AURA SECURITIES PVT.LTD.,,AHMEDABAD vs. THE ACIT.,CIRCLE-1,, AHMEDABAD

आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned Cross appeals have been filed at the instance of the Revenue and Assessee against the order of the Commissioner of Income Tax (Appeals)- 6, Ahmedabad [Ld.CIT(A) in short] dated 29/02/2012 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 27/12/2010 relevant to Assessment Year (A.Y) 2008-09.

First, we take up assessee appeal bearing No. 986/AHD/2012 pertaining to the assessment year 2008-09. The assessee has raised the following concise grounds of appeal vide letter dated 17-12-2016:

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 3

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 4

issue raised in ground No. 8 is general, therefore we dismiss all of them as infructuous.

The first issue raised by the assessee in ground no. 2 is that the ld. CIT(A) erred in confirming the order of the AO by sustaining the disallowance of loss of Rs. 1,80,00,000.00 on the sale of shares of M/s Ankul Investments Pvt. Ltd.

4.1 The necessary details of the short-term capital loss claimed by the assessee on the sale of shares of the companies stand as under:

Name Securit Date of No. of Purchase Price/share Date of No. of Value of Sale Indexe Profit/Los of y sold Investment Shares Value s Sales share sales s d Cost s Securit to s purchase sold valu y s e per unit Anukul Sanjay 5/10/07 4000 5000 20000000 27/03/0 4000 2000000 500 174 -18000000 Invest Family 8 mets Trust Anagra Anagra 20/10/07 7000 280.18 1961260 31/2/07 7000 266000 38 72 -1965260 m m Stockbr securiti o King es Ltd. Anagra Anag 23/10/07 8750 280.88 2457704 31/12/0 8750 332500 38 69 -2125204 m Securiti 7 Stockbr es Ltd. o King LRd

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 5

Anagra Anagra 23/10/07 105000 280.88 29492478 31/12/0 105000 3990000 38 69 -25502478 m m 7 Stockbr Securiit o Kind ies Ltd. 5841.94 6588500 -47322952

4.2 The facts regarding the STCL of Rs. 1,80,00,000.00 in respect of M/s Ankul Investment Pvt. Ltd. ( for short AIPL ) stands as under:

The shares were allotted to the assessee at ₹5000 per share i. comprising face value at ₹10 per share and premium of Rs. 4990 per share dated 15 October 2007.

ii. The assessee company and Ankul Investment Pvt. Ltd. belongs to the same group i.e. Lalbhai Dalpatbhai Group.

iii. Both the companies were operating from the same address.

The impugned shares were sold by the assessee at ₹500 per share iv. dated 27th of March 2008 (within the same financial year) to the persons who are part of the group as discussed above.

v. The loss incurred by the assessee was set off against the long-term capital gain in the year under consideration.

4.3 The AO during the assessment proceedings sought an explanation from the assessee on the facts as discussed above. The assessee in compliance to the notice of the AO vide letter dated 1st November 2010 submitted that it had advanced the sum of ₹ 1,99,85,000.00 (approximate Rs. 2 crores) in the financial year 2002 -03 to AIPL with the understanding that it will be allotted shares against such advances. But the shares were actually allotted it in the

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 6

year under consideration at a high premium in order to avoid the payment of the stamp duty. As such it is not the case that the assessee purchased the shares in the year under consideration at a higher value and sold the same in the year under consideration at a lesser value in order to generate the loss.

4.4 The assessee further claimed that it has sold the shares of AIPL ( Rs. 500 per share ) in the year under consideration at a higher value than the book value i.e. Rs. 286 per share of the company.

4.5 However, the AO disagreed with the submission of the assessee by observing as under: i. The assessee failed to furnish any agreement with the AIPL made in the year 2002 regarding the acquisition of the shares as discussed above. ii. There was no board resolution provided by the assessee regarding the acquisition of the shares in the year 2002. Similarly, there was no board resolution made by AIPL in the year 2002 for the allotment of shares to the assessee. iii. The entire transactions for the purchase and sales of the shares were made among the related parties. iv. The assessee had set off the impugned short-term capital loss against the long-term capital gain earned by it in the year under consideration. In view of the above, the AO held that the impugned loss was generated by the assessee in order to reduce the tax liability. Thus such loss represents the bogus loss which was generated using the colorable device.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 7

Accordingly, the AO disallowed the same and added to the total income of the assessee.

The assessee purchased 1,20,750 shares of ASBL at ₹ 280.12 per i. share and sold the same at Rs. 38.00 per share during the year which resulted short-term capital loss of Rs. 2,93,33,942.00 in the year under consideration. ii. The assessee was the major shareholder in ASBL among the other parties. Other parties were also holding the shares of ASBL as detailed under: 1. Ashish Patil 7,000 shares 2. Darshan Mehta 8,750 shares 3. Himanshu Dalai 1,05,000 shares

The above parties were employees in the group company of the assessee.

iii. The assessee was in the process of selling its shareholding in ASBL. The assessee being our major shareholder in ASBL has also acquired the shares from the aforesaid parties to avoid any possible hurdle while selling the shares held by it. Accordingly the assessee purchased the shares after negotiating the price from the aforesaid parties as a measure of business expediency.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 8

iv. The assessee also claimed that all the parties above have declared the capital gain income on the sale of shares to the assessee in their respective return. Therefore there cannot be any question of any tax planning to avoid the tax in the impugned loss incurred by the assessee. v. The assessee subsequently has transferred the shares held by it as well as the shares acquired by it from the parties above after negotiating the price at Rs. 38 per share.

5.1 However, the AO disagreed with the submission of the assessee by observing that the assessee after purchasing the shares from the parties as discussed above has transferred the shares to Anagram Capital Ltd. (for short ACL). As such, ACL could have purchased the shares from the parties as discussed above directly and without the involvement of the assessee. In that event the loss incurred by the assessee could have been avoided. Accordingly, the AO was of the view that the assessee has incurred such loss to avoid the long-term capital gain income earned by it. Thus the AO treated such loss as generated using the colorable device. Hence the AO disallowed the same and added the loss of Rs. 2,93,22,942.00 to the total income of the assessee.

In view of the above, the AO disallowed the short-term capital loss of Rs. 4,73,22,942.00 (Rs. 1,80,0000.00 plus 2,93,22,942.00) and added to the total income of the assessee.

The aggrieved assessee preferred an appeal to the learned CIT (A).

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 9

5.2 The assessee regarding the STCL of Rs. 1,80,00,000.00 in respect of AIPL submitted that the payment was made in the year 2002 for the acquisition of the shares of the company. Thus it is not a case that the shares was required and sold to generate the loss.

5.3 The shares were sold at a price which was higher than the book value of the shares of AIPL which was determined as per the provisions of rule 11UA of Income Tax Rule 1962.

5.4 The provisions of section 40A(2) of the Act cannot be applied to the instant case. It is because such provisions are applicable to the transactions with the income taxable under the head business and profession. The impugned issue relates to the income determined under the head capital gain. Therefore, there cannot be any disallowance of the loss claimed by the assessee on the ground that it was arising from the transactions carried out with the related parties.

5.5 The assessee also claimed that the impugned loss cannot be disallowed merely on the reason that it has not substantiated its understanding of 2002 with the AIPL for subscribing the shares. It is because there are other circumstantial evidences which are contemporaneous for justifying the understanding between the assessee and AIPL for the acquisition of the shares.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 10

claimed and adjusted against capital gain by the appellant. Assessing officer very elaborately discussed the nature of transactions and how the loss is not allowable. AO discussed appellant's submissions in detail and held that the loss claimed by the appellant is not genuine but created with the group entity. It is not in dispute that appellant converted loan of RS 2 crores granted by it to a group company AIPL in 2002 which was converted into shares in October 2007with the premium of RS 4990 per share The same shares were sold at RS 500 per share within six months to Sanjay family trust, another group entity. Therefore both purchase and sale transactions of shares are controlled transactions. When shares were allotted at RS 5000 per share, book value of the shares was less than RS 300 per share. This means/ shares were allotted at huge premium without any basis. The unreasonable and excess premium in such conversion of loan to shares is proved from the sale of these shares within six months at only RS 500. The appellant argued that the loan was to be converted into shares and numbers of shares were be decided after considering stamp duty liability. This clearly shows that the price of shares including huge premium is not in consequence to any valuation but on the consideration of stamp duty liability. Therefore it is clear that appellant did not purchase shares at RS 5000 under any legal obligation or on the basis of any valuation. Appellant also could not submit any / agreement requiring it to purchase these shares at RS 5000 per share. If appellant's arguments are considered correct then the value of shares cannot fall so drastically in less than six months time. Since both the transactions are with group concerns only, such transactions at artificial price could be possible. Appellant can enter into any transactions within the group entities but cannot claim loss of such transactions if it was not able to substantiate the value of these transactions. All other arguments of the appellant are not relevant since appellant claimed short-term capital loss by entering into transactions with group entities at artificial price with no supportings or legal bindings. Considering all these facts and discussion made by the assessing officer, the short-term capital loss claimed by the appellant on account of transactions within the group entities at artificial price is not justified. The disallowance of such loss made by the assessing officer is confirmed.”

6.1 The assessee regarding the STCL of Rs. 2,93,33,942.00 in respect of ASBL submitted that the shares were purchased from the employees at the negotiated price as a measure of commercial expediency. As such the assessee was selling the entire shares as held by it of ASBL. Therefore, the shares held by the employees as discussed above were required by it to avoid any possible hurdle in the process of selling the shares of ASBL.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 11

6.2 Even if the shares would have been acquired directly by ACL from these employees, then also the purchase price would not have been disturbed by the Revenue. Moreover, the AO has no role in directing the assessee to conduct its business in a particular manner. It was the decision of the assessee to acquire the shares of ASBL and sell the same to ACL which cannot be questioned by the AO.

6.3 The assessee also claimed that the Revenue on one hand is accepting the long-term capital gain declared by it from the transactions carried out within the group companies but on the other hand it is disallowing the losses from the transactions carried out by it within the group companies. As such, the AO cannot take different stand for the similar transactions.

As far as sale of shares to a group company is concerned, the entire holding of the appellant along with the minority interest shares purchased from three employees were sold at the same rate i.e. RS 38 per share. This sale price is same for the appellant's own holding and the shares purchased during the year. The sale of shares also resulted in long-term capital gain of Rs 9,19,95,904 along with short- term capital loss disallowed by the AO. If the transaction is to be treated as Sham or artificial by following apex court decisions in the case of Mcdowel then the entire sale of shares has to be ignored which means the long-term capital gain of

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 12

more than RS 9 crores will also have to be ignored. Since assessing officer taxed long-term capital gain declared by the appellant, he cannot ignore the short-term capital loss resulting from the same transaction. Since purchases of shares are not within the group, the said transaction cannot be ignored unless manipulation or tax avoidance is proved. Since appellant paid purchase consideration at RS 280.88 per share which is also disclosed by the sellers at the same price, the purchase price cannot be ignored. It is true that apart from book value, many other business factors were involved in purchasing shares at higher value. The complete control of the company by purchasing minority shareholders' stake is one of the considerations. After taking control of entire equity capital of the company, appellant sold the same to the group company at a negotiated price of RS 38 per share. Appellant earned substantial long-term capital gains on transfer of its own holding whereas suffered short-term capital loss on shares purchased to gain complete control of the company. There is no provision under the law in which declared sale consideration can be changed for the purpose of computing capital gain. Therefore the sale consideration declared by the appellant in a group company transaction cannot be changed unless it is proved that undeclared consideration has passed. Therefore assessing officer cannot change the long-term capital gain disclosed by the appellant and at the same time the loss suffered in the same transaction cannot be ignored. The decisions relied upon by the assessing officer cannot be applied to the peculiar facts of this case. Assessing officer himself mentioned in the assessment order- "The arguments put forth by the assessee company do explain the reasons for fhe purchase of shares at * 280.88/-,"

From the above, it is clear that assessing officer was satisfied with the reasons for purchase of shares at 280.88 per share. The purchase consideration is therefore final and cannot be disturbed. Similarly sale consideration cannot be disturbed as discussed in earlier para. As a result of this, assessing officer cannot ignore long- term capital gain or short-term capital loss arising from these transactions. There is no basis to hold that these transactions were undertaken only to reduce tax liability particularly when these transactions were resulting in long-term capital gain exceeding RS 9 crores. In view of this, the disallowance of short-term capital loss made by the assessing officer cannot be sustained. This ground is accordingly allowed.

Thus in view of the above, the learned CIT-A allowed the grounds of appeal of the assessee in part.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 13

disallowance of the short-term capital loss of Rs. 1,80,00,000.00 and the Revenue is in appeal against the deletion of the disallowance of the loss of Rs. 2,93,22,942.00.

The grounds of appeal raised by the Revenue stand as under: 1. The Id. CIT(A) erred in deleting the disallowance of short term capital loss of shares amounting to Rs.2,93,22,942/-. 2. The Id. CIT(A) erred in holding that as the sellers (the three employees of the company) paid taxes on receipts towards shares sold by them to the company, the transaction and purchase price paid by the company cannot be held any tax planning or manipulation. The transaction by the company is to pass on the undue benefit to the said employees and to reduce the incidence of tax in the hands of the company. 3. The Id. CIT(A) ignored the glaring fact on the record that the said transaction of buying at high price and sellting at low rate is a colourable device. On the facts and in the circumstances of the case and in law, the Id. CIT(A) ought to have upheld the order of the Assessing Officer to the extent mentioned above, since the assessee has failed to disclose his true income. The appellant prays that the order of Id. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. The appellant craves leave or alter any ground or add a new ground which may be necessary.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 14

the issue in favour of the assessee and against the Revenue. The relevant extract of the order is reproduced as under: 10. We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has sold equity shares of Arvind Ltd at Rs. 28.83 per share which is less than the price listed on the stock exchange by Rs. 4.99 per share. The assessee has sold 30 Lacs shares of Arvind Ltd which resulted in the long-term capital loss of Rs. 1,49,70,000/- on account of the difference in the price as discussed above. The assessee sold these shares to Shri Sanjay Lalbhai who is the director in assessee company as well as Arvind Ltd. Accordingly, the AO was of the view that the loss claimed by the assessee has been generated through the use of a colorable device. 10.1 Therefore, the same was disallowed. The view taken by the AO was subsequently confirmed by the learned CIT (A). 10.2 Now the controversy arises whether the loss claimed by the assessee in the given facts and circumstances is based on business expediency or it was used as a tool of a colorable device to generate such loss. 10.3 It is an undisputed fact that all the parties which carried out such transaction were identifiable and there was also a consideration among such parties. The limited issue before us is that whether the assessee can sale listed shares off-market at a price lesser than the price listed on the stock exchange. 10.4 The price prevailing on the stock exchange at the relevant time was Rs. 33.30 per share. It is an undisputed fact that among other things the price at the stock exchange is decided by demand and supply of the shares. It means if there is more supply of the shares in the market, the price of the share will fall and vice versa. Thus, if the assessee would have sold these shares through the network of the stock exchange, the possibility of the reduction in the value of shares in the market would not have been avoided. It is because at that relevant time the daily average number of shares traded in the stock exchange namely BSE & NSE were 4,87,085 and 9,56,701 respectively. The relevant details showing the average number of shares traded in the stock exchange is placed on pages 54 to 55 of the paper book. Thus the sudden supply of 30 lacks shares, that too by the promoter of the assessee company in the stock exchange would have adversely affected the price of the shares of Arvind Ltd. 10.5 We also note that the assessee must have saved transaction cost consisting of service tax, Security transaction tax, and brokerage by selling the shares off- market. Had the assessee gone through the network of stock exchange then he would have incurred the cost as stated above. Therefore the difference, to the extent of the cost involved in such transfer, as discussed above, between the market price and actual price requires due consideration for quantifying the loss arising from the sale of shares.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 15

10.6 We also note that there is no provision under the Act prescribing the guidelines for pricing of the shares unlike the provisions contained under section 50C of the Act concerning immovable properties under the head capital gain. Thus in the absence of any specific provision to determine the sale price of the shares of the listed company, we are inclined to hold that the price declared by the assessee is correct and within the provisions of law. 10.7 We also find that a new section 50CA of the Act was inserted by the Finance Act 2018 which is applicable from 1st April 2018, the relevant extract of the section is reproduced as under: “[Special provision for full value of consideration for transfer of share other than quoted share. 50CA. Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed 40a , the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. Explanation.—For the purposes of this section, "quoted share" means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.]”

10.8 From the plain reading of the above provision we note that the law was amended to bring the transaction of unquoted sale and purchase of shares under the net of income tax concerning the sale price of the shares. As per the provisions of section 50CA of the Act, the sale price of shares other than quoted shares shall be the fair market rate which shall be determined as prescribed under the rule 11UAA of the Income Tax Rule. 10.9 From the above provisions it is clear that the lawmakers have not brought any mechanism to determine the sale price of quoted shares if sold off-market. Thus it is transpired that the sale price of the quoted shares shall be the price as agreed between two parties if it is sold off-market. 10.10 We also note that there is no provision under the head capital gain which empowered AO to determine the fair sale or purchase price of the quoted shares between the related parties unlike the provisions of section 40A(2) of the Act under the head business & profession. 10.11 Thus after considering the above facts, we are of the opinion that AO is not correct in challenging the sales consideration decided by the parties. There is no mechanism in the law, as discussed above, which allows AO to take the listed price of a share in place of actual sales consideration. 10.12 We also note that it is not the case of the Revenue that there was some inflow of money from the buyer of the shares to the assessee which is unaccounted.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 16

As there is no dispute about the nature of the transaction and the consideration received by the assessee against the sale of shares, therefore the transaction cannot be termed as a sham transaction. 10.13 Moreover, the onus is on Revenue to establish that assessee has received some benefit over and above the actual sales consideration. In this regard, we find support and guidance from a recent judgment of Delhi high court in case Arjun Malhotra vs. CIT (403 ITR 354) where the same issue has been dealt and decided in favor of the assessee. The relevant extract of the order reads as under: “24. In view of the aforesaid discussion and pronouncement of law in K.P. Varghese case (supra), we fail to fathom how the tribunal had distinguished the said decision solely and entirely on the ground that in the present case the transaction was not at arm's length (see paragraphs 18 and 19 of the order of the tribunal quoted above in paragraph 16). K.P. Varghese case (supra) case holds that sub-sections (1) and (2) relate to transactions, which were not at arm's length between related parties and third parties respectively, but the two provisions were integrally connected inasmuch as they would apply when there was evidence and material to show that the consideration declared and disclosed was under-stated and not the actual consideration received by the assessee. Only when the said pre-condition was satisfied, the Assessing Officer was entitled to treat the fair market value as the full value of consideration. Difference between the consideration actually received and market value of consideration by itself would not justify invoking the said Section. The aforesaid ratio has been followed by the Supreme Court in CIT v. Shivakami Co. (P.) Ltd. [1986] 25 Taxman 80K/159 ITR 71, which observes that the provision would apply only when there was consideration and which consideration actually received was more than the consideration disclosed or declared. Further, onus was on the Revenue to prove under-statement of the said consideration. Section 52 was not meant to apply to tax capital gains on the basis that the assessee might have gained or could have gained a higher price which in fact was not received. Reference can be also made to CITv. Godavari Corpn. Ltd. [1993] 68 Taxman 344/200 ITR 567 (SC) and judgments of this Court in CIT v. Dinesh Jain, HUF [2012] 25 taxmann.com 550/211 Taxman 23/[2013] 352 ITR 629 and CIT v. Gulshan Kumar [2002] 123 Taxman 111/257 ITR 703 (Del). 25. As noted above, Section 52 of the Act was omitted by Finance Act, 1987 with effect from 1st April, 1988. The said provision, therefore, was not applicable in the Assessment Year 1999-2000. We have referred to the aforesaid judgment in K.P. Vearghese case (supra) as this judgment was referred to and distinguished by the tribunal in the impugned order. We have also referred to K.P. Varghese case (supra) to elucidate that the legal ratio propounded with reference to then applicable Section 52 of the Act would be against the Revenue even if the said Section was applicable. It is obvious that when Section 52 of the Act itself was not applicable, the Assessing Officer could not have substituted the actual sale consideration

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 17

received by the Assessee with another figure stating that this was the fair market value. The aforesaid discussion would also take care of the argument that M/s GIPL had paid for foreign travel of the assessee. The fact that M/s GIPL had incurred any such expenditure would not be a ground and reason to substitute the actual consideration received with the figure relying upon the market quotation of the share as the fair market value.” 11. Now coming to the main allegation/finding of the AO, which was later confirmed by the ld. CIT(A), that assessee has used this transaction as a colorable device to reduce its future tax liability and heavily relied on Honorable Supreme court in case of McDowell & Co. Ltd vs. Commercial tax officer (154 ITR 148) dated 17-4-1985 wherein apex court observed that tax planning within the law is permitted, but colorable devices cannot be part of tax planning. 11.1 In the case of McDowell & Co, the assessee was not collecting the sales tax liability on the excise duty even after the amendment in the distillery rules 76 & 79 w.e.f. 4-8-1981. As such before the amendment in the rules, i.e., distillery rules 76 & 79 w.e.f. 4-8-1981, the buyers were liable to deposit the excise duty directly to the state government. Therefore the assessee did not collect the sales tax on such excise duty. It is pertinent to note that the Hon’ble SC before the amendment in the rules 76 & 79 decided the issue in favor of the assessee reported in 1 SCR 914 dated 25-10-1976. Thus the assessee defaulted in complying the amended distillery rules 76 & 79 w.e.f. 4-8-1981. Thus the Hon’ble Apex Court decided the issue in favor of Revenue. Hence we are of the considered view that the principles laid down by the Hon’ble Apex Court cannot be applied in the case before us as the facts are different. 11.2 It is also pertinent to note here that the Hon’ble apex court in case of Union Of India And Anr vs. Azadi Bachao Andolan (263 ITR 705) discussed the case McDowell & Co. Ltd vs. Commercial tax officer (supra) in detail and distinguished from it by observing as under: “We may in this connection usefully refer to the judgment of the Madras High Court in M.V.Vallipappan and others v. ITO , which has rightly concluded that the decision in McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corporation Ltd. , and did not have the benefit of the House of Lords's pronouncement in Craven , the view taken by the Madras High Court appears to be correct and we are inclined to agree with it.” 11.3 Further, we also note that Hon’ble Jurisdictional High Court in case of Banyan And Berry Vs. Commissioner Of Income Tax (222 ITR 831) held that tax planning within the law is permissible and only if any transaction which is

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 18

reducing the tax liability cannot be regarded as a colorable device. The court also discussed the meaning of colorable device and case of McDowell & Co. Ltd vs. Commercial tax officer (supra) in detail. The relevant extract of the order is read as under: “From the aforesaid, it is apparent that on the factual aspect the Court was considering the case where in a going business a liability to pay duty which was legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part of its selling price to the buyers, was as a result of arrangement between the seller and buyer split into two, namely - duty so far paid separately directly to the tax authorities and the balance so paid to the seller; the arrangement was existing solely for the purpose of not paying the tax and it is not a transaction in reality of receiving less price than the one on which it was marketing. The Court no where said, that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case (supra). Ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision (supra) leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the frame work of law, unless the same fall in the category of colorable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. It was with this consciousness that the Court has used these expressions while depreciating the schemes of tax avoidance in the name of tax planning. All the expressions used by their Lordships in depreciating the methodology of tax avoidance through tax planning of resorting to 'colorable device', 'dubious methods or subterfuge' have special significance in legal world. In the context of the present discussion, the meaning assigned to 'colorable' in Brown's Judicial Dictionary has been defined as 'reverse of bona fide'. Black's Law Dictionary explain 'colorable' to mean 'that which is in appearance only, and not in reality, what it purports to be, hence, counterfeit, feigned having the appearance of truth'. So also a device. The context in which the expression device has been used in its ordinary dictionary meaning as per Shorter Oxford Dictionary means 'inneuity, something device, arrangement, plan, contrivance, a plot or a trick. Black's Dictionary refers to device as contrivance, a scheme, trick.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 19

Subterfuge - according to ordinary meaning as per the Shorter Oxford English Dictionary - means that to which one refers for escape or concealment. Subterfuge on historical principles means, an article or device to which a person refers in order to escape the force of an argument, an excuse with which conceals a clue.So also the expression dubious refers to a doubtful or of questionable character. That is to say what has been deprecated as tax planning for avoidance of tax are those acts which have doubtful, or questionable character as to their bona fide and righteousness. Not all legitimate acts of a taxpayer which in ordinary course of conducting his affairs a person does and are under law he is entitled to do, can be branded of questionable character on the anvil of McDowell (supra). We are unable to read in the aforesaid decision that any act of an assessee which results in reduction of his tax liability or expectation of tax benefit in future amounts to colorable device, a dubious method or subterfuge to avoid tax and can be ignored if the acts are unambiguous and bona fide, merely on the ground that treating those as deliberate would result in tax liability in future. While the planning adopted as a device to avoid tax had been deprecated, principle cannot be read as laying down the law that a person is to arrange his affairs so as to attract maximum tax liability, and every act which results in tax reduction, exemption of tax or not attracting tax authorised by law is to be treated as device of tax avoidance.” 11.4 It is also pertinent to mention here that whenever assessee has two options, any layman will always go for one which reduces its tax liability but to hold that the transaction as a colorable device Revenue needs to see it in entirety, as held by the Hon’ble Gujarat high court in the abovementioned case. 11.5 The AO in his order also relied on the judgment of Supreme Court in the case of workmen vs. Associated Rubber Industry limited (157 ITR 77) (SC) and held that facts of the above case are similar to assessee’s case. However, we note that the above decision was in respect to the calculation of bonus payable to workers where an artificial entity was created to divert the income so that bonus liability can be reduced as the bonus was to be calculated at a fixed rate and diverting the income resulted in reducing the bonus liability. Therefore, Hon’ble Supreme Court held that it is not permissible as the artificial entity was later wound up in 2 years. But we find that facts in the case on hand are different from the case as mentioned in the immediately preceding paragraph. Further, we also note that the above case was related to the issue of labors while the present case is related to tax planning. Thus, the principles laid down concerning the labor laws cannot be adopted in the case before us.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 20

11.6 We also note that there was no set off of such loss against any income till the date of passing the order as claimed by the assessee. The Learned DR before us has not brought any iota of evidence against the argument of the learned counsel for the assessee. Thus we feel that had the loss claimed by the assessee been colorable device then, the assessee should have claimed set off of such loss against the income as per the provisions of the Act. As the assessee has not claimed the set off of such loss, we are of the view that the same cannot be held as the result of the colorable device. 11.7 We also note that the purchase and sale of the shares by the assessee of the shares of Arvind Ltd were duly supported with the relevant shreds of evidence which are placed on pages 50 to 53 of the paper book. It is also pertinent to note that the lower authorities did not doubt the details of the purchases and sales of the securities. 11.8 In view of the above, we are not inclined to uphold the finding of authorities below. Accordingly, we set aside the order of learned CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 21

19.2 Now the controversy before us arises whether the loss claimed by the assessee on the sale of shares of AKAL is generated as a tool of a colorable device. It is an undisputed the fact that all the parties involved in such transaction were identifiable and the whole transaction was based on the documentary evidence. Now the question arises to determine the price at which the assessee sold these shares. It is an undisputed fact that the assessee acquired shares of AKAL at a premium of Rs.490 per share having face value at Rs.10 per share only. These shares were sold at a price of 150 per share which is in excess than the fair market value of the shares determined as per rule 11UA of Income Tax rule. As per rule 11UA, the value of the share comes at Rs.109 per share. Therefore, there remains no doubt that the price of the share sold was at a higher price than the fair market value. 19.3 Under the income tax provision, we note that there was no mechanism to determine the purchase & sale price of the share at that the relevant time. The lawmakers to determine the transfer value of unquoted share brought special provision by introducing Section 50CA of the Act which reads as under: “[Special provision for full value of consideration for transfer of share other than quoted share. 50CA. Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed 40a , the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. Explanation.—For the purposes of this section, "quoted share" means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.]”

19.4 However, section 50CA is applicable w.e.f. 01st April 2018, therefore, for the assessment year under consideration there was no mechanism under the law to determine the sale price of unquoted shares. Similarly, there is also no provision under the provision of law to determine the price, which should be taken as the purchase cost of a capital asset. 19.5 Further, we also note that there is an amendment under the provisions of section 56(2)(x) of the Act which reads as under: “[(x) Where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, --- XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (c) any property, other than immovable property, -----

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 22

(A) Without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (B) For a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:” 19.6 A plain reading of the above provision reveals that the person being the recipient is subject to tax if it acquires anything at a value lesser than the fair market price. These provisions have been brought under the statute with effect from 01.04.2017. We also note that the same provision was also there in the old provision under clause (vii) to section 56(2) of the Act. However, on reading the same, we note that the tax liability, if any arises will be applicable in the hands of the recipient and no liability, can be imposed on the transferor. Therefore, we are of the view that the assessee being the transferor of shares cannot be subject to tax in the instant case. 19.7 In holding so, we also find support and guidance from the judgment of Asara Sales and Investments Private Limited (ITA No. 1345/PUN/2014) wherein it was held as under: “19. Another aspect of the issue is the allegation of Assessing Officer that as against book value of share as on 31.03.2008 at Rs.59.61 per share, the shares of GGDL were sold at Rs.48/- per share to another group concern BVHPL. These shares were acquired by the assessee @ Rs.74.25 in December, 2006. The said transaction as per the Assessing Officer suggested colorable device so that by selling the shares to its own subsidiary, at prices above or below the book value, the assessee was manipulating the income to reduce its tax liability. First of all, as decided in the paras hereinabove, the shares have not been sold to subsidiary of the assessee but to a concern from whom the assessee has raised loan to the extent of Rs.18 crores and the decision was taken to repay the loan and arrest the payment of interest on such loans, the shares of the group concern were sold in off market transaction to BVHPL. The said transaction is not a colorable device. Further, the assessee has sold the shares on the market price prevailing on the date of sale and no fault can be found with such transactions undertaken by the assessee. In case as against the market value, the other concern had purchased the shares at a higher value, then it would be questionable, but it is not so, in the present case and hence, we find no merit in the orders of authorities below in holding that the loss claimed by selling the shares of GGDL to its 100% subsidiary below the book value should be ignored while setting it off against the other income, if any, in current year or for carry forward and set off in subsequent years. The loss was worked out at (-) Rs.2,75,83,524/-. We reverse the orders of Assessing Officer and CIT(A) in this regard and hold that the total loss

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 23

arising on the said transaction can be adjusted against the gain arising on sale of unquoted shares during the year and balance loss can be carried forward and set off against any other gain arising in the subsequent years.”

19.8 We also note that in the case tax needs to be levied on the share capital & premium is taxable in the hands of the recipient. The share capital & premium can be brought to tax under the provisions of section 56(2) or 68 of the Act as the case may be. But there is no provision to tax the investment along with share premium amount in the hands of the payer or investor. It is an undisputed fact that the assessee has invested in AKAL by acquiring the shares at a premium. The act of acquiring the shares at a premium by the assessee does not result in any income in its hands. Thus there cannot be any tax in the hands of the assessee on account of the investment in shares in AKAL at a premium. In this regard, we draw the principles from the order of Mumbai Tribunal in the case of Pratik Syntex Pvt. Ltd. Vs. ITO reported in 94 taxmann.com 12 wherein the headnote reads as under: “Section 68 of the Income-tax Act, 1961 - Cash credits (Share capital) - Assessment year 2012-13 - During relevant year, assessee received huge amount from three companies as share capital - Assessing Officer taking a view that transaction of issue of share capital was bogus, added said amount to assessee's taxable income under section 68 - It was noted that even though shares had been issued at a very high premium to new shareholders, yet assessee could not even give correct addresses of three applicant companies where they were located - Further, assessee did not file any cogent material/evidences to justify chargeability of such a huge share premium from three new shareholders vis-a-vis issuing shares at par to original promoters within same relevant year under consideration - It was also undisputed that three companies paying huge amount to assessee, had miniscule paid up capital and earned very small profits and, thus, they were not in a financial condition to subscribe to assessee's shares at such a high premium - Whether, in aforesaid circumstances, Assessing Officer rightly concluded that assessee failed to prove identity of parties and genuineness of share transactions and, thus, impugned addition was to be confirmed - Held, yes [Para 6] [In favour of revenue]” 19.9 We also feel to clarify that the issue of shares at a premium is the prerogative of AKAL which cannot be questioned. Similarly, the decision of the assessee to subscribe the shares of AKAL at a premium is its prerogative which cannot be questioned. The only test to treat the sum of share capital as income under section 68 of the Act or 56 of the Act and that too in the hands of the recipient i.e. AKAL in the instant case. In this regard, we find support & guidance from the judgment of Mumbai Tribunal in the case of Green Infra Limited Vs. ITO reported in 38 taxmann.com 253 wherein it was held as under: “No doubt a non est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 24

of the shareholders whether they want to subscribe to such a heavy premium. The revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land.” 19.10 Thus we hold that the investment made by the assessee at such a high premium and subsequent sale at a loss cannot be the basis holding that such loss is bogus in the given facts & circumstances. 20. Now the 2nd controversy arises whether the loss incurred by the assessee on account of the sale of the shares of AKAL is the result of the colorable device used to generate such loss. We want to explain such loss incurred by the assessee with the help of an example. Supposing Mr. X acquires 10 shares of ABC Ltd having a face value of ₹ 10 20.1 per share at a premium of rupees 490.00 per share in the financial year 2009-10. Accordingly, Mr. X has shown an investment of ₹ 5000 in its balance sheet as on 31.3.2010. On the acquisition of the shares, there is no question of working out any taxable income in the hands of the assessee. Thus the value of the investment shown by the assessee in its balance sheet will certainly be accepted by the Revenue. There cannot be any question of any income in the hands of Mr. X on account of investment in ABC Ltd. at a premium. 20.2 However, the provisions of the Act requires ABC Ltd. to justify the share capital & share premium in its hands. ABC Ltd. is required to explain the source of share capital and premium under section 68 of the Act. Similarly, ABC Ltd. is also required to explain the source of share premium in its hands under section 56(2) of the Act. Thus if ABC Ltd. fails to justify the same under the relevant section 68/ 56(2) of the Act, then it will be subject to tax in the hands of ABC Ltd. Thus the value of share price along with premium at the most can be brought to tax in the hands of the ABC Ltd if it fails to justify the same. Now Mr. X sales the shares in the financial year 2012-13 say at ₹150 per 20.3 share. The sale price of the shares was determined as per the provisions of rule 11UA of Income Tax Rule. Accordingly, the assessee shall claim the loss of ₹ 3,500.00 ( Rs. 5000- 1500 ) in its books of accounts. The question arises whether the loss claimed by the assessee is allowable. The answer is yes. It is because the purchase value cannot be disputed and the sale price of the shares was determined as per the provisions of Income Tax Rule. Therefore the loss claimed by the assessee is within the provisions of the Income Tax Act. 20.4 In our considered view the same logic can be applied to the case on hand. However, the facts of the case in hand are a bit different from the example given above. In the case on hand, the shares were sold within 5 days from the date of acquisition. Accordingly, the loss was incurred in the same financial year in which the assessee acquired the shares. The transaction resulting the loss creates suspicion in the mind that it was generated for the purpose of the loss in order to set off the taxable income. Now the next doubt arises that such loss must have been

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 25

set off against the income. But the fact is that the assessee has not claimed the set off of such loss in the year under consideration. In our considered view this fact cannot be ignored. It is because if the assessee would intend to set off of such loss in the same financial year, then it would have done so in that year only. But the assessee has not done so. Thus had there been any planning of the assessee for creating such bogus loss than it should have claimed the set off of such loss in that year only. It is also pertinent to note that such loss was not set off till the date of the passing of the order by the ld. CIT-A dated 16-11-2015. 20.5 We also note that the assessee acquired the shares at the fag end of the financial year which was sold immediately after the acquisition which resulted in the loss as discussed above, but the same was not set off against any other income. 20.6 In addition to the above, we also note that the assessee could have split the transaction into two financial years by acquiring the shares of AKAL in one year and selling the same in the year of set off of such loss. So that there should not have been any question of any disallowance. On the contrary, the assessee has not done so rather incurred the loss within 5 days from the acquisition of the shares. It is also pertinent to note that the shares were acquired at the fag end of the previous year, and there were few days left for the expiry of such financial year. The assessee could have planned such transaction by splitting into 2 different financial years as it was the matter of few days only. Thus the action of the assessee does not show any malafide intention to use the sale of shares as the colourable device in creating such a loss. Accordingly, we are of the view that had there been any malafide intention of the assessee then it could have booked such loss in the more planned manner so that there should not have been any doubt. We are forming our view on the basis that the assessee did not set off such loss till the date of passing the order by the learned CIT-A. Had there been any malafide intention of the assessee, then it could have claimed the set off of such loss in the same financial year or the subsequent financial year. 20.7 Similarly, we also note that the future income under the head capital gain cannot be predicted for claiming the set off of such loss. Moreover, there was no allegation of the Revenue that such loss was created to claim the set off of the future income. The future income is unseen and unpredictable and it was not possible to design the same in the relevant year. Therefore, we are of the view that such loss cannot be disallowed keeping in mind the future income of the assessee. 20.8 Thus simply the transaction was carried out among the related parties can not the ground to hold that the loss claimed by the assessee is bogus. The taxability of the transaction has to be seen as per the provision of the Act. It cannot be decided based on emotions and the moral of the assessee. In this regard we find support & guidance from the judgment of Hon’ble Apex Court in the case of CIT Vs. A. Raman & Co. reported in 67 ITR 11 wherein it was held as under: “Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 26

device depends not upon considerations of morality, but on the operation of the Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.” 20.9 Thus from the above, we note that the conduct of the assessee is suggesting that the loss was not created purposefully to meet some malafide purposes. 21. We also want to explain such loss incurred by the assessee with the help of another example. 21.1 Supposing Mr. X, a trader in shares, acquires 10 shares of ABC Ltd having a face value of ₹ 10 per share at a premium of rupees 490.00 per share in the financial year 2009-10. Accordingly, Mr. X has shown stock in trade at ₹ 5000 in its books of accounts. Further Mr. X requires to value such stock in trade in the balance sheet as on 31.3.2010 which comes to Rs. 1500.00. Thus there shall be a loss of Rs. 3500 to the assessee which will be allowed to him as a business loss. 21.2 But in case Mr. X classified the shares in its balance sheet as an investment then the loss cannot be allowed to him on account devaluation of the investment at the year-end unless Mr. X sells these. Thus the loss allowable to the trader of shares cannot be disallowed if such shares were held as an investment. But such loss will be allowed only on the sale of such shares. 21.3 We also find support & guidance from the order of this Tribunal in the case of DCIT Vs. Orbit Finmark Pvt. Ltd. in ITA 100/Ahd/1999 dated 9/11/2012 wherein it was held as under : “10. After hearing both the parties and perusing the record we find that ld. CIT(A) has given relief to the assessee by holding that the case of the assessee is squarely covered by the Hon'ble Calcutta High Court decision in the case of CIT vs. Smt. Nandini Nopany (230 ITR 679), the relevant portion of which reads as under:- "The genuineness of the transaction of the sale and purchase of the shares between the assessee and Vishwa Mangal Trading Co. Pvt. Ltd., has not been doubted by the Assessing Officer. This has not even been questioned by the Department. It is not disputed that the assessee had transferred those shares at the book value cost maintained by her. It is also not disputed that the book value cost was lower than the market value of the shares. In fact it is admitted that the market value of those shares was to the tune of Rs.20,67,876/-. Under those circumstances, holding that the assessee had derived any income, being the difference between the market value and the price on which the shares were sold by the assessee, in our opinion, was not correct. We are of the view that the Tribunal rightly upheld the finding of the Commissioner of Income-tax (Appeals). It is not a case where any

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 27

understatement of value or misstatement of value of the shares sold was made by the assessee. This is a case where the assessee had sold the shares at a value admittedly lower than the market price. Yet the shares could not be assessed on the difference amount being her income because no inference can be drawn in the facts and circumstances of the case that the design of the assessee was such that she concealed certain facts and she received the difference of the value by fraudulent means. There was no evidence direct or inferential, nor was there any finding by any income-tax authority that the assessee indulged in such a practice. We are fortified in our view by a judgment of the Supreme Court in the case of CIT v. Shivakami Co. Pvt. Ltd. [1986] 159 ITR 71 (SC). We also find support in our view from a Division Bench judgment of the Bombay High Court in the case of India Finance and Construction Co. Pvt. Ltd. v. B.N . Panda, Dy. CIT[1993] 200 ITR 710." A.Y. 1994-95 We further find that the order of ld. CIT(A) is in conformity with the decision of jurisdictional High Court in the case of Marghabhai Kishabhai Patel & Co. (supra) wherein Hon'ble Court referred to the case of Madras High Court in the case of Ramlinga Choodambikai Mils Ltd. vs. CIT (1955) 281 ITR 952 and that of Gujarat High Court in the case of CIT Vs. Keshavlal Chandulal (1996) 59 ITR 120 and held as under:- "In absence of evidence to show either that the sales were sham transaction or that the market price were in fact paid by the purchasers, the mere fact that goods were sold at a concessional rate to benefit to purchaser at the expenses of the company would not entitled to income-tax department to assess the difference between market price and price paid by the purchaser as profit of the company." 11. In view of the above and since no contrary decision was cited by the Revenue, we are not inclined to interfere with the order passed by ld. CIT(A) deleting the addition of Rs.14,14,06,326/- and the same is hereby upheld. This ground of the Revenue is dismissed.”

21.4 Further, in almost in a similar case Hon’ble Gujarat high court in case of Assistant Commissioner of Income-tax vs. Biraj Investment (P.) Ltd ( 24 taxmann.com 273) held as under: “14. Having thus heard the learned counsel for the parties, we find that the relevant facts are not in dispute. The respondent assessee sold shares of Rustom Mills and Industries Ltd for a sum of Rs.4,01,000/- on which transaction, the assessee claimed long term capital loss of Rs.8,38,790/-. During the same period, the assessee also sold certain shares of Rustom Spinners Ltd. and showed long term capital gain of Rs.1,46,792 and short

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 28

term capital gain of Rs.7,41,563/-. It is also not in dispute that the shares of Rustom Mills and Industries Ltd. were pledged by the assessee with IDBI Bank. The original share certificates along with the transfer form duly signed by the assessee were in possession of the IDBI Bank. The assessee had also undertaken not to transfer such shares. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 17. We are not inclined to accept the Revenue's contention that this was a colourable device and that the entire arrangement was a paper arrangement. Firstly, there is no provision in the Act which would prevent the assessee from selling loss making shares. Simply because such shares were sold during the previous year when the assessee had also sold some shares at profit by itself would not mean that this is a case of colourable device or that there is a case of tax avoidance. Further, there is no restriction that such sale or transaction cannot be effected with a group company. As long as the Revenue could not doubt the sale price of the shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suffer. In the present case, it is not even the case of the Revenue that shares were sold at a price lower than the market rate. If that be so, the question of inflating the loss by transferring the shares to group company would not arise. Under ordinary circumstances, it is always open to the assessee in his own wisdom to either hold on to certain bunch of shares or to sell the same to avoid further loss, if he finds that market value of the shares is fast diminishing. It is equally open for the assessee to effect such sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI is concerned and insofar as the purchaser's right to have shares transferred in its name is concerned. This, however, by itself would not establish that the sale of shares was only a paper transaction and a device contrived by the assessee to claim loss which it did not suffer and thereby seek set off against the capital gain received by it during the year under consideration.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 29

assessee in making the gift was to save tax on the income from shares at a higher rate applicable to him.

21.5 In view the above the loss of Rs. 3,50 crores cannot be treated as generated through the use of colrable decvice. The only alleagation of the Revenue was that the loss was generated as a device of coulorable tool. However, we disagree with the reasoning of lower authorities.

We also note that the Revenue has taken the different stand by taxing the gain with respect the transaction for the sale of shares within the group but disallowed the loss with respect the transaction for the sale of shares within the group. Thus the stand of the Revenue was contradictory.

The next issue raised by the assessee in ground nos. 3 & 4 is that the learned CIT(A) erred in confirming the disallowance of ₹ 10,62,041.00 under the provisions of section 14A read with rule 8D of Income Tax Rule and under the provisions of section 115JB of the Act.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 30

The assessee during the year has earned dividend income of ₹ 13. 74,54,831/- which was claimed as exempt income under section 10(34) of the Act. The assessee in respect of such income has made the following disallowances in its income tax return for the direct interest expenses of 1,57,202.00 only.

13.1 The assessee regarding the administrative expenses submitted that it has claimed expenses to the tune of ₹ 10,62,041.00 only in the profit & loss account which has not been incurred in connection with the earning of the exempted income. There no further disallowance can be made on account of administrative expenses.

13.2 However, the AO disagreed with the contention of the assessee and worked out the disallowance of the expenses under section 14A read with rule 8D as detailed under: 1. Direct expenses under rule 8D(a)(i) 1,57,202.00 2. Interest expenses under rule 8D(a)(ii) 75,442.00 3. Administrative expenses under rule 8D(a)(iii) 50,28,282.00 Total 52,60,926.00

In view of above, the AO worked the disallowance of the balance amount of ₹ 51,03,742.00 (52,60,926- 1,57,202.00 i.e. the amount already disallowed by the assessee) but restricted the actual expenses claimed by the assessee at Rs. 10,62,041.00 and added to the total income of the assessee.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 31

13.3 The AO also made the disallowance of the similar amount of ₹ 10,62,041.00 while determining the income under the provisions of section 115 JB of the Act.

14.1 The assessee also claimed that all the investments were not giving rise to the exempted income. There were certain categories of investments in the mutual fund which was subject to tax.

14.2 The assessee further submitted that it has claimed total expenses of ₹ 1,24,43,442 in its profit and loss account and it has already made the disallowance to the tune of ₹ 1,13,81,401.00 leaving the balance amount of ₹ 10,62,041.00 which was claimed as deduction. As per the assessee the administrative expenses cannot be linked with the earning of exempt income.

Coming to the method of computation of disallowance under section 14 A, assessing officer disallowed expenses relatable to exempt income as per rule 8D which is mandatory from assessment year 2008-09. For interest, proportionate expense is disallowable whereas for other expenses .5% of average investment value is disallowable. Considering the fact that appellant claimed huge administrative and other expenses, the disallowance of administrative expenses made by the assessing officer @.5% of investment resulting in exempt income is as per the formula given in rule 8D which is mandatory for making disallowance. However assessing officer restricted the disallowance to the expense claimed in

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 32

P&L account. In view of this the addition made by the AO which is much less than .5% of investment resulting/ in exempt income made by the assessing officer is confirmed. As regards interest, appellant had borrowed funds on which interest was paid. While making investments, both borrowed funds as well as own funds were used hence one cannot say that borrowed funds were used only for business purpose and owned capital was only used for investment. Admittedly no separate accounts are maintained for business and investment activities therefore appellant's claim is not justified that borrowed funds were not used in making investment. Therefore In the absence of clear cut details of utilization of funds, the formula given in rule 8D which is mandatory from this year onward is to be applied. The decisions relied upon by the appellant are not applicable in view of the fact that dividend receivable on even trading stock is exempt and disallowance of expenses are to be made. In view of this, the computation of disallowance made by the appellant by excluding stock of shares is not correct. Since assessing officer worked out the interest and direct expenses disallowance as per rule 8D, the same is confirmed.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 33

the authority below has not disputed this fact. Therefore, there is no question of making the disallowance on account of interest expenses.

19.1 As regards the administrative expenses we note that the assessee has already made the disallowance of the expenses amounting to ₹1,13,81,401.00 out of the total expenses of ₹ 1,24,43,442.00 only. As such the assessee claimed that it has claimed deduction of the expenses for ₹ 10,62,041.00 against the other taxable income declared by it in the income tax return.

19.2 The provisions of section 14A of the Act require the AO to make the disallowance after having regard to the books of accounts of the assessee. But in the instant case, we note that the AO has made the disallowance under rule 8D mechanically without referring to the expenses claimed by the assessee in its books of accounts. The expenses claimed by the assessee are only to the tune of ₹ 10,62,041/- under the head administrative expenses in the profit & loss account. This fact has not been disputed by the authorities below. Thus in our considered view, the disallowance cannot be made of the entire amount as the assessee has shown income from other activities which are giving rise to the taxable income.

19.3 However, in the interest of justice and fair play and to avoid the possible leakage of the revenue, we are of the opinion that the justice will be served to both the parties if the disallowance on account of administrative expenses is restricted to the tune of ₹3 Lacs only.

19.4 Regarding the disallowance of the expenses under the provisions of section 115 JB of the Act, we note that in the recent judgment of Special

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 34

Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: “In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”

The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot used while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.

19.5 However, in our considered view the disallowance needs to be made as per Clause (f) to Section 115JB of the Act independently. In holding so, we draw our support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation- 1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.”

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 35

Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).

19.6 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the disallowance. Therefore in the given facts & circumstances, we feel that ad- hoc disallowance will service the justice to the Revenue and assessee. We, therefore, are directing for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 36

19.7 The issue raised by the assessee in ground No. 5 and 6 or consequential and the issue raised by the assessee in ground No. 7 is premature to decide. Therefore we dismiss all of them as infructuous.

In the result the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.

Coming to ITA 3462/AHD/2014

The assessee has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the legality of the Assessing Officer's order passed u/s.271(1)(c) of the IT. Act levying penalty of Rs.60,58,800/-. 2. Without prejudice to the aforesaid ground, on the facts and in the circumstance of the case, the learned CIT(A) erred in confirming penalty levied by the Assessing Officer u/s.271(1)(c) of the IT. Act amounting to Rs. 60,58,800 with reference to the addition confirmed by the CIT(A) in quantum appeal. 3. On the facts and in the circumstances of the case and without prejudice to the foregoing grounds of appeal, the learned CIT(A) erred in not dealing with and deciding ground no.3 raised before him challenging the quantum of penalty at Rs.60,58,800/- on the basis of such amount of tax allegedly sought to be evaded as was based on the rate of tax application to normal source of income instead of the correct rate of 20% application to indexed long term capital gain. 4. The appellant craves leave to add alter amend and/or withdraw any grounds of appeal either before or during the course of hearing of the appeal.

ITA nos.834-986/AHD/2012 & No.3462-Ahd-2014 Asstt. Year 2008-09 37

the AO which was confirmed by the learned CIT (A). Hence the ground of appeal of the assessee is allowed.

In the result the appeal of the assessee is allowed.

Order pronounced in the Court on 28/06/2019 at Ahmedabad.

-Sd- -Sd- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 28/06/2019