TMI Blog2017 (5) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the ld CIT (A). In the result we allow ground no 2 of the appeal of the assessee accordingly holding that revenue has failed to establish that transactions are sham and merely book entries and further the explanation to section 73 does not apply to the facts of the case thereby directing the ld AO to allow the short term capital loss to be carried forward. - ITA No. 2512/Del/2013 - - - Dated:- 18-5-2017 - Shri H. S. Sidhu, Judicial Member And Shri Prashant Maharishi, Accountant Member Assessee by : Sh. Ashwani Kumar, CA Revenue by : Sh. NK Bansal, Sr DR ORDER Per Prashant Maharishi, A. M. 1. This appeal is preferred by the assessee against the order of the ld CIT(A)-XII, New Delhi dated 28.02.2013 for the Assessment Year 2008-09, raising the following grounds of appeal:- 1. That the order dated 28-02-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) XII, New Delhi is against law and facts on the file in as much as she was not justified to uphold the action of the Learned Deputy Commissioner of Income Tax, Ward 9(1), New Delhi in directing the Assessing Officer to rework the disallowance of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessment proceedings, it is noticed that the assessee has shown capital loss on transaction of shares of following companies as under: 4.2 The assessee, vide order sheet entry dated 10.12.2010, was required to justify the transactions as also to explain as to why the same may not be treated as sham and just to lower the company's profits of business. The assessee, vide its reply dated 27.12.2010, has submitted as under besides the details of transactions already filed: (b) In connection with the above it is submitted that while it is a fact that the said transactions were a result of an off-market sale, it would not be correct to treat the same as sham transactions entered into just with a motive to lower the profits of the business. (c) The assessee Company had invested in the said two companies viz. M/s. Supreme Placement Services Pvt. Ltd. and M/s. Dependable Transport Pvt. Ltd. upon the basis of their future business plans and prospects. The said investments were made on the basis an analysis of the said plans and prospects, arising out of personal discussion, which revealed a substantial potential for future growth and resultant capital appreciation whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43.09 2 Dependable Transport Pvt. Ltd. RL-30, Ganga Ram Vatika, Tilak Nagar, New Delhi 210000 22.34 3 Supreme Placement Services Pvt. Ltd. E-60, Near Anand Pradhan, Om Vihar, Phase-V, Uttam Nagar, New Delhi. 325000 34.57 Total 940000 100,00 Shareholding of assessee company i.e. M/s Stylish Construction Pvt. Ltd, in the following company's : S . NO . Name Address No. of shares Percentage of equity shares held 1 Dependable Transport Pvt. Ltd. RL-30, Ganga Ram Vatika, Tilak Nagar, New Delhi 210000 22.34 2 Supreme Placement Services Pvt, Ltd, E-60, Near Anand Pradhan, Om Vihar, Phase- V, Uttam Nagar, New D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which short term capital] gain has been arrived. 4.6 All the above facts of the case lead to the conclusion that the transactions were made merely for entry purposes and as such the transactions are sham and have been carried out to lower the business profit of the company. Therefore the Short Term Capital Loss of ₹ 4,88,90,050/- claimed by the assessee is disallowed and the Long Term Capital Gain of ₹ 3,25,11,441/ and Short Term Capital gain of ₹ 1,58,43,649/ is treated as taxable income of the assessee as per the provisions of the Act. I am satisfied that the assessee has concealed income by furnishing inaccurate particulars to the extent of ₹ 4,88,90,050/.Hence, penalty proceeding u/s 271(l)(c) are being initiated separately 5. with the above observation, the income of the assessee company is computed as under: A. Income from Business and Profession: Income as declared by the assessee ₹ 1,28,860 Add: As discussed in para 3 above Rs.4,40,663 ₹ 5,69,523 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Pvt Ltd 23.05.07 170000 17000000 18.1.08 170000 10 1700000 15300000 (b) -do- 08.09.07 48200 4822050 18,1.08 48200 10 482000 4340050 (c) -do- 13.09.07 170000 17000000 18.1.08 170000 10 1700000 15300000 2. (a) M/s Dependabl e Transport Pvt Ltd 07.09.07 125000 12500000 18.1.08 125000 10 1250000 11250000 (b) -do- 08.09.07 30000 3000000 18.1.08 30000 10 300000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. This Explanation shall not apply to the following companies: a) Investment companies i.e. a company whose gross total income consists mainly of income chargeable under the heads 'Income from House Property', Capital Gains ' and 'Income from Other Sources '. b) A company whose principal business is of banking or granting of loans/advances The above explanation does not apply to the assessee since its main business consists of Capital Gains. But the assessee on his own w.r.t. his reply to 14A had said that his main business is supply of man power which forms a pre-dominant part of its business activities. (Detail is given at page 4 of this order). This is shows that it is not Capital Gain but supply of Man power is his pre-dominant business activities hence Sec. 73 is applicable and as a result carry forward of Short Term Capital Loss is dismissed. In result the appeal is partly allowed. 5. Therefore, assessee aggrieved by the above said o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d further the shares purchased were transferred in the name of the appellant company. The assessee has made certain profit and loss in sale of certain shares is on profit and sale of certain shares is at the loss. Therefore, merely when the shares are sold at loss it cannot be said to be a sham transaction. 6. With respect to the order of the ld CIT(A) he submitted that the ld CIT(A) has accepted the claim of the assessee that transaction is not sham but has applied explanation to section 73 of the Act holding that it is speculative loss. He submitted that ld CIT (A) has already held that transactions are not sham. He submitted that acceptance of the transaction of the ld CIT(A) holding it to be a speculative loss proves that order of the ld AO holding transaction of loss in shares is not sham. He submitted that main income of the assessee company is capital gain and not business , therefore provision of that explanation does not apply to the facts. He submitted that while disallowing 14 A something is mentioned is not determinative of the business of the assessee. Ld AO himself has taxed the above short term loss of shares under the head Capital gains‟ . He submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. The consideration of shares has not gone to the coffers of those companies from transacting parties but to the purchaser and sellers. Further off market transaction‟ as alleged by the ld AO is also not correct as the companies whose shares are purchased and sold are not listed and therefore there shares cannot be traded on stock exchange but off market only. Therefore merely there is cross holding of the companies, it cannot be said that the transaction purchase and sale is sham. The identical question arose before the Hon Gujarat High court in ACIT V Biraj Investments ( P ) Ltd [2012]24 taxamnnn.com 273 [Guj] where in has been held as under :- 3. The Assessing Officer noted that the shares of Rustom Mills and Industries Ltd., which the assessee sold were pledged with the IDBI Bank. The original share certificates were also lying with the said Bank. The assessee had also handed over duly executed transfer forms to IDBI. The Assessing Officer, therefore, called upon the assessee to clarify how under such circumstances the assessee could sell the shares. The Assessing Officer further noted that the purchaser company, viz. Bijal Investment Ltd and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had common Directors. Even Rustom Mills and Industries Ltd. whose shares were under contention had common Directors. He was of the opinion that looking to the impediments attached to such shares, the same would hardly have any market value. He was, therefore, of the opinion that the ratio of the decision of the Supreme Court in the case of McDowell Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11 would apply. 6. The assessee carried the matter further in appeal before the Tribunal. The Tribunal by the impugned order reversed the orders passed by the Revenue Authorities. Tribunal placed reliance on a decision of the Madras High Court in the case of A.M.P. Arunachalam v. A.R. Krishnamurthy [1979] 49 Comp. Cas. 662 (Mad) wherein the facts were that R had borrowed a sum of ₹ 35,000/- with security of 5000 shares held by him in a private limited company. The share certificates together with blank transfer forms duly signed by R were handed over to the creditors. R sold the shares to the plaintiff requesting him to discharge the debts due to defendant Nos.1 and 2 amounting to ₹ 37,602/- out of the sale consideration. He authorized defendant Nos.1 and 2 to deliver the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77] 47 Comp. Cas. 185 wherein the Apex Court held that the requirements of section 108 of the Companies Act were mandatory and not directory. In the said case, finding that despite the shares being under attachment and despite a separate prohibitory order having been issued to the Company, the Company registered transfer of shares, the Apex Court held that such action on the part of the Company was contrary to law. 10. Counsel placed heavy reliance on the decision in the case of McDowell Co. Ltd. (supra) to contend that transaction itself should be ignored as being a colourable device to avoid tax. Counsel drew our attention to some of the observations made in a recent decision in the case of Vodafone International Holdings B.V. v. UOI [2012] 341 ITR 1/ 204 Taxman 408 /71 taxmann.com 202 (SC) reported in wherein the ratio of the decision in the case of McDowell Co. Ltd. (supra) came up for consideration in view of the later decision of the Apex Court in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706/ 132 Taxman 373. 11. On the other hand, learned counsel Shri Bandish Soparkar for the respondent assessee contended that this is not a case of colourable devic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest. Therefore when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. 14. Having thus heard the learned counsel for the parties, we find that the relevant facts are not in dispute. The respondent assessee sold shares of Rustom Mills and Industries Ltd for a sum of ₹ 4,01,000/- on which transaction, the assessee claimed long term capital loss of ₹ 8,38,790/-. During the same period, the assessee also sold certain shares of Rustom Spinners Ltd. and showed long term capital gain of ₹ 1,46,792 and short term capital gain of ₹ 7,41,563/-. It is also not in dispute that the shares of Rustom Mills and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 difficult to envisage that if the purchaser company had tried to register the same in its name by virtue of the present transfer, such attempt would be met with stiff resistance from IDBI Bank. 16. In the present proceedings, however, we are not concerned with such internal disputes. We are primarily concerned with the question whether by virtue of the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 CIT v. Sakarlal Balabhai [1968] 69 ITR 186 (Raj.), a Division Bench of this Court observed that avoidance of tax cannot include every case of reduction of tax liability of an assessee. The assessee may enter into a transaction which has the effect of diminishing his income and consequently reducing his tax liability. In such a case, there would be no avoidance of tax, For example, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than [2053][four assessment years] immediately succeeding the assessment year for which the loss was first computed. [ Explanation.-Where any part of the business of a company ( [other than a company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , Income from house property , Capital gains and Income from other sources ], or a company [the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.] 10. It is apparent that above explanation applies in the case of the company whose any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to section 73 does not apply to assessee. Hon Madras High court in [2016] 68 taxmann.com 3 (Madras) Rajapalayam Mills Ltd. v. Deputy Commissioner of Income-tax, Special Range-I, Madurai had an occasion to consider the applicability of explanation to section 73 and it has been held that 7. As held in the decisions relied upon by the learned counsel for the assessee, the facts and circumstances of each case is relevant to find out, whether the transaction alleged would amount to speculative transaction or not. 8. In order to decide that, the nature of the transaction alleged is important, it has been stated the order of Commissioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the sister company viz., Madras Cements Limited. Subsequently, when the shares were sold the market had not been favourable to the assessee and that is how he sustained loss. There is no intention to speculate and to benefit out of the speculation as there was a clause in the Memorandum of Association to invest surplus funds in shares, the appellant has chosen to invest fund in shares. Moreover, the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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