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Income Tax Appellate Tribunal, Hyderabad ‘A‘ Bench, Hyderabad
Before: Shri Laliet Kumar & Shri Manjunatha, G.
Per Manjunatha, G. A.M This appeal filed by the assessee is directed against the order dated 28.09.2017 of the learned CIT (A)-5, Hyderabad, relating to A.Y. 1999-2000.
The assessee has raised the following grounds: “1. The order of the learned Commissioner of Income Tax (Appeals)-5, Hyderabad, is erroneous both on facts and in law so far as it is prejudicial to the appellant.
2. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, erred in confirming the interest disallowance on borrowed funds made by the Assessing officer to the extent of Rs.25,79,642.
3. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the investments in shares is not made for the purpose of dividend income and therefore the provisions of section 14A have no application and, therefore ought to have allowed the entire claim of interest payment on borrowed funds amounting to Rs.35,60,747/- or alternatively the entire amount ought to have considered the cost of shares and deduction shall be provided from the sale consideration of shares while arriving Short Term Capital Loss.
4. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, erred in allowing the Short Term Capital loss of Rs.42,08,226 against the appellant total claim of Rs.4,24,29,033. 5. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have allowed the entire Short Term Capital loss of Rs.4,24,29,033 as claimed by the appellant. 6. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the appellant company had purchased the shares as an associate company in the background of Kaiahasteeswara Finance Pvt Ltd., as acquirer under the scheme of "open offer" for acquisition of shares as approved by Securities and Exchange Board of India (SEBI) and further supported by MOU between the appellant and Kalahasteeswara Finance Pvt Ltd. 7. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the appellant company has given the written consent for price revision of Rs.100 per share as per clause 5 of the MOU for acquisition of the shares in Open Offer. 8. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the transaction of purchase and sale of shares by the appellant is supported with evidence and, therefore, ought to have allowed the total claim of Short Term Capital Loss.
The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, erred in observing that, the purchase price of share in excess of Rs.33/- per share is not in accordance with commercial expediency.
The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have allowed the total purchase price of Rs.108/- per Equity Share.
11. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the facts of Lakshmipriya Investments Pvt Ltd., are different from appellant's case. 12. The appellant craves leave to add/alter/modify grounds which would be necessary for adjudication of the case.”
The brief facts of the case are that the assessee company is engaged in providing loans and making investment. The assessee filed its return of income for the A.Y 1999-2000 on 31.12.1999 declaring total income of Rs.3,84,09,010/- which includes long term and short term capital gains. The assessment has been completed u/s 143(3) of the I.T. Act, 1961 on 30.03.2022 and determined the total income at Rs.9,27,95,450/- by inter alia making disallowances of short term capital loss claimed against the short term capital gains derived from sale of shares for Rs.,4,24,29,003 and disallowance of interest expenditure u/s 14A of the I.T. Act, 1961.
The assessee carried the matter in appeal before the first appellate authority and the learned CIT (A) in his order dated 31.01.2003 sustained additions made by the Assessing Officer towards disallowance of Short-Term Capital loss derived from the sale of shares. The assessee carried the matter in further appeal
Page 3 of 26 before the ITAT and the ITAT Hyderabad Benches vide order dated 14.09.2009 set aside issue to the file of the learned CIT (A) with a direction to consider all the details on record and decide the issue in respect of disallowance of Short-Term Capital Loss derived from transfer equity shares of Shri Vishnu Cements Ltd (SVCL) and also relating to disallowance of interest. In consequence to the directions given by the ITAT, the learned CIT (A) vide its order dated 28.09.2017 in appeal No.1671/2015-16 partly allowed the appeal filed by the assessee, where the learned CIT (A) allowed partial relief in respect of disallowance of interest expenditure u/s 14A of the Act and out of the total disallowance made by the Assessing Officer towards interest expenditure of Rs.35,16,777/- allowed relief to the extent of Rs.9,81,105/-and sustained the addition to the extent of Rs.25,79,642/-.As regards computation of Short-Term Capital Loss, the learned CIT (A) computed STCL of Rs.42,08,226/- by adopting the cost of purchase of shares of Rs.33/- per share as against the cost of shares claimed by the assessee at Rs.85/- to Rs.108/- per share.
Aggrieved by the order of the learned CIT (A), the assessee is in appeal before the Tribunal.
The first issue that came up for our consideration from Ground Nos. 1 & 2 of assessee’s appeal is disallowance of interest expenditure u/s 14A of the I.T. Act, 1961. The fact with regard to the impugned disputes are that the assessee has borrowed loans from various banks and financial institutions and paid interest.
Page 4 of 26 The appellant had also made investment in shares of various companies. The Assessing Officer disallowed interest paid on loan u/s 14A of the Act on the ground that the appellant has utilized interest bearing fund for making investment in shares and securities which yield exempt income. The learned CIT (A) after considering relevant details of loans borrowed from Banks and financial institutions and also investment made in shares and securities of various companies disallowed the proportionate interest relatable to loan fund utilized for purchase of shares and loan fund utilized for non-business purpose amounting to Rs.25,79,642/- and balance amount of Rs.9,81,105/- is deleted.
The learned Counsel for the assessee submitted that the learned CIT (A) erred in confirming the interest disallowance on borrowed fund to the extent of Rs.25,79,642/- without appreciating the fact that the investment in shares is not made for the purpose of dividend income and therefore, the provisions of section 14A have no application and therefore, the entire interest expenditure on borrowed fund amounting to Rs.35,60,747/- needs to be allowed.
The learned DR, on the other hand, supporting the orders of the authorities below submitted that the learned CIT (A) have analyzed the funds borrowed from banks and investment made in shares and securities to workout proportionate interest expenditure relatable to investment in shares u/s 14A of the I.T. Act, 1961, and, therefore, there is no error in the findings
Page 5 of 26 recorded by the learned CIT (A) on this issue and same needs to be upheld.
9. We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The appellant has filed a statement explaining the source of loan borrowed from various financial institutions, amount of loan, interest paid, proportionate interest on loan fund utilized for share purchase and pro-rata interest relatable to funds not used for business purpose. The learned CIT (A) after considering the relevant details filed by the assessee has worked out the interest disallowance u/s 14A of the Act to the tune of Rs.25,79,642/- out of total interest expenditure disallowed by the Assessing Officer for Rs.35,60,747/-. Although the appellant agitated the reasons given by the Assessing Officer to sustain the addition to the extent of Rs.25,79,642/-, but on perusal of the reasons given by the assessee, in our considered view, the assessee could not substantiate its argument that the investments in shares of other companies is for strategic business purpose is not provided with relevant evidences. On the contrary, the assessee itself has admitted fact that the interest bearing funds has been used for investment in shares and also for non-business purpose. The learned CIT (A) after considering the relevant facts has rightly sustained disallowance of interest to the extent of Rs.25,79,642/- and thus, in our considered view, there is no error in the reasons given by the learned CIT (A) on this issue to take a contrary view.
Page 6 of 26 Thus, we reject the argument of the assessee and uphold the findings of the learned CIT (A).
10. The next issue that came up for our consideration from Ground Nos. 4 to 11 of assessee’s appeal is computation of Short-Term Capital Loss from purchase and sale of shares of M/s Shri Vishnu Cements Ltd. The fact with regard to the impugned dispute are that during the relevant A.Y 1999-2000, the appellant has purchased 5,85,300 shares of M/s. SVCL from 3 different parties. The appellant has purchased 3,85,300 shares of SVCL @ Rs.108/- per share on 15.12.1998 from Kalahasteeswar Finance Pvt. Ltd. The appellant had also purchased 43,000 shares @ Rs.85/- per share on 7.9.98 from Bhoopathy Engineering Consultants Pvt Ltd. Similarly, the appellant has purchased 1,50,000/- shares of SVCL @ Rs.90 per share on 4.9.98 from Shri Rampriya Consultants Pvt Ltd. The appellant had sold 5,83,900 shares of SVCL to various parties @ Rs.25 to 33/- per share. The appellant has computed Short-Term Capital Loss of Rs.4,24,29,003/-. The Assessing Officer has disallowed Short- Term Capital Loss derived from sale of SVCL shares at Rs.4,24,29,003/- on the ground that the appellant has booked artificial Short-Term Capital Loss by arranging share purchase and sale transaction with group entities to claim the benefit of set off of loss derived from sale of shares against the capital gain derived from shale of shares. The Assessing Officer discussed the issue at length and held that although the market quotation of SVCL shares at the time of purchase of shares by the appellant
Page 7 of 26 was at Rs.41 per share, the appellant has paid higher price of Rs.85 to 108 per share. Therefore, the Assessing Officer opined that the Short-Term Capital Loss derived by the appellant from sale of shares is non-genuine, which is entered into with related parties to offset Short-Term Capital Gain derived from sale of shares.
In appeal, the learned CIT (A) by following the decision of the ITAT Hyderabad Benches in the case of M/s. Lakshmipriya Investments Pvt. Ltd in dated 14.09.2007 recomputed the Short-Term Capital Loss derived from shale of shares of SVCL by considering purchase cost of Shares at Rs.33/- per share.
The learned counsel for the assessee submitted that the learned CIT (A) is erred in allowing Short-Term Capital loss of Rs.42,08,226 against the appellant claim of Short-Term Capital Loss of Rs.4,24,29,033. The learned Counsel for the assessee submitted that the Short-Term Capital Loss computed by the assessee is genuine in nature which is supported by necessary evidences including contract notes, payment of consideration by cheque and also relevant additional evidences like SEBI permitted open offer given by the company to public at large for purchase of shares and further supported by the MOU between the assessee and M/s. Kalahasteeswar Finance Pvt. Ltd. The learned Counsel for the assessee further referring to the similar transaction entered into by promoter of the appellant company and India
Page 8 of 26 Cements Ltd for purchase of shares of Rasi Cements Ltd in an open offer submitted that when the market quotation of shares of RCL was at Rs.162/- per share, the appellant has sold said shares at Rs.300/- per shares on bulk basis and if we go by the above transaction, the transaction of the appellant in buying shares from 3 entities at higher rate and selling the same shares at lower rate cannot be treated as arranged transaction. The learned Counsel for the assessee further referring to the various documents submitted that M/s. SVCL is a group company of Dr B V Raju. The promoter in the process of saving the company from take over has given an open offer to public with the approval of the SEBI for purchase of shares to hold a controlling interest. Since the public are not coming forward to sell their shares, the appellant has bought shares from 3 entitles at higher rate in order to keep controlling interest in the company. Therefore, merely for the reason that sale of said shares resulting into loss, the transaction cannot be treated as arranged transaction. Therefore, he submitted that the Assessing Officer and the learned CIT (A) are erred in recomputing the Short-Term Capital Loss by adopting the cost of purchase at Rs.33/- per share. The learned Counsel for the assessee referring to the decision of the ITAT Hyderabad Benches in the case of Laxmipriya Investments Pvt Ltd vs. DCIT in submitted that the facts of present case and facts of the case before the Tribunal in Laxmipriya Investments (P) Ltd are distinguishable. Therefore, the order of the Tribunal in the above case cannot be considered. Therefore, he
Page 9 of 26 submitted that the Short-Term Capital Loss claimed by the assessee from sale of shares of SVCL should be allowed.
13. The learned DR, on the other hand, supporting the order of the learned CIT (A) submitted that the issue involved in this appeal is fully covered by the decision of the ITAT Hyderabad Bench in the case of Laxmipriya Investments (P) Ltd vs. DCIT (Supra) where an identical transaction of purchase and sale of shares of M/s. SVCL has been considered by the Tribunal and after considering the relevant facts held that the transaction between the appellant and different group entities is an arranged transaction to claim the benefit of set off of Short-Term Capital Loss against the Short-Term Capital Gain. Further, the learned CIT (A) has brought out clear facts to the fact that the purchase of shares by the appellant is from group entities and sale of shares is also to the related entities. There is no actual transfer of consideration for purchase and sale of shares. In fact, the same has been adjusted by way of book entries. From the above, it is clear that the appellant has arranged transaction in collusion with the group entities to claim the benefit of Short-Term Capital Loss. The learned CIT (A) after considering the relevant facts has rightly disallowed or recomputed Short-Term Capital Loss from sale of shares and their order should be upheld.
14. We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that when the Page 10 of 26 market quotation of listed shares of M/s. SVCL was about Rs.41/- per share, the appellant has purchased shares from 3 related parties by paying higher rate of Rs.85/- to Rs.108/- per share. Further, the appellant has purchased shares in the month of September and December, 1998 and claimed that the reasons for purchase of shares from 3 entities is to acquire controlling interest in the company M/s. SVCL. The appellant had sold 5,83,900 shares in the month of January to March, 1999 i.e. within a period 5 months @ Rs.25/- to Rs.33/- per share to 10 related parties. If the claim of the appellant is correct that it has acquired shares from public and other group entities for holding controlling interest in M/s. SVCL, then why it has sold the shares within a period of 5 months is not explained. If at all the assessee purchased shares to hold controlling interest, then, it would not have sold the shares within a period of 5 months for lesser amount. Further, the learned CIT (A) has brought out clear fact to the effect that the appellant has purchased shares from group entities and also sold shares to group entities. It was further noted that in some cases, consideration for purchase and sale of shares has been adjusted through book entries without any actual payment of consideration by cheque or cash. From the facts brought on record by the Assessing Officer and the learned CIT (A), it is abundantly clear that the transaction of purchase and sale of shares of SVCL is definitely not for acquiring controlling interest in M/s. SVCL, but only for the purpose of booking Short-Term Capital Loss to offset huge capital gain derived by the assessee from sale of shares of Rasi Cements Ltd.
Page 11 of 26 Although the appellant tried to justify the transaction as genuine, but on perusal of the relevant dates and events and also parties to the transaction, it is undisputedly clear that the appellant has arranged transaction in collusion with the related parties to book artificial Short-Term Capital Loss to offset huge capital gain derived from transfer of shares of Rasi Cements Ltd. We further note that the appellant entered into a MOU with and M/s. Kalahasteeswar Finance Pvt. Ltd for acquiring shares at Rs.25 per share. Although, as per MOU shares has to be purchased at Rs.25/- per share, why it has paid Rs.109 per share to the above parties is not explained. Therefore, in our considered view, the reasons given by the learned CIT (A) to adopt purchase price of Rs.33 per share for all the share purchase from 3 entities is based on well reasonings and on relevant facts.
We further note that, a similar issue had been considered by the Coordinate Bench of the Tribunal in the case of M/s. Laxmipriya Investments (P) Ltd, a group entity of the appellant where a similar transaction of purchase and sale of shares of SVCL was undertaken by the appellant and the Tribunal after considering the relevant facts held that the appellant has paid excess price for purchase of shares to group entities and sold very same shares to other group entities at lower rate to book artificial Short-Term Capital loss. The relevant findings of the Tribunal are as under: “12. We have heard the learned representative of parties, record perused and gone through the decisions cited. The learned A.R. while summarizing the issue raised in grounds of appeal submitted that both lower authorities accepted
Page 12 of 26 transactions though for different reasons, but, according to them, purchase price paid was excessive, which is not correct. The learned A.R, submitted that there is no provision to hold it to be excessive under section 37 (1) without providing that money has come back to the assessee or there is some fraud. The impugned transactions arc on the basis of Memorandum of Under Standing (MOU) with M/s. Kalapasteeswar Finance (P) Ltd. (KFPL), a group company dated 3-8-1998 for purchase of shares of SVCL. The relevant portion of above agreement reproduced as under from the order of CIT (A) at para 2.5 al page 7 as under : "According to this MOU, the appellant company would invest a Sum of Rs. 5 crores for the purpose of acquiring M/s. SVCL shares and the acquisition price would be Rs. 25/- per share. According to clause 5 of the MOU, the cost of acquiring the shares would be aggregated and divided on the number of shares acquired and cost per share would be worked 0ut and Rs. the procurement, cost would be loaded into the acquisition price. It is also stated that the appellant Company would pay 1 per share to M/s, KIPL towards brokerage. It is also stated that the total number of shares to be acquired by the Appellant company under this MOU would be crystalized upon the final cost of acquiring being determined. It is also stated that the shares would be delivered on or before 20-12- 98. It us also mentioned that if, either parties to the MOU not meeting their obligations would be, liable for compensation on account of interest to other party @ 18% p.a. It is also mentioned that either parties to the MOU are eligible for specific performance. It is also mentioned that "any of the terms and conditions of this undertaking can be amended with the written mutual consent of both the parties"
From the MOU it is very clear that purchase price fixed was Rs.25 + 8 = Rs. 33/- per share. Against this agreed price, the assessee purchased these shares (@ Rs.1 08/- per share. Even average quotation of share of SVCL was Rs.41.14 per share (as noted Irom Assessing officer’s order - para 9). Thus, the crux of the matter to be examined whether the Assessing officer empower to examine whether purchase consideration paid for purchase of SVCL shares was excessive, so, whether excessive amount by the lower authorities for purchase price is reasonable or not. In order to examine the issue, let us see the relevant provisions of I.T, Act. Section 37 (1) reads as under: "(1) Any Expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of Page 13 of 26 capital expenditure or personal expenses of/ the assessee), laid out or expended wholly or exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”. Explanation - for the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or Profession. and no deduction or allowance shall be made in respect of such expenditure."
In the above section, it is clearly provided that any expenditure laid out or extended wholly and exclusively for the purpose of business shall be allowed. If we examine the impugned transaction in the light of the above provision, we find that the transaction were not in nature of assessee’s business as there is no such business objects to acquire control over other companies in the object clause given in the Memorandum of Article of Association of assessee company. Tic impugned share transactions stated to purchase to acquire controlling power over SVCL. As stated above, there is no such business objects of the assesee company. Therefore, there is no question of allowability of any expenditure under section 37 (1). However, it is not the case of the Revenue. We, therefore, did not go into examination of this issue in detail. The Revenue make out the case only in respect of impugned transaction of excess and unreasonable payment or purchase price of shares of SVCL. We, therefore, concentrate our examination and finding on this issue only. For examining this issue, we would like to have a discussion referring the following judgment of Delhi High Court in the case of Siddho Mal & Sons vs ITO (Delhi) 122 ITR 839 (Delhi) held as under: “The words falling for interpretation in the above provision are “… expended wholly and exclusively for the purpose of the business….” -It may be recalled that the aforesaid words were borrowed and employed in the Indian Act by the Indian Income Tax (Amendment) Act, 1939, from the English Income Tax Act, 1918, corresponding to s. 127 of the English Act of 1952. Before, 1939, the words in the Indian Act were”.. any expenditure .. incurred solely for the purpose of earning such profit or gain”. The language of the amended s 10(2)(xv) has been retained in the corresponding provision in the I.T Act,
1961 i.e. in s.37 thereof. The word “wholly” in the above provision refers to the quantum of expenditure but the word “exclusively” appears to refer to the motive, objective and purpose of the expenditure and in our opinion, gives jurisdiction to the concerned authorities to examine the exp from this standpoint and the contention of the learned Counsel for the assessee that on the findings of the Income Tax Officer contained in Paras (a), (b) and (c) above, the law did not permit him to proceed to scrutinize the expenditure further, is not tenable or acceptable” (emphasis supplied by us). In Swadeshi Cotton Mills Co. Ltd v. CIT (1967) 63 ITR 57, the Supreme Court considered the case of an assessee company which had, by resolution of the shareholders, decided to give one per cent of the net profits as commission to the directors. Repelling and rejecting the arguments put forward by the counsel for the assessee that the payment having been made in accordance with law and by a resolution of the shareholders, cannot be called in question in income-tax proceedings, the court held on pages 59,60. It is true that as between the directors und the company the resolution had a binding effect and the payment had to be legally made. But it is for the Income-tax Officer to decide whether the amount so paid to the directors was wholly and exclusively spent Jor the purpose of the business within the meaning of section 10(2)(xu) of the Income-tax Act. It is an erroneous proposition to contend that as soon as an assessee has established two facts, i.e., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although the payment might be an agreement in existence, it, would still be open to the Income-lax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by section 10(2)(xv). The question as to whether an amount claimed as expenditure was laid out or expanded wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each Case. But, as observed by this court in Eastern Investments Ltd vs Commissioner of Income-tax (195l) 20 ITR 1 (SC), the final conclusion on the admissibility of an allowance claimed is one of law. It is for example open lo the assessee to contend that the decision arrived at by the Page 15 of 26 income-tax authorities was based on no evidence at all. If the assessee satisfies the court that the decision of the income- tax authorities is based on no evidence then the question at issue becomes 01e of law and the court would be entitled to say that the decision of the Income-tax Officer is defective in law. But, as we have already stated, it is not open to the assesee to contend that merely because of existence of an agreement between the employer and the employee and the fact of actual payment, the Income-tax Officer must hold that the payment was made exclusively and wholly for the purpose of the business. It is manifest that the Income-tax Officer is entitled to examine the circumstances of each case to determine for himself whether the remuneration paid to the employee or any portion thereof was properly deducted under section 10(2)(xu) of the Income-tax Act.” The above decision was followed in Lachminarayan Madan Lal v. CIT |1972) 86 ITR 439 (SC). In this case, the payment in respect of which the deduction was claimed had been made to a selling agency firm. The Tribunal found, (i) that on the day the selling agency agreement was executed, the firm had not come into existence; (ii) that the ladies, members of the firm, had no prior business experience; (iii) that the only male adult partner in the firm was a partner in another manufacturing concern situated at a place quite distant from the place where the selling agency business is said to have been carried on; (iv) that the business of the selling agency firm was the same us that of the assessee: (v) that the selling agency firm had no godown of its own nor any transport vehicles. On these findings, the Tribunal reached the conclusion that the selling agency firm was not genuine and the agreement was only a make-believe arrangement and that it was merely a device to minimize the assessee's tax liability. After considering a number of earlier decisions of the Supreme Court, Dhirajlal Girdharilal v. CIT(954) 26 ITR 736 (SC),, CIT v. Rajasthan Mines. Ltd. [1970) 78 ITR 45 (SC), CIT V. A. Raman & Co. [19681 67 ITR 11 (SC), CIT V. Indian Woollen Textile Mills(1964) 51 ITR 291 (SC) and CIT v. Durga Prasad More (197l) 82 ITR 540 (SC), the court concluded by holding as follows': “In our, opinion, the facts of this case come within the rule laid down by this court in Swadeshi Cotton Mills Co Ltd. v. Commissioner of Income- tax |1967| 63 ITR 57 (SC). The question whether an amount claimed as un expenditure was laid out or expended wholly and exclusively for the purpose
Page 16 of 26 of the business has to be decided on the facts and in the light of the circumstances in each case. The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee’s business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible u/s 37 of the Act. For the reasons mentioned above, we are of opinion that the Tribunal was justified in not stating a case for the opinion of the High Court u/s 256(1) of the Act and the High Court was justified in not calling for a statement of case under sub- section (2) of section 256.” In Bengal Enamel. Works Ltd. v. CIT/1970) 77 ITR 119, the .Supreme ,Court considered remuneration paid by the assessee to a technical adviser and taking into consideration that the taxing authorities had uniformly found that the remuneration agreed to be paid was influenced by “extra commercial considerations”, it being much in excess of what was normally payable, rejected the criticism of the assessee that the Tribunal's finding was based on no evidence or was based on irrelevant considerations and held at page 123: “Where an amount paid to an employee pursuant because of “extra commercial considerations”, the taxing authority has jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business. The earlier decision in Swadeshi Collon Mils Co. Ltd. v. CIT(1967) 63 ITR 57 (SC) was referred to and followed. In CIT v. Travancore Sugars and Chemicals Ltd (1973) 88 ITR 1 (S.C) the Supreme Court, dealing with the test of commercial expediency, held at page 10 as follows: “In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances
Page 17 of 26 of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer way of arriving at a just conclusion would be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of these facts. judicial statement on the Jacts of a particular case can never assist courts in the construction of an agreement or a statute which was not considered in those judgments or to ascertain what the intention of the legislature was. What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was entered into. This decision was followed in CIT v. Panipat Woollen & General Mills Co. Ltd. |1976) 103 ITR 66 (SC). In this case, the court was considering whether a particular payment under an agreement styled as selling agency agreement was deductible expense under the aforesaid provision. At page 74, the court held : “It is well settled that the court in order to construe all agreement has to look to the substance or the essence of it rather than to its' form. A party cannot escape the Consequence of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction." On page 76, the court, held “Even so 'whatever be the commercial considerations it is difficult to hold that the commercial expediency dictated the assessee-company allow itself to be 'completely overshadowed by, its selling agents so as to pay them not only for the services rendered but also allow them to share profits, control the manufacture of the goods and the programme thereof and also to share the losses. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a watertight compartment so as to be confined in a straight-jacket. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits
Page 18 of 26 ascertained in particular manner. It seems to us that on ultimate analysis the matter would depend on the intention of the parties as spell out from the terms of the agreement the nature or the surrounding circumstances, character of the rude or venture, the purpose for which, the expenses are incurred and the object which it sought to be achieved for incurring those expenses”. In Amritlal and Co. Pvt. Ltd. v. CIT |1977] 108 ITR 719, Bench of the Bombay High Court considered the argument of the assessee that a commission paid to the two directors and four salesmen under a resolution of the Company should be allowed as a deduction without any further scrutiny: The court held that the mere fact that the assessee-company should be allowed as a deduction without any further scrutiny. The Court held that the mere fact assessee- company had proved that the payment had been "made could not carry the matter would not be sufficient to entitle it to claim a deduction. After considering a number of decisions on the subject, the Court held at Page No.736: “In the first place, the payment of commission is disproportionately high as compared to their salaries and, secondly, no trade practice had been pointed out by the assessee company in support of the commission paid. ln other words, the expenditure incurred cannot be said to have satisfied the requirements of the proviso of cl (x) of sub- section (2) of s. 10." In J.K. Steel & Industries Ltd. us. CIT (1978) 112 ITR 233, a Division Bench or the Calcutta High Court considered the payment of commission under an agreement which was found to be genuine but a part of which commission had been disallowed by the taxing authority. The court restored the disallowance on the ground that the Tribunal “not having found that the payment of this commission was excessive nor having found that any part of such payment was for extra commercial consideration, it had no basis nor any reason to hold that the commission paid should be apportioned." In our opinion, the aforesaid decision lends support to our view that the use of the adjective "exclusively" in section 10 (2) (xv) confers jurisdiction, indeed casts a duty on the ITO to examine and, scrutinize an expenditure so us to be satisfied that the same has been incurred exclusively for the purposes business before allowing it as a deduction and in doing so he must take into consideration the totality of circumstances"
Page 19 of 26 15.In the light of the above judicial pronouncements, it can be held that the use of the objective "wholly and exclusively" in section 37 (1) confers jurisdiction, in deed casts a duty on the Assessing Officer as to examine and scrutinize an expenditure so as to satisfied that same has been incurred exclusively for the purpose of business, before allowing it as a deduction and in doing so, we must take into consideration the totality of circumstances. Thus, an expenditure is to be allowed if it satisfied the test of commercial expediency and commercial expediency, has to be judged from the point of view of the assessee who knows best how his business has to be run but such a point of view has to be a prudent and reasonable point of view which is free from apparent taint of excessiveness, collusiveness or colorable discretion. Thus, on the one hand it is not nor the ITO to judge whether the assesee could have avoided or reduced a particular expenditure but, on the other, an unreasonably high or excessive expenditure would normally and correctly caution the ITO to examine it more carefully and if combined with other circumstances it leads to the conclusion that the motive behind the expenditure is to unduly benefit someone, the ITO is well within his rights to come to a finding that the expenditure is not exclusively for the purposes of business (emphasis supplied).
In the light of the above discussion, we examine the facts of the instant case. We find that the Assessing Officer has power to examine the excessive or unreasonable and purchase price not paid in accordance with commercial expediency for purchase of shares of SVCL. In other words, the revenue authorities are duty bound to determine a fair and reasonable profit/income/loss in accordance with law. We, therefore, do not find submission of learned AR in this regard that the revenue authorities have no power to examine excessiveness of the expenditure/purchase price of the shares.
Now issue remained to examine is disallowance of excess unreasonable purchased price of shares determined by lower authorities is reasonable or not ? In the case under consideration, the Assessing Officer determine purchase price of shares on the basis of prevailing rate of shares in market, whereas, the CIT (A) was of the view that the rate of purchase of shares of SVCL should be in accordance with MOU. When basis of determination of assessee is not acceptable, the Assessing Officer empower to exercise power for estimation. But, when the authorities making such Page 20 of 26 estimation, it must be honest and fair estimation of the income of the assessee and though arbitrariness cannot be avoided in such an estimate, the same must not be capricious, but, should have a reasonable nexus to the available material and the circumstances of the case. The authority making such assessment must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment and for the purpose, he must be able to take into consideration all matters which he thinks will assist him in arriving at fair and proper estimate. The assessing authorities are not bound by strict rules of evidence. The jurisdictional High Court in the case of Kodidasu Appalaswamy & Suryanarayana vs. CIT, A.P. 46 1TR 735 (AP) referring the judgment of Privy Council in the case of CIT vs. Laxminarain Badridas 5 ITR 170 (PC) wherein it was held as under : "Under section 23 (4) of the Income-tax Act the Officer: is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by, and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate."
The Allahabad High Court in the case of Gangadhar Baijnath vs. CIT 102, Kanpur ITR 383 (ALL) held that: "The Income-tax Officer, however, made his own estimate of the income of the assessee for the period [rom 1942-43 to 1947-48, by taking the following facts into consideration: (i) the general market condition during the material period; (ii) the admissions made by the assessee before the Investigation Commission and the I.A.C., Central Range, New Delhi; and (iii) the facts found by the Commission. The ITO on these considerations held that the assessee's concealed income from business could be reasonably estimated at Rs.37 lakhs….”
Page 21 of 26 …. In making this enhanced estimate, Income Tax Officer took into consideration a number of circumstances which have already ben tabulated above. The estimate as such cannot be said to be arbitrary, capricious or conjectural. It is supported by the relevant materials on the record. The questions raised are mostly of fact and those which have a semblance of questions of law, are based upon misreading of the order of the Income Tax Officer”.
In the case under consideration, we find that there is no material available on record nor the assessee pointed out that action of revenue authorities was dishonest or vindictively or capriciously. They taken the same what they honestly believes to be a fair estimate of the proper figure of assessment.
Now we consider the judgments cited by the learned AR. We do not see how these decisions help to the case of the assessee. The Apex Court in the case of JK Woollen Manufactures 72 ITR 612 (SC) clearly held that it is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee though it is to be adjudged from the point of view of the businessman and not of the IT Department. In the case under consideration, the issue of purchase price of shares of SVCL has been examined from the point of view of assessee and found that there was neither commercial expediency nor reasonable reasons pointed out under which circumstances excess purchase price was paid. Thus, excess payment made was not in accordance with commercial expediency. Therefore, the judgment of Madras High Court in the case of CIT vs. Raman & Raman 7 ITR 345 (Mad) also rather helps to the Revenue. Similarly, the other Judgments in the case of Eastern Investment Ltd. vs. CIT 20 ITR 1 (SC), Newtone Studios Ltd. vs. CIT 28 ITR 378 (Mad), Calcutta Landing & Shipping Co. Ltd. vs. CIT 65 ITR 1 (Cal.) and the judgment of Guwahati High Court in the case of Narasivsdas Surajmal Properties (P) Ltd. vs. CIT 127, ITR 221.'The other judgments cited by the A.R. are decided by the Courts considering the facts of the respective cases. Thus, the facts of those judgments are not similar to the facts of the case undcr consideration. Therefore, those judgments are also distinguishable on facts. The ratio laid down in these judgments that expenditure incurred in accordance with commercial expediency arc allowable, but, as stated above that excess payment made by assessee for purchase of shares of SVCL is not in accordance with commercial expediency. In none of the cases it was held that whatever
Page 22 of 26 expenditure incurred by assessee at his sweet will, are allowable expenditure. No prudent business man will pay Rs. 108 per share when MOU is for Rs. 25/-.
The CIT (A) after examining the issue in detail found that the assessee company had entered into an agreement for purchase of SVCL Shares at the price of open offer and plus cost. The CIT (A) further noted when the intention of Mr. Raju and his group companies to purchase as many as many SVCL shares as possible from all possible sources at any cost, there is no logic or reason of commercial expediency in selling SVCL Shares through right arm when the left arm of the group was purchasing the shares. The CIT (A) considered assessee’s explanation and noticed that it is wondered as to why the "resolution on circulation" was passed on 4-9-98. On going through the share market quotation of M/s. SVCL Shares in HSE, my doubt got cleared. It was on 4-9-98, the share market quotation of M/s. SVCL had attained its peak of Rs. 90/-. Therefore, no wonder, it is claimed that the "resolution on circulation" was passed on 4.9.98. When the learned CIT (A) conveyed his finding to the assessee it was argued that even without the resolution dated 4.9.98, the appellant Company could have agreed to purchase the shares @ Rs. 108/- per share and the department cannot question the business discretion of the appellant. It is further argued that having agreed to purchase the shares at the open offer price plus cost, it was not possible to go back and refuse to take delivery of the shares @ Rs. 108/- per share. It was also submitted that that having made an huge advance of Rs. 5.17 crores, if the appellant had refused to purchase the shares, there would have been a legal battle in the Court and the appellant would not have got back Rs. 3.1 crores. As against this option, it was submitted, that the appellant had agreed to purchase the shares @ Rs. 108/- per share. The CIT (A) considered, the submission. The CIT (A) noticed that even though, there is no cross holding, cross directorship or cross company shareholding", it is noticed, that the, appellant company is a group company of Dr. Raju and the transactions of the appellant company were conducted according to the convenience and concurrence of Dr. Raju. But, there cannot be two opinion on the issue that each Company is to be run on commercial lines, even if they are group companies. In the case of the appellant Company, an agreement was entered for purchasing the shares @ Rs. 25/- per share and even at the cost of repetition, it may again be stated that the agreement was not entered to purchase the shares at open offer price + cost and the agreement was entered to purchase the shares @ Rs.25 + cost. Even if we
Page 23 of 26 presume that the rate of Rs. 25/- was mentioned in the MOU only because M/s. KFPL had made an offer to purchase M/s. SVCL shares from public at that rate, M/s. KFPL, had revised the open offer price in the advertisement dated 25-8- 98 and the offer price was further upped to Rs. 100/- by the advertisement dated 29/9/98. (In fact, the public announcements were dated 22-8-98 and 28/8/98 respectively, even though it appeared in the newspaper on 25/8/98 and 29-8-98 respectively). Before making this open offer to the general public, M/s. KFPL should have consulted the appellant company and asked the appellant whether the appellant would be willing to purchase the shares @ Rs.55/ - Rs. 100/-, According to the Minutes Book of Board meeting took place before these two open offers and in the Board Meeting held on 1-8-98 and 2-9-98. no discussion on the upping of offer price was discussed. If for some unknown reasons, M/s. KFPL and Dr. Raju had increased the offer price from Rs.25/- to Rs.55/- and then .from Rs.55/- to Rs. 100/-, how does it bind the appellant, who had agreed to purchase the shares only @ Rs. 25/- per share ? According to the AR,, the appellant company had discussed this issue on 4-9-98 and agreed to purchase the share @ Rs. 100/- on that date. In this regard, we agree with the CIT(A) that unless the appellant had given written consent before 22-8-98 / 28-8- 98, the act of M/s. KFPL in upping the offer price does not bind on the appellant. At least, if the market quotation of M/s. SVCL shares had gone up to say around Rs. 1007- at the time of delivery of shares, there would have been some rationale in agreeing to take delivery @ Rs. 00/- per share. Howevcr, when the delivery of the shares was given, the prices were hovering around Rs. 41/- per share and the price was not around Rs. 108/- per share. Even on the so called date of resolution viz., 4-9-98, "revising" the share price, the average market quotation of HSE was Rs,87.80. In these circumstances, will a company would have agreed to purchase the Shares @ Rs. 108/- per share? Unless, the assessee company have some other motive other than commercial expediency or unless the assessee company wanted to incur losses, the assessee company would not have agreed to purchase the shares @ Rs.108/- per share. The argument that the appellant company could not have recovered the advance of Rs.5.17 Crore, would have appealed, had the parties to the transactions were not group companies. In the case of the appellant, both the Companies are the group companies and, therefore, this argument does not cut much ice. We agree with the findings of the CIT (A) that it cannot also ignore the fact that the appellant company had made huge gains on sale of RCL Shars in the beginning
Page 24 of 26 of the financial year and making the appellant to incur huge losses would benefit the group. Also alive to the fact that there no such huge capital gain in the hands of M/s. KFPL and making M/s. KFPL to bear the loss would not have made any "tax sense". In these circumstances, we hold that the appellant company would not have agreed to purchase the shares @ Rs. 108/- per share and it was forced to take delivery @Rs. 108/- per share. Had the appellant company not been a group company, it would have resisted the force with all the might at its command. But, since it is a group company, its records have been doctored to show that it agreed to take delivery @ Rs. 108/ per share. Therefore, assessee company had agreed to purchase the shares Rs. 108/- per share, it was only to reduce the taxes or to help M/s. KFPL and definitely not for any commercial or moral compulsions. In these circumstances, we agreed with the findings of CIT (A) and hold that the price paid in excess of the originally agree amount was paid for consideration other than the commercial consideration. The group concern do not fall undcr section 40A(2), even though on the basis of commercial expediency such excess payment of purchase price of shares is not allowable expenditures. 22, We find that Assessing Officer has considered prevailing market rate, whereas, the learned CIT (A) taken rate as provided in MOU. We find that MOU is an agreement between two parties and purchase rale is also determined. There is no material on record nor pointed by the assessee why the terms and Conditions laid down in MOU is not followed. We find that the finding of CIT (A) is based on the MOU executed between the parties, we find the excess purchase prices than of Rs.33/- per share paid by the assessee company is not in accordance with commercial expediency, The CIT (A) is correct in calculating excess amount of share purchase. Therefore, the order of CIT (A) is confirmed.
As regards the alternate submission of learned A.R. that that rate adopted by CIT (A) should be restricted to the shares purchased KFPL. We notice that issue before us in only in respect of 485,500 shares purchased and CIT (A) has restricted/ considered only those shares 485,500 as detailed given in para 5 of this order.”
16. In view of the matter and by following the decision of the Coordinate Bench of the ITAT Hyderabad Benches in the case
Page 25 of 26 of Laxmi Priya Investments (P) Ltd vs. DCIT (Supra), we are of the considered view that the transaction of the appellant for purchase and sale of shares of M/s. SVCL is not genuine transaction but a transaction designed to avoid payment of taxes arising on capital gain due to transfer of shares of Rasi Cements Ltd. The learned CIT (A) after considering the relevant facts has rightly recomputed the Short-Term Capital Loss of Rs.42,08,226/- on sale of shares of 5,83,900, by adopting the cost of purchase at Rs.33/- per share. Thus, we are inclined to uphold the findings of the learned CIT (A) and rejects the grounds taken by the assessee.