Sercon (P.) Ltd. Vs. Income-tax Officer - Court Judgment

Excerpt:
1. in this appeal directed against the order of the cit(appeals) numerous grounds have been raised. the learned counsel for the appellant at the outset however, stated that insofar as ground nos.5,6, & 7 were concerned, he did not wish to press the same. these are accordingly being rejected. the learned cit(a) ought to have held that the appellant was entitled to claim deduction under section 80m of the act without taking into account relief granted to it under section 80k of the act.the learned counsel for the appellant at the outset stated that this was covered against the assessee by the special bench decision of the tribunal in the case of jeewan ltd. v. ito [1986] 15 itd 14 (bom.). he, however, hastened to add that the appeal had been filed with a view to keep the matter alive. the learned d.r. on the other hand strongly supported the order of the cit (appeals).2.1 in view of the aforesaid accepted position we see no reason to interfere with the order of the first appellate authority and reject the relevant ground in the appeal.3. the only issue which now survives for our consideration is the one raised in ground nos. 1 to 3 and that being the assessee's claim in respect of long-term capital loss of rs. 6,96,856 on the sale of shares of m/s. sarayu in vestments pvt. ltd. the ito rejected the claim treating it as non-genuine. in doing so he recorded the following observations:- 4. in the year under consideration the assessee has sold 7426 shares of sarayu investments pvt. ltd. of rs. 100 each to sarabhai pvt. ltd. on 7-9-1982 for a total consideration of rs. 45,744. the reasons for sale is not mentioned. the value of rs. 100 per share of sarayu inv. (p.) ltd. has been fixed at rs. 6.16 per share as per the report of b.c. kapadia & co., c.as. the assessee has stated that they did not receive any dividend from sarayu inv.(p). ltd. from 28-2-74 to 7-9-82... as already stated, the reasons for selling these shares after along spell of time are not given by the assessee. the shares of sarayu inv. (p.) ltd. which has not done anything pursuant to its main objects or ancillary objects are sold by one company of sarabhai group to another company without any commercial consideration. the requirement of funds cannot be taken as ground for sale because the alleged sale consideration is so small as needs no mention. the whole transaction is a colourable device to evade payment of tax because assessee has adjusted the fictitious loss on sale of sarayu's shares against gains arising out of sale of shares of bakubhai ambalal ltd. (london). hence it is a colourable device. in view of the finding given, the loss of rs. 6,96,856 on the sale of shares of sarayu investment pvt. ltd. is disallowed as not genuine loss.4. the cit (appeals) upheld the decision taken by the ito agreeing with him in toto vis-a-vis the non-genuine nature of the transaction and avoiding the payment of tax.5. the learned counsel for the appellant at the outset vehemently challenged the action of the tax authorities in rejecting the claim and also recording in the process certain observations which were based on extraneous considerations and not relevant to the issue in question.according to the learned counsel the transaction was not only genuine in nature but had been undertaken in the interest of the assessee's business and that being in the direction of divesting itself of an investment which had not fetched any income in the form of dividends from 1974 up to the date of the sale which was in september 1982. he also invited attention to the fact that the sale price of rs. 6.16 ps.per share was supported by the report of an approved valuer and this report had not been challenged by the department at any stage. it was also stated that the shares were sold to another company within the sarabhai group since these shares were of a private limited company and not freely transferable. the learned counsel also challenged the observations of the tax authorities vis-a-vis a "device" to off-set the capital gains that arose out of the sale of the shares of m/s. bakubhai ambalal ltd. (london); on the ground that the permission to sell these shares had been requested for under section 27 of the fera act in may 1981 but the same had been obtained in january 1983, and it was only thereafter that the shares were disposed of. the shares of m/s. sarayu investments pvt. ltd. according to him, had however, been sold prior to january 1983 viz. on 7-9-1982. the submission thereafter was that there could be no deliberate design on the part of the assessee to evade tax under the aforesaid circumstances. in the same direction the learned counsel advanced another argument and that was to the effect that the assessee-company had numerous other profitable investments and in case the intention was to avoid payment of tax then these investments could have also been sold off during the assessment year under consideration and the long-term capital gains earned thereof be set off against the long-term capital loss incurred on the sale of shares of m/s. sarayu inv. pvt. ltd. this, according to him, however, was not done. he also invited our attention to the fact that the penalty proceedings initiated under section 271(1)(c) vis-a-vis the rejection of the claim in question had been subsequently dropped vide order dt. 3-3-88 by the ito himself. the learned counsel also made a statement at the bar to the effect that the question of "tax avoidance" would lose importance since the long-term capital loss if treated as genuine and allowed, would lapse in the subsequent assessment year since the assesse-company had not earned any long-term capital gains till date against which the said loss could be set off. on the basis of the aforesaid arguments the learned counsel made an impassioned plea for the acceptance of the claim in question as genuine and to be adjusted against the current year's income as required by law.6. the learned d.r. on the other hand strongly supported the orders passed by the tax authorities. the subsequent arguments advanced by him were a reiteration of the reasons recorded by these authorities in rejecting the assessee's claim.7. we have examined the rival submissions and have also perused the orders passed by the tax authorities. the paper book filed by the learned counsel for the appellant has also been taken into account in deciding the issue under consideration. in our opinion, the loss in question deserves to be treated as genuine and allowed in accordance with the provisions of law. our reasons for opining so are as under:- (1) the company m/s. sarayu investments pvt. ltd. had not declared any dividend from 1974 till the date of sale of the shares by the appellant. in other words the investment in these shares was a losing proposition. (2) the said shares were sold at a rate which had been determined by a registered valuer whose report was filed with the authorities and not challenged by them. (3) one of the primary reasons recorded by the tax authorities in rejecting the assessee's claim was that no "reasons" for selling these shares had been given by the assessee-company. this approach of the department, according to us, is not justified since it is the prerogative of a businessman as to how he should plan his affairs and what he should sell and what he should purchase. it was with this intention that the company disposed of the shares of m/s. sarayu inv. p. ltd. and on which no dividend had been declared for the last so many years. (4) the charge of "tax evasion" levelled by the tax authorities is also not valid and borne out by the facts specially when one finds that the shares of m/s. bakubhai ambalal ltd. (london) were disposed of after receiving permission from the central government in january 1983 the application in respect of which was moved as far back as may 1981. in other words in case the permission had been received much earlier then the chances are that the long-term capital gain in respect of the sale of the said shares may have fallen for consideration in assessment year 1982-83. then again it would not be proper to draw and adverse inference only on that score when the assessee could have sold other profitable investments held by it during the assessment year under consideration or in the subsequent assessment years and off-set the income thereof against the long-term capital loss which is presently under discussion. this was not done. it would also be a very far fetched proposition to presume that an assessee would dispose of shares of the face value exceeding rs. 7 lacs merely to off-set a taxable long-term capital gains quantified at rs. 52,788 by the ito. (5) there is also the order of the ito dropping the penalty proceedings under section 271(1)(c) and the reply dt. 20-2-1988 to the penalty notice appended at page 44 of the paper book, does explain at length the nature and background of the transaction with which we are presently concerned.in the final analysis we opine that the sale of shares of m/s. sarayu investments pvt. ltd. by the assessee during the assessment year under consideration represented a genuine transaction and was required to be accepted by the department as such. we direct accordingly. the relevant grounds in the appeal are accordingly accepted.

Judgment:
1. In this appeal directed against the order of the CIT(Appeals) numerous grounds have been raised. The learned counsel for the appellant at the outset however, stated that insofar as ground Nos.

5,6, & 7 were concerned, he did not wish to press the same. These are accordingly being rejected.

The learned CIT(A) ought to have held that the appellant was entitled to claim deduction under Section 80M of the Act without taking into account relief granted to it under Section 80K of the Act.

The learned counsel for the appellant at the outset stated that this was covered against the assessee by the Special Bench decision of the Tribunal in the case of Jeewan Ltd. v. ITO [1986] 15 ITD 14 (Bom.). He, however, hastened to add that the appeal had been filed with a view to keep the matter alive. The learned D.R. on the other hand strongly supported the order of the CIT (Appeals).

2.1 In view of the aforesaid accepted position we see no reason to interfere with the order of the first appellate authority and reject the relevant ground in the appeal.

3. The only issue which now survives for our consideration is the one raised in ground Nos. 1 to 3 and that being the assessee's claim in respect of long-term capital loss of Rs. 6,96,856 on the sale of shares of M/s. Sarayu In vestments Pvt. Ltd. The ITO rejected the claim treating it as non-genuine. In doing so he recorded the following observations:- 4. In the year under consideration the assessee has sold 7426 shares of Sarayu Investments Pvt. Ltd. of Rs. 100 each to Sarabhai Pvt.

Ltd. on 7-9-1982 for a total consideration of Rs. 45,744. The reasons for sale is not mentioned. The value of Rs. 100 per share of Sarayu Inv. (P.) Ltd. has been fixed at Rs. 6.16 per share as per the report of B.C. Kapadia & Co., C.As. The assessee has stated that they did not receive any dividend from Sarayu Inv.(P). Ltd. from 28-2-74 to 7-9-82...

As already stated, the reasons for selling these shares after along spell of time are not given by the assessee. The shares of Sarayu Inv. (P.) Ltd. which has not done anything pursuant to its main objects or ancillary objects are sold by one company of Sarabhai Group to another company without any commercial consideration. The requirement of funds cannot be taken as ground for sale because the alleged sale consideration is so small as needs no mention. The whole transaction is a colourable device to evade payment of tax because assessee has adjusted the fictitious loss on sale of Sarayu's shares against gains arising out of sale of shares of Bakubhai Ambalal Ltd. (London). Hence it is a colourable device. In view of the finding given, the loss of Rs. 6,96,856 on the sale of shares of Sarayu Investment Pvt. Ltd. is disallowed as not genuine loss.

4. The CIT (Appeals) upheld the decision taken by the ITO agreeing with him in toto vis-a-vis the non-genuine nature of the transaction and avoiding the payment of tax.

5. The learned counsel for the appellant at the outset vehemently challenged the action of the tax authorities in rejecting the claim and also recording in the process certain observations which were based on extraneous considerations and not relevant to the issue in question.

According to the learned counsel the transaction was not only genuine in nature but had been undertaken in the interest of the assessee's business and that being in the direction of divesting itself of an investment which had not fetched any income in the form of dividends from 1974 up to the date of the sale which was in September 1982. He also invited attention to the fact that the sale price of Rs. 6.16 Ps.

per share was supported by the report of an approved valuer and this report had not been challenged by the department at any stage. It was also stated that the shares were sold to another company within the Sarabhai Group since these shares were of a Private Limited Company and not freely transferable. The learned counsel also challenged the observations of the tax authorities vis-a-vis a "device" to off-set the capital gains that arose out of the sale of the shares of M/s. Bakubhai Ambalal Ltd. (London); on the ground that the permission to sell these shares had been requested for under Section 27 of the FERA Act in May 1981 but the same had been obtained in January 1983, and it was only thereafter that the shares were disposed of. The shares of M/s. Sarayu Investments Pvt. Ltd. according to him, had however, been sold prior to January 1983 viz. on 7-9-1982. The submission thereafter was that there could be no deliberate design on the part of the assessee to evade tax under the aforesaid circumstances. In the same direction the learned counsel advanced another argument and that was to the effect that the assessee-company had numerous other profitable investments and in case the intention was to avoid payment of tax then these investments could have also been sold off during the assessment year under consideration and the long-term capital gains earned thereof be set off against the long-term capital loss incurred on the sale of shares of M/s. Sarayu Inv. Pvt. Ltd. This, according to him, however, was not done. He also invited our attention to the fact that the penalty proceedings initiated under Section 271(1)(c) vis-a-vis the rejection of the claim in question had been subsequently dropped vide order dt. 3-3-88 by the ITO himself. The learned counsel also made a statement at the bar to the effect that the question of "tax avoidance" would lose importance since the long-term capital loss if treated as genuine and allowed, would lapse in the subsequent assessment year since the assesse-company had not earned any long-term capital gains till date against which the said loss could be set off. On the basis of the aforesaid arguments the learned counsel made an impassioned plea for the acceptance of the claim in question as genuine and to be adjusted against the current year's income as required by law.

6. The learned D.R. on the other hand strongly supported the orders passed by the tax authorities. The subsequent arguments advanced by him were a reiteration of the reasons recorded by these authorities in rejecting the assessee's claim.

7. We have examined the rival submissions and have also perused the orders passed by the tax authorities. The paper book filed by the learned counsel for the appellant has also been taken into account in deciding the issue under consideration. In our opinion, the loss in question deserves to be treated as genuine and allowed in accordance with the provisions of law. Our reasons for opining so are as under:- (1) The company M/s. Sarayu Investments Pvt. Ltd. had not declared any dividend from 1974 till the date of sale of the shares by the appellant. In other words the investment in these shares was a losing proposition.

(2) The said shares were sold at a rate which had been determined by a registered valuer whose report was filed with the authorities and not challenged by them.

(3) One of the primary reasons recorded by the tax authorities in rejecting the assessee's claim was that no "reasons" for selling these shares had been given by the assessee-company. This approach of the department, according to us, is not justified since it is the prerogative of a businessman as to how he should plan his affairs and what he should sell and what he should purchase. It was with this intention that the company disposed of the shares of M/s.

Sarayu Inv. P. Ltd. and on which no dividend had been declared for the last so many years.

(4) The charge of "tax evasion" levelled by the tax authorities is also not valid and borne out by the facts specially when one finds that the shares of M/s. Bakubhai Ambalal Ltd. (London) were disposed of after receiving permission from the Central Government in January 1983 the application in respect of which was moved as far back as May 1981. In other words in case the permission had been received much earlier then the chances are that the long-term capital gain in respect of the sale of the said shares may have fallen for consideration in assessment year 1982-83. Then again it would not be proper to draw and adverse inference only on that score when the assessee could have sold other profitable investments held by it during the assessment year under consideration or in the subsequent assessment years and off-set the income thereof against the long-term capital loss which is presently under discussion. This was not done. It would also be a very far fetched proposition to presume that an assessee would dispose of shares of the face value exceeding Rs. 7 lacs merely to off-set a taxable long-term capital gains quantified at Rs. 52,788 by the ITO. (5) There is also the order of the ITO dropping the penalty proceedings under Section 271(1)(c) and the reply dt. 20-2-1988 to the penalty notice appended at page 44 of the paper book, does explain at length the nature and background of the transaction with which we are presently concerned.

In the final analysis we opine that the sale of shares of M/s. Sarayu Investments Pvt. Ltd. by the assessee during the assessment year under consideration represented a genuine transaction and was required to be accepted by the department as such. We direct accordingly. The relevant grounds in the appeal are accordingly accepted.