1999 (8) TMI 108 - AT - Income Tax

Tribunal decision: Profit deletion upheld, interest addition confirmed, penalty dismissed

The Tribunal partly allowed the appeal, directing the deletion of the addition of Rs. 19,00,500 as alleged profit from shares allotted in a public issue. ... Effect of illegal contract on transfer of property - benami transaction - provisions of the Securities Contracts (Regulation) Act - colourable device for tax avoidance - substitution of sale price by market value - accrual basis of accounting - taxation of the right personEffect of illegal contract on transfer of property - benami transaction - provisions of the Securities Contracts (Regulation) Act - colourable device for tax avoidance - substitution of sale price by market value - taxation of the right person - Deletion of addition of Rs. 19,00,500 being profit arising out of shares allotted to the assessee and subsequently sold by financing companies - HELD THAT: - The agreements between the assessee and the financing companies (VIL/VAL) designated the assessee as a fund manager and provided that investments and accruing benefits belonged to VIL/VAL, who supplied the funds. The Tribunal held that the Benami Transactions (Prohibition) Act did not apply because the funds were provided by VIL/VAL and no transfer of existing property by VIL/VAL occurred on allotment; further, the Securities Contracts (Regulation) Act did not apply as the investee companies were not listed at the relevant time. Even if the transactions were illegal or opposed to public policy, that would not permit the Revenue to disregard completed transfers and treat profits realised by VIL/VAL as the assessee's income. The law does not permit substitution of market value for the sale price unless it is shown that more was in fact received than the recorded consideration. Reliance on the principle that courts will not undo transfers of property completed under an antecedent illegal agreement was applied (B.O.I. Finance Ltd. reasoning): once title passed to VIL/VAL on transfer at cost, the profits on subsequent sales belong to them. The Departmental finding that the arrangements were colourable for tax avoidance and therefore taxable in the assessee's hands was rejected; on the facts and agreements the profits of Rs. 19,00,500 were held to belong to VIL/VAL and the addition is deleted. [Paras 8]Addition of Rs. 19,00,500 deleted; issue decided in favour of the assessee.Accrual basis of accounting - Upholding addition of Rs. 2,92,274 as accrued interest on term deposits - HELD THAT: - The assessee maintained accounts on the mercantile system and therefore interest on term deposits accrued - even if not received by year end - must be accounted for on accrual basis. The assessee's explanation that interest would not be payable where fixed deposits were broken prematurely was not borne out by facts, and no FDRs encashed before maturity were shown. The AO computed the accrued interest (working relying on figures provided) and the Tribunal found the addition appropriate and confirmed it. [Paras 9]Addition of Rs. 2,92,274 upheld as income on accrual basis.Taxation of the right person - Charges of interest under ss. 234A, 234B and 234C dismissed as not pressed / not arising - HELD THAT: - No specific arguments were advanced before the Tribunal on the grounds challenging levy of interest under the specified provisions, and the CIT(A) had not given findings on these points. Consequently these grounds were treated as not pressed and dismissed. [Paras 10]Grounds relating to interest under ss. 234A, 234B and 234C dismissed as not pressed or not arising.Prematurity of penalty proceedings - Ground challenging initiation of penalty proceedings under s. 271(1)(c) dismissed as premature / not arising - HELD THAT: - The Tribunal observed that the challenge to initiation of penalty proceedings was premature and did not arise out of the order of the CIT(A); no adjudication on penalty merits was called for at this stage, and the ground was therefore dismissed. [Paras 11]Ground challenging initiation of penalty proceedings under s. 271(1)(c) dismissed.Final Conclusion: The appeal is partly allowed: the addition of Rs. 19,00,500 is deleted in favour of the assessee, the addition of Rs. 2,92,274 as accrued interest is upheld, and grounds relating to interest under ss. 234A/234B/234C and initiation of penalty under s. 271(1)(c) are dismissed as not pressed or premature. Issues Involved:1. Addition of Rs. 19,00,500 as alleged profit from shares allotted in a public issue.2. Addition of Rs. 2,92,274 as interest on term deposits.3. Charging of interest under sections 234A, 234B, and 234C.4. Initiation of penalty proceedings under section 271(1)(c).Issue-wise Detailed Analysis:1. Addition of Rs. 19,00,500 as Alleged Profit from Shares Allotted in a Public Issue:The assessee challenged the addition of Rs. 19,00,500, which was the profit made by Videocon International Ltd. (VIL) and Videocon Appliances Ltd. (VAL) from shares allotted to the assessee in public issues. The Assessing Officer (AO) contended that the profit belonged to the assessee and not VIL/VAL, citing violations of the Benami Transactions (Prohibition) Act, Securities Contracts (Regulation) Act, and Companies Act. The AO argued that the transactions were colorable devices to avoid tax, invoking the Supreme Court decision in McDowell & Co. Ltd. vs. CTO.The assessee argued that the funds for acquiring the shares were provided by VIL/VAL, and the shares were transferred to them at cost, making the transactions legitimate. The assessee contended that the Benami Transactions (Prohibition) Act did not apply as there was no transfer of existing property. They also argued that the Securities Contracts (Regulation) Act did not apply as the shares were not listed at the time of the agreements. Additionally, the assessee claimed that section 187C of the Companies Act was not violated as the shares were transferred immediately, leaving no occasion to file a declaration.The Tribunal found that the agreements between the assessee and VIL/VAL were legitimate and that the profits belonged to VIL/VAL. It held that the provisions of the Benami Transactions (Prohibition) Act and Securities Contracts (Regulation) Act were not applicable. The Tribunal concluded that the transactions were not colorable devices for tax avoidance and directed the deletion of the addition of Rs. 19,00,500.2. Addition of Rs. 2,92,274 as Interest on Term Deposits:The AO added Rs. 2,92,274 as accrued interest on term deposits, arguing that the assessee, following the mercantile system of accounting, should have accounted for the interest on an accrual basis. The assessee contended that interest was not accounted for as the term deposits could be broken before maturity, resulting in no interest.The Tribunal upheld the AO's decision, stating that income must be accounted for on an accrual basis, and the computation of Rs. 2,92,274 was based on the assessee's own working. Therefore, the addition was justified.3. Charging of Interest under Sections 234A, 234B, and 234C:The assessee did not advance specific arguments regarding the charging of interest under sections 234A, 234B, and 234C. The Tribunal dismissed these grounds as not pressed and noted that they did not arise from the CIT(A)'s order.4. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee's objection to the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature and not arising from the CIT(A)'s order.Conclusion:The appeal was partly allowed. The Tribunal directed the deletion of the addition of Rs. 19,00,500 but upheld the addition of Rs. 2,92,274 as interest on term deposits. The objections regarding interest under sections 234A, 234B, and 234C, and the initiation of penalty proceedings under section 271(1)(c) were dismissed.