TMI Blog2023 (10) TMI 462X X X X Extracts X X X X X X X X Extracts X X X X ..... on protective basis, while that for Rs. 97.64 lakhs would be on substantive basis. Even allowing credit for Rs. 21.40 lakhs, withdrawn cash from the OD account, i.e., assuming it being recycled, which would though have to be shown so, would reduce the addition qua unexplained cash deposit to Rs. 76.24 lakhs. Be that it as may, we confirm the impugned addition. Unexplained investment in immovable property (IP) - Apart from a bald statement as to the investment in property being made out of cash withdrawals from the bank account of self and wife, not produced at any stage, the assessee has not brought any material on record to substantiate his case. In fact, as found the bank accounts were used for channelizing unaccounted money, so that nothing turns on their having been not produced, perhaps also explaining their non-furnishing. We, accordingly, finding no infirmity in the impugned order, confirm the addition sustained. Gain on sale of shares - LTCG OR STCG - sale of 42,500 shares in Manko (including 500 held in the name of his wife), constituting 50% of the 85,000 shares therein; the balance 50% being held, similarly, by Sh. Ittoop and his wife, Lissy Ittoop - manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ya Ravindran, Adv. with him) For the Revenue : Smt. J.M. Jamuna Devi, Sr. DR ORDER PER SANJAY ARORA, AM These are cross Appeals by the Assessee and the Revenue, arising out of the Order dated 04.01.2019 by the Commissioner of Income Tax (Appeals), Thrissur [CIT(A)], partly allowing the assessee s appeal contesting his assessment under section 147 read with s. 143(3) of the Income Tax Act, 1961 (hereinafter the Act ) dated 14.12.2017 for Assessment Year (AY) 2014-15. 2. The background facts of the case are that the assessee, a dealer in old vehicles, was issued and served a notice u/s. 148(1) of the Act on 20.03.2017, consequent to the survey under section 133A of the Act at the business premises of one, Shri Ittoop Konuparamban, Chalakkudy, Thrissur, also the place of the assessee s residence, on 13.03.2015, on the basis of the material impounded there-from and the subsequent statement of Shri Ittoop and, indeed, the assessee himself. The assessee, who had not filed any return of income for the year, was found to have made investments during the relevant year in a company, Manko Natural Flavours and Extracts Pvt. Ltd. (Manko), floated by him and Sh. Ittoobp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the orders by the Revenue authorities, tabulating, date-wise, the cash deposits in the bank account and the corresponding bank transfers to the company (Manko), which are for the period (01.04.2013 to 11.10.2013) and (01.04.2013 to 04.01.2014) respectively. The OD account, never really utilized, had been, as rightly inferred by the Assessing Officer (AO), deployed as a ruse, a cover-up so to speak, the source of bank transfers to and, thus, investment in Manko by the assessee being the unexplained cash deposits in his bank (OD) account. Why, rather, we wonder did the AO, then, not make addition for the same, i.e., for Rs. 97.64 lakhs instead, which would obviate the need for a separate addition for Rs. 70.50 lakhs toward investment in the company or, making it, regard it as on protective basis, while that for Rs. 97.64 lakhs would be on substantive basis. Even allowing credit for Rs. 21.40 lakhs, withdrawn cash from the OD account, i.e., assuming it being recycled, which would though have to be shown so, would reduce the addition qua unexplained cash deposit to Rs. 76.24 lakhs. Be that it as may, we confirm the impugned addition for Rs. 70.50 lakhs. We decide accordingly. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,72,056/-. The balance amount of Rs. 35,72,056/- stands confirmed. The ground is partially allowed. 7. We have heard the parties, and perused the material of record. Apart from a bald statement as to the investment in property being made out of cash withdrawals from the bank account of self and wife, not produced at any stage, the assessee has not brought any material on record to substantiate his case. In fact, as found (refer paras 4,5), the bank accounts were used for channelizing unaccounted money, so that nothing turns on their having been not produced, perhaps also explaining their non-furnishing. We, accordingly, finding no infirmity in the impugned order, confirm the addition sustained. We decide accordingly. 8. Coming to the Revenue s appeal, the only issue arising is the capital gain on sale of 42,500 shares in Manko (including 500 held in the name of his wife), constituting 50% of the 85,000 shares therein; the balance 50% being held, similarly, by Sh. Ittoop and his wife, Lissy Ittoop. The bone of contention between the parties is the consideration arising on the sale of the entire shareholding to Vidya Herbs Pvt. Ltd. (VHPL), a Bangalore-based company in the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it may, is it then that the assessee had no (or at best 500) shares prior to the current year; the first tranche of 14000 shares, costing Rs. 14 lac (i.e., of 42,000 shares, on which STCG arises) having been allotted during the current year on being applied for only on 31/3/2013? This, as would be presently seen, is the first among the many intrigues that one comes across as he proceeds to unravel the simple task of price at which the shares have been sold per a formal document executed on 20/2/2014 between the buyers and sellers of shares, which, going by the Manko s Balance-sheet, is thus clearly 84,000. The entirety of the assessee s shares (42,000), thus, stand acquired by him only during the current year. 9.2 Coming to the aspect of sale consideration, the second determinant of the share price the first being the number of shares, we reproduce the relevant part of the sale agreement dated 20.02.2014, as under: AND WHEREAS First Party agreed to sell its entire shares in the company named MANKO NATURAL FLAVOURS EXTRACTS PVT. LTD. in favour of the Second party company VIDYA HERBS Pvt. Ltd. for a total consideration of 6,75,00,000/- (Rupees six crore and seventy fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er much deliberation, exercising due caution and diligence, in a carefully thought-out manner, over a period of time, envisaging a number of actions, including internal audit of Manko. The first payments, made equally to both the constituents of the first party, including the assessee, it may be noted, is made on 23/12/2013, so that the negotiations for and determination of the sale consideration and, thus, the share price, of which internal audit is an integral part, preceded it. 9.3 The share price for 84000 shares is, thus, Rs. 803.57 (Rs. 675 lac/0.84 lac) per share. What, then, one may ask, is the controversy about? Why, a mere mention of the number of shares on which aspect there is no doubt, or the share price itself, in the Share Agreement (SA),would have had the effect of scotching or obliterating any such controversy, which arises, not, as one may expect, between the parties to the Agreement, but between the assessee and the Revenue. 9.4 The Controversy The basis of the assessee s case, since accepted by the first appellate authority, is that only Rs. 100 lacs (out of Rs. 675 lacs) found its way to the principal shareholders, Sh. Ittoop and the assessee, at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to transpire, in writing. The AO records it as 17/2/2014 , on which date the last of the purchases (being at 6000 shares) is made by the assessee, i.e., from Sh. Ittoop, the other co-promoter and Director. The sellers having sold the shares at a value reckoned on the basis of the assets of the company being free of any charge, have directed the buyers to pay, for and on their behalf, the bank directly in liquidation of the company s secured debt. Why, it may well be an understanding that either the sellers shall, prior to the sale, pay off the said debt or, in the alternative, VHPL shall retain a part of the consideration to pay off the same, i.e., utilize a part of the consideration toward the same, and which explains the transfer of funds to Manko s bank loan/advance accounts in the same sum in which they outstand as on the date of their discharge as reflected in it s accounts. The amount having been credited to VHPL itself, retaining thus it s ownership therein, cannot be regarded as part of the consideration discharged by it, so that the same is to be reduced in reckoning the actual consideration. This explains the respective cases. 9.6 The matter warrants, and was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Manko also cannot also be regarded as a nominee or assignee of the sellers inasmuch receipt is not credited by it to it s own reserves. The legal relationship and status arising out of SA only is to be had regard of (CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC)). The accounting entries in Manko, crediting VHPL instead of the seller-shareholders, are without any legal or contractual basis. It is not a case of, or could be regarded as one of sale, in lumpsum, of it s assets by the company, i.e., Manko, in which case the capital gain would arise thereto. It is undisputedly a case of sale of shares therein, and the underlying assets continue to be owned, both before and after 20/2/2014, the date of SA, by Manko. In fact, even in such a case, it is the cost of acquisition of the relevant assets, and not the outstanding secured debt there-against, that would stand to be deducted, adopting, in case of a depreciable asset, it s WDV. When it is therefore stated therein that VHPL would thus become the absolute owner of it s assets, the same is to be understood as stated in a loose manner; the acquisition of the entire share-holding in Manko, a private company, giving it complete control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r their valuation (including the aspect of realizability, as in the case of trade debtors), which they otherwise must. In fact, the buyer being in the same business, has, as apparent, a clear understanding of its potential, and the manner of deployment of the assets, tangible and intangible, for it s purposes, which also explains it s stipulation of Manko being completely employeefree, a condition which a share purchaser cannot normally put, indicating clearly of it being accompanied by, and a case of, change in management. No wonder, then, that the net worth of the company, at Rs. 154.68 lacs as on 31/3/2013, the beginning of the current year, fell to (-) Rs. 4.71 lacs as on 31/3/2014, its end, suggesting a massive write-off of assets and/or booking of all known liabilities, including to employees on termination of their services. Statutory liabilities cannot be transferred by agreement, much less one for share transfer and, in any case, continue to be of Manko. The said liabilities have accordingly been determined and provided for, clearly with a view to eschew any liability arising later on that count. That is, the transfer is based on audited financials, approved by the Board o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing surrounding facts and circumstances of the case: (a) The assessee, despite being an equal (50%) stakeholder in Manko, has an almost nil investment therein up to 31.03.2013, on which date share application (pending allotment as on that date) for 14,000 shares (for Rs. 14 lakhs) is made. This is clearly a part of the process of sale of Manko, which thus commences in March, 2013. (b) The assessee, despite not having any disclosed source of funds explaining the same, yet transfers funds , commencing 31.03.2013, to 17.02.2014, at Rs. 112.50 lakhs in the company, being at Rs. 42 lakhs and Rs. 70.50 lakhs by way of share capital and unsecured loans respectively; the former including Rs. 28 lacs by way of secondary purchase of shares. (c) The company s net worth of Rs. 140.68 lakhs (Rs. 154.68 lacs, including share application money of Rs. 14 lacs) as on 31.03.2013, includes fixed assets at Rs. 334.71 lakhs (at book-value), comprising, besides others, lease-hold rights in 40.47 ares of land; factory building; plant and machineries; intangibles, i.e., a substantial fixed asset inventory. (d) Consideration against the assessee s entire share-holding in Manko (i.e., 42, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee receives (on 23.12.2013) the entire share consideration for 42,000 shares, i.e., even prior to their acquisition, which goes right up to 17.02.2014? Though, in view of the time of their purchase, applicable to the entire purchase, the last tranche of 6000 shares, value of which gets decided prior to 23.12.2013, are thus purchased/acquired by the assessee-seller on 17.02.2014, i.e., the day of their sale, and at a profit of 700% of cost; 9.8 Reference, at this stage is drawn to section 56(2)(vii) of the Act, which reads as under in its relevant part: - 56. (1) Income of every kind which is not to be excluded from . (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely: (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017, . (c) any property, other than immovable property, (i) without consideration, the aggregate fair market value of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seller by paying itself? Could, again, it be said that the sellers assigned the consideration to the buyer? This is precisely what the ld. CIT(A), in effect, holds. That apart, could, one may ask, such be the intention of the parties which, as afore-stated, could be easily expressed, as all that was necessary in case the share consideration was indeed Rs. 100 lakhs, was to specify the said amount in the SA dated 20.02.2014. Nothing more and, nothing less, aborting the controversy, which impels one to regard it as contrived. These liabilities, regarded as material by the ld. CIT(A) in determining the share price, stand reckoned in determining the net worth and, thus sale consideration, being unitized net worth. That is, the payment of liability is an irrelevant fact. True, it is the intent of the parties that is to be deciphered, but the same cannot be against its explicit and unambiguously worded terms. Why, Manko itself clarifies both, the number of shares and total consideration, per it s letter dated 05.12.2016, confirming thus the contents of the SA, which stands acted upon and given effect to by the parties, and on its terms. Sure, subsequent conduct is relevant. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ko either for investment therein, or for paying off it s liabilities. Nothing, therefore, turns thereon. Why, on take-over, it becomes it s de facto liability, so that there is every reason for it to pay off the same. Even otherwise, it could, where so required for any reason, have been paid by VHPL, and without in any manner impacting the sale consideration, being only a substitution of one creditor by another. The reading of the same as being toward discharge of the obligation for payment of the loan liabilities on the sellers is presumptuous. Both the share valuation and the sale consideration as per the SA are, without doubt, at Rs. 803.57 per share. There is, further, no doubt on the transfer of shares and the accrual of the consideration thereon, and on which rests the charge to tax on capital gain. The manner of discharge of consideration, otherwise irrelevant, has nowhere been explained. In fact, just as in the case of the bank OD account, the unsecured loan account in Manko has been used as the conduit for transfer of unaccounted money, which is not surprising considering that it is the funds routed through the OD account that get parked in the company as unsecured loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losing balance, which stands paid in full, neutralizing it, is Rs. 133.11 lacs, leaving thus a difference of Rs. 5 lacs. 10. In Sum 10.1 The share sale agreement (SA), preceded by due diligence, read as a whole, and holistically, as it ought to, in contradistinction with one part of it being in conflict with the other, is found as having been given effect to, on its, explicitly stated and clearly worded, terms, by the parties. There is no dispute between them on either of the two determinants of share price, i.e., number of shares and the total consideration, as indeed as by whom and to whom the same is to paid, i.e., the buyer and the seller respectively and, accordingly, has been adopted as such. The issue arising having both factual and legal aspects, stands considered in entirety. The controversy raised is found as not qua share valuation (see para 9.3), nor even qua sale consideration, but that paid by and, accordingly, received by, the parties to the Agreement; the manner of its discharge raising doubt as to if it had actually been (to the extent of Rs. 575 lacs) and, by implication, of the stated consideration being not the actual consideration. The conduct, not explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... east on record. It therefore became necessary to raise it to the required level in view of the proposed sale of the company. How could he sell his 50% shareholding therein, working to 42,000 shares, when the same is at best at 500? The increase in unsecured loans is not shown to be guided by any business purpose, with the company being on sale and, besides, he having no disclosed source of income to exhibit the investment or the transfer of funds, was increased so as to match the sum that would finally be required to be withdrawn from the company, attracting thus no tax. This explains the transfer of funds at Rs. 70.50 lakhs (or is it Rs. 75.50 lacs) during the year, as well as their timing, to which our attention was drawn by Smt. Devi, the ld. Sr. DR, stating it to be quixotic and as wholly inconsistent; rather, bizarre in view of the surrounding developments; the assessee in fact exiting the said company by selling his stake therein. Why, he even does not have money to purchase the property which we find him to be regularly purchasing, on 17.01.2014, explaining it from the funds received against share sale on 23.12.2013. That is, he is unable to undertake his own, regular trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the conspectus of the case and the flow of the same funds, though leading to invocation of separate sections under the Act, once again emphasizing that the Act is to be read as a whole and, further, both the assessee s and the Revenue s appeals are to be, as in the instant case, decided together. B. Decision (a) No long term capital gain arises to the assessee inasmuch as the entire shareholding of 42,000 shares sold during the year stands acquired during the year, with there being nothing on record to exhibit acquisition of 500 shares earlier. (b) The assessee is liable to be assessed u/s. 56(2)(vii)(c) of the Act at Rs. 337.50 lakhs, the fmv of 42000 shares in Manko acquired by him during the relevant year, less the cost shown to have been incurred on their acquisition, representing thus the price differential between the two. (c) No short term capital gain would arise to the assessee on the sale of 42,000 shares during the year for Rs. 337.50 lakhs in view of the same, the sale value agreed upon between the parties, at around the same time, in a transaction between unrelated parties, being, under the circumstances, also their deemed cost u/s. 49(4). (d) Inasmu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly have, restoring the matter back for the purpose, as we have toward the cost incurred, finding no material on record to support the claim of having actually incurred the cost claimed, nor indeed any finding in its respect, having been in fact presumed at the sum claimed. That apart, the application of s. 56(2) rests on the same factual findings as qua STCG. As is well-settled, the Tribunal is to deal with and determine questions which arises out of the subject matter of appeal, in light of the evidences, and consistently with the justice of the case (CIT vs. Walchand Co. Pvt. Ltd. [1967] 65 ITR 381). The subject matter of appeal, again, there is no gainsaying, flowing from the ratio afore-stated, is to broadly construed (CIT vs. Edward Keventer (Successor) Pvt. Ltd. [1980] 123 ITR 200 (Del))(refer para 2 of the order). There is no estoppel against law, and the proceedings under the Act are not in the nature of lis between the parties nor an assessment there-under a suit for adjudication of a civil dispute (Gadgil (S.S.) v. Lal Co. [1964] 53 ITR 231 (SC)). It is, it is to be appreciated, the correct legal position that is relevant, and not the view that the parties may take ..... X X X X Extracts X X X X X X X X Extracts X X X X
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