M/S STYLISH CONSTRUCTION PVT. LTD. vs. DCIT, NEW DELHI

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “G”: NEW DELHI BEFORE SHRI H. S. SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 2512/Del/2013 (Assessment Year: 2008-09)

Stylish Construction Pvt. Ltd, DCIT, 1027, Top Floor, Ward No. 8, Circle-9(1), Vs. Mehra Chowk, Mehrauli New Delhi PAN: AAICS4664H (Appellant) (Respondent)

Assessee by : Sh. Ashwani Kumar, CA Revenue by: Sh. NK Bansal, Sr DR Date of Hearing 01/05/2017 Date of pronouncement 18/05/2017

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is preferred by the assessee against the order of the ld CIT(A)-XII, New Delhi dated 28.02.2013 for the Assessment Year 2008-09, raising the following grounds of appeal:- “1. That the order dated 28-02-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) XII, New Delhi is against law and facts on the file in as much as she was not justified to uphold the action of the Learned Deputy Commissioner of Income Tax, Ward 9(1), New Delhi in directing the Assessing Officer to rework the disallowance of Rs. 4,40,6637- on account of expenses incurred in earning dividend income earned by the Appellant Company in view of the provisions of Section 14A of the Income-tax Act, 1961 read together with Rule 8D of the Income Tax Rules, 1962 as against Rs. 12,4267-added by the Appellant Company itself while filing the return of income. 2. That the order dated 28-02-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) XII, New Delhi is against law and facts on the file in as much as she was not justified to uphold the action of the Learned Deputy Commissioner of Income Tax, Ward 9(1), New Delhi in disallowing a sum of Rs. 4,88,90,050/- claimed by the Appellant Company as a short term capital loss”

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

anticipated that, given the forecasts in the business segments, of the said two companies investments therein would be profitable venture for it and the prospect of future capital appreciation was high, (d) However it soon became apparent that the claims of the said companies were not based on a realistic assessment of their capabilities and business prospects and as such locking up substantial capital therein would not lead to commensurate profits either m the medium or even the long term. As such the same were sold off in an off market deal, at the best available price with a view to minimize basis and free capital which was otherwise locked up in unprofitable ventures and which could now be used for further more profitable ventures, (e) Even otherwise it cannot be said that the transactions are sham in as much as the sale is through normal banking channels supported by duly executed and valid transfer deeds in accordance with the process of law. The transactions are duly entered into the books of accounts of all the parties concerned whereby the legitimacy of the transactions is conclusively proved. In the instant case the entire transaction is duly supported and documented by all the parties thereto and also supported by the fact of consideration having been passed between the buyer and seller companies. In these circumstances it is clear that the same can by no stretch of imagination be considered as a sham, transaction. As such it is clear that no cause exists to treat the said transactions as sham and accordingly no part of the same is disallowable." 4.3 The above explanation of the assessee has been considered and found not be acceptable in view of the followings facts: a) Both the companies are shareholders of the assessee company and the assessee company is also a shareholder of both the companies in the following pattern: The assessee company's shareholding pattern S.No. Name Address No. Percentage of shares of equity shares held 1 Golden Job E-60, Near 405000 43.09 Finder Anand Pradhan, Pvt. Ltd. Om Vihar, Phase-V, Uttam Nagar, New Delhi. 2 Dependable RL-30, Ganga 210000 22.34 Transport Pvt. Ram Vatika, Tilak Ltd. Nagar, New Delhi 3 Supreme E-60, Near 325000 34.57 Placement Anand Pradhan, Services Pvt. Om Vihar, Phase-V, Page3 Ltd. Uttam Nagar, New Delhi.

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

Total 940000 100,00 Shareholding of assessee company i.e. M/s Stylish Construction Pvt. Ltd, in the following company's : S.NO. Name Address No. Percentage of shares of equity shares held 1 Dependable RL-30, Ganga 210000 22.34 Transport Pvt. Ram Vatika, Tilak Ltd. Nagar, New Delhi 2 Supreme E-60, Near 325000 34.57 Placement Anand Pradhan, Services Pvt, Ltd, Om Vihar, Phase- V, Uttam Nagar, New Delhi.

Thus, there is a cross holding of shares in the above companies, also the companies are closely held companies and any manipulation in the transaction of shares of the companies can be easily done. The assessee has not discharged its onus of proving the genuineness of transaction as no contract notes to justify the transactions have been submitted. (b) Secondly, the assessee has itself accepted that the investments made in the said companies were not based on realistic estimates and that the companies were not fit for making investments. (c) Thirdly, the transactions have been made off the market as is also accepted by the assessee company. (d) Also, the transactions duly recorded, documented within the close held group of companies and routed through banking channels cannot lead to be genuine transactions. 4.4 As per assessee's own submission para {c) & (d) are contradictory. Firstly the assessee has submitted that the investments in the two companies i.e M/s Dependable Transport Pvt, Ltd. and M/s Supreme Placement Services Pvt. Ltd. were made on the basis of future business plans and prospects arising out of personal discussion and that the potential for future growth and resulting capital appreciation were foreseen. On the other hand, it is submitted that the apparent claims of the said companies were not based on realistic assessment of the capabilities and business prospect. This submission of the assessee cannot be accepted by any stretch of imagination as the assessee himself is a stake holder in the two companies and had a fairly good idea and perfect knowledge of the financial affairs of the two companies. Being a substantial shareholder in the above two companies, the assessee had the first hand knowledge of the general affairs Page4 of these two companies. The assessee had all the knowledge before making investment in these two companies. Thus, it can be said without any element

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

of doubt that the investments have been planned in such a way so as to adjust the loss incurred on the transactions made with the above companies against the income generated. 4.5 As per details filed by the assessee the transactions made with the above two companies wherein loss has been incurred are later in point of time and all are of the same day than the transaction in which short term capital] gain has been arrived. 4.6 All the above facts of the case lead to the conclusion that the transactions were made merely for entry purposes and as such the transactions are sham and have been carried out to lower the business profit of the company. Therefore the Short Term Capital Loss of Rs. 4,88,90,050/- claimed by the assessee is disallowed and the Long Term Capital Gain of Rs. 3,25,11,441/ and Short Term Capital gain of Rs.1,58,43,649/ is treated as taxable income of the assessee as per the provisions of the Act. I am satisfied that the assessee has concealed income by furnishing inaccurate particulars to the extent of Rs. 4,88,90,050/.Hence, penalty proceeding u/s 271(l)(c) are being initiated separately 5. with the above observation, the income of the assessee company is computed as under: A. Income from Business and Profession: Income as declared by the assessee Rs. 1,28,860 Add: As discussed in para 3 above Rs.4,40,663 Rs. 5,69,523 B. Short Term Capital Gain as discussed above Rs. 15843649/- C. Long Term Capital Gain as Rs. 3,25,11,441 Discussed above Less Exemption u/s 10(38) Total Income Rs. 3.25.11.441 _____NIL R/o. Rs.1,64,13,172 Rs. 1,64,13,200 .” 4. The assessee being aggrieved with the order of the ld AO preferred appeal before the ld CIT (A). Ld CIT(A) vide order dated 28.02.2013 held that assessee is engaged in the business activity of supply manpower therefore, the provision of section 73 and its explanation are applicable to the assessee and therefore the above capital loss is speculative in nature. He therefore, dismissed the claim of the assessee for carry forward of short-term capital loss. The ld CIT(A) has dealt with Page5 this issue as under:- “Ground No. 2

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

I have perused the facts stated in the assessment order as well as the facts stated by the assessee in his submissions. The Assessing Officer had made an addition amounting to Rs 4,88,90,050/- under the head Short Term Capital Loss. During the year assessee had disclosed capital loss in following companies:- M/s Supreme Placement Services Pvt. Ltd Rs. 3,49,40,050/- M/s Dependable Transport Pvt. Ltd Rs. 39.50.000/ -Rs. 4,88,90,050/- The details of the transactions in the purchase and sale of shares of M/s Supreme Placement Services Pvt. Ltd. and M/s Dependable Transport Pvt. Ltd, resulting in the above loss are as follows:-

s. Name of Date of No of Cost Price Date of No of Sale Price Loss (Rs.) No, the Scrip purchase shares (Rs.) Sale shares (Rs.) Total Rate Total 1. (a) M/s 23.05.07 170000 17000000 18.1.08 170000 10 1700000 15300000 Supreme Placement Services Pvt Ltd (b) -do- 08.09.07 48200 4822050 18,1.08 48200 10 482000 4340050 (c) -do- 13.09.07 170000 17000000 18.1.08 170000 10 1700000 15300000 2. (a) M/s 07.09.07 125000 12500000 18.1.08 125000 10 1250000 11250000 Dependabl e Transport Pvt Ltd (b) -do- 08.09.07 30000 3000000 18.1.08 30000 10 300000 2700000 TOTAL LOSS 48890050

The Appellant Company had invested in the said two companies viz M/s Supreme Placement Services Pvt. Ltd and M/s Dependable Transport Pvt Ltd on the basis of their future business plans and prospects. Further the assessee in his submission has stated that the sale is through normal banking channels supported by duly executed and valid transfer deeds in accordance with the process of law. The transactions are duly entered into the books of accounts of all the parties concerned whereby the legitimacy of the transactions is conclusively proved. The entire transaction is duly supported and documented by all the parties thereto and also supported by the fact of consideration having been passed between the buyer and seller companies The genuineness of the transaction is not only supported and documented but also proved by the entries made in the books of accounts and the Page6 statutory records and the requisite documentary evidence. The fact of the

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

purchase and subsequent sale of the said shares is proved by the statutory records of both the assessee Company and the investee companies. "

The assessee was asked vide order shed entry dated 11 Feb 2013 why section 73 is not applicable in this case and the assessee had replied vide their submission dated 25/02/2013 it is reproduced below:- "The explanation to section 73 of the Income-tax Act, 1961 to the loss on shares reads as follow:- " Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital Gains" and "Income from other sources") or (a company the principle business of which is the business of banking or the granting of loans and advances) consists of the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. " As per the above explanation, where any part of the business of a company (whether private or public) consists of the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. This Explanation shall not apply to the following companies: a) Investment companies i.e. a company whose gross total income consists mainly of income chargeable under the heads 'Income from House Property', Capital Gains ' and 'Income from Other Sources '. b) A company whose principal business is of banking or granting of loans/advances The above explanation does not apply to the assessee since its main business consists of "Capital Gains. But the assessee on his own w.r.t. his reply to 14A had said that his main business is supply of man power which forms a pre-dominant part of its business activities. (Detail is given at page 4 of this order). This is shows that it is not Capital Gain but supply of Man power is his pre-dominant business activities hence Sec. 73 is applicable and as a result carry forward of Short Term Capital Loss is dismissed. In result the appeal is partly allowed.”

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

assessee has purchases 17000 shares on 23.05.2007 of Supreme Placement Services Pvt. Ltd from Kingfisher Packaging Pvt Ltd. He further submitted that on 08.09.2007 the assessee has purchased Rs. 48200/- share of the above companies Venus Recruiter Pvt. Ltd and further on 13.09.2007 17000 shares have been purchased from Sunlight tour and Travel Pvt ltd. He further submitted that these shares were sold by the assessee on 18.01.2008 to Dependable Transport Co. Ltd. He further submitted that the assessee has purchased further the shares of Dependable Pvt. Ltd in two lots. One of 125000 shares of Ultra Modern Developer and Builder P Ltd and 30000 from Prominent Agency Pvt. Ltd. On 18.01.2008 these shares were sold to Supreme Placement Services Pvt. Ltd. He further submitted that all these purchase and sale of shares are carried out by the assessee on payment of account payee cheques for the purchase and receipt of sale of consideration also by payment of account payee cheque. He further referred to the shares certificates wherein those share certificates were transferred in the name of the assessee company. He further produced the corresponding share transfer forms duly stamped and lodged in the transfer of shares. He further referred to the computation of total income where the assessee has earned a long term capital gain of Rs. 32511441/- and also short term capital gain of Rs. 15843649/- and further profit of sale of non trade investment of Rs. 1865841/-. He therefore, submitted that the assessee has incurred net short term capital loss of Rs. 32859820/- which was carry forward by the assessee for set off in subsequent years. The main argument was that the ld AO has held that this is a sham loss. He submitted that merely there is cross holding of shares or transaction of shares in the companies and where the investment are made through account payee cheques and sale transaction are also through account payee cheques, neither the purchase price nor the sale price of shares transferred is in question. He further stated that executed transfer form was duly submitted and further the shares purchased were transferred in the name of the appellant company. The assessee has made certain profit and loss in sale of certain shares is on profit and sale of certain shares is at the loss. Therefore, merely when the shares are sold at loss it cannot be said to be a sham transaction. 6. With respect to the order of the ld CIT(A) he submitted that the ld CIT(A) has accepted the claim of the assessee that transaction is not sham but has applied Page8 explanation to section 73 of the Act holding that it is speculative loss. He submitted

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

that ld CIT (A) has already held that transactions are not sham. He submitted that acceptance of the transaction of the ld CIT(A) holding it to be a speculative loss proves that order of the ld AO holding transaction of loss in shares is not sham. He submitted that main income of the assessee company is capital gain and not business , therefore provision of that explanation does not apply to the facts. He submitted that while disallowing 14 A something is mentioned is not determinative of the business of the assessee. Ld AO himself has taxed the above short term loss of shares under the head „ Capital gains‟ . He submitted that there is gain of 32511441 as long term capital gain and other short term capital gain of Rs. 15843649/- on shares and Rs 186581 on non trade investments which are charged under the head „ capital gains‟, therefore the main income of the assessee is not business. Hence, according to him, explanation section 73 does not apply. He further relied on the decision in DCIT Vs. Jindal Export 101 ITD 129 and ACIT Vs. Viraj Investment 210 Taxmann 418. 7. The ld DR relied upon the orders of the lower authorities and vehemently contested that the transaction of the assessee is sham transaction by incurring loss of sale of shares and ld CIT(A) is correctly applied the explanation to section 73 of the Act holding it to be speculative in nature. 8. We have carefully considered the rival contentions and perused the orders of the lower authorities. Firstly, we examine the order of the Ld. assessing officer who has held that loss derived by the assessee is merely made for entry purposes. According to him, such transactions are sham and have been carried out to lower the business profits of the company. We have examined the facts and the reasons given by the Ld. assessing officer for holding so. Assessee has purchased and sold those shares after taking the delivery and getting them transferred in the name of the assessee. To demonstrate this assessee has submitted the share transfer forms as well as the share certificates of those companies registered in the name of the company. Assessee has submitted the names of the parties from whom those shares are purchased and consideration of purchases is through account payee cheques . Regarding sale of share also assessee had given the details of parties to whom they are sold and consideration was received through cheques. Had these transactions been book entries only, the consideration of purchases and sales would Page9 not have been flown thorough banking channels. Further, despite having

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

information about the seller and purchaser of the shares, the ld AO did not examine them. It was also not proved incorrect that shares have been transferred in the name of the appellant. Ld AO has also not questioned the prices at which the shares are transacted. The investee companies being the shareholders of the assessee Company and assessee holding shares in them is of no consequence in absence of challenge to the transaction itself. The consideration of shares has not gone to the coffers of those companies from transacting parties but to the purchaser and sellers. Further „off market transaction‟ as alleged by the ld AO is also not correct as the companies whose shares are purchased and sold are not listed and therefore there shares cannot be traded on stock exchange but „ off market „ only. Therefore merely there is cross holding of the companies, it cannot be said that the transaction purchase and sale is sham. The identical question arose before the Hon Gujarat High court in ACIT V Biraj Investments ( P ) Ltd [2012]24 taxamnnn.com 273 [Guj] where in has been held as under :-

“3. The Assessing Officer noted that the shares of Rustom Mills and Industries Ltd., which the assessee sold were pledged with the IDBI Bank. The original share certificates were also lying with the said Bank. The assessee had also handed over duly executed transfer forms to IDBI. The Assessing Officer, therefore, called upon the assessee to clarify how under such circumstances the assessee could sell the shares. The Assessing Officer further noted that the purchaser company, viz. Bijal Investment Ltd and the assessee company, viz. Biraj Investment Pvt. Ltd. were part of the same group of companies. The Assessing Officer also noted that directors of both these companies were common. He noticed that the husband of the common Director of these companies was the Managing Director of Rustom Mills and Industries Ltd. These companies, i.e. the assessee company and the purchaser company were therefore aware of the bad financial condition of Rustom Mills and Industries Ltd. The purchaser company was also aware that shares were pledged with IDBI and therefore delivery of shares was not possible. On the basis of these factors, the Assessing Officer asked the assessee to justify the claim of long term capital loss on sale of such shares. 4. In response to such queries, the assessee contended before the Assessing Officer that law does not require that the transfer of share can happen only upon delivery of shares. The shares form a capital asset and for the purpose of computing the capital gain and loss, what is to be seen is the transfer as defined in section 2(47) of the Income Tax Act, 1961 ('the Act' for short) which includes extinction of any rights in the capital asset. The Assessing Officer, however, was not convinced by such explanation. He was of the opinion that transfer of shares would be complete only when the share certificates along with duly executed transfer forms are delivered. In Page10 the present case, this was not done. Share certificates were lying with IDBI who had lien over such shares. The shares therefore could not have been validly transferred.

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

He was of the opinion that full transaction was intended for creating loss to the assessee so that its capital gains resulting from sale of shares of Rustom Spinners can be set off. 5. The assessee carried the matter in appeal. The Commissioner (Appeals), by his order dated 23.3.98, dismissed the appeal. He was of the opinion that sale of shares can be completed only when the share certificates are handed over to the buyer with duly completed transfer forms. Since the assessee did not have the possession of share certificates, it could not have completed these formalities. In his opinion, therefore, no sale of shares had been effected. He also concurred with the view of the Assessing Officer that the entire transaction was a colourable device. He noted that the assessee company and the purchaser company had common Directors. Even Rustom Mills and Industries Ltd. whose shares were under contention had common Directors. He was of the opinion that looking to the impediments attached to such shares, the same would hardly have any market value. He was, therefore, of the opinion that the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11 would apply. 6. The assessee carried the matter further in appeal before the Tribunal. The Tribunal by the impugned order reversed the orders passed by the Revenue Authorities. Tribunal placed reliance on a decision of the Madras High Court in the case of A.M.P. Arunachalam v. A.R. Krishnamurthy [1979] 49 Comp. Cas. 662 (Mad) wherein the facts were that R had borrowed a sum of Rs.35,000/- with security of 5000 shares held by him in a private limited company. The share certificates together with blank transfer forms duly signed by R were handed over to the creditors. R sold the shares to the plaintiff requesting him to discharge the debts due to defendant Nos.1 and 2 amounting to Rs.37,602/- out of the sale consideration. He authorized defendant Nos.1 and 2 to deliver the share certificates and the blank transfer forms on the debt being discharged. When defendant Nos. 1 and 2 failed to hand over the share certificates together with blank transfer deeds signed by R and other related documents, the 1st plaintiff instituted suit seeking declaration that he had title over the shares and they belonged to him and for consequential directions. In this background, the High Court upheld the case of the plaintiff observing that transfer of interest in the shares from the transferor to the transferee is independent of the requirements of its registration for the purpose of Companies Act. 7. The Tribunal on the basis of such decision concluded that merely because the physical possession of the shares was with IDBI, it would not automatically follow that the person who is entitled to legal possession, that is, the assessee would be deprived of his right to deal with such goods until he secures the cooperation of the third party. The Tribunal was of the opinion that the assessee had the right to transfer the shares because legal title vested in the assessee. 8. Before us, learned counsel Shri M.R.Bhatt for the Revenue vehemently contended that this was a clear case of colourable device created for tax avoidance. He submitted that the assessee and the purchaser company were part of the same Page11 group. In fact, the assessee, the purchaser Company and Rustom Mills and Industries Ltd. whose shares were under consideration had directors from the same

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

family. He submitted that the shares in question were subjected to severe restrictions. They were pledged with IDBI Bank. Original share certificates with transfer forms duly signed by the assessee were in possession of the Bank. The assessee had agreed not to transfer the forms and given undertaking to this effect to the Bank. Such shares, therefore, had no real market value. The very fact that the purchaser Company agreed to purchase such shares at the market value would show that the entire transaction was not a genuine transaction. 9. Counsel drew our attention to section 108 of the Companies Act, 1956 to contend that such transfer could not have been registered without following the mandatory requirements contained in sub-section (1) of section 108 of the Companies Act. In this respect, counsel relied on the decision of the Apex Court in the case of Mannalal Khetam v. Kedar Nath [1977] 47 Comp. Cas. 185 wherein the Apex Court held that the requirements of section 108 of the Companies Act were mandatory and not directory. In the said case, finding that despite the shares being under attachment and despite a separate prohibitory order having been issued to the Company, the Company registered transfer of shares, the Apex Court held that such action on the part of the Company was contrary to law. 10. Counsel placed heavy reliance on the decision in the case of McDowell & Co. Ltd. (supra) to contend that transaction itself should be ignored as being a colourable device to avoid tax. Counsel drew our attention to some of the observations made in a recent decision in the case of Vodafone International Holdings B.V. v. UOI [2012] 341 ITR 1/ 204 Taxman 408 /71 taxmann.com 202 (SC) reported in wherein the ratio of the decision in the case of McDowell & Co. Ltd. (supra) came up for consideration in view of the later decision of the Apex Court in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706/ 132 Taxman 373. 11. On the other hand, learned counsel Shri Bandish Soparkar for the respondent assessee contended that this is not a case of colourable device. The assessee in its own wisdom desired to dispose of certain loss making shares. No provision of the Act or any other provision of law prohibits the assessee from disposing of such assets. Simply because during the same year, the assessee also sold certain other shares for a profit, it cannot be stated that there was an attempt to avoid tax. 12. Counsel submitted that what section 108 of the Companies Act prohibits is registration of transfer of shares by the company without following certain mandatory requirements and not transfer of shares themselves by the owner of the shares. In this respect, counsel relied upon the decision of the Madras High Court in the case of A.M.P. Arunachalam (supra). Counsel pointed out that the assessee had entered into an agreement dated 24.3.93 with the purchaser company under which the shares of Rustom Mills and Industries Ltd. were transferred. He further pointed out that the assessee had also given irrevocable power of attorney to the purchaser company on 30th March 1993 to deal in such shares as the Company desired. He further pointed out that the entire sale consideration was also received by the assessee company. He, therefore, submitted that in view of such facts, the Page12 provisions of section 2(47) of the Act would apply and in relation to capital asset in question, transfer at least for the purpose of the Income Tax Act would be complete.

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

Stylish Construction Pvt Ltd V DCIT Circle 9 (1) New Delhi ITA No 2512/Del/2013 A Y 2008-09

(iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1982 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation - for the purpose of sub-clauses (v) and (vi) "immovable property" shall have the same meaning as in clause (d) of section 269UA." It may be that by virtue of pledging of shares with IDBI, having handed over the original share certificates to such financial institution along with the duly signed transfer forms, in so far as the assessee's relation with IDBI is concerned, there would be a serious question of validity of such transaction. We are, however, in the present proceedings, not concerned with such internal possible dispute between the assessee and the said financial institution. It may also be that if the purchaser Company desired to have such shares transferred in its name, such attempt would run into serious road block. Primarily, without the original share certificates in possession of the purchaser company, which was in possession of the IDBI Bank, the Company would not, in view of section 108 of the Companies Act, be able to register such transfer. Sub-section (1) of section 108 provides that a company shall not register a transfer of shares in or debentures of, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and further fulfilling the procedural requirements specified therein has been delivered to the company along with the certificate relating to the shares or debentures along with the letter of allotment of shares or debentures. Therefore, it would not be difficult to envisage that if the purchaser company had tried to register the same in its name by virtue of the present transfer, such attempt would be met with stiff resistance from IDBI Bank. 16. In the present proceedings, however, we are not concerned with such internal disputes. We are primarily concerned with the question whether by virtue of the agreement dated 24th March 1993, and the irrevocable power of attorney given by the assessee to the purchaser company on 30th March 1993, and also having received the full sale price of the shares, section 2(47) of the Act apply. In our opinion, the assessee did transfer whatever rights it had in the shares to the purchaser company. If such transfer is not recognized by the IDBI and there are other legal implications of breach of undertaking given to IDBI, such issue would have to be thrashed out between the concerned parties. Insofar as income tax Page14 proceedings are concerned, we are of the opinion that by virtue of section 2(47) of the Act, the assessee was entitled to claim that upon transfer of shares or interest

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thereon, it had suffered long term capital loss which it was entitled to set off against the capital gain on sale of shares during the same previous year. 17. We are not inclined to accept the Revenue's contention that this was a colourable device and that the entire arrangement was a paper arrangement. Firstly, there is no provision in the Act which would prevent the assessee from selling loss making shares. Simply because such shares were sold during the previous year when the assessee had also sold some shares at profit by itself would not mean that this is a case of colourable device or that there is a case of tax avoidance. Further, there is no restriction that such sale or transaction cannot be effected with a group company. As long as the Revenue could not doubt the sale price of the shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suffer. In the present case, it is not even the case of the Revenue that shares were sold at a price lower than the market rate. If that be so, the question of inflating the loss by transferring the shares to group company would not arise. Under ordinary circumstances, it is always open to the assessee in his own wisdom to either hold on to certain bunch of shares or to sell the same to avoid further loss, if he finds that market value of the shares is fast diminishing. It is equally open for the assessee to effect such sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI is concerned and insofar as the purchaser's right to have shares transferred in its name is concerned. This, however, by itself would not establish that the sale of shares was only a paper transaction and a device contrived by the assessee to claim loss which it did not suffer and thereby seek set off against the capital gain received by it during the year under consideration. 18. In the case of CIT v. Sakarlal Balabhai [1968] 69 ITR 186 (Raj.), a Division Bench of this Court observed that avoidance of tax cannot include every case of reduction of tax liability of an assessee. The assessee may enter into a transaction which has the effect of diminishing his income and consequently reducing his tax liability. In such a case, there would be no avoidance of tax, For example, a case where the assessee makes a gift of shares to his son. By reason of gift income from the shares would not accrue to the assessee but would accrue to the son and to that extent the income of the assessee would be diminished and his tax liability reduced. This cannot be regarded as a case of tax avoidance even if the motive of the assessee in making the gift was to save tax on the income from shares at a higher rate applicable to him. 19. Under the circumstances, even without referring to the decision of the Apex Court in the case of Azadi Bachao Andolan (supra) and the observations made in the later decision in the case of Vodafone International Holdingss B.V. (supra), we do not find that this a case which would fall within the parameters of the decision in the case of McDowell & Ltd (supra). Page15

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Therefore, in view of above facts and circumstances, respectfully following the decision of honourable Gujarat High court we hold that the transaction of purchases and sales of shares entered in to by the assessee cannot be held to be sham. We have also perused the orders of the ld CIT (A) where in the transaction is held to be speculative in nature and therefore it has been held that these transactions are not sham. Hence, we reject the reasons assigned by the ld AO. 9. Now we come to the orders of the ld CIT (A) where in these transactions are held to be speculative in nature and therefore hit by explanation to section 73 of the act. It is important to examine the provisions of explanation to section 73 of the income tax act, which together with the provisions of section 73 reads as under:-

SECTION 73 Losses in speculation business. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and— (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than [2053][four assessment years] immediately succeeding the assessment year for which the loss was first computed. [ Explanation.—Where any part of the business of a company ( [other than a Page16 company whose gross total income consists mainly of income which is chargeable under the heads “Interest on securities” , “Income from house property”, “Capital

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gains” and “Income from other sources”], or a company [the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]

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Section 73 provides that such loss can be set off only against income from speculative business. The object of the Explanation is to explain the scheme in the main provision to situations where part of business is from speculative transactions. To that extent the assessee will be deemed to be carrying on speculative business - Aravali Engineers (P.) Ltd. v. CIT [2011] 335 ITR 508/200 Taxman 81 (Mag.)/11 taxmann.com 291 (Punj. & Har.). As there is no business of purchases and sales of the shares, explanation to section 73 does not apply to assessee. Hon Madras High court in [2016] 68 taxmann.com 3 (Madras) Rajapalayam Mills Ltd. v. Deputy Commissioner of Income-tax, Special Range-I, Madurai had an occasion to consider the applicability of explanation to section 73 and it has been held that “7. As held in the decisions relied upon by the learned counsel for the assessee, the facts and circumstances of each case is relevant to find out, whether the transaction alleged would amount to speculative transaction or not. 8. In order to decide that, the nature of the transaction alleged is important, it has been stated the order of Commissioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the sister company viz., Madras Cements Limited. Subsequently, when the shares were sold the market had not been favourable to the assessee and that is how he sustained loss. There is no intention to speculate and to benefit out of the speculation as there was a clause in the Memorandum of Association to invest surplus funds in shares, the appellant has chosen to invest fund in shares. Moreover, the transaction is not periodic. It was also not settled otherwise than by actual delivery. Only when there is settlement otherwise than by delivery speculative transaction can be thought of. In the present case, it is not so. As the main activity is only in manufacture and sale of yarn, the purchase of shares, having not been regular, should be construed only as an investment. When there is no systametic or organised course of activity and when there is no regularity in the transaction and as the purchase is infact an one time activity it cannot be construed as a speculative transaction. When the purchase of shares cannot come within the definition of business, under Section 2(13) of the Income Tax Act, 1961, there is no point in contending that the assessee is engaged in the business much less in a speculative business. Therefore, the Assessing Officer ought to have allowed the loss, as short term capital loss and set off against the other business income of the appellant Company. As the appellant Company had properly delivered the shares at the time of selling, the transaction would not come under the provisions of Section 43 (5) of the Income Tax Act, 1961. When the Page18 provisions of Section 43 (5) is not applicable to the facts of this case, the contention that the case of the assessee would be covered under explanation

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to Section 73 of the Income Tax Act, 1961, cannot be accepted. As the genuineness of the transaction is not doubted the contention of the Revenue that it is a case of avoidance of tax liability by dubious means also cannot be accepted.” In the present, case also I. it is not held that assessee has purchased the shares as a dealer, II. and subsequently the shares were sold as the plans for which shares have been purchased could not be fulfilled, III. no intention imputed for speculation, IV. assessee being a company can invest in the shares as it has already made huge capital gains both short term and long term which are not disturbed so far the head of the taxability s concerned, V. actual delivery is taken and given, We are not in a position to hold that to the impugned transactions provision of explanation to section 73 applies. Therefore, we also cannot uphold the order of the ld CIT (A). In the result we allow ground no 2 of the appeal of the assessee accordingly holding that revenue has failed to establish that transactions are sham and merely book entries and further the explanation to section 73 does not apply to the facts of the case thereby directing the ld AO to allow the short term capital loss of Rs 4,88,90,050/- to be carried forward. 12. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 18/05/2017. -Sd/- -Sd/- (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 18/05/2017 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) Page19 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi