TaxTMI 
TaxTMI 
TaxTMI 
2006 (1) TMI 188
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...., those described in the prospectus as promoters, directors, friends, relatives and associates should not be less than 25 per cent of the total issue of equity capital up to Rs. 100 crores and 20 per cent for the issue above Rs. 100 crores. In the case of FCDs, one-third of issue amount should be contributed by promoters, directors, friends, relatives and associates by way of equity before issue is made. In the case of PCDs, one-third of the convertible portion should be brought in as contribution of promoters, directors, friends, relatives and associates b~fore issue is made. Minimum subscription by each of the friends/relatives and associates under quota should not be less than Rs. 1 lakh. (b) This promoters' contribution shall not be diluted for a lock-in-period of 5 years from the date of commencement of the production or date of allotment whichever is later. Promoters must bring in their full subscription to issues in advance before public issue. (c) All firm allotments, preferential allotments to collaborators, shareholders of promoter companies whether corporate or individual shall not be transferable for three years from the date of the commencement of production or date ....
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....re warrant holders who had exercised their option to subscribe for their shares to pay the remaining sum of Rs. 79.20 ps. per share (i.e. the difference between Rs. 88 being face value of share and Rs. 8.80 ps. already paid along with application for allotment of shares and exercising option to purchase shares). The board of directors had called upon the warrant-holders who had exercised option to purchase shares to pay the call money of Rs.79.20 ps. per share vide their board resolution dated 10th October, 1995. 8. It is at this stage that the following promoters of M/s. SRF Ltd. who had exercised their option to purchase shares before payment of call money due on the share entered into an agreement for sale of the following shares to the assessee: No. of shares Mr. Sumant Bharat Ram 65,000 Dr. Vinay Bharat Ram 2,02,300 Mr. Ashish Bharat Ram 1,85,000 Mr. Vivek Bharat Ram 2,57,300 Mrs. Sukanya Bharat Ram 47,700 -------- 7,57,300 -------- There were separate agreements for sale with the aforesaid persons but all were dated 18th January, 1996. The aforesaid persons also executed an irrevocable power of attorney all dated 18th January, 1996 empowering the assessee to a....
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....tus was permitted but the requirement relating to lock-in-period would continue to apply to the extent initially prescribed. The assessee was also a promoter and as such transfer to the assessee was permissible but the requirement of lock-in-period for sale to outsider would however continue to apply. 12. There is no dispute about the fact that the assessee paid the application money of Rs. 8.80 ps. per share paid by the seller of the shares to M/s. SRF Ltd. There is also no dispute that the assessee paid the call money on the shares and the shares were thus fully paid up. In fact for late payment of call money, the assessee also paid interest. 13. The assessee sold all these shares to M/s. DCM Shriram Consolidated Ltd. which is also another promoter of M/s. SRF Ltd. on 1st November, 1996. This transfer was also within the lock-in-period. The agreement for sale of these shares between the assessee and M/s. DCM Shriram Consolidated Ltd. is dated 1st November, 1996. The sale consideration received by the assessee was Rs. 50 per share. The agreement refers to the basis on which the sale price of Rs. 50 per share was fixed, clause 2 of the agreement in this regard reads as follows: ....
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....shares were not through brokers. The Assessing Officer therefore, also concluded that transactions are bogus and only book entries to reduce payment of tax. 16. The assessee had borrowed funds for making payment for purchase of these shares and had paid interest on such borrowings totalling Rs. 1,72,01,022 and claimed the same as deduction against dividend income that it received on these shares. The Assessing Officer disallowed the said claim for the same reasons that were assigned while disallowing short-term capital loss on sale of shares. 17. As already noticed, the agreement between the registered holder of shares and the assessee under which the assessee purchased the shares provided that any declaration of dividend by the company M/s. SRF Ltd. would enure to the benefit of the assessee. As registered shareholders, the seller of the share to the assessee were paid dividend by the company. The same was passed on by them to the assessee as per the agreement. Thus a sum of Rs. 9,03,173 was received by the assessee as dividend. This was offered to tax by the assessee as "other income". The company M/s. SRF Ltd. deducted tax at source on the dividend declared. The tax deduction ....
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....t had a share capital of only Rs. 8 lakhs and had borrowed Rs. 4.62 crores as unsecured loan for purchase of shares of M/s. SRF Ltd. The assessee had paid Rs. 1,72,01,022 on such borrowings. Out of the interest payment as above a sum of Rs. 1,56,58,917 were paid to persons belonging to the group companies from whom borrowings have been made. Thus, the funds for purchase of shares had came from within the group companies. The CIT(A) noticed that the shares were sold by the assessee within a period of 9 1/2 months from the date of purchase resulting in a loss of Rs. 2,87,77,400. The assessee in the intervening period of purchase and sale of the shares received a dividend of only Rs. 9,03,173. The CIT(A) was of the view that no prudent businessmen will enter into such transaction. 21. The CIT(A) thereafter analysed the agreement under which shares were purchased by the assessee. He was of the view that there was no basis for fixing the price at Rs. 88 per share. The CIT(A) noticed that the shares were claimed to have been purchased by the assessee on 18th January, 1996 and the lock-in-period was to expire on 6th October, 1997 and the time-gap between these two periods was 21 months. ....
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....l be handed over to the purchaser and that a power of attorney would be executed in favour of the purchaser. The CIT(A) noticed that there was no evidence filed to prove the execution of transfer deeds or the power of attorney. The other objections of the CIT(A) were that the agreement did not specify the distinctive number of shares, that there was no reference to the non-transferability of shares up to 6th October, 1997, that the date on which the assessee received payment has also not been mentioned. The CIT(A) thereafter made a reference to the decision of the Hon'ble Delhi High Court in the case of CIT v. Bharat Nidhi Ltd. [1982] 133 ITR 447 and held that as laid down in the said decision in the absence of payment of sale consideration and delivery of blank transfer form along with shares there cannot be a valid sale of shares. The CIT(A) ultimately concluded as follows: "The assessee-company did not have any title to the property in the shares on 1st November, 1996 as there was no power of attorney in its favour by implication and no such power of attorney has been handed over to the buyer on 1st November, 1996. In fact there is a mention of such power in the agreement dated....
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....e assessee. 27. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. 28. We have heard the submissions of the learned counsel for the assessee and the learned Departmental Representative. Three issues arise for our consideration in this appeal: (a) Whether the Revenue authorities were justified in not allowing the short-term capital loss on sale of shares amounting to Rs. 2,87,77,400? (b) Whether the Revenue authorities were justified in disallowing the claim for deduction on account of interest paid by the assessee of Rs. 1,72,01,022? (c) Whether the Revenue authorities were justified in not giving credit to TDS amounting to Rs. 1,80,633? 29. As far as the first issue regarding the claim of short-term capital loss, the first and foremost issue to be considered is as to whether the assessee became the owner of the shares which were claimed to have been sold resulting in a short-term capital loss. The facts in this regard have already been narrated. The conclusion of the Revenue authorities on this issue was that no prudent businessmen would enter into a transaction whereby he would pay a sum of Rs. 4.6 crores by way of interest and borrow money....
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....with the 5 shareholders) of the shares in favour of the assessee all dated 18th January, 1996. The agreement for sale does not specify the prices that the assessee was to pay to the original holders of the shares. The original holders also executed power of attorney in favour of the assessee. This power of attorney was dated 18th January, 1996. Even in this power of attorney there is no reference to the consideration to be paid by the assessee to the sellers of the shares. It has, however, been brought to our notice that the assessee had paid to the vendors total sum of Rs. 66,64,240 in respect of the total quantity, of 7,57,300 shares of M/s. SRF Ltd. This had been paid by a cheque dated 30th March, 1996 drawn on ANZ Grindlays Bank, Connaught Place, New Delhi. A perusal of the power of attorney reveals that the original holders of shares have acknowledged the receipt of full consideration for the shares from the assessee as on 18th January, 1996. They have further acknowledged the fact that they have delivered the share certificates along with blank transfer forms in respect of the shares duly executed by them. The agreement for sale of shares in its schedule gives the quantity of....
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....ate. In those circumstances the Court had held that there was no transfer of ownership in shares. As already pointed out in the present case the position is different inasmuch as all the conditions have been fulfilled. The law is well-settled that absence of registration of the name of the transferee as a shareholder in the register of members of the company is not a condition precedent for holding that a particular person is a holder of shares in a company or not. In view of the above, we are of the view that the assessee became the owner of shares as on 18th January, 1996. 32. The other objection of the Revenue was that the SEBI regulations prohibited sale of shares on or before 6th October, 1997. We have already made a reference to the SEBI Regulations which permit transfer of shares as between the promoters. It was only the promoters holding that was required to be maintained without any dilution. In the present case there has been no violation of these regulations also. Even the Assessing Officer or the CIT(A) did not dispute the fact that the transfer had taken place between the persons belonging to the same group who were promoters of M/s. SRF Ltd. In view of the above, we ....
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....ne by the assessee on the basis of the formula prescribed by the SEBI for preferential allotment. In any event the Assessing Officer cannot dispute the full consideration received by the assessee on sale of shares. There was no material before the Assessing Officer to come to the conclusion about receipt of any higher consideration by the assessee than a sum of Rs. 50 per share. Therefore, this was not a valid basis for disbelieving the plea of sale of shares by the assessee. The definition of transfer as contained in section 2(47) is very wide and is an inclusive definition. There was, therefore, a valid sale of shares by the assessee in favour of M/s. DCM Shriram Consolidated Ltd. 34. The objection of the Revenue authorities regarding SEBI regulations prohibiting sale of shares before 6th October, 1997 is again not relevant for the reason that M/s. DCM Shriram Consolidated Ltd. was also a promoter of M/s. SRF Ltd. and therefore, transfer or sale between the persons who are promoters was not prohibited even by the SEBI Regulations. 35. The learned counsel for the assessee has also made an alternative submission before us that even assuming that there was no purchase and sale of ....
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....under an agreement for purchase of shares. It could be said that there was a valid assignment of whatever rights the assessee got to purchase the shares under the agreement dated 18th January, 1996 which was assigned to another person under the agreement dated 1st November, 1996. These agreements/assignments did give rise to a capital loss in the hands of the assessee. It could be said that such assignment resulted in a transfer of capital assets giving rise to a short-term capital loss. Even this alternative plea of the assessee deserves to be accepted. 39. The next plea of the learned Departmental Representative was that the transactions have been held to be sham and nominal transactions. On this aspect we find that there has been actual payment and delivery of shares as contemplated in various agreements. In these circumstances it has to be accepted that the transactions were real. The legal effects of the transactions cannot be ignored. Learned counsel for the assessee in this regard has placed reliance on the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. According to him, the decision of the Hon'ble Supreme Cou....
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.... investment in shares have to be held to be deductible irrespective of the fact whether the assessee receives dividend on shares purchased or not. In the present case, dividend income has been brought to tax under the head "Income from other sources". In view of the provisions of section 57(iii), the claim of the assessee for deduction of interest paid on borrowings to make investment in the shares from which dividend was received was to be allowed as deduction. The Assessing Officer is directed to allow the claim for deduction. 42. The third issue for consideration is as to whether the Revenue authorities were justified in denying the credit for TDS. On this issue the facts are that when the company paid dividend to the original holders of shares it had deducted tax at source and issued a TDS certificate in the name of the original holders. The proportionate dividend was duly passed on by the original holders of shares to the assessee. The original holders also filed an affidavit before the Assessing Officer as well as the indemnity bond together with declaration in Form No. 15B of the IT Act. In this declaration, the original owners have clearly mentioned that they were the regi....