TaxTMI 
TaxTMI 
2010 (4) TMI 910
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....essee with some presumed fair market value ignoring the judgment of the hon'ble Supreme Court in the cases of CIT v. Gillanders Arbuthnot and Co. [1973] 87 ITR 407, CIT v. Smt. Nilofer I. Singh [2009] 309 ITR 233 (Delhi) and Dev Kumar Jain v. ITO [2009] 309 ITR 240 (Delhi). Thus, the action of the Assessing Officer should be reversed and the capital gain should be computed on the basis of full value of consideration. (2) The Commissioner of Income-tax (Appeals) erred in law and on facts in confirming an addition of Rs. 37,60,41,886 as short-term capital gain on sale of 23,90,000 shares transferred on May 10, 2005 by considering their date of acquisition as July 27, 2004 whereas the same was April 4, 2004 following Circular No. 704 dated April 28, 1995 reported at ([1995] 213 ITR (St.) 7). Thus, the said loss should be assessed as long-term capital loss as claimed by the assessee. (3) The Commissioner of Income-tax (Appeals) erred in law and on facts in confirming the disallowance of Rs. 22,03,822 under section 57(iii) of the Act on interest paid to others ignoring the facts and evidence placed on record. Thus, the action of the Assessing Officer should be reversed." The fa....
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....ction of sale. He came to the conclusion that sale to Shri R. P. Mittal was a colourable transaction as Shri R. P. Mittal and Smt. Sarla Mittal, the husband and wife duo, controlled the assessee-company. Since Hotel Queen Road Pvt. Ltd. was wholly owned subsidiary company of the assessee-company, it was also controlled by the husband and wife duo. In order to arrive at this conclusion, he relied on the decision of the hon'ble Calcutta High Court in the case of CIT v. L.N. Dalmia [1994] 207 ITR 89, in which it was held that sale of shares to other company formed by the assessee at a lower rate was a device to avoid tax and, thus, the resulting loss cannot be allowed. Thereafter, he proceeded to work out the fair market value of the shares of Hotel Queen Road Pvt. Ltd. on the date of transfer to Shri R. P. Mittal. In this connection, it was mentioned that the bid value of Hotel Ashok Yatri Niwas was about Rs. 45.03 crores. However, the assessee took over only the land and building and sundry creditors and debtors were to be dealt with by ITDC. On this basis, the asset taken over by the assessee from ITDC, representing 8,98,166 shares, was about Rs. 16.49 crores. This constituted....
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....peals)-VIII, New Delhi. One of the grounds taken before him was that all the shares held by the assessee ought to have been treated as long-term capital asset. It was mentioned that the assessee had shown the asset as short-term capital asset and consequently declared short-term capital loss of about Rs. 8.64 crores. In this connection, the claim of the assessee is that 23,90,000 shares of Hotel Queen Road Pvt. Ltd. were allotted to it on April 4, 2004 even though the delivery of the shares was taken on or after July 27, 2004. In order to support this contention, the assessee was required to file copies of letter of allotment and the board resolution. The assessee expressed its inability to file the aforesaid evidence. As against the aforesaid, evidence by way of copies of letter purportedly written in connection with allotment of shares were filed. According to letter dated November 11, 2003, the shares were to be allotted on the condition that the assessee paid Rs. 2.00 to Rs. 2.50 crores by March 31, 2004. The assessee responded to this letter on the same date. These letters were signed by the assessee and his wife respectively, who corresponded in the capacity of managing ....
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....ction 57(iii). Apart from that, the account of Shri Mittal was debited by a sum of about Rs. 6.58 crores towards the shares transferred to him. This makes the absence of the nexus more clear. Therefore, the action of the Assessing Officer in this regard was upheld. Before us, learned counsel for the assessee furnished a brief background in regard to issues in dispute. We think it fit to paraphrase the background as it clarifies the contentious issues. The assessee filed a bid to takeover Hotel Ashok Yatri Niwas as a going concern for a sum of about Rs. 45.33 crores. In case the bid became successful, the hotel was to be taken over from the ITDC by acquiring the shares of Hotel Queen Road Pvt. Ltd., a subsidiary of the ITDC. The bid was successful. In terms of the bid, the ITDC was to deal with the debtors and the creditors and only the fixed assets were to be taken over by the assessee. The cost to be paid in respect of the assets, after making adjustment for creditors and debtors, was about Rs. 16.00 crores. Some shares of Hotel Queen Road Pvt. Ltd. were held by the others. Such shares were also acquired by the assessee. There is no dispute about the cost of acquisition of the ....
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....vember 11, 2003 that there is a need of funds for completing the work of renovation within the stipulated period. The fresh loans are not forth coming, which necessitates further infusion of capital between Rs. 2.00 to Rs. 2.50 crores. In lieu thereof, equity shares of the company are to be allotted at par on confirmed basis (paper book 21). This letter was responded to by the assessee-company through Smt. Sarla Mittal on November 11, 2003 that the necessary subscription will be made in cash in instalments so as to make-up Rs. 2.25 crores by March 15, 2004 for which fresh equity must be allotted by March 31, 2004. A cheque of Rs. 50 lakhs was enclosed with this letter (paper book 22). Hotel Queen Road Pvt. Ltd. wrote a letter to the assessee-company through Shri R. P. Mittal on April 4, 2004 acknowledging receipt of Rs. 2.39 crores by cheques up to March 4, 2004, being capital contribution towards 23,90,000 equity shares and confirming that a right in the shares was created in favour of the assessee-company. The share certificate numbers to be delivered to the assessee shortly were also mentioned in this letter (page 23 of the paper book). A copy of share application money account ....
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....n the stock exchange through brokers. Since the shares were handed over to the assessee on July 27, 2004, the date of acquisition will also be July 27, 2004. In regard to substitution of the fair market value in place of sale consideration, the contention is that the transaction was colourable in nature, being between the assessee-company and its substantial shareholder. The assessee has not shown any basis for charging sale consideration at Rs. 20 per share. These shares rank pari passu with the shares acquired at the time of taking over Hotel Ashok Yatri Niwas. The cost of acquisition and the cost of improvement of the shares at that point was computed by the Assessing Officer at Rs. 185.68 per share. Therefore, there is no reason to sell the shares at a price below the aforesaid amount. The cases relied upon by learned counsel are not applicable while the cases relied upon by the Assessing Officer and the learned Commissioner of Income-tax (Appeals) are relevant for deciding the controversy. Therefore, it was argued that the computation of capital gain made by the lower authorities may be upheld. In the alternative, it is argued that since originally acquired shares were s....
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....n of Rs. 2.39 crores. These shares were sold to Shri R. P. Mittal at Rs. 20 per share for aggregate consideration of Rs. 6,57,63,620. The Assessing Officer worked out the fair market value of the shares, on the basis of acquisition of 8,98,181 shares, at Rs. 185.68 per share. The long-term and the short-term capital gains were worked out accordingly by substituting the aforesaid fair market value in place of the sale consideration actually received by the assessee. Section 48 of the Act prescribes the mode of computation of the capital gains. It reads as under : "48. The income chargeable under the head 'Capital gains' shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the asset and the cost of any improvement thereto :" (The remaining portion of the section is not relevant for our purpose). The issue as to whether fair market value can be substituted in place of the sale consideration was examined by the hon'ble Supreme Court ....
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....on' is used in contradistinction with 'fair market value of the capital asset' and there is an express power granted to the Income-tax Officer to 'take the fair market value of the capital asset transferred' as 'the full value of the consideration' in specified circumstances. It is evident that the Legislature itself has made a distinction between the two expressions 'full value of the consideration' and 'fair market value of the capital asset transferred' and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are : (1)that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value o....
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....st future tax liability for gain either under the revenue head or under the capital head. We have observed that as for the exercise of control over the shares, more particularly over the control of the company (Punalur Paper Mills Ltd.), there has been no change whatsoever. He continued to exercise the same control over Punalur Paper Mills Ltd. as before. This special aspect cannot be overlooked by any appellate authority dealing with tax matters. When there was no real change whatsoever, the apparent change being the transfer on the surface of shares from the individual to the company, a handmaid of the transferring individual, cannot be overlooked and we are in complete agreement with the view of the taxing authority that there was no real change or transfer and the transfer claimed was a sham transfer. Relying upon the decision of the Supreme Court in the case of Workmen of Associated Rubber Industry Ltd. [1986] 157 ITR 77 ; 59 Comp Cas 134, we hold that it was the duty of the Tribunal to get behind the smoke-screen and discover the true state of affairs in a case like the one before us. This duty the Tribunal pre-eminently failed to do. Accordingly, the issue set out earli....
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.... one security for another could be described as realisation of the security resulting in profit ? The hon'ble court held that having taken shares in the second company in exchange for the shares of the first company, the assessee had made realisation of the value of shares of the first company and the difference between the price of the shares of the first company and the second company on the date of such exchange has to be treated as profit of the assessee. It may be mentioned that the assessee had valued the shares of the second company at Rs. 1.45 lakhs, being the cost of shares of the first company. The Assessing Officer valued the shares of the second company on the basis of quotation at Rs. 5.51 lakhs. The ratio of this case is that where money's worth is received in consideration for transfer of an asset, the fair market value will be the realisation made for the purpose of computing the profit. The ratio of this case is also not applicable because the assessee realised the consideration in money and not in money's worth. On consideration of the facts and the case law relied upon by the rival parties, we are of the view that the ratio of the decisions in the cases of Gil....
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....t a gain of Rs. 10 per share i.e., at 100 percent gain as those were allotted to the appellant just a little more than a year ago at Rs. 10 per share but sold at Rs. 20 per share. It is only the balance 8,98,181 equity shares the appellant incurred loss as due to passage of time the value eroded and the property got sterlised. It could not be used for any other purpose and in the absence of the funds the same could also not be commissioned. All the licences having been expired it could not be operated even as the old budget hotel as all the permissions were required afresh. It was an extremely adverse situation with a bleak prospect then. Thus, under several compulsions including as above, the said impugned shares were transferred to save the investments made by the appellant in the hotel company by letting Mr. Mittal arrange funds for the said company and then to enable it to commence commercial operations of the hotel. Admittedly, the appellant could not have arranged more funds and in the absence of which the entire investment would have sunk. Thus, by the said transfer of shares, the appellant not only saved its investment and reduced the liability but also ensured that in due ....
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....there the Assessing Officer never determined the value under any permitted method but adopted a value as declared by the assessee. However, here the learned Assessing Officer substituted the sale price by the value at which the appellant-company acquired the said shares in 2002 while the hotel was running and the circumstances were different. In the said case, after appreciating various facts, the loss was disallowed but no addition was made. However, in this case an addition has been made on presumption presuming receipt of a higher sale consideration, which is not permitted. Thus, the ratio of the said judgment is not applicable to this case." The facts of this case are that 8,98,181 shares were originally acquired in the year 2002 for a consideration of about Rs. 12.82 crores in order to acquire control over Hotel Queen Road Pvt. Ltd. Since the hotel required extensive repairs, etc. and money was not forthcoming from third parties, subscription was made in the year 2004 at Rs. 10 per share for additional capital of Rs. 2.39 crores. Further subscription was made in the year 2005 at Rs. 10 per share at about Rs. 4.15 crores. The original shares and 23,90,000 shares acquire....
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....f Income-tax (Appeals) erred on facts and in law in confirming the addition of about Rs. 37.60 crores as short-term capital gain on sale of 23,90,000 shares of Hotel Queen Road Pvt. Ltd. transferred on May 10, 2005 by taking the date of acquisition as July 27, 2004 in place of April 4, 2004. The facts in this connection are that Hotel Queen Road Pvt. Ltd. wrote a letter dated November 11, 2003 through Shri R. P. Mittal, managing director, to the assessee bringing to his notice the matter regarding lack of funds necessary to meet various requirements and requested to make necessary arrangements by March 31, 2004 for fresh contribution between Rs. 2 crores to Rs. 2.50 crores by way of equity to be allotted at par. This letter was responded by the assessee vide letter dated November 11, 2003, i.e., on the same date through Smt. Sarla Mittal, director, in which a firm commitment of subscribing Rs. 2.25 crores was made and promising to make effort for the balance contribution. It was also mentioned that the fresh equity must be allotted before March 31, 2004. A cheque of Rs. 50 lakhs was enclosed with this letter. We may treat these letters as prospectus and offer to make contributio....
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....s. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned from the date of the broker's note for purchase on behalf of the investors. In case the transactions take place directly between the parties and not through stock exchanges, the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds." Therefore, the case of learned counsel is that the period of holding should be reckoned from April 4, 2004 when confirmation letter was received by Hotel Queen Road Pvt. Ltd. Against the aforesaid, the case of the learned Departmental representative is that the husband and the wife duo are controlling both the companies. These letters have not been filed before any authority. Therefore, the authenticity of the letters cannot be relied upon in the face of the fact that the assessee itself had taken the shares to be a short-term capital asset in the return of income by counting the period of holding from July 27, 2004. The assessee was required to produce the minutes book, which was not done by stating that there were disputes with the....
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....ly met to approve the transaction but there was the endorsement by five out of seven directors which shows that they consulted each other and the majority of them was of one mind and this was sufficient to signify their agreement on behalf of the company. The court relied upon Bonelli's Telegraph Co., In re (Collie's claim) [1871] LR 12 Eq 246, 258. Also Bai Mangu v. Bharatkhand Cotton Mills Co. AIR 1930 PC 134 and Universal Banking Corporation, In re (Gunn's case) [1867] 3 Ch App 40. Further, the Act uses the term "holding of shares" in section 81(1)(a). The general understanding under that Act is that this term is synonymous with the term "member". Although the term "holders of the equity shares" is used in sub-section (1)(a) and members in sub-section (1A)(b), the two terms are synonymous and mean persons whose names are entered in the register of members as held in Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp Cas 563 ; AIR 1985 SC 520 ; Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215 ; [1959] 29 Comp Cas 282 ; AIR 1959 SC 775 ; Killick Nixon Ltd. v. Bank of India [1985] 57 Comp Cas 831 (Bom-DB). The assessee relies on Board circular (supra), which deals with ....
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....ed April 4, 2004. In other words this letter loses evidentiary value, more so because it has been written by Hotel Queen Road Pvt. Ltd. without narrating the background details regarding meeting etc. and allotment. In the case of S. N. Zubin George v. CIT [2004] 265 ITR 683 (Ker), relied upon by the learned Departmental representative, the Tribunal had recorded the finding that there was no evidence to show that the shares were in existence prior to May 31, 1988. Even if the money belonging to the assessee was appropriated to share deposit account of the company that by itself will not amount to allotment of shares. The reason being that the shares can be issued only after company passes a resolution deciding to allot shares. The assessee could not establish that the shares were allotted to him earlier than May 31, 1988. Therefore, its finding that the date of issue of share certificates was the date of allotment was upheld by the hon'ble court. As in that case, in this also there is no evidence regarding the holding of board meeting to consider allotment of shares to the assessee in terms of its conditional offer dated November 11, 2003. The computation of gain as short-term ....
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....n of the fact whether borrowings were made to partly discharge the debt in respect of Shri R. P. Mittal, were not produced. Substantial part of the money raised from Shri R. P. Mittal has been utilised for acquisition of shares of Hotel Queen Road Pvt. Ltd. Thus, no specific case was made out regarding the nexus. It was further mentioned that on perusal of account of Shri R. P. Mittal it is found that the same has been debited by a sum of Rs. 6,57,63,620 for transfer of shares to him. Therefore, the claim of the assessee is factually incorrect. Before us, it has been submitted that no question was asked by the Assessing Officer regarding disallowance of interest. The facts are that the assessee had raised loans of about Rs. 9.65 crores from Shri R. P. Mittal on which interest was not charged. A sum of about Rs. 8.80 crores was deposited with Hotel Queen Road Pvt. Ltd., on which interest of about Rs. 90 lakhs was earned. As Shri Mittal was demanding the return of money, borrowings had to be made from outsiders on which interest of about Rs. 22 lakhs was paid. Therefore, there is a nexus between interest paid and interest received. In reply, the learned Departmental representative....
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....r as annuity deposit is concerned, the Tribunal and the High Court have come to the right conclusion that the dominant purpose was not to earn income by way of interest but to meet statutory liability of making the deposit. The test to apply is that the expenditure should be incurred wholly and exclusively for the purpose of earning the income. The fact finding authorities have come to the conclusion that no part of the expenditure came within the purview of section 57(iii). Relying on this decision, it was held that the assessee's appeal has to fail. In the case of Jaswantrai P. Mehta v. CIT [1991] 192 ITR 577 (Guj), it was held that interest paid on loan taken for the purpose of earning income was deductible, but interest on interest paid was not deductible. In this connection, it was mentioned that whether interest payable on interest is part of the same transaction and whether it becomes part of principal amount borrowed under the principles of accountancy is of no consequence. The facts canvassed by learned counsel in our case are that the assessee had raised interest-free loans from Shri R. P. Mittal. The money was advanced to Hotel Queen Road Pvt. Ltd. and interest income....