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Assessee by : Shri Satyen Sethi, Adv.; Department by : Shri Anil Kumar Sharma, Sr. D.R.; Date of Hearing : 03.05.2017 Date of Pronouncement : 14.07.2017 O R D E R. PER I. C. SUDHIR, J. M. :
The Revenue has questioned first appellate order in both the assessment years on the following common grounds :-
“ 1. The ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in deleting additions of Rs.4,32,66,830/- (for assessment year 1996-97) /
2 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
Rs.3,85,55,340/- (for assessment year 1997-98 on account of valuation of shares held as stock in trade for the reason that loss was bogus, sham and fictitious, ignoring that : a) The assessee company has purchased mainly the shares of the H.B. Group companies and booked the heavy losses due to over valuation; b) The shares of the group companies have remained with the H.B. Group only along with the funds as the transactions were made internally amongst the various group companies and funds have been among them; c) These transactions were not made through any stock exchange broker; d) Reliance is placed on the decision of Hon’ble Supreme Court in the case of Mc Dowell & Co. Ltd. Vs. CIT 154 ITR 148. ”
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
In the appeals preferred by the Revenue, the issue is regarding valuation of shares and genuineness of the claimed loss. It is second round of the matter before the Tribunal. The assessee company
3 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. incorporated on 23.08.1995 is a domestic company in which public are substantially interested. There are two Directors in the company holding share capital of the company in the ratio of 50% each. The total paid up share capital of the company was 200 equity shares of Rs.10/- each for Rs.2,000/- only. During the year the company had dealt in sale / purchase of shares. The income received was from dividend and interest. It declared loss on account of valuation of stock in trade at the close of the accounting year. The shares which were purchased at cost were valued at market price at the end resulting in loss as the market price had fallen.
The assessee filed its return of income declaring a loss of Rs.4,32,66,830/- in assessment year 1996-97 and Rs.3,85,55,340/- in assessment year 1997-98. The return was processed under section 143(1) at the returned income. Later on case was selected for scrutiny and assessment was framed under section 143(3) of the Act at an income of Rs.8,00,000/- in assessment year 1996-97 and at a loss of Rs.3,5802,524/- in assessment year 1997-98. The assessee went in first appeal before the ld. CIT (Appeals) and the ld. CIT (Appeals) in assessment year 1996-97 dismissed the appeal and in assessment year
4 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
1997-98 while dismissing the appeal enhanced its income by disallowing the entire loss claimed by the assessee to the tune of Rs.3,85,55,338/-. The assessee thereafter went in second appeal before the Tribunal and the Tribunal vide its order common dated 28.09.2007 set aside the issue pertaining to the valuation of closing stock on account of shares held by the assessee company to the file of the Assessing Officer with the direction to reexamine the entire issue with reference to the transactions involved in other group companies after affording a reasonable opportunity to the assessee of being heard.
The Assessing Officer in the assessment year 1996-97 held that the claim of loss of Rs.4,32,66,827/- was sham / bogus and it was a colorable device. In other words, the Assessing Officer disallowed the claimed loss in its entirety. Similarly in assessment year 1997-98 the Assessing Officer framed the assessment at the income of Rs.27,52,814/- as against returned loss of Rs.3,85,55,340/-. The Assessing Officer disallowed loss of Rs.3,85,55,340/- on account of valuation of shares held as stock-in-trade, for the reason that loss was bogus, sham and fictitious. The assessee went in first appeal and the ld. CIT (Appeals) in the appeal has deleted the addition of Rs.4,33,66,830/- in assessment
5 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. year 1996-97 and Rs.3,85,55,340/- in assessment year 1997-98 made on account of valuation of shares held as stock in trade and claimed as loss. This action of the ld. CIT (Appeals) has been questioned in the appeals preferred by the Revenue for these two assessment years.
In support of the grounds, the ld. Sr. DR has basically placed reliance on the assessment orders for the assessment years under consideration. He contended that assessee had purchased the shares of H.B. Group companies mainly and had booked the heavy losses due to over valuation. The shares of the group companies remained with the H.B. Group only along with the funds as the transactions were made internally amongst the various group companies and funds were among them. He pointed out that the transactions were not made through any stock exchange broker. Thus, the ld. CIT (Appeals) was not justified in deleting the addition without appreciating the above stated facts. He failed to appreciate that it was colorable device of the assessee to declare the claimed loss. The ld. Sr. DR referred contents of the assessment order with the conclusion of the Assessing Officer that the assessee had simply once again filed copies of all those documents which it had filed
6 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. before the Assessing Officer during the course of original assessment proceedings.
The ld. AR, on the other hand, submitted that the Assessing Officer had not complied with the directions of the Tribunal while making the assessment afresh and has simply copied the original assessment orders which were subject matter of the appellate authorities. The ld. AR reiterated submissions made before the authorities below. He referred the order dated 28.09.2007 of the Tribunal setting aside the issue pertaining to the valuation of closing stock on account of shares held by the assessee company to the file of the Assessing Officer with direction to reexamine the entire issue with reference to the transactions involved in other group companies.
7.1 The ld. AR submitted that there was a search and seizure action under section 132(1) in August, 1997 in respect of various assessees of H.B. Group of companies, its Directors and other Individuals, investment companies and satellite company plotted by the group etc. The assessee company is one of the satellite companies plotted by the main company of the H.B. Group. The block search assessments covered by the search for the block period are separately
7 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. pending in respect of all the assessees including the assessee company. The assessments under consideration have been made on the disclosed income on the basis of returns of income filed by the assessee for the assessment years 1996-97 and 1997-98. In the assessment year 1996-97 the assessee had paid up capital of only Rs.2,000/- i.e. 200 shares of Rs.10/- each, but it had purchased shares worth Rs.14,40,66,545/- and effected sales of shares worth Rs.5,52,37,675/- which resulted into a loss of Rs.4,32,69,347/-, which was a loss due to valuation of stock at market value at the end of the year whereas the cost price was more.
7.2 The ld. AR submitted that the assessee is engaged in the business of sale and purchase of shares and securities. In the assessment year 1997-98 the assessee has received various advances, the net credit balance of which came to Rs.12,23,82,952/-. The assessment was completed by the Assessing Officer on a loss of Rs.3,58,02,524/- as against returned loss of Rs.3,85,55,338/-.
7.3 Against the appeal for the assessment year 1996-97 the ld. AR made following written synopsis :-
8 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
“ 13. Explanation on facts (i) It is correct that paid up capital was 2000 and shares worth 14.40 crores were purchased and shares worth 5.52 crores were sold. (ii) It is also correct that assessee received huge advances and majority of companies from whom advances were received were group companies. Details of the advances received with confirmations and advances given were filed with the Assessing Officer. It is not the case of the department / Assessing Officer that - • parties did not exist. There is no allegation to this effect. • parties from whom advances were received and the parties to whom advances were given were assessed to tax. fund flow chart filed in response to query raised on12.12.2008 was • incorrect or otherwise improper.
Details of the advances received and advances given with confirmations are at page 26 to 42 of the paper book.
(iii) During the year assessee purchased shares of following companies :- “ Sl. No. Name of the company. No. of shares Purchase price (i) HB Portfolio Leasing Ltd. 734200 & 4,64,71,600 9 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. 908700 (Deb) 5,52,24,472 (ii) Hot Line Glass Ltd. 1000 11,200 (iii) Indo Gulf Industries Ltd. 2350 84,269 (iv) Hot Line Teletube Ltd. 14000 5,57,700 (v) RRB Securities Ltd. 64100 1,09,51,800 (vi) HB Leasing & Finance Co. Ltd. 502480 1,72,78,388 (vii) Nova Electro Magnet Ltd. 418600 1,73,07,312 “
Out of seven (7) companies, whose shares / debentures were purchased by the Appellant, as many as four (4) companies did not belong to HB group. It needs to be emphasized here that all the aforesaid shares were transferred in the name of the Appellant before the expiry of relevant previous year. Shares of HB Portfolio Leasing Ltd were transferred on 23.3.1996 and that of Hot Line Teletube Ltd. on 2.1.1996 and that of RLE] Securities Ltd on 18.12.1996 and that of HB Leasing & Finance Co. Ltd on 12.2.1996 and that of Nova Electro Magnet Ltd on 26.3.1996. In other words, delivery of the shares purchased was actually taken.
(iv) Out of aforesaid purchase, assessee sold following shares / debentures :-
10 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
“ Sl. No. Name of the company. No. of shares Sale price (i) HB Portfolio Leasing Ltd. 908700 (Deb) 5,52,24,472 (ii) RRB Securities Ltd. 31250 38,33,400 (iii) Nova Electro Magnet Ltd. 418600 1,73,07,312 “ (v) Transaction of purchase and sale of shares cannot be doubted merely because the transactions between the parties have taken place directly and not through the stock exchange / stock brokers. CBDT in its Circular No. 704 dated 28.04.1995 reported in 213 ITR (St) 7 has recognized that the shares can be purchased directly by the parties (pages 43 & 44 of the paper book). Details of purchase and sale of shares / debentures as also the chart of cost price of shares and their market value as on 31.3.1996 are at pages 45 to 48 of the paper book.
Appellant Company has been maintaining its accounts as mercantile system of accounting and the closing stock of shares was valued at well established principle of cost or market value, whichever is less. This factual position is evident from Tax Audit Report for the year ended March, 1996, wherein, tax auditor has stated that method of valuation of stock was cost of market value, whichever is less. It is not the stand of the department that method of valuation was not what was stated or that in subsequent years assessee changed its method of accounting. Loss of Rs.4,32,66,827/-, which is disputed before your honour had occurred because of fall in market value of shares.
11 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
Comparative analysis of cost and market value ot shares acquired during the year is evident from the following table :-
“Sl. Name of the company. Shares Cost Market value No. (i) HB Portfolio Leasing Ltd. 734200 4,64,71,600 1,98,23,400 (ii) Hotline Glass Ltd. 1000 11,200 12,250 (iii) Indo Gulf Industries Ltd. 2350 84,269 65,800 (iv) Hotline Teletube Ltd. 14,000 5,57,700 2,94,000 (v) RRB Securities Ltd. 32850 39,93,400 32,85,000 (vi) HB Leasing & Finance Co. 502480 1,72,78,388 80,39,680 Ltd. (vii) Nova Electro Magnet Ltd. 418300 1,72,94,109 72,15,675 (viii) Hotline Teletube Ltd. 14,000 5,57,700 2,94,000 (ix) Zero FCD RRB 31250 3,12,5000 3,12,5000 TOTAL : 8,88,28,869 4,18,60,805
Market value of shares was taken on the basis of market quotation because all the shares were quoted. Relevant quotations are at pages 49 to 53 of the paper book.
What is important is that only value of shares of the group companies were down but value of shares of other companies also went down. Loss on account of fall in market value was the result of fluctuations in share market. Therefore, it cannot be alleged that loss was managed.
15. The position that emerges from the facts set out above is that the shares were actually purchased and sold. Since transactions of purchase and sale of shares were not paper
12 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. transaction, therefore, the allegation that loss on account of fall in market value of closing stock of shares was sham / fictitious was baseless being not based on facts because market value in turn was based on share market quotations. Balance sheet of the Appellant as at 31.3.1996 is at pages 115 to121 of the paper book.
16. That in succeeding assessment years, value of closing stock was taken as opening stock and trading results were accordingly worked out. This fact is sufficiently sufficient to believe the inference that loss resulting in fall in market value was sham / fictitious. Since the transactions of purchase an i sale itself was not bogus I sham and purchase / sale price in the hands of the Appellant was sale / purchase price in the hands of other parly, therefore, neither any undue benefit has been drawn by the Appellant nor by other parties from whom the shares were purchased / sold. It important to note that in assessment year 1998-99, the Assessing Of has accepted trading results prepared on aforesaid basis. The assessment order for assessment year 1998-99 is at pages 54 & 55 of the paper book.
17 The fact that assessee has not drawn any benefit is evident from details oi carried forward losses, a copy of which is annexed herewith at page 56 of the paper book. From the details, your honour will appreciate that for assessment years 1999-2000, 2003-04, 2004-05, 2006-07, 2007-08 & 2008-09, returns of declaring income were filed. In fact, loss for assessment year
13 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
1996-97 was not carried forward in assessment year 2000-01 and that in any case, assessment year 2004-05 was the last year for carried forward of loss for assessment year 1996-97. Computation of income for assessment years 2003-04 to 2006-07 are at page 57 to 64 f the paper book. In the computation for the assessment year 2003-04. Appellant did not carry forward loss for assessment years 1996-97 & 1997-98;
In the identical case of HLA Trading and Agencies (P) Ltd, wherein, on absolutely identical reasons the loss was disallowed, this Hon’ble Tribunal vide order dated 18.11.2005 in allowing the ap; held that Assessing Officer was not justified in treating the assessee company as conduit or sham. It is important to note here that Assessing Officer referred to the aforesaid case in the assessment order. Order of ITAT in the case of HLA Trading and Agencies (P) Ltd is at pages 65 to 72 of the paper book.
The allegation that the group indulged in buy back of its own 19. shares through a number of satellite companies to provide impetus & buoyancy to share of H.B. Portfolio Leasing Ltd, so that its public issue could be over subscribed. The allegation is not only factually incorrect but is also without substance because public issue came on 19.12.1994, i.e. much before the assessment year in question, when the assessee company was not even existence. Prospectus issued by H.B. Portfolio Leasing Ltd at pages 73 ‘o 110 of the paper book.
14 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
Sum up 20.
Shares were actually purchased and they were transferred in (i) the name of the Appellant. Shares were actually sold and they were transferred in the (ii) name of the buyer. Shares were purchased and sold at the prevailing market rate. (iii) Market forces dictated market value of the shares as on the (iv) last date of the previous year. It was the result of these forces that value of not only shares of HB group but shares of other companies fell down drastically. In the succeeding years, closing valuation is taken as opening (v) valuation and trading results were accordingly drawn. Since trading results for the year ended 31.03.1998 have been accepted therefore, there is no reason to doubt or disallow loss on account of valuation for the year ended March, 1996. Department has not shown as to what undue benefit has (vi) been derived by the Appellant. In-fact, no benefit of loss of Rs.4,32,66,827/- has been drawn by the Appellant, inasmuch as. in succeeding years either there was loss or tax was paid under section 115JB and the loss remained unadjusted upto assessment year 2004-05, which was the last year of the carry forward of loss.
Alleged tax avoidance
Entire case of the department revolves around the case of McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). In the 15 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
present case, transaction was not a device to avoid tax because:
• It cannot be said that on the date assessee purchased a share it knew that market value will fall and it will incur loss.
• No tax has been avoided because no tax was payable.
• Legal effect of transaction cannot be ignored. Transactions cannot be ignored on the basis of alleged motive.
22 Hon’ble Supreme Court in UOI v. Azadi Bachao Andolan (2005) 263 ITR 706, had occasion to consider the issue of act of incorporation of “shell companies" by Foreign Institutional Investors under the Mauritius Act as a “sham” and “a device” actuated by improper motives. Considering this issue from the prospective of device, the Hon’ble Apex Court having considered the entire law on this issue, observed at page 762 that :-
“ If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the ‘real motive’ of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’-the-whip. ”
23. So what is relevant is the legal result and not the 16 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
hypothetical real motive In the present case, it cannot be the case of anybody that legal result of transactions undertaken by the Appellant has not resulted. Admittedly, the same have resulted. In such a case, real intention of the transaction cannot be said to be different from the legal result. The issue of real intention would come only where the legal results have not followed and therefore, the transactions are to be ignored. It is therefore, submitted that the whole case of the department that the loss was sham or fictitious had no basis.
In view of what has been put forth above, it is submitted that the claim of loss of Rs.4,32,66,827/- deserves to be allowed. ”
The ld. AR also referred page Nos. 26 to 110 of the paper book which are copies of details of advances received and given with confirmations; CBDT Circular No. 704 dated 28.04.1995 reported in 213 ITR (St.) 7; details of purchase and sale of shares with chart of cost price of shares and their market value as on 31.03.1996; market quotation of shares; assessment order for the assessment year 1997-98; chart of carried forward of losses; computation of income for the assessment years 2003-04 to 2006-07; order of the Tribunal in the case of HLA Trading and Agencies P. Ltd. and prospectus issued by H. B. Portfolio Leasing Ltd.
17 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
Against the appeal for assessment year 1997-98, the ld. AR has made following written synopsis :-
“ 14. Explanation on facts : (i) It is correct that paid up capital was 2000 but purchase and sale of shares worth crores of rupees were made. (ii) It is also correct that assessee received huge advances and majority of companies from whom advances were received were group companies. Details of the advances received with confirmations and advances given were filed with the Assessing Officer. It is not the case of the department / Assessing Officer that :-
parties did not exist. There is no allegation to this effect. parties from whom advances were received and the parties to whom advances were given were assessed to tax.
fund flow chart filed in response to query raised on 12.12.2008 was incorrect or otherwise improper. Details of the advances received and advances given with confirmations are at page 20 to 35 of the paper book.
(iii) During the year assessee purchased shares of following companies :-
18 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
“ Sl. No. Name of the company. No. of shares Purchase price (i) Indo Gulf Industries Ltd. 126350 2545897 (ii) HB Portfolio Leasing Ltd. 14500 602600 (iii) HB Leasing & Finance Co. Ltd. 3000 63000 (iv) Hot Line Teletube Ltd. 7100 148340 (v) Crompton Greaves Ltd. 125650 31013954 (vi) Tata Iron & Steel Co. Ltd. 5000 1187802 (vii) DCM Sriram Industries Ltd. 22250 688604 (viii) Hotline Glass Ltd. 1011200 9477864 Total 45728061 Out of eight (8) companies, whose shares / debentures were purchased by the Appellant, as many as six (6) companies did not belong to HB group. It is important to note here that out of total purchase of Rs.4,57,28,061/-, purchase of share of group companies was only Rs.6,65,600/- (6,02,600 + 63,000), which constitute less than 2% of the total purchase effected during the year. Further, it needs to be emphasized here that all the aforesaid shares were transferred in the name of the Appellant before the expiry of relevant previous year. In other words, delivery of the shares purchased was actually taken.
Out of aforesaid purchase, assessee sold following shares / (iv) debentures : -
19 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
S. No. Name of the company No. of shares Sale price (i) Indo Gulf Industries Ltd. 1050 21930 (ii) Hot Line Teletube Ltd. 150 4229 (iii) Crompton Greaves Ltd. 125000 15250000 (iv) DCM Sriram Industries Ltd. 3450 91305 (v) Hotline Glass Ltd. 4622930. 620800 (iv) Nova Electro Magnet Ltd. 900 5417
Transaction of purchase and sale of shares cannot be (v) doubted merely because the transactions between the parties have taken place directly and not through the stock exchange / stock brokers. CBDT in its Circular No. 704 dated 28.04.1995 reported in 213 ITR (St) 7 has recognized that the shares can be purchased directly by the parties. Details of purchase and sale of shares as also the chart of cost price of shares and their market value as on 31.3.1991 are at pages 36 to 40 of the paper book.
Appellant Company has been maintaining its accounts as mercantile system of accounting and the closing stock of shares was valued at well established principle of cost or market value, whichever is less. This factual position is evident from Tax Audit Report for the year ended March, 1997, wherein, tax auditor has stated that method of valuation of stock was cost of market value, whichever is less. It is not the stand of the department that method of valuation was not what was stated or that in 20 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
subsequent years, assessee changed its method of accounting. Loss of Rs.3,85,55,340/- which is disputed before your honour had occurred because of fall in market value of shares. Comparative analysis of cost and market value of shares is evident from the following table :-
S. No. Name of the company Shares Cost Market value (i) Nova Electro Magnet Ltd. 417400 17270079 2504400 748700 (ii) HB Portfolio Leasing Ltd. 47074200 11604850 (iii) Hotline Glass Ltd. 402500 3844592 2254000 (iv) RRB Securities Ltd. 64100 7118400 6410000 (v) Hot Line Teletube & 20950 701065 209500 Component Ltd. (Vi) Indo Gulf lndustries®Ltd. 127650 2592623 2106225 (vii) HB Leasing & Finance Co. Ltd. 505480 17341388 1895550 (viii) Crompton Greaves Ltd. 650 150267 ,58175 (ix) DCM Shriram Ind. Ltd. 18800 576688 451200 (x) Tata Iron & Steel Co. Ltd. 5000 1187803 802000 Total : 2311230 80587026 28295900 • Market value of shares was taken on the basis of market quotation because all the shares were quoted. Relevant quotations are at pages 41 to 47 of the paper book.
• What is important is that only value of shares of the group companies were down but value of shares of other companies also 21 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. went down. Loss on account of fall in market value was the result of fluctuations in share market. Therefore, it cannot be alleged that loss was managed. Balance sheet of the Appellant as at 31.3.1997 is at pages 92 to 97 of the paper book. Scrip wise loss on account of dealing in shares / valuation is at pages 98 to 102 of the paper book.
The position that emerges from the facts set out above is that the shares were actually purchased and sold. Since transactions of purchase and sale of shares were not paper transaction, therefore, the allegation that loss on account of fall in market value of closing stock of shares was sham / fictitious was baseless being not based on facts because market value in turn was based on share market quotations.
That in succeeding assessment years, value of closing stock was taken as opening stock and trading results were accordingly worked out. This fact is sufficiently sufficient to believe the inference that loss resulting in fall in market value was sham / fictitious. Since the transactions of purchase and sale itself was not bogus / sham and purchase / sale price in the hands of the Appellant was sale / purchase price in the hands of other party, therefore, neither any undue benefit has been drawn by the Appellant nor by other parties from whom the shares were purchased / sold. It is important to note that in assessment year 1998-99, the Assessing Officer has accepted trading results prepared on aforesaid basis.
22 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
The fact that assessee has not drawn any benefit is evident 18. from details of carried forward losses, a copy of which is annexed at page 56 of paper book for assessment year 1996-97. From the details, your honour will appreciate that for assessment years 1999-2000, 2003-04, 2004-05, 2006- 07, 2007-08 & 2008-09, returns of declaring income were filed. In fact, loss for assessment year 1997-98 was not carried forward in assessment year 2003-04 and that in any case, assessment year 2005-06 was the last year for carried forward of loss for assessment year 1997-98. In the computation for the assessment year 2003-04, Appellant did not carry forward loss for assessment years 1996-97 & 1997-98.
In the identical case of HLA Trading and Agencies (P) Ltd, 19. wherein, on absolutely identical reasons the loss was disallowed, this Hon’ble Tribunal vide order dated 18.11.2005 in allowing the appeal held that Assessing Officer was not justified in treating the assessee company as conduit or sham. It is important to note here that Assessing Officer referred to the aforesaid case in the assessment order.
The allegationthat the group indulged in buy back of its own shares through a number of satellite companies to provide impetus & buoyancy to share of H.B. Portfolio Leasing Ltd, so that its public is^ue could be over-subscribed. The allegation is not only factually incorrect but is also without substance because public issue came on 19.12.1994, i.e. much before the assessment year in question, when the assessee company was not even existence.
23 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
21 Sum up :
Shares were actually purchased and they were transferred in (i) the name of the Appellant.
Shares were actually sold and they were transferred in the (ii) name of the buyer.
Shares were purchased and sold at the prevailing market (iii) rate.
Market forces dictated market value of the shares as on (iv) the last date of the previous year. It was the result of these forces that value of not only shares of HB group but shares of other companies fell down drastically. This aspect assumes importance when seen in the context of the fact that during the relevant year, purchase of shares of HB group was less than 2% of total purchases made during the year.
In the succeeding years, closing valuation is taken as (v) opening valuation and trading results were accordingly drawn. Since trading results for the year ended 31.03.1998 have been accepted, therefore, there is no reason to doubt or disallow loss on account of valuation for the year ended March, 1997.
Department has not shown as to what undue benefit has (vi)
24 I.T. Appeal Nos. 1590 & 1905/Del/2011 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. Assessment Years : 1996 been derived by the Appellant. Infact, no benefit of loss of been derived by the Appellant. Infact, no benefit of loss of been derived by the Appellant. Infact, no benefit of loss of Rs.3,85,55,340/ Rs.3,85,55,340/- has has been been drawn drawn by by the the Appellant, Appellant, inasmuch as, in succeeding years either there was loss or inasmuch as, in succeeding years either there was loss or inasmuch as, in succeeding years either there was loss or tax was paid under section 115JB tax was paid under section 115JB and the loss remained and the loss remained unadjusted upto assessment year 2005 unadjusted upto assessment year 2005-06, which was the 06, which was the last year of the carry forward of loss. last year of the carry forward of loss. • Alleged tax avoidance Alleged tax avoidance
Entire case of the department revolves around the case Entire case of the department revolves around the case Entire case of the department revolves around the case of McDowell and Co. Ltd. v. CTO (1985) 154 IT McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). R 148 (SC). In the present case, transaction was not a device to avoid tax the present case, transaction was not a device to avoid tax the present case, transaction was not a device to avoid tax because:-
It cannot be said that on the date assessee purchased a It cannot be said that on the date assessee purchased a It cannot be said that on the date assessee purchased a share it knew that market value will fall and it will incur loss. knew that market value will fall and it will incur loss. knew that market value will fall and it will incur loss.
No tax has been avoided No tax has been avoided because no tax was payable. because no tax was payable.
Legal effect of transaction cannot be ignored. Transactions Legal effect of transaction cannot be ignored. Transactions Legal effect of transaction cannot be ignored. Transactions cannot be ignored on the basis of alleged motive. cannot be ignored on the basis of alleged motive.
Hon’ble Supreme Court in Hon’ble Supreme Court in UOI v. Azadi Bachao Andolan UOI v. Azadi Bachao Andolan (2005) 263 ITR 706, (2005) 263 ITR 706, had occasion to consider the issue of had occasion to consider the issue of act of incorporation of “shell companies" by Foreign Institutional of incorporation of “shell companies" by Foreign Institutional of incorporation of “shell companies" by Foreign Institutional Investors under the Mauritius Act as a “sham" and “a device” Investors under the Mauritius Act as a “sham" and “a device” Investors under the Mauritius Act as a “sham" and “a device” actuated by improper motives. Considering this issue from actuated by improper motives. Considering this issue from actuated by improper motives. Considering this issue from the prospective of device, the Hon'ble Apex Court having the prospective of device, the Hon'ble Apex Court having the prospective of device, the Hon'ble Apex Court having considered the entire law on this issue, observed at page considered the entire law on this issue, observed at page considered the entire law on this issue, observed at page
25 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
762 that :-
“ If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the real motive’ of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’-the-wisp. ”
So what is relevant is the legal result and not the hypothetical 24. real motive. In the present case, it cannot be the case of anybody that legal result of the transactions undertaken by the Appellant has not resulted. Admittedly, the same have resulted.'In such a case, real intention of the transaction cannot be said to be different from the legal result. The issue of real intention would come only where the legal results have not followed and therefore, the transactions are to be ignored. It is therefore, submitted that the whole case of the department that the loss was sham or fictitious had no basis.
In view of what has been put forth above, it is submitted that the claim of loss of Rs.3,85,55,340/- deserves to be allowed. ”
26 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
The ld. AR also referred to page Nos. 20 to 110 of the paper book which are copies of details of advances received and given with confirmations; details of purchase and sale of shares with chart of cost price of shares and their market value as on 31.03.1997; market quotation of shares; account of Mr. S.C. Khaneja with all the bills / contract notes issued by him; balance sheet of the assessee as on 31.03.1997; script wise loss on account of dealing in shares / valuation; written submission before the ld. CIT (Appeals) in original assessment; letter dated 7.07.1997 with details of advances received; and names and addresses of parties / brokers from whom shares were purchased / sold during the year.
11. Besides, the decisions cited above, the ld. AR placed reliance on the following decisions :-
ITO Vs. Smt. Aarti Mittal (2014) (i) 149 ITD 728 (Hyd. Trib.); (ii) Mridu Hari Dalmia Parivar Trust Vs. Assessing Officer (2016) 158 ITD 521 (Del.);
27 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
We have already discussed the facts of the case in the above paragraphs. It is second round of appeal before the Tribunal. On earlier occasion, the Tribunal vide its common order dated 28.09.2007 in & 2717/Del/2003 (assessment years 1996-97 and 1997-98) had set aside the matter vide para No. 8 (1996-97) and para No. 10 (1997-98) to the file of the Assessing Officer for fresh assessment on the issue. The relevant para Nos. 8 and 10 of the order of the Tribunal are being reproduced hereunder :-
“ 8. We have heard both the parties and perused the material available on record. On perusal of material we find that the Assessing Officer has not examined the real nature of transaction. The assessee had purchased shares of other companies which are not group companies of HB group. From assessment order, we also find that Assessing Officer had not given any finding as to how the shares of other companies were acquired directly and when all the shares were transferred in the name of assessee. The purpose for which advance were received. The assessee received shares application money of Rs.24,50,500/- and applied for allotment of shares by payment of share application money of Rs.66 lakhs. The real intention
28 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. of such transactions have not been investigated. Therefore, in our considered view, it will be fair and reasonable if the matter is set aside to the file of Assessing Officer with the directions that he should decide the entire issue with reference to the transactions involved in other group companies. The Assessing Officer will ascertain the nature of the transactions. He will afford a reasonable opportunity of being heard to the assessee. ”
10. In assessment year 1997-98, the ld. CIT (Appeals) had enhanced the assessment by disallowing the loss on account of shares. Since we have set aside the appeal for assessment year 1996-97, we feel it proper to set aside this issue also to the file of Assessing Officer with the similar direction.
The ld. CIT (Appeals) has discussed the issue in detail and has come to the following findings in the assessment year 1996-97 and followed the same in the assessment year 1997-98 :-
“ 9. I have considered the order of the ld. Assessing Officer and the submissions made by the ld. AR of the assessee. There is no doubt that the share capital of the assessee was only Rs.2,000/-. On this, a huge amount of transactions had taken place which were mainly financed from the funds of the 29 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. group companies. During the year, there is no doubt that the assessee had credited in the shares of the group companies, but apart from that had also engaged in trading of shares of other companies such as Hotline Glass Ltd., Indo-gulf Industries Ltd., Hotline Tele-tube Ltd., RRB Securities Ltd. and Nova Electro Magnetics Ltd. In such circumstances, it cannot be stated that only the shares of the group company was transacted and the loss generated. At Pages 49-53, the quotations of the shares in which transaction had taken place was also given as part of the Paper Book. There is no doubt that the transactions had taken place at the market price which had since suppressed. As such, as per the accounting policy the assessee was constrained to book the value of the investments at the cost or the market price whichever was lower. Considering the revealing documents that had been filed, it cannot be stated that the transactions engaged in by the assessee were sham and the issue of colourable device would come in.
10. It is important to mention here that while framing the impugned order, the ld. Assessing Officer has not examined the real nature of transactions. The purpose for which advances were received had only been commented upon, but the basic foundation had not been enquired. The real
30 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. intention had also not been investigated. In other words, the order of the Delhi Tribunal was not complied with.
There is no doubt that income tax is a levy on income. Here the ld. Assessing Officer has alleged that the apparent is not real. However, as held in CIT Vs. Daulatram Rawatmal (1973) 87 ITR 349 (SC). It is now settled law that the onus of proving that the apparent is not the real is on the party who claims it to be so. Here, the onus lay on the Revenue to prove the same as it was the Department which was emphasizing that the transactions and the consequent losses were sham. This allegation remains unproved.
12. In view of the discussion above, I see no reason how the addition can be sustained. The assessee deserves to succeed in Grounds of Appeal No. 3 and its parts. I may clarify, however, that this decision of mine will not prejudice the decision in the assessment and appellate proceedings pursuant to the search operation. They are independent proceedings. ”
14. Having gone through the orders of the authorities below, we find that in his order the ld. CIT (Appeals) has meet out the objections raised by the Assessing Officer while disallowing the loss
31 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. claimed by the assessee on account of valuation of shares held as stock in trade treating the same as sham and bogus. The objection of the Assessing Officer was that only the shares of group company was transacted and the loss generated. The ld. CIT (Appeals) has meet out this objection with this finding that during the year there was no doubt that assessee had credited in the shares of the group companies but apart from that the assessee had also engaged in trading of shares of other company, such as, Hotline Glass Ltd., Indo Gulf Industries Ltd., Hot Line Tele Tube Ltd., RRB Securities Ltd. and Nova Electro Magnetic Ltd. He has referred page Nos. 49 to 53 of the paper book i.e. the quotations of the shares in which transactions have taken place. The ld. CIT (Appeals) has noted further that there was no doubt that the transactions have taken place at the market price which has since suppressed. As such, as per the accounting policy the assessee was constrained to book the value of investments at the cost of the market price, whichever was lower. In absence of rebuttal of these material facts noted by the ld. CIT (Appeals), we do not find reason to interfere with the findings of the ld. CIT (Appeals) on the issue that the transaction engaged in by the assessee were sham and the issue of colourable device would
32 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98. come in. The ld. CIT (Appeals) has observed that while framing the impugned order the Assessing Officer has not examined real nature of the transactions. The purpose for which advances were received have only been commented upon, but the basic foundation had not been enquired. The real intention has also not been investigated and thus, order of the Tribunal was not complied with. Since the Revenue could not improve its case before the Tribunal by rebutting the above findings of the ld. CIT (Appeals), we are not inclined to interfere with the first appellate order. The same is upheld. The view taken by the ld. CIT (Appeals) is also supported by the above cited decisions. The Delhi Bench of the Tribunal in the case of Mridu Hari Dalmia Parivar Trust Vs. Assessing Officer (supra), the assessee suffered long term capital loss on off market sale transaction of shares and carried forward said amount for future set off. The Assessing Officer, observing that if those transactions had been made through recognized stock exchange with STT payment, then loss would not have been carried out forward within meaning of section 10(38), held that assessee used a colourable device to avoid tax and, therefore, disallowed such loss by holding it to be bogus. It was held that it was a glaring example of tax planning rather than tax avoidance.
33 I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.
As such, loss being a genuine loss could not be disallowed as it does not fall within ambit of section 10(38). Again in the case of ITO Vs. Smt. R.C. Mittal, the Tribunal has upheld the first appellate order wherein the ld. CIT (Appeals) had opined that in absence of any positive evidence, merely on the basis of suspicion, transactions could not be held to be not genuine. In that case the assessee had claimed entire sale proceeds arising out of transaction of long term capital gain exempt from tax under section 10(38) of the Act. The Assessing Officer did not believe transactions as genuine and treated the entire sale proceeds as income from other sources. We thus, do not find substance in the grounds of the appeals preferred by the Revenue and the same are rejected.
15. In result, both the appeals of the Revenue are dismissed.
16. The order is pronounced in the Open Court on : 14th July, 2017.