TMI Blog1998 (4) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... 1993-94, 1994-95 and 1995-96 respectively. 4. The brief facts of the case are that the assessee is an individual deriving income from business of dealing in securities, shares and units and also from the sources as reflected in the computation of income. The assessee filed its returns of income for the three assessment years which were accepted under intimation by an order under s. 143(1)(a) at the said declared amounts. Thereafter a notice under s. 148 was issued on12th Dec., 1995, whereby the learned Asstt. CIT proceeded to reopen the assessments by means of notice under s. 148 of the IT Act. In the notice dt.8th Jan., 1996, the Asstt. CIT intimated the following reasons for reopening the said assessments: "While inspecting the books of accounts during the course of assessment proceedings for the asst. yr. 1994-95, it was observed that you had purchased 30,000 units from Unit Trust of India @ Rs. 14.90 on 15th July, 1992 and you had sold 4 lakhs units @ Rs. 13.90 on 16th July, 1992 to your HUF, M/s Shankar Lal Ved Prakash. As you know the sale and repurchase prices of US 64 of UTI remain the same during the month hence sale to HUF was made to create a fictitious loss. An imme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above by holding that the dividend income of an amount of Rs. 10,05,500 be taxed under the head Income from other sources as per s. 56(2) of the IT Act, as against the claim of the assessee treating the same to be business income. The learned AO alleged that the assessee did not sell the UTI s units to the HUF. Except making book entries no real transaction has taken place. The HUF neither came in possession of the units because they were pledged to the bank and sold by the assessee, as and when he wished, nor any payment was made by the HUF to the assessee. The units were never transferred by the assessee to the HUF as it is clear from the fact that these units were pledged to the bank by the assessee. The certificates though remained in the bank custody till10th Dec., 1995. When the certificates were in bank s custody, he could not transfer or mortgage the same in anyway. There is no record in the bank to show that he has sold these units to HUF, M/s Shanker Lal Ved Prakash. There was no attempt by M/s Shanker Lal Ved Prakash, i.e., units were never sent to UTI for transfer. The dividend has always been coming in the name of the assessee and credited in his bank account even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had adopted a novel way to avoid sales made by the assessee to its HUF. In this way the dividend income of the assessee from the above units was taxed as income from other sources as per s. 56(2) of the IT Act for the detailed reasons given in paras 4 to 9 of the assessment order, which were also incorporated in the order of the CIT(A). 5. However, the first appellate authority concurred with the finding given by the AO, basically on the similar reasoning. The CIT(A) also justified the reopening of assessments under s. 148. 6. Aggrieved by that order, the assessee filed appeals before the Tribunal. 7. The learned assessee s counsel challenged the reopening of the proceedings under s. 148 of the IT Act, on the basis that the reasons given by the AO for reopening the assessment is not justified. It is pointed out that in the reasons recorded the AO stated that the assessee had purchased 30,000 units at the rate of Rs. 14.90 per unit on15th July, 1992and sold 4 lakhs units at the rate of Rs. 13.90 per unit on16th July, 1992to his HUF, M/s Shanker Lal Ved Prakash. According to the AO, sale and purchase price of unitsUS64 of the UTI remained the same during the month and sale to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calculation sheet arising from the sale/purchase of units Asst. yr. 1993-94 (Year ending 31st March, 1993). Date Units Rate Amount 26, 29 30 May, 1992 Purchased 4,00,000 15.75 63,00,000 16th July, 1992 Sold 4,00,000 13.90 55,60,000 Loss...... 7,40,000 However, dividend aggregating to Rs. 10,00,000 @ 2.50 earned on30th June, 1992. Effect : There is a net gain of 2,60,000. If the transaction of sale is disputed, then the purchaser will not be liable of assessment of dividend from units which on 30th June, 1993, aggregates to 10,40,000 and further, when purchased by M/s Shanker Lal Ved Prakash @ 13.90 were sold @ 17.95 and hence the difference of Rs. 405 aggregating in all to 16,20,000 is not taxable in the hands of M/s Shanker Lal Ved Prakash. Asst. yr. 1994-95 (year ending 31st March, 1994 ). Date Units Rate Amount 30th Jan., 1993 Purchased 60,000 16.40 9,84,000 30th July, 1993 Sold 60,000 15.10 9,06,000 Loss...... 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of Rs. 13.90 per unit to the HUF, M/s Shanker Lal Ved Prakash had given a profit of 05 P. per unit, then, if it was sold to the UTI. There is, therefore, no justification to compare the rate of purchase and sale of the unit. It is pointed out that the object of UTI s US 64 Scheme is to provide growing income. This is the first scheme of the trust, which was introduced on1st July, 1964. The sale and repurchase of units are always ever since inception the scheme in 1964, is lowest in July with gradual monthly increases and the highest in May before the books close from 1st June, until 30th June. The sale and repurchase prices, as stated above, are increased by Unit Trust of India every month starting from July onwards. The very basis on which the UTI determines such monthly increases is primarily interest-oriented and the very object is to provide the unit-holder a regular income, as is the prime object of the scheme so that the unit-holder can earn in the form of dividend and by selling the units at any time of the year even if the unit-holder decides not to wait until usual July month for the receipt of annual interest/dividend. Thus, the buyer of units pays a base price plus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permissible under the personal law which governs the Hindu. It is also pointed out that same income cannot be assessed in the hands of individual as well as the HUF. Once the Department has treated the dividend income in the hands of HUF and assessed the same, even the interest has been allowed, it is accepted by the Department that the dividend income belongs to the HUF, otherwise there was no purpose of allowing any interest claimed to have been paid to the bank. So far as the Department is concerned, income has been assessed, it cannot be twicely assessed in the hands of the assessee. Reliance was placed on the following decisions: (1) Jhaveribhai Behari Lal Co. vs. CIT (1984) 43 CTR (Pat) 125 : (1985) 154 ITR 591 (Pat); (2) State ofUttar Pradesh Anr. vs. Raza Buland Sugar Co. Ltd. (1978) 118 ITR 50 (SC); (3) CIT vs. Calcutta Discount Co. Ltd. 1973 CTR (SC) 425 : (1973) 91 ITR 8 (SC); (4) Ramalinga Chhodambikai Mills Ltd. vs. CIT (1955) 28 ITR 952 (Mad); (5) India Finance Construction Co. (P) Ltd. vs. B.N. Panda, Dy. CIT (1993) 109 CTR (Bom) 140 : (1993) 200 ITR 710 (Bom); and (6) Imperial Chemical Industries Ltd. vs. CIT (1979) 119 ITR 46 (Cal). 9. As against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1992, at the rate of Rs. 15.75 per unit-cum-dividend. The dividend was received in July, 1992, at the rate of Rs. 2.50 per unit. Thus, the effective cost of each unit purchased aggregated to Rs. 13.15 per unit, whereas the present units were sold at Rs. 13.90 per unit to the HUF since after the declaration of dividend, whereas the UTI s repurchase rate was Rs. 13.85 per unit. In this way, the sale thereof did not result into loss but income by way of dividend. In such circumstances, the assumption of jurisdiction for initiation of proceedings under s. 148 of the IT Act was arbitrary and not based on any valid material. In the case of ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC) at p. 448, the Hon ble Supreme Court has observed as under: "The reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year because of his failure to disclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lculation sheet as additional paper-book given at pp. 4 to 6 in order to show that in fact the assessee had not suffered any loss but made a gain of Rs. 2,60,000 in asst. yr. 1993-94, Rs. 78,000 in asst. yr. 1994-95 and Rs. 2,13,750 in asst. yr. 1995-96, because of the fact that the assessee had earned dividend from these units before the sale is made to M/s Shanker Lal Ved Prakash HUF. But this fact has been ignored by the Revenue. The AO accepted purchase of the units and receipt of dividend and ignored the third part, the sale of units to the HUF. Whereas the transaction has to be seen in totality. If we go through the calculation sheet given by the assessee, which is not challenged by the Departmental Representative, it will reveal that in fact there is no loss at all in the said transaction. Had the assessee not entered into this transaction, his income would have been less by the net profit shown in the calculation sheet for these assessment years respectively. The learned AO was of the view that motive to make the sale was not for any business purpose and there was no profit motive, which is not correct. These units were purchased by the assessee cum-dividend and the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised an overdraft limit of Rs. 75 lakhs from Punjab National Bank and provided the same to the assessee. The said HUF has paid interest in the asst. yrs. 1994-95, 1995-96 and 1996-97 towards interest on the amount borrowed and provided to the assessee. This important aspect also proves that the HUF had purchased the units and had provided the funds when required to the assessee-HUF. It is not necessary that a person must pay the price immediately in a trade practice if the person may finance transaction from borrowed funds. Merely because one has no immediate funds by itself for financing the transactions, cannot be regarded as a sufficient ground to conclude that the transaction was sham. It is true that in the records of UTI the name of the unit holder assessee was entered. Therefore, in the normal course of event, as the units were not registered in records of UTI, it was the assessee, who has executed the documents of loan. It will be pertinent to mention here that a person has two capacities, one of his individual and another as a member of HUF. He binds the HUF with all his acts. Therefore, execution of document for loan by the assessee will not amount that this was a pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records that the Department has accepted the returned income from these units. It will be pertinent to mention here that the assessee had earned Rs. 10,05,500 by way of dividend on these units and thereby had taken the full advantage of the purchase by receiving dividend and it was only thereafter that the units were sold to the HUF. We do not understand as to how the Department is affected, whether the tax is paid by the assessee or is paid by his HUF, makes no difference to the Revenue and in such a situation, it cannot be concluded that the nature of device to reduce the incidence of tax was followed by the assessee, especially when there is no difference in the rate of tax chargeable from an individual and from his HUF. In this way, there has been no loss in the entire transaction. If for a moment it is believed that the seller and the purchaser are the same, then in what way the Department stands aggrieved. The assessee buys units for Rs. 15.75 per unit, receives dividend at Rs. 2.50 per unit and sells for Rs. 13.90 per unit, thereby making a profit of Rs. 0.65 per unit. At the same time the HUF s cost price is reduced to Rs. 13.90 per unit and when he actually sells the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court has observed that tax planning may be legitimate provided it is within the framework of the law. But certainly colourable device was denounced to be a part of tax planning. So it is pleaded that if there is a legitimate tax planning, it can be approved by the Courts. In the case of IRC vs. Duke of Westminister (1936) AC 1 : 19 Tax Cases 490 finds place at p. 152 of the said decision, it was observed that every man is entitled if he can order his affairs so that the tax attaching under the appropriate tax is less than it otherwise would be. If he succeeds in ordering them so as to secure this result then, however, unappreciative the IRCs or his fellow tax gatherers may be of his ingenuity, he cannot be compelled to pay an increased tax. Therefore, it is clear that the law permits legitimate tax planning within the framework of law and not a colourable device. In the case of CIT vs. Calcutta Discount Co. Ltd. the Hon ble Supreme Court has observed as under: "Whether a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device. But in the present case the facts are entirely different, and known to the Department. Therefore, the principal laid down in that case is distinguishable on the facts of the present case. Taking into consideration the totality of facts and circumstances, we are of the opinion that the sale of units by the assessee to the HUF was not a sham transaction but at arm s length. Therefore, the computation of income by the AO treating the sale by assessee to his HUF as sham, is unjustified. We, therefore set aside the order of the Revenue authorities and direct the AO to delete all the additions in the hands of the individual-assessee. 13. In the result, the appeals are allowed. ANNEXURE "A" Asst. yr. 1993-94 [year ending 31-3-1993 ] Per Unit Basic Price in July, 1991 14.10 Dividend Accrued 1.65 Total 15.75 July, 1991 to May, 1992 Sale/Realisation 13.90 2.50 16.40 (-) .20 (+) .85 (+) .65 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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