TaxTMI 
TaxTMI 
2000 (11) TMI 1225
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....loss of ₹ 6,32,62,694 (Fig. same in both original and revised returns). This loss the working of which was given in Annexure 4 to the return, arose on account of the sale of 60,00,000 shares which the assessee-company held in its wholly-owned subsidiary by name Epro Biotechnologies Ltd. a company engaged in the business of seed development, considered to be a high-risk venture. These shares were sold to a group of persons Ashok Sampat, Meena Sampat, Vijan Bhangar, Nirupa Bhangar and Vikram Parekh on 30th March,1996 for a price of ₹ 10,00,000. The loss on the sale of shares was worked out in Annexure 4 to the return as follows : ANNEXURE ';4'; Computation of Capital Gains on Sale of Shares of EPRO Biotechnologies Ltd. Long term Cost Indexed Cost Rs. Rs. 2,50,000 shares of ₹ 10 each invested during financial year 1989-90 25,00,000 40,84,302 6,50,000 shares of ₹ 10 each invested during financial year 1991-92 65,00,000 9,17,892 51,00,000 shares of ₹ 10 each invested during financial year 1995-96 5,10,00,000 5,10,00,000 6,00,00,000 6,42,62,694 Less : Sales Value of 60,00,000 shares 10,00,000 Long/Short term capital loss 6,32....
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.... a company which had a negative worth of ₹ 30 lakhs. There was thus a clear profit of ₹ 40 lakhs. The new management of EPRO had later on been forced to pay ₹ 300 lakhs to Indian Bank by December, 1998 as against the dues of ₹ 275.67 lakhs outstanding as on 31-3-1998 since Ashok Sampat could not strike a deal with the bank on account of allegations against the top personnel of the bank. The assessee was thus saved of another ₹ 25 lakhs. The total savings were thus ₹ 65 lakhs, assuming that the assessee-company also would have been able to obtain the same terms as Ashok Sampat was able to obtain from the Bank. 15. It was also pointed out that once the shares were sold, the further liability to Indian Bank was to be to the account of EPRO under the new management of Ashok Sampat and the further liability of the assessee towards interest etc. on the loan ceased. 16. It was thus pleaded that the decision to increase the shares capital of EPRO and then dispose of the assessee';s holdings was dictated by commercial considerations, that the transaction had been entered into bona fide in the interests of the Company and that therefore the loss shou....
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....he purchase of EPRO shares was a paper transaction. He noticed that for investing ₹ 271.32 lakhs in EPRO as part payment of the rights shares, the assessee had borrowed ₹ 3 crores from Abuzu Holding and Meghraj Finance Service Pvt. Ltd. on 22-3-1996. Originally this amount had been borrowed to repay an inter-corporate deposit of ₹ 3 crores taken from Jindal Vijaynagar Steel Ltd. on 27-3-1996. But on 26-3-1996, out of the amount borrowed from Abuzu and Meghraj, the assessee issued a cheque for ₹ 2,71,31,785 in favour of EPRO and on the same day took back a cheque for ₹ 271 lakhs from EPRO and used this amount to pay back the inter-corporate deposit of ₹ 3 crores taken from Jindal Vijaynagar Steels. 20. The Assessing Officer further observed that though the assessee entered into an agreement with Ashok Sampat on 30-3-1996 requiring EPRO to make a security deposit of ₹ 271 lakhs with the assessee, in reality the deposit had already been taken on 26th March itself when the assessee was in total control of EPRO and Sampat had no stake in EPRO. Thus, according to the Assessing Officer, the entire transaction "was given a facade of sale purc....
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.... other points were raised by both the sides and authorities were also cited and all of these would be considered presently. 27. In our opinion, the loss claimed cannot be allowed. The reasons follow. 28. I. What attraction does EPRO hold for a prudent businessman ? In order to answer the question, one has to take a look at the financial position of EPRO. Its balance sheet as on 31-3-1995 (with the figures for 31-3-1996 given side by side) is at pages 62 to 70 of the paper-book filed by the assessee. Its accumulated losses as on 31-3-1995 were ₹ 5.76 crores. The current liabilities were ₹ 37.63 lakhs. The unsecured loans, including the loan from Indian Bank, stood at ₹ 4.70 crores. As against these, the share capital was only ₹ 90 lakhs. The fixed assets freehold land, farm building, plant and machinery etc. were only ₹ 19.96 lakhs (after depreciation). The cash and bank balances were just ₹ 2.12 lakhs. The loss for the year ending 31-3-1995 itself amounted to a high figure of ₹ 67.12 lakhs. Thus the financial position as exhibited in the balance sheet is itself sufficient to discourage any prudent businessman from taking over the company....
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....s of Marico, according to the Assessing Officer, accounted for ₹ 6.81 crores i.e., almost 96%. He is carrying on individual business from the same building which is owned by the family controlling Marico and the assessee-company. These facts do show that he is a man of some means but to embark upon a high-risk business, that too by taking over a sick unit which has a huge accumulated loss and a negative worth requires much more resources. He responded to the summons issued by the Assessing Officer and filed a letter dated 6th October, 1998 which is at page 35 of the paper-book. Therein, he has sought to explain why he bought the shares of EPRO. But he does not explain wherefrom he was going to pay off the bank loan which would be quite substantial, even granting that he is able to obtain a substantial waiver. This is significant, in our opinion, because as we shall presently see the funds came from the assessee-company itself in December, 1998. Therefore, he was perhaps confident that the assessee-company would bail him out. But that in turn also shows that it was so arranged that the funds would come from the assessee-company. And if the assessee-company was going to pump in....
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....it and out of this amount paid back Jindal Vijaynagar Steels. Thus what was given as purchase price for the rights shares was taken back immediately on the ground that the assessee wanted to safeguard itself against the enforcement of the bank guarantee by the Indian Bank. The intention was perhaps that since the negotiations were underway with Sampat (they had started in December, 1995) for the disposal of the shares nothing should happen before the deal is finalised which would compel the assessee to part with its funds in discharge of the loan from Indian Bank as otherwise the whole object of the sale would be frustrated. Thereafter things happened lighting-fast and in hardly a week';s time the sale was put through the EPRO went into the hands of the new management headed by Ashok Sampat. The bank guarantee was still enforceable and had not been cancelled. The decision of the assessee to hold on to the security deposit till the new management of EPRO finds funds and pays off the bank loan is not strange, granted. But finally, when attempts allegedly made by Sampat to obtain a substantial waiver of the loan failed, one would have expected the new management of EPRO to clear t....
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....en to be considered as having been undertaken necessarily for achieving the commercial object or purpose but as having been undertaken with the oblique motive of evading taxes. One such consideration is to examine the timing of the transaction. It is not in dispute that in December, 1995 the assessee received shares of Marico on the liquidation of Harsh Archana Trading & Investment Ltd. and became liable for capital gains under section 46(2). The gains amounted to ₹ 7.10 crores. It was around the same time that it started negotiations with Ashok Sampat, as confirmed by him in his letter to the Assessing Officer. Thus the seeds of the device sought to be adopted by the assessee were sown once it came to know that it would be liable to pay tax on huge capital gains under section 46(2). Apparently it had taken some time for the details of the device to be worked out. Time was however running out and the sale of shares had to be put through before the end of the accounting year. That is the reason for the unseemly hurry which makes it appear as if Ashok Sampat could not wait any longer to take over a loss-making, worthless, defunct unit which was nothing but a shell. Its Profit &....
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....he shares) and (iii) the assessee was relieved of the liability of ₹ 27.57 lakhs which EPRO owed as "other liabilities". It was also submitted that it was sufficient to see if the assessee is able to offer commercial justification for the sale and it was not further necessary for the assessee to show that even from the point of view of Sampat, the transaction was so justified. In this connection it was even suggested that from his point of view the deal might have been imprudent, but so far as the assessee is concerned, it was not so and that is what should matter. As we have already adverted to, the question is whether the step i.e., the sale of shares, was a necessary step in order to achieve the result, viz., the whipping off of the liability to Indian Bank. We are of the view that it was not necessary and the some result could have been achieved by paying off the bank with assessee';s own funds; in fact that is what ultimately happened the money taken as security deposit was used to pay off the bank. It is possible to imagine a situation where the assessee purchases the rights shares, pays ₹ 271 lakhs to EPRO, takes it back as security deposit and then....
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.... and if that is satisfied, no further questions need be asked. The suggestion was that the receipt or non-receipt of the consideration during the year is not the criterion and so long as there was a transfer of the capital asset, section 45 read with section 48 is attracted and if a loss is claimed it should be allowed. We are unable to accept the argument. Under the Income-tax Act, the income-tax authorities are empowered to go behind the apparent to find out the real and if a transaction, on the basis of the evidence and the surrounding circumstances of the case, appears to them to be non-genuine or a facade or a make-believe affair, got up to evade the tax liability or if it appears that the series of steps taken to achieve the desired result is sham or collusive, they can ignore the transaction. Such power is not taken away by the provisions of section 45 or 48. It was further contended that hurry or haste in putting through the sale of shares is not conclusive and the decision of the Hon';ble Bombay High Court in 81 ITR 236(sic) was cited. Taken by itself and in the light of an acceptable or plausible explanation for the hurry or haste, it may not be decisive, but in the ....