TMI Blog1993 (3) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal that the Income-tax Officer did not bring any material on record to show that the market price of the shares at the time of sale was more than Rs. 25 is vitiated in law being contrary to evidence or based on no evidence or the same is otherwise unreasonable and/or perverse ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the assessee is entitled to capitalisation of interest of Rs. 1,46,501 and the said interest should be allowed in computation of short-term capital loss on the sale of shares and whether such conclusion is based on no evidence or contradictory of evidence or based on misconstruction of statutory language or the same is otherwise unreasonable and/or perverse ? (5) Whether, on the facts and in the circumstances of the case, the finding or conclusion of the Tribunal that the short-term capital loss of Rs. 3,00,811 on the sale of shares of Messrs. Punalur Paper Mills Ltd. was rightly allowed by the Appellate Assistant Commissioner is vitiated in law being contrary to evidence or based on no evidence or the same is otherwise unreasonable and/or perverse ?" The relevant facts are that M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dum and articles of association of Laxminiwas and Co. (Export) Pvt. Ltd. The printed memorandum and articles duly signed by them were deposited on March 12, 1969, with the Registrar of Companies along with the other requisite statutory documents and fees. The certificate of incorporation of Laxminiwas and Co. (Export) Pvt. Ltd. was issued by the Registrar of Companies on June 6, 1969. The assessee sold 27,162 shares of Punalur Paper Mills Ltd. to Laxminiwas and Co. (Export) Pvt. Ltd. (a company till then not incorporated) at Rs. 25 per share in May, 1969. Laxminiwas and Co. (Export) Pvt. Ltd., on June 7, 1969, after its incorporation, duly ratified the purchase of the said shares. Thereafter, a further lot of 12,000 shares of Punalur Paper Mills Ltd. was sold by the assessee to Laxminiwas and Co. (Export) Pvt. Ltd. at Rs. 25 per share. The assessee suffered a loss at Rs. 7 per share on the sale of the said 39,162 shares to the Laxminiwas and Co. (Export) Pvt. Ltd. The loss claimed on the sale of the said shares was disallowed by the Income-tax Officer, who held that Laxminiwas and Co. (Export) Pvt. Ltd. was a dummy of the assessee and the transactions of the sale initially of 27, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest should be added to the cost of the capital assets. The Tribunal further found that the market price of the said shares of Punalur Paper Mills Ltd. was Rs. 25 only as apparent from the evidence of transactions made in the shares of the said company during the relevant period as recorded in the order of the Appellate Assistant Commissioner and that no other material had been adduced on behalf of the Department to show that the market rate was higher. On these facts, the questions as stated earlier have been referred to this court. There are three aspects involved in the five questions referred to this court on the allowability of the loss suffered in the sale of the said shares and the interest paid on the borrowing made for their acquisition. They are : (i) whether the transaction of sale of the shares with Laxminiwas and Co. (Export) Pvt. Ltd. was void having been made prior to its incorporation on June 7, 1969 ? (ii) whether the transfer of the shares by the assessee to Laxminiwas and Co. (Export) Pvt. Ltd. at the prevailing market price was sham ? and (iii) whether the interest paid on the borrowing for acquisition of the said shares could be added to its cost of acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket price or was a sham. The Tribunal answered this question in favour of the transferor being the respondent-assessee. The Tribunal is of the view that the transaction took place between individuals being the holders of the shares and a company having a separate legal entity. The fact of the transferor happening to be a shareholder-cum-director of the transferee-company cannot lead to an adverse inference and the price at Which the transaction took place was the proper price uninfluenced by any other extraneous factor. On the face of it, the transaction does not appear to be influenced by doubtful factors and the transaction took place as if a normal transaction was taking place between persons, viz., the seller and the buyer, who are individually otherwise quite competent. The assessee was holding 78,885 shares of Messrs. Punalur Paper Mills Ltd. and he has been stated to be receiving no dividend since he purchased shares. The shares were purchased at Rs. 32 per share and before the sales, the value of the share had fallen to Rs. 25 per share and the sale was made at Rs. 25 per share. Thus, by the sale, a loss of Rs. 7 per share was incurred by the assessee. The shares were held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls and his controlling interest in Punalur Paper Mills Ltd. need not undergo sacrifice, rather he maintains the interest over the companies at both the ends. The transaction took place without any ready cash and the entire sale was made on credit. He was shown as a creditor in the books of the purchasing companies and there was apparently no indication as to how the consideration was to be met. Particulars regarding the paid-up capital of the newly formed companies and the resources available to acquire a huge lot of shares by such companies are wanting. At least, there is no positive proof that the purchasing company had sufficient funds to acquire 39,162 shares for a total consideration of Rs. 9,79,000. There is no indication as to how the consideration would be met by the purchasing company, i.e., Laxminiwas and Co. (Export) Pvt. Ltd. The appellate authorities below considered this to be a normal transaction without going through this vital aspect of the issue. The vendor, L. N. Dalmia, was incurring huge interest on borrowed money allegedly utilised for the acquisition of the very shares and this year such interest amounted to Rs. 1,46,501. Redemption of such borrowings was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee seems to have accepted. This loss has formed a cushion against the future gain capable of being carried forward and set off against the future capital gain. From the surrounding circumstances, the leading factor is the creation of a sink for future gain be it revenue or capital and this particular factor is the deciding matter which has been attained by resorting to this device as adopted by the assessee. Though a paper loss, it has got a far-reaching effect on the tax liability in future years of the transferor. The Tribunal upheld the decision of the Appellate Assistant Commissioner and the Appellate Assistant Commissioner in his turn cited the Supreme Court decision in the case of CIT v. Dalmia Jain and Co. Ltd. [1972] 83 ITR 438, where the Tribunal held: "that the object or motive with which these shares were acquired were neither relevant nor sufficient to take the dealing in shares outside the ordinary course of the business, and, hence, the loss was to be allowed as a revenue loss". This view was upheld by the High Court and the supreme Court. But the ratio decidendi of that case does not advance the instant case under reference before us. The assessee, having acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the still earlier decision of the Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540, the court observed that the taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. The most important decision of the Supreme Court in this regard is the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC), where the court held thus (headnote): "It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction.... Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering problems arising out of such avoidance has necessarily to be the same." In that case, the Associated Rubber Industry Ltd. were holding shares of INARCO Ltd. by investing a sum of Rs. 4.50 lakhs. They were getting annua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As discussed, the assessee effected a transaction of sale of shares held by him to companies formed by himself holding the major part of shares of such companies along with his nephew and wife, who held only the smaller part therein and are shown to have suffered a loss by the sale which would be a cushion against future tax liability for gain either under the revenue head or under the capital head. We have observed that as for the exercise of control over the shares, more particularly over the control of the company (Punalur Paper Mills Ltd.), there has been no change whatsoever. He continued to exercise the same control over Punalur Paper Mills Ltd. as before. This special aspect cannot be overlooked by any appellate authority dealing with tax matters. When there was no real change whatsoever, the apparent change being the transfer on the surface of shares from the individual to the company, a handmaid of the transferring individual, cannot be overlooked and we are in complete agreement with the view of the taxing authority that there was no real change or transfer and the transfer claimed was a sham transfer. Relying upon the decision of the Supreme Court in the case of Workme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts before us are different from the facts in the case cited. There the plot of land was for a building purpose and it was not intended for using as income-earning investment while the investment in shares in the case before us are investments made with a view to earning dividend. In the Delhi High Court case in CIT v. Mithlesh Kumari [1973] 92 ITR 9, the interest paid on borrowed amount for the acquisition of such plot of land, therefore, constituted part of the cost of acquisition. The investment in shares is quite different from that and we do not actually know how the interest paid for the borrowed amount has been claimed and treated in earlier years. Moreover, it has been submitted on behalf of the assessee that the assessee is entitled to submit before this court that the said deduction should be allowed under the head "Other sources" though against the decision of the Tribunal that such interest was to be capitalised being part of cost of acquisition of shares has not been appealed against. It is well-settled that an allowance for deduction can be upheld on a ground other than that on which it was allowed by the Tribunal. We, accordingly, hold that the interest in question i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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