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Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
ORDER PER C.M.Garg, J.M.
This appeal has been filed by the assessee against the order of the CIT(A) – IV, New Delhi dated 13.01.2014 passed in appeal no. 307/11-12 for AY 2009- 10. The ground raised by the assessee read as under -:
1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of Rs. 4,84,73,750/- being the short term capital loss on sale of shares on the ground that the entire transaction was sham and arranged with a view to book an artificial loss when in fact the transactions of purchase as also the sale have been carried out at the prevailing market rates by actual payment / receipt of funds.
2 AAA Portfolios Pvt. Ltd.
2. That the learned CIT(A) failed to appreciate that it was only the transfer of shares which was barred during the lock-in-period and there was no prohibition by SEBI on sale of shares by the allottee. The learned CIT(A) has neither specified nor confronted the appellant with the relevant provision of the SEBI Act which barred the sale of shares allotted on preferential basis.
3. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of Rs. 8,48,019/- made by the Assessing Officer u/s 14A of the Income-tax Act without appreciating the explanation of the assessee and without there being any claim of exempt income in the return.
4. That the entire expenditure claimed in the Profit & Loss Account at Rs. 8,48,019/- (including financial charges of Rs. 7,37,694/-) have been disallowed u/s 14A without there being any direct or indirect nexus of such expenses with the earning of exempt income.”
Briefly stated the facts giving rise to this appeal are that the assessing officer selected the case for the scrutiny and completed the assessment at taxable income of Rs. 6,48,399/- as against declared negative income (loss) of Rs. 5,46,32,189/- as per Profit & Loss of the assessee. The assessing officer made disallowance on account of sale of investment, provision for doubtful debts, diminution in the value of investment written back and disallowance u/s 14A of the Income Tax Act, 1961 (for short Act).
Aggrieved assessee preferred an appeal before Ld. CIT(A) which was partly allowed. Now the aggrieved assessee is before this tribunal with this 2nd appeal agitating mainly two issues viz. challenging the upholding / confirmation of the disallowance of Rs. 4,84,73,750/- being short term capital loss on account of shares and the disallowance of Rs. 8,48,019/- made by the AO u/s 14A of the Act.
3 AAA Portfolios Pvt. Ltd. Ground no. 1 and 2 of the assessee :-
Apropos these grounds, we have heard arguments of both the sides and carefully perused the relevant material placed on record before us, inter alia, impugned assessment order, first appellate order, assessee’s paper book spread over 48 pages and copies of the order of Hon’ble High Court of Gujarat in the case of ACIT vs. Biraj Investment (P) Ltd. 210 Taxman 418 (Gujarat) and judgment of Hon’ble High Court of Madras in the case of CIT Madurai vs. M. Ramaswamy 151 ITR 122 (Madras). The ld. Counsel of the assessee reiterating the written arguments dated 19.03.2013 before CIT(A) submitted that the assessee purchased Rs. 16,25,225/- equity shares of Escort Ltd. from HPC at a price of Rs. 83.79 per share. The HPS acquired these shares from Escorts Ltd. as preferential allotment of shares warrants was made by the Escorts Ltd. to Har Parshad & Company Pvt. Ltd. (hereinafter HPS) as per SEBI guidelines and HPC had an option to convert each share warrants into one equity share of Escorts Ltd. share at a conversion price of Rs. 83.79 per share. The Ld. Counsel further submitted that 10% of the value was payable upfront by the HPC to Escort Ltd. and the balance 90% at the time of conversion of each warrant into equity share. It was also the condition of preferential allotment that that failure to exercise the conversion option before 29.09.2007 would result forfeiture of initial 10% of amount already paid. The ld. Counsel further stated that around the time of conversion of warrants into equity shares the said allottee HPC did not have adequate financial resources to exercise the conversion option and thus, approached the assessee company to finance the payment of balance 90% of conversion price and in turn to acquire the equity shares Escorts Ltd. at the price of Rs. 83.70 per share. The ld. Counsel contended that as per this agreement, both the parties were in a win-win situation under this arrangement because 4 AAA Portfolios Pvt. Ltd. HPC would save its 10% amounts from forfeiture whereas the assessee company would acquire the shares at a price of 83.79 per share when the weighted average market price of the share at the stock exchange ranged between Rs. 106 to Rs. 133 per share. The ld. Counsel further elaborated that this was a out of share market transaction carried out between the parties as there was a locking period of 3 years which was expired on 31.02.39 and these shares were not transferable immediately in the name of assessee purchaser but by virtue of purchase from HPC, the assessee company acquired full beneficial interest in the share as an owner.
The ld. Counsel further submitted that in financial year 2008-09 relevant to assessment year 2009-10 under consideration the assessee was faced with huge tax demands for which it had to liquidate its investment in these shares but since these shares were neither tradable in the stock exchange nor transferable before 31.03.2009, the appellant negotiated with M/s. HPC to purchase back these shares from assessee at around the then prevailing market price of the shares at the stock exchange and HPC agreed to buy back these shares at a price Rs. 53.96 per share. The ld. Counsel pointed out that the weighted market price of these shares at the Bombay stock exchange on the date of transaction was Rs. 58.80 per share and the sale price settled by the assessee company was fair price considering the illiquidity of these shares for open market purchase/sale. The ld Counsel pointed out that the loss claimed by the asessee was actually suffered on sale of these shares during the relevant financial period and the same was claimed as short term capital loss. The ld. Counsel vehemently contended that the AO disallowed the entire claim on the ground that the transaction is completely sham to book artificial loss because the transaction of purchase/ sale of these shares of a group company was between the two group companies. The ld. Counsel vehemently point out that during the assessment proceedings the 5 AAA Portfolios Pvt. Ltd. assessee provided complete evidence to prove the genuineness of the transaction both at the time of purchase as well as at the time of sale and he further strenuously contended that merely because the transaction has been entered into by two group companies does not automatically mean that it is sham. The ld. Counsel reiterating assessee submissions dated 19.3.2013 before Ld. CIT(A), submitted that once the assessee has proved genuineness of the transaction the onus is shifted to the AO to prove that the transaction is sham and the AO has failed to discharge the onus shifted on him. The ld. Counsel also contended that the purchase is supported by an tripartite agreement alongwith full payment of consideration through bank and the sale is also established beyond doubt by sale invoice and the receipt of funds in the bank, thus, there was no case for booking an artificial loss in this transaction or to allege the same as sham.
The ld. Counsel also pointed out during the relevant financial period there were very low profits as per book results of the assessee. Hence, the theory of sham transaction as applied by the authorities below is not applicable and practically acceptable to the present case. The ld. counsel pointed out that till the date of hearing of this appeal i.e. 27.11.2015 the loss declared by the assessee in the relevant assessment year 2009-10 has not been adjusted.
The Ld. DR strenuously opposing the above noted contention of the assessee and strongly supporting the action of the AO as well as impugned order submitted that there was lock-in period for transfer of preferential shares allotted to HPC which was to be expired on 30.03.2009 and the assessee effected purchase of the shares on 29.07.2007 from a group company HPC and same were sold back to the same HPC company on 30.09.2008 and therefore the assessing officer was quite correct and justified in construing that the assessee booked loss under grab of sham transaction. The ld. DR further drawn our attention towards relevant para 5.3 of the first appellate order and submitted that 6 AAA Portfolios Pvt. Ltd. under tripartite agreement entered by the assessee company with its group companies namely Harprasad & Co. and M/s. Big Apple Clothing Pvt. Ltd. cannot override the statutory conditions of the preferential allotment and since the assessee company could have neither purchased these shares nor could take them for hypothecation or pledged from HPC the claim of the assessee that these shares were purchased @ Rs. 83.79 per share cannot be accepted as that would amount to violation of legal condition as contained and mentioned on the face of the relevant share certificates in question. The ld. DR firmly contended that since there was lock-in period up to 30.03.2009, the assessee could have not purchase these shares from HPC as the transaction was legally prohibited and there was no question of selling them back to HPC at much lower price of Rs. 53.96 per share and both the companies were under the same management being group companies the claim of the assessee that the shares were purchased and sold back to HPC to generate funds is not acceptable and transactions of purchase and sale during the lock-in period was rightly held as sham transaction because the same was legally prohibited during lock in period up to 30.03.2009. The ld. DR vehemently pointed out when the seller has no right to sale the shares during lock-in period then any transaction without any transfer in the name of buyer as to be held as speculative transactions and the same cannot be held as acceptable short term capital loss. The ld. DR lastly pointed out that the case laws relied by the ld Counsel of the assessee are not applicable to the present case as the ratio of the judgment of Hon’ble Gujarat High Court in the case of ACIT vs. Biraj Investment (P) Ltd. (supra) and the judgment of Hon’ble Madras High Court in the case of CIT Madurai vs. M. Ramaswamy (supra) are not related with a situation were the transaction of purchase and sale back of preferential share was affected during the lock-in period against the conditions of the allotment, and facts and circumstances of the present case quite dissimilar 7 AAA Portfolios Pvt. Ltd. and distinguishable with these cases. Therefore, propositions laid down by Hon’ble High Courts cited and relied by the assessee do not support the case of the assessee in any manner.
On careful considered of above rival submissions of both the sides, at the very outset, we observe that undisputedly rather admittedly preferential allotment was made to HPC in March, 2006 as per SEBI guidelines and HPC had an option to convert each share warrant on equity share at a conversion price of Rs. 83.79 per share on or before 29.09.2007. It is also undisputedly and admittedly that there was a lock-in period of 3 years which was to expire on 31.03.2009 and these were not transferable during this period.
Now the controversy remained that the assessee purchased the shares from HPC @ 83.79 per share on 27.09.2007 under a tripartite agreement and these share were sold back to HPC on 30.09.2008 @ 53.96 per share during the AY under considerable and the assessee claimed the impugned long term capital loss on this transaction of sale of share during the relevant financial peried. From the assessment order, we note that the assessing officer decline to accept claim of the as sessee with following observations and conclusion :- “1 have gone through the replies of the assessee but do not find merit in it due to the following reasons:-
The assessee has claimed short term capital loss amounting Rs. 4,84,73,750/- on account of alleged sale of 16,25,000 shares ol M/s Escorts Ltd on| 30/09/2008. Vide letter dt. 14/11/2011, the assessee has submitted a copy of the share certificate M/s Escorts Ltd vide share certificate No. 01428581 in the name of M/s Harprashad & Co. Private Limited which it claimed to be its share certificate. The assessee has stated that these shares were acquired during the AY 8 AAA Portfolios Pvt. Ltd. 2008-09 from Har Parshad & Co Pvt. Ltd, but the said shares were never transferred in company’s name. M/s Harprashad & Co. continued to hold these shares in its name and these share were never transferred in the name of the assessee company. Thus the assessee was never became a registered shareholder in respect of these shares in the shareholder roll of M/s Escorts Itd. Even as per the tripartite agreement, the shares could be transferred only after the lock-in- period, whlch in this case is 31.03.2009. The relevant clause of As per the Tripartite Agreement between M/s HarParshad and Company Pvt. Ltd, AAA Private Ltd and M/s Big Apple clothing Pvt Ltd, reproduced as under:-
“HPC shall immediately after the expiry of the lock in period transfer to Big Apple and AAA respectively or their nominee as may be desired by Big Apple and AAA, Escorts Equity Shares in proportion to the money paid them ” As stated above, the lock-in-period as stated in the share certificate is upto 31/03/2009 and the same cannot be transferred to any concern before 31/03/2009, then how could the assessee claims to have acquired the shares from M/s Har Parshad and Co. Pvt. Ltd. on 31/03/2007.
Here, the question which needs consideration is that whether the assessee is the owner of the capital asset during the previous year relevant to the AY 2009-10 which it claimed to have transferred and on which it booked short term capital loss. The shares were continued to be held by M/s Harprashad & Co Private Ltd which is also established on the basis of name of M/s Harprashad & co Private Ltd 9 AAA Portfolios Pvt. Ltd. on share certificate. Moreover, these certificates were under a lock- in-period till 31/03/2009. Before this date, M/s Harprashad & Co Private Ltd could not transfer these shares to any one. Therefore, there was no transfer of shares in the name of the assessee company.
Even if it is presumed for the sake of academic interest that these shares belonged to the assessee, the price quoted for sale of shares at Rs. 53.96 per share in the off-market deal. The assessee cannot be allowed to sell the shares at less than the price market price at the given date even in off-market transaction. The market price of M/s Escorts ltd was of Rs. 58.80 per share. Therefore it has resulted in over stated loss of Rs. 78,65,000/- ( 16,25,000X4.84=78,65,000). Without prejudice to the above, it goes without saying that for transfer of shares, the assessee should be the owner of assets in the previous year in which transfer takes place. As the shares belonged to M/S Har Parshad & Co. Pvt. Ltd at the given date, the assessee cannot be allowed to take the benefit of this by claiming the short term capital loss. The assessee has also contended that as per its agreement with M/s Harprashad & Co Private Ltd, it acquired the right to capital asset which it has transferred back. However, it may be noted that all the concerns including the Listed concern whose share were claimed to be transferred back and forth belong to one single group and that is Escorts group. The transactions between the concerns were manipulated to give artificial and fictitious loss in the hands of the assessee. The courts have repeatedly held that in such kind of transactions, the AO has the power to go behind the real intention of 10 AAA Portfolios Pvt. Ltd. transactions and lift the corporate veil. The Hon’ble Supreme Court in the case of Mcdowell And Co. Ltd. vs Commercial Tax Officer has held as under:- “Tax planning may be legitimate provided it is within the framework of law. Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.” The court further held that:- “Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well- known principle of Inland Revenue Commissioners v. Duke of Westminster 1936 AC 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or 11 AAA Portfolios Pvt. Ltd. combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax.” The transactions entered into by the assessee with its related parties in respect of shares of the same group concern resulting in substantial losses to the assessee cannot be taken to be genuine by any stretch of imagination. The assessee has claimed to have bought and then sold the rights in shares of listed company Escorts ltd., which is also a group concern, outside the share market in the form of a private bulk deal. As may be noted from above, the transaction has taken place at a rate which was lower than the market rate on that day. Hence, it is held that the transaction claimed to have been entered is a completely sham transaction to book artificial losses. The case completely goes out of the ambit of tax avoidance and is falling under the territory of tax evasion. Hence the whole short term capital loss of Rs. 4,84,73,750/- is being disallowed. In view of the above, I am satisfied that the assessee had furnished inaccurate particulars/concealed its income. Therefore, penalty proceedings u/s 271(1) (c) of the Income- tax Act, 1961 have been initiated on this issue.
The assessee carried out matter before Ld CIT(A) and the CIT(A) confirm the disallowance with following findings and conclusion :- “5.2 Before me, the Id. AR for the appellant submitted that the shares in question were purchased from M/s Harprasad & Co. Pvt. Ltd. in the AY 2008-09 and were sold back to them in AY 2009-10. These shares were allotted by Escorts Ltd. to M/s Harprasad & Co. on conversion of share 12 AAA Portfolios Pvt. Ltd. warrants and were to remain in lock-in period upto 30th March, 2009. These shares were purchased from HPC under the tripartite agreement and were sold back to them to raise funds. It was submitted that both the transaction of purchase and sale were validly executed but resulted in a loss. For the sake of the convenience, the relevant submissions of heId. AR are reproduced as under:
In Assessment Year 2008-09, the appellant purchased 16,25,225 a) equity snares of Escorts Ltd. from M/s Harparshad & Company Pvt. Ltd. (HPC) at a price of Rs. 83.79 per equity share. The equity shares of Escorts Ltd. are listed at the stock exchanges in India. However, this was an off market transaction carried out between the parties when the weighted average price of equity share of Escorts Limited ranged between Rs.106/- to Rs.133/- per share during the month of October, 2007 at the stock exchange.
M/s HPC came to acquire these shares from Escorts Limited in the b) following Manner:- i) A preferential allotment of share warrants was made by Escorts Ltd. to HPC in March, 2006 as per SEBI guidelines. HPC had an option to convert each share warrant into one equity share of Escorts Ltd. at a conversion price of Rs.83.79 per share. 10% of the value was payable upfront by HPC to Escorts Limited and the balance 90% at the time of conversion of each warrant into equity share. Failure to exercise the conversion option before would have resulted in 13 AAA Portfolios Pvt. Ltd. forfeiture of initial 10% already paid. ii) Around the time of conversion of warrants into equity shares, the said HPC did not have adequate financial resources to exercise the conversion option and thus approached the appellant company to finance the payment of balance 90% of the conversion price and in turn acquire the equity shares of Escorts Ltd. at a price of Rs.83.70 per share. Both the parties were in a win-win situation under this arrangement because HPC would save its 10% amount from forfeiture whereas the appellant company would acquire the equity shares of Escorts Ltd. at a price of Rs.83.79 per share when the weighted average market price of the share at the stock exchange ranged between Rs. 106 to Rs. 133 per share. c) The equity shares acquired by the appellant were however, under a lock-in period three years which was to expire on 31.03.2009. Thus, these were not transferable immediately in the name of the appellant. However, by virtue of purchase from HPC, the appellant company acquired full beneficial interest in these shares as an owner. d) In assessment year 2009-10, the appellant was faced with huge tax demands for which it had to liquidate its investment in these shares. However, since these shares were neither tradable in the stock exchange nor transferable before 31.03.2009, the appellant negotiated with M/s HPC to purchase these shares from the appellant at around the then market price of the shares at the stock exchange. After negotiation, HPC 14 AAA Portfolios Pvt. Ltd. agreed to buy these shares from the appellant at a price of Rs. 53.96 per share in an off market transaction. The weighted market price of these shares at the Bombay stock exchange on the date of transaction was Rs.58.80 per share. The price settled by the appellant company was fair price considering the illiquidity of these shares for open market purchase/sale. e) The appellant suffered a loss of Rs.4,84,73,7507- on sale of these shares which was claimed as short term capital loss. f) The learned Assessing Officer disallowed the entire claim on the ground that the transaction is completely sham transaction to book artificial loss. He held so because the transaction of purchase/sale of these shares was between two group companies. g) During the assessment proceedings, the appellant provided complete evidence to prove the genuineness of the transaction both for the purchase as well as for the sale of these shares. Merely because the transaction has been entered into by two group companies does not automatically mean that it is sham. Once the assessee proved genuineness of the transaction, the onus shifted to the Assessing Officer to prove that it is sham, which he has failed to do so. None of these transactions of purchase and sale of shares has been done by book entry. The purchase is supported by an agreement along with full payment of consideration through bank and sale is also backed by sale invoice and the receipt of funds in the bank. Thus, there is no case for booking an artificial loss in this transaction. h) The disallowance of entire short term capital loss of Rs.4,84,73,750/- deserves to be deleted."
15 AAA Portfolios Pvt. Ltd. 5.3 I have carefully considered the submissions of Id. AR and perused the order pasted by the AO. It is an admitted fact that M/s Harprasad & Co. Pvt. Ltd., M/s Big Apple Clothing Pvt. Ltd. and the appellant company are group companies of Escorts Ltd. having common directors. It is also an admitted fact that the Escorts Ltd. has allotted 16,25,000 equity shares of paid up value of Rs. 10 per share to Harprasad & Co. Pvt. Ltd. on 18th September, 2008 with a lock-in period till 30th March, 2009. As per the guidelines issued by the Securities & Exchange Board of India (SEBI), it was a statutory requirement that these shares could neither be sold, nor hypothecated, nor pledged, nor transferred till 30th March, 2009. The tripartite agreement entered by the appellant company with its group companies namely Harprasad & Co. Pvt. Ltd. and Big Apple Clothing Pvt. Ltd. cannot over-ride the statutory conditions. Since the appellant company could have neither purchased these shares nor could take them for hypothecation or pledge from Harprasad & Co. Pvt. Ltd., the claim of the appellant that these shares were purchased at the rate of Rs. 83.79 per share cannot be accepted as that will amount to violation of law as contained in the share certificates quoted above. Since the appellant could have not purchased these shares from M/s Harprasad & Co. Pvt. Ltd. in the first place as same was legally prohibited, there is no question of selling them back to M/s Harprasad & Co. Pvt. ltd. at much lower prices of Rs. 53.96 per share. Both the companies are under me same management. The claim of the appellant that the shares were purchased as per the tripartite agreement from M/s Harprasad & Co. Pvt. Ltd. and were sold back to them to generate funds is not supported by the facts and circumstances of the case. As per the listing requirement, the shares in question were in the lock-in period and the allottee, i.e. M/s Harprasad & 16 AAA Portfolios Pvt. Ltd. Co. Pvt. Ltd. could have not sold these shares to the appellant company or disposed them off in any manner till 30.3.2009, Therefore, there is no question of appellant buying these shares @ Rs. 83.79 and then selling them back to the very same party at the lower rate of Rs. 53.96 per share before the expiry of the lock-in period. The tripartite agreement which is claimed to be the basis for entire transaction is not a enforceable agreement because the same was in violation of the SEBI law When an act is prohibited by the statute, the same becomes an illegal act and cannot be made legal by way of a private tripartite agreement. It is an undisputed fact that the shares in question were prohibited to be disposed off in any manner whatsoever by Harprasad & Co. Pvt. Ltd. till 30.03.2009. Therefore, the claim of the appellant that the transaction was genuine and made as per the tripartite agreement between the group companies is rejected. Considering the facts and circumstances of the case, I agree with the views of the AO that entire transaction was a sham transaction and arranged with a view to book the artificial loss for tax evasion and the same was not a genuine loss. Therefore, the disallowance made by the AO is confirmed. This ground of appeal is rejected.
11. In view of above from the assessment order we note that the assessing officer disallowed the claim of the assessee by holding that the transaction entered into by the assessee with its related parties in respect of shares of the same group concern resulting in substantial loss to the assessee cannot be taken and accepted to be genuine by any stretch of imagination. The AO also held that the assessee has claimed to have buy and then sold the rights in the shares of listed company Escort Ltd. which is also a group concern, outside the share market in the form of a private bulk deal and the transaction has taken place at a 17 AAA Portfolios Pvt. Ltd. rate which was lower then the market rate on that date, therefore, the transaction’s claim to have been entered is a completely sham transactions to book artificial losses and to evade legally payable taxes.
12. The CIT(A) dismissed appeal of the assessee by holding that the claim of the assessee that the transaction was genuine and made as per tripartite agreement between the group companies deserve to be rejected and he agreed with the conclusion of the AO that entered transaction was a sham transaction and oriented with a view to book artificial loss for tax evasion and the same was not a genuine claim of long term capital loss. 13. When we respectfully consider the ratio laid down by Hon’ble Gujarat High Court in the case of ACIT vs. Biraj Investment Pvt. Ltd. (Supra), we note that in that case the assessee sold the shares and booked capital loss therefrom which were pledged with the Industrial Development Bank of India and Hon’ble High Court held that the transaction in question cannot be said to be a device for reducing tax effect. In the present case, there was no transaction of pledging shares before sale resulting into capital loss and there was no lock-in period for transfer of these shares as exists in the present case therefore, facts and circumstances of the present case are quite dissimilar to that case. When we further respectfully consider the facts and dicta laid down by Hon’ble Madras High Court in the case of CIT Madurai vs. M.Ramaswamy (Supra) and we observe that in that case there was a controversy regarding the shares pertaining to a sick mill and the tribunal held that the shares being movable property can be transferred as per articles of the company and transferee gets the right of ownership even if the transaction of sale is not entered in share registers of the company then also the assessee is entitled to claim adjustment of “Capital Loss” on such transfer. In the present case, it is not the case of the lower revenue authorities that since the name of the assessee 18 AAA Portfolios Pvt. Ltd. was not entered into the share holders register or share roll register of the company, therefore, the assessee is not entitle to claim loss on such transfer of share but the main allegation of the assessing officer and the first appellate authority is that the assessee purchased from HPC and sold back the same shares preferential convertible shares to HPC during the lock-in period and the transaction was affected between group companies about the shares of a group company resulting into huge losses in other words transactions entered into by the assessee with its related parties in respect of shares of the same group concern resulting in substantial to the assessee cannot be taken on accepted as genuine by any stretch of imagination. . Therefore, the transaction was a sham transaction and since the transaction was not permissible and legally prohibited during the lock-in period, the purchase and sale of shares without any legally permissible physical transfer of shares is a sham transaction and the claim of the assessee is not acceptable which was placed and advanced with an intention to evade taxes.
On the careful and vigilant analysis of the ratio of the judgments, as relied by the ld. Counsel of the assessee, in our humble opinion the facts of the present and prevailing circumstances are quite dissimilar and distinguishable from the facts and circumstances of the cited cases, therefore, we respectfully hold that benefit of the ratio of these decisions are not available for the assessee in the present case.
The ld. Counsel of the assessee, during the arguments, also placed copies of the tax payment challans and reiterating the written submissions dated 03.11.2011 place before AO submitted that the demand of tax after rectification order dated 21.08.2009 passed u/s 154/143(3)/143(1) has been communicated at Rs. 4,69,45,501/- and this amount has been worked out after giving credit for deposit of 6 crores in March 2009 and thereafter the assessee 19 AAA Portfolios Pvt. Ltd. has deposited further amount of Rs. 2.50 crore on 30.12.2009. 2.10 crore on 29.1.2010 copies of challans were placed before us. The ld. Counsel of the assessee also drawn out attention towares para (d) of the written submissions of the assessee placed before CIT(A) dated 19.03.2013 and contended that in the assessment year 2009-10. The appellant was faced with huge tax demands for which it had to liquidate its investments in these shares. The ld. DR vehemently contended that the ld. Counsel of the assessee is misleading the facts before the court and there was no requirement or urgency before the assessee on 30.09.2008 on which the shares were sold back to the HPC. The ld. DR pointed out that in the written submission dated 19.03.2013 before the CIT(A) during first appellate proceedings in para (d) page 2 the assessee submitted that in the assessment year 2009-10, the assessee was faced with huge tax demands for which it had to liquidate its investments in these shares. The ld. DR further pointed out that in the written submission dated 09.01.2014 the assessee at page 3 first sentence submitted that share were sold back to the HPC in September, 2009 whereas in the written submission dated 17.11.2011 before the AO, the assessee in para 1 mentions the date of transaction as 30.09.2008 and in this letter of the assessee explained the AO about the share price of Escorts Ltd. on Bombay Stock Exchange and National Stock Exchange during the month of October, 2007 and September, 2008. Therefore, the assessee has submitted misleading facts and explanation before the authorities below and this conduct of the assessee cannot be held as a conduct of sincere and innocent tax payes. Ld. DR also pointed out that the assessee had submitted challans of tax payment pertaining to AY 2006-07 dated 29.01.2010, 30.12.2009, 28.3.2009 and 05.03.2009 which are not relevant and acceptable as a good cause for selling the impugned shares during the lock-in period in the month of September, 2008 20 AAA Portfolios Pvt. Ltd. against which huge impugned capital loss of Rs. 4,84,73,750/- has been claimed by the assessee.
On carefully and vigilant perusal of the assessee’s paper book available at 48 pages submissions of the assessee before AO dated 03.11.2011 copies of the 4 challans submitted during the hearing before us at the very outset, we note that as per sample copy of the share certificate available at page 38 of the assessee’s paper book the preferential share allot to HPC could not be sold/ hypothecated / pledged/ transferred till 30th March, 2009 and this prohibition has been expressly mentioned on face of the share certificate. We further note that the cause of sale of share back to HPC has been submitted before the authorities below is that, in the assessment year 2009-10, the assessee was faced with huge tax demands for which the assessee had to liquidate its investment in these shares. As per submissions of the assessee before AO dated 17.11.2011 available at pages 41 and 42 of the assessee’s paper book and stock prices of the shares of Escort Ltd. during 01.09.2007 to 30.09.2008 available at page 43 of the assessee’s paper book it is ample clear that the assessee sold the shares back to HPC Ltd. on 30.09.2008. Whereas in the written submission before the CIT(A) dated 09.01.2014 available at pages 23 to 27 of the assesseeps paper book, we note that at page 3 top line the assessee submitted that the shares were sold back to HPC in September, 2009 based on the prevailing market price of these shares in the stock exchanges.
Firstly we may pointed out that if the shares were sold in September, 2009 then the same cannot be held within lock-in period which was only up to 30.03.2009 and there would be no controversy about the loss claimed by the assessee but shares were actually sold in the month of September, 2008. Therefore, the controversy arose and claim of the assessee was dismissed. Furthermore, in the written submission dated 19.03.2013 filed before first 21 AAA Portfolios Pvt. Ltd. appellate authority available at pages 16 to 20 of the assessee’s paper book, which were also read out and reiterated by the ld. counsel of the assessee during the hearing before us, we observe that the urgency and requirement of the assessee in selling shares before the lock-in period has been stated that in the assessment year 2009-10, the assessee was faced with huge tax demands for which it had to liquidate its investment in these shares but there is no document before us showing the tax demand pertaining to AY 2009-10 and evidence or proof to show the tax payment to the exchequer on or after 30.09.2008 or even up to and of relevant calendar year 2008. Per contra, from the copies of the four challans placed before us it is apparent and vivid that the assessee made payment of tax for AY 2006-07 in four installments starting from 05.03.2009, 28.03.2009, 30.12.2009 and 29.01.2010 and in the light of these documents urgency and necessity shown by the assessee in September 2008 or nearby time cannot be held as tenable, acceptable or sustainable in the view of contradictory incorrect and baseless facts narrated by the assessee in its submissions and explanation before the authorities below as well as before this Tribunal. Thus, we decline to accept contention of the assessee that for AY 2009-10 the assessee faced huge tax demand and due to this reason assessee sold the shares. In this regard, we place our serious concern on record about the conduct of the assessee in narrating incorrect contradictory, misleading and irrelevant facts before the authorities below as well as before this Tribunal.
At this stage, it would be appropriate and necessary to consider dicta laid down by Hon’ble High Court of Delhi in the case of Friends Overseas Pvt. Ltd. u/s CIT (2004) 136 Taxman 94(Del.) wherein (at pages 98&99) their Lordship speaking for the Jurisdictional High Court and upholding and confirming the order of Tribunal has held as follows, which is being respectfully reproduced below :-
22 AAA Portfolios Pvt. Ltd. “11. In the present case, while rejecting the argument that the provisions of section 158BC of the Act were not applicable, the Tribunal has observed that it was never the case of the assessed that the document in question (Annexure A-11) was not recovered from its business premises or that it did not belong to it or that the entries regarding expenditure aggregating to Rs.14,88,754 were not made by its employee; vide letter dated 7-11-1996 the assessed had categorically accepted that the entries in question were made by its accountant, though for some other purpose; again on 15-11-1996 the assessed reiterated the same explanation and an affidavit of the accountant was filed stating that the figures mentioned on the document were imaginary figures; this explanation was again retracted and one Babulal Goenka was produced to own the said entries, which, according to Goenka were again typed by assessed's accountant. The Tribunal found that the assessed had knowingly and admittedly given different explanations in respect of the same document and, therefore, its yet another explanation that the subject transactions, though typed by its accountant, were made by the said Goenka lacked credence. It is pertinent to note that the assessed had not only owned up the document but had also explained the cheque transactions reflected in the lower portion of the same very document. In view of the factual scenario projected above, we unhesitatingly affirm the view taken by the Tribunal that section 158BC had been correctly invoked in the case of the assessed company and that section 158BD of the Act had no application in the matter.
For the foregoing reasons, we are of the view that this appeal by the assessed is wholly misconceived, as no question of law of general public importance arises or that the issue raised is such that it poses difficulty in answering it or that the issue is capable of an alternative view. As noted supra, the view of the Tribunal is based on clear provisions of law, causing no ambiguity. Thus, no substantial question of law, which is the sine qua non for the exercise of power under section 260A of the Act arises from the impugned order.”
On careful perusal of the relevant order of the Tribunal in the case of Friends Overseas (P) Ltd. vs. DCIT reported as (2001) 73 TTJ 367 (Delhi Trib.) we observe that the Tribunal has referred the preposition laid down by the 23 AAA Portfolios Pvt. Ltd. Hon’ble Kolkata High Court in the case of Amal Kumar Chakraborty vs. CIT (1994) 207 ITR 376 (Kol.) wherein their Lordship (at page 390) held as follows :- Here, we are to go by the dictum "falsus in uno falsus in omnibus". Though applicable in criminal law, it is a sound principle to apply in taxation when the matter is one of finding of fact on the basis of statements of a witness and their judicial evaluation. It is seen that in 1975, the assessee gave a false statement by stating that he had no connection with the bank deposits. Later he makes a volte face and says that the deposits are from the money supposedly declared in 1971. Therefore, the later statements of the assessee cannot be credited as the source of the deposits.
Keeping in view our conclusion in the earlier paras of this order in the light of dicta laid down by Hon’ble High Court of Delhi in the case of Friends Overseas (Supra) and Hon’ble Kolkata High Court in the case of Amal Kumar (supra), we reject the explanations of the assessee that the assessee sold back the shares to HPC due to huge tax demand in AY 2009-10 and this was the compelling situation and circumstances wherein the assessee was compelled to sale these shares back to HPC ( from whom the assessee purchased these shares within lock-in period) during lock-in period which was to expire on 30.03.2009. We have no hesitation to hold that this baseless and factually incorrect contradictory version and explanation of the assessee deserves to be treated as desperate measure to evade responsibility cast by the taxing provisions of the Act and the law and the said explanation of the assessee in this regard is nothing but ill-contrived fictional story which is baseless and not acceptable.
On the basis of foregoing discussion, we reach to a logical conclusion that the assessee had no bonafide reason or cause in September, 2008 which forced 24 AAA Portfolios Pvt. Ltd. the assessee to sale shares during the lock-in period which resulted into huge loss to the assessee. In this situation, we are also inclined to agree with the conclusion of the authorities below that sale of share was effected between two group companies having the same directors about the shares of the group company during the lock-in period wherein the transactions of sale and purchase of these shares were expressly prohibited by the allotting authority during lock- in period which was to be expired on 30.03.2009. There was no good cause for the assessee to sale these shares back to HPC group company which was purchased from HPC and thus, we have hasitation to hold that the transaction of sale of shares under taken by the assessee company during the relevant financial period, with group company was a sham transaction and the loss booked under said transaction cannot be held as allowable claim of short term capital loss for the assessee. Finally, we uphold the impugned order which confirm the disallowance and addition made by the AO. Accordingly ground no. 1 and 2 of the assessee being devoid of merit are dismissed. Ground no. 3 and 4 of the assessee 22. Apropos ground no. 4 the ld. Counsel of the assessee placing reliance on the decision Hon’ble High Court of Delhi in the case of CIT vs. Holcim India Pvt. Ltd. (2014- TIOL-1586-HC-DEL- IT) submitted that the assessee had not claim any exempt income during the year under consideration and the dividend income earned by the assessee of Rs. 12,900/- has been included as a part of business income of the assessee and the same has been offered to tax and tax has been paid accordingly. Therefore, there is no question of any disallowance of expenditure incurred on earning the said income u/s 14A r.w Rule 8D of the IT Rules, 1962. The ld. Counsel vehemently pointed out that as per proposition laid down by Hon’ble High Court in the case of Holcim (Supra), if there is no exempt income then no disallowance u/s 14A of the Act read with Rule 8D of 25 AAA Portfolios Pvt. Ltd. the IT rules, 1962 can be made. The ld. departmental representative supported the action of the AO as well as conclusion of the CIT(A), however, he could not controvert the legal proposition laid down of Hon’ble High Court of Delhi in the case of Holcim (supra)India wherein it was held that there could be no disallowance if there is no exempt income.
When we analyse the facts and circumstances of the present case, admittedly and undisputedly, the assessee has not claimed any exempt income for AY 2009-10, thus, in the view of dicta laid down by Hon’ble Jurisdictional High Court of Delhi in the case of Holcim India (supra) we hold that there could be not disallowance u/s 14A read with rule 8D of the Act and respectfully following the same the issue is decided in favour of the assessee and AO is directed to delete impugned addition. Accordingly, ground no. 3 of the assessee are allowed.
In the result, appeal of the assessee on ground no 1 & 2 is partly dismissed and partly allowed on ground no. 3 & 4. (Order Pronounced in the Court on 20/01/2016).