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TMI Blog2017 (3) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,00,000/- for Mumbai Office. Accordingly income was assessed at Rs. 2,97,13,750/-. 3. Aggrieved, assessee went in appeal before ld. CIT(A) but could not succeed. 4. Now assessee is in appeal before the Tribunal raising following grounds :- 1) The order of the learned Commissioner of Income Tax (Appeals) is erroneous and bad in law and on the facts of the case. 2) The learned Commissioner of Income Tax (Appeals) has wrongly disallowed Short term capital loss of Rs. 1,75,50,000/- considering the same as Sharn Transactigns. 3) The learned Commissioner of Income Tax (Appeals) has not allowed interest expense of Rs. 9,18,134/- as against interest free advance to group company. 4) The learned Commissioner of Income Tax (Appeals) has not considered Rent Exp of Mumbai Office as a Business expense. 5) The Appellant graves to add, alter or modify the aforesaid grounds. 5. Ground no.1 is general in nature which needs no adjudication. 6. As regards ground no.2 ld. AR submitted that during the course of assessment proceedings ld. Assessing Officer enquired about the short-term capital loss of Rs. 1,75,50,000/- wherein it was submitted that purchases of 15,000 equity shares each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt and, therefore, the transaction should not be treated as sham and claim should be allowed. An examination of the facts show thp4 the appellant has purchased the shares at a premium of Rs. 30 for a face value of Rs. 10/- per share. The shares were purchased on 22/02/2008 and were sold at face value of Rs. 10 on 23/12/2008. The companies whose shares have been purchased and sold are group companies involved in similar line of business. It is observed from the balance sheets of the three group companies as on 31/03/2009 whose shares have been purchased and sold that the income of these companies are from interest. The details of income shown by these companies for Financial Year 2007-08 & 7008- 09 are .as under; S. No. Name of company whose shares were sold Income F.Y, 2008-09 Income F.Y. 2007-08 1. Suraj Commodity Pvt. Ltd 31045 6782 2, Suraj Retail Pvt. ltd 31045 6782 3, Suro| Star Trading Pvt, ltd 30745 6782 The above facts show that the Interest income shown by the group companies was less In earlier year i.e. the year in which the shares were Issued on premium, It has increased marginally In the current A. Y. However, there is no major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase and sale of shares. These facts also clearly prove the motive of the appellant. In view of the above facts, I am in complete agreement with the findings of the A, O. which has been given by him on page 9 & 10 of his order. The transactions are treated as sham transactions and the short term capital loss is held to be disallowable. Before concluding this issue, the recent judgment of Hon'ble Bombay High Court in Income Tax Appeal No. 5538 of 2010 in the case of Killick Nixon Limited Vs. DCIT is worth mentioning. The Hon'ble Court has dealt with the similar facts ana* has held that the transactions were sham. The Hon'ble Judges have considered all the leading judgments of the Hon'bi(c) Supreme Court on issue and have analyzed the principle. It would be appropriate to quote from the judgment given by Hon'ble Judges which is relevant to ihe issue and regarding the clarity between tax planning and fax evasion. The relevant extracts are asunder: 14. So far as the principle Said down in the matter of Omar Safety Monamed Soft (supra) is concerned there can be no dispute about the proposition laid down therein. However we have not been shown how the Tribunal was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 The aforesaid observations of the Supreme Court makes it very clear that a colourable device cannot be a parf of tax planning, Therefore where a transaction is sham and not genuine as in the present case then it cannot be considered to be a parf of tax planning or legitimate avoidance of tax liability. The Supreme Court in fact concluded that there is no conflict between its decisions in the matter of Mc Dowell (supra), Azadi Bachao (supra) and Mathuram Agarwal (supra), in the present case the purchase and sale of shares, so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. Therefore authorities came to a finding that the same was not genuine. So far as the question Nos.(ii), (iii) fiv} and (v) ore concerned, we hold that these- are pure questions of facts and as there are concurrent finding of the authorities below, no question of /aw arises for this Court to interfere. In view of above facts and discussion, the ground of appeal is dismissed. 7. During course of proceedings before the Tribunal, ld. AR submitted that the impugned transactions of sale of shares of the three companies made to directors we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to call the transaction as "sham" transactions as both the parties were in existence i.e. buyer and seller, shares in question were already transferred to buyer, consideration is also fully received by the seller and duly accounted for. 8. Further ld. Assessing Officer has not considered the transactions of profit nature as sham transaction, which were also entered "off market" and executed between related parties as mentioned in the computation of income and has, therefore, acted with bias mind for the treatment of sale of investment on two different footings as per his own will. Ld. AR also objected to the observation of ld. Assessing Officer that in the event if the transaction is treated as genuine, the loss should be considered as speculation as no evidence of delivery of shares is given. Ld. AR firmly argued that there was proper delivery of equity shares of private limited companies through share transfer deed and bank account clearly indicates that the sale consideration has been passed which is contrary to the allegation of ld. Assessing Officer that only loss amount has been paid. 9. Further since the transaction between the related parties does not change the character ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact got amalgamated with the listed company "SURAJ STAINLESS LTD." during A. Y.2010-11 whose name was subsequently changed to "SURAJ LIMITED1. The purpose of sale/transfer of all shares of private limited companies held as Investment in the appellant company were with an intention that on amalgamation with the listed company the majority stake of such companies would not get transferred to listed company apart from the purpose of family arrangement. The shares in question of the private limited companies were transferred in the name of Directors at face value as part of family arrangement as stated hereinabove and the delivery of shares were given while incorporating their names in the share certificate, copy of which were submitted to the AO. Further, the sale consideration of such shares has been actually received by the company and is duly reflected in the bank account and books of accounts. The necessary documents such as debit/credit note, copy of share transfer forms and Bank Statement as well as of the directors as well as company showing payment/receipt of sale consideration were also furnished to the A.O. The comparison made by the AO of the transactions during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities and also submitted that colourable device has been used by the assessee in order to evade tax for setting off of short term capital loss as against long term capital gain by way of making sale of shares to the related parties at a very low price as compared to the purchase price. Ld. DR further submitted that purchase and sale of shares giving rise to the capital loss are rather sham transactions with a view to evade tax. 14. We have heard the rival contentions and perused the material placed before us and also gone through the decisions relied on. Through this ground assessee is aggrieved with the order of ld. CIT(A) confirming the action of ld. Assessing Officer treating short term capital loss of Rs. 1,75,50,000/- as sham transaction as well as speculative in nature. From perusal of record we find that in the computation of income assessee has shown long term capital gain of Rs. 2,97,13,752/- from sale of 3336 shares of Kamla Mansions Pvt. Ltd. Against this long term capital gain of Rs. 2,91,13,752/- assessee has claimed short term capital loss of Rs. 1,75,50,000/- from sale of shares of three companies purchased on 22.2.2008. Details of transactions giving rise to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her observe that the view taken by ld. Assessing Officer about the impugned transaction of short term capital loss of Rs. 1,75,50,000/- as speculative in nature cannot stand for in the given circumstances where there is physical delivery of shares by the company at the time of purchase on 22.2.2008, physical delivery of shares at the time of sale on 23.12.2008, full value of consideration for purchase and sale has been entered through account payee cheque. Copies of share transfer deeds are available on Paper Book from pages 39 to 56. Details of shares transfer are duly recorded in the statutory books of the company and also being filed in the annual return submitted with the Registrar of Companies. 16. We further find that the observation of ld. Assessing Officer that the transactions entered into in this year are similar to those entered in Asst. Year 2007-08 and 2008-09 is also not correct for the reasons that in the previous year the transactions were in the listed securities whereas in the current year the transactions are for sale of shares of private limited company entered into on "off market". 17. As regards the issue raised by Assessing Officer about the genuineness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of the facts and circumstances there was no justification for disallowing the capital loss from the sale of the shares. [Para ll] 20. We further observe that Hon. Jurisdictional High Court in the case of ACIT vs. Biraj Investment Pvt. Ltd. in Tax Appeal No.260 of 2000 has dealt with similar issue wherein assessee sold certain shares of Rustom Spinners Ltd. and had shown a long term capital gain of Rs. 1,46,792/- and short term capital gain of Rs. 7,41,563/- on sale of such shares. The assessee had also sold 80200 equity shares of Rustom Mills and Industries Ltd. for total consideration of Rs. 4,01,000/- and incurred a long term capital loss of Rs. 8,38,798/-. Observing all these facts ld. Assessing Officer was of the view that entire transaction which has been entered into between the group company are of a colourable device as the assessee company and the purchasing company had common directors. However, Hon. Jurisdictional High Court adjudicated the above facts and decided the issue in favour of assessee by observing as under :- 14. Having thus heard the learned counsel for the parties, we find that the relevant facts are not in dispute. The respondent assessee sold share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duly signed transfer forms, in so far as the assessee's relation with IDBI is concerned, there would be a serious question of validity of such transaction. We are, however, in the present proceedings, not concerned with such internal possible dispute between the assessee and the said financial institution. It may also be that if the purchaser Company desired to have such shares transferred in its name, such attempt would run into serious road block. Primarily, without the original share certificates in possession of the purchaser company, which was in possession of the IDBI Bank, the Company would not, in view of section 108 of the Companies Act, be able to register such transfer. Sub-section (1) of section 108 provides that a company shall not register a transfer of shares in or debentures of, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and further fulfilling the procedural requirements specified therein has been delivered to the company along with the certificate relating to the shares or debentures along with the letter of allotment of shares or debentures. Therefore, it would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther loss, if he finds that market value of the shares is fast diminishing. It is equally open for the assessee to effect such sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI is concerned and insofar as the purchaser's right to have shares transferred in its name is concerned. This, however, by itself would not establish that the sale of shares was only a paper transaction and a device contrived by the assessee to claim loss which it did not suffer and thereby seek set off against the capital gain received by it during the year under consideration. 18. In the case of Commissioner of Income Tax v. Sakarlal Balabhai, 69 ITR 186, a Division Bench of this Court observed that avoidance of tax cannot include every case of reduction of tax liability of an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been entered through proper banking channel. (h) Revenue has not doubted the purchase price of the shares in the earlier year. (i) Revenue has also not brought any material on record to prove that the price at which the shares have been sold during the year are less than the fair market price. (j) Insertion of section 56(2)(viia) has been made by Finance Act, 2010 w.e.f. 1.6.2010 for the calculation of deemed income if sale is not applicable to assessee as it is not retrospective in nature. (k) There is no iota of evidence to prove that the impugned transactions giving rise to short term capital loss of Rs. 1,75,50,000/- was a colourable device and entire arrangement was a paper arrangement. (l) Assessee has merely made legitimate tax planning within the frame work of law. 22. In view of our above observations and respectfully following the judgment of Hon. Jurisdictional High Court in the case of ACIT v. Biraj Investment Pvt. Ltd. (supra) and the decision of the Co-ordinate Bench in the case of Hasmukh M. Patel vs. ACIT (supra) we are of the view that assessee has rightly claimed short term capital loss of Rs. 1,75,50,000/- which is eligible to be set off against long term c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed. 25. Aggrieved, assessee is now in appeal before the Tribunal. 26. Ld. AR submitted that as regards non charging of Interest on Advances of Rs. 20.86 crore to M/s. Suraj Stainless Limited, referred to the financial statement of the company to clarify that the company has interest free fund of Rs. 19,31 Crore at the time of advances and the company was going to be merged with M/s. Suraj Stainless Limited from 01.04.2009 as per Scheme of Amalgamation and therefore the management has not charged interest on such advances. Ld. AR further submitted that non-charging of interest on loans cannot by itself be a sufficient ground for disallowing interest paid on loans taken by it in the absence of any nexus between the borrowed capital or interest free advances. Ld. AR also submitted that there are number of various judicial pronouncements that if there are sufficient funds on the particular date to cover the advance merely because assessee has also taken some loan it cannot be attributable that the interest bearing funds are diverted for non- business purposes. Reference was also made to Suraj Stainless Ltd. to which advance has been made on various dates out of surplus funds, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re interest-free funds include owner's own capital, accumulated profits and other interest-free creditors and loans, if total interest-free advances including debit balances of partners do not exceed the total interest-free funds available with the assessee, no interest is disallowable on account of utilisation of fund for non-business purposes and if it exceeds, the proportionate disallowance can be made. The AO is required to recalculate the figures of disallowance of interest paid on borrowed funds, therefore, the order of CIT(A) on this issue is set aside and the issue is restored back to the file of AO for the limited purpose to recalculate disallowance of interest paid on borrowed funds, if any, in accordance with the above observations and as per provisions of IT Act.-CIT vs. Tingri Tea Co. Ltd. (1971) 79 ITR 294 (Cal) relied on. 30. Respectfully following the decision of the Co-ordinate Bench in the above referred case we find that ld. Assessing Officer has made an estimated addition without proving the nexus between the interest bearing funds and interest free advances whereas assessee had sufficiently demonstrated to have enough interest free reserve and surplus and inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is a limited company and is regularly engaged in the business. The directors of the company used to visit Mumbai frequently for office purpose and in order to reduce the hotel expenses it was decided in the interest of the company to hire a Guest House at Mumbai so that as and when the directors visit Mumbai they can stay therein. Registered deed of leave and licence was entered on 19.11.2008, TDS was deducted on the payment made and all transactions have been entered through proper banking channel. Ld. AR referred and relied on the following decisions :- 1, CIT vs. South India Vicose Ltd. (2003) 259 ITR 107 (Mad) 2. CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd. [1992] 197 ITR 538 (Guj). 35. Ld. DR vehemently argued and supported the orders of lower authorities. 36. We have heard the rival contentions and perused the material placed before us. Through this ground assessee has challenged the order of ld. CIT(A) confirming the action of ld. Assessing Officer disallowing rent expenses of Rs. 9,00,000/-. We observe that for the first time during the year under appeal assessee has claimed rent expenses of Rs. 9,00,000/- towards hiring of Guest House at Mumbai for the stay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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