The Commissioner of Income Tax - VI vs. M/s. Manikanta Iron AND Hardware

C/TAXAP/194/2008 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 194 of 2008 With R/TAX APPEAL NO. 195 of 2008 With R/TAX APPEAL NO. 196 of 2008 With R/TAX APPEAL NO. 211 of 2008

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? NO ================================================================ SULOCHANA V. GUPTA Versus INCOME TAX OFFICER ================================================================ Appearance: MR. B.S. SOPARKAR FOR MRS SWATI SOPARKAR(870) for the Appellant(s) No. 1 MR.VARUN K.PATEL(3802) for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

Date : 04/02/2020 Page 1 of 41

C/TAXAP/194/2008 JUDGMENT ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.These Tax Appeals are arising in case of Smt. Sulochana V. Gupta and late Shri Vijaykumar Gupta   for   the   Assessment   Year   1992­93, raising   common   issues   and   are   admitted   by framing the following question of law by the Co­ordinate Bench of this Court vide an order dated 08.05.2008 as under: “Whether in the facts and circumstances of   the   case,   the   Income   Tax   Appellate Tribunal has erred in holding that since the   assessee   could   not   establish   the factum of sale of the shares made to her associate

concern

and

the

said transactions   of   sale   were   made   without intervention   of   broker,   the   (capital) loss   claimed   by   the   assessee   is   not allowable?” 2.The Income Tax Appellate Tribunal, Ahmedabad ‘A’  Bench,  Ahmedabad   passed  a  common   order dated   05.01.2007   in   respect   of   all   these appeals   for   the   A.Y.   1992­1993   in   cross­ appeals   filed   in   case   of   each   of   the assessee. 3.Tax Appeal No. 194 of 2008 is arising out of the   order   in   ITA   No.   763/AHD/1997   dated 05.01.2007 filed by the revenue in case of Smt. Sulochana V. Gupta. Page 2 of 41

C/TAXAP/194/2008 JUDGMENT 4.Tax Appeal No. 195 of 2008 is filed against the   order   passed   in   ITA   No.   631/AHD/1997 filed  by  the  revenue   in case   of late   Shri Vijaykumar Gupta. 5.Tax Appeal No. 196 of 2008 is filed against the   order   passed   in   ITA   No.   671/AHD/1997 filed by late Shri Vijaykumar Gupta. 6.Tax Appeal No. 211 of 2008 is filed against the order passed in ITA No.672/AHD/1997 filed by Smt. Sulochana V. Gupta. 7.For the sake of convenience, Tax Appeal No. 194 of 2008 is treated as a lead matter. 8.1. The assessee filed return of income for A.Y. 1992­93 on 30.07.1993 declaring total income of   Rs.3,02,099/­.   During   the   course   of assessment proceedings, the Assessing Officer found  that  assessee  had  claimed  short  term loss   of   Rs.16,88,750/­   on   the   following transactions: “8. The assessee  i.e. Smt. Sulochana V. Gupta had shown loss of Rs.16,88,750/­ on the following transactions: Name of shares No. of shares Purchase Price Date & Rate Sale Price Date & Rate Short term capital loss Mysore Cement 10,000 12,62,500/­ 7.1.92 126.25 11,05,000 8/1/92 110.50 Rs.1,57,000/­ UTI Master a) 50,000 17,37,500 14,00,000 Rs.3,37,500/­ Page 3 of 41

C/TAXAP/194/2008 JUDGMENT 12.2.92 34.75 16.1.92 28.00 b) 5,000 2,01,250 19.2.92 40.25 9,80,000 16.1.92 Rs.4,43,750/­ c) 30,000 12,22,500 19.2.92 40.75 28 L & T 19,45,000 18.2.92 a) 10,000 194.50 21,30,000 b) 5,000 9,35,000 19.2.92 187.00 21.1.92 142.00 Rs.7,50,000/­ Total LossRs.16,88,250/­ 8.2. The   Assessing   Officer   after   verification found that the assessee had sold the shares prior in point of time without involving any broker, and thereafter, purchased the shares through   brokers.   The   Assessing   Officer noticed that shares of Mysore Cement were not sold   at   the   prevailing   market   price   on 08.01.1992.   The   prevailing   market   price   of shares   of   Mysore   Cement   on   08.01.1992   was Rs.125/­ per share, whereas, the assessee has sold the share at Rs.110.50 /­ per share. The Assessing Officer further found that shares of UTI Master and Larson & Tubro (L & T) were purchased through share broker on 12.02.1992 and 19.02.1992 respectively, but these shares were stated to be sold without involving any share   broker   to   the   closely   connected company,   viz.   Gujarat   Ambuja   Finstock   Ltd. (GAFL)   on   16.01.1992   and   21.01.1992 receptively,   and   thus,   sale   of   shares Page 4 of 41

C/TAXAP/194/2008 JUDGMENT preceded to purchase of shares. 8.3. The   Assessing   Officer   also   found   that   the assessee was a Director in various companies of   Ambuja   group   and   GAFL   was   one   of   the closely connected companies of Ambuja group. It was also found by the Assessing Officer that   the   loss   has   been   shown   only   on   the basis   of   the   debit   notes   issued   by   the assessee on paper, without actual delivery of the shares, as the assessee was not having the possession of the shares on the date of sale.   Alternatively,   the   Assessing   Officer also recorded the finding that sale of these shares were effected without taking or giving actual delivery, total loss arising from such transactions was in the nature of speculation loss, and hence, the same cannot be given set off  against  regular  income  of  the  assessee except   to   be   adjusted   with   speculation profit, if any, arising to the assessee in business. 8.4. The   Assessing   Officer   therefore   refused   to give set off of the loss of Rs.16,88,750/­ paid   by   the   assessee   against   the   regular business for capital gain. 8.5. The

assessee,

being

aggrieved

and dissatisfied with the assessment order, filed Page 5 of 41

C/TAXAP/194/2008 JUDGMENT an appeal before the CIT (A) contending that the entire loss has wrongly been denied to be set   off   against   the   other   incomes   of   the assessee.   The   assessee   made   several submissions before the CIT (A). The CIT (A) thereafter  allowed  the  loss  claimed  by  the assessee except to the tune of Rs.75,000/­ in respect   of   the   shares   of   Mysore   Cement   by holding as under: “11.   After   going   through   rival   contentions   and after personally hearing Shri P.S. Vasava, I am of the opinion that the claim of the assessee with respect   to   short   term   capital   loss   cannot   be rejected,   this   find   is   supported   by   following accepted / acceptable facts: (i) The purchases have been made through a share broker, which establishes the purchase along with its purchase value. The Assessing Officer has accepted   the   purchases   and   its   price   to   be genuine. (ii) Once the purchases have been found to be genuinely   made,   either   there   should   be corresponding sales or the shares should form part of the closing stock. Since these are not part of the   closing   stock,   the   inference   is   that corresponding   sale   is   there.   That   confirms   the accepted fact that corresponding sales are there. (iii) The   sales   are   confirmed   by   seller   and purchases are confirmed by purchaser who are two separate taxable entities, assessed to tax. (iv) The purchases in the hands of the purchaser and its subsequent sale to a third party, earning profit in the process have been accepted and taxed by the revenue. This profit could have been earned only   after   purchases   from   the   appellant   are genuinely accepted. (v) Against the sale / purchase of shares, payments have been received, though after a time gap, which is not an illegality under any existing provisions of law. (vi) The  sales  without  involving  a  share  broker are not illegal one and are permissible. Page 6 of 41

C/TAXAP/194/2008 JUDGMENT 12. Once purchases and subsequent sales are beyond doubt,   there   is   no   way   one   can   wish   away transactions   involved   to   be   not   genuine,   the element   of   profit   or   loss   notwithstanding.   I therefore,   hold   that   these   purchases   and   sales have   genuinely   taken   place   and   the   short   term capital loss claimed by the assessee is genuine. I shall   revert   to   the   question   of   sale   on   market rate   or   otherwise  in   the   following   paras,  after first   deciding   the   alternate   finding   of   the assessing officer that if not a bogus loss, it is a speculative one. 13. It has been observed by the Assessing Officer that the sale of shares appeared to be effected without taking actual delivery. In Short, when the shares were stated to have been sold i.e. the date of selling, the assessee was not in possession of these shares. But once a person is accepted to be dealing in shares, to my knowledge there was no legal bar at the given time of sale to sell the shares first and then buy these to effect actual delivery. It is simply not the case of buying and selling   from   /   to   the   same   person   without effecting actual delivery. It is also not the case where only accounts have been squared to get the loss. Actual payments in full are reported to be made for purchases and sales both and these are from / to different parties. As per bills of share brokers, full details of the shares involved are available   which   goes   on   to   prove   that   the transactions were of specific shares. Once actual delivery   is   proved,   followed   by   full   payments, transactions   are   just   not   speculative   by   any stretch of imagination. I therefore, hold that the short term capital loss is not speculative, either as claimed by the assessing officer. Before the question of sale of shares, whether on market   rate   or   otherwise   is   decided,   it   is desirable to reproduce the chart indicating rates pertaining to sale of shares, which is as under: A. Rates at which shares have been sold: Name

of Script No. of shares Date

of sale Rate

of sale Mysore Cement 10000 8.1.92 110.50 UTI Master 85000 16.1.92 28.00 L & T 15000 21.1.92 142.00 Page 7 of 41

C/TAXAP/194/2008 JUDGMENT B. Actual Prevailing Rates as per B.S.E.: Name   of Script Date Opening Rate Highest Rate Lowest Rate Closing Rate Average Rate Mysore Cement 8.1.92 120.00 125.00 117.05 123.75 121.50 UTI Master 16.1.92 27.25 29.00 26.00 27.50 27.56 L & T 20.1.92 134.00 140.00 132.00 139.00 136.25 (Note 02 21.1.92   i.e.   date   of   sale   of   L   &   T Shares) The   market   was   closed   and   thus   rates   on   the previous date are considered) It will be seen that sale of UTI Master was at Rs. 28.00 against the average of 27.56 per share, while   sale   of   L   &   T   was   at   Rs.   142/­   against average rate of Rs. 136. 25. As both these sale rates   were   on   the   higher   side,   no   adverse inference needs to be therefore drawn, since the sales   were   at  a  rate   which   was  higher  than   the average rate. The average rates are desirable to be taken since it can simply not be presumed that the transactions running into thousands of shares will   be   on   the   maximum   rate   available   on   that particular day. Even without giving credit to net realizable value after deducting brokerage & D. D. charges, the sale rates are far better otherwise. As such no further adjustment is called for. 14. But so far sale of shares of Mysore Cement is concerned,   obviously   the   same   is   not   on   market rates. Rate shown by the assessee is of Rs. 110.50 while rate adopted by the assessing officer is of Rs.125/­ only, which is the maximum. To my mind adopting the highest rate is not a very practical proposition   since   it   cannot   be   presumed   that transactions running into thousands of shares will be   on   the   maximum   rate   available   on   that particular date. To be more realistic, since only a  fair   estimate  market   rate  has   to  be  made,  it will be more scientific and authentic to take the average   of   such   rates   on   the   particular   day   of sale. The average rate as indicated above comes to Rs. 121.56.  When confronted with the average rate enhancement   and   addition   on   account   of   market rate,   the   plea   of   the   appellant   is   that   since while making purchases, element brokerage and DD. Charges is also there, similar adjustment be made, in all fairness this adjustment is called for. If Page 8 of 41

C/TAXAP/194/2008 JUDGMENT concession for brokerage and DD. Charges is given, net   realizable   rate   comes   to   Rs.118/­only.     On this   rate,   adjusted   sale   price   will   come   to Rs.11,80,000/­ (i.e.. 10000 x 118 = 11,80,000/­) against Rs. 11l,05,000/­as shown by the assessee. The loss will therefore get reduced by Rs.75,000/­ consequently. The loss of Rs.1,57,000/­ only will get reduced to Rs. 82,000/­ i.e. Rs. 1,57,000 ­ Rs.   75,000/­.   Same   loss   of   Rs.   82,000/­is therefore directed to be allowed in the sale of shares of Mysore Cement. As regards UTI master and L & T shares, no rate adjustment is called for and loss   as   claimed   of   Rs.   15,31,250/­   is   to   be allowed   in   full.   Thus,   total   short   term   capital loss   of   Rs.   15,31,250/­   +   82,000   (   Rs. 16,13,250/­) is directed to be allowed against the claim of Rs. 16,88,250/­ only.” 8.6. Being aggrieved and dissatisfied by the order of the CIT (A), revenue as well as assessee filed   appeals   before   the   Tribunal.   The Tribunal   after   considering   the   submissions and material on record held that the CIT has committed an error by allowing the short term loss   claimed   by   the   assessee,   though   the assessee   could  not  establish   the  factum  of sales made to the associate concern and the transactions were without the intervention of the   broker.   The   tribunal   therefore   allowed the appeal filed by the revenue rejecting the appeal   filed   by   the   assessee,   holding   as under: “21.   We   have   carefully   considered   the   rival submissions   in   the   light   of   material   placed before   us.   The   assessee   is   engaged   in   the activity of sale and purchase of shares. The loss claimed in respect of UTI Master shares and L & T shares   is   doubted   on   the   ground   that   without Page 9 of 41

C/TAXAP/194/2008 JUDGMENT having   possession   of   those   shares   assessee   had sold these shares to a group concern. The sales are made without intervention of any broker. This fact   created   a   suspicion   regarding   the transaction. The sale of these shares/ securities to group concern by the assessee is supported by only evidence which is a debit note prepared by the assessee copy of which is placed at pages 50 to 52 of the documents attached with the appeal relating   to   Smt.   Sulochana   V   Gupta.   We   have perused the copy of these vouchers which are self prepared giving the particulars of credit amount, number   of   shares,   rate   of   sale   and   name   of company.   On   these   vouchers   neither   the particulars of shares i.e. distinctive number nor names of persons in whose names those shares were standing etc. have been given. Ld. Counsel of the assessee   admitted   that   apart   from   these   debit notes there is no material on record to prove the factum of sale more particularly that what were the   distinctive   numbers   of   shares   which   were delivered   by   the   assessee   to   its   group   concern namely   GAFL   and   on   which   date   these   deliveries were given. However, it is the contention of Ld. Counsel that the purchases of similar quantity of shares were made by assessee through share broker and   such   purchase   is   an   evidence   of   having delivered   these   shares   by   the   assessee   to   GAFL subsequently.   We   are   unable   to   accept   such submissions.   There   is   no   material   on   record   to prove that the shares were actually delivered by the   assessee   to   GAFL   even   subsequently   as   on record  there  is complete  absence   of particulars of those  shares  which  are  alleged  to  have been delivered   subsequently   by   purchasing   the   same from   broker   on   subsequent   dates.   Even   in   the brokers   voucher   distinctive   numbers   of   those shares  were  not given.   The broker  has  also  not stated   that   from   whom   he   has   purchased   these shares   for   assessee   and   in   whose   names   these shares   were   standing.   Thus   there   is   absence   of proof on record to hold that shares were actually delivered by the assessee to GAFL. Merely on the basis  of presumption   it cannot  be held  that  as the shares have been purchased subsequently they must have been delivered by the assessee to GAFL. It   has   not   been   controverted   that   GAFL   is   an associate concern of the assessee. Entering into transaction   with   the   associate   concern   without intervention of a broker (more particularly when Page 10 of 41

C/TAXAP/194/2008 JUDGMENT all   other   transactions   are   done   through   broker only)   creates   suspicion   and   to   remove   this suspicion,  the  assessee  was  under  an obligation to   bring   on   record   the   evidence   to   prove conclusively   that   shares   in   particular   were actually   delivered   to   GAFL.   Not   only   such evidence   of delivery   is absent  but  there  is no evidence   on   record   to   prove   the   sale   of   those shares on alleged dates by the assessee to GAFL. The   shares   are   identifiable   items   and   if   they change   hands   i.e.   if   their   ownership   is transferred   to   somebody   else,   it   is   necessary that   evidence   should   be   there   to   prove   that change in hands. Thus it cannot be claimed by the assessee that he/ she does not have evidence to prove the factum of sale or purchases. Therefore, producing   evidence   in   this   regard   was   not physically impossible for the assessee and if the same is not produced or no reason has been given for non production of evidence then according to well   established   principle   of   law,   it   will   be presumed   that   assessee’s   claim   is   not   genuine particularly in the circumstances when onus is on assessee who is claiming the loss to be set off against other income.” 8.7. The   Tribunal   thereafter,   referred   to   the decisions,  i.e. (i) in the case of  CIT v. Ganga Prasad Birla (HUF) reported in 199 ITR 173 (Cal.), (ii) CIT v. Shekhawati Rajputana Trading   Co.   (P).   Ltd.  reported   in  236   ITR 950   (Cal.),   (iii)  M.Ravji   &   Co.   v.   ITO reported in  55 TTJ (Ahd) 625, (iv)  CIT v. L.N. Dalmia  reported in  207 ITR 89 (Cal.), and thereafter, held as under: “22. As the onus was on assessee and it has not

been

discharged

producing evidence   which   in   case   of   genuine transaction   could   well   be   proved   by producing   evidence   in   this   regard,   the Page 11 of 41

C/TAXAP/194/2008 JUDGMENT transactions   entered   into   by   the   assessee are liable to be ignored particularly when sales   are   made   without   ownership   of   the shares and that too without intervention of a   broker.   As   pointed   out   earlier   the transaction is between the assessee and its associate concern and it was not physically impossible for assessee to bring on record all the relevant record which were time and again asked to be produced by the assessing officer. Even before us assessee could not produce  evidence   to conclusively   show that sales were actually made of specific shares, which are stated to be later on bought by the assessee and delivered to the associate concern. 23. The contention of Ld. Counsel that on similar advance sales profits had accrued to assessee and it has been taxed, therefore, similar   treatment   should   be   given   to   the relevant   transaction   and   loss   should   be accepted, is also not acceptable as in those transactions   profits   has   accrued   to   the assessee and there is no material on record to show that said transactions of profit was also   without   the   intervention   of   broker. Thus the said transaction cannot be held to be similar to the relevant transaction. 24. There is also no force in the contention of   assessee   that   subsequent   purchases   of shares sold in advance and absence of those shares in the balance sheet of the assessee is   indicative   of   the   fact   that   actually these shares were delivered by the assessee to   associate   concern.   Unless   it   is conclusively

shown

that

subsequently purchased shares were actually delivered by the  assessee   to his/her  associate  concern, presumption   in   this   regard   cannot   take colour of conclusive proof. It has already been pointed out that it was not physically impossible   for   the   assessee   to   bring relevant   material   on   record   to   prove   the factum   of   subsequent   delivery   as   the transaction   is   between   the   assessee   and his / her associate concern. Therefore, only on   the   basis   of   presumption   it   cannot   be conclusively   established   that   as   assessee Page 12 of 41

C/TAXAP/194/2008 JUDGMENT had subsequently purchased shares to satisfy the transaction of sale to his/ her sister concern   and   absence   of   that   quantity   of shares in balance sheet or closing stock is indicative   of certainty  of assessee  having delivered the similar quantity of shares to sister   concern.   Therefore,   this   contention of assessee is also liable to be rejected. 25. The contention of assessee that GAFL had earned profit on the shares purchased by it from assessee and thus the gain has suffered tax in the hands of GAFL has nothing to do with the loss claimed by the assessee as it has been held, that the sale by the assessee is   not   supported   by   conclusive   evidence. More so, in case of Patel Chemical Works Vs. CIT  (Supra)  a decision  relied  upon  by Ld. DR, similar contention was raised on behalf of assessee. The contentions of assessee as recorded

their

Lordships

of Jurisdictional High Court are as under:­ “The   learned   advocate,   Shri   J.P.Shah, appearing   for   the   assessee,   has   submitted that  in the  instant  case  the  Tribunal  has not considered that the amount of tax which is   alleged   to   have   been   avoided   by   the assessee;   has   already   been   paid   by   the sister   concerns  of  the assessee.  According to him, in fact, there is no avoidance of tax because the sister concerns had earned income   from   the   said   transactions   and   had paid   tax   thereon.   In   other   words,   the learned

advocate

has submitted   that   even   if   some   tax   has   been avoided,   the   tax   so   payable   by   the assessee has already been paid by the sister concerns of the assessee, who earned profit on account of the said transactions of sale. It   has   been,   therefore,   submitted   by   him that without considering the fact that the amount of tax has already been paid by the sister concerns, the Tribunal ought not to have   come   to   a   conclusion   that   there   was avoidance of tax. According to him, if one looks at the overall picture by considering the total amount of tax, which has been paid by   the  assessee   as   well   as   the   sister concerns, in fact, there is no avoidance of Page 13 of 41

C/TAXAP/194/2008 JUDGMENT tax   and     there   is   no   loss   caused   to   the revenue.  It has  been,  therefore,  submitted by   him   that   without   ascertaining   the   fact whether the revenue had suffered any loss, the   tribunal   should   not   have   come   to   a conclusion   that   payment   of   tax   had   been avoided by the assessee”. Giving   decision   on   these   contentions,   the observations   of   their   Lordships   are   as under: We   have   heard   the   learned   advocates   at length. The assessee has not challenged the findings   on   the   ground   of   perversity. Moreover,   it   is   not   in   dispute   that   the goods   were   sold   by   the   assessee   to   its sister concerns at a very low price and at times, even at a price lower than the cost of   production.   It   is   also   not   in   dispute that   the   goods,   which   were   sold   by   the assessee   to   its   sister   concerns,   were immediately   sold   to   third   parties   at   a subsequently higher rate and in the same lot and delivery of the goods was given by the assessee   directly   to   the   third   parties without   sending   the   goods   to   the   sister concerns.   The   said   facts,   which   have   been ascertained   by   the   Assessing   Officer   and confirmed   by   the   Tribunal,   have   become final.   Looking   to   the   said   facts,   the tribunal has come to a conclusion that the payment   of   tax   had   been   avoided   by   the assessee. “Once   it   has   been   established   that   the payment   of   tax   has   been   avoided,   in   our opinion,   it   was   not   necessary   for   the Revenue   to   ascertain   whether   any   loss   had been caused to it. In our opinion, it was also  not  necessary   for the  revenue  to see whether the sister concerns had paid tax and if so, how much tax was paid by the sister concerns. We are also of the view that it was not necessary for the revenue to look at the overall effect with regard to receipt of tax   by   the   Revenue   before   coming   to   the conclusion   whether   payment   of   tax   was avoided   by   the   assessee.   Thus,   in   our opinion, the tribunal was right when it came Page 14 of 41

C/TAXAP/194/2008 JUDGMENT to the conclusion that tax was avoided and for coming to the said conclusion it was not necessary   for   the   tribunal   to   ascertain whether any loss was caused to the Revenue on

account

of non­inclusion of income in question in the assessee’s assessment and it is inclusion in the assessment of the sister concerns”. Viewing   the   present   case   in   the   light   of above  observations  of their  Lordships,   the contention   of   assessee   that   his/   her associate concern had paid tax on the gains, accrued   by   sales   of   relevant   shares,   is irrelevant for deciding the allowability or otherwise of loss shown by the assessee on alleged sale of these shares, as sales have not   been   conclusively   established   by   the assessee. 26.   In   view   of   above   discussion,   we   hold that   as   assessee   could   not   establish   the factum   of   sales   made   to   his/her   associate concern and the transactions are without the intervention of broker, the loss claimed is not allowable.” 9.1. Learned advocate Mr. B.S. Soparkar appearing for the assessee submitted that the Tribunal has committed an error in holding that since the assessee could not establish the factum of   sale   of   the   shares   made   to   associate concern   and   the   said   transactions   of   sale were made without intervention of broker, the capital loss claimed by the assessee is not allowed ignoring the fact that the assessee has   delivered   the   shares   for   consideration after   purchasing   the   same   through   share broker in order to fulfill the obligation on the   part   of   the   assessee,   pursuant   to   the Page 15 of 41

C/TAXAP/194/2008 JUDGMENT transaction   of   sale   which   had   admittedly taken, prior in point of time. 9.2. It was submitted that, it is nowhere provided in the provisions of the Income Tax Act, 1961 that   the  assessee  should   have  the  physical possession of the shares at the time of sale of   such   shares.   In   this   context,   it   was pointed   out   that   the   Tribunal   has   not considered   this   aspect   that   the   Assessing Officer has taxed the profit earned by the assessee in similar circumstances of selling the shares in prior point of time then the purchase of shares, because in all there were 19 transactions which were carried out by the assessee during the previous year, wherein, in  some  of  the  transactions,   assessee  sold the   shares   in   advance,   and   thereafter, purchased the shares, resulting into profit which   is   offered   to   tax.   Learned   advocate invited the submission made on behalf of the assessee before the Tribunal, as recorded by the Tribunal in para­13 as under: “13. Shri J.P. Shah, Ld. Counsel, appearing on behalf   of   assessee,   invited   our   attention towards   page   4   of   the   paper   book,   wherein assessee has annexed statement  showing details of profits  and loss from shares for the year under   consideration.   As   per   said   chart consolidated sum of profits and loss shown by assessee   in  respect   of   sale   and   purchase   of Page 16 of 41

C/TAXAP/194/2008 JUDGMENT shares can be summarized as under: 1Long term profits 17,27,200/­ 2Short term profits 11,03,600/­ 3Short term loss 16,88,750/­ The consolidated  figures  of sale and purchase of shares are as under:­ Purchase Price Rs. 85,84,750/­ Sale Price Rs. 97,26,800/­ In all total 19 transactions have been done by   assessee.   Referring   to   transaction   No.10 which is in respect of shares  of Ambuja Port Ltd,   he   pointed   out   that   assessee   had   sold 25,000 shares on 29.11.91@ Rs. 45/­ per share against which purchase were made on 27.12.91 of 23,900   shares   @   Rs.10/­   and   1100   shares   on 1.3.90 @ Rs.10/­. Thus he pleaded that assessee had earned a sum of Rs. 38,500/­ as long term profit and Rs.8,36,500/­ as short term profit. He   contended   that   if   Assessing   Officer   is treating   loss   as   not   allowable   arising   to assessee out of shares of UTI Master Shares and L & T Shares on the ground that sale proceeded the   purchase   then   Assessing   Officer   cannot treat the profit arising on similar transaction on   different   footing   as   the   same   will   be discriminatory.” Referring to the above submissions made before the Tribunal, it was pointed out that while considering the issue, the Tribunal has ignored this fact. 9.3. Learned advocate further submitted that, the GAFL has shown profit on sale of shares on which  the  assessee  claimed  loss,   which  has been   denied   by   the   Assessing   Officer.   He Page 17 of 41

C/TAXAP/194/2008 JUDGMENT referred   to   the   following   submissions recorded   by   the   Tribunal   in   the   impugned order   made   on   behalf   of   the   assessee   as under: “14.   Further   he   contended   that   GAFL   has shown profit on sale of shares on which the loss has been denied to the assessee. He in this regard referred to the assessment order of GAFL which is dated 19.01.1995 in which income   has been  assessed   at Rs.8,68,478/­. However,   it   was   seen   that   at   page   88   the assessee  has  enclosed  computation  of total income of GAFL according to which income has been computed at NIL by chiming unabsorbed business   loss   brought   forward   from   Asst. Year 1991­92 at Rs. 16,38,462/­ and in the note   total   business   loss   to   be   carried forward to asst. year 1993­94 are computed at Rs.6,91,502/­. 15. In paragraph 12 of the assessment order it has been mentioned by Assessing Officer that according to the assessment order for Asst.   Year   1991­92   read   with   order   under section 154 there is no carry forward loss, therefore, no set off of the same is given.” 9.4. Referring to the above facts which are not in dispute, it was submitted that the Tribunal has brushed aside the relevant facts and has relied upon the irrelevant facts to hold that the   assessee   is   not   entitled   to   claim   the loss suffered by it. The Tribunal has also not   considered   that   the   CIT   (A)   after considering in detail the material on record has   arrived   at   following   findings   of   fact recorded in para­10 of the order of the CIT (A): Page 18 of 41

C/TAXAP/194/2008 JUDGMENT “10….. (i) The purchases have been made through a share broker, which establish the purchases along   with   its   purchase   value.   The Assessing   Officer   has   accepted   the purchases and its price to be genuine. (ii) Once the purchases have been found to be genuinely made, either there should be corresponding   sales   or   the   shares   should form part of the closing stock. Since these are   not   part   of   the   closing   stock,   the inference is that  corresponding sales are there. (iii)The sales are confirmed by seller and purchases   are   confirmed   by   purchaser   who are two separate taxable entities, assessed to tax. (iv) The   purchases   in   the   hands   of   the purchaser   and   its   subsequent   sale   to   a third   party,   earning   profit   in   the   same, earned   only   after   purchases   from   the appellant are genuinely accepted. (v) Against   the   sale/purchase   of   shares, payments   have   been   received,   though after a time gap which is not an illegality under any existing provisions of law. (vi) The sales without a share broker are not illegal ones and are permissible.” 9.5. Referring to the aforesaid findings, it was pointed out that, in view of such finding of facts arrived at by the CIT (A), the Tribunal could   not   have   given   different   finding   of facts contrary to record, which is based on the   findings   arrived   at   by   the   Assessing Officer. 9.6. Learned   advocate   for   the   appellant   placed reliance upon the decision of the Co­ordinate Bench   of   this   Court   in   case   of  Assistant Commissioner   of   Income­tax   v.   Biraj Page 19 of 41

C/TAXAP/194/2008 JUDGMENT Investment  (P.) Ltd. reported  in  (2012) 24 taxman.com   273   (Guj.)  to   submit   that   the Court   in   similar   situation   has   held   that simply because the assessee had sold shares to group company at loss during previous year by   itself   would   not   mean   that   it   was   a colourable   device   and   the   loss   cannot   be allowed to be set off. Reliance was placed upon   the   following   findings   of   the   Court which reads thus: “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 Page 20 of 41

C/TAXAP/194/2008 JUDGMENT 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 Commissioner of Income Tax v. Sakarlal   Balabhai,   69   ITR   186,   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. 18.   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 (supra),   we   do   not   find   that   this   a   case which   would   fall   within   the   parameters   of Page 21 of 41

C/TAXAP/194/2008 JUDGMENT the   decision   in   the   case   of   McDowell   & Company Ltd (supra).” 10.1. On the other hand, learned advocate for the revenue Mr. Varun K. Patel submitted that the Tribunal   has   arrived   at   finding   of   fact, considering that the copies of vouchers which are self­prepared   by   the   assessee   giving   the particulars of credit amount, number of shares, rate of sale and name of the company does not inspire confidence, as neither distinctive number nor   names   of   the   persons   in   whose   names   the shares   which   were   sold   were   mentioned   on   such vouchers. It was submitted that, apart from these debit notes and vouchers, there is no material on record   to   prove   the   factum   of   sale,   more particularly,   that   what   were   the   distinctive numbers   of   shares   which   were   delivered   by   the assessee to GAFL and on which date, such delivery was given by the assessee. It was submitted that, merely because the purchase of such shares were made subsequently, cannot entitle the assessee to claim capital loss to be set off. It was pointed out that, there is no material record to prove that the shares were actually delivered by the assessee to GAFL even subsequently. 10.2. It   was   therefore   submitted   that,   the Tribunal has rightly considered the fact that the assessee was under obligation to bring on record Page 22 of 41

C/TAXAP/194/2008 JUDGMENT the evidence to prove conclusively that shares in particular were actually delivered to GAFL. 10.3. It   was   further   submitted   that,   the Tribunal   has   also   arrived   at   an   admitted   fact that the sale of the shares were prior in point of time to associate concern, inasmuch as, the assessee   failed   to   produce   any   evidence   with regard   to   subsequent   delivery   of   shares   and receipt of sale consideration from GAFL. It was therefore contended that in such circumstances, the Tribunal has rightly held that the claim of the assessee is not genuine in the facts of the case   and   the   assessee   failed   to   discharge   the onus   to   claim   loss   to   be   set   off   against   the other income. 10.4. It was further submitted that, in view of the facts emerging from record, the Tribunal has   rightly   held   that   the   assessee   is   not entitled to claim the capital loss arising out from the transaction to be set off against the other income of the assessee. 11. Having   heard   the   learned   advocates   of   the respective parties and having gone through the material   on   record,   in   order   to   answer   the questions framed, it would be germane to refer to relevant provisions of the Income Tax Act, Page 23 of 41

C/TAXAP/194/2008 JUDGMENT 1961 as under: Section 2 (14) "capital asset" means— (a)   property   of   any   kind   held   by   an   assessee, whether   or   not   connected   with   his   business   or profession; (b)   any   securities   held   by   a   Foreign Institutional Investor which has invested in such securities   in   accordance   with   the   regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), but does not include— (i)   any   stock­in­trade   [other   than   the securities   referred   to   in   sub­clause   (b)], consumable stores or raw materials held for the purposes of his business or profession; (ii)   personal   effects,   that   is   to   say,   movable property

(including

wearing

apparel

and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes— (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. Explanation   1.—For   the   purposes   of   this   sub­ clause, "jewellery" includes— (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not   containing   any   precious   or   semi­precious stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi­precious stones, whether or not   set   in   any   furniture,   utensil   or   other article   or   worked   or   sewn   into   any   wearing apparel. Explanation 2.—For the purposes of this clause— Page 24 of 41

C/TAXAP/194/2008 JUDGMENT (a)   the   expression   "Foreign   Institutional Investor" shall have the meaning assigned to it in   clause   (a)   of   the   Explanation   to  section 115AD; (b)   the   expression   "securities"   shall   have   the meaning assigned to it in clause (h) of section 2 of   the   Securities   Contracts   (Regulation)   Act, 1956 (42 of 1956); (iii) agricultural land in India, not being land situate— (a)   in   any   area   which   is   comprised   within   the jurisdiction of a municipality (whether known as a   municipality,   municipal   corporation,   notified area   committee,   town   area   committee,   town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or (b)   in   any   area   within   the   distance,   measured aerially,— (I) not being more than two kilometres, from the local   limits   of   any   municipality   or   cantonment board   referred   to   in   item   (a)   and   which   has   a population   of   more   than   ten   thousand   but   not exceeding one lakh; or (II)   not   being   more   than   six   kilometres,   from the   local   limits   of   any   municipality   or cantonment   board   referred   to   in   item   (a)   and which has a population of more than one lakh but not exceeding ten lakh; or (III) not being more than eight kilometres, from the   local   limits   of   any   municipality   or cantonment   board   referred   to   in   item   (a)   and which has a population of more than ten lakh. Explanation.—For the purposes of this sub­clause, "population"   means   the   population   according   to the last preceding census of which the relevant figures have been published before the first day of the previous year; (iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; (v)   Special   Bearer   Bonds,   1991,   issued   by   the Central Government ; (vi)   Gold   Deposit   Bonds   issued   under   the   Gold Page 25 of 41

C/TAXAP/194/2008 JUDGMENT Deposit   Scheme,   1999  1[or   deposit   certificates issued under the Gold Monetisation Scheme, 2015] notified by the Central Government. Explanation.—For   the   removal   of   doubts,   it   is hereby   clarified   that   "property"   includes   and shall   be   deemed   to   have   always   included   any rights  in or  in relation   to an Indian  company, including rights of management or control or any other rights whatsoever; Section 2 (47) “transfer”,  in   relation   to   a   capital   asset, includes,­ (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (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, stock­in­trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; 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, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a   member   of,   or   acquiring   shares   in,   a   co­ operative   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. Explanations: 1. For the purposes of sub­clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA. 2.   For   the   removal   of   doubts,   it   is   hereby clarified that “transfer” includes and shall be deemed   to   have   always   included   disposing   of   or Page 26 of 41

C/TAXAP/194/2008 JUDGMENT parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally,   voluntarily   or   involuntarily,   by way   of   an   agreement   (whether   entered   into   in India   or   outside   India)   or   otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares   of   a   company   registered   or   incorporated outside India. Section 45 Capital gains. “45.  (1)  Any profits   or gains  arising  from  the transfer   of   a   capital   asset   effected   in   the previous  year  shall,  save  as otherwise  provided in  sections 54,  54B,  54D,  54E,  54EA,  54EB,  54F, 54G  and  54H,   be   chargeable   to   income­tax   under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A)   Notwithstanding   anything   contained   in   sub­ section   (1),   where   any   person   receives   at   any time during any previous year any money or other assets   under   an   insurance   from   an   insurer   on account   of   damage   to,   or   destruction   of,   any capital asset, as a result of— (i)  flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii)  riot or civil disturbance; or (iii)  accidental fire or explosion; or (iv)  action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income­tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset   was   received   and   for   the   purposes   of section 48, value of any money or the fair market value of other assets on the date of such receipt shall   be   deemed   to   be   the   full   value   of   the consideration received or accruing as a result of the transfer of such capital asset. Page 27 of 41

C/TAXAP/194/2008 JUDGMENT Explanation.—For   the   purposes   of   this   sub­ section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).” 12. It is not in dispute that the Tribunal has arrived   at   finding   of   fact   and   the   findings arrived at by the CIT (A) in its order allowed the   claim   of   the   capital   loss   made   by   the assessee. The CIT (A) has gone on a tangent in arriving at a finding on presumption that once the   purchases   have   been   found   to   be   genuinely made, either there should be corresponding sales or   the   shares   should   form   part   of   the   closing stock and because the shares are not part of the closing   stock,   the   inference   was   drawn   that corresponding   sale   is   also   genuine.   As   against that,   the   Tribunal   has   relied   upon   only   the evidence   which   is   debit   note   prepared   by   the assessee which was produced on record. On perusal of such debit note, it was found by the Tribunal that the same were self­prepared giving only the particulars   of   the   credit   amount,   number   of shares,   rate   of   sale   and   name   of   the   company, without   there   being   any   particulars   of   shares i.e. distinctive number or names of the persons in whose names those shares were standing, etc. Moreover, the Tribunal has also found as a matter of fact that there is no material on record to prove that the shares were actually delivered by Page 28 of 41

C/TAXAP/194/2008 JUDGMENT the   assessee   to   the   GAFL   even   subsequently   as there   is   total   absence   of   any   document   to remotely   indicate   such   fact.   The   Tribunal   has also   found   that   there   is   no   matching   of   the shares which were sold and purchased subsequently through   some   share   brokers.   It   was   also   found that, even in the broker’s voucher, distinctive numbers of those shares were not given and the broker had also not stated that from whom he has purchased these shares for assessee and in whose names   such   shares   were   standing.   The   Tribunal therefore found that there is absence of proof on record   to   hold   that   the   shares   were   actually delivered   by   the   assessee   to   GAFL.   In   such circumstances, it would be necessary to refer to the   decision   of   the   Privy   Council   in   case   of Aveline Scott Ditcham v. James J. Miller reported in AIR 1931 Privy Council 203, wherein it is held as under: “That deed poll, remarkable as it is, and it is a notable example of salvage conveyancing, was not in their Lordships' judgment, effective for its purpose. The Supreme Court took the view that as between the company and the three persons whose title it purported to confirm, it amounted to a legal   assignment   in   writing   of   the   leasehold interest   in   the   property   with   all   rights appurtenant thereto which included the right to obtain payment of compensation under the Act of 1921.   It   certainly   did   not   purport   to   be   more than this.  But, so regarded it was at law quite inoperative, inasmuch as the estate or interest which it purported to assign had at the date of the   deed   no   existence,   and   it   is   well   settled that   neither   at   law   nor   in   equity   can   the Page 29 of 41

C/TAXAP/194/2008 JUDGMENT assignment of such an interest operate according to its tenor: see Sweet v. Shaw, (1), Collyer v. Isaacs (2), Performing Rights Society v. London Theatre of Varieties, Limited (3) and Performing Rights   Society   v.   London   Theatre   of   Varieties (4).   In   equity   such   a   transfer   may   in   certain circumstances create equitable rights, but at law it is useless. The deed poll accordingly was for this reason alone of no effective service to the respondent. And there are other objections to its efficacy. If it may be assumed, as it seems to have   been,   that   the   "shareholders"'   already referred   to   and   the   "debtors“   were   the   same persons,   then   it   was   the   title   of   these shareholders as contributors of the company, and that title only, which the company in 1980 had by its   liquidator   any   right   to   confirm.   No assignment of this interest of theirs now for the first time emanating from the company was, as has been seen, made by the trust deed of 14th January 1931, and accordingly they, as contributors, were alone   entitled   to   have   their   title   perfected. Putting   it   in   another   way,   without   their concurrence in the deed poll as assignors, that deed,   even   if   otherwise   unobjectionable,   was inoperative   to   assign   any   interest   to   the respondent and his two co­assignee's.” 13.  Therefore, in view of the aforesaid dictum of law   and   considering   the   provision   of   Sections 2(14) r/w. 2 (47) of the Act, 1961, if the estate or interest which it purported to assign had at the date of the deed did not exist, it is well settled that neither at law nor in equity can the assignment of such an interest operate according to   its   tenor.   Similarly,   in   the   facts   of   the case, when the shares were not in existence on the date of sale, then the same could not have been considered as capital asset, so as to fall within the definition of transfer under Section 2 Page 30 of 41

C/TAXAP/194/2008 JUDGMENT (47) of the Act. 14. The Madras High Court in the case of  Chief Controlling Revenue Authority, Madras, Referring Officer v. Sudarsanam Picture, Madras­18 reported in  AIR   1968   Madras   319,   in   the   context   of Transfer of Property Act has held as under: “(5)  The   word   "conveyance"   is   used   in   this definition   in   a   wide   sense   so   as   to   include sale, mortgage, charge, lease, etc. As will be seen presently, it is settled law that while a transfer of property may take place not only in the   present,   but   also   in   the   future,   the property must be in existence at the time of the transfer, for an instrument to be a deed of transfer. The words "in present or in future" in the definition, it is manifest, qualify the word "conveys" immediately preceding "property" and not the word "property". The conveyance may be in present or in future, but the conveyance should be of property in existence. A purported transfer of property, not in existence at the time   of   the   contract,   can   only   operate   as   a contract to be performed in future.  Reference in this connection may be made to the decision of   the   Privy   Council   in   Ranee   Bhobosoondree Dassee v. issur Chunder Dutt, (1872) 18 Suth WR 140 (PC). There, a person who had not the means to   institute   a   suit   for   the   recovery   of   the property he was entitled to, agreed to sell and sold   a   moiety   of   the   property   to   another   in consideration   of   a   sum   of   money,   which   the other   person   was   to   pay   for   the   purpose   of carrying on the suit, both of them to figure as plaintiffs.   Shortly  after  the   conveyance,  the owner compromised with the opposite party, who was   in   possession   of   the   property.   Affirming the dismissal of the suit in ejectment filed by the person who had advanced the money as on a sale against the owner and the opposite party, their  Lordships  observed   that   the  transaction of sale did not operate as a present transfer of the property, but only as an agreement to transfer so much of it as might be recovered in Page 31 of 41

C/TAXAP/194/2008 JUDGMENT a   suit   to   be   instituted.   They   referred   to earlier   observations   of   the   Privy   Council   in Rajah   Sahib   Perhlad   Sein   v.   Y.   Baboo   Budhee Singh, (1867­68) 12 Moo Ind App 275, 286, 307 (PC), where it is stated: "To support it, the execution of the bill of sale must be treated as a constructive transfer of possession. But how can there be any such transfer,   actual   or   constructive,   upon   a contract under which the vendor sells that of which he has no possession and to which he may never establish a title. The bill of sale in such a case can only be evidence of a contract to   be   performed   in   future   and   upon   the happening   of   a   contingency   of   which   the purchaser may claim a specific performance, if he comes into Court showing that he has himself done all that he was bound to do." In Jugalkishore Saraf v. Raw Cotton Co., Ltd., AIR 1955 SC 376, the Supreme Court points out that "under the Transfer of Property Act, there can be no transfer of property which is not in existence   at   the   date   of   the   transfer."   If there   can   be   no   transfer   in   praesenti   of property not in existence, it stands to reason and follows that there can be no creation of a right over, or in respect of such property. In our   view,   the   principles   that   govern   the construction of the word 'transfer' in relation to property under the Transfer of Property Act, would equally apply to the transfer or creation of   right   provided   under   the   definition "mortgage deed" in Sec. 2(17) of the Stamp Act. The   Lahore   High   Court   in   Miran   Baksh   v. Emperor,   AIR   1945   Lah   69   (SB)   on   a   Stamp Reference observed: "A   transfer   of   property   that   is   not   in existence   operates   as   a   contract   to   be performed in future which may be specifically enforced   as   soon   as   the   property   comes   into existence,   but   it   does   not   operate   as   a transfer.   I   am   of   opinion   that   the   same principles must govern the construction of the words 'transfer' and 'property' used in Section Page 32 of 41

C/TAXAP/194/2008 JUDGMENT 2(17)  of  the  Stamp  Act,  and  in  order   that  a document by which property is transferred may come within the purview of a mortgage deed for the purposes of the Act, the property to which it relates must be in existence." The   learned   Government   Pleader   drew   our attention to In re Bajraj Singh, (1887) ILR 9 All 585 (FB), also a reference under the Stamp Act,   as   authority   for   the   proposition   that future property could be subject of mortgage. Having perused the judgment carefully, we find no   warrant   for   such   an   inference.   What   was hypothecated there was produce of a field with sugarcane,   then   existing   property,   and   there was no discussion in the case whether property not   in   existence   could   be   the   subject   of mortgage; nor does the decision in Secretary to the   Commr.   of   Salt,   Abkari   and   Separate Revenue, Madras v. Mrs. Orr, ILR 38 Mad 646 = (AIR 1917 Mad 374), cited for the State advance the contention. The question there was, whether the   instrument   was   a   mortgage   within   the meaning of Sec. 2(17) of the Stamp Act and was chargeable with stamp duty under Art. 40 or was a   declaration   of   trust   chargeable   under   Art. 64. The instrument was between the proprietors of a business and the Bank of Madras, who had agreed   to   advance   moneys.   The   deed   covered besides machinery, plant, etc., stock­in­trade, goods, chattels and effects of the business in Madras and Rangoon, described in the schedule to   the   instrument.   The   net   profits   realised after payment of expenses under the instrument in   question   were   also   to   be   retained   by   the trustee   under   the  instrument   in  trust   to  pay and apply the same in payment of sums advanced by the bank. The Special Bench held that so far as stock­in­trade etc., described in the deed as   trust   properties   were   concerned,   the properties   were   specified   and   that   the instrument was a mortgage deed. But as to net profits,   which   had   also   to   be   applied   in payment of the sums advanced by the bank, it was observed, at p. 649: "It may be that the net profits here are not 'specified property' within the meaning of the definition". Crompton Engineering   Co.,   Madras,   Ltd.   v.   Chief Controlling   Revenue   Authority,   Madras   (FB) Page 33 of 41

C/TAXAP/194/2008 JUDGMENT again   as   only   an   authority   for   the   position that   stock­in­trade   is   'specified   property' within   the  meaning   of  Section  2(17).   In  that case it was held that the document was not a mortgage   deed,   as   there   was   no   transfer   of rights in accordance with the requirements of Sec. 59 of the Transfer of Property Act. Apart from the stock­in­trade, there were other items of properties and immoveable property comprised in   the   transaction,   all   one   and   indivisible, and   the   instrument   was   unattested.   While holding, in the circumstances, that there was no mortgage, their Lordships pointed out that to make a document liable to stamp duty as a mortgage deed it was not enough if the document purported   to   effect   a   transfer,   but   that   it must   transfer.   Authority   for   the   view   that stock­in­trade   is   'specified   property'   under Sec.   2(17)   is  not   authority   for  the   position that   future  property   could   be  the   subject  of immediate   transfer.   Stock­in­trade   is   not future property.   If   stock­in­trade   is mortgaged, there is existing property for the transfer to act upon, the security takes in all the   effects  then   available   as  stock­in­trade. No   doubt   substituted   property   may   be effectually   included   in   the   security   by   apt words, which can be found and are usually found in mortgages of stock, machinery, plant and the like where the subject­matter may change from day to day. It is a matter of construction of the   deed   whether   effects   subsequently  brought in   on   the   promises   for   the   purposes   of replacing those disposed of or consumed in the course   of   the   business   are   covered   by   the mortgage.   They   are   future   property,   but   when the instrument is executed, there is existing property. No formalities are required for the creation of a mortgage of moveable property. A parole   mortgage   of   goods   is   perfectly   valid though a transfer on an actionable claim will have to comply with the requirement of Section 130 of the Transfer of Property Act. For the purpose   of   the   Stamp   Act,   the   effect   of   the instrument has to be examined at the time of the   execution;   whether   in   fact   there   is   an operative transfer or mortgage on the execution of   the   instrument   and   by   virtue   of   the instrument. In this connection we may refer to the   observations   of  the  Supreme   Court   in  AIR Page 34 of 41

C/TAXAP/194/2008 JUDGMENT 1955 SC 376 already cited, where it is observed as follows: "Where there is a contract for the transfer of property which is not in existence at the date of the contract, the intending transferee may, when the property comes into existence, enforce the contract by specific performance, provided the   contract   is   of   the   kind   which   is specifically enforceable in equity. It is only when the transferor voluntarily executes a deed of transfer a sin all conscience he should do or   is   compelled   to   do   so   by   a   decree   for specific   performance   that   the   legal   title   of the transferor in that property passes from him to   the  transferee.   This  transfer   of  title  is brought   about   not  by   the  prior   agreement   for transfer   but   by   subsequent   deed   of   transfer. This process obviously involves delay, trouble and   expense.   To   obviate   these   difficulties, equity   steps   in   again   to   short   circuit   the process." Their Lordships easier refer to the equitable principles   enunciated   by   Lord   Westbury   in Holroyd v. Marshall (1862) 10 HLC 191, 210­211, in the following words:­­ "It is quite true that the deed which professes to convey property which is not in existence at the time is as a conveyance void at law, simply because   there   is   nothing   to   convey.   So   in equity   a   contract   which   engages   to   transfer property,   which   is   not   in   existence,   cannot operate   as   an   immediate   alienation   merely because there is nothing to transfer. But if a vendor or mortgagor agrees to sell or mortgage property, real or personal, of which he is not possessed   at   the   time   and   he   receives   the consideration for the contract, and afterwards becomes   possessed   of   property   answering   the description in the contract, there is no doubt that   a   Court   of   Equity   would   compel   him   to perform   the   contract,   and   that   the   contract would,   in   equity,   transfer   the   beneficial interest   to   the   mortgagee   or   purchaser immediately on the property being acquired." Page 35 of 41

C/TAXAP/194/2008 JUDGMENT The equitable principle flowing from the above that   equity   treats   as   done   what   ought   to   be done does not make out any new contract between the parties or alter the true character of the original instrument.” 15. Similarly, in the case of  Patel Brass Works v. Commissioner of Income Tax reported in (2006) 286 ITR 598 (GUJ.), in case of claim of capital loss   on   cancellation   of   order   of   supply   of machinery,   it   was   held   that,   the   claim   of   the assessee   for   loss   on   account   of   cancellation charges   as   business   loss   or   in   alternative   as short   term   capital   loss   cannot   be   allowed   as there was no capital asset existing in the hands of the assessee and there was no transfer within the meaning of Section 2 (47) of the Act, 1961, as under: “6. The Scheme of the Act envisages a conjoint reading  of   provisions   of   Sections   45,   2(47) and 2(14) of the Act. Under section 45 of the Act,   any   profits   or   gains   arising   from   the transfer of a capital asset effected in the previous year shall be deemed to be the income of   the   previous   year   in   which   the   transfer took   place.   Therefore,   for   the   charge   of capital   gains   tax   or   capital   loss,   the essential requirements are that there should be a transfer of a capital asset effected in the   previous   year.   This   would   require ascertainment   of   the   meaning   of   the   terms transfer and capital assets. Transfer has been defined, in relation to a capital asset, to include   various   contingencies   stipulated   by sub­clauses of Section 2(47) of the Act. Sub­ clause (ii) of Section 2(47) of the Act states that transfer includes the extinguishment of any   right   therein.   That   requires   assigning Page 36 of 41

C/TAXAP/194/2008 JUDGMENT meaning to the term therein. In other words, for   the   purposes   of   transfer   of   a   capital asset,   it   would   suffice   if   there   is extinguishment   of   any   rights   in   a   capital asset.   However,   even   for   the   purposes   of extinguishment of any rights, existence of a capital asset is a must. 7. Section 2(14) of the Act defines capital asset to mean property of any kind held by an assessee. For the present, it is not necessary to   refer   to   the   exclusionary   clauses.   The definition stipulates existence of property of every   description   and   such   property  must   be held by an assessee. 8. As can be seen from the facts of the case, the assessee had entered into a contract for purchase of machinery. The contract had been executed and entered into by the parties to the contract. The contract was in subsistence till the point of time the assessee cancelled the  contract.   Therefore,   till   that   point   of time,   the   assessee   did   not   have   any   right which could be termed to be property so as to fall within the definition of capital asset as defined under section 2(14) of the Act. The right that the assessee had till that point of time was to make payment of the balance amount and take delivery of the machinery for which the order had been placed by the assessee. In other   words,   the   assessee   was   required   to perform its part of the contract or show or express readiness and willingness to perform its obligation as emanating from the contract, namely, making payment of the balance amount towards  machinery   to   be  purchased,   and   then call upon the supplier to fulfill its part of the   contract,   namely,   supply   the   machinery. Upon the supplier refusing to perform its part of   the   contract,   the   only   right   that   could come into existence would be a right to sue for   specific   performance,   and   in   the alternative,   claim   damages.   However,   in   the present case, it was the assessee who was not willing to perform its part of the contract. Therefore, to claim that the assessee was in possession of a right which could be termed to Page 37 of 41

C/TAXAP/194/2008 JUDGMENT be   a   capital   asset   within   the   meaning   of section 2(14) of the Act, cannot be accepted and the Tribunal was justified in holding that the   assessee   was   not   in   possession   of   any capital asset. 9. As already seen hereinbefore, the assessee was  not  holding  any  capital  asset   so   as  to enable the assessee to claim extinguishment of any rights in such a capital asset. Whether extinguishment per se is sufficient or whether it could operate as distinct and independent of   transfer   of   a   capital   asset   is   not   the issue   in   the   present   case,   and   hence,   the decision   in   case   of   C.I.T.   v.   Mrs.   Grace Collis   (supra)   relied   upon   by   the   learned advocate   for   the   assessee,   cannot   carry  the case   of   assessee   any   further.   Even   if   the contention   that   extinguishment   by   itself   is sufficient to constitute transfer is accepted, nonetheless, it is necessary for the assessee to   establish   that   extinguishment   is   of   any rights in a capital asset. The facts of the case reveal that the assessee never held any capital asset. The endeavour on behalf of the assessee   to   contend   that   the   assessee   was holding a right, which itself was a capital asset, is not supported by the facts of the case. The only right that the assessee had, till   the   point   of   time   it   cancelled   the contract,   was   to   perform   its   part   of   the contract and seek performance of the contract from its suppliers. This could not be termed to   be   a   capital   asset,   howsoever   wide   the definition of property may be cast. 10. In these circumstances, when the Tribunal came   to   the   conclusion   that   the   concluded contract   between   the   assessee   and   the suppliers through the exchange of letters was not   a   capital   asset   in   the   hands   of   the assessee, and there was no transfer whatsoever within   the   meaning   of   Section   2(14)   of   the Act, it cannot be said to be incorrect. Even if   the   unilateral   act   of   cancellation   of contract   would   amount   to   extinguishment,   it would be extinguishment only of the right to seek performance of the contract after showing Page 38 of 41

C/TAXAP/194/2008 JUDGMENT the   willingness   to   perform   its   part   of   the contract. 11. Therefore, in absence of any infirmity in the impugned order of Tribunal, question No. 2 is answered in the affirmative. The Tribunal was right in law in holding that the assessee was not entitled to deduction of Rs. 80,000/­ as short term capital loss. The question is accordingly answered in favour of the revenue and against the assessee.” 16. In view of the aforesaid settled legal position   and   in   view   of   the   findings   of   fact arrived by the Tribunal, it cannot be said that the Tribunal has committed any error in holding that the assess is not entitled to claim capital loss arising out of the transactions of sale of shares, which were not in actual possession of the assessee. 17. With regard to the decision of this Court in the case of Biraj Investment (supra), the facts of the said case were different as the assessee in that case was owner of the shares but such shares were pledged by the assessee with the IDBI Bank   and   all   original   share   certificates   were also lying with the said Bank along with the duly executed transfer forms. In such circumstances, it was held that, though it was not possible for the   assessee   to   deliver   the   original   share certificates to its purchaser along with the duly signed transfer forms, but by itself it would not Page 39 of 41

C/TAXAP/194/2008 JUDGMENT 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. However, in the facts of the case, the assessee was   not   having   either   the   possession   or   the ownership of the shares which were sold to GAFL. Moreover, it is also finding of fact arrived at by the Tribunal that there is no evidence as to the   actual   delivery   or   the   time   of   receipt   of sale   consideration   by   the   assessee.   In   such circumstances,   in   view   of   the   settled   legal position as held by the Supreme Court in case of Omar Salay Mohamed Sait v. Commissioner of Income Tax, Madras  reported in  (1959) 37 ITR 151 (SC), the Tribunal which is a fact finding authority, has arrived at its own conclusion of facts after due   consideration   of   the   evidence   before   it, therefore,   this   Court   will   not   interfere.   The Supreme Court held as under: “34.   We   are   aware   that   the   Income­tax Appellate   Tribunal   is   a   fact   finding Tribunal   and   if   it   arrives   at   its   own conclusions of fact after due consideration of   the   evidence   before   it   this   court   will not   interfere.   It   is   necessary,   however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were   the   questions   which   arose   for determination, what was the evidence pro and contra   in   regard   to   each   one   of   them   and what were was the reached on the evidence on record before it. The conclusions reached by the Tribunal should not be coloured by any Page 40 of 41

C/TAXAP/194/2008 JUDGMENT irrelevant   considerations   or   matters   of prejudice and if there are any circumstances which   required   to   be   explained   by   the assessee,   the   assessee   should   be   given   an opportunity   of   doing   so.   On   no   account whatever   should   the   Tribunal   base   its findings   on   suspicions,   conjectures   or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly   on   suspicions,   conjectures   or surmises   and   if   it   does   anything   of   the sort, its findings, even though on questions of fact, will be liable to be set aside by this court.” 18. In overall view of the matter and in absence of   any   infirmity   in   the   impugned   order   of   the Tribunal,   the   question   is   answered   in affirmative.   The   Tribunal   was   right   in   holding that   if   the   assessee   could   not   establish   the factum   of   sale   of   the   shares   made   to   her associate   concern   and   the   said   transaction   of sale   is   made   without   the   intervention   of   the broker, the capital loss claimed by the assessee is   not   allowable.   The   question   is   accordingly answered in favour of the revenue and against the assessee. 19. Appeals

therefore

fail

and

are accordingly dismissed. There shall be no order as to costs.

(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Pradhyuman Page 41 of 41