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TMI Blog2017 (7) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of which are given by the Assessing Officer at pages 2 to 9 of the assessment order. As per the said chart the assessee has disclosed an amount of Rs. 15.95 crores which comprises of jewellery and contingency of Rs. 1 crore and disallowance of business loss of Rs. 14.95 crores. 3. The Assessing Officer noted that during the assessment proceedings completed u/s.143(3) of the Act claim of short term capital loss of Rs. 14,95,84,395/- on sale of shares of HCL was disallowed by the Assessing Officer. Subsequently, the assessee preferred an appeal before the Ld.CIT(A) and the CIT(A) also upheld the view taken by the Assessing Officer. The assessee preferred an appeal before the Tribunal and the decision of the Tribunal was yet to come. Meanwhile, a search action u/s.132 of the Act was conducted in the case of the assessee and their business concerns. Vide statement recorded u/s.132(4) of the Act Mr.Cyrus Poonawalla agreed on behalf of the assessee to withdraw the claim of short term capital loss of HCL Technologies Ltd. in A.Y. 2007-08. The Assessing Officer reproduced the statement of Mr.Cyrus Poonawalla recorded u/s.132(4) of the Act which reads as under : "It is submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred an appeal before the Tribunal and the decision of the Tribunal is yet to come. Therefore, to keep consistency in department's view, the Assessing Officer treated the sale of shares of City Park Pvt. Ltd. as "business income". The Assessing Officer accordingly determined the total income of the assessee at Rs. 20,21,64,507/-. 7. Before CIT(A) the assessee strongly challenged the action of the Assessing Officer. It was submitted that the assessee held the gifted shares of closely held company namely City Park Pvt. Ltd. as investment and not as "stock in trade" nor did he convert the same as stock in trade after receiving the same by way of gift. It was vehemently argued that profit from sale of these shares is required to be assessed under the head 'Long-Term Capital Gain' as per provisions of see. 2(42A) read with Explanation 1(b) and see. 49(1) of the I.T. Act. It was submitted that the Assessing Officer erred in assessing 'Capital Gain' as 'Business Profit' when shares received as 'Gift' were transferred without converting the same as 'stock-in- Trade'. 8. Countering the observation of the Assessing Officer that the assessee as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of capital gain/loss by considering the cost of acquisition as per FIFO Method and consequentially the cost of acquisition in respect of bonus shares would be valued at Nil and there is no question of claiming double deduction of cost when bonus shares are sold. The assessee also brought to the notice of the CIT(A) the return of income filed for subsequent year wherein same is reported without considering cost for the same and gross sale consideration is reported while computing the capital gain. It was further argued that the assessee acquired shares of HCL Technologies Ltd. with an intention to hold the bonus shares for a long time as an investor and this aspect is substantiated in the context of long holding of the bonus shares. 11. As regards the computation of the cost of bonus shares on the principle of averaging adopted by the Assessing Officer is concerned it was argued that such a method is not simple and the action of the Assessing Officer in imposing average method on valuation of shares of listed companies does not meet with provisions of section 45(2A) or section 55(2)(aa)(iiia) of the I.T. Act and it also overrules the instruction of CBDT Circular which the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the loss of Rs. 15,01,80,424/- on account of sale of original shares of HCL Technologies Ltd. While doing so, he observed that the grounds raised by the assessee before him were subject matter of appeal filed against the original assessment order u/s.143(3) for the same year which was decided by him in his capacity as CIT(A)-III. In the said order, he had granted partial relief in respect of profit on sale of shares in City Parks Pvt. Ltd. holding there in that the said profit is chargeable to tax as "income from capital gains" as claimed by the assessee. 15. So far as the loss claimed on sale of HCL Shares Ltd. is concerned, he observed that the findings of the Assessing Officer on chargeability of the profit/loss on sale of these shares to tax under the head 'business and the valuation of shares were upheld by him. Since nothing has been brought on record to show that the factual situation or the legal position concerning the said issues has changed during the intervening period, he held that the findings/conclusions arrived in his order dated 28-02-2011 holds good as on date. 16. Again elaborating the issue the Ld.CIT(A) further held that the shares of City Parks Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of holding of land by the appellant, it is but natural that there was enhancement in the value of the land acquired by the company and the resultant appreciation in the value of the shares of the company. As the appellant was able to get better price, he decided to see off the shares held by him to Peninsula Land Ltd. when the said company approached the appellant. From these facts placed on record, it is difficult to draw the inference that the shares of City Park were held by the appellant as stock in trade or sale of the said shares by the appellant constitutes an adventure in the nature of trade." 17. He observed that the shares of a company are an asset distinct from the assets owned by the company. Relying on various decisions and the CBDT Circular dated 15-06-2007 where certain criteria are prescribed by the Department to treat the profit on sale of shares as capital gain or business income he held that the shares of City Parks Pvt. Ltd. received by the assessee from his father as gift cannot be regarded as stock in trade of the assessee. Further the transactions cannot be treated as an "adventure in nature of trade". He accordingly held that the gains arising out of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital Gains". 3. The learned CIT (A) ought to have held that the transaction of sale of Equity Shares of HCL Technologies Ltd. is a bonafide transaction and is not covered either by Section 94 and in fact favorably covered by the decision of Supreme Court in the case of Walfort Shares and Stock Brokers Pvt. Ltd. (326 ITR 1). 4. Without prejudice to ground no. 2, the learned CIT (A) erred in confirming that bonus shares received of HCL Technologies Ltd. formed part of stock-in-trade and he erred in valuing the said bonus shares at average cost when they ought to have been excluded altogether in light of Supreme Court decision in the case of CIT v. Madan Gopal Radhey Lal (1969) 73 ITR 652 wherein the Supreme Court held that even in the hands of a dealer bonus shares received are capital asset unless specifically converted into stock-in-trade. 5. Without prejudice to ground no. 2 and without admitting that the purchase and sale of equity shares of HCL Technologies Ltd. is an adventure in the nature of trade, the learned CIT (A) erred in not accepting that in view of principle incorporated in the provisions of section 55(2), the cost of bonus shares shall be taken to be Nil and ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders Ltd. reported in 378 ITR 57 he submitted that the Hon'ble High Court in the said decision has held that the assessee could not be bound by higher disallowance agreed to before the Assessing Officer during the course of assessment proceedings. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Bambino Investment and Trading Co. Ltd. Vs. DCIT reported in 2 SOT 585 he submitted that the Tribunal in the said decision has held that appeal against assessment on concession is maintainable if it transpires later on that concession was given on a mistaken impression of true legal position. 23. Referring to page 223 of the Paper book the Ld. Counsel for the assessee drew the attention of the Bench to the answer to Question No.14 given by Dr. Cyrus S. Poonawalla in his statement recorded u/s.132(4) wherein he has stated that Mr. Adar Poonawalla will be free and will continue to contest the other issue as to whether the transaction in shares of City Parks Pvt. Ltd. and HCL Technologies Ltd. were adventure in the nature of trade as held by the Assessing Officer or capital gain on investments as claimed by Adar Poonawalla. He submitted that admission on points of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatements cannot be treated as incriminating material found in the course of search. He accordingly submitted that statement of Mr. Cyrus Poonawalla cannot be treated as incriminating evidence. Since the Tribunal has already decided both the issues in favour of the assessee he submitted that the appeal filed by the assessee should be allowed and the appeal filed by the revenue should be dismissed. 26. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A) to the extent he has upheld the action of the Assessing Officer in disallowing the loss of Rs. 15,01,80,424/-. He submitted that the statement recorded u/s.132(4) is an enforceable evidence unless it is proved that it was made due to any coercion or threat. Therefore, the statement recorded u/s.132(4) has to be given sanctity. He submitted that the assessee has furnished a letter to the Assessing Officer during the course of assessment proceedings accepting the disallowance of loss which was given after due application of mind. He submitted that the Ld.CIT(A) has given cogent reasons while upholding the action of the Assessing Officer in disallowing the loss of Rs. 15,01,80,424/- on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T. Act was conducted on various premises of the Poonawalla group on 21-06-2011. The statement of Dr. Cyrus S. Poonawalla was recorded u/s.132(4) who in his reply to Question No.14 had stated that with a view to buy peace he, on behalf of Mr. Adar Poonawalla, agrees to consider the cost of shares sold of HCL Technologies Ltd. on average basis as done by the Assessing Officer which will result in an additional income of Rs. 14.50 crores in the hands of Mr. Adar Poonawalla for A.Y. 2007-08. The detailed reply of Mr. Cyrus Poonawalla has already been reproduced in the preceding paragraphs. Based on this and following the order of his predecessor the Assessing Officer worked out the loss on account of sale of HCL Technologies Pvt. Ltd. at Rs. 39.41 lakhs as against the claim of loss by the assessee at Rs. 14.95 crores. 30. So far as the sale of shares of City Parks Pvt. Ltd. is concerned, the AO following the order of his predecessor in the original assessment proceedings, treated the profit on sale of City Parks Pvt. Ltd. as "business income". While doing so, he further observed that although the CIT(A) has not accepted the view taken by the Assessing Officer, however, the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) on 27.01.2006 on par (@ Rs. 10/- each) and the balance 667 shares were allotted to him on 09.06.2006 on par. These shares were received by the assessee as a gift from him father (i.e. Cyrus S. Poonawalla) in the preceding year, i.e. on 01.09.2006. The fact-position emerging from the orders of the authorities below reveals that such shares were indeed held by assessee's father as an investment. In such a scenario, especially in the absence of any notable instances of other purchase and sale of shares of City Park Pvt. Ltd. by the assessee during the year under consideration, in our view, the onus was on the Revenue to demonstrate that the sale of shares of City Park Pvt. Ltd. by the assessee was a transaction akin to an adventure in the nature of trade. 17. The CIT(A) has observed that the investee company i.e. City Park Pvt. Ltd. is an unlisted Pvt. Ltd. Company and therefore its shares are not freely marketable or tradable. According to the CIT(A), shares of an unlisted private limited company do not have the basic characteristics of a marketable product, that are associated with the shares of a stock exchange listed company. On this aspect, we find no reason to differ with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the articles of association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders." 18. On this aspect, we may also refer to the discussion by the CIT(A) in para 5.1.3 of his order wherein he has referred to the CBDT Circular dated 15.06.2007. As per the CIT(A), following the criteria laid down in the CBDT Circular, the shares in question are to be understood as 'investment' thereby giving rise to capital gain on its sale. The aforesaid finding of the CIT(A) has not been negated by the Revenue before us and is accordingly affirmed. 19. Another aspect raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bachao Andolan 263 ITR 706." 21. In our view, the aforesaid discussion by the CIT(A) is fair and apt, having regard to the facts and circumstances of the case and we find no reason to interfere with the same. In any case, there is no material to suggest that any colourable device has been adopted by the assessee to avoid tax while carrying on the transaction of sale of shares of City Park Pvt. Ltd. to Peninsula Land Ltd. 22. In view of the aforesaid discussion, we hereby affirm the order of the CIT(A) holding that the surplus arising on the sale of shares in City Park Pvt. Ltd. is assessable as capital gain and not as profits and gains of business. Thus, on this aspect, Revenue fails. 23. Now, we may take-up the appeal of the assessee which relates to the nature and quantification of loss incurred by the assessee on sale of shares of HCL Technologies Ltd.. 24. To recapitulate, the background of the dispute in assessee's appeal can be summarized as follows. The assessee before us is an individual, who is Executive Director of Serum Institute of India Ltd.. In the period from 28.02.2007 to 13.03.2007, assessee purchased 4,71,517 equity shares of HCL Technologies Ltd. for a total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,36,28,768/-, i.e. the price originally incurred by the assessee. The Assessing Officer treated the shares of HCL Technologies Ltd. as stock-in-trade and therefore the loss of Rs. 39,41,287/- treated as a business loss. The CIT(A) has affirmed both the stands of the Assessing Officer, namely, that the transaction in the shares of HCL Technologies Ltd. was a business transaction, and, secondly that the methodology of loss computed by the Assessing Officer was correct. 26. Before us, the Ld. Representative for the assessee vehemently argued that the lower authorities have erred in treating the activity of dealing in the shares of HCL Technologies Ltd. as a business activity. According to the Ld. Representative, assessee was whole-time involved as Executive Director of Serum Institute of India Ltd.; and, that there was neither an organized activity of trading in shares and nor was there any organizational support in this regard. With regard to the profit motive, it has been contended by the Ld. Representative that be it be a business transaction or an investment transaction, profit maximization is an element which is always present. It has also been contended that the lower authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) in a somewhat similar situation. 28. On the other hand, the Ld. Departmental Representative appearing for the Revenue has reiterated that the magnitude and frequency of the transactions in the HCL Technologies Ltd. shares was quite substantial which reflects that the intention of the assessee was to trade in such shares. With regard to assessee's intention, it was pointed out that at the time of undertaking transactions in HCL Technologies Ltd. shares, assessee was aware that he was considering the sale of shares of City Park Pvt. Ltd., which was to yield him substantial amount of capital gain and therefore he undertook the impugned transaction in shares of HCL Technologies Ltd. in order to incur a loss. According to the Ld. Departmental Representative, it is a common knowledge that share prices come down after the issue of the bonus shares, since the bonus shares are allotted after capitalizing the free reserves of a company. Therefore, assessee bought the shares of HCL Technologies Ltd. on cum bonus basis and after having received the bonus shares, the original shares were sold in the market at the reduced prices. According to the Ld. Departmental Representative, sequence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price realized was only Rs. 303 per share. First of all, the Assessing Officer viewed the whole transaction as a dubious tax planning. In this context, a reference has been made to the judgement of the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra). In the case before the Hon'ble Supreme Court, assessee purchased mutual fund units on 24.03.2000 and became entitled to dividend on the units @ Rs. 4 per unit and earned a dividend of Rs. 1,82,12,862/-. As a result of the dividend payout the value of the units reduced from Rs. 17.23 to Rs. 13.23 per unit on March 27, 2000, when assessee sold all the units and collected an amount of Rs. 5,90,55,207/- as well as other incentives of Rs. 23,76,778/-. In all, assessee received back Rs. 7,96,44,847/- as against initial payout of Rs. 8,00,00,000/-. In the return of income, assessee claimed dividend of Rs. 1,82,12,862/- as exempt u/s 10(33) of the Act and also claimed a set- off Rs. 2,09,44,793/- as loss incurred on sale of units. The Revenue disallowed the set-off of loss claimed which was negated by the Tribunal and thereafter the Hon'ble Supreme Court. As per the Hon'ble Supreme Court, it stood establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) of the Act, which has been inserted by the Finance (No.2) w.e.f. 01.04.2005, and it provides that loss arising on bonus stripping of units is to be ignored after 01.04.2005. The phraseology of section 94(8) of the Act itself reveals that the Parliament in its wisdom restricted the scope of bonus stripping u/s 94(8) of the Act only to the units and did not extend it to the shares while the scope of the dividend stripping contained in section 94(7) of the Act applied both to shares/securities as well as units. Therefore, on the strength of section 94(8) of the Act also and having regard to the parity of reasoning laid down by the Hon'ble Supreme Court in the case Walfort Share & Stock Brokers (P.) Ltd. (supra), the transactions of purchase and sale of shares of HCL Technologies Ltd. are to be understood as a genuine transaction and are not covered by the provisions of section 94(8) of the Act. 33. Now, with regard to the stand of the assessee that he has acted as an investor and not as a trader while carrying out the aforesaid transaction in the shares of HCL Technologies Ltd.. In this context, the sum and substance of the case made out by the Revenue is that within a short perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction in HCL Technologies Ltd. is substantial. In our considered opinion, in the present case, the nature of the assessee's dealing in shares as an investor stands established in past as well as also in future years. The assessee is full time involved in other activity of being Executive Director of Serum Institute of India Ltd.. There is no material to suggest that any organizational structure or infrastructure is possessed by the assessee to undertake trading in shares as a business activity. There is no material to say that assessee acted as a frequent dealer in shares over an extended period of time. No doubt, for a short spell of time in the months of February and March, assessee has undertaken transactions in the shares of HCL Technologies Ltd.. But the same by itself cannot be categorized as a business activity, as it is not a continuous activity. Moreover, we also find weight in the plea setup by the Ld. Representative before us that if the intention was to incur loss, as canvassed by the Assessing Officer, then obviously such an activity cannot be categorized as 'business'. It is well understood that no business is carried out with an intention of making a loss, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee could not be bound by agreed disallowance offered before the Assessing Officer during the course of assessment proceedings. The relevant observation of the Hon'ble High Court reads as under : "10. Having considered submissions of Mr.Malhotra for the revenue and Mr.Pardiwalla for the assessee, we are of the view that the order of the Tribunal as regards disallowance under section 14A and restricting the same to Rs. 1 lac was justified in view of the material ita1165.13 before the Tribunal. Furthermore, having considered the fact that a sum of Rs. 4,47,649/- was not conceded in the return but was adhoc acceptance during the course of assessment, the assessee could not be bound by it. The Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the High Court held that the appeal to the AAC was not maintainable since the assessee had conceded before the AO that the discrepancies could not be reconciled and, that the amount may be added to the income. This factual position was not resiled from by the assessee at any time thereafter before the ITO. The High Court, therefore, held that so long as the assessee's statement stood, it could not have a grievance in that behalf and was not entitled to appeal against the same. In our humble opinion, the judgment is not applicable where an admission or concession is made by the assessee on a pure question of law. No tax can be imposed or collected without the authority of law and merely because the assessee admits or concedes before the AO that a particular amount is taxable in law, there being no dispute regarding the facts, It cannot be brought to tax. If still AO has brought the same to tax based merely on concession made by the assessee, it cannot be equated to a concession as regards facts, and it cannot be said that the assessee can have no right of appeal when he is later advised or informed of the correct position in law. The AO derives the power to assess a receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of T. Sivaprabhaskar (supra) has held that the statement is not an evidence and in absence of discovery of any evidence in the course of search at the premises of the assessee or any information relatable to any such material addition cannot be made on the basis of the statement of a third party. The relevant observation of the Hon'ble High Court from Para 7 onwards read as under : "7. We heard Mr. K. Subramaniam, learned senior standing counsel for the appellant and Mr. V.D. Gopal, learned counsel for the respondent/assessee. 8. A perusal of the order of the assessing authority as well as that of the Tribunal discloses that even while considering the cash flow statement filed by the respondent/assessee, what was mainly relied upon by the assessing authority was not based on any search materials, but were based on the statement of one T. Sivaprabhaskar. The Tribunal also noted that in the acknowledgement enclosed with the letter of ITO, Ward-III(1), Trichy dt. 14th Nov., 2006, there was no mention about any seized material except the sworn statement of the said T. Sivaprabhaskar dt. 3rd April, 1996 and that of the assessee dt. 21st March, 1996. 9. It is well-sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected as a result of search and therefore, it cannot be held that there was any undisclosed income of the assessee assessable in terms of Chapter XIV-B of the Act. In this regard, Jodhpur Bench of the Tribunal in the case of Chitra Devi vs. Asstt. CIT (supra), as regard the provisions contained in s. 158BB of the Act, held that the statements recorded during the search cannot be said to be an evidence found as a result of search though the same may be an evidence obtained during the search. It was thus held that, any addition made on the basis of statements recorded or through enquiry alone cannot constitute evidence found as a result of search and accordingly, no addition can be made by way of undisclosed income in the block assessment. It has been so held in para 39 of the decision: "39. Besides, the said addition in the hands of present assessee CD is not tenable on the legal score as well. We may note that the provision of s. 158BB(1) stands amended vide Finance Act, 2002 w.r.e.f. 1st July, 1995, and the. relevant amended provision stands as under: '158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been expressed by the Jodhpur Bench in another case of Shree Chand Soni vs. Dy. CIT (2006) 101 ITJ (Jd) 1028, wherein para 47 contains the following : "47. This addition is based on the statement alone and no such income was disclosed in the returns filed for the block period. Admittedly no incriminating document was found to support the impugned addition. This Bench has been continuously taking the view that a statement recorded under s. 132(4) of the Act does not tantamount to unearthing any incriminating evidence during the course of search, therefore, no addition can be made on that score alone. Therefore, in our opinion, the impugned addition cannot survive, and the same has to be deleted. The following cases can be referred to for the above proposition of law: (i) Dy. CIT vs. Sanmukhdas Wadhwani (2003) 80 ITJ (Nag) 648 : (2003) 85 ITD 734 (Nag); (ii) Concord of India Insurance Co. Ltd. vs. Smt. Nirmala Devi & Ors. (1979) 118 ITR 507 (SC); (iii) Satishbhai Jayantilal Shah vs. Asstt. CIT (1997) 57 ITJ (Ahd) 424 : (1997) .61 ITD 307 (Ahd). " 9. The Cochin Bench of Tribunal in the case of Mrs. Catherine Thomas vs. Dy. CIT (2008) 116 ITJ (Coch) 797 : (2008) 111 ITD 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an addition under Chapter XIV-B can be made solely on the basis of the statements recorded in the search. In the case of Ramjas Nawal (supra) not only there was an admission during the statement recorded at the time of search but incriminating material in the form of valuables, assets, documents, jewellery and papers relating to investments etc. were also found and seized. In para 19 of the said judgement, it is clearly observed by the Hon'ble High Court that as per the material on record, the firm M/s S.P. was found not to be genuine. This prompted the assessee to surrender the income shown in the name of M/s S.P. as income of the assessee and his two sons. From the reading of the said judgement, it transpires that it is not the statement of the assessee during the search alone which formed the basis with the AO to make the addition. In the present case, as we have found earlier, the sole basis to make the addition are the statements recorded at the time of search. Therefore, the decision of the Hon'ble High Court of Rajasthan in the case of Ramjas Nawal (supra) stands on a different footing and does not militate against the legal proposition relied upon by us in order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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