TMI Blog1998 (4) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... had objected the share loss on surmise and conjectures, was based on no evidence or partly relevant or partly irrelevant evidence and is otherwise perverse and arbitrary ? 3. Whether, considering the totality of the facts and in the circumstances of the case, the Tribunal was correct in law in directing the AO to allow the share of loss of Rs. 3,38,861.50 to the assessee-company ?" 2. The assessee-company claimed loss of Rs. 3,38,861.50 from the following dealings: ------------------------------------------------------------------------------------------- Date of Shares No. of Cost Date of Sale Loss purchase shares sale price ------------------------------------------------------------------------------------------- Rs. P. Rs. Rs. P. 10-3-1974 The General Fibre 5,760 1,53,867.50 10-7-1981 86,400 67,467.50 Dealers Ltd. 18-8-1976 Bhagatpur Tea 1,448 1,45,562.50 -do- 21,720 1,23,842.50 17-9-1980 Co. Ltd. 23-6-1986 Jokai India Ltd. 21, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 31-3-1981 By cheque 5,000 4-6-1981 -do- 2,00,000 16-6-1981 -do- 1,000 23-6-1981 -do- 1,00,000 20-7-1981 -do- 5,000 31-7-1981 -do- 1,000 14-9-1981 -do- 3,82,000 29-9-1981 -do- 1,000 Against the above loan receipt the assessee made the following payments immediately after the receipt. Rs. 13-4-1981 By clearing 5,525.53 8-6-1981 -do- 2,00,000.00 23-6-1981 -do- 1,00,165.00 21-7-1981 -do- 1,081.00 14-9-1981 By transfer 3,82,375.00 30-9-1981 -do- 1,000.00 The CIT(A) after considering the facts of this case confirmed the order of the ITO, inter alia, for the following reasons : "On the facts of the case, the share transactions with the chairman, Shri R. L. Kanoria, do not appear to be genuine t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk account of the assessee. The purchase of shares of Jokai India Ltd. is also reflected in the bank account of the assessee. The assessee's claim that sale of shares was effected through spot delivery has also not been refuted. Thus prima facie the transactions have been established. For treating these transactions as non-genuine, the lower authorities took into account the fact that transactions were carried with the chairman of the assessee-company. The CIT(A) held that transactions to be colourable device claimed at tax avoidance and, therefore, liable to be ignored in view of the decision of the Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC). To examine whether there was any tax avoidance, we looked into the relevant record of the assessee as well as that of Shri R. L. Kanoria. In the asst. yr. 1982-83, after disallowance of share loss as also interest of Rs. 93,622 the net income of the assessee-company was determined at Rs.9,437. The CIT(A) further allowed interest of Rs. 93,622 and thus income of the assessee-company has been assessed at loss without considering the share transactions in question. Thus. no' case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market but had nil value by the break-up method on the date of sale. It is also not disputed that Sri Kanoria was a creditor of the assessee-company and on the loan advanced by him, the assessee-company was paying interest at Rs. 18 per annum when it was receiving no income from the share holdings. The assessee's case that sale of shares was effected to reduce liability to pay interest is borne out from the record. We are also unable to agree with the CIT(A) that the assessee-company as "debtor" could dictate and get any price for shares from Sri Kanoria. There is nothing on record to refute the assessee's claim that there was no buyer of the above shares except Sri Kanoria. As stated by the lower authorities, the price and position of shares change from day-to-day, and, therefore, the CIT(A) was not correct in rejecting the transaction in question on account of purchase of shares of General Fibre Dealers Ltd. from Smt. Urmila Devi Kanoria at Rs. 30 per share, particularly when sale rates have not been challenged. The above independent transaction took place almost about a year after the sale in question. Share transaction was definitely an act of business prudence. The compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are unable to hold the transaction as non-genuine. The Revenue has failed to establish its case and rejected share loss on surmise and conjectures. For the above reasons, we allow loss in share dealings to the assessee as claimed. Accordingly, we set aside the orders of the lower authorities on this point and direct the AO to allow the above loss to the assessee." Against the said order of the Tribunal, the instant reference has been directed. 4. The questions raised by the Revenue and referred by the Tribunal to this Court seek to challenge the aforesaid order of the Tribunal mainly on the ground that the same is passed on no evidence or partly relevant or partly irrelevant evidence or is otherwise arbitrary and perverse. It has been pointed out on behalf of the Revenue that the loss claimed by the appellant at Rs. 3,38,868 cannot be allowed for the following reasons : (a) Sale of the unquoted shares of General Fibre Dealers Ltd. and Bhagatpur Tea Co. Ltd. at a substantial loss was mainly intended-to benefit its chairman, Sri Kanoria, to acquire control over the two companies. Accordingly, even assuming for argument's sake that the relevant loss was a business loss, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was between the company and its chairman and there was no substantial credit of the parties in the bank, at the time when the cheques were issued by the assessee as well as by its chairman all upon the same bank, viz., United Commercial Bank. It has also been submitted that all transactions through cheques are not sacrosanct nor do they by themselves make the transaction genuine. It has also been argued on behalf of the Revenue that even assuming that some of the transactions were accepted in case of assessment of Kanoria, it is not conclusive to hold that the transactions should be accepted as genuine, so far as the company is concerned, in view of the facts and circumstances of the case. It has also been pointed out on behalf of the Revenue that the Tribunal failed to consider several facts as fully mentioned by the ITO and the CIT(A) in their respective orders and the said finding of the Tribunal is perverse and cannot be supported in law. It has been argued on behalf of the Revenue that the Tribunal failed to consider the following relevant materials referred to in the order of the AO and the CIT(A) : (a) Prima facie the transaction being between the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see- company and Kanoria tried to claim the assessee-company wanted to help its chairman, Mr. Kanoria, to gain control over the other two companies and to claim short-term loss under the head "Capital gain" in respect of the shares of Jokai India Ltd. It has been argued on behalf of the Revenue that this is a case of tax avoidance by resorting to fictitious transactions between the assessee-company and its chairman, Mr. Kanoria, and the principle laid down by the Supreme Court in McDowell's case, applies to the facts of this case. It has further been submitted on behalf of the Revenue that it is the duty of the Court in the facts and circumstances to lift and/or pierce the corporate veil of the assessee-company to find out the truth as to how by manipulation of transactions of shares of the assessee-company evaded tax. It has also been argued on behalf of the Revenue that in view of the fiduciary relationship between the assessee-company and its director, Mr. Kanoria, the burden of proving the genuineness of the transaction is on the assessee. It has accordingly been submitted that the question should be answered in favour of the Revenue in the affirmative so far as question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passes are also legally responsible for payment of the excise duty which is collected from them by the authorities of the excise Department." The Supreme Court then proceeded to determine whether excise duty paid directly to the excise authorities or deposited directly in the State exchequer in respect of Indian liquor by the buyers before removing the same from the distillery could be said to form part of the taxable turnover of the appellant distillery. Precedents were referred to and the Court came to the conclusion that excise duty did not go into the common till of the appellant and did not become a part of the circulating capital. Therefore, the sales-tax authorities were not competent to include in the turnover of the appellant, the excise duty which was not charged by it, but was paid directly to the excise authorities by the buyers of the liquor. The appellant, therefore, succeeded before this Court and the notices issued by the sales-tax authorities were quashed. The Supreme Court after considering the several earlier decisions held, inter alia, as follows : "On an examination of the provisions of the Excise Act, the Rules framed thereunder and the pronouncements re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s bound to be a seller at one end and a buyer at the other, and transfer of title in the goods takes place for a consideration." Considering the relevant provisions of the statutes, the Supreme Court, as aforesaid, dismissed the appeal of the writ petitioner. The Supreme Court in this connection recalled the observations of Viscount Simon in Latilla vs. IRC (1943) 25 Tax Cas 107, 171 (HL) : "'Of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however, elaborate and artificial such methods may be, those who adopt them are 'entitled' to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 2 lakhs. It was only in April, 1955, when the price of those shares went up in the market and they had to be sold, that the Rana opened an account with the Allahabad Bank and in that account were credited sums amounting to Rs. 38 lakhs got by the sale of those shares. Practically the entire sum of Rs. 38 lakhs was encashed by nine bearer cheques for large amounts by Das, a peon of Ashoka Marketing Co., a company controlled by the assessee, and Das was said to have handed over the cash to the Rana at the premises of Sahu Jain and Co., a company with which the assessee was closely associated. The Rana had been introduced to Dujari (accountant of Ashoka Marketing Co.) by the assessee and Dujari had asked Das to render the service to the Rana. The share certificates were found to be in the possession of Ashoka Marketing Co., after their sale to the Rana. Though several opportunities were given, the Rana did not appear before, the authorities to explain the circumstances under which he purchased those shares, but only his letter was produced, Wood was not produced and there was nothing to show that the letters were written by him. The ITO held that the Rana was merely a name-lender f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be interfered with on any of the grounds recognised by law ? and 2. Whether the Department has been able to establish that the shares alleged to have been purchased by the Rana were actually purchased by the assessee and that the Rana was a mere benamidar for the assessee ? The findings reached by the Tribunal are, prima facie, findings of fact. Before rejecting those findings, we must be satisfied that there are grounds in this case recognised by law which empower us to interfere with those findings. If the Department succeeds in crossing this hurdle, it has to further establish not merely that the Rana was not the real purchaser of those shares but that he was the benamidar of the assessee. The question which naturally arises at the very threshold is whether it is permissible for this Court to go behind the findings of fact as found by the Tribunal upon which it had come to the conclusion that the Rana was the real purchaser." The Supreme Court took into consideration its earlier decision in Karnani Properties Ltd. vs. CIT (1971) 82 ITR 547 (SC) : TC 54R.333, wherein the Supreme Court had indicated the limitations imposed on the High Court and the Supreme Court from in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugn the findings and the validity of the Tribunal's conclusion that Rs. 10,80,000 was not an income from undisclosed sources, but was the product of a genuine sale by the vendor-companies. Dealing with the questions, the Supreme Court further held and observed as follows : "In our view, the High Court and this Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language as a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated." The next question that the Supreme Court considered in the aforesaid decision was whether the Department established t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to take note of the fact that the main purpose of the sale of shares at Rs. 20.50 per share on 10th July, 1981, to Sri Kanoria and the subsequent repurchase of the same from him on 14th Sept., 1981 at Rs. 17.50 per share appears to be to enable Sri Kanoria to claim short-term loss under the head "Capital gain" in respect of the purchase and sale of shares by him respectively on 10th July, 1981, and 14th Sept., 1981. In this process, the appellant also had tried to claim the benefit of the loss of Rs. 1,41,561 for the asst. yr. 1982-83. This arrangement has the character of a well planned scheme of tax avoidance. (v) Further consideration should have been with regard to the fact that no actual movement of funds took place from the assessee to Kanoria and the cheques were issued by each of them without sufficient funds in their respective bank account which go to show that the transaction was sham and not genuine. This aspect of the matter was also ignored by the Tribunal. 8. It also appears that the Tribunal did not consider all the points of objection mentioned by the ITO or the CIT(A) nor has dealt with the same. The Tribunal mainly based its findings on the ground that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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