TMI Blog2017 (7) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... re being disposed of by this common order. 2. Facts of the case, in brief, are that the assessee is an individual and is the Executive Director of Serum Institute of India Limited and Serum International Ltd. In this case a search action u/s.132 of the I.T. Act was conducted at the various business premises of the Poonawalla group of cases on 21-06-2011 and the search was concluded on 13-09-2011. During the course of search action the total undisclosed income admitted by the Poonawalla group was ₹ 141.795 crores, the details 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 ₹ 15.95 crores which comprises of jewellery and contingency of ₹ 1 crore and disallowance of business loss of ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es at ₹ 39.41 lakhs against the claim of loss by the assessee at ₹ 14.95 crores as it was made by the Assessing Officer in the order passed u/s.143(3) of the Act and confirmed by the CIT(A). 6. The Assessing Officer further noted that during the assessment u/s.143(3) the Assessing Officer had treated the sale of shares of City Park Pvt. Ltd. as business income . Subsequently, the assessee preferred an appeal before the Ld.CIT(A) and the Ld.CIT(A) has not accepted the view taken by the Assessing Officer and treated it as capital gain . The Department has preferred 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 ₹ 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis. The shares were also sold on ex- bonus basis at prevailing market rate on recognised stock exchange through authorised broker. The shares were subject to delivery on sale from the Demat account and sale consideration was received from the share broker. It was argued that the assessee had followed FIFO method for determining the value of shares sold. The CBDT Circulars 704 and 717 were also brought to the notice of the CIT(A). It was argued that in view of FIFO method shares sold, which were acquired with cost on cum-bonus basis and sold on ex-bonus basis were subject to computation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued that provisions of section 94(8) is applicable for bonus stripping transactions in case of units and not for shares. It was accordingly argued that the Assessing Officer was not justified in disallowing the loss of ₹ 15,01,80,424/- on account of sale of original shares of HCL Technologies Ltd and treating the profit on sale of shares of City Parks Pvt. Ltd. as business income . 14. Based on the arguments advanced by the assessee the Ld.CIT(A) held the profit on sale of shares of City Parks Pvt. Ltd. as capital gain. He, however, upheld the action of the Assessing Officer in disallowing the loss of ₹ 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al from office of the Development Commissioner, SEZ for set up of Special Economic Zone, permission from Ministry of Communication information technology to import the items for setting up of STP units under Software Technology Park Scheme, Approval from Ministry of Commerce Industries for setting up of the industrial park, letter from Govt. of Maharashtra agreeing in principle approval for setting up of product specific SEZ etc. 4. There was general increase in the land value in the area, i.e. Hinjewadi where City Park Project was located. In view of the above developments that had taken place during the period 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 constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r appellant raises following 'Grounds of Appeal' among others: On the facts and in the circumstances of the case and in law. 1. The learned CIT (A) erred in disallowing the loss of ₹ 15,01,80,424/- on account of sale of original shares of HCL Technologies Ltd. 2. The learned CIT (A) erred in confirming that the transaction of purchase and sale of original equity shares of HCL Technologies Ltd. was an adventure in nature of trade and thus chargeable under the head Profits and Gains from Business as against the Appellant's contention that the same was in the nature of investment and thus chargeable under the head Income from Capital 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the assessee on merit. The Tribunal in the said decision has held that bonus stripping is allowable in law. He submitted that CIT(A) while holding that profit on sale of shares of City Parks Pvt. Ltd. as capital gain upheld the disallowance of loss of ₹ 15,01,80,424/- on account of sale of HCL Technologies Ltd. on the ground that the assessee itself has admitted in his statement recorded u/s.132(4). He submitted that the admission by Mr. Cyrus Poonawalla during the course of search action that he will not claim the loss is not binding on the assessee since the same is a legal issue. 22. Referring to the decision of Hon ble Bombay High Court in the case of CIT Vs. Everest Kento Cylinders 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of CIT Vs. T. Sivaprabhaskar reported in 238 CTR 457 he submitted 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. 25. Referring to the decision of the Chandigarh Bench of the Tribunal in the case of DCIT Vs. Pratap Singh Rajendra Chamola Co. reported in 19 DTR 182 he submitted that the Tribunal in the said decision has held that no addition in block assessment can be made solely on the basis of statements recorded during the search. It has been held in the said decision that such statements 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,41,287/- as against loss of ₹ 15,01,52,644/-. Similarly he determined the profit on sale of City Parks Pvt. Ltd. at ₹ 17,34,20,000/- as against capital gain determined by the assessee. We find the Ld.CIT(A) vide order dated 28-02-2011 held that Assessing Officer had correctly determined the loss from sale of HCL Shares as business loss of ₹ 39,41,287/- as against capital loss of ₹ 15,01,80,423/- claimed by the assessee. He, however, held that the gains arising out of transfer of shares of City Parks Pvt. Ltd. is assessable as capital gain and not as profit and gains from business as held by the Assessing Officer. Both the assessee and the department were in appeal before the Tribunal. In the meantime, a search action u/s.132 of 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 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. and the issue relating to profit on sale of shares of City Parks Pvt. Ltd. as capital gain or business income has been decided in favour of the assessee by the Tribunal in assessee s own case in ITA Nos. 764 and 824/PUN/2012 filed by the assessee and revenue respectively vide order dated 30-01-2015 for A.Y. 2007-08. The relevant observation of the Tribunal from Para 16 onwards read as under : 16. We have carefully considered the rival submissions. Factually speaking, shares of City Park Pvt. Ltd. sold by the assessee were neither purchased and nor acquired by the assessee on his own volition, but the same have been received as gift from his father. Notably, out of the total of 6,67,000 shares, the investee company allotted 6,66,333 shares to Cyrus S. Poonawalla (assessee s father) on 27.01.2006 on par (@ ₹ 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 invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee by relying on the judgement of the Hon ble Supreme Court in the case of Mrs. Bacha F. Guzdar (supra). The following observations of the Hon ble Supreme Court in the case of Mrs. Bacha F. Guzdar (supra) is worthy of notice, and which clearly support the conclusion of CIT(A) :- That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills case [1950] SCR 869 at 904. That judgment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... City Park, receipt of shares by the appellant way of gift, subsequent sale of shares, genuineness of the transactions are not doubted by the Assessing Officer. It cannot also be glossed over that 50% of the shares in the company were held by other prompters, namely Mr. Anirudha Deshpande, Mr. Vithal Maniyar, Namrata Film Enterprises Ltd. In such circumstances, in so far as acquisition and sale of shares of City Pak are concerned, it is difficult to say that the appellant adopted colorable device to avoid tax. The manner in which the transaction in shares of City Park has been entered into by the appellant's father and appellant can at best be termed as tax planning, but it cannot be regarded as tax evasion. Tax planning is permissible as held by the Hon'ble Supreme Court in the case of Union of India vs. Azadi 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motive of the assessee in dealing in the shares of HCL Technologies Ltd. was tax avoidance and a dubious tax planning. Ultimately, the Assessing Officer disagreed with the assessee with nature and the quantification of loss on the sale of 4,71,500 equity shares of HCL Technologies Ltd.. The Assessing Officer computed the loss at ₹ 39,41,287/- as per the Tabulation which we have reproduced earlier in this order. The point of difference on this aspect between the assessee and the Assessing Officer was with regard to the cost of the shares sold. The Assessing Officer followed the methodology of spreading the cost of original shares to total shares i.e. the original shares plus bonus shares. In other words, the total shares held by the assessee (i.e. original shares 4,71,517 + bonus shares 4,71,517) were considered to have been acquired for an amount of ₹ 29,36,28,768/-, 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit arising from such transactions have been accepted by the Assessing Officer to be assessable as capital gains . Furthermore, it was pointed out that in the preceding assessment years as well as in the subsequent assessment years, the Assessing Officer has assessed the gain on sale of shares as an income assessable under the head capital gains, even in the course of scrutiny assessment. For all the aforesaid reasons, it has been canvassed that there was no scope for treating the impugned transaction as business transactions. It was also vehemently argued that there was no material to impeach the genuineness of the transactions and that at best the transaction can be termed as a use of the provisions of law and it cannot be said to be a abuse of law , as was observed by the Hon ble Supreme Court in the case of CIT vs. Walfort Share Stock Brokers (P.) Ltd., 326 ITR 1 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with him i.e. bonus shares of 471517 and the 17 out of the original 471517 shares. As the period of holding that was in excess of 12 months, in subsequent years the gain on sale of such shares has been accepted by the Assessing Officer as long term capital gain, which was exempt u/s 10(38) of the Act. Notably, while computing such capital gain, the cost of acquisition of the bonus shares was taken as Nil by application of the provisions of section 55(2)(aa)(iia) of the Act. The aforesaid position has been accepted by the Assessing Officer in scrutiny assessment, as asserted by the assessee in the course of the hearing before us, and this material has not been repudiated from the side of the Revenue. 30. In the current year, assessee computed the loss on sale of 4,71,500 original shares by considering the average acquisition cost of ₹ 622 per share. Ostensibly, it resulted in a loss because the sale price realized was only ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort Share Stock Brokers (P.) Ltd. (supra) is definitely attracted in the present case too. In the present case, even if it is taken that the transaction in the shares of HCL Technologies Ltd. was pre-planned, but the inference drawn by the Assessing Officer that it was a dubious tax planning cannot be upheld because there is nothing to impeach the genuineness of the transaction carried out by the assessee. In the case before the Hon ble Supreme Court also, similar situation prevailed and the Revenue had cast doubt on the transaction because of pre-planned nature of the transaction. The Hon ble Supreme Court negated the stand of the Revenue, as noted by us earlier. Applying the similar parity of reasoning in the present case, the stand of the Assessing Officer that the transaction was pre-meditated with the intention of incurring loss and setting-off against capital gains income is an abuse of law cannot be affirmed. 32. We may also refer to section 94(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 itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequent assessment years the profit on sale of shares earned by the assessee has been accepted as assessable under the head capital gains . Notably, even with regard to the gain on sale of bonus shares of HCL Technologies Ltd., it was stated at Bar that in subsequent assessment years it has been accepted by the Assessing Officer as an income assessable under the head capital gains . On all these aspects, the Revenue has not controverted the factual matrix brought out by the assessee. In this background, in our considered opinion, the onus was on the Revenue to establish that the transaction in the shares of HCL Technologies Ltd. was not assessable under the head capital gains , as declared by the assessee in the return of income. The moot point is as to whether or not, having regard to the discussion in the orders of the authorities below, such an onus has been discharged by the Revenue. 35. The only point made by the Revenue is that magnitude and frequency of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is as to whether such admission by the assessee during the course of search will be binding on him or not. 35. The courts in various decisions have held that an admission would bind the person making it only in so far as facts are concerned but not in so far as it relates to a question of law vide Banarsi Das Vs. Kanshi Ram reported in AIR 1963 SC 1165, 1169. The Hon ble Supreme Court in the case of Bharat Singh Vs. Mst. Bhagirathi reported in AIR 1966 SC 405, 410 has held that admission must be clear if they are to be used against a person making them. It has also been held by the Hon ble Supreme Court in the case of Shri Krishan Vs. Kurukshetra University (Supra) that any admission made in ignorance of legal rights or under duress cannot bind the maker of the admission. In the instant case, the admission was a point of law and therefore the same is not binding on the assessee. 36. The Hon ble Bombay High Court in the case of Everest Kento Cylinders Ltd. has held that assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of true legal position. The relevant observation of the Tribunal from Para 6 onwards read as under : 6. We have carefully considered the facts and the rival contentions. The question whether the interest on debentures can be considered to be interest from loans and advances within the meaning of s. 2(7) of the Interest-tax Act is a question of law and not a mere question of fact. The judgments of the High Courts and the orders of the Tribunal cited on behalf of the assessee (supra) bear out this position. The judgment of Bombay High Court in the case of Ramesh Chandra Co. (supra) cited on behalf of the Department is a case of a statement made of a fact. Certain discrepancies in the sarki account were found by the ITO and the assessee was asked to reconcile-the same. The assessee expressed his inability to do so and agreed that the amount may be added to the income. The ITO recorded the same in the order sheet which was also signed by the partner of the assessee-firm. It was on these facts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal cited on behalf of the assessee, it has been held that interest on debentures cannot be considered as interest on loans and advances and, therefore, no interest-tax is chargeable. Respectfully following the judgments and the orders, we delete the debenture interest of ₹ 24,26,974 from the assessment and allow the appeal. (emphasis supplied by us) 38. We further find Mr. Cyrus Poonawalla in his statement recorded u/s.132(4) had categorically stated that Mr. Adar Poonawalla will be free and will continue to contest the other issue as to whether the above transaction in shares of City Parks Pvt. Ltd. and HCL Technologies Ltd. were adventure in nature of trade as held by the Assessing Officer or capital gain on investment as claimed by Mr. Adar Poonawalla. Another fact that merits consideration is that no incriminating evidence was found during the course of search. It was only on the basis of statement of Mr. Cyrus Poonawalla that the addition has been made. 39. The Hon ble Madras High Court 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw raised are therefore answered against the appellant and in favour of the assessee. The appeal fails and the same is dismissed. No costs. 40. We find the Chandigarh Bench of the Tribunal in the case of Pratapsingh Rajendra Chamola (Supra) has held that no addition in block assessment can be made solely on the basis of statements recorded during the course of search. Such statements cannot be treated as incriminating material found in the course of search. The relevant observation of the Tribunal from Para 7 onwards read as under : 7. We have considered the rival submissions, perused the orders of the lower authorities and the material on record. In the instant case, it is not in dispute that the addition of ₹ 20,35,000 has been made solely on the basis of statements recorded of the employees of the assessee firm under s. 133A of the Act and statement recorded of one of the partners of the assessee under s. 132 of the Act. The basic contention of the assessee before us is that such statements so recorded do not constitute evidence detected as a result of search and therefore, it cannot be held that there was any undisclosed income of the assessee assessable in term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; as a result of search inasmuch as the statement recorded during search cannot be said to be an evidence 'found' as a result of search though the same may be an evidence 'obtained' during search. Accordingly, in view of the provision of s. 158BB(1) as it stands amended vide Finance Act, 2002, w.r.e.f. 1st July, 1995, an addition on account of household expenses deemed to have been met out of job work income, estimated on the basis of statement recorded during search, cannot justifiably be made in the block assessment as the said statement does not fall within the embracement of evidence found as a result of search, nor within that of information relatable thereto. The addition, as such is liable to be deleted. 8. The aforesaid decision of the Tribunal stands affirmed by the Hon'ble Rajasthan High Court in an appeal by the Revenue as reported in CIT vs. Smt. Chitra Devi Soni (2008) 214 CTR (Raj) 118, though on a different ground, as the Revenue has not challenged the order of the Tribunal on the aforesaid proposition. In fact, similar view has been expressed by the Jodhpur Bench in another case of Shree Chand Soni vs. Dy. CIT (2006) 101 ITJ (Jd) 1028, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of Chapter XIV-B of the Act. The addition is hereby deleted. 11. Before parting we may also refer to an argument taken by the learned Departmental Representative, on the basis of the decision of the Hon'ble Rajasthan High Court in the case of Ramjas Nawal vs. CIT (2003) 183 CTR (Raj) 144. By relying on the said decision, it was contended that the statement recorded at the time of the search can be a basis to determine undisclosed income of the assessee under Chapter XIV-B of the Act. We have perused the said decision. In this case, statement was recorded during the search whereby the assessee could not explain the profits of a partnership firm M/s S.P. and the gifts shown in the papers seized. The assessee, therefore surrendered the same for taxation whereas in the IT returns, the same was not offered for taxation. The additions were made by the AO on this count, which were sustained by the Hon'ble High Court whereby it was noticed that at the time of search, the income in question was admitted by the assessee. However, the said decision is not a case to support the proposition that an addition under Chapter XIV-B can be made solely on the basis of the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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