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2004 (3) TMI 787 - ITAT MUMBAI

2004 (3) TMI 787 - ITAT MUMBAI - [2004] 89 TTJ 1 - ITA No. 3200 (Mum) of 1999 - Dated:- 30-3-2004 - Pramod Kumar (Accountant Member) ORDER Pramod Kumar (Accountant Member) This is an appeal filed by the revenue and is directed against the order dated 19-3-1999, passed by the Commissioner (Appeals) for the assessment year 1994-95. 2. By way of this appeal, the revenue has raised the following grievances: 1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Ap .....

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genuine commercial consideration. 2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in facts and in law in not taking cognisance of findings of the fact by the assessing officer at para 3 of the assessment order that M/s Sameta Exports (P) Ltd., a closely held company, was fully controlled by the assessee and therefore the shares of Maharana Mills Ltd., a company in liquidation, all the more was not eligible for transfer of shares as the transaction .....

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igible for set off against the long-term capital gains accruing to the assessee in other genuine transaction(s). 3. In order to properly adjudicate on the controversy requiring our adjudication, it is necessary to take a careful look at factual matrix of this case and at the applicable legal position. 4. Briefly, the material facts bereft of unnecessary details. The assessee is an individual, and the main sources of his income consist of income from salary, dividends, director's fees and dir .....

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464. It is this claim for set off which has given rise to this litigation before us. 5. During the relevant previous year, the assessee had sold 991 shares for a consideration of ₹ 1 per share. The total consideration on sale of these shares thus aggregated to ₹ 991. These shares were sold to one private limited company by the name of Sameta Exports (P) Ltd. Incidentally, this Sameta Exports (P) Ltd. had only two shareholders, namely Smt. Santokhben Mehta and Km. Savitaben Mehta both .....

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, how could the assessee sell the shares to anyone because such a transfer could not be registered in the name of the transferee. While the assessee fairly admitted that the transfer of shares could not take place, he also pointed out that the assessee has executed an indemnity bond which, in substance, provides that in case the assessee, in his capacity as registered shareholder of MML, in liquidation, receives any amount, he shall hand over the same to the transferee. It was thus contended tha .....

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'in pari delicto was applicable. It was in the background of these facts that the assessing officer questioned commercial motives of this sale transaction and, not satisfied with the answers by the assessee- concluded as follows .. 'Since the assessee and Sameta Exports (P) Ltd. have entered into an agreement with a view to transfer the non-transferable shares against the liquidation rules framed, and is therefore void. The said transaction is entered into mainly to avoid the payment of .....

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long-term capital gains earned on sale of Saurashtra Cement and Chemical Industries Ltd. Aggrieved by the action of the assessing officer, the assessee carried the matter in appeal before the Commissioner (Appeals) who reversed the action of the assessing officer by observing as follows : 'I have considered the rival submissions and gone through the decisions relied upon. It is noted that (a) The assessing officer has never controverted the valuation of shares of Maharana Mills by calculatin .....

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lant cannot be termed as manipulative. (c) In any case since Maharana Mills was a loss-incurring concern and the value of shares had reached a negative point, the assessee was all along carrying loss incurring asset. Therefore, it was for him to decide in which year to sell the loss incurring asset. (d) The entire argument of the assessing officer has been built on one factor that, since the shares cannot be registered in the name of buyer in view of the liquidation proceedings, the transaction .....

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questions of business prudence which are best left to the will of the appellant only and does not come in the purview of the tax administration authorities. In view of the above, the assessing officer is directed to allow the claim of the appellant regarding setting off capital loss against the capital gain, as made in the return. The carrying forward etc. would consequentially follow. This ground succeeds. ' Aggrieved by the relief so given by the Commissioner (Appeals), the revenue is in .....

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phasis is laid by the Departmental Representative on the plea that since, on account of the Maharana Mills Ltd., being under liquidation, the shares in question could not have been transferred to the transferee, the sale of shares is non-existent in the eyes of the law. This plea does not, however, impress us because it is not the legal position that there is any prohibition on sale of shares of companies under liquidation but the law at best prohibits the registration of transfer deeds during t .....

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owner but he holds that position, until the time transfer takes place, in purely fiduciary capacity and not as a beneficial owner. We may also, in this regard, refer to the following observations of Hon'ble Delhi High Court in the case of H.L. Seth v. Wearwell Cycles Co. (India) Ltd. 64 Comp Cases 497 (Delhi) : 'It could not be disputed that between the transferor and transferee, a transfer of shares executed after the commencement of winding up was valid, whether it was executed in perf .....

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rties honestly and in the ordinary course of business. The law which makes transfer of shares and alteration in the status of members void, operates for the benefit of the company and its creditors and not for the benefit of any third party ................ It appears to me that the court has full discretion in the matter of transfer of shares where the company is being wound up and that exercise of discretion of the court would be controlled only by the general principles of justice and fairnes .....

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s void, operates for the benefit of the company and its creditors and not for the benefit of any third party. In any event, Hon'ble Courts have full discretion to direct registration of transfer of shares-a discretion which would be controlled only by the general principles of justice and fairness. What is 'void' under the Companies Act is, upon commencement of winding up proceedings, the transfer of shares and alteration in the status of members, and not the sale of shares itself. I .....

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TR148(SC) , Chinnappa Reddy J's views, which were unambiguously endorsed by other four Honble Judges speaking through Rangnath Mishra J. are important in this regard. He observed that 'in our view the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether a provision should be construed literally or liberally nor whether the transaction is unreal and not prohibited by the statute, but whether a transaction is a device to avoid tax, and whe .....

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e, is to be viewed with suspicion and be treated as device for avoidance of tax irrespective of the legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal appears to have drawn from enunciation in McDowell's case ............. what has been depreciated as tax planning for avoidance of tax are those acts which have doubtful or questionable character as to their bona fides or righteousness. Not all legitimate acts of a taxpayer, which in the ordina .....

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those as deliberate would result in tax liability in future. While the tax planning adopted as a device to avoid tax had been depreciated, principles cannot be read as laying down the law that a person is to so arrange his affairs as to attract the maximum tax liability, and every act which results in tax deduction, exemption of tax or not attracting tax authorised by the law, is to be treated as a device of tax avoidance ........' In CWT v. Arvind Narottam : [1988]173ITR479(SC) , Hon'bl .....

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f the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be possible for the court to treat the intervening steps as non est based upon some hypothetical assessment of the 'real motive' of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o' the wisp .....

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lity. 9. The shares are transferred to Sameta Exports (P) Ltd. which is not only a separate artificial juridical person but also an entity in which the assessee does not have any stake or control. The fact that the transferee- company is de facto owned by close relatives of the assessee cannot alter the fact that transaction between the assessee and the Sameta Exports (P) Ltd. is transaction between two independent persons. There is also no allegation by the revenue that the consideration for sa .....

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o as to minimise his tax liability. As Hon'ble Supreme Court has, in the case of Arvind Narottam (supra), observed 'Where the true effect on the construction of deed is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration'. Accordingly, since we have come to the conclusion that the sale of shares of MML has in fact taken place and the same cannot be dubbed as 'null and void', as the assessing officer has chosen to dub, it cannot be op .....

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terial difference between the real intention and the intention as discernible from the documents. However, as observed by a Special Bench of this Tribunal in the case of Mideast Portfolio Management v. Dy. CIT , if the real intentions of the parties are discovered to be something different from the intentions professed in the documents, the Income Tax Authorities are at liberty to brand the same as subterfuge or a dubious device or a colourable transaction. However, in our view, there is no mate .....

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