ASSISTANT COMMISSIONER OF INCOME-TAX vs. SMT. SUNITA AJAY RAMNATHKAR,, MUMBAI

The cross appeals of related assessee on similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.322/PUN/2014, relating to assessment year 2010-11 has raised the following grounds of appeal:- 1. The CIT(A) erred in confirming the disallowance of short term capital loss of Rs.15,08,10,000 arising on the sale of shares of Vadivarhe Specialty Chemicals Ltd. 2. The CIT(A) erred in confirming the disallowance of long term capital loss of Rs.1,93,16,031 arising on the sale of shares of Pentagon Manufacturing and Marketing Ltd. 3. The CIT(A) erred in holding that the transactions of subscription to the shares of Vadivarhe Speciality Chemicals Ltd.@ a premium of Rs.9,900 per share and sale of 16,500 shares @ Rs.860 per share by the appellant were :- (i) not genuine and, (ii) had no business purpose and, (iii) were undertaken with the sole purpose of avoiding tax. 4. The CIT(A) erred in holding that the transaction of sale of the shares of Pentagon Manufacturing and Marketing Ltd. @ Re. 1 per share was not a genuine business transaction. 5. The CIT(A) erred in : (a) holding that there was no basis for determining the sale price of the share of Pentagon Manufacturing and Marketing Ltd.@ Re.1 per share (b) determining the value of the said share at Rs.3.35 instead of Re.0.11 on 22.02.2010, the date of sale of the said shares.

The Revenue in ITA No.448/PUN/2014, relating to assessment year 2010-11 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition of Rs.5,34,47,817/- on account of loss claimed from sale of shares of Reliance Industries Ltd. 2. On the facts and in the circumstances of the case, the CIT(A) has erred in holding the transactions of purchase and sale of Reliance Industries shares by the assessee as tax planning within the four corners of law and subsequently permitting the same. 3. The order of the CIT(A) be vacated and that of the A.O. be restored. 4. The appellant prays for admission of an additional ground of appeal or additional evidences, if required to support his case.

First, we shall take up cross appeals in the case of Mr. Sunil Haripant Pophale.

Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income declaring total income of ₹ 85,29,72,540/-. The case of assessee was selected for scrutiny under CASS. The assessee was promoter, shareholder and Director of Fem Care Pharma Limited (in short ‘FEM’). During the year under consideration, the assessee had sold his shares to Dabur India Ltd. at a consideration of ₹ 800/- per share. The assessee had received consideration of ₹ 114.64 crores on the sale of Fem and had shown long term capital gains of ₹ 109.07 crores. The assessee did not claim any indexation for the computation of capital gains on the said transfer of shares and paid taxes @ 10%. Against this long term capital gains, the assessee had set off of short term capital loss of ₹ 20.51 crores and long term capital loss of ₹ 1,31,94,000/-. The assessee had also claimed exemption under section 54F of the Act at ₹ 6.91 crores. Besides that the assessee had shown other income of ₹ 4.50 crores and also salary from Fem and income from business. Further, the assessee had claimed exempt income of ₹ 2.79 crores under section 10 of the Act, which included dividend of ₹ 2.36 crores, PF of ₹ 29,66,102/- and gratuity and leave encashment. The long term capital gains sold on shares of FEM at ₹ 109.07 crores was accepted by the Assessing Officer as per his deliberations in the assessment order and he observed that since no indexation for cost of acquisition has been claimed, then the same had to be taxed @10%. The assessee then was asked to furnish details of short term capital loss and long term capital loss claimed against the aforesaid shares. The first transaction was sale of shares of Vadhivare Specialty Chemicals Ltd. and the assessee had claimed loss of ₹ 15.08 crores. The Assessing Officer noted that the assessee had floated this company on 23.02.2009 and he was holding 4,940 shares at the face value of ₹ 100/-. Subsequently, the assessee purchased 16,500 shares on 13.01.2010 again at

The CIT(A) was of the view that all the steps taken by assessee were for avoidance of tax, so the loss on sale of shares of Vadhivare Specialty Chemical Ltd. of ₹ 15.08 crores cannot be set off against capital gains on sale of shares of FEM at ₹ 109.07 crores. The CIT(A) upheld the order of Assessing Officer in this regard.

The assessee is in appeal against the order of CIT(A) and vide grounds of appeal No.1 and 3 has raised the issue of denial of set off of short term capital loss of ₹ 15.08 crores on sale of shares of Vadhivare Specialty Chemicals Ltd.

The learned Authorized Representative for the assessee has filed written submissions in this regard and has placed heavy reliance on the said submissions.

The learned Departmental Representative for the Revenue on the other hand, strongly pointed out that the assessee after entering into transaction of sale of shares of FEM to Dabur India Ltd., on which it earned huge profits had formed the concern Vadhivare Specialty Chemicals Ltd. and booked the losses. He heavily relied on the deliberations of Assessing Officer at pages 15 to 19 and on the order of CIT(A) in para 7 at page 20 of the appellate order.

We have heard the rival contentions and perused the record. The assessee had during the year under consideration earned capital gains on sale of shares of FEM and had shown capital gains of ₹ 109.07 crores. The said

Now, coming to the next issue raised vide grounds of appeal No.2 and 4 i.e. against non set off of long term capital loss of ₹ 1.93 crores on sale of Pentagon Manufacturing and Marketing Ltd. (in short ‘Pentagon’)

Brief facts relating to the issue are that the said company was incorporated on 30.01.1995 and the assessee was one of the promoters of the company holding 5,39,800 shares at face value of ₹ 10/- as on 01.04.2009. He was also holding 3,00,000 preference shares. The total holding of 8,39,800 shares i.e. Equity and Preference shares were sold on 22.02.2010 for ₹ 1/- per share to Manasi Pophale for consideration of ₹ 8,39,800/-, which resulted in long term capital loss of ₹ 1.93 crores (after indexation). The Assessing Officer show caused the assessee to explain the said transaction and why set off should be allowed against long term capital gains shown by the assessee. The assessee claimed it to be tax planning and not colourable device. The Assessing Officer noted that shareholding pattern of Pentagon in which the assessee held 5,39,800 equity shares and 3,00,000 preference shares. On verification of financial statements of Pentagon for financial years 2006-07 to 2008-09, the Assessing Officer found that the company had shown losses in the said financial years. However, the price of shares was to be decided on the basis of valuation of shares. In this case, the valuation of shares was to be worked out on the basis of net asset value method. Since the company had shown losses, price to earning ratio for valuation shares was not applicable. The Assessing Officer thus, on the basis of share capital value, Reserves & Surpluses and contingent liability worked out net current asset. As per the

The CIT(A) has upheld the order of Assessing Officer. The CIT(A) held that where the assessee was main promoter and Director of Pentagon having total shareholding of 8,39,800 and the total shareholding was sold to his daughter Manasi Pophale on 22.02.2010 for ₹ 1/- per share, he was of the view that transaction was entered in order to reduce his tax liability, wherein the shares were sold to his daughter @ ₹ 1/- per share as against face value of ₹ 100/- per share. The CIT(A) refers to premium of ₹ 9,900/- per share but that noting of the CIT(A) is incorrect. However, the CIT(A) does not accept the tax planning plea of assessee and held the transaction to be not genuine but the device to evade tax.

The assessee is in appeal against the said denial of set off of capital loss on sale of shares of Pentagon against long term capital gains arising on sale of shares of FEM.

The learned Authorized Representative for the assessee pointed out that the said company Pentagon was floated in 1995 and was dealing in the business of selling garments with bar code brand. The said company incurred losses. Our attention was drawn to the balance in Profit and Loss Account of the said concern, wherein it was pointed out that as against capital of the company at ₹ 1.40 crores, accumulated loss as per Profit and Loss Account of ₹ 2.18 crores. Thus, the entire capital was wiped away by losses incurred over the years. The Reserves & Surplus of ₹ 80 lakhs was out of share premium and were not out of profits of earlier years. The breakup value of shares as on 31.03.2010 was negligible and the details were given at page 124 of Paper

The learned Departmental Representative for the Revenue on the other hand pointed out that the Assessing Officer has worked out the value of said shares at ₹ 3.35 per share, whereas the assessee sold the shares @ 1/- per share.

The learned Authorized Representative for the assessee in reply pointed out that the Assessing Officer had adopted the figures on 01.04.2009. Reference was made to page 21 of the order of Assessing Officer. However, the assessee’s case is that it had sold the shares on 22.02.2010, then NAV has to be worked out as on 31.03.2010, wherein as against fund of ₹ 2.20 crores, there was loss of ₹ 2.18 crores. Hence, the net worth was Nil. However, as per computation of market value as on 31.03.2010, which is placed at page 124 of Paper Book in the case of Sunita A Ramnathkar, works out to ₹ 0.11 per share.

The learned Departmental Representative for the Revenue then referred to the case laws relied upon by the learned Authorized Representative for the assessee and stated that in none of the case laws relied upon by the learned Authorized Representative for the assessee, the transaction was with daughter. He relied on the ratio laid down by the Hon'ble Supreme Court in Mc Dowell & Co. Ltd. Vs. Commercial Tax Officer (1985) 154 ITR 148 (SC), CIT Vs. Durga Prasad More (1971) 82 ITR 540 (SC), Hon’ble High Court of Karnataka in CIT Vs. Wipro Ltd. (2014) 50 taxmann.com 421 (Kar), Hon’ble High Court of Delhi in CIT Vs. Abhinandan Investment Ltd. (2015) 63 taxmann.com 263 (Del) and Mumbai Bench of Tribunal in Bombay Oil Industries Ltd. Vs. DCIT (2002) 82 ITD 626 (Mum). He stressed that the transaction was a collusive transaction with daughter to evade payment of tax.

The learned Authorized Representative for the assessee in rejoinder pointed out that the shares were sold by assessee on 22.02.2010 @ ₹ 1/- per share were holding shares of Pentagon, held by the assessee from 1995. He stressed that there was no prohibition in law that if you sell the shares to daughter, then the loss cannot be claimed. Then, he rebutted the case laws relied upon by the learned Departmental Representative for the Revenue and stressed that the facts were entirely different and cannot be relied upon. He stressed that it was not a colourable device.

We have heard the rival contentions and perused the record. The assessee was one of the promoters of Pentagon, which was floated in 1995. The said company had incurred losses over the period of years. The perusal of Balance Sheet at pages 39 to 76 of Paper Book with special reference to page 70 reflects that capital of the company totaled to ₹ 1.40 crores; while the

The Hon'ble Supreme Court in K.P.Verghese Vs. ITO & Anr. (1981) 131 ITR 597 (SC) had held that for the purpose of section 48 of the Act, if the Revenue wants to tax higher consideration, firstly it has to prove that the assessee has actually received some consideration over and above that shown by him. As pointed out in the paras hereinabove, the Revenue has not brought on record any such evidence to prove that the assessee has received anything over and above ₹ 1/- from his daughter and in the absence of the same, the Assessing Officer is incorrect in taking NAV of the shares for the purpose of computing capital gains at ₹ 3.35 per share.

Now, coming to the next aspect of the issue whether even if it is held that the assessee has indulged in some tax planning i.e. sold shares held by it and the transaction being not doubted and thereafter claimed the set off of the capital loss against capital gains shown by the assessee on sale of another set of shares, then is it a case of tax planning or tax avoidance.

The Hon'ble Supreme Court in Union of India & Anr. Vs. Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC) held that citizen is free to carry on his business within four corners of law and mere tax planning without any motive to avoid taxes through colourable device is not frowned upon. The Apex Court further held that the principle laid down in Mc Dowell & Co. Ltd. Vs. Commercial Tax Officer (supra) relied upon by the learned Departmental Representative for the Revenue applies to an artificial transaction and not a real transaction.

In another celebrated decision, the Apex Court in CIT Vs. Walfort Share and Stock Brokers (P.) Ltd. (2010) 326 ITR 1 (SC) considering the case of a company, which had purchased the shares before dividend and received the dividend thereafter, which was tax free, and later on sold the shares ex- dividend and claimed capital loss on sale of shares, had held that even assuming that the company had made use of provisions of section 10(33) of the Act, such use could not be said to be abuse of law. It further held that even assuming that the transaction was pre-planned, there was nothing to impeach the genuineness of the transaction and hence, capital loss on sale of shares was allowed in the hands of assessee.

The Hon’ble High Court of Karnataka in Bhoruka Engineering India Ltd. Vs. DCIT (2013) 356 ITR 25 (Kar) had also held that where the arrangement, if any, made by assessee does not contravene any statutory provisions and is achieved within four corners of law but the same is entered into as part of tax planning, then no fault can be found with such a transaction.

The Hon’ble High Court of Punjab & Haryana in Porrits & Spencer (Asia) Ltd. Vs. CIT (2010) 329 ITR 222 (P&H) has laid down similar proposition and

Applying the said principles to the facts of present case, we thus, find no merit in the stand of Assessing Officer that the transaction of booking loss by selling shares by the assessee to his daughter is colourable device, cannot be accepted. Once the transaction has been entered into within four corners of law and the transaction has not been doubted; where the shares which were held by assessee for long period were sold at a price which was more than NAV value of shares as on date of sale of shares, then it may be case of tax planning within four corners of law and the same cannot be brushed aside. Merely because the transaction was pre-planned by the assessee would not affect the genuineness of transaction, where the transaction has been undertaken by the assessee within framework of law.

The Hon’ble High Court of Calcutta in CIT Vs. Oberoi Hotels (P) Ltd. (2011) 334 ITR 293 (Cal) had considered the similar proposition. In the facts before the Hon’ble High Court, the assessee purchased the shares of the company SKB in 1991 and later on, also subscribed to the additional shares at a hefty premium of ₹ 1800/- per share of ₹ 100/- face value. However, immediately thereafter, the assessee sold his shares at the price of ₹ 18,33,752/- as against the cost of ₹ 8,78,11,500/-. Thus, it booked the short term capital loss of ₹ 8,59,77,725/-. The said loss was allowed on the ground that the transaction was genuine. The Assessing Officer had disallowed the claim holding it to be a colourable transaction on the ground that the company could have invested further amount or waited for a reasonable period for the business to grow. The contention of Assessing Officer was rejected and the loss was allowed in the hands of assessee.

Another reason why the said loss was disallowed in the hands of assessee was that shares were sold by the assessee to his daughter. In this regard, we find support from the ratio laid down by Delhi Bench of Tribunal in Raghvendra Singh Vs. Inspecting Assistant Commissioner (1991) 39 ITD 463 (Delhi Trib.). In the facts of said case, the shares were sold by the said assessee to his daughter at loss. The legal form of transaction was accepted but the Assessing Officer did not allow the set off of loss on the ground that it was device to evade tax. The Tribunal allowed the claim of assessee especially when the legal form of transaction was accepted and there was no evidence to hold that the transfer was not legally effected.

The learned Departmental Representative for the Revenue had placed reliance on various decisions which are factually different and the said ratio are not applicable to the facts of present case, especially in view of the dictate of the Apex Court and the ratio laid down by the Hon’ble High Court of Calcutta in CIT Vs. Oberoi Hotels (P) Ltd. (supra) on identical issues. We thus, allow the claim of assessee.

Applying the ratio laid down by the Hon’ble High Court of Punjab & Haryana in Porrits & Spencer (Asia) Ltd. Vs. CIT (supra), wherein it has been held that once the transaction is genuine and merely it has been entered into with a motive to save tax, it would not become a colourable device and consequently, earn any disqualification. We direct the Assessing Officer to allow the claim of assessee and set off of loss on sale of shares of Pentagon against gains arising on sale of shares of FEM. The grounds of appeal No.2 and 4 raised by assessee are thus, allowed. The grounds of appeal raised by assessee are thus, partly allowed.

Now, coming to the appeal filed by Revenue which is against the order of CIT(A) in allowing the loss claimed on sale of shares of Reliance Industries Ltd.

The Assessing Officer had denied the said loss of ₹ 5.34 crores in the hands of assessee on the ground that the assessee had sold original shares immediately after acquisition of bonus shares. In the facts relating to the issue, the assessee had purchased 45,000 shares of Reliance Industries Ltd. on 10.08.2009 @ 2,201/- per share. Subsequently, bonus shares were issued by the said company i.e. one bonus share per original share. Immediately, after acquisition of bonus shares, original shares of 45,000 have been sold by the assessee on 27.11.2009 @ ₹ 1,013/- per share. The assessee had declared loss of ₹ 5.34 crores. The Assessing Officer was of the view that this was colourable device in order to book losses against gain arising from the sale of shares of FEM.

The CIT(A) allowed the plea of assessee holding the transaction to be genuine and legitimate tax planning within framework of law, since the shares of Reliance Industries Ltd. were quoted shares.

The Revenue is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee before us has pointed out that the issue stands covered by the ratio laid down by the Hon’ble Bombay High Court in Pr. CIT Vs. Adar Cyrus Poonawalla in Income Tax Appeal (IT) No.226 of 2016, judgment dated 19.11.2018, which has upheld the decision of the Pune Bench of Tribunal in Adar Poonawalla Vs. Addl.CIT in ITA

In the case before the Tribunal in Adar Poonawalla Vs. Addl.CIT (supra), facts were similar. The assessee therein had purchased shares of HCL Technologies Ltd. and after announcement of bonus shares of one share for every one share held on 16.03.2007, the assessee sold the original shares which resulted into loss of ₹ 15.01 crores. The claim of assessee of short term capital loss was denied by the authorities below on the ground that it was for avoidance of tax liability. The Tribunal applying the principle laid down by the Hon'ble Supreme Court in CIT Vs. Walfort Share and Stock Brokers (P.) Ltd. (supra) had held the said transaction to be genuine and allowed capital loss. The Hon’ble Bombay High Court while deciding appeal of Revenue held that Surely, the Revenue cannot object to the legitimate tax planning. Legitimately, if the assessee had claimed set off of loss against the gain in sale of shares, the Revenue cannot frown upon the same simply by pointing out that in the process, the assessee reduced his tax liability.

Applying the said principle to the facts of present case, wherein the facts of assessee are similar to the facts before the Hon’ble Bombay High Court in Pr. CIT Vs. Adar Cyrus Poonawalla (supra), we hold that the sale of shares of Reliance Industries Ltd. by the assessee after the announcement of bonus issue at the market price which is available on the stock market and where the transaction has not been doubted, there is no merit in not allowing set off of capital loss on the ground that it was colourable device to evade payment of taxes.

Now, coming to the appeal filed by assessee in the case of Sunita A. Ramnathkar, wherein following grounds of appeal have been raised:- 1. The CIT(A) erred in confirming the disallowance of set off of the long term capital loss of Rs.1,28,70,103/- arising on the sale of shares of Pentagon Manufacturing and Marketing Ltd. (‘PMML’) against the long term capital gain from sale of shares of FEM Care Pharma Ltd. 2. The CIT(A) erred in holding that the sale of the shares of PMAML @ Re.1 per share by the Appellant to her daughter was not a genuine transaction but a device to avoid tax. 3. The CIT(A) erred in holding that: (a) The price of shares of PMML was manipulated by the appellant for the purpose of avoiding tax. (b) There was no basis for determining the sale price of the share of PMML @ Re.1 per share.

The issue arising in the present appeal is similar to the issue arising vide grounds of appeal No.2 and 4 in the case of Sunil Haripant Pophale i.e. against allowance of set off of long term capital loss of ₹ 1.28 crores arising on sale of shares of Pentagon. The said loss was allowed in the hands of Sunil Haripant Pophale to be set off against long term capital gains arising on sale of shares of FEM. Following the same parity of reasoning as discussed in the paras hereinabove, we allow the grounds of appeal raised by assessee.

The Revenue in the case of Sunita A. Ramnathkar vide ITA No.447/PUN/2014, relating to assessment year 2010-11 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition of Rs.90,71,917/- on account of loss claimed from sale of shares of Reliance Industries Ltd. 2. On the facts and in the circumstances of the case, the CIT(A) has erred in holding the transactions of purchase and sale of Reliance Industries shares by the assessee as tax planning within the four corners of law and subsequently permitting the same. 3. The order of the CIT(A) be vacated and that of the A.O. be restored. 4. The appellant prays for admission of an additional ground of appeal or additional evidences, if required to support his case.

The issue raised by the Revenue in cross appeal in the case of Sunita A. Ramnathkar is against order of CIT(A) in allowing set off of loss arising on sale of shares of Reliance Industries Ltd. We have already decided similar issue in the case of Mr. Sunil Haripant Pophale and following the same parity of reasoning, we dismiss the grounds of appeal raised by Revenue.

In the result, the appeal of assessee in ITA No.322/PUN/2014 is partly allowed, appeal of assessee in ITA No.301/PUN/2014 is allowed and both the appeals of Revenue are dismissed.