This appeal by the assessee is directed against the order of the Commissioner (Appeals) on various grounds which are as under : "1(a) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming the disallowance made by the assessing officer for loss of Rs. 11,40,72,556 on sale of 22,00,000 shares of NOCIL by the appellant treating the impugned transaction as sham.
(b) The learned Commissioner (Appeals) failed to appreciate that the loss incurred by the appellant on sale of shares of NOCIL was genuine and is supported by sufficient materials and evidences on record.
(c) In reaching to the conclusion and confirming such addition, the learned Commissioner (Appeals) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
2.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming the disallowance made by the assessing officer for loss of Rs. 5,40,00,000 on sale of 60,00,000 shares of Mafatlal Burlington Industries Limited treating the impugned transaction as sham.
(b) The learned Commissioner (Appeals) failed to appreciate that the loss incurred by the appellant on sale of shares of Mafatlal Burlington Industries Ltd. was genuine and is supported by sufficient materials and evidences on record.
(c) In reaching to the conclusion and confirming such addition, the learned Commissioner (Appeals) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
3.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in upholding the view of the assessing officer that the amount worth Rs. 1,99,50,554 received from British Asia Pacific Holding (P.) Ltd. on transfer of shares of Gujarat Gas Company Limited was assessable under the head 'Income from other sources' as against correct head of 'Capital gains' shown by the appellant.
(b) The learned Commissioner (Appeals) failed to appreciate that the money received by the appellant was the part and parcel of full value of- the consideration received on sale of shares.
(c) Without prejudice, the learned Commissioner (Appeals) ought have treatedsuch receipt as business income of the appellant.
4.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in confirming the addition of Rs. 8,01,611 made by the assessing officer by way of disallowing interest under section 14A of the Income Tax Act, 1961.
(b) The learned Commissioner (Appeals) failed to appreciate that the interest was paid on the amount borrowed for the purposes of the business of the appellant.
5. The learned Commissioner (Appeals) erred in holding that the charging of interest under section 234B of the Income Tax Act, 1961 is mandatory. The appellant denies its liability for such interest. , 6. The learned Commissioner (Appeals) erred in holding that the ground raised against initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 is ab initio untenable. The appellant denies its liability for such penalty." We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.
With regard to ground No. 1, the facts borne out from the record are that during the course of assessment proceedings, assessing officer noticed that assessee has incurred a capital loss of Rs. 11,40,72,556 on transfer of 22 lakh shares of National Organic Chemical Industries Limited (hereinafter called as NOCIL) to M/s. Sumish Associates a firm wherein the assessee was a partner. The details of computation of loss are as follows : The transaction of share transfer were duly recorded in the books of account of the assessee and of M/s. Sumish Associates. The consideration for transfer was credited by M/s. Sumish Associates to the assessee's current account as a partner. The shares were shown in the balance sheet olf M/s. Sumish Associates as on 31-3-2000 under the head 'Investments'. Copy of the same is placed on record. The said amount was also shown by the assessee in its balance sheet as 'due from partnership firm' in which the assessee-company is a partner. A copy of the balance sheet of the assessee as on 31-3-2000 was also placed before the assessing officer. The shares transferred were reduced by the assessee from his investment accounts. The investment schedule and the balance sheet was also placed before the assessing officer.
During the course of assessment proceedings, the assessing officer required the assessee to furnish details of capital loss on sale of aforesaid 22 lakh shares of NOCIL and also to furnish information whether the above shares were purchased/sold through a recognized stock broker, if yes, then to produce particulars of above brokers along with its bill, contract note, confirmation of account and payment proof. The assessee vide letter dated 5-9-2002 furnished before the assessing officer details of the capital loss on sale of 22 lakh shares of NOCIL and submitted that out of 22 lakh shares, the date of purchase of 9,000 shares was 19-8-1994. The assessee has purchased 3,90,000 shares of Polythin Industries Ltd., i.e., PIL and subsequently PIL was amalgamated with NOCIL and accordingly the assessee has received 3,90,000 shares of NOCIL in lieu of 3,90,000 shares of PIL. The NOCIL shares were of the face value of Rs. 100 which was subsequently sub-divided into shares of face value of Rs. 10. Thus the assessee received 39 lakh shares of NOCIL of such sub-division. The 9 lakh shares which are sold now are part of these 39 lakh shares. The assessee has also submitted that purchase of above shares were part of strategic purchase of shares of PIL from Hoechst AG Company. In support of this, the assessee filed copies of letter dated 12-8-1994 issued by the Reserve bank of India. It was further submitted that 13 lakh shares of NOCIL were received as a bonus share. As regards, brokers contract note for purchase of shares, it was submitted that the above 22 lakh shares were not purchased through any recognized broker and to prove the genuineness of the purchases, assessee has filed letter dated 12-8-1994 issued by the Reserve bank Of India and bank payment voucher.
With regard to brokers contract note for sale of 22 lakh shares of NOCIL, the assessee submitted before the assessing officer that above 22 lakh shares were transferred to M/s. Sumish Associates on 6-3-2000 and it was an off-market transaction. Therefore, no recognized broker was involved. As a proof of transfer, assessce has placed the ledger account of M/s. Sumish Associates in the books of the assessee-company and the copy of the ledger account of the assessee-company in the books of M/s. Sumish Associates.
Assessing Officer further required the assessee to furnish the copy of following information: 2. The value at which the shares of NOCIL were sold to M/s. Sumish Associates.
5. Whether the sale consideration was received for sale of shares of NOCIL. If yes furnish the details of the same.
The assessee submitted the above required details vide letter dated 23-1-2003 that 22 lakh shares of NOCIL were transferred to M/s. Sumish Associates where the assessee is a partner, but the shares remained to be held in the name of the assessee, who is a partner in the firm, as the shares cannot be legally transferred in the name of the partnership firm. However, the beneficial ownership of shares was M/s. Sumish Associates and these facts were also recognized by the NOCIL in their letter dated 11-10-2001 addressed to various stock exchanges. Copy of the letter was filed before the assessing officer. With regard to sale consideration of NOCIL shares, it was submitted that it was transferred at a total consideration of Rs. 2,64,00,000 at the rate of Rs. 12 per share, at the prevailing market price. Copy of the statement showing market price as on 6-3-2000 was filed before the assessing officer. It was also explained that since shares were continued to be held in the name of the assessee, who was a partner in the firm, no transfer deed was required to be executed. The sale consideration of Rs. 2,64,00,000 was duly credited to the partners current account in the books of account of M/s. Sumish Associates. The assessing officer further asked the assessee to furnish the distinctive number of shares, details of pledge of NOCIL shares which were sold to M/s. Sumish Associates and distinctive number of bonus shares of NOCIL in the name of the assessee. Consequent upon the assessee has furnished the pledge agreement dated 27-3- 1998 with ICICI Limited and a letter dated 13-3-1999 addressed to Bajaj Auto Limited. With regard to the pledge of the shares, it was explained, that out of 22 lakh shares of NOCIL, 15,000 shares were pledged with ICICI Limited and 5,000 shares were pledged with Bajaj Auto Limited. The assessing officer was not convinced with the explanations of the assessee and he proposed to disallow the loss incurred on sale of shares of NOCIL after having observed that above transaction of 22 lakh shares are entered with a group concern and also no delivery of shares were given as the same were pledged. The assessing officer was also of the view that the above transaction of transfer of 22 lakh shares of NOCIL, is a sham transaction entered upon with a view to avoid payment of taxes. The assessee was accordingly asked to explain why the loss on the above 22 lakh shares of NOCIL should not be disallowed. In response thereto it was submitted that assessee is one of the partner of M/s. Sumish Associates to whom 22 lakh equity shares of NOCIL bearing distinctive Nos. 4593841 to 5493840 and 901104801 to 91404801 were sold. As per the provisions of Companies Act, a partnership firm cannot be registered as a member of the company because a partnership firm is not a juristic entity or a person. Being a partnership firm, the impugned shares could not be transferred in the name of the partnership firm and it remained in the name of one of the partner, who is the assessee. However, the beneficial ownership of the above shares were transferred to M/s.
Sumish Associates. The assessing officer was not convinced with the explanations of the assessee and he treated these transactions of transfer of shares as sham and disallowed the claim of loss suffered on the transfer of the shares by the assessee.
The assessee preferred an appeal before the Commissioner (Appeals) with the submissions that the shares of NOCIL were transferred to M/s.
Sumish Associates subject to existing pledge of shares. M/s. Sumish Associates has agreed to acquire these shares in the pledged conditions. Therefore, transfer of all these shares is a valid transfer. It was further argued that the pledge agreement does not restrain the assessee from selling the pledged shares, subject to the existing clause. Even in the case of pledged immovable properties, the law does not prohibit sale of immovable property. The charge created over the property moves to the buyer along with the property. Similar has been the case here. Both the purchaser and seller agreed to the transactions of sale of shares in pledged conditions and since such transaction is permitted under law, it cannot be doubted by the department. A reliance was also placed on the order of the Tribunal in the case of Mafatlal Holdings Ltd. (IT Appeal No. 2935 (Mum.) of 2002) in which the Tribunal has categorically held that there is no bar in transferring the shares in pledged conditions. With regard to the necessary intimation to the respective companies it was contended that M/s. ICICI and M/s. Bajaj Auto Limited were duly informed by the assessee. The Commissioner (Appeals) re-examined the issue, but was not convinced with it and he confirmed the disallowance.
Now, the assessee has preferred an appeal before us with the submissions that Commissioner (Appeals) has ignored the order of the Tribunal in the case of Mafatlal Holdings Ltd. (supra) in which under similar set of facts the transaction in sale of shares was considered to be genuine and the claim of loss suffered by the assessee was allowed.
During the course of hearing, the learned counsel for the assessee has filed copy of the order of the Tribunal in the case of Mafatlal Holdings Ltd. (IT Appeal No. 2935 (Mum.) of 2002) and other evidences which were filed before the lower authorities. In order to prove that the facts of the assessee's case are quite identical with the facts of the case of M/s. Mafatlal Holdings Ltd. The assessee has filed a comparative chart to demonstrate that the assessee's case is rather on better footing than the Mafatlal Holdings Ltd. Besides reiterating the submissions raised before the lower authorities, he invited our attention to its various letters through which nature of transactions were explained to the assessing officer. Copies of ledger accounts were also filed to establish that the corresponding entries on transfer of shares were made in the books of account of the assessee-company as well as of M/s. Sumish Associates. The learned counsel for the assessee further invited our attention to the legal propositions that there is no bar to transactions within the group companies and as such the transaction in the group companies cannot be termed to be the same transactions. Learned counsel for the assessee has also invited our attention to the relevant provisions of Sales of Goods Act with the submissions that the constructive delivery of goods is permitted under the law. In support of this, the learned counsel for the assessee has invited our attention to the commentary in the Pollak and Mullas Sales of Goods Act with the submission that symbolic delivery of goods divesting the seller's possession and lien is sufficient. It was further contended that since the above shares could not be held in the name of M/s. Sumish Associates on its transfer, they remained to be continued in the name of one of the partner ie., the assessee though beneficial ownership of the shares were transferred to M/s. Sumish Associates which has been recognized by the NOCIL. As per the Sales of Goods Act, an oral contract or a contract implied from the conduct of the parties is also a valid contract. In the present case, where necessary accounting entries have been duly given effect to in the books of the assessee as well as of the transferee for transfer of shares and the fact that transferee is a beneficial owner has been reported to the company and also to stock exchange. It was further contended that the shares were transferred to M/s. Sumish Associates at the market price and in support of this claim, a statement showing market price of NOCIL shares in Bombay Stock Exchange for the period from 6-3-2000 to 21-3-2000 was filed before the assessing officer vide letter dated 23-12- 2002. Copy of the same is also placed on record. It was further contended that as per the provisions of section 45(3), the profit and gain arising from transfer of a capital asset from a partner of a firm to the firm shall be chargeable to tax as his income of the previous year in which such transfer took place. In such a case, cost recorded in the books of the firm for such capital asset shall be deemed to be the full value of consideration. With regard to the registration of a firm it was contended that the registration with the Registrar of Firms is not compulsory. Even otherwise any registration can be made at a later stage. With regard to the observation of the assessing officer that assessee has surrendered its right in NOCIL to the lender, it is submitted that it has not surrendered all the rights in the share of NOCIL to the lender. It simply pledged the shares by giving the physical possession of it and as per clause I of pledge agreement, the shares have been pledged for securing the due repayment of loan. The lender can have the shares executed in their own name only in the event that the borrower fails to make the payment of amount borrowed. In this regard, our attention was invited to clause 7 of the agreement, according to which, when the loan or other monies which recovered by the lenders or repaid by the borrower in full; the lender shall as far as may be, returned the said certificates more particularly described in Schedule II hereby together with the relative transfer deeds absolutely to the pledgers or as the case may be, subject to the pledgers obtaining the approval of such authorities as may be necessary transfer, at the cost of the borrower, the said share to the pledger. The pledger will indemnify the lender against all costs and liabilities which may be incurred or sustained in respect of said shares. The learned counsel for the assessee further invited our attention to the legal propositions with regard to sale of goods that subject to the provision of any law for the time being in force, a contract of sale may be made in writing or by word of mouth or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.
The learned counsel for the assessee further invited our attention to the judgment of the Apex Court in the case of Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) in which Their Lordships of the Apex Court has examined the judgment in the case of McDowell & Co. Ltd v. CTO (1985) 154 ITR 148 (SC) in which it has been laid down that tax planning may be legitimate provided it is within the frame work of law.
Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the tax honestly without resorting to subterfuges.
The Hon'ble Madras High Court has commented on this judgment of McDowell & Co. Ltd. case (supra) by holding that decision in McDowell & Co. Ltd. case (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored or that every transaction or arrangement which is perfectly permissible under law, which has effect of reducing the tax burden of the assessee's, must be looked upon with disfavour. Their Lordships of the Apex court has also observed that they are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest, as perceived by the respondents. The learned counsel for the assessee further contended that McDowell & Co. Ltd. case (supra) did not lay down any principle of its own to deal with tax avoidance device. No doubt, the Hon'ble Supreme Court did use strong language against tax avoidance, but the same were in context of artificial tax devices adopted to defeat a taxing statute. Their Lordships of the Apex court who delivered the judgment in McDowell & Co. Ltd. case (supra) recognized the tax planning within the four corners of law is still legal and valid.
The learned counsel for the assessee further contended that the Tribunal has adjudicated identical issue in the similar set of facts in the case of Mafadal Holdings Ltd. (supra) and held the transaction to be genuine and allowed a claim of capital loss to M/s. Mafatlal Holdings Ltd. a group concern of the assessee. As such, the Tribunal should not take a contrary view in this appeal under similar set of facts. In support of his plea, he has relied upon the following judgments in which it has been held that though principles of res judicata are not applicable in income tax proceedings, but the rule of Consistency must be followedPradip Chandra Parija v. Pramod Chandra Patnaik (2002) 254 ITR 991 (SC) The learned Departmental Representative on the other hand besides placing heavy reliance upon the observations of the lower authorities, has invited our attention to the fact that in the instant case neither the delivery of shares were effected nor the consideration was passed from the buyer to the seller. It was mere a book entries that too between the interested parties. The learned Departmental Representative further contended that since the shares were pledged with ICICI and Bajaj Auto Ltd. it cannot be transferred without the prior permission of these pawnee/pledgees. Even they were not duly informed with regard to this transfer of these shares. The transfer of shares were effected between the interested parties under a colourable device to evade taxes. Therefore, the lower authorities have rightly treated the transactions as sham and disallowed the claim of loss. With regard to the judgments referred to by the assessees, it was contended that it has been repeatedly held by the Apex Court and various High Courts that tax planning is permissible under the law, but tax evasion under a colourable device is not permissible. Since the assessee has transacted among its group companies or concerns with an ulterior motive to evade tax, the revenue authorities are justified in treating these transactions as sham.
Having heard the rival submissions and from careful perusal of the order of lower authorities and material available on record we find that the assessee held 22 lakh shares of National Organic Chemical Industries Ltd. (NOCIL) which were transferred to M/s. Sumish Associates a firm in which the assessee is a partner. Undisputedly, the transfer of shares were duly recorded in the books of account of the assessee as well as of M/s. Sumish Associates. The consideration for transfer was credited by M/s. Sumish Associates to the assessee's current account as a partner and the shares were also shown in the balance sheet of M/s. Sumish Associates as on 3 1 -3-2000 under the head "Investments". The balance sheet of M/s. Sumish Associates as on 31-3-2000 along with its investment schedule is placed on record. In the assessee's balance sheet, the consideration was shown to be due from partnership firm i.e., M/s. Sumish Associates. It is also undisputed fact that at the time when the shares were transferred in favour of M/s. Sumish Associates, it was pledged with ICICI Limited and Bajaj Auto Limited through pledge agreement. Despite the transfer of these shares by the assessee in favour of M/s. Sumish Associates, these shares remained in the name of the assessee being one of the partner in M/s. Sumish Associates. It is also not disputed that the shares were sold at the prevailing market rate. These transactions were considered by the revenue as sham for the following reasons: (ii) Physical delivery of NOCIL shares were not given to M/s. Sumish Associates as the same were pledged.
(iii) The shares were not transferred in the name of M/s. Sumish Associates. There was no physical transfer of money from M/s. Sumish Associates to assessee.
Our attention was also invited to the fact that M/s. NOCIL have stated that M/s. Sumish Associates was not holding any shares as per their Shareholder Register. Now the question comes whether the assessee is debarred under law from entering any transactions with the group concern? The answer is certainly 'no'. If the assessee deals with his group concerns according to law the said trangactions cannot be doubted by the revenue unless a contrary is brought on record. Now the second question comes whether the physical delivery of shares is must while selling it, the answer depends upon the facts and circumstances of each case. Undisputedly, the shares are considered to be goods and its sale is governed by the provisions of Sales of Goods Act. According to the provisions of section 20 of Sales of Goods Act, where there is an unconditional contract for sale of a specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made and it is immaterial whether the time of payment of price or the time of delivery of goods or both is postponed. In the case of Sadhu Saran Singh v. West Bengal State Electricity Board AIR 1986 (Cal.) 240, it has been held by the Hon'ble High Court that it must be borne in mind, however, that these rules are but prima facie rule of construction and in each case the intention of the parties must be ascertained and when ascertained, acted upon. Meaning thereby, the completion of contract depends upon the intention of the parties. When the parties have agreed to sell the goods, the property therein immediately passes to the buyer and the delivery and payment can be deferred. But, in the instant case, though physical delivery was not effected, but, the corresponding entries with regard to the consideration were passed in the books of the seller as well as of the buyer. With regard to the transfer of name with the NOCIL companies, it is observed that shares cannot be transferred in the name of the partnership firm. It is to be registered in the name of one of the partners. Since the shares were sold by one of the partners to the partnership firm, it remained in the name of same partners i.e., the seller though company was duly informed regarding this fact.
Partnership firm i.e., M/s. Sumish Associates were recognized as a beneficial owner of these shares in the record of NOCIL. With regard to the transfer of money from M /s. Sumish Associates to the assessee, it is noticed that money was not transferred, but, necessary entries were passed in the books of account of the assessee as well as of the partnership firm and in the partnership firm, the consideration amount was shown in the name of partner under the head "Partners Current Account". Likewise, in the books of the assessee, this amount was shown to be recovered from the partnership firm. According to provisions of section 20 of the Sales of Goods Act, if the goods are identified and parties intend to pass the property to the buyer, the payments can be deferred. But, in the instant case, necessary entries were made in the books of account. Only the physical payment of sale consideration was deferred. We have carefully examined the various provisions of law and we find that the transactions entered upon by the assessee are not hit by any provisions of any relevant law.
During the course of hearing, our attention was also invited to the order of the Tribunal in the case of Mafatlal Holdings Ltd. (IT Appeal No. 2935 (Mum.) of 2002 in which the Tribunal has examined similar type of transactions in the light of various provisions of law and finally arrived at a conclusion that these transactions cannot be called to be illegal from any angle. For the sake of reference, we illustrate the facts of that case as under which are similar to the present case : "20. During the assessment year, the assessee company has claimed loss of Rs. 6,63,42,188. The assessing officer observed that during the previous year relevant to the assessment year under consideration, the assessee company sold shares of Gujarat Gas Company Limited in which it has earned long-term capital gain of Rs. 14,70,11,801. Vide agreement dated 2-7-1997, the entire shares of Gujarat Gas Company Limited belonging to the assessee company and two other group companies namely Mishapar Investments and Sushmita Holding Ltd. has been sold out to British Gas Asia Pacific Holding Pvt. Ltd. The shareholding of the assessee-company in Gujarat Gas Company Limited over the years from financial year 1997-98 totalling to 16,82,500 has been sold and on these sale proceeds long term capital gain has arisen which is of Rs. 14,70,11,801. The assessing officer has also stated that the assessee company has sold shares totalling to 6,16,530 on 30-7-1997 to a partnership concern namely M/s. Arvi Associates at the rate of Rs. 24.50 per share. Subsequently on 24-7-1997, the assessee company has purchased shares numbering to 2,28,00,000 from its group companies at the rate of Rs. 43.01 per share. On 24-8-1997, the assessee company has sold 98,00,000 shares to itspartnership firm M/s. Arvi Associates at the rate of Rs. 27.50 per share.
21. The assessing officer found that the assessee company had not received any sale consideration of the shares sold to the partnership firm M/s. Arvi Associates. As per the partnership deed dated 12-10-1995, the original partners of M/s. Arvi Associates were Sushripada Investment P Ltd. and Suvin Trexechem P. Ltd., both are group companies of Mafatlal Group. Subsequently, vide deed of partnership dated 1-7-1997, two nem partners which are also group companies of Mafatlal Group were admitted i.e., Mafatlal Holding Ltd. and Mafatlal Finance Co. Ltd. The assessing officer noticed that deed of partnership dated 1-7-1997 was not registerec with the Registrar of Firms. Therefore, this is an unregistered firm. The assessing officer also found that the original partnership deed dated 12-10-1995 between Sushripada Investment P. Ltd. and Suvin Taxchem P. Ltd. was not registered with the Registrar of firms. The assessing officer also noticed that as on 31-3-1996, the capital of the partners of the firm was of Rs. 5,000 each and the total assets of the firm was Rs. 10, 154.
According to him the firm did not carry out any business activity during the year and there was a loss transferred to the partners current account amounting to Rs. 746 only. Further as on 31-3-1997, the total assets had remained at Rs. 10, 154 and during the year, the assessee company had carried out no activity and as per the profit and loss account, the loss was Rs. 100 only. As per the balance sheet as on 31-3-1998, the firm had received capital of Rs. 1,00,000 from Mafatlal Finance Co. Ltd. and Rs. 5,000 from Mafatlal Holding Ltd. The firm had shown investment of Rs. 1,34,16,530 equity shares of Rs. 10 each of NOCIL full paid. As per the profit and loss account, the firm had received Rs. 2,450.23 as profit on sale of investments. Thus, according to the assessing officer the firm from assessment year 1996-97 to assessment year 1997-98 remained unregistered and it did not carry on any business activities and the shares sold by Mafatlal Holding Ltd. had been shown as investment in the hands of the firm. it is further observed by the assessing officer that the share certificates were not filed before him as according to the assessee the shares sold to M/s.
Arvi Associates had been pledged to finance company on behalf of the Mafatlal Industries Ltd. and Mafatlal Industries had obtained loan against the above shares. The assessing officer has also stated the assessee company was introduced in this partnership firm only on 1-7-1997. The first lot of shares totalling to 6,16,530 of NOCIL were sold to Arvi Associates on 3-7-1997 and the balances were sold on 24-8-1997. Thus, according to the assessing officer, the fact of joining of the assessee company as a partner on 1-7-1997 and subsequently selling of first lot of shares on 3-7-1997 cannot be mere coincidence.
22. The assessing officer made enquiries with the assessee company regarding the genuineness of the transaction of transfer of shares of NOCIL to Arvi Associates. The assessee company explained that the shares of NOCIL totalling to 1,04,16,530 had been transferred to M /s.
Arvi Associates as a consideration towards the capital contribution of the assessee company, therefore, it was not required for the assessee company to receive the sale consideration of the shares. The assessing officer, however, did not accept the contention of the assessee and had stated that as per the balance sheet of Arvi Associates as on 31-3-1998, the capital amount shown against Mafatlal Holding Ltd. under the heading 'Partners Capital Account' was Rs. 5,000 only. Thus, according to the assessing officer, the amount of capital alleged to have been introduced through the sale of shares had not been shown in the balance sheet of the firm. The assessing officer further observed from the balance sheet of the assessee firm that the investment made by the assessee company in the partnership firm was only Rs. 5,000. The assessing officer has thus, stated that the contention of the assessee company that the sale consideration of NOCIL shares to Arvi Associates was not received on the ground that the same were introduced as capital was not found correct. The assessing officer further noticed that in the balance sheet as on 31-3-1998 of the assessee company under schedule 6, under the heading 'loans and advances' the assessee-company has shown this amount as an advance receivable, from M/s. Arvi Associates. Thus, according to the assessing officer, this amount cannot be stated as the capital contribution of the assesseecompany and the same was an afterthought of the assessee company. The assessing officer, therefore, concluded that there was no introduction of the capital by the assessee-company in Arvi Associates in the shape of transfer of subject shares of NOCIL.
23. Regarding the sale of shares, the assessing officer had observed that the transfer deed of shares was not produced by the assessee. The shares had not been sold through stock exchange. The shares transferred continued to remain in the name of original holder even after the shares had been sold twice, once to assessee-company by Sushmita Holdings and Mishapar Investments and secondly to M/s. Arvi Associates by the assessee-company. The assessing officer had also observed that 1,30,000 shares were held by Sushmita Holdings Ltd. on behalf of the Mafatlal Holdings Ltd. Further 30 lakh shares and 98 lakh shares were held by Mishapar Investments Ltd., and 6,16,530 shares were held by Mafatlal Holdings Ltd. on behalf of the Arvi Associates. The total of the shares comes to 1,34,16,000 which is equal to the number of shares claimed to have been sold by the assessee-company to Arvi Associates.
Thus, the assessing officer had stated that the shares were also not in the name of the assessee-company who is a partner in the Arvi Associates but in the name of Mishapar Investments Ltd., which was not partner of Arvi Associates. The assessing officer, therefore, has concluded that the transfer deeds simply do not exist in the case of these shares till date, therefore, the share transaction of the shares of NOCIL was bogus and sham." In this case, various provisions of Income Tax Act, Companies Act and Sales of Goods Act were examined by the Tribunal, before arriving at a conclusion that the sales of NOCIL shares by the assessee-company to M/s. Arvi Associates, the firm in which the assessee-company is a partner, is genuine. Therefore, the provisions of section 45(3) are applicable to the sale transaction by the assessee. Various judicial pronouncements rendered on the subject were also examined by the Tribunal and for the sake of reference, we feel it appropriate to reproduce the findings of the Tribunal on the impugned issues, which are as under : "43. We have carefully considered the submissions made by the rival parties. We have also gone through the various documents filed before us during the course of hearing. The assessee-company is a public Ltd. company undisputedly by belonging to Mafatlal Group of Mumbai. In the return filed by the assessee-company, it claimed business loss of Rs. 1,76,64,887 and also net loss under the head 'capital gains' at Rs. 6,63,42,188. In arriving at the business loss, the assessee-company adjusted (by way of addition) against the net loss of Rs. 88,39,173 as per profit and loss account, the dividend income of Rs. 71,19,180 and also profit on sale of investment at Rs. 17,06,579 both for separate consideration. The dividend income being exempt from income-tax, was ultimately not taken into consideration in the computation of total income. On the other hand, the net loss under the head 'capital gains' was arrived as follows : (ii) Adjusted long-term/short-term capital loss on transfer of NOCIL shares The department has disallowed the loss of Rs. 21,33,53,989 claimed by the assessee-company on the basis that the assessee was not owning the shares which it has transferred to the firm M/s. Arvi Associates. Thus, according to the department the transfer of shares was not valid and the assessee-company is not entitled to benefit of section 45(3) of the Act. On the other hand, the assessee-company submitted that the transfer of NOCIL shares to the firm Arvi Associates was as per the provisions of law, therefore, the assessee-company is entitled to the benefit of section 45(3) of the Act.
44. The assessing officer has challenged the genuineness of the sale transactions of the shares under consideration for various reasons. The first reason is regarding the registration of the firm M/s. Arvi Associates with the Registrar of Firms. In the case of Dulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC), the Hon'ble Supreme Court held that section 4 of the Indian Partnership Act, 1932, clearly requires the presence of three elements to constitute a firm namely: (i) that there must be an agreement entered into by two or more persons; (ii) that the agreement must be to share profits of business; and (iii) that the business must be carried on by all or any of those persons acting for all. Thus, to form a valid firm, it is not necessary to get it registered with the Registrar of Firms. But in the present case, proper application was made by M/s. Arvi Associates for its registration. Receipt of the application was also acknowledged by the Registrar of Firms. This evidence was produced before the lower authorities. Thus, the firm M/s. Arvi Associates made sincere efforts to get itself registered as a partnership firm. We do agree with the learned counsel that whether M/s. Arvi Associates was registered with the Registrar of Firms or not is of little consequence with regard to the issue of sale of shares to that concern. As we have mentioned above, it is not mandatory for the existence of a partnership firm to get itself registered with the Registrar of Firms and the genuineness of the partnership firm under the Income Tax Act cannot be challenged simply on the ground that it is not registered with the Registrar of Firms. Hon'ble Supreme Court in the case of CIT v. Juggilal Kamlapat (1964) 63 ITR 292 (SC) has laid down that a deed evidencing the transfer of an interest of a partner in partnership assets does not require registration even though the partnership assets are comprised of movable as well as immovable property. Therefore, for the sale transactions, it is not necessary that the partnership firm must have been registered with the Registrar of Firms. This contention of the department is, therefore, without any substance and cannot be taken into consideration for considering the sale transaction in shares as nongenuine.
45. The next contention of the department is that neither the consideration amount was paid by M/s. Arvi Associates to the assessee-company nor was the amount credited to the capital account of the assessee-company. It is a fact that no cash money was paid by M/s.
Arvi Associates to the assessee-company in respect of purchase of shares under consideration by that concern to the assessee-company. It is also a fact as pointed by the learned counsel that the capital account of the assessee-company in the books of the firm was not affected on account of this purchase. However, at the same time, the entire amount of consideration was credited to the current account of the assessee-company in the books of the said firm. The learned counsel also rightly pointed out that there is no requirement under any law relating to sale of goods or even of immovable property that the purchase consideration has necessarily got to be paid in cash. The meaning of word 'paid' has been defined in section 43(2) of the Act as follows : 'The word 'paid' is defined to mean the amounts actually paid or incurred according to the method of accounting followed by the assessee, for the purpose of computing profits or gains under the head 'profits or gains of business or profession'.' In the present case, the assessee is following mercantile system of accounting, and hence crediting the amount of the assessee in the books of the firm and debiting the account of the firm in the books of the assessee is sufficient for the purpose of actual payments towards sale of the shares to the firm. The learned counsel has also rightly pointed out that there is no requirement under the law that in case of transfer of an asset by a partner to the firm in which he is a partner, the amount of sale consideration has got to be credited to his capital account. Sub-section (3) of section 45 provides when a 'capital asset' owned by the person, is introduced as the said person's capital contribution into a firm wherein such person was a partner or becomes a partner, such introduction of the capital shall be deemed to be a transfer of the said capital asset for the purposes of section 45(1).
The value recorded in the books of account of the said firm shall be deemed to be the face value of the consideration of the said capital asset for computing the chargeable capital gains. The provisions of section 45(3) are abundantly clear on this issue that the value of the capital asset has to be recorded in the books of account maintained by the said firm and it is not necessary that the value of capital asset should be credited to the capital account of the partner. In the present case, the sale consideration has been credited to the current account of the partner and that is exactly as per the provisions of section 45(3) of the Act. We also do not find any substance in the contention of the department that the sale has not been mentioned in the Partnership Deed because the firm was formed on 1-7-1997 and the sale under consideration had taken place on 24-7-1997, therefore, the question of mentioning the sale of shares in the Partnership Deed does not arise. There is also no provision in the partnership deed of M/s.
Arvi Associates about payment of interest on the credit balance of a partner in his current account, thus, no interest has been paid by M/s.
Arvi Associates to the assessee-company on the outstanding balance. In view of what is stated above, the transaction under consideration cannot be considered to be a capital contribution at the time of inception of the firm. It is certainly a case of transfer of a capital asset by the assessee-company being a partner to M/s. Arvi Associates, the firm. The assessee-company has relied on the provisions of section 45(3) of the Act according to which when a capital asset owned by the person is introduced as the said person's capital contribution into a firm wherein such person was a partner, such introduction of the capital shall be deemed to be a transfer of the said capital asset for the purpose of section 45(1). The value recorded in the books of account,of the said firm shall be deemed to be the full value of consideration of the said capital asset for computing the chargeable capital gains. In the present case, in the books of the firm the value of the capital assets have been recorded at the amounts at which it is shown to have been sold, in accordance with the provisions of section 45(3) forthe purpose of computation of capital gains/loss on the transaction. The aforesaid amount recorded in the books of account of the firm have to be considered to be the full value of the consideration of the shares transferred.
46. The genuineness of the sale transactions of the shares is also challenged by the department on the basis that the shares under consideration have not been transferred in the name of M/s. Arvi Associates and they still continue to be either in the name of assessee-company or M/s. Mishapar Investments Ltd. In this connection.
the learned counsel explained that the shares purchased by the assessee-company from M/s. Mishapar Investments Ltd. and sold to M/s.
Arvi Associates stood pledged with the .bank and financial institutions by M/s. Mafatlal Holdings Ltd., therefore, the shares could not be transferred either to the assessee-company or to M/s. Arvi Associates.
We find force in the arguments of the learned counsel that M/s. Arvi Associates being a partnership firm is not capable of holding any shares in its name and that is why, as per the business practice, part of the shareholding continues to be in the name of the assessee-company which happens to be a partner in the firm. In the present case as we have stated above the beneficial owner of the shares under consideration is M/s. Arvi Associates. The dividend declared in the name of M/s. Mishapur Investments Ltd. or the assessee-company have been passed on to M/s. Arvi Associates. Thus, M/s. Arvi Associates is the real beneficial owner of the shares. Therefore, for all practical purposes and also for the purpose of Income-tax, M/s. Arvi Associates has become the real owner of shares under consideration. For assessing the income arising out of the transaction or holding of shares have to be assessed in the hands of M/s. Arvi Associates and not the nominal owners in the books of the company. We find substance in the arguments advanced by the learned counsel that the fact the shares are still being held in the name of the original holders is of little importance in determining the genuineness of the transfer of shares. In the case of CIT v. Narang Dairy Products (1996) 219 ITR 478 (SC) the Hon'ble Supreme Court has laid down that there are different shades of meaning of the word 'transfer' i.e., to make over possession of to another, a delivery of title or property from one person to another, to displace from one surface to another, removal, displace. Definition of transfer in section 2(47) is an inclusive one and does not exclude contextual or the ordinary, meaning of the word'transfer'. In the present case the shares have been transferred by the delivery of the title of the shares as evidenced from the various documents discussed above. Therefore, the shares under consideration have been transferred in the name of M/s.
Arvi Associates. The Delhi and Andhra Pradesh High Courts in the case of CIT v. Manjit Engg. Industries 154 ITR 509 (AP) and CIT v. A. V Bhanoji Rao 142 ITR 706 (AP) have held that no particular mode or form is provided for bringing in a separate property of the partner into the stock of the firm and no deed whatsoever registered or otherwise is required to be executed by the partner- for doing,so.
47. The contention of the department that no broker was involved in the sale of shares, therefore, the transaction of sale is not genuine is also without any basis. The transaction of sale of shares was between two independent parties and had not been carried out in a recognized stock exchange as it was not necessary that dealing in shares should be through any recognized broker of Stock Exchange. The learned counsel rightly invited our attention to the provisions of section 108 of the Companies Act which provides that the shares of listed company shall be freely transferable hence it was not necessary that the transactions under consideration should have been carried through a recognized Stock Exchange or broker. The learned departmental Representative could not produce any evidence before us to contradict the arguments of the learned counsel. The department has also not supported the findings of the assessing officer and the learned Commissioner (Appeals) with any material on record or any court case wherein it has been stated that the transactions of shares of a listed company should be through a broker of a Stock Exchange or such transactions should be carried out only in a recognized Stock Exchange. In our opinion, it is not a mandatory condition that the transactions of sale of shares between independent parties should be carried out in recognized Stock Exchange.
48. The findings of the learned Commissioner (Appeals) that neither the assessee-company nor the purchaser M/s. Arvi Associates were benefited from the transactions of sales and purchases because the shares had been pledged by M/s. Mafatlal Industries Ltd. are also not supported by any material evidence. The learned Commissioner (Appeals) has not supported his findings with any legal provisions either in the Income Tax Act or in any other law. In our opinion, there is no embargo for selling the pledged goods. Such goods are kept as a security for getting the loan but these goods can always be sold after the undertaking or the promise is fulfilled. The learned counsel rightly pointed out that even immoveable properties, which have been mortgaged are saleable and the law does not prohibit such sales. More over , in the present case both the purchaser and the seller agreed to the transaction by way of sale of shares in pledged condition and since such transactions are permitted by law no objection can be raised by the department on this account. The allegation of the learned Commissioner (Appeals) is also without any basis in view of the fact M/s. Arvi Associates has actually been benefited by enjoying dividend on the shares purchased by it. In any case, the genuineness of the transaction does not depend on the benefit enduring to the parties concerned. Neither the lower Income-tax Authorities nor the learned departmental Representative has brought any evidence on record to contradict the arguments of the learned counsel except making some wild assumptions and presumptions. As the shares were pledged with the banks and financial institutions, it was not possible to produce the said share certificates before the departmental authorities as required by them. The share certificates were required by the departmental authorities to prove whether such share certificates had actually been transferred or not in the names of M/s. Arvi Associates. This exercise of the department would have been futile in view of the fact that it is already admitted that the shares were not transferred in the books of the company. In our view, this exercise by the department was not necessary in the face of other documentary evidences in support of the genuineness of the sale transaction. But if the authorities below were very keen to examine the share certificates, they could have summoned the concerned bankers and other financial institution with whom the shares have been pledged by resorting to the provisions of section 131 of the Act for producing such documents. The approach of the department in this connection appears to be quite casual. Under the circumstances, the department has not brought any evidence on record to prove that the transaction of sale of shares is not genuine.
49. The learned Commissioner (Appeals) referred to the provisions of Companies Act and has contended that the transactions were not genuine in shares because the transfer deeds were not executed in respect of the shares sold by the assessee-company. In this connection, we would like to refer to some of the provisions of Sale of Goods Act. Section 2(4) of the Sale of Goods Act, 1930 pertaining to definitions reads as follows: '"Document of title of goods" includes a bill of lading, dock-warrant, warehouse keeper's certificate, whare fingers 'certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery the possessor of the document to transfer or receive goods thereby represented.' Further section 2(7) of Sale of Goods Act defines Goods meaning every kind of movable property other than actionable claim and money and including stocks and shares etc. Thus a transaction for transfer of shares would be covered under the said Sale of Goods Act, 1930. Madras High Court held that 'if shares could be transferred by issuing document whereby the seller purports to assert his title to the goods and authorizes the buyer to receive such goods represented thereby, may be from third party, yet it would operate as a valid delivery of such goods notwithstanding the non-cooperation of the person in physical possession of the goods by refusing to attorn or acknowledge to the buyer that he holds goods on his behalf. (1979) 49 Comp. Cas. 662 (671) (DB) (Mad.)' In the present case, the assessee company authorized M/s. Arvi Associates to receive the shares from Mafatlal Industries who pledged it with banks and financial institutions by an agreement, therefore, it is a valid delivery of the shares as has been laid down in the above case. Therefore, execution of transfer deed in respect of the shares sold by the assessee company was not necessary. The learned Departmental Representative referred to section 4 of Sale of Goods Act, 1930 and contended that the contract of sale used in that section is important and according to it the property must pass from seller to the buyer as per agreement of sale. In this connection, we would like to refer to the decisions of Delhi High Court wherein it has been laid down that sale can be complete without effecting immediate delivery or even without immediate payment AIR 1967 Delhi 88 (91). In the present case, the assessee-company made an agreement of sale of shares with M/s. Arvi Associates whereby the assessee-company transferred the shares to M/s. Arvi Associates though the immediate delivery of the shares was not given because the shares were pledged with banks and financial institution. In view of the decision of the Delhi High Court (supra), it does not make the transaction non-genuine. Thus, the provisions of section 4 of Sale of Goods Act, 1930, are moreover in favour of the assessee. The learned Departmental Representative also made reference to section 5 of Sale of Goods Act, 1930 and contended that the sale becomes final only when there is a transfer of property.
Section 5(2) of the aforesaid Sale of Goods Act reads as under : 'Subject to the provisions of any law for the time being in force a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.' Thus, in view of the above provisions of Sale of Goods Act, even an oral contract would also suffice for the purpose of sale of shares. In the present case, the transactions have been confirmed by the transferee and necessary accounting entries had duly been given effect to in the books of both the assessee-company as well as the transferee.
Moreover, the transferee had become a beneficial owner of the shares and this fact had been reported to the Government and also to the Stock Exchanges. The evidence regarding this was also filed before the tax authorities (supra). In addition to the formalities of transfer of the shares, between the assessee-company and the purchaser and also the entries in their respective books of account, even the company concerned i.e., NOCIL and SEBI also took note of the beneficial ownership in the shares under consideration. Thus, the shares have been transferred to M /s. Arvi Associates as per the provisions of Law. The provision of Sale of Goods Act, 1930 relied upon by the learned Departmental Representative are moreover, in favour of the assessee.
The genuineness of this transaction, thereforc, cannot be challenged.
50. The learned Departmental Representative also referred to the provisions of section 20 of the Sale of Goods Act, 1930 and argued that the sale should be unconditional. We do not find any force in the arguments of the learned Departmental Representative. The provisions of section 20 of Sale of Goods Act are moreover in favour of the assessee company. Section 20 of the Sale of Goods Act, 1930 read as follows: 'Section 20 specific goods in a deliverable State-where there is an unconditional control for the sale of specific goods is a deliverable State, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods or both is postponed.' In the present case, the proposal for the sale of shares which were in a deliverable State had been accepted by M/s. Arvi Associates but the actual delivery had been postponed because the shares were pledged with the Banks and Financial Institutions, but shares have been passed on to M/ section Arvi Associates as the firm accepted the proposal of sale.
The Madras High Court has held that "when there is an unconditional contract for sale of specific goods in a deliverable State, property in goods passes to buyer when contract is made and it is immaterial whether the time of payment of the price or the time for delivery of goods or both is postponed. Where goods are already in custody or control of buyer all that is required is that, there should be an appropriation of goods by buyer in respect of particular contract. AIR 1948 Mad. 122 (127,128) (DM).
51. During the previous year under consideration, the assessee-company purchased 228 lakh equity shares of NOCIL at the total cost of 98,06,39,400, 98,00,000 shares were purchased from Mishapur Investments and 1,30,00,000 shares were purchased from Sushmita Holdings Ltd. The assessee company did not make any payments to them. These shares were purchased on 24-7-1997 through Bombay Stock Exchange, which is a recognized Stock Exchange. Thus, the ownership of 228 lakh shares of NOCIL by the assessee-company cannot be doubted. Therefore, the shares of NOCIL owned by the assessee were in a deliverable State. Therefore, in the present case, there was an unconditional contract for sale of specific shares, which were in deliverable State, therefore, the shares as per the provisions of section 20 of Sale of Goods Act, 1930, were passed on to M/s. Arvi Associates as soon as there was contract between the assessee company and M/s. Arvi Associates. The shares remained no longer of the ownership of Mafatlal Holdings Ltd. Dividend on the shares after the sale transaction has been passed on to M/s. Arvi Associates, thus confirming the fact of sale. Therefore, the reference to the abovesaid provisions of the Sale of Goods Act by the learned Departmental Representative is not relevant to support the case of the department moreover, these provisions support the contention of the learned counsel.
52. We also find substance in the arguments of the learned counsel that the transfer of shares is guided solely by the provisions of Sale of Goods Act, 1930 and the Companies Act merely provides for the mechanism in which such shares already transferred in the eyes of law, will be mutated in the books of the company. The process is similar to the question of mutation of the name of the transferee in place of vendor in the books of Municipal Authorities in respect of immovable properties. The mutation of name in the books of the Municipal Authorities may take a long time but once the property is transferred by following the recruitments of the Transfer of Properties Act, 1982 read with the relevant section of Registration Act, the genuineness of the transfer itself cannot be challenged, even though the transferor may still be shown as the owner of the property in the books of the Municipal Authorities. Thus, the formalities under the Companies Act relating to registration of transfer of shares in the event of such transfer are different from the process of transfer itself. So far as the transfer of shares is concerned, it is quite usual for the shares to pass hands successively without the names of the intervening owners being brought in the books of the company as holder of the shares. Such transfers are very much recognized by the Stock Exchange and under the Income Tax Act, each transaction of transfer will rope in the transferor to the process of levy of capital gains tax or even business income as the case may be. We agree with the learned counsel that Registration of shares in the books of the company is a merely formality to acknowledge the name of the transferee in the record of the company, it has got nothing to do with the validity of the transfer as such. In other words, the Registration of shares in the books of the company, is only meant for keeping account of the shares and in whose name the shares have been finally transferred. The objection of the department that the shares have been sold on Sunday, therefore, the sale cannot be considered as genuine is also without any substance.
These transactions of sale of shares were between private parties and therefore, the rules of Stock Exchange were not applicable to them.
There is nothing in law, which prevents conducting of transactions on Sunday between private parties. The learned Departmental Representative did not bring on record any material or evidence to support the contention of the department that even private parties cannot enter into such transactions on Sunday.
53. Now the only point remains for consideration that whether the shares if sold in the open market would have fetched more price by way of premium. The department has not produced any evidence to support their case. The department has also not contradicted the contention of the learned counsel that the shares were transferred by the assessee-company at the prevailing market rate on the relevant date.
The opinion expressed by the departmental authorities cannot be considered unless they are based on some evidence. The assessee-company has furnished documentary evidence in support of the genuineness of the sale transactions. It was also brought to our notice that the department has accepted the purchase of the shares in similar conditions of remaining shares pledged by M/s. Mafatlal Industries Ltd. as genuine. Therefore, the department cannot indulge in double standards to call the sale of shares in the same condition to be bogus.
There is nothing wrong in carrying on the transactions of shares between the members of the group provided all legal requirements are complied with. The department has not brought any evidence on record to prove that any of such legal requirements was lacking in the present case. The department in fact has accepted that on the date of sale of the shares, the assessee company has actually sold the shares at the proper price because the department has not brought anything on record to prove that the shares have been sold at lower price. The various issues raised by tax authorities are merely based on suspicion and surmises without any support of evidence on record. The documentary evidences produced by the assessee have not been looked into property by the lower authorities and they have proceeded merely on the basis of suspicion, surmise and conjecture.
54. The various court cases relied upon by the learned counsel are not relevant to the f acts of the present case. In the case of Bharat Nidhi (supra) there was merely agreement to sell. No transfer deed was also executed. The shares were not handed over and the price was not received. In these circumstances the Delhi High Court held that transfer was not complete. But in the present case, the entire amount of purchase consideration was credited to the current account of the assessee-company in the books of the firm. There is no requirement under the law relating to sale of goods and even of immovable property that the purchase consideration has necessarily got to be paid in cash.
Thus, as per the provisions of section 5(l) of the Sale of Goods Act, 1930 where the parties to a contract agree that the payment for and delivery of the goods are to be postponed, the property in goods passes to the buyer as soon as the proposal for sale is accepted. In the present case, there was an agreement to sell. The entire amount of purchase consideration was credited to the current account of the assessee-company in the books of the firm. The other various conditions were also fulfilled for the transfer of shares as we have discussed above. Therefore, there was a complete transfer of shares. This court case, therefore, is not relevant to the facts of the present case.
Moreover, the transfer in the present case is under the provisions of section 45(3) of the Act, hence the above court case is different on facts and the same therefore, does not have any application to the present case. The case of Kartikeya v. Sarabhai (supra) is also not relevant because of amendment to section 45(3) of the Act with effect from 1-4-1988. This case pertains to the year 1981. Sub-section (3) of section 45 was brought on the statute by the Finance Act, 1987 with effect from 1-4-1988. The Hon'ble Supreme Court in the above case held that when a partner contributes his capital asset to the firm, the capital gain tax will not be leviable since the value of the consideration is not ascertainable. The new sub-section (3) of section 45 has statutorily superceded to the effect of the said judgment.
Therefore, the ratio of the above judgment and similar other judgments would apply only up to assessment year 1987-88. Under the circumstances, the above judgment is not relevant to the facts of the present case as the assessment year under consideration is 1998-99. The Calcutta High Court decision in the case of Sumitra Devi Jalan (supra) pertains to wealth tax. The assessee had acquired shares of a company but transfer of the shares had not been rigistered in the name of the assessee in the share register. The Hon'ble Calcutta High Court held that pending registration of the shares in the books of the company, the shares could not be considered to be belonging to the assessee.
Therefore, this decision was under the wealth tax and main question before the Hon'ble court was to decide about the ownership of the shares i.e., whether the shares could be considered to be belonging to the assessee or not. The court held that the rights conferred on the transferee by virtue of the sale clothed her with an equitable ownership, but were not sufficient to make the transferee a full owner.
Thus in this case the court did not challenge the genuineness of the transfer and even considered the assessee to be the equitable owner of the shares. So far as the present case is concerned, the beneficial ownership in the shares under consideration has been sold and the transactions involved transfer of such beneficial ownership only.
Therefore, this judgment is also not relevant to the facts of the present case.
55. In view of the discussion above, we find that the sale of NOCIL shares by the assessee-company to M/s. Arvi Associates, the firm in which the assessee-company is also a partner, is genuine one and, therefore, the provisions of section 45(3) are applicable to the sale transaction by the assessee. The disallowance made of the loss of Rs. 21,33,53,989 is, therefore, deleted and these grounds of, appeal are decided in favour of the assessee." During the course of hearing, our attention was invited that the facts of the instant case are on better footings, as the assessee was holding the shares of NOCIL in its own name and were sold to M/s. Sumish Associates a partnership concern in which the assessee itself is a partner. During the course of hearing, the learned counsel for the assessee has also invited our attention to the various judgments in support of his plea that once the Tribunal has taken a particular view more so in the case of group concern, it should not digress from its views ordinarily without bringing contrary on record. In support of these contentions, he placed reliance upon the Agrawal Warehousing & Leasing Ltd. v. CIT (2002) 257 ITR 235 (MP) in which Their Lordships have held that the Tribunal should not come to the conclusion a contrary one reached by another Bench of the same Tribunal. The Tribunal cannot overrule its own judgment rendered in another case.
Only the matter can be referred to a Larger Bench. While passing judgment in the case of Agrawal Warehousing & Leasing Ltd. (supra).
Their Lordships have relied upon the judgment of the Apex Court in the case of Pradip Chandra Parija v. Pramod Chandra Patnaik (2002) 254 ITR 99 (SC) in which their Lordships of the Apex Court have categorically held that judicial discipline and proprietary demands that a Bench of two Judges should follow a decision of a Bench of three Judges. But, if a Bench of two Judges concludes that earlier judgment of three Judges is so very incorrect that in no other circumstances, can it be followed, the proper course for it to adopt, is to refer the matter to a Bench of three Judges setting out the reasons why it could not agree with the earlier judgment. If, then the Bench of three Judges also comes to a conclusion that the earlier judgment of the Bench of 3 Judges is incorrect, reference to Bench of five learned Judges is justified. The only situation when a two Judge Bench may refer a matter directly to a Constitution Bench is where the provision of clause (3) of article 145 are attracted. In the case of Sayaji Iron & Engg. Co. v.CIT (2002) 253 ITR 749 (Guj) their Lordships of the Gujarat High Court have held that there was no reason for the Tribunal to take a different view when such disallowances were deleted by it all along in the past and the said decision was not challenged. In the case of Dy. CIT v.Reliance Industries Ltd. (2004) 88 ITD 273 (Mum.), the Special Bench of the Tribunal has also taken a similar view by holding that judicial consensus in the field of income tax laws, as in the other branches of law, has always been that if a Bench is of the view that earlier order of a Bench of equal strength in the same assessee's case requires a re-consideration in the light of change in the factual or legal position, the Bench shall not take a different view, but the proper course would be to place the matter before the President of the Tribunal to constitute a Special Bench consisting of three or more members. The learned counsel for the assessee has heavily relied upon the order of the Tribunal in the case of Mafatlal Holdings Ltd. (supra), a group concern of the assessee in which under the similar circumstances, the shares were sold by the assessee and capital loss was claimed. Having taken the cognizance of relevant provisions of law, the Tribunal has given a conclusive finding that sale of shares of NOCIL by the assessee-company to M/s. Arvi Associates, the firm in which the assessee is a partner, is a genuine one and allowed the capital loss suffered by the assessee in this transaction. Since this order of the Tribunal has not been reversed or disturbed by the appellate authorities, it holds the field. Moreover, during the course of hearing, the learned DR except placing heavy reliance upon the orders of the lower authorities, had not brought out anything contrary to the findings of the Tribunal in the case of Malatlal Holdings Ltd. (supra) We, however, examined the orders of the lower authorities and the various judgments of the Apex Court relating to the genuineness of the transactions and we find that judgment of the Apex Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) was examined by various High Courts and the Apex Court. In the case of Azadi Bachao Andolan (supra) Their Lordships of the Apex Court have held that, an act which is otherwise valid in law, cannot be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudicial to the national interest. If the court finds that notwithstanding of series of legal steps taken by assessee, the intended legal results has not been achieved, the court might be justified in overlooking the intermediate step, but it would not be permissible for the court to treat the intervening legal steps as non-est based upon some hypothetical assessments of the 'real motive' of the assessee. Court must deal with what is tangible in an objective manner and cannot afford to change the will-of the-wisp.
There is no change in the fiscal jurisprudence in India. The judgment of the Apex Court in the case of McDowell& Co. Ltd. (supra) was also examined by the Madras High Court and Their Lordship have commented upon it and concluded that decision in McDowell & Co Ltd.'s case (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored or that every transaction or arrangement which is perfectly permissible under law, which has effect of reducing the tax burden of the assessee must be looked upon with disfavour. Keeping in view the totality of the facts and circumstances of the case, in the light of the order of the Tribunal in the case of Mafatlal Holdings Ltd. (supra) and of the judicial pronouncements, we are of the opinion that the transactions entered upon by the assessees are legally permissible transactions and it cannot be doubted only for the reasons that assessee transacted in shares among the group concerns and suffered a capital loss. The argument of the assessee during the course of hearing, that if he had any intention to claim a bogus capital loss, it could have very well transfer the investment in shares to a stock-in-trade and claimed the capital loss, and this Act of the assessee is also permissible under the Income Tax Act, but, the assessee did not venture to do it, cannot be ignored. Nothing had been brought on record that sale consideration determined between the assessee and a group concern was lower than the market price at the relevant point of time. Since the Tribunal has taken a particular view in a similar set of facts, we find no valid reasons to take a contrary view in this appeal. We, therefore, hold these transactions as genuine and direct the assessing officer to allow the capital loss claimed by the assessee.
Ground No. 2 relates to a capital loss of Rs. 5,40,00,000 suffered by the assessee on sale of 60 lakh shares of M. Werlingdon Industries Limited. It is, noticed from the record that transaction of sale of shares of M. Werlingdon Industries Limited to M/s. Sumish Associates is akin to the transactions of sale of shares of NOCIL to the same entity i.e., M/s. Sumish Associates. The same arguments were raised before us by the parties. We, therefore, decide this issue in favour of the assessee following our view expressed in foregoing paras. Accordingly, we hold this transaction of sale as genuine and direct the assessing officer to allow the claim of loss to the assessee.
Ground No. 3 relates to an addition of Rs. 1,99,50,554 after treating it to be income from other sources as against the capital gains shown by the assessee being received from M/s. British Asia Pacific Holdings Pvt. Ltd. on transfer of shares of Gujarat Gas Company Limited.
The facts borne out from the record are that during the previous year relevant to the impugned assessment year, the assessee sold 6,41,150 shares of Gujarat Gas Company Limited for a total consideration of Rs. 22,42,48,584. The sale was made pursuant to the agreement dated 5-3-1999. This agreement dated 5-3-1999 was entered pursuant to the rights available to the assessee as per the agreement dated 2-7-1997 which was entered into by the assessee along with other group companies of M/s. Mafatlal Industries Ltd. with British Gas Asia Pacific Holdings (P.) Ltd. for sale of shares of Gujarat Gas Company Limited. As per clause 9.2 of the agreement dated 2-7-1997, the assessee had right to require the purchaser ie., British Gas Asia Pacific Holdings (P.) Ltd. to acquire the remaining shares of Gujarat Gas Company Limited from the assessee. Pursuant to such right given in the agreement dated 2-7-1997, the assessee along with other companies entered into share purchase agreement dated 5-3-1999 with the British Gas Asia Pacific Holdings (P.) Ltd. for selling remaining shares ie., 6,41,150 shares of the assessee. Clause 2 of the agreement dated 5-3-1999 deals with the consideration for sales of above shares and it reads as under : "As consideration for sale of transfer of shares by Mishapur & Vishadeep, B.G. Shall pay to Mishapur & Vishadeep the price per share computed as under : Rs. 270 + interest at Rs. 27 computed a Rs. 8 per annum of 2 per cent above the Re-prime landing rate from time to time of Barlacys, PIc.
Mumbai for the period commencing from 26-9-1997 till the date of payment of consideration as contemplated herein, such interest to accrue from day to day." During the course of assessment proceedings, the assessing officer required the assessee to furnish the details of purchases and sales along with documents for sale of 6,41,150 shares of Gujarat Gas Company Limited and in pursuance there to the assessee submitted the details and documents with the submissions that these shares were sold to British Gas Asia Pacific Holdings (P.) Ltd. in the month of April, 1999 for total consideration of Rs. 22,42,48,584. These shares were not sold through any recognized stock brokers, as such, sale was part of the strategic sale of shares of Gujarat Gas Company Limited. From the documents, the assessing officer observed that sale consideration contains partial payment on account of interest at the rate of 2 per cent from September, 1997. Vide letter dated 23-12- 2002, it was explained to the assessing officer that the assessee along with other group companies of the ANM group entered into an agreement with British Gas Asia Pacific Holding (P.) Ltd. for sale of shares of Gujarat Gas Company Limited. As per the agreement, total 40,22,575 equity shares of Gujarat Gas Company Limited were sold to British Gas Asia Pacific Holdings (P.) Ltd. and as per agreement, an option was given to the assessee-company and other corripanies of the ANM. group to require the British Gas Asia Pacific Holding (P.) Ltd. to purchase remaining shares available with any of the companies of ANM group. Pursuant to the option available through this agreement, assessee sold the shares of Gujarat Gas Company Limited to British Gas Asia Pacific Holdings (P.) Ltd. during the impugned assessment year. The learned counsel for the assessee further contended that interest accrued ori Rs. 270 from September, 1997 is part and parcel of sale consideration. He, accordingly, worked out the capital gain. The contentions of the assessee were not accepted by the learned assessing officer and he accordingly treated the interest accrued thereon as income from other sources after holding that as per the agreement, the sale consideration was fixed at Rs. 270 per share and the amounts paid over and above to Rs. 270 is on account of interest thereon as stipulated in the agreements dated 2-7-1997.
The assessee preferred an appeal before the Commissioner (Appeals).
Besides reiterating its contentions, the assessee has contended that the assessee is an investment company and one of the main business of the assessee is to make investments in other companies, as such, the interest received even on sale consideration of shares, can only be treated as business income and not income from other sources. The financing activity is also one of the major activity of the assessee-company. it was further contended that the assessing officer has wrongly co-related clause 10. 1 of the agreement dated 2-7-1997 and the sale consideration for the sale of 6,41,150 shares whereas the clause 10.1 is applicable in the case of purchaser defaults in payment of any sum due as per the agreement dated 2-7-1997. The shares were not sold vide agreement dated 2-7-1997. They were sold pursuant to agreement dated 5-3-1999 and as per clause 2 of the agreement dated 5-3-1999 the sale consideration is to be computed as Rs. 270 + interest thereon from 20-9-1997. The provision of 2 per cent of interest on Rs. 270 was made in order to arrive at a total consideration amount at the time of sale of shares as it was considered to be in the nature of price escalation. The Commissioner (Appeals) re-examined the issue, but, was not convinced with the contention of the assessee and he confirmed the order of the assessing officer.
Now the assessee has preferred an appeal before the Tribunal with the submissions that the shares were not sold through agreement dated 2-7-1997. It was a formal agreement between the parties, but, the shares were not transferred through this agreement inasmuch as before entering final agreement for sale, parties to the agreements were required to perform certain formalities. The learned counsel for the assessee has invited our attention to the clause 2.2 of the Agreement dated 2-7-1997, according to which vendors have agreed to procure the passing of resolution of Board of Directors of the company referred to in clause 2. 1.1 above forthwith following the execution of this agreement. Provided that the purchaser complies with its obligations and the clause 4.2.1 MIL undertake to the purchase to complete the acquisitions of 2,82,500 equity shares from GIIC. No doubt, rate of shares was fixed in this agreement through its clause 4.1, but, it was subject to escalations given in clause 10.8. Through this agreement shares were not transferred or delivered to the purchaser. Only formal terms and conditions were stipulated to bind both the parties with regard to sale transactions of these shares. It is not a case where the sale of shares were finally effected and shares were delivered and the payment of the consideration were deferred. No transfer deed was executed through this agreement. It was just like an agreement to sale immovable property which cannot be termed to be a final sale. In case of immovable property, the sale can only be determined on the basis of the execution of a sale deed. Likewise, in the case of movable properties, of which sales are governed by the provisions of Sales of Goods Act, factum of sale can only be effected when the goods are identified and delivered. As per provision of section 20 of Sales of Goods Act, no doubt the delivery and payment can be differed, but, there should be a clear cut intentions of sale of movable goods. It cannot be a subject to certain conditions to be fulfilled in future. In the instant case, through agreement dated 2-7-1997 the primary conditions for sale of shares were stipulated, but, the sale of shares were neither effected nor other conditions requiring a very valid transfer of shares were fulfilled. From reading the various clauses of this agreement, only one inference would be drawn that its primary document relating to sale of shares which gives right to the parties to enforce the transactions of sales at a price stipulated in this agreement. It was also made very clear through this agreement, if sale of shares is delayed, the sale consideration would be determined by invoking the provisions of clause 10.8 of this agreement. Since the sales of shares were delayed and were effected through an agreement dated 5-3-1999, the consideration stipulated in this agreement is the real sale consideration of sale of share and the interest determined on Rs. 270 is not interest in real sense, but, is a part of sale consideration. As such, the assessee has rightly computed the capital gain on sale of these shares.
The learned Departmental Representative on the other hand has placed heavy reliance upon the order of the lower authorities.
Having carefully examined the orders of the lower authorities, in the light of rival submissions, we are of the view that the main controversy revolves around a core issue whether the sale of shares were effected through an agreement dated 2-7-1997 or it was effected through agreement dated 5-3-1999. Copy of the agreement dated 2-7-1997 is filed before us and from its perusal, we find that this agreement was executed between the assessee's along with its group concern and British Gas Asia Pacific Holding (P.) Ltd. Through this agreement, assessee along with its group concerns expressed their desire to sell the shares of Gujarat Gas Company Limited and the purchaser ie., British Gas Asia Pacific Holding (P.) Ltd. has also expressed their desire to purchase it. In this agreement, certain conditions are stipulated which are to be complied with by the parties in the near future. Through this agreement, the purchaser has also agreed to make advance payment against consideration payable in clause 4, but, it should be subject to the execution and delivery to the purchases of the custodian agreement together with the share certificate and executed shares, transfers in blank for the 25,65,000 shares to be deposited therein. On satisfaction of the condition precedent referred to, the purchaser will instruct the remittance of the deposit into a designated account in the name of the purchaser with Barclays Bank, Bombay. From a reading of this clause 4, we would find that though the consideration was stipulated but parties were required to do certain acts on their part. If they successfully do that Act and part amount of sale consideration was passed to the vendor, shares would be transferred and it amounts to a valid sale of shares though balance amount is required to be paid after some time. In that eventuality, whatever interest earned on the due amount, it would not form a part of sale consideration. It may be either a business income of the assessee if the assessee is doing the business of investment in shares or income from other sources. From the material available on record, it is not clear how much portion of this agreement was fulfilled by the respective parties. For the sake of reference, we extract clause Nos. 4 and 5 of this agreement as under : 4.1 The consideration for the purchase of the Sale Shares shall be the cash sum of Rs. 270 for each Sale Share making an aggregate consideration of Rs. 1,08,60,95,250 which shall be divisible among the Vendors as set out in Part I of Schedule I and paid to the Vendors in due proportion on Completion.
4.2.1 Subject to the execution and delivery to the Purchaser of the Custodian Agreement together with the share certificates and executed share transfers in blank for the 25,65,000 sale shares to be deposited thereunder, the Purchaser agrees to advance the sum of Rs. 35,00,00,000 by way of an advance payment against the consideration payable for the Sale Shares under this clause 4 (the 'Deposit'). On satisfaction of the condition precedent referred to in the previous sentence, the Purchaser will instruct the remittance of the Deposit into a designated account in the name of the Purchaser with Barclays bank Pic. Bombay (the 'Designated Account'). Following receipt of the Deposit into the Designated Account, the Purchaser will at the direction of MIL (by notice in writing) instruct Barclays bank Pic. to pay the amount of the Deposit to such account with a scheduled bank in India as MIL shall instruct. Payment in accordance with MIL's directions as aforesaid will be a good discharge to the Purchaser of its obligation to pay the Deposit and the Purchaser will not be bound to see to the application thereof as between the Vendors.
4.2.2 The Deposit shall become immediately due and payable to the Purchaser in the event that : 4.2.2.1 the conditions precedent contained in clause 5.1 have not all been satisfied by the date specified in clause 5.3.1; 4.2.2.2 either or both of the approvals referred to in clauses 5.1.1 and 5.1.2 are refused or granted only with respect to the acquisition by the Purchaser of part only of the Equity Shares for which application has been made, or are otherwise granted in a form or subject to conditions which, in the reasonable opinion of the Purchaser, are not in accordance with the scope of the approval sought; 4.2.2.3 this Agreement is terminated by the Purchaser under clause 8.5; or 4.2.2.4 this Agreement is terminated for any other reason by mutual agreement of the parties.
4.2.3 In the event that MIL does not repay the Deposit to the Purchaser forthwith upon the Deposit becoming due and payable under clause 4.2.2.1 or clause 4.2.2.2 only the Purchaser agrees not to take any action to enforce the repayment of the Deposit for a period of 90 days commencing on the due date for repayment. If or to the extent that on the expiry of such period of 90 days the Deposit shall not for whatever reason have been repaid in full, the Purchaser shall be entitled to take such action as it may determine to recover from the Vendors an amount equal to 50 per cent only of the amount of the Deposit remaining due and payable to the Purchaser.
4.3.1 In case the Company is able to enter into an agreement with Gujarat State Petroleum Corporation Limited on mutually acceptable terms for supply of gas to the Company at least 10 working days (as defined for the purposes of the Takeover Regulations) prior to closure of the Offer pursuant to the takeover Regulations of at least 0.3 million standard cubic metres per day making an aggregate of at least I million standard cubic metres per day, the price payable per State share under clause 4.1 shall be increased to Rs. 301 per Sale share.
4.3.2 The Vendors agree to procure that prior to Completion the Company will not enter into a legally binding contract for an additional supply of gas to the Company without the prior written consent of the Purchaser, which consent will not be withheld in the event that the Purchaser's prior consent is sought of an unconditional and legally binding contract between Gujarat State Petroleum Corporation Limited.
Niko Resources Limited and the Company for an additional supply of gas to the Company of at least 0.3 million standard cubic metres per day with delivery commencing not later than 1-12-1999 at the price and on terms which are no less favourable to the Company than the contract between Gujarat State Petroleum Corporation Limited, Niko Resources Limited and the Company dated 6-6-1997.
4.3 Wherever in this Agreement provision is made for the payment by one party to another, such payment shall be effected by banker's draft drawn payable in Bombay and drawn on any scheduled bank reasonably acceptable to the payee and the payer and having an office in Bombay.
Payment of such sum shall be a good discharge to the payer of its obligation to make such payment. Payment to each of the Vendors shall be by separate banker's draft in accordance with their respective entitlements as set out in column (4) of Part I of Schedule I net of their proportionate share of the Deposit.
Completion of the sale and purchase of the Sale Shares under this Agreement is conditional upon the satisfaction of the following conditions for the benefit of the Purchaser: 5.1.1 the Purchaser having received an appropriate approval of the Foreign Investment Promotion Board through the Secretariat of Industrial Assistance to the acquisition by the Purchaser of all the Sale Shares, the Additional Shares and of the Equity Shares to be acquired by the Purchaser under the Offer; 5.1.2 the Purchaser having received an appropriate approval of the Reserve bank of India to the acquisition and holding of the Sale Shares, the Additional Shares and of the Equity Shares to be acquired by the Purchaser under the Offer; 5.1.3 the Purchaser having received approval from IDBI as lead lender and of the other lenders to the Company of the acquisition by the Purchaser of the Sale Shares, the Additional Shares and of the Equity Shares to be acquired by the Purchaser under the offer and any other approvals or consents required under any other contract or agreement to which the Company is a party.
The Purchaser acknowledges that it is aware of the possible conditions to approval that may be imposed by the Foreign Investment Promotion Board/ Secretariat of Industrial Assistance which are set out in the form FC(SIA) for applications for foreign investment and technology agreement! During the course of hearing, copy of agreement dated 5-3-1999 is not placed before us. We, therefore, are not in a position to make any comments on this agreement through which assessee has claimed to have sold the shares to British Gas Asia Pacific Holding Pvt. Ltd. against a stipulated amount which is Rs. 270 + Interest @ 29% from 26-9-1997. In this regard, we would like to refer section 20 of the Sale of Goods Act which governs the sales of shares and according to section 20, time of payment of the price and the time of delivery of the goods can be postponed, but it would be subject to the conditions that it is unconditional contract for the sale of specific goods in a deliverable state. For reference, we reproduce section 20 of the Sales of Goods Act as under: "Section 20 - Where there is unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made and it is immaterial whether time of payment of price and the time of delivery of the goods or both is postponed for effecting the sale, the goods must be identified and be made in a deliverable state." 1. that the contract of sale must be for specific goods in a deliverable state.
2. the contract must be unconditional one. If the parties to the contract are required to fulfil certain conditions, the contract may not be called to be unconditional and property would not immediately pass on execution of an Agreement.
From a careful reading of this agreement dated 2-7-1997 in the light of the provisions of section 20 of Sales of Goods Act and other provisions of Act, we find that it was a formal agreement between the parties with regard to sale of shares, but it was to be enforced on fulfilment of certain conditions by the respective parties. No evidence has been placed before us in order to prove that through this agreement either of the parties have acted upon or payment was passed to the assessee or delivery of the shares were effected including the transfer deeds.
Unless and until it is proved that through this agreement respective parties have made the compliance of the conditions imposed thereon and only delivery part and payment was deferred through this agreement, it cannot be held that the property passes to the purchaser and sales of shares were effected. If the sales of shares are not effected through this agreement, the amount paid over and above Rs. 270 per share cannot be termed to be the interest accrued on the sale price of share on account of late payment. The other agreement dated 5-3-1999 is not placed before us, as such, we refrain ourselves for making comments thereon. We, therefore, of the view that this issue requires a fresh adjudication by the assessing officer in the light of observations made hereinabove. We, therefore, set aside the order of the Commissioner (Appeals) and restore it to the file of the assessing officer for readjudicating the issue in terms indicated above and also in the light of both agreements.
Ground No. 4 relates to an addition of Rs. 8,01,611 made by the assessing officer by way of disallowing interest under section 14A of the Income Tax Act.
The facts borne out from the record are that the assessee has incurred interest expenditure of Rs. 8,01,611 and claimed it as revenue expenditure. The assessing officer during the course of assessment proceedings, asked the assessee to explain as to why the above interest expenditure of Rs. 8,01,611 should not be disallowed under section 14A of the Income Tax Act. In response thereto, it was stated that the interest expenditure cannot be disallowed under section 14A as amount on which interest is paid was borrowed from Global Trust bank and such borrowings were utilized for re-paying the loan taken from M/s.
Mafatlal Industries. assessing officer, did not accept the contentions of the assessee and he disallowed the interest/expenditure after having observed that the assessee did not furnish any evidence to substantiate its claim that interest was paid on borrowed funds which were utilized for re-payment of outstanding balance payable to M/s. Mafatlal Industries. Assessee preferred an appeal before the Commissioner (Appeals) with the submissions that the assessing officer did not ask the assessee to produce any evidence in this regard. It was further submitted that it has not received any interest from any debtors and advances given as per terms and conditions mutually agreed between the assessee and debtors and the persons to whom the appellant has given advances. The Commissioner (Appeals) re-examined the issue, but, was not convinced with the explanation of the assessee and he confirmed the disallowance after having observed that nothing had been placed on record to prove that the shares in question were purchased out of own funds and not from the borrowed funds. He, further observed that it is also not known as to on which date the money was actually borrowed and share was purchased.
Now the assessee preferred an appeal before the Tribunal with the submissions that the lower authorities have not properly examined the facts of the case. Whatever investments were made in the shares, it was out of own funds. During the course of hearing, it was asked from the assessee to furnish the evidence that investment was not made out of the borrowed funds or from his personal funds and in response thereto it was stated that investments were made from the common funds in which borrowed and personal funds were parked. From a careful perusal of the order of the lower authorities in the light of rival submissions, we find that nothing has been placed on record as to how the investments were made. It was either from the borrowed funds or from personal/own funds. If the assessee had made the investment from a common pool only a corresponding disallowance can be made not the entire interest. We, therefore, are of the view that this issue requires a fresh adjudication by the assessing officer. We, therefore, set aside the order of the Commissioner (Appeals) and restore it to the file of the assessing officer with a direction to re adjudicate the issue. The asscssee is also directed to place all relevant evidence before him to establish how the borrowed funds were utilized. Accordingly, this issue is disposed of.
Ground No. 5 relating to charging of interest under section 234B. This ground is of consequential nature. As such, no independent adjudication is called for.
Ground No. 6 relates to penalty under section 271(1)(c) is not maintainable. We, therefore, dismiss the same.
in the result, appeal of the assessee is partly allowed for statistical purposes.