This is an appeal by the assessee against the order dated 18-12-2000 of Commissioner (Appeals)-II, New Delhi, relating to the assessment year 1997-98.
2. Securities and Exchange Board of India Act, 1992, provides for establishment of a Board called Securities & Exchange Board of India, hereinafter called SEBI, to protect the interests of the investors in securities and development of securities market. The Board has powers to issue regulations/guidelines/ directions to carry out the intents and purpose of the Act. One such regulation issued by SEBI in connection with public issue of shares DIP series provides in section L as follows : (a) Equity capital to be subscribed in any issue to the public by the promoters, i.e., those described in the prospectus as promoters, directors, friends, relatives and associates should not be less than 25 per cent of the total issue of equity capital upto Rs. 100 crores and 20 per cent for the issue above Rs. 100 crores. In the case of FCDs, one-third of issue amount should be contributed by promoters, directors, friends, relatives and associates by way of equity before issue is made. In the case of PCDs, one-third of the convertible portion should be brought in as contribution of promoters, directors, friends, relatives and associates before issue is made. Minimum subscription by each of the friends/relatives and associates under quota should not be less than Rs. 1 lakh.
(b) This promoters' contribution shah not be diluted for a lock-in-period of 5 years from the date of commencement of the production or date of allotment whichever is later. Promoters must bring in their full subscription to issues in advance before public issue.
(c) All firm allotments, preferential allotments to collaborators, shareholders of promoter companies whether corporate or individual shall not be transferable for three years from the date of the commencement of production or date of allotment whichever is later.
(d) The share certificate issued to promoters, friends relatives and associates, etc. should carry the inscription, 'not transferable' for a period of 3 or 5 years as may be applicable from the date of commencement of production or date of allotment whichever is later." There was a company by name M/s SRF Ltd., which raised share capital by issue of share warrants which enabled the holder of such warrants to apply pay for and seek allotment of one equity share of Rs. 10 at a premium of Rs. 78 per share. The share warrants carrying such a right were issued on 6-10-1994. The share warrants did not have any face value. As per the terms of issue the company will call upon the warrant holders to exercise option at any time by a notice in writing, The amount payable along with application exercising the option is Rs. 8.80 and the remaining sum of Rs. 79.20 per share shall be paid as and when the company calls upon the warrant holders who have exercised the option to purchase shares.
Out of the share warrants so issued by M/s SRF Ltd., 23,49,170 share warrants were offered on a preferential basis to companies/persons of the management group, the particulars of which are as follows : The share warrants issued to the above promoters were dated 6-10-1994 and were not transferable for a period of 3 years thereafter, i.e., up to 5-10-1997 as per the SEBI guidelines already referred to above.
M/s SRF had already offered shares to the warrant holders. The following persons exercised their option to subscribe for shares and had also paid the application money of Rs. 8.80 per share. They thus held partly paid shares of Rs. 8.80 each.
The company, i.e., SRF Ltd. had already called upon the share warrantholders who had exercised their option to subscribe for their shares to pay the remaining sum of Rs. 79.20 per share (i.e., the difference between Rs. 88 being face value of share and Rs. 8.80 already paid along with application for allotment of shares and exercising option to purchase shares). The board of directors had called upon the warrant-holders who had exercised option to purchase shares to pay the call money of Rs. 79.20 per share vide their board resolution dated 10-10-1995.
It is at this stage that the following promoters of M/s SRF Ltd. who had exercised their option to purchase shares before payment of call money due on the share entered into an agreement for sale of the following shares to the assessee There were separate agreements for sale with the aforesaid persons but all were dated 18-1- 1996. The aforesaid persons also executed an irrevocable power of attorney all dated 18-1- 1996 empowering the assessee to all acts, deeds and things necessary to give effect to the agreement for sale.
A reference to the various terms of the agreement as well as the power of attorney is necessary for proper appreciation of the issue to be decided in this appeal. The main terms of agreement for sale of shares were that the aforesaid 5 persons were described as sellers and the assessee is described as purchaser and that the seller is holder of shares of M/s SRF Ltd. and that these shares have a lock-in-period and cannot be transferred before 6-10-1997. The agreement provides that the seller will execute an irrevocable power of attorney in favour of the buyer conferring all his/her rights as a shareholder in respect of the shares including power to transfer the same upon the expiry of the lock-inperiod of the said shares. That any bonus or rights shares or dividend declared from the date of the agreement till transfer of shares in favour of the assessee shall enure to the benefit of the assessee.
The power of attorney in the preamble refers to the agreement for sale of shares and further recites that the seller of shares has received the fun sale consideration for the shares and that the share certificates relating to the shares along with blank transfer forms in respect thereof duly executed have been delivered to the assessee. The power of attorney thereafter contains various clauses describing the acts, deeds and things which the assessee as a power agent is empowered to do on behalf of the principal. These clauses are : (1) to pay call money together with interest on the shares; (2) to apply for and accept rights shares if any offered by the company; (3) to open bank account on behalf of the principal and operate the same for collection of dividend declared by the company; (4) after the expiry of lock-in-period i.e., on or after 4-10-1997 to sell, transfer the share to the agent or to any other person including any bonus shares that may be issued on the shares that are sold by the principal to the agent; (5) to sign agreements, share transfers, etc. for effectual transfer of shares; (6) to lodge transfer forms with the company for effecting transfer of shares.
It is relevant at this juncture to mention that as per clarification issued by SEBI dated 10-10-1994 transfer of shares amongst promoters specifically described as such in the prospectus was permitted but the requirement relating to lock-in-period would continue to apply to the extent initially prescribed. The assessee was also a promoter and as such transfer to the assessee was permissible but the requirement of lock-in-period for sale to outsider would however continue to apply.
There is no dispute about the fact that the assessee paid the application money of Rs. 8.80 per share paid by the seller of the shares to M/s SRF Ltd. There is also no dispute that the assessee paid the call money on the shares and the shares were thus fully paid up. In fact for late payment of call money, the assessee also paid interest.
The assessee sold all these shares to M/s DCM Shriram Consolidated Ltd. which is also another promoter of M/s SRF Ltd. on 1-11-1996. This transfer was also within the lock-in-period. The agreement for sale of these shares between the assessee and M/s DCM Shriram Consolidated Ltd. is dated 1-11-1996. The sale consideration received by the assessee was Rs. 50 per share. The agreement refers to the basis on which the sale price of Rs. 50 per share was fixed, clause 2 of the agreement in this regard reads as follows : "The purchase consideration per share shall be Rs. 50. In order to determine the purchase price, the following observations are considered : (a) ICICI, Securities & Finance Co. (I-SEC) has made a valuation report of the company in July-August, 1996 which states that the value of the company per equity share is Rs. 268 as per discounted cash flow method.
(b) The share price of SRF Ltd. as on 16-8-1996 as per the format prescribed by SEBI for preferential allotment has been certified as Rs. 47.20 by M/s Thakur Vadhyanath Aiyar & Co., chartered accountant vide their certificate dated 30-9-1996.
(c) The book value of SRF Ltd. shares as per audited accounts for the year ended 31-3-1996 computes to Rs. 49.53 (per) share.
(d) Prevailing market price of SRF share/s on 29-10-1996 was Rs. 32.50 per share on Mumbai Stock Exchange where the shares are widely dealt.
Keeping in view the substantial number of shares being sold, it is agreed that price' for the purchase of these shares shall be Rs. 50 (fifty) per share aggregating to Rs. 3,78,65,000 (Rupees three crores seventy eight lakhs sixty five thousand only)." It is not clear as to the date on which the share certificates were delivered along with transfer forms by the assessee to M/s DCM Shriram Consolidated Ltd. The assessee suffered a short-term capital loss in the transaction of purchase and sale of share of M/s SRF Ltd. referred to above. A sum of Rs. 2,87,77,400 was claimed as short-term loss.
On the above facts, the assessing officer disallowed the claim of the assessee for deduction of short-term loss for the following reasons viz., that the transfer of shares during the lock-in-period was prohibited by SEBI regulations and therefore, any transfer of shares which is prohibited by law and consequent loss cannot be allowed in view of the provisions of Explanation to section 37(1) of the Act, which lays down 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, The assessing officer also held that the transaction of share transfers were between group companies where promoters had full control. He also made a reference to the fact that transfer of shares were not through brokers. The assessing officer therefore, also concluded that transactions are bogus and only book entries to reduce payment of tax.
The assessee had borrowed funds for making payment for purchase of these shares and had paid interest on such borrowings totalling Rs. 1,72,01,022 and claimed the same as deduction against dividend income that it received on these shares. The assessing officer disallowed the said claim for the same reasons that were assigned while disallowing short-term capital loss on sale of shares.
As already noticed, the agreement between the registered holder of shares and the assessee under which the assessee purchased the shares provided that any declaration of dividend by the company M/s SRF Ltd. would enure to the benefit of the assessee. As registered shareholders, the seller of the share to the assessee were paid dividend by the company. The same was passed on by them to the assessee as per the agreement. Thus a sum of Rs. 9,03,173 was received by the assessee as dividend. This was offered to tax by the assessee as "other income".
The company M/s SRF Ltd. deducted tax at source on the dividend declared. The tax deduction certificates were in the name of the registered share-holders. The registered holders of shares had given Form No. 15B, a declaration in terms of rule 30A(1)(ix) of the IT Rules to the effect that the registered holders had not claimed credit for tax deducted by the company at source on the dividend. The assessee claimed credit for TDS. The assessing officer refused to allow credit for the reasons that the TDS certificates were not in the name of the assessee.
Aggrieved by the order of the assessing officer, the assessee preferred appeal before the Commissioner (Appeals). Before Commissioner (Appeals), the assessee explained the nature of the transaction resulting in the short-term capital loss and contended : (a) What the assessee acquired from the promoters was equitable interest in the shares. That the legal ownership of the shares continued with the promoters. That purchase of equitable interest in shares was permissible as held by the Hon'ble Supreme Court in the case of Seth R. Dalmia v. CIT (1977) 110 ITR 644 (SC) .
(b) That there was no violation of the provisions of the SEBI Act or regulations made thereunder since the promoters continued to be owners of the shares as per the register of members of the company. That the SEBI regulations provided that promoters' holding of shares cannot be diluted. That an inter se transaction between promoters would still result in the promoters collectively holding such shares. Therefore, there was no violation of the SEBI regulations and was well within the framework of law.
(c) It was submitted that the short-term capital loss has to be allowed. The interest paid on borrowings have to be allowed against dividend income. It was also submitted that credit for TDS has to be allowed to the assessee.
The first and foremost observation of the Commissioner (Appeals) was that the assessing officer ought to have considered the issue of short-term capital gain according to the provisions of sections 45 and 74 of the Act. Thereafter the Commissioner (Appeals) posed the following point for consideration : "Prima facie it appears that the short-term capital loss claimed is a mere paper loss and sham. Therefore, all the details relating to these transactions were examined to see whether there is collusive or colorable transaction or transactions aimed at tax avoidance under the guise of corporate veil." The Commissioner (Appeals) on an analysis of the balance sheet of the assessee noticed that it had a share capital of only Rs. 8 lakhs and had borrowed Rs. 4.62 crores as unsecured loan for purchase of shares of M/s SRF Ltd. The assessee had paid Rs. 1,72,01,022 on such borrowings. Out of the interest payment as above a sum of Rs. 1,56,58,917 were paid to persons belonging to the group companies from whom borrowings have been made. Thus, the funds for purchase of shares had come from within the group companies. The Commissioner (Appeals) noticed that the shares were sold by the assessee within a period of 9-1/2 months from the date of purchase resulting in a loss of Rs. 2,87,77,400. The assessee in the intervening period of purchase and sale of the shares received a dividend of only Rs. 9,03,173. The Commissioner (Appeals) was of the view that no prudent businessman will enter into such transaction.
The Commissioner (Appeals) thereafter analysed the agreement under which shares were purchased by the assessee. He was of the view that there was no basis for fixing the price at Rs. 88 per share. The Commissioner (Appeals) noticed that the shares were claimed to have been purchased by the assessee on 18-1- 1996 and the lock-in-period was to expire on 6-10-1997 and the time-gap between these two periods was 21 months. The assessee claimed to have sold these shares on 1-11-1996 and the time gap between this date and the expiry of the lock-in-period of 6-10-1997 was only 11 months. He was of the view that within a shorter tenure of the lock-in-period the assessee ought to have got a better price for these shares when he sold them. With a larger tenure of lock-in-period the assessee purchased these shares for Rs. 88 and when the tenure of lock-in-period was shorter he sold the very same shares for Rs. 50. According to the Commissioner (Appeals), the sale price of the shares by the assessee therefore should have been higher.
In this regard the Commissioner (Appeals) referred to the manner of fixation of sale price at Rs. 50 per share as recited, in the agreement under which the shares were sold by the assessee to M/s DCM Shriram Consolidated Ltd., which reads as follows : "The purchase consideration per share shall be Rs. 50. In order to determine the purchase price, the following observations are considered : (a) ICICI, Securities & Finance Co. (I-SEC) has made a valuation report of the company in July-August, 1996 which states that the value of the company per equity share is Rs. 268 as per discounted cash flow method.
(b) The share price of SRF Ltd. as on 16-8-1996 as per the format prescribed by SEBI for preferential allotment has been certified as Rs. 47.20 by M/s Thakur Vadhyanath Aiyar & Co., chartered accountant vide their certificate dated 30-9-1996.
(c) The book value of SRF Ltd. shares as per audited accounts for the year ended 31-3-1996 computes to Rs. 49.53 (per) share.
(d) Prevailing market price of SRF share/s on 29-10-1996 was Rs. 32.50 per share on Mumbai Stock Exchange where the shares are widely dealt.
Keeping in view the substantial number of shares being sold, it is agreed that price' for the purchase of these shares shall be Rs. 50 (fifty) per share aggregating to Rs. 3,78,65,000 (Rupees three crores seventy eight lakhs sixty five thousand only)." The Commissioner (Appeals) expressed doubt as to how the price at Rs. 50 would be equitable and fair when 10 months prior to the sale, the assessee paid Rs. 88 for the same shares when the duration of the lock-in-period was longer. The Commissioner (Appeals) thereafter referred to the terms in the agreement for sale of shares by the assessee to the effect that share transfer duly signed by the appropriate person will be handed over to the purchaser and that a power of attorney would be executed in favour of the purchaser. The Commissioner (Appeals) noticed that there was no evidence filed to prove the execution of transfer deeds or the power of attorney. The other objections of the Commissioner (Appeals) were that the agreement did not specify the distinctive number of shares, that there was no reference to the non-transferability of shares upto 6-10-1997, that the date on which the assessee received payment has also not been mentioned. The Commissioner (Appeals) thereafter made a reference to the decision of the Hon'ble Delhi High Court in the case of CIT v.Bharat Nidhi Ltd. (1982) 133 ITR 447 (Del) and held that as laid down in the said decision in the absence of payment of sale consideration and delivery of blank transfer form along with shares there cannot be a valid sale of shares. The Commissioner (Appeals) ultimately concluded as follows : "The assessee- company did not have any title to the property in the shares on 1-11-1996 as there was no power of attorney in its favour by implication and no such power of attorney has been handed over to the buyer on 1-11-1996. In fact there is a mention of such power in the agreement dated 1-11-1996. Thirdly on 1-11-1996 the promoters namely, the 5 individual members of DCM group could not have signed even blank transfer form as that would clearly violate the SEBI regulation on promoters' quota. Further since the related shares certificates should have carried on its face a declaration that they are not transferable before 6-10-1997 there cannot be a blank transfer of such shares on 1-11-1996. Thus, I find that the assessee has not proved with cogent evidence that there was real purchase @ Rs. 88 per share on 18-1- 1996; nor has it proved that cogent evidence that there was a real sale @ Rs. 50 per share on 1-11-1996. As such on facts the short-term capital loss of Rs. 2,87,77,400 is not allowable. It is merely a paper loss, artificially generated within the same group of persons making undue use of the corporate veil. " The Commissioner (Appeals) also held that the 5 persons (promoters) who sold the shares to the assessee have given affidavit regarding the passing on of the dividends to the assessee which showed that they did not offer the dividend to tax thereby avoiding tax payable on dividend.
On the action of the assessing officer in rejecting the claim for deduction of interest of Rs. 1,72,01,022 against dividend income, the Commissioner (Appeals) held that the same was Justified since the transaction was found to be sham.
On the question of allowing credit for TDS on dividend, the Commissioner (Appeals) held as follows : "I have carefully considered the above. In first place since it has been found earlier in this order that there was no valid transfer of non-transferable shares, question of giving credit for TDS on dividends allegedly earned on those shares does not arise. Secondly, the case of the assessee does not fall within the provisions of r. 30A(1)(ix) of the IT Rules, 1962. Therefore, the assessee is not entitled to the credit for TDS on these shares." The Commissioner (Appeals) also held that the decision of the Hon'ble Supreme Court in the case of Seth R. Dalmia (supra) relied upon by the, learned counsel for the assessee was not applicable to the facts of the assessee's case, since the Hon'ble Supreme Court did not decide in the said case as to whether there can be a sale of equitable title in the shares. He held that the decision of the Hon'ble Delhi High Court in the case of Bharat Nidhi (supra) will apply to the case of the assessee.
Aggrieved by the order of the Commissioner (Appeals), the assessee is in appeal before the Tribunal.
We have heard the submissions of the learned counsel for the assessee and the learned Departmental Representative. Three issues arise for our consideration in this appeal : (a) Whether the revenue authorities were justified in not allowing the short-term capital loss on sale of shares amounting to Rs. 2,87,77,400 (b) Whether the revenue authorities were justified in disallowing the claim for deduction on account of interest paid by the assessee of Rs. 1,72,01,022 (c) Whether the revenue authorities were justified in not giving credit to TDS amounting to Rs. 1,80,633 As far as the first issue regarding the claim of short-term capital loss, the first and foremost issue to be considered is as to whether the assessee became the owner of the shares which were claimed to have been sold resulting in a short-term capital loss. The facts in this regard have already been narrated. The conclusion of the revenue authorities on this issue was that no prudent businessman would enter into a transaction whereby he would pay a sum of Rs. 4.6 crores by way of interest and borrow money for earning a dividend of Rs. 9.03 lakhs.
The further conclusion of the revenue authorities was that the agreement for purchase by the assessee dated 18-1- 1996 did not specify the price to be paid or the rate of each share and that there was no explanation whatsoever as to how the share price got fixed at Rs. 88 per share. On this aspect, the learned counsel for the assessee has submitted that the approach of the revenue authorities on this issue was fallacious. He brought to our notice the fact that the assessee held the shares as a capital asset and not as stock-in-trade of any business. In short, his submission was that the assessee had claimed capital loss on sale of the shares and the claim of the assessee had to be judged in accordance with the provisions applicable for computation of capital gains as laid down in Chapter IV-E of the Act. It was further submitted that the Commissioner (Appeals) fell into an error in judging the case by bringing in the aspect of a prudent businessman. It was brought to our notice that when M/s SRF Ltd. offered shares, the price per share was fixed by M/s SRF Ltd. at Rs. 88 per share and a sum of Rs. 8.80 was to be paid along with application for exercising the option to purchase shares. Learned counsel for the assessee brought to our notice that the person who sold the shares to the assessee had paid Rs. 8.80 per share and the assessee had paid the balance consideration as and when M/s SRF Ltd. made demand for payment of the call money on these shares. It was further submitted that the explanation with regard to price of shares at Rs. 88 per share was available on record and the conclusion of the Commissioner (Appeals) to the contrary was not correct.
Learned Departmental Representative brought to our notice the reason given by the assessing officer which was to the effect that there.was a prohibition as per the SEBI regulations whereby transfer of these shares before 6-10-1997 was prohibited and therefore, there could not be a valid sale of shares in favour of the assessee. Learned Departmental Representative also submitted that the transaction had taken place between the group companies without the assistance of stock brokers and so they were to be considered as bogus. She also relied on the decision of the Commissioner (Appeals).
We have considered the rival submissions. We have already noticed that there was an agreement for sale (with the 5 shareholders) of the shares in favour of the assessee all dated 18-1- 1996. The agreement for sale does not specify the prices that the assessee was to pay to the original holders of the shares. The original holders also executed power of attorney in favour of the assessee. This power of attorney was dated 18-1- 1996. Even in this power of attorney there is no reference to the consideration to be paid by the assessee to the sellers of the shares. It has, however, been brought to our notice that the assessee had paid to the vendors total sum of Rs. 66,64,240 in respect of the total quantity of 7,57,300 shares of M/s SRF Ltd. This had been paid by a cheque dated 30-3-1996 drawn on ANZ Grindlays Bank, Connaught Place, New Delhi. A perusal of the power of attorney reveals that the original holders of shares have acknowledged the receipt of full consideration for the shares from the assessee as on 18-1- 1996. They have further acknowledged the fact that they have delivered the share certificates along with blank transfer forms in respect of the shares duly executed by them. The agreement for sale of shares in its schedule gives the quantity of shares as well as distinctive numbers of the shares that have been sold to the assessee. In the light of these documents we have to examine as to whether there was a transfer of ownership of the shares in favour of the assessee. Shares are goods within the meaning of the Sale of Goods Act and therefore, the transfer of ownership of the shares in favour of the assessee have to be judged in the light of the provisions of the Sale of Goods Act. Chapter III of the Sale of Goods Act, 1930, from sections 18-30 deal with the provisions applicable to decide the question as to when a transfer of property in goods as between seller and buyer takes place. Section 18 requires that goods must be ascertained. In this case there is no dispute 'that the goods were ascertained. The share certificate has been delivered to the assessee along with blank transfer forms duly signed. The distinctive numbers of the shares had also been given. Thus the goods were ascertained even as on 18-1-1996 when the agreement for sale of these shares were executed. Section 19 of the Sale of Goods Act mentions that contract of sale of ascertained goods will result in transfer of the goods from the seller to the buyer when the parties to the contract intend it to be so transferred. Certain rules for ascertaining the intention of the parties is laid down in sections 20-24 of the Sale of Goods Act. Section 20 talks about sale of specific goods in a deliverable state and irrespective of the time of payment of price or the time of delivery of the goods the title passes when the contract is made. We may point out that in the present case the agreement for sale of shares clearly recognizes that the assessee would be the owner of the goods (i.e., the shares) from the date of agreement. What is postponed is only getting the shares registered in the register of members of-the company. The other rules laid down in sections 21-30 are not relevant for the present case. The Commissioner (Appeals) has however made a reference to the decision of the Hon'ble Delhi High Court in the case of CIT v. Bharat Nidhi Ltd. (supra). It may be mentioned here that in the facts of that case the serial numbers of the shares had not been mentioned. There was no evidence regarding delivery of shares nor was there evidence to show payment of purchase price.
Besides the above, there was no delivery of transfer deed duly signed along with share certificate. In those circumstances the court had held that there was no transfer of ownership in shares. As already pointed out in the present case the position is different inasmuch as all the conditions have been fulfilled. The law is well settled that absence of registration of the name of the transferee as a shareholder in the register of members of the company is not a condition precedent for holding that a particular person is a holder of shares in a company or not. In view of the above, we are of the view that the assessee became the owner of shares as on 18-1- 1996.
The other objection of the revenue was that the SEBI regulations prohibited sale of shares on or before 6-10-1997. We have already made a reference to the SEBI regulations which permit transfer of shares as between the promoters. It was only the promoters' holding that was required to be maintained without any dilution. In the present case there has been no violation of these regulations also. Even the assessing officer or the Commissioner (Appeals) did not dispute the fact that the transfer had taken place between the persons belonging to the same group who were promoters of M/s SRF Ltd. In view of the above, we hold that the assessee was legally the owner of the shares as on 18-1- 1996.
Next aspect to be considered is as to whether the assessee had validly transferred these shares in favour of M/s DCM Shriram Consolidated Ltd. As far as this aspect of the matter is concerned, perusal of the agreement for sale between the assessee and M/s DCM Shriram Consolidated Ltd. shows that the distinctive number of shares have not been mentioned in this agreement. The price per share is however fixed at Rs. 50. Clause III of this agreement dated 1-11-1996 further prescribes that the consideration shall be paid by the buyer to the assessee by cheque and on such payment the assessee will deliver full share certificates along with duly executed valid share transfer deeds.
It is also further seen that the purchaser from the assessee had paid the sum of Rs. 3,78,65,000 by way of a cheque as early as 19-3-1997. A copy of the bank statement in this regard has been filed before us. The absence of distinctive numbers of shares in the agreement will not render the agreement for sale being in respect of unascertained goods.
This is because the assessee owned only 7,57,300 shares of M/s SRF Ltd. and it sold all these shares to M/s DCM Shriram Consolidated Ltd. On this issue the objection of the Commissioner (Appeals) was that there was no basis to fix the price at Rs. 50 per share when the assessee sold the shares to M/s DCM Shriram Consolidated Ltd. The reasoning of the Commissioner (Appeals) was that when the assessee purchased these shares on 18-1- 1996, the value of shares was Rs. 88 per share. The lock-in-period was upto 6-10-1997. The period between the purchase and the lock-in-period was 21 months. The assessee sold the shares on 1-11-1996 and the period between this date and the date of lock-in-period, i.e., 6-10-1997 was about 11 months. The reasoning of the Commissioner (Appeals) was that since the time gap at the time of sale for the expiry of the lock-in-period was shorter, the price the assessee ought to have received must be higher than Rs. 88 which was paid when the very same shares were purchased on 18-1- 1996. We are of the view that this approach of the Commissioner (Appeals) was not very relevant. The lock-m-period has nothing to do with the value of the shares. The shares in question had to be valued on the basis of market forces. The valuation has been done by the assessee on the basis of the formula prescribed by the SEBI for preferential allotment. In any event the assessing officer cannot dispute the full consideration received by the assessee on sale of shares. There was no material before the assessing officer to come to the conclusion about receipt of any higher consideration by the assessee than a sum of Rs. 50 per share.
Therefore, this was not a valid basis for disbelieving the plea of sale of shares by the assessee. The definition of transfer as contained in section 2(47) is very wide and is an inclusive definition. There was, therefore, a valid sale of shares by the assessee in favour of M/s DCM Shrirarn Consolidated Ltd. The objection of the revenue authorities regarding SEBI regulations prohibiting sale of shares before 6-10-1997 is again not relevant for the reason that M/s DCM Shrirarn Consolidated Ltd. was also a promoter of M/s SRF Ltd. and therefore, transfer or sale between the persons who are promoters was not prohibited even by the SEBI regulations.
The learned counsel for the assessee has also made an alternative submission before us that even assuming that there was no purchase and sale of share by assessee, by virtue of the rights the assessee acquired under the agreement dated 18-1- 1996 by which the assessee bargained to purchase the shares and the agreement dated 1-11-1996 by which the assessee sold the very same rights to M/s DCM Shriram Consolidated Ltd. would be enough for the assessee to claim the short-term capital loss. In this regard, learned counsel for the assessee relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Tata Services Ltd. (1980) 122 ITR 594 (Bom). His submission was that the rights which the assessee acquired under the agreement dated 18-1-1996 could be considered as capital asset and the transfer of such rights under the agreement dated 1-11-1996 in favour of M/s DCM Shriram Consolidated Ltd. could be regarded as a sale of such rights giving rise to a capital gain/loss. In the decision of the Hon'ble Bombay High Court, it has been held that the definition of capital asset under section 2(14) of the Income Tax Act should mean property of any kind held by the assessee whether or not connected with his business or profession. The word property was held to be of the widest amplitude. The court held that an assessee who held rights under a contract for purchase of land had a right to obtain specific purpose of such agreement. The court held that assignment of such right in favour of another person would give rise to a transfer. On the facts of that case the capital gain on such assignment of rights was held to be taxable.
Learned counsel for the assessee therefore submitted that even if the agreement between the parties is looked at from the angle of transfer or assignment of rights to purchase shares, the same would amount to transfer giving rise to either capital gain or capital loss.
In reply to this argument, the first submission of the learned Departmental Representative was that such an argument was not put forth before the revenue authorities. Secondly, it was submitted by the learned Departmental Representative that the revenue authorities have held that there was no bona fide transfer of shares either in favour of the assessee or by the assessee in favour of any other person.
We have considered the rival submissions. As held by the Bombay High Court in the case of Tata Services (supra) the transaction can be looked at even from the angle of sale of rights under an agreement for purchase of shares. It could be said that there was a valid assignment of whatever rights the assessee got to purchase the shares under the agreement dated 18-1-1996 which was assigned to another person under the agreement dated 1-11-1996. These agreements/assignments did give rise to a capital loss in the hands of the assessee. It could be said that such assignment resulted in a transfer of capital assets giving rise to a short-term capital loss. Even this alternative plea of the assessee deserves to be accepted.
The next plea of the learned Departmental Representative was that the transactions have been held to be sham and nominal transactions. On this aspect we find that there has been actual payment and delivery of shares as contemplated in various agreements. In these circumstances it has to be accepted that the transactions were real. The legal effects of the transactions cannot be ignored. Learned counsel for the assessee in this regard has placed reliance on the decision of the Hon'ble Supreme Court in the case of Union of India & Anr. v. Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC). According to him, the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) has been held to be no longer applicable. It was submitted that in the light of the legal effects that arise from the transaction, the revenue was not entitled to ignore the same merely on the ground that accepting the transaction would result in loss of revenue.
As already observed by us, by virtue of the agreement a transfer of ownership in shares had taken place and this aspect cannot be overlooked. There is no other reason why the transaction should not be accepted. The transaction might result in an apparent tax benefit to the assessee but that cannot be the sole basis on which the same can be ignored. The revenue had to bring facts which would show that the entire transaction formed part of a scheme or arrangement aimed at tax evasion. Nothing has been brought on record in this regard. In view of the above, the basis for not allowing the short-term loss on the ground that transaction was a sham transaction cannot be accepted. Looking to the facts and the circumstances of the present case, we are of the view that the loss, i.e., short-term capital loss on sale of shares has been duly established by the assessee and the revenue authorities were bound to allow the claim of capital loss. We order accordingly.
The next issue for consideration is with regard to disallowance of claim for deduction on account of interest paid by the assessee. We have already noticed that as stated in the agreement for purchase of shares by the assessee, the assessee was entitled to receive dividend that may be declared by the company on these shares. The dividend so declared by the company was duly passed on by the seller of these shares to the assessee. This sum was offered for taxation. The assessee had borrowed money for making investment in the shares and had paid interest on such borrowings. This interest was claimed as an expenditure incurred for earning the dividend income. The only reason for disallowance of interest was that the transactions have been held to the sham transactions. The assessing officer has further taken a stand that since there was violation of SEBI regulations the transactions are illegal. We have already found that transactions were neither sham nor illegal. In CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC), it has been held that interest paid on borrowings for making investment in shares have to be held to be deductible irrespective of the fact whether the assessee receives dividend on shares purchased or not. In the present case, dividend income has been brought to tax under the head "Income from other sources". In view of the provisions of section 57(iii), the claim of the assessee for deduction of interest paid on borrowings to make investment in the shares from which dividend was received was to be allowed as deduction.
The assessing officer is directed to allow the claim for deduction.
The third issue for consideration is as to whether the revenue authorities were justified in denying the credit for TDS. On this issue the facts are that when the company paid dividond to the original holders of shares it had deducted tax at source and issued a TDS certificate in the name of the original holders. The proportionate dividend was duly passed on by the original holders of shares to the assessee. The original holders also filed an affidavit before the assessing officer as well as the indemnity bond together with declaration in Form No. 15B of the Income Tax Act. In this declaration, the original owners have clearly mentioned that they were the registered holders of the shares but the assessee was the beneficial owner of the shares entitled to receive the dividend. They have further declared that they have not claimed credit for tax deducted on such dividend. The only reason assigned by the revenue authorities for rejecting the claim was that the TDS certificate was not in the name of the assessee. On this issue the provisions of r. 30A(1)(ix) are relevant. Rule 30A talks about credit for TDS to a person other than the shareholder in certain circumstances. Clause (ix) of r. 30A(1) specifies that where shares have been sold or otherwise transferred by registered holders and where action for registering the transfer in the name of the purchaser or other person has been taken in accordance with the provisions of section 108 of the Companies Act then the credit for payment of tax should be given to the other person. It is, however, necessary that declaration in Form No. 15B has to be given by the person in whose name the TDS certificate stands. In the present case, it is observed that necessary declaration has been given by the assessee from the persons in whose name the TDS certificate stands. One of the conditions contemplated by r. 30A(1)(ix) is that the purchaser or other person should have taken action for registering the transfer in his name in accordance with the provisions of section 108 of the Companies Act, 1956. In the present case, the assessee purchased the shares on 18-1- 1996 and sold the same on 1-11-1996. There was, therefore, no occasion for the assessee to have taken steps to register the transfer of shares. Moreover, by reason of the lock-in-period, no other person could take steps to have share transfer registered on or before 5-10-1997, the expiry of the lock-in-period. The provisions of section 199 of the Act, mandates that credit for tax deducted and paid to the Central Government shall be construed as a payment on behalf of the shareholder and credit shall be given to him (i.e., the shareholder) for the amount so deducted on the production of certificate under section 203 in the assessment of such income (i.e., the dividend income). Proviso (ii) to section 199 provides for exceptions where credit can be given to some other person also (i.e., other than the shareholder) and these exceptions are listed in r. 30A of the IT Rules, 1962. In the present case, the applicable rule is r.
30A(1)(ix), which we have already referred to hereinbefore. The facts with regard to steps taken for registration of shares are not available on record. The requirement of the rules are not fulfilled in the present case. The credit claimed, therefore cannot be allowed. In view of the above, the assessee is not entitled to credit for TDS on the dividend and the assessing officer was not justified in not giving due credit. This issue is decided against the assessee.