Commissioner of Income-tax, West Bengal-ii Vs. M/S. Shekhawati Rajputana Trading Co. (P) Ltd., Calcutta - Court Judgment

SooperKanoon Citationsooperkanoon.com/872947
SubjectDirect Taxation
CourtKolkata High Court
Decided OnApr-17-1998
Case NumberSpecial Jurisdiction (Income-tax) Income Tax Reference No. 180 of 1992
JudgeShyamal Kumar Sen and ;Bijitendra Mohan Mitra, JJ.
Reported in(1998)3CALLT464(HC),[1999]236ITR950(Cal)
ActsIncome Tax Act, 1961 - Sections 9, 10, 12 and 256;; Income Tax (Amendment) Act, 1964 - Section 256(2);; Seruity Contracts (Regulation) Act, 1956;; Security Contracts (Regulation) Act, 1986;; Andhra Pradesh Excise Act, 1968 - Section 2(10);; Andhra Pradesh General Sales Tax Act, 1957 - Section 2;; Distillery Rules - Rules 76, 80, 81, 82, 83 and 84
AppellantCommissioner of Income-tax, West Bengal-ii
RespondentM/S. Shekhawati Rajputana Trading Co. (P) Ltd., Calcutta
Cases ReferredKarnani Properties Ltd. v. C.I.T.
Excerpt:
Notice (8): Undefined variable: kword [APP/View/Case/amp.ctp, line 120]
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 120]
- 
Notice (8): Undefined variable: kword [APP/View/Case/amp.ctp, line 123]
Notice (8): Undefined variable: query [APP/View/Case/amp.ctp, line 123]
s.k. sen, j.1. in the instant reference under section 256(2) of income-tax act. 1964 the three questions raised at the instance of the reason for consideration are as follows:1. whether, on the facts and circumstances of the case the finding of the tribunal that the transactions of sales of shares of two companies viz.. (a) the general fibre dealers ltd. (b) bhagatpur tea co. with shri r.l. kanoria, chairman of the assessee company had been proved and were done as an act or prudency, was based on no evidence or partly relevant or partly irrelevant evidence and is otherwise perverse and arbitrary? 2. whether on the facts and in the circumstances of the case the findings of the tribunal that the revenue failed to establish its case of false sale transaction of shares of jokai india ltd. to.....
Judgment:

S.K. Sen, J.

1. In the instant reference under section 256(2) of income-tax Act. 1964 the three questions raised at the instance of the Reason for consideration are as follows:

1. Whether, on the facts and circumstances of the case the finding of the Tribunal that the transactions of sales of shares of two companies viz.. (a) The General Fibre Dealers Ltd. (b) Bhagatpur Tea Co. with Shri R.L. Kanoria, Chairman of the assessee company had been proved and were done as an act or prudency, was based on no evidence or partly relevant or partly irrelevant evidence and is otherwise perverse and arbitrary?

2. Whether on the facts and in the circumstances of the case the findings of the Tribunal that the Revenue failed to establish its case of false sale transaction of shares of Jokai India Ltd. to Shri R.L.Kanoria, Chairman of the assessee company and had objected the share loss on surmise and conjectures, was based on no evidence or partly relevant or parity irrelevant evidence and is otherwise perverse and arbitrary?

3. Whether, considering the totality of the facts and in the circumstancesof the case, the Tribunal was correct in law in directing the assessing Officer to allow the share of loss of Rs. 3,38.861.50 to the assessee company?

The assessee company claimed loss of Rs. 3,38,861,50 from the following dealings:--

Date of purchaseSharesNo. of SharesCostDate of SaleSale priceLoss

10.3.74The General Fibre Dealers Ltd.5760153867.5010.7.818640067467.5018.8.76Bhagatpur Tea Co. ltd.1448145562.50'21720123842.5023.6.86Jokai India Ltd.21850595486.50'447925

147551.50

556045

338861.50

All the aforesaid sales were made by the company with the Chairman of the assessee company. Sri R.L.Kanoria.

The Assessing Officer disallowed the assessee's claim on the following grounds:--

(1) Within 66 days i.e. on 14.9.81, the assessee company repurchased all the shares of Jokai India Ltd. for a sum of Rs. 3,82.375.

(ii) On scruitiny of the bank statement of both assessee company and Shri R.L.Kanoria, it transpires that on 10.7.81 the assessee company issued a cheque for a sum of Rs.5,56,000 to Shri R.L.Kanoria when the assessee company had only Rs. 999.37 in their credit balance.

(iii) On the same date Shri R.L. Kanoria issued a cheque for Rs. 6,56.046 to the assessee company to purchase the above noted shares when Shri R.L.Kanoria had only Rs. 434.53 in Bank Account for disposal. Both the assessee company and Shri R.L.Kanoria had their account with United Commercial Bank at 2, India Exchange Place. Calcutta and neither actual transfer of money took place nor the transfer had any source to purchase the shares.

(iv) While re-purchasing the shares of Jokai India Ltd. again Shri R.L.Kanoria issued a cheque for Rs. 3,82,000 to the assessee company and the assessee company issued a cheque for Rs. 3,82.375 for re-purchase. Here also the parties had only petty balance in their Bank Accounts and had no money for such transaction. From above facts the Assessing Officer held that no real business transaction between the assessee company and Shri R.L.Kanoria took place and the loss shown in the accounts was nothing but an eye-wash. Moreover, the Assessing Officer found that the transactions were not effected through any recognised broker, when no private dealing of listed share within 10 kms, of the place where Stock Exchange being situated were permissible and were void under the Seruity Contracts (Regulation) Act, 1956.

2. The loans taken by the company from Shri R.L.Kanoria and the payments made by the assessee are as follows:--

The assessee took following loans for Shri Kanoria:

Rs.31.3.81By Cheque 5,0004.6.81' '2,00,00016.6.81' ' 1,00023.6.81' '1,00,00020.7.81' ' 5,00031.7.81' ' 1,00014.9.81' '3,82,00029.9.81' ' 1,000

Against the above loan receipt the assessee made following payments immediately after the receipt:

Rs.13.4.81By clearing 5525.538.6.81' '200000.0023.6.81' '100165.0021.7.81' ' 1081.0014.9.81By transfer 3,82,37530.9.81' ' 1,000

3. C.I.T. (Appeal) after considering the facts of this case confirmed the order of I.T.O. inter alia for the following reasons:--

On the facts of the case, the shares transactions with the Chairman Shri R.L.Kanoria do not appear to be a genuine tranactions. They appear to have been entered into with the object of reducing the appellant's liability to tax as per a scheme of tax planning or lax avoidance.

4. The Commissioner of income-tax (Appeals) after considering the assessee's submission and the whole facts of the case in respect of share of Jokai India Ltd. held that the arrangement for sale of shares was a part of well-planned scheme of tax avoidance and there was no commerical prudency in selling away substantial holdings of 21.850 shares to only one person, when nobody would try to sell away the shares in a declining market. The above arrangement was a part of lax planning with the ultimate purpose of enabling both the assessee and Shri R.L.Kanoria to claim losses in their respective income-tax assessments. In holding so. the Commissioner of income-tax (Appeals) look supporl from the decision of the Supreme Court in the case of McDwell and Co. Ltd. (154 ITR 148).

5. In respect of the alleged transaction of shares of M/s. General Fibre Dealers Ltd. and Bhagatpur Tea Co. Ltd. the Commissioner of income-tax (Appeals) observed that if there was no prospect of receiving any dividend Sri. R.L.Kanoria who had through knowledge of working of the assessee company would not have acquired them. He also pointed out that on 24.6.82 the assessee company purchased 2400 shares of M/s. General Fibre Dealers Ltd. @ Rs. 30 per share from Smt. Urmila Devi Kothari, sister of Sri R.L.Kanoria and that Sri Kanoria acquired the shares to gain control of two companies and under that circumstances, the assessee company could have demanded any price for those shares. The Commissioner of income-tax (Appeals) accordingly disallowed the assessee's claim of losses in respect of shares of those companies also.

6. Against the Commissioner of income-tax (A)'s order, the assessee filed appeal before the Tribunal. The Tribunal accepted the submission put forward by the assessee company. The Tribunal held as under:--

'We have caarefulty considered this rival submissions, facts and circumstances of the case and material on record. It is not in dispute that the assessee-company carried on business of shares dealings. It is also not in dispute that sale of all shares and repurchase of shares of M/s. JokaiIndia Ltd. are supported by vouchers. The shares of three companies were sold to M/s. R.L. Kanoria for total consideration of Rs, 5,56.055 and the amount was received through cheque which was duly credited in the bank account of the assessee. The repurchase of shares of M/s. Jokal India Ltd. is also reflected in the bank account of the assessee. The assessee's claim that sale of shares was effected through spot delivery had also not been refuted. Thus prima facie the transactions have been established. For treating these transactions as non-genuine, the lower, authorities look into account the fact that transactions were carried with the Chairman of the assessee-company. The CIT(A) held that transactions to be colourable device claimed at tax avoidance and, therefore, liable to be ignored in view of decision of the Hon'ble Supreme Court in the case of McDwell and Co. Ltd. (supra).

7. To examine whether there was any tax avoidance, we looked into relevant record of the assessee as well as that of Shri R.L.Kanoria. In the assessment year 1982-83, after disallowance of share loss as also interest of Rs. 9,3,622 net income of the assessee comapany was determined at Rs. 9.437. The CIT (A) further allowed interest of Rs. 93,622 and thus income of the assessee company has been assessed at loss without considering the share transactions in question. Thus no ease of tax avoidance is established as far as the assessee company is concerned. Turning to the file of Sri R.L. Kanoria we find that the assessment in his case for the assessment year 1982-83 was made on total income of Rs. 71,530 as per order dated 28.1.85 by the ITO General Circle XXVIII. Calcutta. In the said assessment the ITO disallowed deduction on interests of Rs. 3.26,646 and share losses of Rs. 81. 749 and Rs. 43.181. The share loss which included share dealing with the assessee was disallowed on the ground that these transactions were carried with the companies in which Sri Kanoria was interested. It was further observed that the transactions were carried without any registered broker. On appeal, the CIT (A) as per order dated 10.2.88 uphold the disallowance of interest but directed the iTO to re-examine similar contentions as advised before us in respect of share loss. The Asst. Commissioner in compliance to the above directions reconsidered the matter and as per order dated 3.7.89 allowed loss of share dealings to Sri Kanoria. In the said order net income of Sri Kanoria has been taken at Rs: 5,740, long term loss of Rs. 43.181 has been allowed to be carried forward. Thus no income has been assessed even in the hands of Sri Kanoria. !n other words, no tax avoidance has been proved. It is interesting to note that all the share dealings in questions have been accepted by the Assistant Commissioner in the assessment of Sri Kanoria. Thus when purchase and sale have been accepted in the case of Sri Kanoria, there is hardly any reason and Jurisdiction for the revenue to blow hot and cold and not accept them in the case of the assessee company. In consistence with the order passed in case of Sri Kanoria, we msut hold that lower authorities were not justified in holding the transactions in questions non-genuine and ignoring the loss claimed in share dealings. The share loss has to be allowed and we direct lower authorities to allow the loss to the assessee.

8. The lower authorities were not Justified in treating three transactions of different shares as one transaction. The sale of shares of M/s. General Fibre Dealers Ltd. and M/s. Bhagatpur Tea Co. are required to be consideredseparately. It is not in dispute that these companies had not declared any dividend for the past several years and had huge accumulated losses. The shares of these companies were not quoted in the market but had nil value by the break-up method on the dale of sale. It is also not disputed that Sri Kanoria was a creditor of the assessee company and on the loan advanced by him, the assessee company paying interest @ Rs. 18 p.a. when it was receiving no income from the share holdings. The assessee's case that sale of shares was effected lo reduce liability to pay interest is borne out from the record. We are also unable to agree withe the CIT(A) that the assessee company as 'debtor' could dictate and get any price for shares from Sri Kanoria. There is nothing on record to refute assesee's claim that there was no buyer of above shares except Sri Kanoria. As stated by the lower authorities, the price and position of shares change from day-to-day and. therefore, the CIT(A) was not correct in rejecting the transaction in question on account of puchase of shares of M/s. General Fibre Dealers Ltd. from Smt. Urmila Devi Kothari @ Rs. 30 per share, parttcualarly when the sale rates have not been challenged. The above independent transaction took place almost about a year after the sale in question. Share transaction was definitely an act of business prudence. The companies did not perform well and, therefore, loss in the shares occured due to sell in price and this fact has not been disputed. The CIT (A)'s views that sales should not have been affected by the assessee company in declining market, in one lot to one person on single day on facts are unjustified. Every businessman is entitled to arrange his affair in the manner he likes. Sri Kanoria paid the share price through cheque and the cheque was duly honoured and therefore low balance in bank account was not material. It has also not been shown on record that spot delivery of shares in question was hit by provisions of Security Contract (Regulation) Act. On the other hand, the transactions have been accepted in the case of the purchaser Sri Kanoria. Thus the transactions of sale of shares of two companies, in our view, had been proved and prima facie looked to be an act of business prudency, as far as the assessee company is concerned.

9. The sale of shares of M/s. Jokai India Ltd. stands on a different footing as these shares were quoted and were re-purchased after 66 days. The Assessing Officer therefore, viewed the transaction with the great suspicion, requiring deeper probe. But here again the assessee's claim that on the date of sale of the price of shares had come down to Rs. 20.00 per share had not been disputed. Thus loss would have accured even if the shares were also sold to an outsider and not to Sri Kanoria. Likewise repurchase price @ Rs. 17.50 per share has not been challenged. Without challenging sale and purchase rate, no case of diversion of income or avoidance of tax could be established. The question why same shares were purchased after 66 days of their sale may not be relevant to a person carrying on business of share dealing. He may not be able to lead demostrative evidence lo show the transaction to be an act of prudency after few years although selling and paying of same script in short interval, is not uncommon in share dealing business. From Sri Kanoria's account it is evident that in the sale purchase transaction ihe assessee company reduced its loan liability (c) Rs. 3 per share and ihus had gained, to the above extent. If purchase and then sale and the resultant loss was to be questioned it was to be done in the case of the Sri Kanoria. Therefore, as stated earlier, the transactions have been duly accepted. Thus on totality of circumstances we are unable to hold the transactions asin genuine. The revenue has failed to establish its case and rejected share loss on surmises and conjectures.

For the above reasons we allow loss in share dealings to the assessee as claimed. Accordingly, we set aside orders of lower authorities on this point and direct the Assessing Officer to allow above loss to the assessee.

10. Against the said order to Tribunal the instant reference has been directed.

11. The questions raised by the Revenue and referred by the Tribunal to this court seek to challenge the aforesaid order of Tribunal mainly, on the ground that the same is passed on no evidence or partly relevant or partly irrelevant evidence or is otherwise arbitrary and perverse. It has been pointed out on behalf of the Revenue that the loss claimed by the appellant at Rs. 338868 cannot be allowed for the following reasons:

(a) Sale of the un-quoted shares of General Fibre Dealers Ltd. and Bhagalpur Tea Co. Ltd. at a substantial loss was mainly intended to benenfit its Chairman. Sri Kanoria, to acquire control over the two companies. Accordingly, even assuming for arguments sake that the relevant loss was a business loss, this loss should be disallowed as being on capital account.

(b) The ITO questioned the property of the appellant in purchasing 2,400 shares of General Fibre Dealers Ltd. at Rs. 30 per share on 24.6.82 from a shareholder and relative of the Director, namely, Smt. Urmila Kanoria, when in fact the break up of the value of the share was nil.

(c) Thus there is absolutely no aspect of commercial prudency involved in selling the un-quoted shares to Sri Kanoria at a loss. The impugned sale effected solely with the objecct of benefitting the Chairman Sri Kanoria to gain control over the other two companies. Accordingly the item of loss of Rs. 67,458 and Rs. 1.23,482 cannot be allowed as genuine business loss.

(d) Regarding the sale of shares of Jokai India Ltd. here also there is something fishy about the sale thereto to Chairman Sri Kanoria. The main purpose of the sale of shares at Rs.20.50 per share on 10.7.81 to Sri Kanoria and the subsequent re-purchase of the same from him on 14.9.81 at Rs. 17.50 per share appears to be to enable Sri Kanoria to claim short term loss under the head 'capital gain' in respect of the purchase and sale of shares by him respectively on 10.7.81 and 14.9.81. In this process the appellant also had tried to claim the benefit of the loss of Rs. 1,41,561 for the assessment year 1982-83. This petitioner's arrangement has the character of a well-planned scheme of tax avoidance.

(e) The fact that the cheques were issued simulteously on the same date viz., on 10.7.81 and 14.9.81 by the assessee and Mr. Kanoria in favour of each other does not represent a mere stray coincidence. There was in fact no actual movement of funds from the assessee or Sri Kanoria and cheques were issued by each of them on the same date had got cancelled against each other. The ultimate purpose ofthe assessee and Sri Kanoria is to claim loss in their income-tax assessment.

It has further been submitted on behalf of the Revenue that the Tribunal did not consider all the grounds of objection mentioned by I.T.O. or by the C.I.T. (A) nor has dealt with the same. The Tribunal mainly based its finding on the ground that the consideration of Rs. 5,56, 055 was received through cheque and was duly credited in the Bank Account of the assessee. The Tribunal did not appreciate properly the fact that the transaction was between the comany and its Chairman and there was no substantial credit of the parties in the Bank, at the time when the cheque were issued by the assessee as well as by its Chairman all upon the same Bank viz., United Commercial Bank. It has also been submitted that the all transactions through cheques are not sacrosanct nor do they by themselves make the transaction genuine.

12. It has also been argued on behalf of the Revenue that even assuming that some of the transactions were accepted in case of assessment of Kanoria, it is not conclusive to hold that the transaction should be accepted as genuine, so far as the company is concerned, in view of the facts and circumstances of the case.

13. It has been pointed out on behalf of the Revenue that the Tribunal failed toconsider several facts as fully mentioned by the i.T.O and C.l.T. (A) in their respective orders and the said finding of the Tribunal is perverse of cannot be supported in law.

14. It has been argued on behalf of the Revenue that the Tribunal failed to consider the following relevant materials referred to in the order of Assessing Officer and CIT (A):

(a) Prima facie the transaction being between the assessee company and its Chairman the onus lies heavily on the assessee to prove that the transaction is genuine. Assessee has failed to discharge the said onus. In fact the cheques were issued simultaneously by parties in favour of each other for purchase and re-purchase on the same day, i.e. on 10.7.81 and 14.7.81 respectively.

(b) The Tribunal failed to deal with the facts that at the time of issuing cheques for Rs. 5,56,000 on 10.7.81 the assessee company had credit balance in the Bank Rs. 999.37 only and at the time of issue of cheques for Rs. 5.56.045 by Sri Kanoria he had a credit balance of Rs. 434.53 only in the same Bank. So there was no actual movement of funds and the tranaction was sham. The Tribunal did not consider this important aspect of the matter.

(c) The fact of sale of shares by the company to its Chairman and the re-purchase thereof within a very short period raises a serious doubt about the genuineness of transaction, which were not been satisfactorily explained by the assessee and not dealt with by the Tribunal.

(d) Regarding the sales of shares of the three companies, particularly, M/s. Jokai (India) Ltd. the assessee produced no evidence that there was no other buyer of the shares except Mr. Kanoria, its Chairman, although those shares were quoted in the Stock Exchange.

(e) It has been submitted that the assessee has to prove the object of commercial prudence/expediency in the sale/purchase of the shares. which the assessee company failed to prove, by producing cogent evidence. The CIT(A) found that there was no commercial prudence in setting away substantial holdings of 21750 shares of Jokai (India) Ltd. on the same day to one person. The finding of i.T.O. that the purchase of same shares by the company after 66 days of sale may not be relevant to a person carrying on business of shares dealings is a vague and not a correct finding.

(f) It has been contended that the Tribunal has not dealt with the objection of I.T.O that sale through broker of listed shares are essential under Security Contract (Regulation) Act on 1986. and in this case, sale of shares of Jokai (India) Ltd. was not done through any broker. There is no finding of the Tribunal on this contention except recording rival submissions.

(g) The Tribunal did not appreciate that by these fictitious transaction, the assessee company and Kanoria tried to claim toss in their respective assessment for tax avoidance. Assessee company wanted to help its Chairman. Mr.Kanoria. to gain control over the other two companies and to claim short term loss under the head 'Capital Gain' in respect of shares of Jokai (India) Ltd.

15. It has been argued on behalf of the Revenue that this is a case of lax avoidance by resorting to fictitious transactions between the assessee company and its Chairman, Mr. Kanoria and the principle laid down by the Supreme Court in McDwell's case reported in : [1985]154ITR148(SC) applies to the facts of this case.

16. It has further been submitted on bnhalf of Revenue that it is the duly of the court in the facts and circumstances to lift and/or pierce the corporate veil of the assessee company to find out truth as to how by manipulation of transactions of shares of the assessee company evaded tax.

17. It has also been argued on behalf of Revenue that in view of fiduciary relationship between the assessee company and its Director Mr. Kanoria. the burden of proving the genuineness of the transaction is on the assessee. It has accordingly been submitted that the question should be answered in favour of ihe Revenue in the affirmative so far as the question Nos. 1 and 2 are concerned and question No. 3 in the negative.

18. We have considered the respective submission of the learnedadvocates for the parties.

19. Judgment and decision in the case of McDwell & Co. Ltd. v. Commercial Tax Officer reported in : [1985]154ITR148(SC) may be taken note of. In the aforesaid decision McDwell & Co. Ltd., the appellant company, a licensed manufacturer of Indian liquor at Hyderabad, is. In appeal by special leave before the Supreme Court questioned the dismissal of its writ petition by the High Court.

20. . v. Commercial Tax Officer : [1977]1SCR914 . examined provisions of the Excise Act and the Rules made thereunder as also the provisions of the Sales Tax Aet. The Supreme Court took ihe view: 'We hold that intending purchasers of the Indian liquor who seek to obtain distillery passes are also legally responsible for payment of ihe excise duty which is collected from them by the authorities of the excise department.'

21. The Supreme Court then produced to determine whether excise duty paid directly to the excise authorities or deposited directly in ihe State Exchequer in respect of Indian liquor by the buyers before removing the same from the distillery could be said to form part of the taxable turnover of the appellant distillery. Precedents were referred to and the court came to the conclusion that excise duty did not go into the common till of the appellant and did not become a part of the circulating capital.. Therefore, the sales lax auihorilies were not competent to include in the turnover of the appellant, the excise duty which was not charged by it, but was paid directly to the excise authorities by the buyers of the liquor. The appellant, therefore, succeeded before this court and the notices issued by the sales tax authorities were quashed.

22. The Supreme Court after considering the several earlier decisions held inter alia as follows:--

'On an examination of the provisions of the Excise Act. the Rules framed thereunder and the pronouncement referred to above, we are of the view that the conclusion of this court at page 921 of the Reports that intending purchasers of the Indian liquors who seeks to obtain distillery passes are also legally responsible for payment of the excise duly is too broadly stated. The 'duly' was primarily a burden which the manufacturer had to bear and. even if the purchasers paid the same under the Distillery Rules, the provisions were merely enabling and did not give rise to any legal responsibility or obligation for meeting the burden, we do not propose however to examine this aspect any further for the change in rule 76 of the Distillery Rules has clearly affirmed the position that liability forpayment of excise duty is of the manufacturer. Provisions of the rules 80, 81, 82 and 83 and 84 do not militate against the conclusion that the payment of excise duty is a liability exclusively of the manufacturer. In these rules, detailed provisions have been made regarding obtaining of distillery pass, correct calculation and full payment of excise duty, the manner of depositing such duty and ultimately issue of the spirit under the pass from the distillery. These rules, therefore, do not detract from the position that payment of excise duty is the primary and exclusive obligation of the manufacturer and if payment be made under a contract or arrangement by any other person, it would amount to be meeting of the obligation of the manufacturer and nothing more.

The Supreme Court further held as follows:

'Turnover is defined in s. 2(s) of the Sales Tax Act to mean the total amount set out in the bill of sale (or if there is no bill of sale, the total amount charged) as the consideration for the sale or purchase of goods (whether such consideration be cash, deferred payment or any other thing or value) including any sums charged by the dealer for anything done in respect of goods sold at the time of or before the delivery of the goods and any other sums charged by the dealer, whatever be the description, name or object thereof.'

'The definition clearly indicates that the total amount charged as the consideration for the sale is to be taken into account for determining the turnover. Where a bill of sale is issued (and obviously the bill has to state the total amount charged as considertion) the total amount set out therein is to be taken into account. In every transaction of sale, there is bound to be a seller at one and a buyer at ther other, and transfer of title in the goods takes place for a consideration.'

23. Considering the relevant provisions of the statute the Supreme Court, as aforesaid, dismissed the appeal of the writ petitioner.

24. The Supreme Court in this connection recalled the observations of Viscount Simon in Latilla v. IRC reported in (1943) 25 TC 107 :

'Of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however, elaborate and artificial such methods may be, those who adopt them are 'entitled' to do so. There is of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is. of course, to increase pro tanto the load of tax on the shoulders of the great body of good citizens who do not desire, or do not know how, to adopt these manoeuveres. Another consequence is that the Legislature had made amendments to our income-tax Code which aim at nullyfying the effectiveness of such schemes.'

25. The Supreme Court further observed that tax planning may be legitimate provided it is within the framework of law. Colourable devices 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 obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

26. The judgment and decison in the case of C.I.T v. S.O. Jain reported in : [1973]87ITR370(SC) may be taken note of. The facts involved in the aforesaid case are that the assessee. who held certain shares in Rohtas Industries Ltd. and S.K.G. Sugars Ltd.. sold them in July 1952, to two companies D.J.C. Ltd. and M.C. Ltd. These two companies sold those shares to a Rana of Nepal in two lots each on May 30. 1953 and August 28, 1953. One Wood. General Manager of the Allahabad Bank, was said to have delivered the shares to the Rana alter collecting the sale price of Rs. 10,80,000 in cash on those two days and given the amount to one Durga Prasad on loan against two promissory notes and receipts. There was no official record of the transaction, no prior correspondence, no broker and no receipt for the cash payment of Rs. 10,80,000. Neither D.J.C. Ltd. nor M.C. Ltd. nor the Rana nor Durga Prasad had any account with the Allahabad Bank in May or August 1953, the shares were not bank's custody, the sale transactions were not through the bank, and no reason was given for the unusual procedure of routing the money through Wood. The letters of Wood produced by the assessee. the confirming the transactions, though written on official note-paper of the bank, gave no reference number of the bank and there were no office copies of the letters with the bank. The Rana never attended any general meeting of the shareholders nor appointed any proxy in his behalf, and dtd not take steps till April. 1955 to have the shares registered in his name or to collect the dividends amounting to Rs. 2 lakhs. It was only in April 1955 when the price of those shares went up in the market and they had to be sold, that the Rana opened an account with the Allhabad Bank and in that account were credited sums amounting to Rs. 8 lakhs got by the sale of those shares. Practically (he entire sums of Rs. 38 lakhs was encashed by nine bearer cheques for large amounts by Das, a peon of Ashoka Marketting Co., a company controlled by the assessee, and Das was said to have handed over the cash to the Rana at the premises of Sahu Jain and Co.. a company with which the assessee was closely associated .The Rana had been introduced to Dujari (accountant of Ashoka Marketting Co.) by the assessee and Dujari had asked lo render the service to the Rana. The share certificate were found to be in the possession of Ashoke Marketting Co. after their sale to the Rana. Though several opportunities were given, the Rana did not appear before the authorities to explain the circumstances under which he purchased those shares, but only his letter was produced. Wood was not produced and there was nothing to show that the letters were written by him. The income-tax Officer held that the Rana was merely a name-lender for the assessee, and that the sum of Rs. 10,80,000 belonged to the assessee, and the source of that amount not having been explained by the assessee, assessed the sum of the assessee's income from undisclosed sources. The Appellate Assistant Commissioner upheld the order of the income-tax Officer, but on further appeal the Tribunal held that the purchase by the Rana was not a benami transaction and directed the deletion of the sum of Rs. 10,80,000 from the total income. In arriving at its conclusion, the Tribunal, inter alia, treatedthe transactions of sale by the vendor companies to the Rana as having been established by the letters of Wood, and as not having been challenged by the department, and speculated as to the manner in which the Rana came to make a definite offer for the purchase of the shares and actually purchased the shares across the counter of the bank.

27. On the Tribunal's fidings, the following questions were referred to theHigh Court:

(1) Whether, on the facts and in the circumstnces of the case, the Tribunal was justified in law in declining to consider the documents which were already on record and which the department wanted to adduce as evidence?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the purchase of the shares by the Rana was not a benami transaction was legally valid?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 10,80,000 from the total income of the assessee by holding that the Rana was not the benamidar of the assessee?

28. The Supreme Court observed that what has to be considered in this case is weather the sale of shares by the vendor comanies to Rana on the date when it is alleged to have taken place was a sham and bogus one: and if it was, and that Rana was merely a name-lender, whether the loan alleged to have been advanced by the vendor companies to Durga Prasad of Tumsur was in fact advanced by the assessee. Both are interlinked and unless the connection of the assessee with the loan is established, the assessment in respect of that amount as income from undisclosed source cannot be sustained.

The Supreme Court further observed inter alia at page 380 of the said Report as follows:

'The two primary questions that arise for decision in these appeals are:

1. Whether the findings of fact reached by the Tribunal are liable to be interferred with on any of the grounds recognised by law? and

2. Whether the department has been able to establish that the shares alleged to have been purchased by the Rana were actually purchased by the assessee and that the Rana were actually 'purchased by the assessee and that the Rana was a merely benamdar for the assessee?

The findings reached by the Tribunal, are. prima facie, findings of fact. Before rejecting those findings, we must be satisfied that there are grounds in this case recognised by law which empower us to interfere with those findings. If the department succeed in crossing this hurdle, it has to further establish not merely that the Rana was not the real purchaser of those shares but that he was the benamdar of the assessee. The question which naturally arises on the very threshold is whether it is permissible for this court to go behind the findings of fact as found by the Tribunal upon which it had come to the conclusion that the Rana was the real purchaser.

29. The Supreme Court took into consideration its earlier decision in Karnani Properties Ltd. v. C.I.T. reported in : [1971]82ITR547(SC) wherein the Supreme Court had indicated the limitations imposed on the High Court and the Supreme Court from interfering with the findings of fact arrived at by the Tribunal. The assesses in that case owned a number of residential flats and was providing various services and amenities. It claimed that its income should be assessed under the head 'business'. The income-tax Officer split the recipts into two parts, one part being treated as rent and the other as income from other sources' taxable under section 12 of the Act. The Appellate Tribunal, however, held that the second part was assessable as income from the business Under section 10. Whether the department nor the assessee contended that part was assessable under section 9. The High Court thought that some of facts found by the Tribunal were not correct and on a reappraisal of the material on record came to the conclusion that the income was assessable under section 9 of the Act. This the High Court could not do as it had no jurisdiction to go behind or question the statements of fact made by the Tribunal unless a reference challenging the findings of fact arrived at by the Tribunal were made to it. It appears that in that case the question whether the findings of fact urged by the Tribunal were vitiated for any reason was not before the High Court. In those circumstances the Supreme Court pointed out:

The jurisdiction of the High Court in dealing with a reference unde section 66 is a very limited one. It must take the facts as staled in the statement of the case unless the question whether the findings of the Tribunal are vitiated for one or the other of the reasons recognised by law is before it.'

30. After considering the case the Supreme Court held that there can be no doubt that unless the Tribunal has been asked to refer a question impugning the validity of ihe findings suslainable on any principle of law, the facts stated in the statement of the case would form the basis on which the legality or otherwise of the assessment would alone require to be considered by the High Court.

31. In this case before the Supreme Court the specific questions raised on behalf of the Revenue for reference was as follows:-

'Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that a sum of Rs. 10,80,000 paid for the purpose of the shares was not the assessee's own income was a perverse finding having regard to the evidence on the record'?

32. The Supreme Court held that the two questions on which reference has been made impugn the findings and the validity of the Tribunal's conclusion that Rs. 10,80,000 was not an income from undisclosed sources, but was the product of a genuine sale by the vendor-companies. Dealing with the question the Supreme Court further held and observed as follows:--

'In our view, the High Court and this Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutorylanguage as a matter of law. or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly revelant and partlyirrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated.'

33. The next questions that Supreme Court considered in the aforesaid decision was whether the department established that the Rana was a benamdar for the assessee. The Supreme Court held that it is not sufficient if the department establishes that the Rana was the benamdar for somebody. It must go further and establish that Rana was the benamdar of the assessee. There are good reasons to come to a conclusion that the Rana was the banamdar of the assessee.

These are, as have been noted already:

1. The close association of the assessee with the Rana, which is evident from the record. It was the assessee who introduced the Rana to Nandlal who was a close associate of the assessee and it was Nandla) who introduced the Rana to the Allahabad Bank.

34. The court took into consideration several other facts which, according to the Supreme Court, clearly established that Rana was benamdar of the assessee. The Supreme Court accordingly reversed the decision of the High Court and passing the question Nos. 1 and 2 in the negative and in favour of the Revenue.

35. Following the aforesaid decisions it appears that the Tribunal has failed to take into account material facts and the same is based on no evidence for the following reasons:

(i) The Tribunal failed to take note of the fact that the sale of the unquoted shares of General Fibre Dealers Ltd. and Phagatpur Tea Co. Ltd. at a substantial loss was mainly intended to benefit its Chairman Sri Kanoria, to acquire control over the two companies. Accordingly, even assuming for aruguments sake that the relevant loss was a business loss, this loss should be disallowed as being on capital account.

(ii) The propriety of the appellant-assessee in purchasing 2400 shares of General Fibre Dealers Ltd. at Rs. 30 per share on 24.6.82 from a shareholder and a relative of the Director namely Smt. Urmila Kanoria, when the fact break of up of the value of the share was nil was ignored by the Tribunal.

(iii) The Tribunal also failed to take into consideration that there is absolutely no aspect of commercial prudence involved in selling the un-quoted shares to Shri Kanoria at a loss. The Tribunal followed the effect that the said sale was effected solely with the object of benefiting the Chairman Sri Kanoria to gain control over the other two companies. Accordingly there is no scope for considering the said items of loss of Rs. 67,458 and Rs. 1,23.428 as genuine business loss.

(iv) The Tribunal failed to take note of the fact that the main purpose of the sale of shares at Rs. 20.50 per share on 10.7.81 to Sri Kanoria and the subsequent re-purchase of the same from him on 14.9.81at Rs. 17.50 per share appears to be to enable Sri Kanoria to claim short term loss under the head 'capital gain' in respect of the purchase and sale of shares by him respectively on 10.7.81 and 14.9.91. In this process, the appellant also had tried to claim the benefit of the loss of Rs. 1,41,561 for the assessment year 1982-83. This arrangement has the character of a well planned scheme of tax avoidance.

(v) Further consideration should have been with regard to the fact no actual movement of funds took place from the assessee to Kanoria and the cheques were issued by each of them without sufficient funds in their respective bank account which go to show that the transaction was sham and not genuine.

This aspect of the matter are also ignored by the Tribunal.

36. It also appears that the Tribunal did not consider all the points of objection mentioned by I.T.O or the C.I.T. (Appeal) nor has dealt with the same. The Tribunal mainly based its finding on the ground that the consideration of Rs. 5,56.056 was received through cheque and was credited in the Bank Account of the assessee. The Tribunal did not appreciate properly the fact that the transaction was between the company and its Chairman and there was no substantial credit of the parties in the Bank, at the time when the cheques were issued by the assessee as well as by its Chairman all upon the same Bank viz. United Commercial Bank, it has been submitted that all transactions themselves make the transaction genuine.

37. The transaction in the instant case is between the assessee company and its Chairman, the onus lies heavily on the assessee to prove that the transaction is genuine which. In our view, was not discharged by the assessee. In the instant case, cheques were issued simultaneusly by the parties in favour of each other for purchase and re-purchase on the same day without both the parties having sufficient funds in the bank, that itself goes to show that the transaction was not genuine. This aspect however could not be explained by the assessee.

38. Regarding sale of shares of three companies particularly Jokai India Ltd. no evidences was produced on behalf of the assessee that there was no other buyer of the shares except Mr. Kanoria. Its Chairman, although those shares were quoted in the stock exchange.

39. The fact that sale through broker of listed shares is essential under the Security Control (Regulation) Act. 1986, it was not done in the instant case was also ignored by the Tribunal. The assessee company failed to take note of the fact that Sri Kanoria tried to claim loss in their respective assessment for tax avoidance by fictitous transaction.

40. For the reasons, aforesaid, we are of the view that the order of the Tribunal is perverse and as such the question No. 1 is answered in the affirmative and in favour of the Revenue. Question No. 2 is also answered in the affirmative and in favour of the Revenue. Question No. 3 is answered in the negative and against the assessee company and in favour of the Revenue.

B.M. Mitra, J.

I agree.

41. Answered in favour of Revenue