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2016 (9) TMI 993 - ITAT CHENNAI

2016 (9) TMI 993 - ITAT CHENNAI - TMI - Addition u/s 14A - Held that:- AO has to consider the assessee’s own fund i.e. capital and reserves as available on the date of investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries as held by the above order of Co-ordinate Bench. With this observation, we remit the issue to the file of AO for fresh consideration - Understatement of sales consideration - dubious or bogu .....

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to prove that the documents filed by the assessee were bogus, false or fabricated and the long term capital loss shown by the assessee is there not at all. The only material to support the conclusion of the AO is that either the purchase of shares by the assessee was at ₹ 31.19 per share or the assessee has sold the shares to the sister concern, TVS e-Access Pvt. Ltd. at a cost of Rs. one paise per share, whereas the same shares were sold to one of the Directors, Smt. Mallika Srinivasan at .....

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negative, it is endeavour of the every person to get rid of that liability to save from future liabilities. In other words, in this modern economy, the share price is subject to high volatile and value of shares, which may be very high on one day and due to change of circumstances it may collapse in the market on very next day and it may go even nil value, due to circumstances beyond the control of the Directors or management of the company. A person, who is dealing in shares would become a mill .....

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the assessee. We have to see the ground realities, one who deals in shares in the open market, knows the depth of the same and not the AO. In our opinion, the reason advanced by the ld. DR to hold that it is not colourable device holds no water. - Further, ccomparing Mrs. Mallika Srinivasan's sale of shares of her holding in TVSF&S @ ₹ 25 per share is also illogical and has no substance. This is because she is a shareholder, under the public category, holding a few hundred shares, whi .....

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- Further, regulations of SEBI for delisting and price ought to be offered to the public shareholder on the basis of book building process should be recognised and when so done, the sale price adopted for sale of some TVSF&S shares held by TVSM to TVSEA at 1 paisa cannot be compared because one is through delisting process price and another is arrangement of the promoters to recognise the nil value or negative value of the shares held by them in huge quantities as promoters. When they want t .....

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NT MEMBER The appeal by the Revenue and the cross objection by the assessee are directed against the order of the Commissioner of Income-tax(Appeals) dated 23.11.2015 for the assessment year 2010-11. 2. The first ground in Revenue s appeal is as under : 2.1 The learned CIT(A) erred in directing the Assessing Officer to restrict the disallowance to Rs. 56,64,493/- as claimed by the assessee without considering the provision of section 14A r.w.s.8D wherein applying the Rule 8D for calculating disa .....

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6,46,250 which is worked out on that basis. 3. The facts of the case are that the assessee has earned Dividend Income of ₹ 13,73,026/- which is exempt from Income tax. The assessee had voluntarily disallowed a sum of ₹ 27,461/- representing 2% of dividend income as expenditure u/s 14A. During the course of assessment, the assessee voluntarily offered for disallowance u/s.14A a sum of ₹ 56,64,493/- after taking into consideration a reasonable portion of salary of the persons wh .....

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iture of the persons engaged in the treasury management and proportionate postage, telephone, conveyance and bank charges for disallowance, considering the huge investments of ₹ 739-26 crores shown in the Balance sheet, the amount offered for disallowance by the company is not at all reasonable. Therefore, it is hereby considered necessary to determine the expenditure as per section 14A r.w. rule 8D' and the same need to be excluded from the total expenditure of the assessee." 4. .....

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lating the disallowance under Rule 8D. d) In view of the decisions of the ITAT, Chennai and the High Court, relied on by the appellant, the investment in subsidiary companies ought not to have been considered for the disallowance under Rule 8D. e) Similarly the investment out of which no dividend was declared should been excluded from the calculation under Rule 8D. f) It is clear from the assessment order that during the assessment proceedings, the appellant had voluntarily offered for disallowa .....

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ent proceedings as perAnnexure-1 to this order is acceptable. The AO is directed to verify the figures in the calculation given in Annexure-1 with reference to the assessment record and to restrict the disallowance u/s. 14A to 56,64,493 - in place of ₹ 1,59,52,574 as admitted by the AO in the assessment order. This ground is partly allowed. 4.1 Against this, the Revenue is in appeal before us. 5. The ld. DR submitted that the CIT(Appelas) cannot remit the issue back to the file of the AO f .....

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r earning exempt income from the investments only to be considered and he drew our attention to the paper book showing that the investments are in equity shares of sister concerns and these investments are made on account of commercial expediency. He placed reliance on the judgment of Delhi High Court in the case of CIT Vs. Bharti Overseas Pvt. Ltd., dated 17th December, 2015 wherein held that expenditure in relation to income which is exempt shall be aggregate of expenditure attributable to tax .....

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to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best & Crompton Engineering Ltd. in ITA No.1603/Mds/2012 dated 16.7.2013, wherein it was observed that interest on borrowings used for the business purpose cannot be considered for the purpose of computing disallowance u/s.14A r.w. Rule 8D(2)(ii) of the IT Rules and the relevant portion is reproduced as below: 10. .....

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us now examine whether the amount has been correctly quantified. The AO had calculated the disallowance at Nil, ₹ 1,04,38,000/- and ₹ 26,87,000/- under (i), (ii) & (iii) of rule 80 (2)respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at ₹ 1,04,38,000/. The AO h .....

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lized for making any investments having tax-free incomes. From the copy of the sanction letters from State Bank of Bikaner & Jaipur it can be seen that the loan was granted with a specific requirement that the loan shall be utilized for purchase of imported machinery while in the case of loan from Federal Bank, it is seen that the loan was to be utilized for expansion of projects. Sanction of both these loans prohibit utilization of funds for purposes other than for the utilization for which .....

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y utilized for investments, then the first and second limb of rule 80 attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term loan amounting to ₹ 67,92,000/- and ₹ 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to ₹ 1,29,43,000/- for com .....

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ch loans were also used for the purpose for which they were sanctioned. In the circumstances, we find that the Commissioner of Income Tax (Appeals) has rightly excluded such interest from the purview of computation of disallowance under Rule 8D(2)(ii). 12. The decision of Calcutta Bench of this Tribunal in the case of Champion Commercial Co.Ltd. (supra) also supports the view of the Commissioner of Income Tax (Appeals). The Tribunal had considered a situation when the loans were utilized for the .....

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s provision admittedly deals with a situation in which the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt . Clearly, therefore, this sub clause seeks to allocate common interest expenses to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is expenditure by way of interest………..which is not direc .....

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gruous inasmuch while it specifically excludes interest expenditure directly related to tax exempt income, it does not exclude interest expenditure directly related to taxable income. Resultantly, while rule 8D(2)(ii) admittedly seeks to allocate expenditure by way of interest, which is not directly attributable to any particular income or receipt it ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is d .....

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to the taxable income. The interest expenditure which is not directly attributable to any particular receipt or income is thus only ₹ 10,000. However, in terms of the formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for ₹ 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be A = amount of expenditure by way of interest o .....

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st expenses, interest expenses directly relatable to tax exempt income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue aut .....

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-any aspect of the assessee's business such as plant/machinery etc.) . Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded from the definition of variable A in formula as per rule 6D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be .....

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al quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)…………… The justif .....

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D(2)(ii), and based on such a stand constitutional validity is upheld by Hon ble High Court, it cannot be open to revenue authorities to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Viewed thus, the correct application of the formula set out in rule 8D(2)(ii) is that, as has been noted by Hon ble Bombay High Court in the case of Godrej and Boyce (supra), amount of expenditure by way of interest that will be taken (as ' .....

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the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain wo .....

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8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice. 13. In view of the decision of the Calcutta Bench of this Tribunal cited above, we uphold the order of the Commissioner of Income Tax (Appeals) in excluding the interest on bank loan and term loans for the purpose of computing disallowance under Rule 8D(2)(ii). The grounds raised by the Revenue are rejected on this issue. 6.1 In view of the above decision, we are of the opinion that t .....

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eld that:- 12. We have considered the rival submissions on either side and perused the relevant material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was ₹ 2385.7 Crores as on 31.03.2010. The available share capital is ₹ 1970.4 Crores and Reserves and surplus is ₹ 21,886.7 Crores. The investments made in mutual funds including subsidiary companies are only ₹ 541.11 Crores. Therefore, it cannot .....

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and investment made by the assessee in the share capital and mutual funds. In the absence of any nexus, the presumption is that the assessee has invested the available interest-free funds in share capital and mutual funds. Furthermore, making investment in sister concerns is for commercial expediency in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not the case of the Revenue that the sister concern or any of the Directors has misused the funds invested .....

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Assessing Officer is deleted. 6.2 We also rely in the case of Beach Miners Co. Pvt Ltd. Vs. ACIT in ITA No.2110/Mds./14 dated 06.08.15 wherein held that: 6.1. Ground No.3 - Disallowance of expenditure by invoking the provisions of section 14A of the Act for ₹ 3,11,34,630/- since the assessee had made investments of ₹ 71,55,33,570/- for earning exempt income. At the outset, we find that there is no merit for the Revenue to make addition of ₹ 3,11,34,630/- invoking the provision .....

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t. This ground raised by the assessee is allowed in its favour. 6.3 In view of the above judgments, the AO has to consider the assessee s own fund i.e. capital and reserves as available on the date of investment which yields exempted income and thereafter he shall apply the Formula in Rule 8D and also exclude investments in subsidiaries as held by the above order of Co-ordinate Bench. With this observation, we remit the issue to the file of AO for fresh consideration. Hence, this ground is allow .....

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ing the assessment year under consideration, the assessee had sold the shares of TVS Finance and Services Ltd (TVSFSL), both long term and short term, for a consideration of one paisa per share which resulted in capital loss. Thereafter, the assessee set off the capital loss arising out of the aforesaid sale of share against the capital gain arising out of sale of land owned by the appellant. The Assessing Officer found that the sale of shares at one paisa per share was a colourable device to se .....

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or purchase of shares of M/s. TVS Finance and Services Ltd (TFSL for brevity) in financial year 2008-09 for a total value of ₹ 3 crores, in order to have interest in the business of TFSL, which would help in financing the products manufactured by TMCL. The assessee was asked to produce copy of the above mentioned agreement entered into with TVS Investments Ltd with the assessee company. However, despite several opportunities given, the assessee was not able to produce the same. Further, th .....

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um. Moreover, the agreement is set to have been entered to provide the assessee company, to further business opportunities by way of credit support to its customers. However, as seen from the financials of the assessee company for the financial year 2009- 10, the company has disposed the shares purchased, immediately i.e on 03.03.2010 for a paltry sum of ₹ 0.01(ie one paisa) per share. 9.2 According to the AO, it is evident that the averment of the assessee that they purchased the shares o .....

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times its tradable value. 9.3 The AO examined the reasons behind such an arbitrary transaction between the assessee and its related group concerns i.e TVS Investments Ltd and TVS e-Access India Ltd. He mentioned that the TVS Investments Ltd. TFSL and TVS e-Access India ltd are group concerns managed by common Chairman whereas the assessee company TVS Motors Ltd. is managed by a different Chairman. Hence, for this precise reason, the assessee has sold the shares of TFSL to TVS e-Access India Ltd .....

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see had booked huge capital loss by selling the shares of TFSL to TVS e-Access India Ltd as stated above. 9.4 Further, the AO observed that the assessee company had sold the shares of TFSL during the financial year and booked long term capital loss. During the scrutiny proceedings, it was found that, for the financial year 2009-10 the case of M/s. TVS Investments Ltd, it was noticed that one Smt. Mallika Srinivasan has sold such shares at a cost of ₹ 25 per share resulting in capital gains .....

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dmitted, then the assessee which is a listed company, should have also bought the shares of TFSL @ 1 paisa only which is not the case. 9.5 In view of the above discussion, the AO held that the entire gamut of transaction between the assessee company and its group concerns was carried out with a single motive to evade tax in the guise of transfer of a capital asset i.e shares of TFSL. This is only a colourable device and a design adopted by the assessee company to evade payment of tax consistentl .....

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is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of "emerging" techniques of int .....

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per way and that too with transparency, For the purpose of showing that transparency and bona fide, it is obligatory on the part of the firm which is avoiding such loans to sister concerns or subsidiary concerns to show that proper efforts were made for the purpose of recovery of such advances/loans, otherwise such entries would be susceptible to inviting of an inference adversely, putting such entries in the gamut of attempts at reducing the taxable income by reducing the profit and resultant r .....

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t, 1961 read with rule 11 of the Income tax (Appellate Tribunal) Rules, 1963 - Appellate Tribunal - Orders of - Assessment Year 2001- 02- Assessee transferred certain land to bank - Assessee claimed to have incurred long term and short term capital losses on share trading transactions- Accordingly, it set off said losses against capital gain earned on sale of land - Assessing officer found that assessee entered into sham and bogus share trading transactions resulting in capital loss with purpose .....

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ging said case to notice of parties, revenue had caused prejudice to its case; all in violation of principles of natural justice and of rule 11 - whether since decision of Supreme Court in Sumati Dayal case (supra) was cited by tribunal only for purpose of reiterating well settled and established position of law, it could not be said to have caused- held yes -Whether when a transaction is sham and not genuine as-instant case , then it could not be considered to be apart of tax planning or legiti .....

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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". 9.9 Thus, considering the precedence rendered in the above cases cited supra and also keeping in mind the facts and circumst .....

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gher selling price at ₹ 31.19/- per share in place of assessee's actual selling price of 1 paisa per share, he analysed the observations of the A.O. mentioned under para 16.2, assessee's submission under para 16.3 and the assessee s rebuttal point-by-point under para 16.4 of CIT(Appeals) order and summarized his remarks under para 16.5 of his order. From the above analysis, the CIT(Appeals) came to the following conclusion: a. I agree with the appellant that the AO has not given an .....

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thod". Therefore, neither the purchase price of ₹ 31.19 nor the selling price of one paisa per share can be termed as "resorting to dubious methods". d. In the absence of a specific provision under the I-T Act, the AO's adoption of ₹ 31.19 per share is untenable. e. It appears that the AO has not considered the factual background which required TVSM to pay ₹ 31.19 per share. The AO has simply assumed that TVSM had "adopted" this price when this was .....

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pellant that the shares purchased from 2002 to 2005 had nothing to do with the price of ₹ 31.19 per share and only seven laklh shares were acquired at this price. Therefore, I do not see any justification for the AO in computing capital gains of almost ₹ 170 crores by adopting the price of ₹ 31.19 per share for all shares. g. The appellant has submitted a copy of the understanding signed by both TVSM and TVSI to substantiate that both TVSM and TVSI agreed to share the acquisiti .....

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with a view to book capital loss by buying shares at ₹ 31.19 per share. The AO has ignored the fact that TVSM has acquired TVSF&S shares in various stages in various years from 2002 onwards, major chunk of them @ ₹ 10 per share, and later at different prices. I agree with the appellant's contention that valuing the entire purchase made by TVSM at various prices at Rs.. 31.19 per share is grossly incorrect and is against the factual position. Therefore, in my considered opini .....

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before the AO. Hence, there is violation of Rule 46A. According to him, as per the assessee's submissions, M/s. TVS Motor Company Limited (TMCL for brevity) had entered into an agreement with M/s. TVS Investments Ltd, for purchase of shares of M/s. TVS Finance & Services Limited. (TFSL for brevity) in financial year 2008-09 for a total value of ₹ 3 Crores, in order to have interest in the business of TFSL which would help in financing the products manufactured by TMCL. The assessee .....

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n advance paid towards purchase of shares of TFSL, then the same need not have been classified as Inter Corporate Deposits' in the financials of M/s. TVS Investments Ltd and more further, there is no need to receive interest on such sum. Moreover, the agreement is set to have been entered to provide the assessee company, to further business opportunities by way of credit support to its customers. However, as seen from the financials of the assessee company for the financial year 2009-10, the .....

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ers manufactured by the Appellant company (TVS Motor Company Limited) (TVSM), b. necessary funds being invested in the years 2001-2005, c. facing acute melt down in the business prospects following economics lowdown d. competition in finance business institutions, between NBFC's and other banking e. inability to infuse necessary funds in the later half of the period 2001-2 010 by the Appellant company TVSM, and f. stricter NBFC norms imposed by RBI on capital adequacy and maintenance of nece .....

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the promoters of TVSFS think very seriously as to how they can salvage TVSFS at least cost as possible. 3) It was a sorry state of affairs that when one of the companies in the TVS group vizTVSFS.1was incurring huge losses, but, being a listed company with public having made in into TVSFS, leading to an unavoidable collapse, it impacted the credibility of the group as aand would create a great slur and a scar on the brand naïve "TVS". 4) The Appellant Company, being a promoter an .....

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ention of safeguarding the name TVS Group Protection of the TVS brand and credibility of the Group. 5) It was not any tax planning or tax avoidance method which was intended to be adopted in selling TVSFS shares at a nominal price of 1 paisa per share. This was an unpleasant and inevitable necessity to cut down the losses of failedbeleaguered finance arm, only to safeguard the public image of TVS among the investing community. 6) It was no doubt a Hobson's choice of either closing down the b .....

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S group that the acquisition through SEBI approved route of buyback price of the shares held by the public would be in the larger interest of the company's creditors, company's shareholders, and above all, in the interests of protecting the image of TVS Group. In this background, if the whole scheme of things, that unfolded itself in the period 2008-12 is seen, it would be evident that with the sale of the entire shares initially within the group into another company adding negligible va .....

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arting the company, utilising it for financing the vehicle sales and supporting it in all ways left the Appellant company, TVSM, at the end with the erosion of its entire investment; Thus it is no way backed by a tax planning scheme. The factual losses in quantitative terms were huge which the promoters had to bear. Incidentally losses sustained were availed to salvage, and to mitigate to the extent possible the huge loss in monetary terms in the investment made into the share capital of TVSFS. .....

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the above, the assessee has adopted a differential price of shares i.e. @ ₹ 31.19 per share while buying from M/s TVS Investments Limited and Re. 0.01 (i.e 1 paisa) per share when selling the same shares to M.s TVS E-Access India Ltd within 47 days. During the course of hearing, the assessee was requested to explain as to why such differential rate per share was adopted for sale of shares of TVS Finance & Services Limited. Para 11.6 in Assessment Order dated 3.3.2014: Thus it is clearl .....

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words, the assessee had purchased the share of TFSL at a cost which is 3119 times its tradeable value. Assessee's (TVSM) Rebuttal of AO's contention TVSF&S was initially engaged in providing corporate finance and made profits till the financial year 2000-01. Thereafter, it began providing finance for purchase of two-wheelers manufactured by TV SM and became an in-house finance company. TVSM invested 4,61,54,592 shares in TVSF&S @ ₹ 10/- per share in 2002-03, TVSM has acqui .....

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sold on March 3, 2010 (within two months) for one paisa per share to TVS e-Access India Ltd. resulting in 2.2 crores (approximately). It is necessary to understand why the shares were eventually sold for just one paisa per share. TVSM explained that TVSF&S was a non-banking finance company which was also listed in the stock exchange. After 2001 -02, TVSF&S incurred losses year after year and, by financial year 2006 - 07, the accumulated losses stood at ₹ 75 crores. All NBFCs are go .....

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directions of RBI and continued to incur further losses. TVSF&S surrendered the certificate of Registration granted by RBI on 22/7/2009. The prime motive of setting up a captive finance company, owned and controlled by a manufacturer ("parent") is underwriting the sale of the parent manufacturer's products. A captive financing arm functions primarily as an extension of a parent's marketing activities. The captive unit facilitates the sale of goods or services by providing f .....

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pleasant inevitable necessity to get out of failed loss beleaguered finance arm. TVSF&S, a NBFC governed by prudential regulations of Reserve Bank of India (RBI) has been incurring huge losses in its business and up to the financial year 2006-07 the accumulated losses of the company stood at ₹ 75 crores. During the financial year 2007-08, consequent on the inadequate Capital Adequacy Ratio (CAR) of TVSF&S, RBI advised the company that the company had not complied with the norms of .....

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making fresh investments. It had to opt, and it opted, for the latter choice as the closure would have not only affected the credibility of the company and the SCL / TVSM, but it could also have affected the TVS Group as a whole. Finally, TVSM had to undertake the main responsibility of restructuring TVSF&S business, as it also needed an in-house finance company. The restructure of TVSF&S was driven on account of the following: That TVSM needed an in-house finance company to effectively .....

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2 Cr, on marginal costing principles. Thus it would be clear that the entire loss of TVSF&S are genuine and that most of the losses mounted only after suspension of the business. Meanwhile, stock exchange regulations require that a listed company should have at least 25% of its share capital held by the public. The public shareholding in Feb 2008 was as follows: # Shareholders Shares Number in Lakhs % held 1 TVS Investments Ltd. 207.06 50.01% 2 TVS Motor Company Ltd. 164.53 39.74% 3 Anusha I .....

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o for delisting. This was considered in the best interest of the public shareholders. TVS Investments Ltd. also believed that the acquisition from public shareholder of the Equity Shares was in the larger interests of the Company, creditors and shareholders themselves, besides being in the larger interest of the TVS Group itself. However, the promoters held 90% of the capital of TVSF&S and the public holding was only 10%. The promoters of TVSF&S had to either increase the public holding .....

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building process, the maximum number of shares were tendered at ₹ 25 and a company called TVS Investment Ltd., which was one of the promoters of TVSF&S, acquired all the shares that were tendered by the public at ₹ 25 per share. Under the SEBI guidelines, only one of the promoters has to make the public offer to acquire shares in preparation for the eventual delisting. As TVSM was also the promoter of TVSF&S, it was agreed that the two promoter companies would equally split .....

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hare as part of TVSM s obligation to acquire the shares from the public as a co-promoter. In addition, TVSM had earlier acquired 8,67,62,192 shares of TVSF&S on various dates during the period 2002-2005 for a total consideration of ₹ 86.91 crores. TVSM had, therefore, acquired most of these shares between 2002 to 2005 at a face value of ₹ 10/- In January 2010, it acquired about 7.04 lakh shares at a price of ₹ 31.19 per share arrived at on the basis of book building price o .....

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the assessee s submissions, M/s TVS Motor Company Limited (TMCL for brevity) had entered into an agreement with M/s TVS Investments Ltd for purchase of shars of M/s TVS Finance & Services Limited (TFSL for brevity) in financial year 2008-09 for a total value of ₹ 3 Crores, in order to have interest in the business of TFSL which would help in financing the products manufactured by TMCL. The assessee was asked to produce copy of the above mentioned agreement entered into with TVS Investm .....

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as Inter Corporate Deposits in the financials of M/s TVS Investments Ltd and more further, there is no need to receive interest on such sum. Moreover, the agreement is set to have been entered to provide the Assessee company, to further business opportunities by way of credit support to its customers. However, as seen from the financials of the Assessee company for the financial year 2009-10, the company has disposed the shares purchased, immediately, i.e., on 03.03.2010 for a paltry sum of Re. .....

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ge Regulations, this ICD was used to adjust against sale proceeds of shares. The same ICD has been adjusted against the price payable by TVSM for 7,04,349 shares purchased as per understanding @ ₹ 31.19 per share. Adjustment of ICD against the price payable is a normal accounting procedure to settle the ICD by adjusting against sale price due. There is no statutory basis for AO to adopt the price of ₹ 31.19 per share as against the selling price of one paisa per share. None of the se .....

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pay ₹ 31.19 per share. The AO has simply assumed that TVSM had adopted this price when this was the actual cost incurred by TVSM in complying with SEBI regulations. As a co-promoter, TVSM was obliged to acquire the shares from the public. The AO has seriously erred in adopting the price of ₹ 31.19 per share as the deemed selling price. Most of the shares had been acquired by TVSM from 2002 onwards for ₹ 10/- per share. Indeed, the adoption of ₹ 31.19 as the price per sha .....

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hares viz., 8,67,62,192 shares acquired between 2002-2004. TVSM bought 7,04,349 shares i.e., 50% of TVSF&S shares from TVSI, out of the 15,90,829 shares acquired through book building process. TVSF&S shares were acquired by TVSI from the public through book building process as laid down under SEBI Regulations. Both TVSM and TVSI agreed to share the acquisition cost and expenses of book building in the ratio in which TVSI and TVSM hold TVSF&S shares in the capital structure of TVSF&am .....

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it, was acquired from the public under book building process viz., 31.19 per share which is the agreed price for co- promoter to acquire from TVSI. It is not correct to say that TVSM bought these shares of TVSF&S from TVSI, arbitrarily and with a view to book capital loss, at ₹ 31.19 per share. The fact is TVSM has acquired TVSF&S shares in various stages in various years from 2002 onwards, major chunk of them @ ₹ 10 per share, and later at different prices. The number of sha .....

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i.e. TVS investments Ltd and TVS e-Access India Ltd. It is pertinent to note at this point that the TVS investments Ltd, TFSL and TVS e-Access India Ltd are group concerns managed by common Chairman whereas the Assessee company TVS Motors Ltd is managed by a different Chairman. Hence, for this precise reason, the assessee has sold the shares of TFSL to TVS e- Access India Ltd. for a paltry rate of 1 Paisa per share whereas purchased the same shares at a huge rate of ₹ 31.19 per share from .....

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TVSM Rebuttal of AO's contention It is not correct to say that it is arbitrary; Management of companies of a group by one Chairman and management ofAssessee company, TVSM, by another Chairman has no relevance to the issue on hand.' TVSF&S was used all the years from 2001 as a finance arm to support sale of TVSM vehicles. All companies belong to the same TVS Group. When business interest, prudence to use captive finance arm to support OEM like TVSM is a common business practice in th .....

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the group since subsequently they were disposed and TVSF&S is getting a scheme approved by the Court for making TVSF&S defunct and liquidated. 4. Para 11.8 in Assessment Order dated 3.3.2014 It is pertinent to note that the assessee company had sold the shares of TFSL during the financial year and booked long term capital loss. During the scrutiny proceedings, it was found that, for the assessment year 2009-10 int eh case of M/s.TVS Investments Ltd. it was noticed that one Smt.Mallika S .....

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vestor" By this con t t' en ion, t h e said company has meant that for other than Retail Invest or', the sale price would be @ 1paisa only. If this specific contentio n is to be admitted, then the assessee which is a listed company, sh ould have also bought the shares of TFSL @ 1 paisa only which is not the case. Assessee's TVSM Rebuttal o AO's contention (a) Comparing Mrs. Mallika Srinivasan's offer, her holding in TVSF&S @ ₹ 25 per share is also illogical and .....

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y that they fixed retail investor price @ ₹ 25 per share and other than retail investor price at 1 paisa per share. (c) Regulations of SEBI for delisting and price ought to be offered to the public shareholder on the basis of book building process should be recognised and when so done, the sale price adopted for sale of some TVSF&S shares held by TVSM to TVSEA at 1 paisa cannot be compared because one is through delisting process price and another is arrangement of the promoters to rec .....

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the entire gamut of transactions between the assessee company and its group concerns was carried out with a singular motive to evade tax in the guise of transfer of a capital asset i.e., shares of TFSL. This is only a colourable device and a design adopted by the assessee company to evade payment of tax consistently over a period of years. 6. Para 11.10 in Assessment Order dated 3.3.2014 Decisions relied on by the A.O and the appellant The Hon'ble Supreme Court in the case of Mc dowell vs CT .....

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desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging' techniques of interpretation was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give ju .....

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was no question of law to be considered - held, yes (in favour of revenue)" Further, their Lordships have held that "The Supreme Court in the Vodafone International Holdings BV v. Union of India (2012) 204 Taxman 408/17 taxmann.com 202 (SC) makes it very clear that a colourable 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 li .....

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has to be adopted at the same rate per share as that of the transactions between the assessee company and TVS Investments Ltd i.e. @ ₹ 31.19 per share and accordingly, the Long Term Capital Gain is worked out to ₹ 167,47,07,618/- and Short Term Capital Gain is ₹ 3,07,09,115 as per Anenxure-2. Assessee's Rebuttal of AO's contention The AO has referred to certain passages from Mc Dowell v CIT 154 ITR 148 (SC) to allege that the transaction by TVSM is a colourable device. .....

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e. Therefore, neither the purchase price of ₹ 31,19 nor the selling price of one paisa per share can be called as "resorting to dubious methods". Indeed, the purchase price could not have been altered nor could TVSM have received any price for a company that had closed its operations and had a negative net worth. Section 48 of IT Act provides for mode of computation of capital gains. The starting point of computation is the full value of consideration received or accruing. What i .....

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ourt decision actually assist TVSM as the purchase price was based on SEBI regulations and the sale price was based on a valuation certificate. These cannot be called as lacking in transparency or bona fides. The AO has not given any. finding that the purchase price or selling price was not correct. There is also no explanation as to how the purchase price of a share based on SEBI regulations can be deemed to be the selling price. The Bombay High Court decision in Killick Nixon Ltd. v DCIT 20 Ta .....

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vs Biraj Investments Pvt Ltd. (2012) 24 Taxmann.com 273 (Guj) : (2) CIT vs Oberoi Hotels (P) Ltd. 334 ITR 293(Kolkata) (3) CIT vs S S Sankaralingam 176 CTR 520 (Madras) 13. We have heard both the parties and perused the material on record. In this case, the assessee had sold the shares of TVS Finance and Services Ltd. (TVSF&S), both long term and short term, for a consideration of one paise per share which resulted in capital loss. Thereafter, the assessee set off the capital loss arising o .....

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s were legal. Considering the various pleas of the assessee, the CIT(Appeals) allowed the claim of the assessee. 13.1 Now, the contention of the ld. DR, before us, is that these transactions were entered into by the assessee for evading tax on long term capital gain on sale of land and short term capital gain on investment and it cannot be allowed. Admittedly, in this case, net worth of TVSF&S is negative. TVSF&S is incurring continuously heavy losses and the said company went out on del .....

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g with other promoters are together the promoters of the assessee company. The Directors and relatives hold in aggregate 7,162 equity shares consisting of 0.01% of the total paid-up equity share capital of the TVSF&S as on Feb. 9th , 2008. The accumulated losses of TVSF&S was ₹ 99 crores as on 31.12.2007. Out of such losses, it is required to strengthen the net owned funds position and increase the long term capital base for future operations of the company. So, the main promoters .....

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negative net worth of the assessee company, it is not practicable to keep such shares in the hands of the assessee company, otherwise it cause huge damage on public image, which cannot be rectified by any means. Hence, the selling of shares of one paisa per share was the conscious decision which was cautiously taken so as to safeguard the image of the company. It was the belief of the company that the acquisition through SEBI approved route of buyback price of the share held by the public would .....

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osure can be understood. The parent company as a promoter was in a most unenviable position in sustaining the huge losses for having invested nearly ₹ 100 crores in the venture at difference stage and finally sustaining a huge capital loss. The sale of shares of one paise per share is only the methodology followed by the assessee to avoid any future losses in monetary terms. Further, it is to be noted that the AO has referred to certain passages from Mc Dowell v CIT 154 ITR 148 (SC) to all .....

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th, the seller cannot expect any amount from the sale of such an unlisted share. Therefore, neither the purchase price of ₹ 31.19 nor the selling price of one paisa per share can be called as "resorting to dubious methods". Indeed, the purchase price could not have been altered nor could TVSM have received any price for a company that had closed its operations and had a negative net worth. Further, normally authorities concerned shall proceed on the basis of the professed intenti .....

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though they resulted in tax liability, provided that they are genuine and bona fide and it cannot be called as colourable device. In case, a transaction took place with the sole intention to protect the image of the company and that resulted in deduction of tax liability, it cannot be called as a dubious method followed by the assessee, as the parties involved therein have the right to indulge any tax planning and it cannot be taken away by any judgment of the Court. This right has to be conside .....

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TR 597, the Supreme Court has held as under : The onus of establishing that the conditions of taxability are fulfilled is always on the Revenue and the burden lies on the Revenue to show that there is an understatement of consideration. Moreover, to throw the burden showing that there is no understatement of consideration on the assessee would be to cast an almost impossible burden upon him to establish a negative, viz., that he did not receive any consideration beyond what is declared by him. O .....

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lue being realized. The AO has cited the decision of the Madhya Pradesh High Court in Binodiram Balchand &Co. CIT (2001)118 Taxman 544. Indeed, the observations of the Madhya Pradesh High Court decision actually assist TVSM as the purchase price was based on SEBI regulations and the sale price was based on a valuation certificate. These cannot be called as lacking in transparency or bona fides. The AO has not given any finding that the purchase price or selling price was not correct. There i .....

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t worth, was delisted and its shares could not be sold to any third party. In other words, the shares of TVSF&S were worthless. 13.3 In the case of CIT vs Biraj Investments Pvt Ltd. (2012) 24 Taxmann.com 273 (Guj), the assessee M/s Biraj investment Put Ltd had made LTCG on sale of shares in M/s Rustom spinners Ltd and incurred Long term capital loss on sale of shares in M/s Rustorn Mills & industries Ltd, and the purchase/sales were effected to another investment company of the same grou .....

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he buyer and also received the full consideration had further held that in the absence of any provision in the Act preventing sale of shares to a company within the same group, it cannot be treated as colorable device. HC further held that it was always open to the taxpayer either to hold on the shares or sell the same to avoid any further loss if it is felt that the market value was diminishing. It is open to sell the same or some other share for profit during the same period. HC also observed .....

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o Ltd., (supra) came up for consideration and it was held by the Apex Court in the case of Union of India v Azadi Bachao Andolan, 263 ITR 706 as follows : ...assessee contended that this is not a case of colourable device. The assessee in its own wisdom desired to dispose of certain loss making shares. No provision of the Act or any other provision of law prohibits the assessee from disposing of such assets. Simply because during the same year, the assessee also sold certain other shares for a p .....

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fit by itself would not mean that this is a case of colourable device or that there is a case of tax avoidance. Further, there is no restriction that such sale or transaction cannot be, effected with a group company. As long as the Revenue could not doubt the sale price of shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suffer. In the present case, it is not even the case of the Revenue that shares were sold at a price lower than t .....

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es. 13.5 It is pertinent to mention the following phase of above judgments: ...a case where the assessee makes a gift of shares to his son. By reason of gift income from the shares would not accrue to the assessee but would accrue to the son and to that extent the income of the assessee would be diminished and his tax liability reduced. This cannot be regarded as a case of tax avoidance even if the motive of the assessee in making the gift was to save tax on the income from shares at a higher ra .....

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e Assessing Officer that the assessee company could have easily waited for a reasonable period of time for watching the market and could also have invested a further amount of ₹ 9 to 10 Crore to revive the business of M/s SKB. It is not within the province of the Assessing Officer to ignore an otherwise genuine transaction and to brand it as a colourable one on the ground that it was the duty of the company to invest further amount or it should have waited for a reasonable period. 13.7 In .....

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e Tribunal. The Tribunal has confirmed the order of the appellate authority regarding the deduction of capital loss from the total income by holding that the deduction made by the AO was unjustified." 13.8 Being so, in our opinion, when the AO has not doubted the purchase price, the selling price also cannot be doubted. The sale of shares of one paise is to avoid future huge liability and it is as per the SEBI regulations. Further, the AO has not doubted the net worth of TVSF&S as negat .....

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Jurisdictional High Court of Madras in the case of CIT v. S.S.Sankaralingam, 176 CTR 520 is in similar line which supports the assessee s case. 13.9 Another allegation of the ld. DR is that the assessee company sold the shares to its sister concerns, TVS e-Access India Ltd. at the cost of one paise and where public shares to the sister concern is one paise, the cost is ₹ 25/- per share to one of the Directors, Smt. Mallika Srinivasan. In our opinion, simply because loss making shares were .....

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as discussed in earlier para. 13.10 It is to be noted that in the case of CIT v. Oberoi Hotels (P) Ltd. (334 ITR 293), the Calcutta High Court has held as under: There is no dispute with the proposition of law that if there is conflict of opinions between the two Benches of the Supreme Court on a question of law, the one declared by the Larger Bench would prevail over the one pronounced by the other Bench. But if a Bench consisting of a smaller number of Judges interprets a decision of a Larger .....

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terprets the decisions of the Larger Bench because that is the interpretation of the Larger Bench by a Bench of the Supreme Court and the High Court cannot make a different interpretation than the one made by the subsequent decision of the Supreme Court which is binding upon it. The position, however, would be different if the subsequent smaller Bench of the Supreme Court in ignorance of the earlier Larger Bench takes a contrary view from the one taken by the earlier Larger Bench. In that situat .....

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taken in the case of Azadi Bachao Andolon. So long the decision in the case of Azadi Bachao Andolan is not held to be per incuriam by a Larger Bench decision of the Supreme Court, the High Courts should be bound by the explanation of that Bench given to the decision in the case of McDowell & Co. Ltd.-Union of India vs. Azadi Bachao Andolan&Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) followed. Even on merit, the reason of the AO that the assessee company could have easily wait .....

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the transaction is found to be quite in conformity with the law of the land. 13.11 Further, on merits also, the issue is squarely covered by the same judgment, wherein it was observed that capital loss attributable to share transaction could not be disallowed; it is not within the province of the AO to ignore an otherwise genuine transaction and to brand it as a colourable one. 14. In our opinion, it was the duty of the AO to bring on record sufficient evidences and materials to prove that the .....

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25 per share. However, none of the judicial pronouncements support this plea of the AO, specifically, the judgment of the Gujarat High Court in the case of Biraj Investment Pvt. Ltd. (supra). While making this kind of addition by the AO, the burden on the AO is very heavy to establish that the assessee has actually received the excess consideration than disclosed by the assessee. 14.1 It is pertinent to mention here that the order of the Tribunal in the case of ITO v. Smt. Kusumlata reported in .....

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T vs. Anupam Kapoor reported in (2008) 299 ITR 179 (P&H) is very much relevant. The held portion of this decision is extracted herein below :- Held, dismissing the appeals, that there was no material before the Assessing Officer which could have led to a conclusion that the transaction was a device to camouflage activities to defraud the Revenue. No such presumption could be drawn by the Assessing Officer merely on surmises and conjectures. The Tribunal took into consideration that it was on .....

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ll as the Tribunal Further, it was held as under: The Tribunal was right in rejecting the appeal of the revenue by holding that the assessee was simply a shareholder of the company. He had made the investment in a company in which he was neither a director nor was he in control of the company. The assessee had taken shares from the market, the shares were listed and the transaction took place through a registered broker of the stock exchange. There was no material before the AO, which could have .....

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se in share prices by more than 25 times too cannot be the basis to assume that the transaction was bogus. Abnormal fluctuation in share prices is a normal phenomena - the learned counsel for the assessee filed a chart showing low and high prices of some quoted shares during the 52 weeks as per Economic Times dated 27.02.2007 from which it can be seen that some shares increased even by more than 100 times. 14.4 The Tribunal, Delhi C Bench in the case of ITO vs. Naveen Gupta (5 SOT 94), has obser .....

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tions resulting in long term material gains in the hand of the assessee but there is no cogent material or evidence to indicate that the impugned sale proceeds reflected unaccounted income of the assessee. 14.5 In the case of Umacharan Shaw & Bros vs. CIT (37 ITR 271), the Supreme Court has held that suspicion howsoever strong cannot take place of proof. From the entire appreciation of evidence, the AO has failed to establish that the assessee has sold the shares at higer price. 14.6 The Sup .....

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not possible to hold that it is only dubious or bogus or collusive transaction, as it is controlled by common managerial persons. When we appreciate the entire evidence in wholesome manner, it cannot be overlooked on the simple reason that the surrounding circumstances would show that the claim of the assessee cannot be said that it is opposed to the normal course of human thinking and conduct or human probabilities. This principle has been laid down by the Supreme Court in two leading cases : .....

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ee was forced to sale the shares at very very low price. Actually, when the companies networth is negative, it is endeavour of the every person to get rid of that liability to save from future liabilities. In other words, in this modern economy, the share price is subject to high volatile and value of shares, which may be very high on one day and due to change of circumstances it may collapse in the market on very next day and it may go even nil value, due to circumstances beyond the control of .....

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d down, that may result in gain or loss, it cannot be said that it is colourable device adopted by the assessee. We have to see the ground realities, one who deals in shares in the open market, knows the depth of the same and not the AO. In our opinion, the reason advanced by the ld. DR to hold that it is not colourable device holds no water. 16.1 Further, ccomparing Mrs. Mallika Srinivasan's sale of shares of her holding in TVSF&S @ ₹ 25 per share is also illogical and has no subs .....

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