was that for the AY 1991-92, the assessee filed its return of income admitting an income of Rs.2.93 crores. The assessee on 21.5.1990 had purchased 25 lakhs units of US 64 of UTI at the then prevalent market rate of Rs.15/unit for a total consideration of Rs.3.75 crores 31 from ANZ Grindlays Bank and that the units were purchased on credit for the purposes of making investment. The assessee, on account of non-availability of surplus funds and cost of holding them on interest being unprofitable, sold the units on 21.7.1990 to the said Bank at the then prevailing market rate of Rs.13.01/unit for a total consideration of Rs.3.25 crores after deducting interest of Rs.9.86 lakhs on the total sale consideration of Rs.3.75 crores for a period of 60 days. Accordingly, the assessee had clamed a loss of Rs.51.61 lakhs as a short-time capital loss [STCL] and also claimed set off against its income. The AO, however, did not allow the same holding that the transactions of purchase and sale of units were not genuine transactions and a device for tax avoidance. On an appeal, the CIT(A) upheld the AO's view. When the issue went before the Tribunal, the Tribunal, among others, held that the transactions were not bona-fide because they were entered into with a motive to reduce the liability of tax which is not permissible in law. While arriving at such a conclusion, the Tribunal considered the various judgments on a similar issue, chiefly, the ruling of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd v. CTO (1985) 154 ITR 148 (SC).
4.24 When the issue came up before the Hon'ble Court, it took cognizance of the findings of the Tribunal that the transactions were not bona-fide etc. After due consideration of the submissions of both sides, the findings of the Hon'ble Tribunal and also analyzing various case laws, the Hon'ble Court had held thus:
"14. The question which falls for consideration is whether to apply the principle laid down by Hon'ble Supreme Court in the 32 case of McDowell & Co. Ltd (supra), wherein it was held that the judgment of House of Lords in IRC v. Duke of Westminster (1936) AC 1(HL), was not applicable. In other words, even if the transaction is genuine and even if it is actually acted upon, it would be permissible in law, in as much as, it is part of continuous tax planning which may be aimed at avoidance of tax not evasion of tax. The aforesaid principle is based on the premise that a taxpayer may resort to a devise to diver the income before it arrives to him and effectiveness of the devise would not depend upon consideration of morality but on the operation of the Act.
15. On the strength of the Division Bench judgment of the Bombay High Court rendered in the case Twinstar Holdings Ltd (supra), learned counsel for the Revenue respondent has argued that if the transaction is entered into with the intention of tax avoidance and it was known to the parties before-hand then even if the transaction is genuine, it would constitute a colourable devise. The aforesaid view is sought to be supported by the observations made in the case of McDowell & Co Ltd (supra). On the contrary, the main plank of argument of the learned counsel for the assessee appellant is that intention and motives are irrelevant. The aforesaid argument has been canvassed on the strength of the judgment of Bombay High Court rendered in the case of Walfort Share & Stock Brokers (P) Ltd (supra) and the view expressed by Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra).
16. In the case of Azadi Bachao Andolan (supra), Hon'ble Supreme Court has explained its earlier judgment rendered in the case of McDowell & Co. Ltd (supra) by concluding that the principles laid down by the House of Lords in Duke of Westminster's case (supra) have never been abandoned and, therefore, Hon'ble Supreme Court in McDowell & Co. Ltd's case (supra) cannot deem to have laid down any different principle. In order to substantiate the aforesaid view their Lordships of Hon'ble Supreme Court placed reliance on a number of judgments of the House of Lords. Reference in this regard was made to a leading judgment rendered in the cases of Craven v. White (1988) 3 All ER 495 (HL). In that case, the House of Lords considered the impact of Furniss (Inspector of Taxes) v. Dawson (1984) 1 All ER 530 (HL), IRC v. Burmah Oil Co. Ltd (1982) Simon's Tax case 30 (HL)(SC) and W.T. Ramsay Ltd v. IRC (1981) 1 All ER 865 (HL). After quoting the speeches of Lord Keith of Kinkel and Lord Oliver, Hon'ble Supreme Court proceeded to conclude that even in the year 1988 the House of Lords emphasized the continued validity and application of the principle I Duke of Westminster's case (supra).33
Accordingly, the principle laid down in Duke of Westminster's case (supra) was reiterated. The observations of Hon'ble Supreme Court in that regard read as under:
'With respect, therefore, we are unable to agree with the view that Duke of Westminster's case (supra) is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster's case (supra) is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah J in CIT v. A. Raman & Co., (1968) 67 ITR 11 (SC) are much relevant even today.
We may in this connection usefully refer to the judgment of the Madras High Court in M.V. Valliappan & Ors v. CIT (1988) 67 CTR (Mad) 289: (1988) 170 ITR 238 (Mad) which has rightly concluded that the decision in McDowell & Co. Ltd v. CTO (1985) 47 CTR (SC) 126; (1985) 154 ITR 148 (SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRD v. Challenge Corporation Ltd. (1987) 2 WLR 24 (PC), and did not have the benefit of the House of Lord's pronouncement in Craven's case (supra), the view taken by the Madras High Court appears to be correct and we are inclined to agree with it.'
17. Hon'ble Supreme Court also proceeded to approve the following view of Gujarat High Court in Banyan & Berry v CIT (1996) 131 CTR (Guj) 127: (1996)222 ITR 831 (Guj), while interpreting McDowell's case (supra):
"The Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell & Co. Ltd v. CTO (1985) 47 CTR (SC) 126; (1985) 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's (supra) decision leave us in no 34 doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.'
18. The aforesaid discussion would show that once the transaction is genuine merely because it has been entered into with a motive to avoid tax, it would not becomes a colourable devise and consequently earn any disqualification. Hon'ble the Supreme Court in the concluding paras of its judgment in Azadi Bachao Andolan (supra) has rejected the submission that an act, which is other valid in law, cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as per the perception of the Revenue. The aforesaid view looks to be the correct view. It has ready support from the Division Bench judgment of this Court rendered in the case of Satya Nand Munjal (supra) and the Division Bench judgment of Orissa High Court in the case of Industrial Development Corporation of Orissa Ltd. (supra) and various other judgments of Delhi and Madras High Courts (supra).
19.......................................................................................... ............................................................................................. ............
20. The argument of the learned counsel for the Revenue respondent based on the judgment rendered in the case of McDowell & Co Ltd (supra) cannot be accepted because the judgment rendered by Hon'ble Mr. Justice O Chinnappa Reddy in McDowell's case (supra) has been explained in detail by the later judgment of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra). It is well settled that if a smaller Bench of Hon'ble Supreme Court has later on explained its earlier Larger Bench then the later judgment is binding on binding on the High Court. In that regard reliance may be placed on a Full Bench judgment of this Court in the case of State of Punjab v. Teja Singh (1971) 78 PLR 433 (P&H)(FB). Speaking for the Bench, Hon'ble Mr. Justice S. S. Sandhawalia observed as under:
'Now it is trite learning to say that when an earlier judgment of the Supreme Court is analyzed and 35 considered by a latter Bench of that Court then the view taken by the latter as to the true ratio of the earlier case is authoritative. In any case latter view is binding on the High Courts..............' Likewise, reliance may be placed on another Full Bench judgment of this Court in Daulat Ram Trilok Nath v. State of Punjab AIR 1976 p7h 304. In para 16, speaking for the Full Bench, Hon'ble Mr. S.S.Sandhawalia held that 'the construction which the Supreme Court itself places on an earlier precedent is obviously binding and authoritative......' The aforesaid view has also been followed by another Full Bench of this Court in the case of Subhash Chander Kamlesh Kumar v. State of Punjab (1990-2) 98 PLF 666 (P&H)(FB). In that case, the Full Bench was considering ratio of the judgment rendered by a Constitution Bench of Hon'ble Supreme Court in the case of K. K Puri v. State of Punjab AIR 1980 SC 1008. The aforesaid judgment was analyzed and explained by the later smaller Benches of Hon'ble Supreme Court in the cases of Sreenivasa General Raders v. State of Andhra Pradesh AIR 1983 SC 1246 and Amar Nath Om Prakash v. State of Punjab AIR 1985 SC 218. Accordingly, the Full Bench held that the later judgment although by smaller Benches, which have analyzed and explained the Constitution Bench were binding. Accordingly, we take it as well settled that if a smaller Bench has later on explained the judgment of a Larger Bench of Hon'ble Supreme Court, then the later is binding. Examined in the aforesaid perspective, the view expressed by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra), has to be accepted as binding. Therefore, it cannot be said that the principle of law laid down by the House of Lords in Duke of Westminster's case (supra), as followed, explained and applied in the case of Azadi Bachao Andolan (supra), is no longer applicable. The principle is found applicable in its native country and cannot be deemed to have been abandoned. Moreover, no such principles having been laid down in the case of McDowell & Co. Ltd (supra) by the majority judgment, it is not possible to accept the argument advanced by the Revenue respondent........."
4.25 We have, with respects, perused the ruling of the Hon'ble Court (supra) and of the considered view that the ratio laid down by the Hon'ble Court is directly applicable to the facts of the issue under consideration.36
4.26 In an overall consideration of the facts and circumstances of the issue as deliberated upon elaborately in the fore-going paragraphs, we are of the firm view that the learned Assessing Officer was NOT justified to arrive at such conclusion for the following reasons, namely:
(i) the assessee had furnished all the details and documents as called for by the learned AO;
(ii) that there were no any material defects in the valuer's report as alleged by the AO;
(iii) that the valuer had taken into account all the relevant factors into consideration while arriving at its conclusion;
(iv) though the AO found fault with the valuer to carryout valuation on the basis of intrinsic worth of the net asset and also final fixation of price was based on the intrinsic value, unfortunately, he had not come out with any discreet documentary evidence or working to rebut such a working of the valuer;
(v) the AO had pointed out that the average P/E ratio of shares quoted at Bombay Stock Exchange at that relevant time were in the range of 15 to 20 etc., This has been contradicted by the assessee before the first appellate authority with facts and figures to prove that the AO's observation was far from reality [Refer: P 17 - 18 of CIT(A)'s order];
(vi) Duly endorsed by the learned CIT (A) in his impugned order at para 4.35 that, after the sale of shares of M/s GFL these were immediately transferred in the name of M/s.
SPS Silks Ltd (as verified from the 'Register of Members' of the appellant company and that of M/s. SPS Silks Ltd) and the sale consideration was also received immediately by it through cheques. In this way, it is seen that whatever transaction of sales taken place, these were found duly reflected in the books of accounts of sellers and buyers.
(vii) from judicial angle too, the argument of the AO cannot be sustainable based on the ruling of the Hon'ble Supreme Court in the case of McDowell & Co (supra) since the judgment rendered by Hon'ble Mr. Justice O Chinnappa 37 Reddy has been dealt with in detail by the later judgment of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra).
4.27 In essence, in conformity with the ratios laid down by various judiciary, predominantly, the (i) Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) and (ii) Hon'ble High Court of Punjab & Haryana in the case of Porrits & Spencer (Asia ) Ltd v. CIT (supra), we are of the considered opinion that the learned CIT (A) was justified in arriving at a conclusion that though the assessee had reduced its tax liability to zero, but, since the same was not against any provision of law existed at the relevant point of time, the transaction relating to sale of 1% - CCP Shares to SPS Silks Ltd was carried out as per the provisions of the I. T. Act and the same cannot be rejected by tainting it as sham or bogus. It is ordered accordingly.
4.28 With regard to the Revenue's other grievance that the learned CIT (A) had erred in not considering the alternative contention of the AO as mentioned in his assessment order for valuing 1% CCPS at book value i.e., 46.27 rather than its transaction value of Rs.6.25 which was based on the valuation report etc., we would like to reiterate that we have carefully considered the valuation report of the Chartered Accountant [courtesy: P 68 - 76 of AR PB]. It has been observed that they have adopted two types of methods to arrive at such a conclusion, namely:
(i) Net assets value methods (book value and intrinsic value:38
They have computed the value of the equity share of GFL, on a diluted basis, based on the book value of its assets and liabilities as at 31st March, 2000. On this basis the value per equity share of Rs.10/- worked out to Rs.46.27 per share. After adjusting the net assets value as on 31.5.2000 on account of the diminution in the value of investments in the equity shares of Garden Silk Mills Ltd (based on the weighted average market price of the share for the last six months ended 31.5.2000) the value per share of Rs.10/- fully paid up based on the intrinsic worth of net assets works to Rs.7.79.
It has been further mentioned that if one were to give a 75% weight- age to the value based on intrinsic worth of net assets and a 25% weight-age to the value based on book value of net assets, the value per equity share of GFL based on net assets would work out to Rs.17.41.
(ii) Profit earnings method:
Under this method, value of shares of a company is arrived at by capitalizing its future maintainable profits by an appropriate Price Earning Ratio. In the present circumstances, as the past profits of the company as tabulated have shown a declining trend they have considered it reasonable to apply weights of 1, 2 and 3 to the profits for the years 1997-98, 1998-99 and 1999-2000 respectively to arrive at the future maintainable profits.
Considering all the relevant factors in respect of the business, past track record of revenues and profits, nature of business and industry, 39 quality of the assets and so on, in their opinion, it would be appropriate and reasonable to apply a capitalization rate of 20% corresponding to a PE ratio of 5, in the present case. Applying the PE ratio of 5 to the weighted average profits for the 3 years ended 31.3.2000, the value per share of Rs.10/- fully paid up works out to Rs.5.92.
4.29 In consonance with the ruling of the Hon'ble Supreme Court in the case of Hindustan Lever Employees Union v. Hindustan Lever Limited (1995) 83 Com cases 30, in the present case, the valuer had considered it appropriate to apply a weight-age of 75% to the value as per the profit earning capacity method and 25% to the value based on net assets method, resulting in the value of the equity shares of GFL working out to Rs.8.79/share. The valuer had further reasoned that although the CCPS carry an option to convert them into equity shares, their holders do not enjoy the same rights as holders of equity shares of the Company. Hence, the value of the equity share of GFL would have to be appropriately discounted to arrive at the value of CCPS.
4.30 In conformity with the ruling of the Hon'ble Supreme Court in the case of A.R. Krishnamurthy & Anr v. CIT reported in (1989) 176 ITR 417 (SC), the valuer had concluded in its valuation report as under:
"On consideration of the above factors and issues, in our opinion, SPL can sell the 1536650 1% Cumulative Convertible Preference Shares of Rs.10/- each fully paid up of Garden Finmark Limited, at a price in the range of Rs.6/- (Rupees six only) to Rs.6.50 (Rupees six and paise fifty) per share."40
4.31 After due consideration of the facts and legal aspects of the issues involved and as per our above observation and discussions we do not have any hesitation to confirm the order of the learned CIT(A). It is ordered accordingly.
5. In the result, the Revenue's appeal is dismissed.
Order pronounced in the open Court on 26-10-2012 Sd/- Sd/-
(D. K. TYAGI) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikanta
Lakshmikant Deka/--
a Deka/
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Asstt. Registrar, ITAT, Ahmedabad
1. Date of dictation: 16-10-12/17-10-12
2. Date on which the typed draft is placed before the Dictating Member: other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement:
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: