TMI Blog2006 (1) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... s promoters, directors, friends, relatives and associates should not be less than 25 per cent of the total issue of equity capital up to Rs. 100 crores and 20 per cent for the issue above Rs. 100 crores. In the case of FCDs, one-third of issue amount should be contributed by promoters, directors, friends, relatives and associates by way of equity before issue is made. In the case of PCDs, one-third of the convertible portion should be brought in as contribution of promoters, directors, friends, relatives and associates b~fore issue is made. Minimum subscription by each of the friends/relatives and associates under quota should not be less than Rs. 1 lakh. (b) This promoters' contribution shall not be diluted for a lock-in-period of 5 years from the date of commencement of the production or date of allotment whichever is later. Promoters must bring in their full subscription to issues in advance before public issue. (c) All firm allotments, preferential allotments to collaborators, shareholders of promoter companies whether corporate or individual shall not be transferable for three years from the date of the commencement of production or date of allotment whichever is later. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The following persons exercised their option to subscribe for shares and had also paid the application money of Rs. 8.80 per share. They thus held partly paid shares of Rs. 8.80 ps. each. Mr. Sumant Bharat Ram Dr. Vinay Bharat Ram Mr. Ashish Bharat Ram Mr. Vivek Bharat Ram Mrs. Sukanya Bharat Ram 7. The company, i.e., SRF Ltd. had already called upon the share warrant holders who had exercised their option to subscribe for their shares to pay the remaining sum of Rs. 79.20 ps. per share (i.e. the difference between Rs. 88 being face value of share and Rs. 8.80 ps. already paid along with application for allotment of shares and exercising option to purchase shares). The board of directors had called upon the warrant-holders who had exercised option to purchase shares to pay the call money of Rs.79.20 ps. per share vide their board resolution dated 10th October, 1995. 8. It is at this stage that the following promoters of M/s. SRF Ltd. who had exercised their option to purchase shares before payment of call money due on the share entered into an agreement for sale of the following shares to the assessee: No. of shares Mr. Sumant Bhara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared by the company; (4) after the expiry of lock-in-period i.e., on or after 4th October, 1997 to sell, transfer the share to the agent or to any other person including any bonus shares that may be issued on the shares that are sold by the principal to the agent; (5) to sign agreements, share transfers, etc. for effectual transfer of shares; (6) to lodge transfer forms with the company for effecting transfer of shares. 11. It is relevant at this juncture to mention that as per clarification issued by SEBI dated 10th October, 1994 transfer of shares amongst promoters specifically described as such in the prospectus was permitted but the requirement relating to lock-in-period would continue to apply to the extent initially prescribed. The assessee was also a promoter and as such transfer to the assessee was permissible but the requirement of lock-in-period for sale to outsider would however continue to apply. 12. There is no dispute about the fact that the assessee paid the application money of Rs. 8.80 ps. per share paid by the seller of the shares to M/s. SRF Ltd. There is also no dispute that the assessee paid the call money on the shares and the shares were thus fully pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , any transfer of shares which is prohibited by law and consequent loss cannot be allowed in view of the provisions of Explanation to section 37(1) of the Act, which lays down that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The Assessing Officer also held that the transaction of share transfers were between group companies where promoters had full control. He also made a reference to the fact that transfer of shares were not through brokers. The Assessing Officer therefore, also concluded that transactions are bogus and only book entries to reduce payment of tax. 16. The assessee had borrowed funds for making payment for purchase of these shares and had paid interest on such borrowings totalling Rs. 1,72,01,022 and claimed the same as deduction against dividend income that it received on these shares. The Assessing Officer disallowed the said claim for the same reasons that were assigned while disallowing short-term capital loss on sale of shares. 17. As alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foremost observation of the CIT(A) was that the Assessing Officer ought to have considered the issue of short-term capital gain according to the provisions of sections 45 and 74 of the Act. Thereafter the CIT(A) posed the following point for consideration: "Prima facie it appears that the short-term capital loss claimed is a mere paper loss and sham. Therefore, all the details relating to these transactions were examined to see whether there is collusive or colorable transaction or transactions aimed at tax avoidance under the guise of corporate veil." 20. The CIT(A) on an analysis of the balance sheet of the assessee noticed that it had a share capital of only Rs. 8 lakhs and had borrowed Rs. 4.62 crores as unsecured loan for purchase of shares of M/s. SRF Ltd. The assessee had paid Rs. 1,72,01,022 on such borrowings. Out of the interest payment as above a sum of Rs. 1,56,58,917 were paid to persons belonging to the group companies from whom borrowings have been made. Thus, the funds for purchase of shares had came from within the group companies. The CIT(A) noticed that the shares were sold by the assessee within a period of 9 1/2 months from the date of purchase resulting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt. Keeping in view the substantial number of shares being sold, it is agreed that 'price' for the purchase of these shares shall be Rs. 50 (fifty) per share aggregating to Rs. 3,78,65,000 (Rupees three crores seventy eight lakhs sixty five thousand only)." 22. The CIT(A) expressed doubt as to how the price at Rs. 50 would be equitable and fair when 10 months prior to the sale, the assessee paid Rs. 88 for the same shares when the duration of the lock-in-period was longer. The CIT(A) thereafter referred to the terms in the agreement for sale of shares by the assessee to the effect that share transfer duly signed by the appropriate person will be handed over to the purchaser and that a power of attorney would be executed in favour of the purchaser. The CIT(A) noticed that there was no evidence filed to prove the execution of transfer deeds or the power of attorney. The other objections of the CIT(A) were that the agreement did not specify the distinctive number of shares, that there was no reference to the non-transferability of shares up to 6th October, 1997, that the date on which the assessee received payment has also not been mentioned. The CIT(A) thereafter made a reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Secondly, the case of the assessee does not fall within the provisions of rule 30A(1)( ix) of the IT Rules, 1962. Therefore, the assessee is not entitled to the credit for TDS on these shares." 26. The CIT(A) also held that the decision of the Hon'ble Supreme Court in the case of Seth R. Dalmia relied upon by the learned counsel for the assessee was not applicable to the facts of the assessee's case, since the Hon'ble Supreme Court did not decide in the said case as to whether there can be a sale of equitable title in the shares. He held that the decision of the Hon'ble Delhi High Court in the case of Bharat Nidhi Ltd. will apply to the case of the assessee. 27. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. 28. We have heard the submissions of the learned counsel for the assessee and the learned Departmental Representative. Three issues arise for our consideration in this appeal: (a) Whether the Revenue authorities were justified in not allowing the short-term capital loss on sale of shares amounting to Rs. 2,87,77,400? (b) Whether the Revenue authorities were justified in disallowing the claim for deduction on account of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative brought to our notice the reason given by the Assessing Officer which was to the effect that there was a prohibition as per the SEBI regulations whereby transfer of these shares before 6th October, 1997 was prohibited and therefore, there could not be a valid sale of shares in favour of the assessee. Learned Departmental Representative also submitted that the transaction had taken place between the group companies without the assistance of stock brokers and so they were to be considered as bogus. She also relied on the decision of the CIT(A). 31. We have considered the rival submissions. We have already noticed that there was an agreement for sale (with the 5 shareholders) of the shares in favour of the assessee all dated 18th January, 1996. The agreement for sale does not specify the prices that the assessee was to pay to the original holders of the shares. The original holders also executed power of attorney in favour of the assessee. This power of attorney was dated 18th January, 1996. Even in this power of attorney there is no reference to the consideration to be paid by the assessee to the sellers of the shares. It has, however, been brought to our notice that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e., the shares) from the date of agreement. What is postponed is only getting the shares registered in the register of members of the company. The other rules laid down in sections 21-30 are not relevant for the present case. The CIT(A) has however made a reference to the decision of the Hon'ble Delhi High Court in the case of Bharat Nidhi Ltd. It may be mentioned here that in the facts of that case the serial numbers of the shares had not been mentioned. There was no evidence regarding delivery of shares nor was there evidence to show payment of purchase price. Besides the above, there was no delivery of transfer deed duly signed along with share certificate. In those circumstances the Court had held that there was no transfer of ownership in shares. As already pointed out in the present case the position is different inasmuch as all the conditions have been fulfilled. The law is well-settled that absence of registration of the name of the transferee as a shareholder in the register of members of the company is not a condition precedent for holding that a particular person is a holder of shares in a company or not. In view of the above, we are of the view that the assessee beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee sold the shares on 1st November, 1996 and the period between this date and the date of lock-in-period i.e., 6th October, 1997 was about 11 months. The reasoning of the CIT(A) was that since the time gap at the time of sale for the expiry of the lock-in-period was shorter, the price the assessee ought to have received must be higher than Rs. 88 which was paid when the very same shares were purchased on 18th January, 1996. We are of the view that this approach of the CIT(A) was not very relevant. The lock-in-period has nothing to do with the value of the shares. The shares in question had to be valued on the basis of market forces. The valuation has been done by the assessee on the basis of the formula prescribed by the SEBI for preferential allotment. In any event the Assessing Officer cannot dispute the full consideration received by the assessee on sale of shares. There was no material before the Assessing Officer to come to the conclusion about receipt of any higher consideration by the assessee than a sum of Rs. 50 per share. Therefore, this was not a valid basis for disbelieving the plea of sale of shares by the assessee. The definition of transfer as contained in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould amount to transfer giving rise to either capital gain or capital loss. 37. In reply to this argument, the first submission of the learned Departmental Representative was that such an argument was not put forth before the Revenue authorities. Secondly, it was submitted by the learned Departmental Representative that the Revenue authorities have held that there was no bona fide transfer of shares either in favour of the assessee or by the assessee in favour of any other person. 38. We have considered the rival submissions. As held by the Bombay High Court in the case of Tata Services Ltd. the transaction can be looked at even from the angle of sale of rights under an agreement for purchase of shares. It could be said that there was a valid assignment of whatever rights the assessee got to purchase the shares under the agreement dated 18th January, 1996 which was assigned to another person under the agreement dated 1st November, 1996. These agreements/assignments did give rise to a capital loss in the hands of the assessee. It could be said that such assignment resulted in a transfer of capital assets giving rise to a short-term capital loss. Even this alternative plea of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. This sum was offered for taxation. The assessee had borrowed money for making investment in the shares and had paid interest on such borrowings. This interest was claimed as an expenditure incurred for earning the dividend income. The only reason for disallowance of interest was that the transactions have been held to the sham transactions. The Assessing Officer has further taken a stand that since there was violation of SEBI Regulations the transactions are illegal. We have already found that transactions were neither sham nor illegal. In CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), it has been held that interest paid on borrowings for making investment in shares have to be held to be deductible irrespective of the fact whether the assessee receives dividend on shares purchased or not. In the present case, dividend income has been brought to tax under the head "Income from other sources". In view of the provisions of section 57(iii), the claim of the assessee for deduction of interest paid on borrowings to make investment in the shares from which dividend was received was to be allowed as deduction. The Assessing Officer is directed to allow the claim for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on or before 5-10-1997, the expiry of the lock-in-period. The provisions of section 199 of the Act, mandates that credit for tax deducted and paid to the Central Government shall be construed as a payment on behalf of the shareholder and credit shall be given to him (i.e., the shareholder) for the amount so deducted on the production of certificate under section 203 in the assessment of such income (i.e., the dividend income). Proviso (ii) to section 199 provides for exceptions where credit can be given to some other person also (i.e., other than the shareholder) and these exceptions are listed in rule 30A of the IT Rules, 1962. In the present case, the applicable rule is rule 30A(1)(ix), which we have already referred to herein before. The facts with regard to steps taken for registration of shares are not available on record. The requirement of the rules are not fulfilled in the present case. The credit claimed, therefore cannot be allowed. In view of the above, the assessee is not entitled to credit for TDS on the dividend and the Assessing Officer was not justified in not giving due credit. This issue is decided against the assessee. 43. In the result, the appeal of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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