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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: SHEKHAWATI RAJPUTANA TRADING CO. JUDGMENT
Court Name: Calcutta High Court Judge(s): Shyamal Kumar Sen, Bijitendra Mohan Mitra Title:COMMISSIONER OF INCOME-TAX vs SHEKHAWATI RAJPUTANA TRADING CO.
JUDGMENT
Reported As: 2000 PTD 2833 Result: Reference answered Judgment JUDGMENT SHYAMAL KUMAR SEN, J.;--In the instant reference under section 256(2) of the Income Tax Act, 1961, the three questions raised at the instance of the Revenue 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 of prudence, 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 partly irrelevant evidence and is otherwise perverse and arbitrary? (3) 'Whether, considering the totality of the facts and in the circumstances of 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 purchaseShares No. of sharesCost Date of saleSale price Loss Rs. P. Rs. Rs. P.
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10-3-1974 The General Fibre Dealers Ltd.5,760 1,53,867.50 10-7-1981 86,400 67,467.50 18-8-1976 17-9-1980Bhagatpur Tea Co. Ltd.1,448 1,45,562.50 -do- 21,720 1,23,842,50 23-6-1986 Jokai India Ltd. 21,850 5,95,486.50 4,47,925 1,47,561.50 17-6-1980 -do- 5,56,045 3,88,861.50 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: (i) Within 66 days, i.e., on September 14, 1981, the assessee-company repurchased all the shares - of Jokai India Ltd. For a sum of Rs.3,82,375. (ii) On scrutiny of the bank statement of both assessee-company and Shri R. L. Kanoria, it transpires that on July 10,1981, 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 the bank account for disposal. Both the assessee-company and Sri R.L. Kanoria had their account with United Commercial Bank at No. 2, India Exchange Place, Calcutta, and neither actual transfer of money took place nor the transferee had any source to purchase the share. (iv) While repurchasing the shares of Jokai India Ltd. Again Shri R.L. Kanoria iW7ued a cheque for Rs.3,82,000 to the assessee-company and the assessee-company issued a cheque for Rs.3,82,275 for repurchase. Here also the parties had only petty balance in their bank accounts and had no money for such transaction. From the above facts the Assessing Officer held that no real business transaction between the assessee-company and Sri 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 dealings of listed shares within 10 kms. Of the place where stock exchange being situated were permissible and were void tinder the Securities Contracts (Regulation) Act, 1956. The loans taken by the company from Sri R.L. Kanoria and the payments made by the assessee are as follows:-- The assessee took following loans from Sri Kanoria-- Rs. 31-3-1981 - do -5,000 4-6-1981 - do -2,00,000 16-6-1981- do -1,000 23-6-1981 - do -1,00,000 20-7-1981 - do -5,000 31-7-1981 - do -1,000 14-9-1981 - do -3,92,000 29-9-1981 - do -1,000 Against the above loan receipt the assessee made the following payments immediately after the receipt. Rs. 13-4-1981 By clearing 5,525.53 8-6-1981 -do- 2,00,000.00
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23-6- 1981-do- 1,00,165.00 21-7-1981 -do- 1,081.00 14-9-1981 By transfer 3,82,375.00 30-9-1981 -do- 1,000.00 The Commissioner of Income-tax (Appeals) after considering the facts of this case confirmed the order of the Income-tax Officer, inter alia, for the following reasons: "On the facts of the case the share transactions with the Chairman, Shri R.L. Kanoria, do not appear. To be genuine transactions. 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 of tax avoidance." The Commissioner of Income-tax (Appeals) after considering the assessee's submission and the whole facts of the case in respect of shares 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 commercial prudence 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 tax planning with the ultimate purpose of enabling both the assessee and Sri R.L. Kanoria to claim losses in their respective income-tax assessments. In holding so the Commissioner of Income-tax (Appeals) took support from the decision of the Supreme Court in the case of McDowell & Co. Ltd. (1985) 154 ITR 148. Against the Commissioner of Income-tax (Appeals)'s order, the assessee filed appeal before the Tribunal. The Tribunal accepted the submissions put forward by the assessee-company. The Tribunal held as under: "We have carefully considered the 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 share dealings. It is also not in dispute that sale of all shares and repurchase of shares of Jokai India Ltd. Are supported by vouchers. The shares of three companies were sold to R.L. Kanoria for a 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 purchase of shares of Jokai 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 has also not been refuted. Thus, prima facie the transactions have been established. For treating these transactions as non-genuine the lower authorities took into account the fact that transactions were carried with the Chairman of the assessee-company. The Commissioner of Income-tax (Appeals) held that transactions to be colourable device claimed at tax avoidance and, therefore, liable to be ignored in view of the decision of the Supreme Court in the case of McDowell & Co. Ltd. (1985) 154 ITR 148. To examine whether there was any tax avoidance we looked into the 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.93,622 the not income of the assessee-company. Was determined at Rs.9,437. The Commissioner of Income-tax (Appeals) 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 case of tax avoidance is established as for a. The assessee- company is concerned. Turning to the file of Sri R.L.Kanoria, we find that assessment in his case for the assessm ent year, 1982-83 was made on a total income of Rs.71,530 as per order, dated January 28,1985, by the Income-tax Officer, Central Circle XXVILL, Calcuta. In the said assessment the Income-tax officer disallowed deduction of interest of Rs.3,26,646 and share losses of Rs.81,749 and Rs.43,181. The share loss which included share dealings with the assessee was disallowed on the ground that these transactions were carried on with the companies in which Sri Kanoria was interested. It was further observed that the transactions were carried out without any registered
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broker. On appeal, the Commissioner of Income-tax (Appeals) as per order, dated February 10, 1988, upheld the disallowance of interest but directed the Income-tax Officer to re-examine similar contentions as advised before us in respect of share loss. The Assistant Commissioner in compliance with above directions reconsidered the matter and as per order, dated July 3, 1989, allowed loss of share dealings to Sri Kanoria. In the said order not 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. In other words, no tax avoidance has been proved. It is interesting to note that all the share dealing in question have been accepted by the Assistant Commissioner in the assessment. Thus, when purchase and sale have been accepted in the case of Sri Kanoria, there is hardly any reason and justification 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 the case of Sri Kanoria, we must hold that the lower authorities were not justified in holding the transactions in question non-genuine and ignoring the loss claimed in share dealings. The share loss has to be allowed and we direct the lower authorities to allow the loss to the assessee. The lower authorities were not justified in treating the three transactions of different shares as one transaction. The sale of shares of General Fibre Dealers Ltd. And Bhagatpur Tea Co. Are required to be considered separately. 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 date 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 was paying interest at Rs.18 per annum when it was receiving no income from the share holding. The assessee's case that sale of shares was effected to reduce liability to pay interest is borne out from the record. We are also unable to agree with the Commissioner of Income-tax (Appeals) that the assessee-company as "debtor" could dictate and get any price for shares from Sri Kanoria. There is nothing on record to refute the assessee's claim that there was no buyer of the above shares expect Sri Kanoria. As stated by the lower authorities, the price and position of the shares change from day-to-day, and, therefore, the Commissioner of Income --tax (Appeals) was not correct in rejecting the transaction in question on account of purchase of shares of General Fiber Dealers Ltd. From Smt. Urmila Devi Kothari at Rs.30 per share, particularly when sale rates have not been challenged. The above independent transaction took place almost above 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. Occurred due to fall in prices and this fact has not been disputed. The Commissioner of Income-tax (Appeals)'s view that sales should not have been effected by the assessee-company in declining market, in one lot to one person on a single day on facts are unjustified. Every businessm an is entitled to arrange his affaires in the manner he likes. Sri Kanoria paid the share price through cheque and the cheque was duly honoured and, therefore, low balance in the bank account was not material. It has also not been shown on record that spot delivery of shares in question was hit by the provisions of the Securities Contracts (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 prudence, as far as the assessse-company is concerned. The sale of shares of Jokai India Ltd. Stands on different footing as these shares were quoted and were repurchased after. 66 days. The Assessing Officer, therefore, viewed the transaction with great suspicion, requiring deeper probe. But here again the assessee's claim that on the date of sale the price of shares had come down to Rs.20 per share had not been disputed. Thus, loss would have occurred even if the shares were also sold to an outsider and not to Sri Kanoria. Likewise
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repurchase price at 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 the same shares were purchased after 66 days of their sale may not be relevant to a person carrying on the business of share dealing. He may not be able to lead demonstrative evidence to show the transaction to be an act of prudence after a few years although selling and buying of same scrip in short interval, is not uncommon in share dealing business. From Sri Kanoria's account it is evident that in the sale purchase transaction the assessee-company reduced its loan liability at Rs.3 per share and thus 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 Sri Kanoria. Therefore, as stated earlier, the transactions have been duly accepted. Thus, on totality of circumstances we are unable to hold the transaction as non-genuine. The Revenue has failed to establish its case and rejected share loss on surmise and conjectures: For the above reasons, we allow loss in share dealing to the assessee as claimed. Accordingly, we set aside the orders of the lower authorities on this point and direct the Assessing Officer to allow. The above loss to the assessee." Against the said order of the Tribunal, the instant reference has been directed. The questions raised by the Revenue and referred by, the Tribunal to this Court seek to challenge the aforesaid order of the 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.3,38,868 cannot be allowed for the following reasons: (a) Sale of the unquoted shares of General Fibre Dealers Ltd. And Bhagatpur 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 argument's sake that the relevant loss was a business loss, this loss should be disallowed as being on capital account. (b) The Income-tax Officer questioned the propriety of the appellant in purchasing 2,400 shares of General Fibre Dealers Ltd. At Rs.30 per share on June 24,1982, from a shareholder and a relative of the director, namely, Smt. Urmila Kanbria, when in fact the break up of the value of the share was nil. (c) Thus, there is absolutely no aspect of commercial prudence involved in selling the unquoted shares to Sri Kanoria at a loss. The impugned sale was effected solely with the object of benefiting 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 thereof to the Chairman, Sri Kanoria. The main purpose of the sale of shares at Rs.20.50 per share on July 10, 1981, to Sri Kanoria and the subsequent repurchase of the same from him on September,14, 1981, at Rs.17.50 per share appears to be to enable Sri Kanoria to claim shoat-term loss under the head "Capital gain" in respect of the purchase and sale of shares by him respectively on July 10, 1981, and September 14, 1981. 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 simultaneously on the same dates, viz, on. July 10, 1981, and September 14, 1981, 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 of Sri Kanoria and cheques were issued by each of them on. The same date had got cancelled against each other. The ultimate purpose of the assessee and Sri Kanoria is to claim loss in their income- tax assessm ent.
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It has further been submitted on behalf of the Revenue that the Tribunal did not consider all the grounds of objection mentioned by the Income-tax Officer or by the Commissioner of Income- tax(Appeals) nor has dealt with the same. The Tribunal mainly based its findings 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 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 also been submitted that all transactions through cheques are not sacrosanct nor do they themselves make the transaction genuine. 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 transactions should be accepted as genuine, so far as the company is concerned, in view of the facts and circumstances of the case. It has also been pointed out on behalf of the Revenue that the Tribunal failed to consider several facts as fully mentioned by the Income-tax Officer and the,, Commissioner of Income-tax (appeals) in their respective orders and the said finding of the Tribunal is perverse and cannot be supported in I law. 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 the Assessing Officer and the Commissioner of Income-tax (Appeals): (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. The assessee has failed to discharge the said onus. In fact the cheques were issued simultaneously by the parties in favour of each other for -purchase and re-purchase on the same day, i.e, on July 10. 1981 and September 14, 1981, respectively. (b) The Tribunal failed to deal with the facts that at the time of issuing cheques for Rs.5;56,000 on July 10, 1981, the assessee-company had a 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 transaction 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 have 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, Jokai India Ltd., the assessee produced no evidence that there was no other buyer of the shares expect 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 Commissioner of Income-tax (Appeals) found that there was no commercial prudence in selling away substantial holding of 21,850 shares of Jokai India Ltd., on the same day to one person. The finding of the Income-tax Officer that the purchase of the same shares by the company after 66 days of sale may not be relevant to a person carrying on business of share dealings is a vague and not a correct finding. (f) It has also been contended that the Tribunal has not dealt with the objection of the Income-tax Officer that sale through broker of listed shares are essential under the Securities Contracts (Regulation) Act of 1956, and in this case, sale of shares of Jokai India Ltd., was not done through
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arty broker. There is no finding of the Tribunal on this 'contention expect recording rival submissions. (g) The Tribunal did not appreciate that by fictitious transactions, the assessee-company and Kanoria tried to claim the 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 the shares of Jokai India Ltd. It has been argued on behalf of the Revenue that this is a case of tax 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 McDowell's case (1985) 154 ITR 148, applies to the facts of this case. It has further been submitted on behalf of the Revenue that it is the duty of the Court in the facts and circumstances to lift and/or pierce the corporate veil of the assessee-company to find out the truth as to how by manipulation of transactions of shares of the assessee-company evaded tax. It has also been argued on behalf of the Revenue that in view of the 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 the Revenue in the affirmative so far as questions Nos. l and 2 are concerned and question No. 3 in the negative. We have considered the respective submissions of the learned Advocates for the parties. Judgment and decision in the case of McDowell & Co. Ltd. v. C.T.O. (1985) 154 ITR 148 (SC) may be taken note of. In the aforesaid decision in McDowell & Co. Ltd.'s case (1985) 154 ITR 148(SC), the appellant company, a licensed manufacturer of Indian liquor at Hyderabad, in appeal by special leave before the Supreme Court questioned the dismissal of its writ petition by the High Court. Manufacture, sale-wholesale and retail-as also storage and transport of liquor are regulated by the Andhra Pardesh Excise Act, 1968, and the Andhra Pradesh Distillery Rules, the Andhra Pradesh Indian Liquor (Storage in Bond) Rules and the Andhra Pradesh Foreign Liquor and Indian Liquor Rules, all made under the Excise Act. "Excise duty" as defined in section 2(10) of the Excise Act is leviable on the manufacture of liquor and the manufacturer cannot remove the same from the distillery unless the duty imposed under the Excise Act has been paid. Buyers of Indian liquor from the appellant's distillery as alleged by it, obtain distillery passes for release of liquor after making payment of excise duty and present the same at the distillery whereupon the bill of sale or invoice is prepared by the distillery showing the price of liquor, but excluding the excise duty. The appellant's books of account also did not contain any reference to excise duty paid by the purchaser. The appellant paid sales tax payable by it under the Andhra Pradesh General Sales Tax Act, 1957, on the basis of its turnover which excluded excise duty. The company was assessed to sales tax on the basis of its returns, but later, the Commercial Tax Officer was of the view that the company had failed to include the excise duty paid on the liquor sold by it to wholesalers. The taxing authority accordingly called upon the company to show cause why assessments made may not be reopened. The appellant m. -ed the High Court for quashing of such notice and having failed, carried the matter in appeal to the Supreme Court. A Division Bench of the Supreme Court in McDowell & Co. Ltd. v. C.T.O. (1977) 1 SCR 914; (1977) 39 STC 151, 158, examined the provisions of the Excise Act and the Rules made thereunder as also the provisions of the Sales Tax Act. The Supreme Court took the view: (page 162 of 154 ITR) "We hold that intending purchasers of the…
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