COMMISSIONER OF INCOME TAX vs. HINDUSTAN TIN WORKS LTD

IN THE HIGH COURT OF DELHI AT NEW DELHI ITA 55/2009 . COMMIISONER OF INCOME TAX, DELHI-IV ?.. Appellant Through: Mr R D Jolly, Advocate Versus . HINDUSTAN TIN WORKS LIMITED ?.. Respondent Through: Mr Prakash Kumar, Advocate . . CORAM HON?BLE MR JUSTICE VIKRAMAJIT SEN HON?BLE MR JUSTICE RAJIV SHAKDHER . 1. Whether the Reporters of local papers may be allowed to see the judgment ? No 2. To be referred to Reporters or not ? Yes 3. Whether the judgment should be reported Yes in the Digest ? . ORDER 13.02.2009 . 1. This is an appeal preferred by the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to in short as the ?Act?) against the judgment dated 07.12.2007 passed by the Income Tax Appellate Tribunal (hereinafter referred to in short as the ?Tribunal?) in ITA No. 1101/Del/05 pertaining to assessment year 2001-02. 1.1 In this appeal, the Revenue has essentially raised two issues. The first issue being that the ITAT misdirected itself in law in deleting the disallowance of a loss of Rs 19,67,450/- claimed by the assessee on account of purchase and redemption of units of Kothari Pioneer Mutual Fund, Mumbai (hereinafter referred to in short as the ?mutual fund?). The second issue pertains to the rejection of the plea of the Revenue for permitting it to canvass submissions with reference to Section 14A of the Act. 2. At this stage, we may also point out that in the impugned judgment of the Tribunal there is a reference to a submission made on behalf of the Revenue to the effect that the loss of Rs 19,67,450/- claimed by the assessee could not have been allowed in view of the provisions of Section 71(3) of the Act which prohibits the set off of loss against income of the assessee under a head other than ?capital gains?. We may point out that the Tribunal has noted that the Assessing Officer has himself treated the loss as ?business loss? and, therefore, there was no question of applying the provisions of Section 71(3) of the Act. Perhaps advisedly the Revenue has neither raised it as a ground before us nor has the same been urged by the learned counsel for the Revenue Mr R D Jolly before us. 3. Coming back to the two issues referred to hereinabove, the learned counsel for the Revenue Mr R D Jolly has contended that both the Commissioner of Income Tax (Appeals) [(hereinafter referred to in short as the ?CIT(A)?] and the Tribunal have misdirected themselves in law in view of the fact that in so far as the first issue is concerned, the said authorities overlooked the fact that . . the Assessing Officer had, based on documents placed before it, come to a conclusion that the entire transaction between the assessee and the mutual fund was a ?collusive arrangement? to purchase a loss of Rs 19,67,450/- and that the said mutual fund had provided an ?accommodation entry? so as to enable the assessee to claim a loss. He further contended that the transaction did not involve physical delivery of units. He submitted that it was really a case of ?dividend stripping? whereby an assessee avoids tax by purchasing units at a cum-dividend price and sells the same immediately thereafter at ex-dividend price to purchase an artificial loss. The transaction, according to the learned counsel, is really entered into for the purposes of tax avoidance. In support of these submissions, the learned counsel for the Revenue has relied upon the order of the Assessing Officer. 4. In order to dispose of the appeal and the issues raised therein, the following facts require to the noted:- 5. The assessee is engaged in the business of manufacturing of tin/metal containers/components required for packing of different commodities like Ghee, Coffee, Baby Food, Processed Food, etc. On 31.10.2001, the assessee had filed a return declaring an income of Rs 1,74,32,909/-. The assessee?s case was picked up for scrutiny. Accordingly, notices under Section 143(2) and 142(1) of the Act were issued. The Assessing Officer after examining the response to queries raised by him assessed the assessee?s total income at Rs 1,94,65,360/-. In doing so, the Assessing Officer made several disallowances. We are in the appeal concerned with the disallowance with respect to loss incurred on account of purchase and subsequent redemption of units of the afore-mentioned mutual fund amounting to Rs 19,67,450/-. 6. In arriving at the conclusion that the transaction was ?collusive? and really in the nature of an ?accommodation entry? provided by the mutual fund to the assessee, and hence the loss was not allowable; the Assessing Officer took into account the following apparent discrepancies:- i) the units worth Rs 1 crore which the assessee had purchased as indicated in the statement of the mutual fund dated 09.03.2001 evidently were not purchased on the said date as the bank statement produced by the assessee indicated that the cheque for the units got cleared on 12.03.2001. Therefore, he concluded that the purchase of the aforesaid units was made on 12.03.2001; ii) the mutual fund seemed to have paid dividend to the assessee in the sum of Rs 15,65,762/- on 12.03.2001. But the books of account of the assessee showed the same as having been credited on 15.03.2001 while the mutual fund as per its statement had re-invested the same on 12.03.2001. There was no cheque of equivalent amount on record which the assessee ought to have in the normal circumstances issued to the mutual fund; iii) on 12.03.2001 initially purchased units and those purchased out of the dividend income were redeemed at a value of Rs 95,98,312/-. The bank statement furnished by the assessee did not indicate as to when out of the redeemed amount a cheque of Rs 80,32,550.46/- which was received from the mutual fund was deposited by the assessee with the bank. 7. The assessee being aggrieved by the reasoning adopted by the Assessing Officer which, according to him, was contrary to facts, preferred an appeal to the CIT(A). The CIT(A) examined the reply of the assessee in detail with respect to the apparent discrepancies pointed out by the Assessing Officer in his assessment order. After examining the plea of the assessee, the CIT(A) in Paragraphs 4.2 to 4.6 of his judgment unraveled the discrepancies by taking note of the following facts:- i) the assessee had recorded the purchase of the units worth Rs 1 crore on 09.03.2001. An application alongwith a cheque dated 09.03.2001 drawn on Punjab National Bank, Mumbai was deposited with the mutual fund on 09.03.2001 at 2:45 pm. It is important to note that in the application the assessee had opted for ?dividend plan and re-investment payout?. The date of 12.03.2001 cropped up as . . the mutual fund encashed the cheque on the said date. The statement of the mutual fund dated 11.03.2001 showed that the assessee was allotted 6,95,894.224 units on 09.03.2001 at the rate of Rs 14.37 per unit. ii) The mutual fund?s statement dated 13.03.2001 indicated that the assessee had received dividend of Rs 15,65,762/- on 12.03.2001 which, as per the re-investment plan opted by the assessee was re-invested in units. Accordingly, the assessee was issued additional units numbering 1,34,631.298 at Net Asset Value (NAV) of Rs 11.63 per unit. Resultantly, the assessee on 12.03.2001 held a total number of 8,30,525.222 units. As per the mutual fund?s statement dated 14.03.2001 the assessee redeemed 6,95,894.224 units at NAV of Rs 11.54 per unit and similarly, 1,34,631.298 units at NAV of Rs 11.63 per unit. Consequently, the assessee received a total amount of Rs 95,98,312.46. iii) The assessee received the redeemed amount by way of a cheque in the sum of Rs 80,32,550.46/- drawn on ABN Amro Bank and a sum of Rs 15,65,762/- by another cheque drawn on ABN-Amro N.V. These cheques had been deposited in the Punjab National bank. In so far as the first cheque was concerned, the CIT(A) observed in his order that even though the date of realisation was not given in the bank statement since the bank statement was for a period from 14.03.2001 to 16.03.2001 it may have been credited either on 15.03.2001 or 16.03.2001. The second cheque, however, was found credited in the bank statement of Punjab National Bank, Mumbai branch on 15.03.2001. 7.1 Based on the aforesaid findings, the CIT(A) came to the conclusion that the transaction was genuine. The CIT(A) also rejected the submission of the Revenue with regard to the aspect of ?dividend stripping? on the ground that sub-section (7) of Section 94 of the Act was not attracted in respect of the assessment year as the said provision was brought on the statute book by virtue of the Finance Act, 2001 w.e.f. 01.04.2002. 8. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal to the Tribunal. The Tribunal sustained the view taken by the CIT(A). The Tribunal after examining the order of the CIT(A), as well as, the Assessing Officer came to the conclusion that nothing had been brought to its notice to controvert the findings of the CIT(A). The Tribunal concluded that the loss was genuine and hence, had to be allowed. The Tribunal concluded that based on the evidence which was placed on record by the assessee and examined by the CIT(A) it could not be held that the transactions were not real but were make-believe. It observed that there was a real and genuine flow of funds between the assessee and the mutual fund. The Tribunal also rejected the submission of the Revenue that the entire transaction was entered by the assessee with the mutual fund to purchase a loss and to avoid tax. The Tribunal said that the transaction between the assessee and the mutual fund was real and having been carried out at arms length could not be deemed as a collusive arrangement and, therefore, loss which had arisen ought to be treated as a genuine loss. The Tribunal relying upon the judgments of the Delhi High Court in the case of CIT vs Vimgi Investment (Pvt.) Ltd: (2007) 290 ITR 505 and CIT vs Vikram Aditya and Associates (Pvt.) Ltd: (2006) 287 ITR 268 rejected the argument based on Section 94(7) of the Act. 9. The Tribunal on the second issue rejected the plea of the Revenue that they should be allowed to raise an issue pertaining to Section 14A of the Act on the ground that this could only be done if there were facts on record on the basis of which the provisions of Section 14A of the Act could be invoked. That not being the situation allowing the additional ground would result in authorizing a fresh investigation into the matter by the CIT(A) which was not permissible. Aggrieved by the impugned judgment, the present appeal was preferred before us. 10. In our view, in so far as the first issue with regard to allowability of loss incurred by the assessee on account of the impugned transaction involving the purchase and thereafter redemption of the units of the mutual fund . . is concerned, the same does not involve any infraction as contended by the Revenue. Both the CIT(A), as well as, the Tribunal have examined the transactions in respect of the said issue in detail. Briefly, the analysis of the transaction revealed that the assessee had purchased a certain number of units by making an application to the mutual fund on 09.03.2001. The said units were purchased at a price of Rs 14.37 per unit. The number of units purchased were 6,95,894.224. The total purchase value was Rs 1 crores. This was reflected in the mutual funds statement dated 11.03.2001. It has also come on record that even though the assessee had made an application accompanied by a cheque on 09.03.2001 the mutual fund encashed the cheque on 12.03.2001. There was thus no discrepancy with regard to the date of purchase of units. It has also come on record that on 12.03.2001 the assessee had received dividend on the said units amounting to Rs 15,65,762/- as per the option given by the assessee while making the application for purchase of units. The said dividend was re-invested to purchase more units. Accordingly, the mutual fund allotted additional units numbering 1,34,631.298 at a value of Rs 11.63 per unit. This, as per the record, is reflected in the statement of the mutual fund dated 13.03.2001. On 14.03.2001 the assessee redeemed both, the units purchased originally and those obtained out of re-investment of dividend. The assessee on redemption received a sum of Rs 95,98,312.46/-. The mutual fund in respect of the redeemed units issued two cheques in the sum of Rs 80,32,550.46/- and Rs 15,65,762/-. Both these cheques were drawn on ABN Amro Bank and were dated 14.03.2001. It has also come on record that the assessee had deposited both these cheques with Punjab National Bank. The second cheque was found credited in the statement of Punjab National Bank, Mumbai branch on 15.03.2001 whereas in case of the first cheque since the statement of Punjab National Bank, Mohan Nagar Ghaziabad branch was available from 14.03.2001 to 16.03.2001 it was taken that it was credited on 15/16.03.2001. 10.1 In view of these findings of fact, it cannot be said that the transaction between the assessee and the mutual fund was a sham and that there was no purchase and subsequent redemption of the units in issue. We, therefore, do not find any fault with the findings of fact returned by both the CIT(A), as well as, the Tribunal that the arrangement was not collusive or that the mutual fund had not provided accommodation entries to the assessee to purchase a loss. It is not disputed that the mutual fund has an approval from the Securities Exchange Board of India (SEBI). Furthermore, nothing has been brought on record to show that the transaction between the assessee and the mutual fund was not an arms length transaction. 11. As regards the submission of the Revenue that the loss incurred by the assessee had to be disallowed as it was in the nature of a ?dividend stripping? transaction which was undertaken only to avoid payment of tax, in our view, both the Tribunal and the CIT(A) have rightly come to the conclusion that at the relevant time there was no provision under the Act which could be invoked to disallow a loss of the nature incurred by the assessee. As correctly held by the Tribunal the provisions of Section 94(7) of the Act were inserted in the Act w.e.f. 01.04.2002 and hence, would impact, if at all, transactions undertaken in assessment year 2002-03. The assessment year which is under consideration in the present appeal is assessment year 2001-02. A Division Bench of this Court, as correctly noted by the Tribunal, in Vimgi Investment (supra) and Vikram Aditya and Associates (supra) has sustained such transactions which were undertaken prior to insertion of Section 94(7) in the Act. On this count too, we find no fault with the decision of the Tribunal. 12. As regards the second issue, that is, the rejection of the Revenue?s plea in so far as the Tribunal did not permit the Revenue to take up an additional ground pertaining to Section 14A of the Act, it is our view that the Tribunal has put the matter in the correct perspective while rejecting the plea of the Revenue. It is noticed upon perusal of both the assessment order as well . . as the order of the CIT(A) that no such plea was taken before the two authorities. A perusal of the two orders would also show that there is no material on record based on which the provisions of Section 14A of the Act could be invoked. Section 14A provides that for the purposes of computation of total income of an assessee under Chapter IV of the Act no deduction is to be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. There is no whisper of any expenditure either in the assessment order or in the order of the CIT(A) with respect to expenditure which the assessee incurred for earning income i.e., dividends from units which are admittedly exempted under Section 10(33) of the Act. Nothing has also been indicated in the appeal which would lead us to believe that there was material which could have been looked into had the Tribunal permitted the Revenue to take up the said additional ground pertaining to Section 14A of the Act. Therefore, in our view, the Tribunal rightly rejected the plea. 13. In order to buttress his submission on this aspect of the matter, the learned counsel for the Revenue referred to the judgment of the Supreme Court in National Thermal Power Co Ltd vs CIT: (1998) 229 ITR 383. It is the submission of the learned counsel that the Tribunal has vast powers to entertain an additional ground even though the same was not raised before the authorities below. While we do not disagree with this broad proposition the necessary caveat is found in the very judgment of the Supreme Court i.e National Thermal Power (supra) wherein the Supreme Court has clearly observed that this power can be exercised so long as there is material on record. As observed by us above, there is not even an averment in the appeal filed before us that there is any such material on record of the Assessing Officer. In these circumstances, we are inclined to agree with the reasoning of the Tribunal. 14. In view of our discussion above, we are of the opinion that the findings returned by the Tribunal as well as the CIT(A) are pure findings of fact which do not call for our interference. No question of law much less a substantial question of law has arisen for our consideration. In the result, the appeal is dismissed. . VIKRAMAJIT SEN, J. . . . RAJIV SHAKDHER, J. February 13, 2009 mb ITA 55/2009 Page 12 of 12 . . . . .