THE COMMISSIONER OF vs. M/S WIPRO LIMITED

IN THE HIGH COURT OF KARNATAKA, BANGALORE

Dated this the 05th Day of November 2013

PRESENT:

THE HON'BLE Mr. JUSTICE N.KUMAR

AND

THE HON'BLE Mrs. JUSTICE RATHNAKALA

ITA No. 1395 of 2006 c/w ITA No. 1394 of 2006

BETWEEN:

Income-Tax, C. R. Building Queens Road Bangalore – 560 001

of Income-Tax Central Circle -1 (3)

C.R.Building, Queens Road,

Bangalore – 560 001

..Common Appellants in both the appeals

(By Sri Indra Kumar, Sr. Counsel, for Sri E.Sanmathi Indrakumar, Advocate)

AND:

M/s Wipro Limited Doddakanahalli Varthur Hobli, Sarjapur Road Bangalore

...Common Respondent in both the appeals

(By Sri N.Venkataraman, Sr.Counsel for Sri R.B.Krishna, Advocate)

ITA No.1395/2006 filed under Section 260A of the Income-Tax Act, 1961 arising out of order dated 22-03-2006 passed in ITA No.669/Bang/2005, praying to (i) formulate the substantial question of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.669/Bang/2005 dated 22-03-2006 and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore.

ITA No.1394/2006 filed under Section 260A of the Income-Tax Act, 1961 arising out of order dated 22-03-2006 passed in ITA No.804/Bang/2005, praying to (i) formulate the substantial question of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.804/Bang/2005 dated 22-03-2006 and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore.

These Appeals coming on for Hearing, this day, N.KUMAR, J., delivered the following:

J U D G M E N T The Revenue has preferred these appeals against the order passed by the Appellate Tribunal allowing the appeal preferred by the assessee partly and dismissing the appeal filed by the Revenue.

The Assessee Company M/s. Wipro Limited filed its returns of income for the assessment year 2000-2001 on

30.11.2000 disclosing a total income of Rs.24,64,18,200/- after claiming exemption of income under Section 10A of the Income Tax Act (for short, hereinafter referred to as the ‘I.T. Act’) to the extent of Rs.277,53,53,125/-. The return furnished on 30.11.2000 was processed under Section 143(1) of the I.T. Act on 15.06.2001. An amount of Rs.8,66,15,805/- was refundable to the Assessee Company. This refund was adjusted against the outstanding demand of the Assessee Company for the assessment year 1998-99 on 30.08.2001.

The Assessee is engaged in the business of software exports, computer peripherals, IT enabled services, manufacture and sale of vegetable oils, soaps, leather products, lighting products, hydraulic cylinders and tippers, and manufacture of reagents as well as marketing and support of medical equipments. The business of the company is carried on through the various business units or divisions of the company. It is the case of the assessee that it runs each business unit as an independent profit centre.

Accordingly, separate accounts are maintained for each business unit. The accounts of the assessee are compiled on the basis of consolidation of all accounts maintained at the business unit levels. The case was selected for scrutiny and notice under Section 143(2) of the I.T. Act was issued on 01.08.2001. Thereafter, notice under Section 142(1) of the I.T. Act along with a detailed questionnaire was issued on 15.11.2002. Further, notices also came to be issued on several dates and further questionnaires were also issued. During the course of the assessment proceedings, the Company was duly represented by its Legal Advisor and other officials. The Wipro Finance Limited is a subsidiary of the assessee. A survey was conducted in the premises of Wipro Finance Limited under Section 133(A) of the IT Act on 17.01.2003. The show-cause notice on the various additions proposed in the assessment order was served on the assessee on 10.02.2003. The objections / rebuttals of the assessee company in their reply to the show-cause notice dated 25.02.2003 was also taken into consideration. In the

course of the enquiry, the representatives of the company furnished necessary details and explained various issues arising out of the returns of income. They also furnished written submissions along with the enclosures. After taking into consideration the various issues emerging out of the returns of income furnished by the assessee and also taking into account the department stand on identical issues in earlier assessment, the Assessing Authority passed an assessment order computing the gross total income at Rs.179,92,19,054/- and after giving deductions under Chapter VIA, the amount of total income arrived was at Rs.179,15,72,920/-. Penal proceedings under Section 271(1)(c) ordered to be initiated separately. A demand for Rs.83,81,39,342/- was raised on the assessee. The said order is dated 28.02.2003 which is passed under Section 143(3) of the IT Act.

Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

The Appellate Authority after carefully

scrutinizing the entire material on record allowed the appeal in part by its order dated 28.2.2005. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal in ITA No. 669/2005 whereas the revenue also preferred an appeal against the said order in ITA No. 804/2005. The appeal preferred by the assessee is partly allowed and the appeal preferred by the revenue was dismissed. Against both the orders the revenue has preferred these two appeals. Both the appeal memos are identical, i.e., the grounds urged in both the appeal memos are identical. The substantial questions of law which are raised in the appeal are as under:- “18. Whether the Tribunal was correct in having held that they need not record a finding whether the notice under Section 148 is valid or not proceeded to come to an observation that reopening under Section 148 of the Act pertaining to eligibility of deduction under Section 10A of the Act, was a change of opinion”?

miscellaneous income from exchange rate fluctuation, sale of scrap and newspaper, reversal of customers balance and debit notes, miscellaneous income and miscellaneous income of non STP units cannot be held as derived from export of article or thing under Section 10A units?”

details when the matter has been relegated back to the Assessing Officer in the earlier assessment years.

any activity other than earning income mainly on account of interest and dividend.

Subsequently, the revenue filed an application for raising an additional substantial question of law. The said substantial question of law which they wanted to raise is as under:- 35. Whether the tribunal is correct in law in allowing the capital loss claimed by the assessee as against the short term capital gains ignoring the position that the claim for capital loss was a colourable devise?

This Court by an order dated 11.2.2013 allowed the said application subject to the right of the assessee to canvas as to whether the question arise and as to whether it is a substantial question of law.. Aggrieved by the said order, the assessee preferred Special Leave Petition in SLP (C) Nos. 20250-20251/2013. Leave was granted on 20.9.2013. Thereafter, it was numbered as Civil Appeal Nos. 8607-8608/2013. After hearing the parties, the appeals were disposed of as under:- ORDER

Leave granted in both the Special Leave Petitions.

“I.A.No.1/2002 for amendment ordered subject to the right of the respondent to canvass as to whether the question arises and as to whether it is a substantial question of law.

Counsel for the appellant to file amended memorandum of appeal within two weeks.”

It is submitted by Mr. Maninder Singh, learned Senior Counsel for the appellant, that when the Income Tax Appellate Tribunal had disposed of two appeals and the revenue had not preferred an appeal against one of them it was not legally permissible to incorporate a ground which pertained to the judgment passed in the other appeal, by amending the memorandum of appeal.

New Delhi, September 20, 2013”

As could be seen from the order of the Apex Court, the contention urged by the assessee was that, the additional substantial question of law which is now sought to be raised arise in ITA No. 669/2005. As no appeal is preferred against the said order, this substantial question of law also would not arise in the pending appeals. Therefore, after the matter was sent back to this Court, the revenue filed an application for amendment of the memorandum of appeal whereby they wanted to substitute the case No. 669/2005 in place of ITA No. 804/2005 in ITA No. 1395/2006. The said application is allowed by us today by a separate considered order.

Once this amendment is permitted in ITA No. 669/2005, the substantial question of law which the revenue wants to add requires to be considered. Whether such a question arise for consideration or not is a matter to be decided after hearing both the parties. Therefore, the said application was heard. After hearing the learned counsel for

the parties at length, we are of the view that the said substantial question of law do arise for consideration. In fact, that is the only substantial question of law which requires to be decided in these appeals, as almost all other questions of law are decided by this Court in the other appeals in the assessee’s case itself. In that view of the matter, we proceeded to hear the rival contentions on the aforesaid substantial question of law.

The learned senior counsel Sri Indra Kumar appearing for the revenue assailing the impugned order contended that, the assessing officer on careful scrutiny of the material on record had recorded a finding of fact that the capital loss generated from the sale of the shares of Wipro Financial Limited to 3 persons for the paltry sum of Rs.75,000/- who had long and rewarding relationship with the assessee group for a long period of time for being set off against the capital gain tax payable is a colourable device. In fact, a sum of Rs.95 crores was invested in WFL and was

withdrawn, immediately thereafter which would clearly establish that it is a device to evade payment of tax on short term capital gains. The Commissioner of Income Tax (Appeals) on careful scrutiny of the entire material on record has upheld the said finding. The said finding of fact has been upset by the Tribunal ignoring the relevant material on record and without proper application of mind, with reasons which is not supported by the material on record and therefore a case for interference is made out.

10.

Per contra, Sri Venkataram, the learned senior counsel as well as Sri R.B. Krishna, the learned counsel for the assessee contended that, it is not a case of avoidance of tax but it is a case of legitimate tax planning. Section 70 of the Income Tax Act provides for set off incurred in sale of capital asset towards short term capital gains. The revenue has not disputed the transfer of shares of Wipro Finance Limited (WFL) and the consideration received for such transfer. It is also not disputed that WFL has sustained

huge loss over a period of time. The WFL being a subsidiary of the assessee would have created serious problems for the assessee because of its financial conditions. Therefore, the assessee wanted to desubsidiarize by selling of its shares and bringing it less than 50% so that the interest of the assessee is not affected. The net worth of the WFL as per the approved valuer is Rs.63,19,679/- and which was sold to three persons for a sum of Rs.75,000/- and consequently the loss sustained in the said transaction of the subsidiary company was set off against the capital gains payable by the assessee which is permitted under law. Therefore, merely because the transaction in which the capital gains accrued and the transaction in which capital loss is incurred happens to be proximate would not lead to an inference that it is a device to avoid tax liability. Similarly, merely because the infusion of capital into the subsidiary company to the extent of Rs.95 crores and withdrawal of the said amount immediately thereafter also would not lead to the inference that it is a sham transaction. Therefore, the Tribunal on a

proper consideration of the material on record rightly held that it is a case of legitimate tax planning and there is no evasion of tax, as such the assessee is entitled to the benefit of deduction. Therefore, they submit it is purely a question of fact, as such no substantial question of law do arise for consideration against the said finding recorded by the Tribunal.

11.

This is the main controversy between the parties. However, as set out above several substantial questions of law have been framed which arise for consideration but which are already decided in the case of the assessee itself in the other appeals for the other assessment years.

12.

In the light of the aforesaid facts and the rival contentions, the substantial question of law which requires to be considered in this appeal is as under:-

Whether the Tribunal is correct in law in allowing the capital loss claimed by the assessee as against short term capital gains ignoring the fact that the claim of capital loss a colourable device to evade payment of tax on short term capital gains?

13.

In the computation of income filed along with return for the financial year 1999-2000 relevant for the assessment year 2000-01, the assessee company had shown two major transactions relating to

(a) short term capital gains on the sale of shares of M/s Wipro Net Limited by the assessee company to M/s KPN Asia Mauritius Holding and to M/s ICICI Limited, resulting in short term capital gains to the assessee company in a sum of Rs.109,54,48,503/-. The particulars of such short term capital gain arising on the sale of shares of M/s. Wipro Net Ltd held by the assessee-company, as referred to in the assessment order is tabulated below.

Short Term Capital Gain on sale of share in Wipro Net Limited A Sale of shares to KPN Telecom – 29,03,410 Equity Shares

Full consideration for sale 203,177,778

Less: Cost of acquisition – Section 48(i) 29,034,100

Sub-total 174,143,678

Less: Expenses Incurred –Section 48(ii) 50,000,000

Capital Gains (A) 124,143,678 B Sale of shares to ICICI Ltd – 17,91,385 Equity Shares

Full consideration for sale 994,218,675

Less: Cost of acquisition – Section 48(i) 17,913,850

Sub-total 976,304,825

Less: Expenses incurred – Section 48(ii) 5,000,000

Capital Gains (B) 971,304,825 C Total short Term Capital Gains (A+B) 1,095,448,503

As against the aforementioned short term capital gain arising from the sale of shares of M/s. Wipro Net Ltd., assessee- company had also claimed long term capital loss from the sale of 4,83,14,144 Equity Shares of the face value of Rs.10/- each and 25,00,000 Cumulative Preference shares of face value of Rs.100/- of M/s. Wipro Finance Ltd., (for short WFL) for a total consideration of Rs.75,000/-. The total capital loss so claimed as per Annexure-7 of the computation is in the sum of Rs.107,97,55,991/-. The computation of the

said loss so furnished by the assessee along with the return of income is as under:

Financial year of acquisition Number of shares Cum holding Cost of investment Index Indexed Cost Capital Gain/ (Loss) 1. Capital Loss on sale of shares in equity shares A. Equity Shares 1991-92 750,000 750,000 7,500,000 199 14,660,804

1992-93 4,250,000 5,000,000 42,500,000 223 74,136,771

1993-94 3,333,340 8,333,340 50,000,100 244 79,713,274

1994-95 8,571,420 16,904,760 149,999,850 259 225,289,350

1995-96 8,571,428 25,476,188 149,999,990 281 207,651,232

1996-97 - 25,476,188 305

1997-98 - 25,476,188 331

1998-99 22,837,956 48,314,144 228,379,560 - 228,379,560

1999-2000 48,314,144 389

Sub-Total (A) 48,314,444 628,379,500 829,830,991

B. 11% Cumulative convertible preference shares 1998-99 2,500,000 2,500,000 250,000,000 250,000,000

Sub-Total (B) 2.500,000 250,000,000 250,000,000

Total Indexed Cost of Acquisition (A+B) 1,079,830,991 Full consideration for the sale of above shares 75,000 Long Term Capital Loss on sale of WFL shares (1,079,755,991)

The assessing authority has also set out the percentage holding of Equity Share of M/s. WFL at end of each financial year since the inception of the company in the following tabular column:-

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999- 2000 2000-01 2001-02 Equity Shares of Rs.10/- each Wipro Limited/ Subsidiary (A) 750000 500000 0 833334 0 1690476 0 2547618 8 2547618 8 2547618 8 5047618 8 4030490 1

% of holding 100.00 % 100.00 % 100.00 % 98.26% 98.84% 94.64% 94.64% 97.22% 49,84% 0.00% 0.00% Wipro Finance Equity Reward Trust - - - 3,00000 270630 270630 270630 278910 296990 296990 296990 G. Srinivasan - - - - 5270 5270 5270 - - - - Nagaraja Rao - - - - 3010 3010 3010 - - - - Laxman - - - - 3010 3010 3010 3010 - - - Vijay Kumar - - - - 3010 3010 3010 3010 3010 61306931 61306931 S.R. Gopalan - - - - 15070 15070 15070 15070 16104714 16104714 16104714 V. Ganeshan - - - - - - - - - - - Comonwealth Development Corporation UK - - - - - 1142857 1142857 1142857 - - - P.G.Karania - - - - - - - - 16104715 28604715 28604715 B.S. Shankar Narayan - - - - - - - - 16104715 60605695 60605695 other

Share- holder(s) - - - 300000 300000 1442857 1442857 1442857 48614144 166919045 166910-45 % of holding 0.00% 0.00% 0.00% 1.74% 1.16% 5.36% 5.36% 2.78% 60.16% 100.00% 100.00% Total number of equity shares – A + B 75000 5000000 8333340 17204760 25776188 26919045 26919045 51919045 96919045 166919045 166919045

The above table disclose, 4,83,14,144 Equity shares and 25,00,000 Cumulative Preference Shares, both of M/s. WFL with total indexed cost of acquisition in the sum of Rs.107,98,30,991/- (A+B) has been sold by the assessee- company for the consideration of Rs.75,000/- on 31-12- 1999 and such shares of M/s. WFL have been sold to 3 persons namely Sri P.G. Karania, Sri S.R. Gopalan and Sri

B.S. Shankar Narayanan for the aggregate consideration of Rs.75,000/- and all the said 3 persons had a long relationship with the assessee-company.

(b) Yet another factor which is not in dispute which requires to be noticed is, the assessee company purchased shares from M/s Common Wealth Development Corporation (CDC) (UK) in September 1999 being 11,42,857 shares of WFL at a price of Rs.17.25 per share. The relevant documents with regard to the transactions with CDC which was furnished by the assessee shows that the assessee had entered into an agreement with CDC on 12.3.1999. Subsequently, negotiations with CDC have taken place primarily for the liquidation of secured loan granted by the CDC to WFL. The total loans taken from CDC by WFL amounted to Pound 5,000,000/-. Out of this, an amount of Pound 3,500,000/- being the principle amount was outstanding. The assessee company negotiated for an amount of Pound 3,337,000/- being repayment of loan amounting to Pound 3,051,000/- together with Pound

286,000/- being consideration for purchase of CDC shares as full and final settlement. Accordingly, the assessee paid a sum of Rs.1,98,00,000/- for purchase of the aforesaid shares. Similarly, the assesee bought convertible preference shares of the face value of Rs.25,00,00,000/- from M/s ICICI Limited on December 28,1999.

The purchase was made at a premium. The sale consideration paid aggregated to Rs.32 crores, out of which Rs.31,68,75,000/- was towards consideration and the balance of Rs.31,21,000/- was on account of pre payment of premium due to early exercise of buy back. (c) The third factor to be taken note of is the assessee- Company deemed it proper to infuse a fresh capital of Rs.95 crores in Wipro Finance Limited on 31.12.1999. Out of this amount, a sum of Rs.45 crores was infused in the equity capital, while a sum of Rs.20 crores was invested in convertible preference shares and a further sum of Rs.30 crores was invested in redeemable preference shares. The explanation offered by the assessee for such infusion of

capital was the Prudential Norms issued by the Reserve Bank of India in respect of non-Banking Finance Companies governed the financial reporting of Wipro Finance Limited. As per the norms, a NBFC can never have a negative owned funds. Reporting a negative net worth would automatically result in cessation of the right to carry on the business of NBFC and cancellation of license by RBI followed by public notification. It also triggers the immediate repayment of all fixed deposits and failure to do so will result in the RBI notifying the NBFC as a defaulter. The consequences usually result in the winding up of the company. Thus there is no discretion in the infusion of capital as it is enforced by mandatory guidelines issued by the RBI. The assessee took a view on the total funds requirements of Wipro Finance Limited and infused additional equity and preference capital. Therefore the specific case pleaded by the assessee was the Preferential Norms of RBI governing the functioning of NBFC compelled the assessee company to infuse the capital of Rs.95 crores on the same date on which it divested.

(d) Yet another factor which requires to be noticed is the valuation of the shares of Wipro Finance Limited was made on 31st December 1999. The proforma accounts has reported loss of Rs.1,64,986,000/- for the nine months period. As per the said valuation, after conversion of preferential shares to equity shares, the total number of equity shares was Rs.166,91,9045/-. The effective net worth per share is Rs.0.086.

Equity shares numbering 4,83,14,144 and 25 crores preferential shares were sold to three employees. After conversion preferential shares to equity shares, the total equity shares transferred would be Rs.7,33,14,144/-. The net worth of the said shares was transferred is Rs.63,19,679/-. However the said shares were sold to the said three employees for a sum of Rs.75,000/-.

14.

The Assessing Authority after taking note of the aforesaid undisputed facts and the explanation offered by the assessee and also after keeping in mind the legal

position, the Assessing Authority recorded the finding as under: (a) During the year, the assessee-Company had a windfall short term capital gains on the sale of the shares of M/s Wipro Net Ltd., in a sum of Rs.109,54,48,503/-. (b) The computation of income filed by the assessee company reveals that out of the total short term capital gains of Rs.109,54,48,503/-, only an amount of Rs.1,56,92,512/- becomes chargeable to tax because of the set off long term capital loss of Rs.107,97,55,991/- on the sale of shares of WFL. The second transaction of loss happened only because of the first transaction of gain. The second transaction, i.e., capital loss of the sale of shares of WFL made to happen in order to take advantage of set off available as per the provisions of the Act. The assessee company had no indexation benefit on the short term capital gain on the sale of shares of M/s Wipro Net Ltd., but for the set off through capital loss, the gains would have been charged to tax at normal rates. The said transaction is nothing but a colourable device, a tool for tax avoidance,

in order to circumvent tax payment on the windfall short term capital gains. (c) The circumstances point out that divestment was effected, in order to get over the incidence of taxation from the short term capital gains. The post facto Resolution of the Board is a futile attempt to cover up. (d) The assessee has not been able to justify the infusion of substantial amount of Rs.95 crores on 31.1.2.1999. The reliance on the Prudential Norms of RBI is misplaced. (e) The assessee Company sold off all the shares acquired through fresh infusion of capital, in the next financial year. Again the shares have been sold to key employees/associates for a nominal price and long term capital loss has been claimed.

15.

The assessee company never chose to discontinue the business prior to divestment, when WFL was under its own management. On the contrary, fresh infusion of capital was done, ostensibly to meet the Prudential norms.

The real purpose of infusion of capital was not the prudential norms for the following two reasons: (1) Infusion of Rs.95 crores was received back by the assessee company on the same date on account of refund intercorporate advances made to WFL. Thus, the capital infusion was not utilized by WFL for any other cause, except for repaying the advances of the assessee. (2) The fresh equity was sold in the next financial year at nominal price to generate further long term capital loss. (3) None of the investors purchasing the shares of WFL invested even one rupee in WFL following the change of management. The investors had not imposed any condition on Wipro Limited to invest Rs.95 crores for the acquisition of controlling stake of WFL. (4) Even for the fresh infusion of Rs.95 crores, approval of the Board was taken post facto.

16.

Shares allotted to three ex-employees found in the premises of WFL adds weight to the position that transfer is just an eye wash. One of the investor is P.G. Karania, who

became one of the Directors of WFL. The only meeting of the Board of Directors of WFL attended by Sri. P.G. Karania is on 25.01.2000, when he approved the appointment of Sri. P.V. Srinivasan, as an alternate Director. Thereafter, 45 meetings have taken place and he has not attended even a single meeting. He has not even taken delivery of the shares allotted to him. Therefore the so called informed investors are a façade enabling assessee to perpetrate its device for tax avoidance. The assessee company was asked to produce relevant share forms which shows that the assessee company has conveniently left out the name of the transferor, the address of the transferor and the name of the witness. The transfer was, therefore, only for the consumption of the tax authorities and to generate capital loss for the company in order to set off the short term capital gains. But for the transfer of share to three key ex- employees on paper, nothing has changed.

17.

With the said transfer, the WFL cease to be a subsidiary only on paper. The assessee continues its support to WFL and allows WFL to use the Wipro name and logo. The Chairman of the assessee pledged his personal holdings to enable WFL to obtain loan from financial institutions. The transaction between the two companies post divestment are also clearly indicative of the close interaction between them. The evidence furnished by the assessee are all post facto, wherein the assessee company having gone ahead with the divestment on paper, had no option but to follow the mandatory reporting requirements.

18.

Therefore in view of the aforesaid legal evidence on record, the Assessing Authority held that the long term capital loss of Rs.107,97,55,991/- is a colourable device used by the assessee company for avoidance of tax on short term capital gains reported on the sale of shares of M/s Wipro Net Ltd., Accordingly the said claim of the assessee was rejected.

19.

The Commissioner of Income Tax (Appeals) has carefully scrutinized and re-appreciated the entire material on record and by detailed order held that he is in agreement with the Assessing Authority that the transfer of M/s WFL shares made by the assessee company to the three key employees/associates at a throw away price is nothing but a colourable device used by the appellate company for avoidance of tax on short term capital gains arising to it on the sale of shares of M/s Wipro Net held by it. Hence the disallowance of claim on long term capital loss of Rs.107,97,55,591/- as done by the Assessing Officer was upheld.

20.

However, the Tribunal interfered with the said concurrent finding of fact. The Tribunal held that transaction of transfer of shares is legal in nature. Run up events leading into the sale of shares in Wipro Net Ltd have happened at different times in the past. It was not possible to conjure up a plan of action for avoidance of tax in this

case having regard to the facts. The sale of shares in WFL was timed to set off against the windfall profits of Wipro Net Ltd., no evidence is brought out that it was done with an intention to avoid tax. The profit earned from sale of shares in Wipro Net Ltd is real and loss incurred and the continued erosion of networth of WFL is also real. There is no evidence to suggest anything more from the sale of shares in WFL. Even if the appellant has sold the shares at a throwaway price, there was no bar against it. It is not unusual for a businessman to act sometimes in due hurry and haste or even without rationale. But when it comes to taxation, what is to be seen is whether the assessee has made any profit or loss and what is the liability to tax. The computation of income under the head ‘capital gain’ is contained in Section 45 to 55 of the Act. Long Term Capital Gain is computed after reducing indexed cost of acquisition from full value of consideration accruing as a result of transfer. It is not the case of revenue that transfer is not affected nor it is the case of the revenue that the assessee has received consideration

in excess of what is apparent. In such a situation it cannot be held that assessee has not incurred loss in the transaction. It is not proper to suspect or conjure a devious scheme of avoidance of tax. There is no law as per which the assessee should sell only profit making assets in one year and in another year the assessee should sell only loss making assets. In fact the set off provision under Section 70 to Section 74 recognizes the situation where loss is set off against profits. It is not strange if both profit and loss transaction occur in the same period. There is no evidence here to show that there was an arrangement to reduce the tax. The transaction with CDC, UK, investment of additional funds, transaction with ICICI are all well explained by sufficient evidence and backed up by agreements. These events cannot be assailed on a mere needle of suspicion. There is no evidence with the department to prove these transactions otherwise. The evidence submitted by the assessee clinches the issue in its favour. The allegation of avoidance of tax from the sale of shares is non-existent and

a far fetched imagination. If someone alleges that apparent is not real, it is for them to prove it and merely on touchstone of suspicion the allegation is inadequate. There is no colourable device here. There is hardly any evidence of tax planning with an intention to avoid tax. There is no evidence of dubious method. There is no conflict between form and substance.

21.

After referring to the judgments of the Apex Court, the Tribunal held that the transaction of transfer of shares resulting in capital loss is a legal transaction, not tainted by any ulterior motive or dubious method to reduce the tax. Accordingly, capital loss claimed by the assessee was allowed and a direction was given to set off against the short term gains earned from other transactions.

22.

Therefore, the question for consideration is in the light of the aforesaid admitted facts, the disputed transaction constitutes a device to avoid short term capital

gain or is it a case of legitimate tax plan? Therefore, it is necessary to keep in mind the clear distinction between a legitimate tax planning and a device to avoid tax. In order to appreciate this point, the judgments of the English Courts are quite helpful.

23.

In IRC V/s. Fisher’s Executors (1926) AC 395 at Page 412 (HL) it is opined as follows: “My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any expressed terms or of any expressed terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.”

24.

As Lord Atkin pointed out in Duke of Westminster’s case[1936] AC 1 (HL); [1935] 19 TC 490, 511).

“I do not use the words device in any sinister sense: for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his dispositions so far as they affect tax.” Lord Tomlin said:- “There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal a different transaction”.

fellow tax payers may be in his ingenuity, he cannot be compelled to pay an increased tax.”

26.

In fact, in English Law also, in the case of Sherdley –Vs.- Sherdley [(1980) ALL ER 202] the following passage has the effect of reiterating the principles of Duke of Westminster :-

“The basic proposition is that any taxpayer is entitled so to order his affairs that his liability to tax is as low as possible (IRC v Duke of Westminster (1936) AC I: (1935) ALL ER 259). However, he is not entitled to pretend so to order his affairs by entering into a sham transaction, and if he does so, the Inland Revenue can call on the Commissioners and, ultimately, the Courts to declare that it is a sham transaction, and, as such, is to be disregarded.”

27.

In Craven V/s. White (1988) 3 All ER 495 (HL), Lord Keith of Kinkel says, with reference to the trilogy of the aforesaid cases. “The Court must first construe the relevant enactment in order to ascertain its meaning; it must then analyse the series of transactions in question, regarded as a whole, so as to ascertain its true effect in law; and finally it must apply the enactment as construed to the true effect of the series of transactions and so decide whether or not the enactment was intended to cover it. The most important feature of the principle is that the series of transactions is to be regarded as a whole. In ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps in it were contractually agreed in advance or had been determined on in advance by a guiding will which was in a position, for all practical purposes, to secure that all of them were carried through to completion. It is also relevant to take into account, if it be the case, that one or more of the steps was introduced into the series with no business purpose other than the avoidance of tax.

The principle does not involve, in my opinion, that it is part of the judicial function to treat as nugatory any step whatever which a taxpayer may take with a view to the avoidance or mitigation of tax. It remains true in general that the taxpayer, where he is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision such as section 460 of the Income and Corporation Taxes Act, 1970. Lord Oliver says: “It is equally important to bear in mind what the case did not decide. It did not decide that a transaction entered into with the motive of minimising the subject’s burden of tax is, for that reason, to be ignored or struck down. Lord Wilberforce was at pains to stress that the fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides (see [1981] 1 All ER 865 at 871; [1982] AC 300 at 323). For did it decide that the court is entitled, because of the subject’s

motive in entering into a genuine transaction, to attribute to it a legal effect which it did not have. Both Lord Wilberforce and Lord Fraser emphasise the continued validity and application of the principle of IRC V/s. Duke of Westminster [1936] AC 1; [1935] All ER Rep.259, a principle which Lord Wilberforce described as ‘cardinal principle’. What it did decide was that, that cardinal principle does not, where it is plain that a particular transaction is but one step in a connected series of interdependent steps designed to produce a single composite overall result, compel the court to regard it as otherwise than what it is, that is to say merely a part of the composite whole.” Lord Oliver observes: “My Lords, for my part I find myself unable to accept that Dawson either established or can properly be used to support a general proposition that any transaction which is effected for the purpose of avoiding tax on a contemplated subsequent transaction and is therefore ‘planned’ is, for that reason, necessarily to be treated as one with that subsequent transaction and as

having no independent effect even where that is realistically and logically impossible.” Continuing, Lord Oliver observes: “Essentially, Dawson was concerned with a question which is common to all successive transactions where an actual transfer of property has taken place to a corporate entity which subsequently carries out a further disposition to an ultimate disponee. The question is: when is a disposal not a disposal within the terms of the statute? To give to that question the answer ‘when, on an analysis of the facts, it is seen in reality to be a different transaction altogether’ is well within the accepted canons of construction. To answer it ‘when it is effected with a view to avoiding tax on another contemplated transaction’ is to do more than simply to place a gloss on the words of the statute. It is to add a limitation or qualification which the Legislature itself has not sought to express and for which there is no context in the statute. That, however, desireable it may seem, is to legislate, not to construe, and that is something which is not within judicial competence. I can find nothing in Dawson or in the cases which preceded it which

causes me to suppose that that was what this House was seeking to do.”

28.

While referring to the case of Duke of Westminster in Macniven (Inspector of Taxes) –Vs.- Westmoreland Investments Ltd., [(2001) 1 ALL ER 865), Lord Hoffman observed as follows:-

“In the Ramsay case both Lord Wilberforce and Lord Fraser of Tullybelton, who gave the other principle speech, were careful to stress that the House was not departing from the principle in IRC v.Duke of Westminster, (1936) AC 1, (1935) All ER Rep 259. There has nevertheless been a good deal of discussion about how the two cases are to be reconciled. How, if the various juristically discrete acquisitions and disposals which made up the scheme were genuine, could the House collapse them into a composite self- cancelling transaction without being guilty of ignoring the legal position and looking at the substance of the matter ?

My Lords, I venture to suggest that some of the difficulty which may have been felt in reconciling the Ramsay case with the Duke of Westminster’s case arises out of an ambiguity in Lord Tomlin’s statement that the Courts cannot ignore ‘the legal position’ and have regard to ‘the substance of the matter’. If ‘the legal position’ is that the tax is imposed by reference to a legally defined concept, such as stamp duty payable on a document which constitutes a conveyance on sale, the Court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, if the legal position is that tax is imposed by reference to a commercial concept, then to have regard to the business ‘substance’ of the matter is not to ignore the legal position but to give effect to it.

The speeches in the Ramsay case and subsequent cases contain numerous references to the ‘real’ nature of the transaction and to what happens in ‘the real world’. These expressions are illuminating in their context, but you have to be careful about the sense in which they are being used. Otherwise you land in all kinds of

unnecessary philosophical difficulties about the nature of reality and , in particular, about how a transaction can be said not to be a ‘sham’ and yet be ‘disregarded’ for the purpose of deciding what happened in ‘the real world’. The point to hold on to is that something may be real for one purpose but not for another. When people speak of something being a ‘real’ something, they mean that it falls within some concept which they have in mind, by contrast with something else which might have been thought to do so, but does not. When an economist says that real incomes have fallen, he is not intending to contrast real incomes with imaginary incomes. The contrast is specifically between incomes which have been adjusted for inflation and those which have not. In order to know what he means by ‘real’, one must first identify the concept (inflation adjustment) by reference to which he is using the word.

Thus in saying that the transactions in the Ramsay case were not sham transactions, one is accepting the juristic categorisation of the transactions as individual and discrete and saying that each of them involved no pretence.

They were intended to do precisely what they purported to do. They had a legal reality. But in saying that they did not constitute a ‘real’ disposal giving rise to a ‘real’ loss, one is rejecting the juristic categorisation as not being necessarily determinative for the purposes of the statutory concepts of ‘disposal’ and ‘loss’ as properly interpreted. The contrast here is with a commercial meaning of these concepts. And in saying that the income-tax legislation was intended to operate ‘in the real world’, one is again referring to the commercial context which should influence the construction of the concepts used by Parliament.”

29.

Similar is the view expressed by the Courts in America which is as under: AMERICAN JURISPRUDENCE The situation in the United States is reflected in the following passage from American Jurisprudence (American Jurisprudence [1973] second edition, volume 71):

“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted. A tax-saving motivation does not justify the taxing authorities or the courts in nullifying or disregarding a taxpayer’s otherwise proper and bona fide choice among courses of action, and the State cannot complain, when a taxpayer resorts to a legal method available to him to compute his tax liability, that the result is more beneficial to the taxpayer than was intended. It has even been said that it is common knowledge that not infrequently changes in the basic facts affecting liability to taxation are made for the purpose of avoiding taxation, but that where such changes are actual and not merely simulated, although made for the purpose of avoiding taxation. Thus, a man may change his residence to avoid taxation, or change the form of his property by putting his money into non-taxable securities, or in the form of property which would be taxed less, and not be guilty of fraud. On the other hand, if a taxpayer at assessment time converts taxable property into non-taxable property for the

purpose of avoiding taxation, without intending a permanent change, and shortly after the time for assessment has passed, reconverts the property to its original form, it is a discreditable evasion of the taxing laws, a fraud, and will not be sustained.”

31.

To similar effect are the following observations of the U.S. court in Perry R. Bas V. Commissioner of Internal Revenue [1968] US 50 TC 595: “We infer than Stantus was created by petitioners with a view to reducing their taxes

through qualification of the corporation under the convention. The test, however, is not the personal purpose of a taxpayer in creating a corporation. Rather, it is whether that purpose is intended to be accomplished through a corporation carrying out substantive business functions. If the purpose of the corporation is to carry out substantive business functions, or if it in fact engages in substantive business activity, it will not be disregarded for Federal tax purpose.”

INDIAN LAW 32.

Following the English decisions, the Apex Court in the case of in the case of Jiyaji Rao Cotton Mills – Vs.- CIT AND CEPT [ (1958) 34 ITR 888 (SC)] held that every person is entitled to so arrange his affairs as to avoid taxation but the arrangement should be real and genuine and not a sham or make-believe.

33.

The Supreme Court in case of Commissioner of Income-Tax, West Bengal -Vs.- Calcutta Discount Co., Ltd., (AIR 1961 SC 372 ) while dealing with the similar

circumstances held that: Where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction.

34.

In India, the Courts have made a clear distinction between Tax evasion and Tax Avoidance. In the case of tax evasion, the Apex Court has held that the Courts would have to pierce the corporate veil and to find out the economic realities behind the legal façade. A corporate entity can be disregarded if it is used for tax evasion or to circumvent tax obligation vide CIT –Vs.- Sri Meenakshi Mills Ltd., [ (1967) 63 ITR 609 (SC) ] .

35.

However, significant important observations in this regard are to be found in case of The Commissioner of Income-Tax, Gujarat –Vs.- M/s.A.Raman and Co., (AIR 1968 SC 49), wherein, it has been held as under:-

The plea raised by the Income-tax Officer is that income which could have been earned by the assesses was not earned, and a part of that income was earned by the Hindu undivided families. That according to the income-tax Officer was brought about by “a subterfuge or contrivance”. Counsel for the Commissioner contended that if by resorting to a “device or contrivance”, income which would normally have been earned by the assessee is divided between the assessee and another person, the Income-tax Officer would be entitled to bring the entire income to tax as if it had been earned by him. But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. [Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment a case for commencing a proceeding for reassessment under

Section 147 (1) (b) may be made out. 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 device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.”

36.

In the case of Calcutta Discount Co., Ltd., - Vs.- Income Tax Officer [ (1973) 91 ITR 8), it has been held that if the assessee had arranged in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus foregoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible under law.

37.

A Constitution Bench of the Apex Court in the case of Mc.Dowell and Company Limited –vs- Commercial Tax Officer [1985 STC Vol.59 277] and in particular relied on the judgment of Chinnappa Reddyl.J., to the following effect: “We think that time has come for us to depart from the Westminister [1936] AC 1 Principle as emphatically as the British Courts have cdone and to dissociate ourselves from the observations of Shah, J., and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious disturbance caused to the economy of the Country by the piling up of mountains of black money, directly causing inflation. Then there is “the large hidden loss” to the community (as pointed out by Master Wheatcraft in 18 Modern Law Review 2009) by some of the best brains in the Country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps

not so skilful, advisers on the other side. Then again there is the “sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it”. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the “artful godgers”. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr.Justice Holmes, who said: “Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization”. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster [1936] AC 1 and the alluring logic of tax avoidance. We now live in a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a

device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is such that the judicial process may accord its approach to it”.

However, the view of the other four Judges was expressed in the following words: “Tax planning may be legitimate, provided it is legitimate it is within the framework of law”. “Colourable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods”. It is the obligation of every citizen to pay the taxes without resorting to subterfuges.

On this aspect, one of us Chinnappa Reddy, J., has proposed a separate and a detailed information with which we agree.

38.

The Apex Court subsequently had an occasion to consider this judgment in the case of Union of India and

another –vs- Azadi Bachao Andolan and another [AIR 2004 SC 1107]. In the aforesaid decision, after referring to the entire catena of cases up-to-date including the aforesaid Constitution Bench judgment as well as the opinion expressed in the said judgment by Justice Chinnappa Reddy, the Apex Court held as under:

“146. With respect, therefore, we are unable to agree with the view that Duke of Westminster is dead, or that its ghost has been exorcised in England. The House of Lords does not seem to think so, and we agree with respect. In our view, the principle in Duke of Westminster is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in CIT v. Raman are very much relevant even today”.

“153. The Constitution Bench reiterated the observations in Bank of Chettinad Ltd., -vs- CIT, quoting with approval the observations of Lord Russel of Killowen in IRC -vs- Duke of Westminster and the observations of Lord Simonds in Russell –vs- Scott”.

“154. It thus appears to us that not only is the principle in duke of Westminster alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of Mc Dowell.”

“We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents”.

Though the words : “sham” and “device” were loosely used in connection with the incorporation under the Mauritius law, we deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catch-all phrases to defeat or nullify the effect of a legal situation.”

39.

After referring to the aforesaid judgments, this Court had an occasion to consider the said question in the

State of Karnataka –vs- M/s.Videocon International Limited vide STRP No.4/2000 in its judgment dated 14.07.2010 wherein it has been observed as under:

“33. From the aforesaid discussion it is clear that there is no inconsistency or deviation in the approach to the interpretation of the taxation law in England, America as well as in India. It is now well settled that a citizen is entitled to arrange his affairs as not to attract taxes imposed by the State, so far as he can do so within the law. Every man is entitled to order his affairs in such a manner that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure the said result, his ingenuity is to be respected and he cannot be compelled to pay an increased tax. He may legitimately claim the advantage of any express terms or of any omissions that he can find in his favour in taxing statutes. His legal right so to dispose of his capital and income as to attract upon himself the least amount of tax is fully recognized. The law does not oblige a trader to make the maximum profit that he can out of his trading transactions.

The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted.

The basic proposition underlining this taxation law is that any tax payer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as low as possible. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. Every person is entitled to so arrange his affairs as to avoid taxation but the arrangement should be real and genuine and not a sham or make-believe. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Colourable devices cannot be part of tax planning.

A tax-saving motivation does not justify the taxing authorities or the courts in nullifying or disregarding a taxpayer’s otherwise proper and bona fide choice among courses of action. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. Tax planning may be legitimate provided it is within the framework of law. The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language”.

40.

Subsequently, the Apex Court considering the aforesaid judgments of the Apex Court in the case of Vodafone International Holdings B.V. –vs- Union of India and another reported in (2012) 341 ITR Page 01. After referring to the aforesaid two judgments of the Apex Court at Paragraph No.64, it has been held as under:

“64. The majority judgment in Mc. Dowell held that “Tax planning may be legitimate provided it is within the framework of law” (paragraph 45). In the latter part of paragraph 45, it held that “colourable devices cannot be a part of tax planning and it is wrong to encourage or entrain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods”. It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with paragraph 46 where the majority holds “on this aspect, one of us, Chinnappa Reddy J. has proposed a separate and detailed opinion with which we agree”. The words “this respect” express the majority’s agreement with the judgment of Reddy J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal / illegitimate / impermissible. Moreover, Reddy J. himself says that he agrees with the majority. In the judgment of Reddy J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax

liability.” In our view, although Chinnappa Reddy J. makes a number of observations regarding the need to depart from the Westminster and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading Mc.Dowell, in the manner indicated hereinabove, in cases of treaty shopping and / or tax avoidance, there is no conflict between Mc.Dowell and Azadi Bachao or between Mc.Dowell and Mathuram Agrawal.”

41.

Justice K.S.Radhakrishnan J., who has written a separate but a concurring opinion dealing with the question whether Mc.Dowell calls for re-consideration has observed as under:

“Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. Revenue’s stand that the ratio laid down in Mc.Dowell is contrary to what has been

laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, call for no reconsideration by a larger Bench.”

42.

After referring to the said judgment, this Court in the case of M/s.Bhoruka Engineering Inds.Ltd., -vs- The Deputy Commissioner of Income Tax in ITA No.120/2011 dated 09.04.2013 held as under:

possible and that he is not bound to choose that pattern which will replenish the treasury. A Citizen may legitimately claim the advantage of any express terms or of any omissions that he can find in his favour in taxing statutes. His legal right so to dispose of his capital and income as to attract upon himself the least amount of tax is fully recognized. The legal right of tax payer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them by means which the law permits, cannot be doubted. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. A tax-saving motivation does not justify the taxing authorities or the Courts in nullifying or disregarding a taxpayer’s otherwise proper and bona fide choice among courses of action. Tax planning may be legitimate provided it is within the framework of law. The intention of the

legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act, it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. Therefore, as long as the arrangement of the assessee to avoid payment of tax do not contravene any statutory provision and is achieved within the four corners of law, it cannot be found fault with. If the transaction in question is sham or colorable and entered into with the sole intention of evading payment of tax, then such a transaction would not have any legitimacy. Therefore, a colorable device cannot be a part of tax planning. Therefore, in each case, the transaction in question and the material on record has to be carefully examined to find out whether the transaction is “sham” or “unreal” or “colourable device” to evade payment of tax.

43.

From the aforesaid judgments it is clear that, a citizen is entitled to arrange his affairs as not to attract taxes imposed by the State, so far as he can do so within the law.

He is entitled to order his affairs in such a manner that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure the said result, his ingenuity is to be respected and he cannot be compelled to pay an increased tax. The basic proposition underlining this taxation law is that any tax payer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as low as possible. But the arrangement should be real and genuine and not a sham or make-believe. Colourable devices cannot be part of tax planning. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. Tax planning may be legitimate provided it is within the framework of law. If the transaction in question is sham or colorable and entered into with the sole intention of evading payment of tax, then such a transaction would not have any legitimacy. Therefore, it is clear as the law as it stands today in India, tax planning is legitimate, provided it is within the frame work of law. The intention of the

Legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxation statute, it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. The question whether a transaction is sham or colorable and entered into with the sole intention of evading payment of tax is purely a question of fact. On appreciation of the material on record and thereafter keeping in mind the statutory provisions in particular, the charging section and the section under which the tax is exempted, the Court has to record the finding of fact. Unless the statutory provisions provide for exemption from payment of tax, the question of an assessee trying to take advantage of the said provision would not arise. Therefore, in each case, the question is, the way the assessee has avoided to pay tax relying on the statutory provisions is legitimate or not is to be considered by the Court. The Court has to bear in mind that it is wrong to encourage or entertain the belief that it is honourable to

avoid the payment of tax by resorting to dubious methods. An obligation is cast on every citizen to pay the taxes without resorting to subterfuges. When the statute provides certain rights, which if properly applied would reduce the tax burden on the assessee or exempts him from the payment of tax, the assessee is entitled to the said benefit. However, if he is invoking the said provisions with the intention of evading payment of tax, then it would be a colorable device to avoid payment of tax, which cannot be entertained by the Court. It is in this context, Court has to find out whether the transaction is real or unreal and then record a finding whether it is a colorable device or sham transaction.

ON FACTS 44.

In this background, when we look at the facts of this case, the assessee is engaged in the business of software exports, computer peripherals, IT enabled services, manufacture and sale of vegetable oils, soaps, leather products, lighting products, hydraulic cylinders and tippers and manufacture of reagents as well as marketing and

support of medical equipments. The assessee also owned or held shares in Wipro Net Limited.

45.

It is not in dispute that on 31.03.1999, the assessee acquired 1,52,19,182 equity shares of Rs.10/- each for an consideration of Rs.15,11,98,000/-. On 05.08.1999, it sold 29,03,410 equity shares in Wipro Net Limited for a consideration of Rs.20,31,77,778/-. Thus after deducting other expenditure, the capital gains accrued as a result of the said transfer is Rs.12,41,43,678. Similarly, on 28.12.1999, assessee sold 17,91,385/- of equity shares in favour of ICICI limited for a consideration of Rs.99,42,18,675/-. The capital gain accrued on account of such transfer is Rs.97,13,04,825. Thus the assessee earned short term capital gains in a sum of Rs.1,09,54,48,503/- under Section 48(1) and (2) of the Act from the sale of shares in Wipro Net Limited. In the normal course, they ought to have paid taxes on these capital gains. However, they invoked Section 70 of the Act – “set off loss from one source

against income from another source under the same head of income” which reads as under:-

Section 70 : set off loss from one source against income from another source under the same head of income (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. (2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. (3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-

term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset. Section 70 foot note : for any assessment year in respect of the any source falling under any head of income is a loss, the assessee is entitled to have the amount of such loss set off against the his income from any other source under the same head.

46.

The assessee had not incurred the loss which he wanted to set off against this capital gain on the day the capital gains was earned. Now in this background, we have to find out the genuineness of the disputed transaction. The assessee held shares in Wipro Finance Limited. Wipro Finance Limited is a non-banking financial company (NBFC). It was incorporated on 02.01.1992 under the Companies Act, 1956, having its registered office at Wipro Centre, No.5, Papanna Street, St.Mark’s Road Cross, Bangalore – 560 001.

It submitted an application on 01.07.1997 to the Reserve Bank of India for issue a certificate of registration under the provisions of Section 45-1A of the Reserve Bank of India Act, 1934. The said application was pending consideration as the company had not complied with the statutory directions relating to the credit rating and the amount of public deposits held. The inspection of the books of accounts of the company was conducted during the period 29.09.1998 and 03.11.1998, with reference to its financial position as on 31.03.1998. The inspection revealed several deficiencies in the working of the company, more particularly, with respect to the net owned fund, the solvency, the outstanding amount of public deposits, the liquidity ratio, the total credit exposure and default in the maintenance of SLR. The Wipro Finance Limited was called upon to show cause with a letter dated 19.03.1999 as to why its application for Certificate of Registration should not be rejected. Wipro Finance Limited was expected to take steps to augment its net owned funds by infusing fresh capital and significant reduction in the

deposits. Again an inspection of books of accounts of the company was conducted between 31.01.2001 and 14.02.2001, with reference to its financial position as on 31.03.2000. The inspection revealed that the company had violated various provisions of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 and also that its financial position was not satisfactory. Therefore, a letter was issued to the company on 16.07.2001, to take requisite steps and also a meeting with the CEO of the company was held on 23.07.2001, to call for an action plan in regard to the repayment of outstanding public deposits and other liabilities of the company. One more scrutiny of the books of accounts was undertaken on 04.03.2002. The company in its reply letter dated 06.03.2002, to the observations made by the Inspecting Officer, submitted (i) an action plan to repay public deposits and other liabilities (ii) projected cash flow statement and (iii) a certified copy of the board resolution for non-acceptance of public deposits. It also submitted documentary proof for

having deposited the outstanding public deposit amount in a term deposit (with State Bank of India, St.Mark’s Road Branch, Bangalore) designated as an “Escrow Account”. In the meanwhile, the assessee by its letter dated 31.03.2002, requested the Bank to allow it to withdraw its application for Certificate of Registration. Accordingly, by an order dated 25.05.2002, the request to withdraw the application of the company was allowed and it was rejected as withdrawn. It is in this background, when we look at the statement of accounts filed on behalf of Wipro Finance Limited which shows that the assessee held Rs.51,91,90,000 equity shares, Rs.25,00,00,000 fully convertible cumulative preference shares, Rs.25,00,00,000 11% fully convertible cumulative preference shares, in all the total share capital of the company is Rs.1,01,91,90,000/-. The assessee sold 4,83,14,144 equity shares of Rs.10/- each and 25,00,000 11% cumulative preference shares to Sri B.S.Shankar Narayan, Sri P.G.Karania and Sri S.R.Gopalan. The total indexed cost of aforesaid equity shares and 11% convertible

preference shares is valued at Rs.1,07,98,30,991. It was valued at Rs.63,19,679/-. However it was sold for Rs.75,000/-. Thus, the assessee incurred a long term capital loss of Rs.1,07,97,55,991. The said sale was done on 29.12.1999, that is, the day after the assessee earned the profit which was liable to capital gains as aforesaid. The said three persons who purchased the shares namely Sri B S Shankar Narayan was legal advisor of the assessee, Sri P G Karania was ex-employee for a period of 20 years and Sri S.R.Gopalan was Ex-CEO of Wipro Finance Limited.

47.

On 06.03.1996, the Common Wealth Development Corporation entered into a share subscription agreement with Wipro Finance Limited and agreed to subscribe to 11,42,857 equity shares, face value of Rs.10/- each, in all at Rs.17.50/- per share. Accordingly, Wipro Finance Limited allotted 11,42,857 equity shares to Common Wealth Development Corporation, which accounted for Rs.1,14,28,570/- with Rs.85,71,430/- as share premium.

They also entered into repayment and settlement agreement dated 12.03.1999.

48.

What is interesting to note here is Wipro Finance Limited had entered into a loan agreement with Common Wealth Development Corporation on 31.12.1994 and made available a loan upto Rs.50,00,000 UK sterling pounds for its business. Similarly, Wipro Finance Limited entered into subscription agreement on 30.03.1998 with ICICI Limited under which ICICI agreed to subscribe 25,00,000/- convertible preference shares of Rs.100 each face value and accordingly, it paid Rs.25 crores. It is in this background, the assessee company purchased 11,42,857 shares from Common Wealth Development Corporation in the month of September 1999 at a price of Rs.17.25 per share. The face value of shares being Rs.10 per share. Similarly, the assessee purchased 25,00,000 convertible preference shares on 23.12.1999 for a total consideration of Rs.32 crores, out of which 31,68,75,000 was towards the purchase

consideration paid towards ICICI Limited and balance of Rs.31,21,000/- was pay as prepayment premium on account of early exercise by bank. The said figures evidences the fact that these shares were bought by the assessee on premium when it shows to divest from Wipro Finance Limited at nominal price. In other words, the assessee purchased the shares at premium at a price of Rs.17.25 per share on 23.12.1999 and thereafter, sold the shares acquired earlier at a price of Rs.0.086 per share.

49.

In addition to that, it made a fresh infusion of capital on 30.12.1999 in equity shares aggregating to Rs.45 crores at face value of Rs.10/- each, and the assessee company also made fresh infusion of share capital on 31.09.1999 and aggregating to Rs.20 crores. Further it again infused capital on 30.12.1999 in redeemable preference shares crediting to Rs.30 crores.

50.

The explanation offered by the assesse is prudential norms on income recognition, asset classification and provision applicable to NBFC are mandatory in nature and are applicable irrespective of the fact that they have public deposits or not. The certificate of registration was pending and it would be considered only on Wipro Finance Limited reaching the mandatory minimum NBFC of Rs.25 lakhs. The company had time upto 08.01.2000 to reach the minimum NBFC preferable share capital although convertible to equity shares are eligible to reckon for the purpose of registration. Therefore, Wipro Finance limited being the subsidiary company of the assessee, the said amounts were infused on 31.12.1999. A copy of the statement of accounts issued by the State Bank of India (Industrial Finance Branch) dated 31.12.1999 is produced.

51.

After crediting the said amount in the account of Wipro Finance Limited, the Wipro Finance Limited has repaid Rs.95 crores to the assessee on the very same day.

Section 70 of the Act provides for “set off loss from one source against income from another source under the same head of income”. That means where the net result of any assessment year in respect of any source falling under any head of income other than capital gain is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.

52.

The aforesaid undisputed and admitted material on record discloses that the purchase of shares of Wipro Finance Limited at premium in one breadth and selling the shares of the said company for a pittance at the rate of less than a paisa in other breadth, which clearly shows the intention behind this arrangement. Secondly, the said shares are sold to the ex-employees who continued to hold the said shares without bringing any fresh capital for conducting the business of Wipro Finance Limited. Thirdly, though it is contended that a sum of Rs.95 crores is infused

to meet the requirement of company under the RBI Act, as demanded by the Reserve Bank of India, the amount of Rs.95 crores infused is withdrawn on the very same day towards the repayment of the debt by Wipro Finance Limited to the assessee clearly demonstrates the intention behind such arrangement. Fourthly, as it is clear from the contention of the assessee that the capital gains was accrued to them because of wind fall profits by selling of shares of Wipro Net Limited, the quantum of short term capital gains disclosed by the assessee was a staggering amount of excess of Rs.100 crores. The loss was generated by disinvestment of assesses share owned in subsidiary Non Banking Finance Company. The fact that three persons/ex-employees who had rewarding association with the assessee group for a long period of time, cast a shadow on the genuineness of the transaction as the shares were sold at a throw away price, when earlier to the sale, the assessee had purchased the shares of Wipro Finance Limited at a premium. Despite disinvesting the shares on such a throw away price under

the guise of complying with the legal requirements as directed by RBI, the assessee chose to infuse fresh capital to the extent of Rs.95 crores at par on the same day and took back the amount on the same day under different head. In the end, they did not comply with the procedures of the law. On the contrary, application filed to the RBI was withdrawn. These undisputed facts borne out from the record clearly establishes the real intention underlying this scheme which they have propounded.

53.

In the facts and circumstances of the case, we are satisfied that it is not a real scheme. It is not a legitimate tax planning. It is a devise adopted to evade payment of tax on the capital gains earned by the assessee company. Though the proximity of the date between the sale of shares and purchase of shares and disinvestment alone cannot be a criteria to hold the transaction is a sham transaction and the profit earned from sale of shares in Wipro Net Limited is real and loss incurred by the sale of

shares is also real and though there was no bar for sale of shares at throw away price and sometimes, the businessman act in undue exercise and hasty and without any rationale any one of them is not sufficient to hold a transaction as sham transaction. But the cumulative effect of all these instances unequivocally points out the real intention behind this transaction and leads to a irresistible conclusion that this tax planning is done with the intention to avoid payment of tax on capital gains and it is not a case of legitimate tax planning but a devise to avoid payment of tax. Therefore, the Tribunal was not justified in characterizing this transaction as a legitimate tax planning. The observation of the Tribunal that the shares transactions of Wipro Finance Limited had happened at different times in the past is not factually correct. It is not a case where the assessing authority came to such a conclusion merely because of the proximity of the dates and it was done hurriedly but the assessing authority on careful consideration of the entire material on record, in particular, the explanation offered by

the assessee for his queries has arrived at the finding that it is a colourable devise and a sham transaction which finding has been affirmed by the Appellate Commissioner on re- appreciation of the entire material on record after making note of the entire case law on the point. It is the Tribunal which has interfered with such a concurrent finding of fact without properly appreciating the mechanism adopted by the assessee to avoid payment of tax. In that view of the matter the finding of the Tribunal on this issue requires interference and accordingly, the same is set aside. The said substantial question of law is answered in favour of the revenue and against the assessee.

54.

Learned Counsel for the assessee submitted that it is their specific case that they purchased the shares from CDC and ICICI at a premium, it is in pursuance of a contract entered into years prior to the said transaction. Though the shares did not have any value on the date of the said purchase, it was made in pursuance of the agreement of

buyback and also to maintain their name in the market. It is also a business loss. That apart, when admittedly they have infused Rs.95 crores for purchasing the shares, which also had no value, if the assessee is able to establish the said fact, then it would be a case of business loss. Though the Assessing Officer as well as the first appellate authority did not accept the case of the assessee on the ground that, once the transaction is held to be a sham transaction, the assessee is also not entitled to the benefit of set-off against the business loss. They had challenged the said finding before the Tribunal. However, the Tribunal did not go into the said question on the ground that they are holding the transaction as a real transaction and granting the benefit. In that view of the matter, the said question, whether the assessee incurred any business loss while purchasing the shares, which had no value, which is in terms of the contract entered into between the parties, it is a matter to be gone into by the Tribunal. Therefore, he submits on that point the matter requires to be remitted back to the Tribunal.

55.

We find force in the said submission. It is only when we held that the purchase of shares at a premium is a genuine transaction and infusion of capital of Rs.95 crores is a genuine transaction, the sale made by the assessee for a throwaway price to its ex-employees was held to be sham. Now whether those transactions were for the market price or the shares had no value but purchased on account of the previous contract and thereby the assessee incurred any loss in the business, is a matter to be gone into by the Tribunal.

56.

Therefore, as the Tribunal had not gone into the said question, the Tribunal shall decide this question and record a finding thereon.

57.

Insofar as other substantial questions of law are concerned, they are common to both the appeals I.T.A.Nos.1394 and 1395/2006 and therefore, they are taken up for our consideration together.

QUESTION No.18

58.

In fact, the said substantial question of law does not arise for consideration at all because what the Tribunal has held as in the present appeal is against regular assessment under Section 143(3) and not against re- assessment under Section 147 of the Act. They need not record a finding as to whether notice under Section 148 of the Act is valid or not. No appeal is provided against mere issue of notice under Section 148 of the Act. What is appealable is re-assessment made under Section 147 pursuant to the notice under Section 148. The validity of notice or consequential assessment pursuant to such notice can be looked into only in an appeal against such

assessment and not earlier to the same. In fact, it is submitted that against the order of re-assessment, the appeals are filed and it has reached this Court and pending consideration. Therefore, the said question has to be considered in the said proceedings and not in these proceedings. Hence, we decline the answer the said question of law.

QUESTION No.19 IN ITA1395/2006:

“19. Whether the Tribunal was correct in reversing the finding of the Assessing Officer that miscellaneous income from exchange rate fluctuation, sale of scrap and newspaper, reversal of customers balance and debit notes, and miscellaneous income of non STP units cannot be held as derived from export of article or thing under Section 10A units?”

QUESTION No.27 IN ITA1394/2006:

“27. Whether the fluctuation gain in the exchange rate of Rs.11.81 crores is not liable to tax as held in the earlier assessment years 1998- 99 and 1999-2000?”

59.

The Tribunal while dealing with the said question has held that, the facts in the present appeal being similar and identical to that of assessment years 1998-99 and 1999-2000 and the issues are covered by the orders for those years, they decided the issue in favour of the assessee and accordingly, they reversed the orders of the authorities on the said issue. Further, they directed the Assessing Authority to consider the said receipts/income as eligible profits of undertakings under Section 10-A of the Act. In fact, this Court had an occasion to consider the said question in the assessee’s case in I.T.A.No.507/2002, which is decided on 25.8.2010 where it is held as under:

“36. This question of law arises in the context of the assessing officer holding that income earned from the sale of old newspapers, diesel drum, wooden racks, etc., aggregating to Rs.21,144/- is not in the nature of income derived from the eligible unit. The Commissioner of Appeals held that the assessee does not require the above items to manufacture or produce the electronics or software items the income on account of which is

claimed to be exempt under Section 10A. He further held that the assessee has not explained how the newspapers, diesel drum, wooden racks, etc., are connected with the industrial activity. However, the Tribunal noticed that both the authorities had proceeded altogether on a wrong basis.

The said amount represents the expenditure incurred by the assessee and he is claiming deduction as an expenditure. In that context the Tribunal has held that, while calculating the eligible profit the income which actually reduces such type of expenses should not be treated as other income not forming part of eligible business. While calculating the profit of the eligible business the expenses and the income of same unit are required to be netted out. The expenses and the income are relatable to the same nature. Therefore, they directed the computation should be made after netting out the expenditure by reducing the income in dispute. In other words, for example, the expenditure incurred for purchase of newspapers was Rs.10,000/-, they sold it for Rs.2,000/- and the expenses which is eligible for claiming deduction was Rs.8000/-. Without properly understanding

the case putforth by the assessee, the authorities have proceeded on the basis that it is an income derived from the business which has no nexus and, therefore, the assessee is not entitled to claim exemption under Section 10A. Therefore, the Tribunal was justified in setting aside those findings and granting the deduction sought for by the assessee. In that view of the matter, in the first place the said question do not arise for consideration. We decline to answer the same in the facts of the case.”

QUESTIONS No.20 AND 21 IN I.T.A.NO.1395/2006:

“20. Whether the Tribunal was correct in holding that the liability to tax interest does not arise unless it accrues to the assesse irrevocably and not when the refund is actually granted in the relevant assessment year in the case of MODVAT Credit 21. Whether the Tribunal was correct in holding that the liability to tax interest does not arise unless it accrues to the assesse irrevocably and not when the refund is actually granted in the relevant assessment year in the case of interest under section 244A of the Act.”

60.

The Tribunal, in fact, did not go into these questions on the ground that, they have already granted assessee for the earlier years, but they remitted the matter back to the Assessing Authority to follow the directions given by them for the assessment year 1999-2000. This question came up for consideration before this Court in the assessee’s case in I.T.A.No.3204/2005 decided on 28th February 2012 where this Court held as under: “6. It is settled law that interest paid is compensatory in nature under the Income Tax Act. If an amount is due on a particular date and if that amount is not paid on that date and if it is paid on a subsequent date the recipient of that amount is deprived of the amount which was legally due till it was actually paid. It is to compensate the denial of the benefit of the said amount that interest is levied paid under various provisions under the Income-Tax Act. It is not dependent on the claim in any legal proceedings when admittedly the assessee has received the money by way of interest on refund and the said amount ought to have been shown in the returns as an income and was liable to pay tax. The

offering of the said amount for tax is not dependent on the fact whether the said interest has become irrevocable under the Act or refundable under the Act. In that view of the matter, the said finding in our view is contrary to law and cannot be sustained. Accordingly, it is set aside. As the matter is already remitted to the assessing authority he shall first calculate the interest refunded and the amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter calculate the interest taxable under the aforesaid Act. That would meet the ends of justice.”

Therefore, the said question of law is not answered as the matter is remanded back to the assessing authority.

QUESTION No.22 IN I.T.A.NO.1395/2006:

“22. Whether the Tribunal was correct in holding that the provision for advances made by the assesse of Rs.3,22,35,059/- should be allowed as a revenue expenditure on account of details having been furnished without actually examining those details when the matter has

been relegated back to the Assessing Officer in the earlier assessment years.”

61.

The Assessing Authority held that the provision is merely in the nature of contingent liability and hence, did not represent the amount actually written off, which finding was upheld by the first appellate authority. The Assessing Authority also disallowed the alternative claim of the appellant for the right of advances against the provision on the ground that the details were not made available to him. On that issue, the Tribunal remitted the matter back to the Assessing Authority and directed the assessee to furnish the details to decide the matter afresh. The Tribunal held on a careful scrutiny of the material on record, the details have been furnished by the assessee, for approval of advances and therefore, they directed the Assessing Authority to allow the deduction for provision for advances. Further, they observed that corresponding adjustment to the income exempted under Section 10A would also be warranted. In fact, this Court had an occasion to consider this question in the

assessee’s case in I.T.A.NO.503/2002 decided on 1st September 2010, wherein this Court has held as under:

“15. In that view of the matter, we decline to answer the aforesaid substantial question of law. But, affirm the order of remand to the Assessing Officer to consider the claim for bad debts, in the light of the observations made by the Tribunal and in the light of the judgments of the Apex Court in the case of Vijaya Bank Vs. Commissioner of Income Tax and another reported in (2010) 323 ITR 166 and T.R.F.Ltd. Vs. Commissioner of Income Tax and another reported in (2010) 230 CTR (SC) 14.”

62.

Therefore, we do not see any justification to interfere with the order passed by the Tribunal. Accordingly, the said substantial question of law has been answered in favour of the assessee and against the Revenue.

QUESTION No.23:

“23. Whether the Tribunal was correct in reversing the finding of the Assessing Officer and

the Appellate Commissioner regarding claim of the bad debts of Rs.8,07,42,140/- and revised enhanced claim of Rs.24.91 crores towards bad and doubtful debts and the revised enhanced claim of Rs.33.05 crores towards write off of debts bad and that too the apportionment of the said write off claim towards 10A income to the extent of Rs.5.28 crores which was never claimed in the return as per the time prescribed under Section 135(5) of the Act?”

63.

This question of law does not arise for consideration in the facts of this case because the Tribunal has held that the dispute is restricted to reconciliation of the amount claimed by the assessee and the amount allowed by the Assessing Officer. The Assessing Officer was directed to verify the reconciliation furnished by the assessee and accordingly, re-compute the figures for provision for bad debts disallowed and the write-off of bad debts claimed in the return of income. In that view of the matter, we decline to answer the said question of law.

QUESTION No.24:

“24. Whether the Tribunal was correct in reversing the finding of the Assessing Officer and the Appellate Commissioner that the write off of bad debts of Rs.1,20,84,943/- towards LD provisions at HQ, Octroi, head office debts, debts due to fluid power division, write off against Department of Atomic energy and others where details were not available?”

64.

On this issue, the Tribunal has held that the debt is barred by limitation. The assessee has written off the debt. The judgment of the assessee cannot be substituted. Once the old debt is written off, the same is allowable as deduction and therefore, they directed the Assessing Authority to allow the deduction. This question also was considered by this Court in the assessee’s case in I.T.A.NO.503/2002 decided on 1st September 2010 at para- 15, which reads thus:

“15. In that view of the matter, we decline to answer the aforesaid substantial question of law.

But, affirm the order of remand to the Assessing Officer to consider the claim for bad debts, in the light of the observations made by the Tribunal and in the light of the judgments of the Apex Court in the case of Vijaya Bank Vs. Commissioner of Income Tax and another reported in (2010) 323 ITR 166 and T.R.F.Ltd. Vs. Commissioner of Income Tax and another reported in (2010) 230 CTR (SC) 14.”

65.

In view of the law declared by the Apex Court in the case of Vijaya Bank Vs. Commissioner of Income Tax and another reported in (2010) 323 ITR 166 and T.R.F.Ltd. Vs. Commissioner of Income Tax and another reported in (2010) 230 CTR (SC) 14, the write-off of the bad debts of the assessee cannot be found fault with and as such, the said substantial question of law does not arise for consideration at all.

QUESTION No. 25:

“25. Whether the Tribunal was correct in holding that the LD (liquidated damages) is a business

loss allowable under Section 37 of the Act and the provisions of Section 36 (1) (vii) of the Act is not applicable as the amount written off is not in the nature of a debt and the claim of write off of the same is not in order as held by the Assessing Officer.”

66.

The assessing officer allowed write off in respect of certain items. He did not allow such write off in respect of 5 items. The assessee contended that the twin conditions viz., existence of debts and write off in the books having been met, the claim ought to have been allowed without any further enquiry. The amounts were also well beyond the period of limitation. The revenue’s case was, the assessee claiming the deduction has to furnish the details required thereof. In the absence of such particulars write off cannot be allowed. On considering the rival contentions the Tribunal held that, the assessee has substantiated the write off by explaining the business expediency and circumstances except in respect of two items, in respect of which the assessee had pleaded irretrievability of the details. The

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Tribunal held that liquidated damages clearly arises out of contractual obligations and being in the nature of a business loss is deductible. In respect of write off against Department of Atomic Energy account, the assessee has brought to the notice of the assessing authority that the debt is very old pertaining to the year 1994-95 and to a discontinued division. As the debt is barred by limitation, the write off of debt by the assessee is governed by prudence. The judgment of the assessee cannot be substituted by the authorities and, therefore, they held that an old debt is written off, the same is allowable.

67.

We do not find any justification to interfere with the said finding of fact recorded by the Tribunal. However, in respect of three items, the Tribunal upheld the revenue’s contention that the assessee had to furnish the details in respect of those items and unless those particulars are furnished it is not possible to uphold the claim for write off. The Tribunal has remitted the matter to the assessing

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authority in respect of the said three items. Here again the Tribunal was fully justified in remitting the matter to the assessing authority. In the light of what we have stated above, as no substantial question of law do arise for consideration on this aspect, the matter is remitted back to the assessing authority. The assessing authority shall pass appropriate orders.

QUESTION No.26 IN I.T.A.NO.1394/2006

“26. Whether the Tribunal was correct in reversing the finding of the Assessing Officer that the loss from 10A units of Rs.13,30 lakhs can be carried forward despite the restriction imposed under Section 10A(6)(ii) read with sub-section (1) of Section 72 of the Act.”

68.

As the said question had not been raised before the Assessing Authority and it was raised for the first time before the First Appellate Authority, the Appellate Authority sent the file to the Assessing Authority to consider the said issue. However, the Tribunal in the appeal held that as the

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said question of law is covered by decision of the Apex Court as well as the judgment of the Tribunal at Mumbai had directed the Assessing Authority to allow the set off of loss from 10A units as held in the aforesaid judgments.

69.

This question is decided by the Apex Court in the case of Commissioner of Income Tax –vs- Canara Workshop (P) Ltd. reported in 161 ITR 320. All that the Assessing Authority has to do is to give effect to the judgment of the Apex Court and grant set off as claimed by the assessee and therefore, we decline to answer the said substantial question of law, as it is answered by the Apex Court.

QUESTION No.28: “28. Whether the Tribunal was correct in holding that the expenditure incurred by the corporate office to 10A units of Rs.9.28 crores is allowable deduction as held in the earlier assessment years despite the corporate office not being involved in

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any activity other than earning income mainly on account of interest and dividend.”

70.

The Tribunal has granted the relief to the assessee, following the judgment rendered in the earlier cases. This question arose for consideration by this Court in the assessee’s case itself in I.T.A.NO.507/2002 decided on 25th August 2010 wherein at para-28 it is held as under:

“28. It is this amount which they were claiming as deduction. In the light of the aforesaid facts, it does not represent the expenditure incurred by the Corporate Office in respect of its sub- divisions. In those circumstances, the Assessing Officer and the First Appellate Authority were not justified in allocating the substantial portion of the amount as the expenses incurred in respect of Section 10A and disallowing the deduction. That is precisely what the Tribunal has held on proper appreciation of the material on record. In that view of the matte we do not find any justification to interfere with the well considered order of the Tribunal. Accordingly, this question of law is

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answered in favour of the assessee and against the Revenue.”

71.

Therefore, the assessee is entitled to the benefit of deduction. The expenditure incurred by the corporate office to its 10A units is to the extent of Rs.9.28 crores. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the Revenue.

QUESTION No.29:

“29. Whether the Tribunal was correct in holding that the amount paid for importing software of Rs.15,97,94,771/- without deducting TDS is an allowable expenditure as held in the earlier assessment years.”

72.

The said question arose for consideration in the assessee’s appeal in I.T.A.NO.507/2002 decided on 25th August 2010, wherein this Court has held as under:

“39. From the aforesaid facts it is clear the assessee claimed deduction on the ground that it falls under revenue expenditure. When the

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assessing officer accepted the case of the assessee to the substantial portion, merely because the imported goods were housed in house by the assessee he was of the opinion that was housed for catering into the requirements of the clients and, therefore, it amounts to royalty and TDS should have been deducted, the same having not been done, the entire amount cannot be claimed as deduction. The Commissioner rightly pointed out it is not a royalty, it is a revenue expenditure and the entire amount is held to deductible. In those circumstances, it was not open to the revenue to contend that it constitutes an asset. Therefore, the Tribunal declined to entertain the said contention and affirmed the order of the Appellate Authority. In those circumstances, the substantial question of law as framed do not arise for consideration in this appeal and we decline to answer the same”.

QUESTION No.30:

“30. Whether the Tribunal was correct in holding that the provision for warranty expenses of a sum of Rs.6,67,06,328/- is an allowable expenditure despite the same has not been

106

written off and the same was treated as the contingent liability”.

73.

This question is no more res integra. The Apex Court in the case of Rotork Controls India Private Limited –vs- Commissioner of Income Tax reported in (2009) 314 ITR 62 has held as under:

“13. In this case we are concerned with product warranties. To give an example of product warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 percent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual

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concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs have to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfills accrual concept as well as the matching concept. For determining appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently.

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Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two year, in the above example,

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may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under s. 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are-provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.”

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QUESTION No.31:

“31. Whether the Tribunal was correct in holding that sales tax and excise duty should be excluded from the turnover for the purpose of computation of deduction under Section 80HHE of the Act ”.

74.

This question has been answered by the Apex Court in the case of Laxmi Machine Works –vs- Commissioner of Income Tax reported in 290 ITR 667 wherein it has been held that, the sales tax and excise duty has to be excluded from the turnover for the purpose of computation of deduction under Section 80HHE of the Act. The said substantial question of law is accordingly answered in favour of the assessee and against the Revenue. QUESTION No.32:

“32. Whether the Tribunal was correct in holding that the total turnover of software business should be taken into account for the purpose of obtaining deduction under Section 80HHE of the Act by following the case of M/s.Wipro GE Medicals.”

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75.

This question has already been decided by this Court in the assessee’s case itself in I.T.A.No.3204/2005 decided on 28th February 2012 wherein this Court has held as under: “Section 80HHE provides that where an assessee being an Indian Company or a person (other than a company)resident in India, is engaged in the business of export out of India of computer software or its transmission from India to a place outside India by any means or in providing technical services outside India in connection with the development or production of computer software, he shall be allowed a deduction in computation of his total income of the profits derived by him in respect of export of computer software on the condition that the consideration in respect of computer software is received or brought into India in convertible foreign exchange within a period of 6 months from the end of the previous year or such extended period as the Commissioner may allow in this behalf. Therefore, the business that is referred to in the aforesaid Section is business in computer

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software or providing technical services. The deduction is to the extent of the profits derived by an assessee from such business namely, computer software export business or technical services provided in connection therewith. Sub- Section (3) of Section 80HHE provides how the profits from such business is to be arrived at. The opening words of sub-Section (3) is of utmost importance. It reads as under:-

“(3) For the purposes of sub-section(1), profits derived from the business referred to in that sub-section shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.”

The word “export turnover” has been defined for the purpose of this Section which means the consideration in respect of computer software received or brought into in India by the assessee in convertible foreign exchange. Similarly the total turnover for the purposes of this Section has been defined as it shall not include the amounts mentioned therein which is also not included in

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the export turnover. The word “profits of the business” is also defined for the purpose of this Section and means the profits of the business as computed under the head profits and gains of business or profession and reduced by the factors mentioned therein. Sub-Section(5) of Section 80HHE makes it clear that where a deduction under the Section is claimed and allowed in respect of the profits of the business referred to in sub-Section (1) for any assessment year no deduction shall be allowed in respect of such profits under any other provision of this Act for the same or any other assessment year. Therefore these provisions have to be understood with reference to such business referred to in sub- Section(1). Therefore in computing the profits from export of computer software what has to be taken into consideration is only the profits from the business of computer software and export turnover which is to be divided by the total turnover of the business of computer software. The business of computer software may include export as well as domestic sales. Both have to be taken into consideration in arriving at the total turnover. There is no difficulty in so far as the

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export turnover is concerned. The only limitation is that the factors mentioned therein has to be excluded in arriving at export turnover. Then we have to look into the profits of the computer software business which may include profits from export as well as domestic sales. As sub- Section(1) is very clear that what is to be taken is the profits derived by the assessee from “such business”. The said business does not include the other business which the assessee may be carrying on. “Such business” specifically referred to the business dealt with under sub-Section(1) that is the business of computer software as well as business of technical services outside India. Even if the assessee is carrying on the business in other goods, for the purpose of computing the profits from export business determining the profits from computer software business the profits derived from other business have to be excluded. Therefore the formula prescribed in sub-Section(3) may be understood as under:- Profits from export of computer software = profits from computer software export

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business (inclusive of domestic profits of such business) X (Export turnover)

Total turnover (export and domestic turnover of such business of export of computer software)

When the Assessing Authority issued notice under Section 143(2) and took up the case for scrutiny assessment, the assessee in the said proceedings realized that various disallowances were contemplated by the Assessing Authority resulting in an enhancement to the gross total income. Therefore, for the first time in the said proceedings, the assessee put forward its claim on 15.03.2002 for the deduction under Section 80HHE supported by a certificate from a Chartered Accountant in the prescribed form with reference to the business of export of computer software eligible for deduction under Section 80HHE.”

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QUESTION No.33:

“33. Whether the Appellate Authorities were correct in holding that the foreign tax credit of Rs.17,75,35,671/- is an allowable deduction based on the conclusion arrived at by it in the case of loss from 10A units.”

76.

This substantial question of law does not arise for consideration because the Tribunal has set aside the finding of the Appellate Authority and has remanded the matter back to the Assessing Officer for proper determination and further action as per law and following the direction of the Tribunal given for the assessment years 1998-99 and 1999-2000. Therefore, we decline to answer the said question of law. QUESTION No.34:

“34. Whether the Tribunal was correct in holding that the order of the Appellate Commissioner remitting the controversy regarding un-availed MODAVT credit of Rs.2,03,71,738/- added to the closing stock which has been considered and decided by the Assessing Officer.

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77.

This question of law also does not arise for consideration at this point of time because the First Appellate Authority has remanded the matter back to the Assessing Officer and therefore, the Tribunal declined to interfere with the said finding. We do not see any justification to interfere with such an order passed by the Tribunal, as the matter is yet to be decided by the Assessing Authority. Accordingly, we decline to answer the said substantial question of law.

Sd/- JUDGE

Sd/- JUDGE

Dh/Ckl/Ksp/KNM/-