TaxTMI 
TaxTMI 
2023 (10) TMI 462
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....13.03.2015, on the basis of the material impounded there-from and the subsequent statement of Shri Ittoop and, indeed, the assessee himself. The assessee, who had not filed any return of income for the year, was found to have made investments during the relevant year in a company, Manko Natural Flavours and Extracts Pvt. Ltd. (Manko), floated by him and Sh. Ittoobp, as also in immovable properties. The assessee, in response, returned an income of Rs. 10,00,000 on 21.08.2017, as income from other sources. In fact, earlier, vide a statement u/s. 131(1) of the Act dated 16.12.2016, extracted in the assessment order itself, the assessee admitted to running a provision store at Market Road, Chalakkudy, in the name of his wife, Celine Johny, in the trade name 'Manappuram Traders', since 1983. Even as some details of his income and personal assets, viz. motor cars, were shared, no details of the investment in Manko (also referred to as 'the company'), in which he admits to be a Director since it's inception (fy 2003-04), owning 50% shares, as also unsecured loans, were furnished. A perusal of his bank account, as well as the books of account of Manko, revealed investments by him during th....
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....s would be on substantive basis. Even allowing credit for Rs. 21.40 lakhs, withdrawn cash from the OD account, i.e., assuming it being recycled, which would though have to be shown so, would reduce the addition qua unexplained cash deposit to Rs. 76.24 lakhs. Be that it as may, we confirm the impugned addition for Rs. 70.50 lakhs. We decide accordingly. This decides Grounds 2 to 4 of the assessee's appeal; Gd. 1 being general in nature warranting no adjudication. (also refer para 10.1) 6. The assessee next agitates the part sustenance in first appeal of an addition for Rs. 51,72,056 toward unexplained investment in immovable property (IP), i.e., at Rs. 35,72,056. The assessee was, on the basis of sale documents found during survey, found to have purchased property, as under:- Sl. No. Date of Purchase Doc. No. Amount (Rs.) 1 25/09/2013 4563/13 10,23,000 2 17/12/2013 5712/2013 8,20,000 3 17/01/2014 284/2014 16,00,000 Total 34,43,000 Another Rs. 17,29,056 was paid to one, Ousech, on 05.04.2013 for purchase of property. The entire sum (Rs. 51,72,056) being unexplained as to its source, was brought to tax as unexplained investment. In appeal, the asse....
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....ngalore-based company in the same business as Manko. While the Revenue, on the basis of the Agreement dated 20.02.2014 between these 4 shareholders, constituting the party of the first part, and VHPL, acting through it's Directors (K. Shyam Prasad and Veena Shyam Prasad), as party of the second part, regards it at the stated sum of Rs. 675 lakhs, the assessee claims it to be Rs. 100 lakhs. Save for 500 shares acquired by the assessee during fys. 2003-04 & 2004-05, the balance 42,000 shares being acquired during the current year (i.e., from 31.3.2013 to 17.2.2014, to be precise), gain thereon has been assessed as short-term capital gain (STCG) as against long-term capital gain on 500 shares, at Rs. 291.53 lacs and Rs. 2.93 lacs respectively. Thus, while the assessee claims to have received only Rs. 50 lakhs, as per the AO he has received Rs. 337.50 lakhs, even if indirectly in part, i.e., Rs. 287.50 lakhs. Further, while the AO has based his findings on the sale agreement and, as we shall presently see, Manko's confirmation, the ld. CIT(A) has, in accepting the total sale consideration at Rs. 100 lakhs, which the Revenue objects, considered, in addition, the books and Balance Sheet ....
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....six crore and seventy five lakh only) and entered into an agreement with terms and conditions therefor. Thereafter the First party company carried out its internal audit jointly with the Second party and as mutually agreed consideration has been paid to the First party as follows 1) Cheque # 435112 Dt 23/12/2013 =Rs. 50,00,000/- 2) Cheque #435113 Dt 23/12/2013 =Rs. 50,00,000/- 3) Cheque #974150 Dt 10/01/2014 = Rs. 100,00,000/- 4) Cheque #974149 Dt 03/02/2014 = Rs. 75,00,000/- 5) Cheque # 594884 Dt 17/02/2014 = Rs. 50,00,000/- 6) SBINH14049330795 = Rs. 3,03,86,682 Dt. 18/02/2014 7) SBINH14049328558 = Rs. 31,69,629 Dt. 18/02/2014 8) SBINH14049328538 = Rs. 14,43,689 Dt. 18/02/2014 Total: Rs 6,75,00,000/-" (emphasis, supplied) The primary facts are undisputed, and for which, apart from the sale agreement, we may refer to the Manko's reply dated 05.12.2016, reproduced at page 12 of the assessment order, reproducing it in its relevant part, as under: "With reference to the above we are herewith producing the following details: 1. We had entered into an agreement with the erstwhile directors of Manko Natural Flavours & Extracts Ltd. consisting of Mr. K.P. Johny (1) ....
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....50 lacs each, and the balance Rs. 575 lacs paid by VHPL, the buyer, under the Agreement, to Manko, and which in turn utilized the same to discharge it's secured and unsecured debt, being to bank (Rs. 350 lacs) and it's said two Directors (at Rs. 225.79 lacs). How could the same be then regarded as part of the share consideration? The Balance-Sheet (as on 31/3/2014) of Manko, and account of VHPL in it's books, is pressed into service. That is, only Rs. 1 cr. has been received by the shareholders; the balance being to Manko for paying off its liabilities, proved by it's books, extracted in the relevant part in the impugned order. As such, even as SA specifies the sale consideration at Rs. 675 lacs, it delineates its payment, being Rs. 575 lacs to the company itself, which credits the same to VHPL, substituting thus the credit to bank and it's erstwhile directors in its accounts. How could VHPL be the beneficiary of a sum paid by it as consideration? The same is only an investment by it, which is to be therefore excluded from the gross consideration? This sums-up the assessee's case. Discussion 9.5 We may at this stage examine the SA which, having been acted upon and given effect to....
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.... examined by us in detail. The assessee's case, seemingly appealing, is seriously flawed, both on facts and in law. Income by way of capital gain arises on transfer of a capital asset, chargeable to tax u/s. 45 of the Act, i.e., on accrual, on which there is no doubt in the instant case. That is, the law deems that payment shall follow, or stands already received, as in fact is in the instant case, and there is under the Act no concept of bad debt in computing capital gains. A transfer may get aborted, in which case there would be no transfer, a precondition for accrual of capital gain. What value, then, i.e., in law, the non-receipt or the short receipt of the sale consideration? There is in fact no short receipt, i.e., vis-à-vis the stated consideration of Rs. 675 lacs, even on facts. The Agreement clearly provides that the entire payment arising there-under is to be, and indeed is being paid, to the party of the first part, the sellers, defined to include their assigns, nominees, etc., i.e., to it's account. What has admittedly been sold to VHPL, the buyer, is 84,000 shares in Manko, at a stated consideration of Rs. 6.75 cr., which sum thus arises to the shareholders and,....
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....nd a de facto ownership it's business and assets. In fact, it is only considering the control afore-said that the prospect of liquidation of secured debt, with a view to have a clear title thereto, which a buyer (of the relevant asset) may want, was considered by us, to though no consequence. In other words, the transaction, whichever way one may look at it, remains inexplicable. Continuing further, how could, one may ask, the manner of discharge of the sale consideration determine the said consideration? There is no stipulation, as for payment of statutory liabilities, for payment of secured (or unsecured) debt, in the SA. The same is thus not a condition of the Agreement. Reading such a condition, which does not in fact exist, is only doing violence to its express terms. The same is in fact not required as all that the buyer needs to, in such a case do, is to reduce the sale consideration to that extent. Share valuation, it is to be appreciated, represents the unitized net worth of the company, implying reduction of all existing and known liabilities from it's assets. That is, the liabilities, including to bank, stand already reduced in arriving at the sale consideration, implyi....
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....ly, Manko, followed by that of the buyer-company, arising out a common exercise carried out. This also explains the non-mention of any of the fixed assets, except generically, in the Agreement, i.e., other that lease-hold rights in 40.47 acres of land, clearly, a prime asset. 9.7 (A) The purport of the foregoing is to emphasize that the takeover of Manko has been, and only expectedly, a very elaborate and carefully planned affair, carried out in a series of steps over a period of time. This would also place in perspective the following disquieting facts noticed, which cannot but be regarded as deliberate: - (a) The SA, a carefully planned document, makes no mention in the respect of the following details of the property being agreed to be transferred thereby, i.e., the shares in Manko: - the number of shares - the share price - the date of transfer (b) Non-reference to the internal audit report or its findings, vital for share valuation; (c) Complete silence and non-explanation as to how and why payment of sale consideration, being, in clear terms of SA to the party of the firs part, the seller, stands made to Manko, the company for purchase of shares in whom the payme....
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....ved, at Rs. 50 lakhs, on 23.12.2013, even as the shareholding therein, as on that date, is at 36,000 shares! In fact it is doubtful that the shares were transferred as on 23.12.2013 inasmuch as the 'condition' of discharge of liabilities, for which the time provided (to the first party) per the SA, i.e., up to 28.02.2014, had not expired. The internal audit and other bank formalities; the erstwhile Directors could well be the guarantors, which (guarantee) could be released only on discharge of the bank liability, may not have been completed by then. (e) Further, while Rs. 57.62 lakhs stood advanced to the company on 31.03.2013, another Rs. 70.50 lakhs were transferred during the year, continuing up to 04.01.2014. That is, while he infuses loan in the company in which the shareholding is being acquired to be sold soon after and, in fact, Rs. 50 lakhs received in December, 2013 itself (as against investment of Rs. 42 lakhs), only to start receiving it back on 07.02.2014 onwards, and in full by 26.02.2014;[[[[ C. Clearly, there is much more at work than meets the eye. We highlight the following inexplicable conduct of the assessee which, while at one hand, makes his case different....
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.... value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:" The same brings the difference between the transfer consideration of a property, moveable or immovable, i.e., with reference to its fair market value (FMV) as on the date of transfer, as income from other sources of the recipient of the property. The provision, on the statute for long, has since 01.04.2014, i.e., AY 2014-15 onwards, been extended in scope qua movable property to include transfers at lower than the fair market value, as against at nil earlier. We have found the sale consideration of the entire share capital in Manko as at Rs. 675 lakhs, i.e., at Rs. 803.57 per share. The stated cost thereof, either on its purchase (from another shareholder) or on allotment (by the company), is stated at Rs. 100 per share. The purchase being proximate in time to the sale of shares, being with reference to a transaction between two unrelated parties, i.e., an....
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..... But it is the assessee who is to explain the same, more so when it becomes un-understandable, going against the grain, the very essence of the transaction itself. The conduct, nowhere explained by either the assessee or Manko - who rather confirms the two determinants of share price, i.e., their number and consideration, is inexplicable, both in principle and facts. The Agreement, it may be appreciated, cannot be read either as an impossibility or, again, against its express terms. When, therefore, it says the sale consideration is at Rs. 675 lakhs, it only means that. Again, it is clearly stated that the entire payment of Rs. 675 lacs, detailed therein, is to the party of first part, the seller. The settled principle of interpretation is that adverse inferences shall follow non-furnishing of the relevant evidence (Union of India v. Rai Deb Singh Bist [1973] 88 ITR 200 (SC)). The ld. CIT(A) has in reading it has implying a sale consideration of Rs. 100 lakhs, i.e., at a near par value of Rs. 119 per share, has, as afore-noted, been guided by the fact of discharge of the sale consideration, making it a self-defeating exercise. It also violates the legal principle that the taxabili....
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....oan', so that the same could be "withdrawn" immediately thereafter (refer paras 4,5 of this order). This, once again, emphasizes the need for the internal audit report, of which there is no whisper at any stage. In fact, in view of the amended law, whereby income arises on the purchase of shares, the transfer thereof itself becomes irrelevant. We, accordingly, delineate our specific findings, as under: (a) The assessee's shareholding in Manko prior to their transfer to VHPL is 42,000 shares, allotted and purchased during the year at 14,000 and 28,000 respectively, representing 50% of the paid-up share capital in the said company, sold in its entirety to VHPL vide sale agreement dated 20.02.2014, which has to be given effect to. (b) The sale consideration arising on the said transfer is Rs. 6.75 crores (i.e., @ Rs. 803.57 per share), consequent to its determination per an internal audit of it's accounts and operations instituted by the buyers and sellers of the shares. Of this, 50%, i.e., Rs. 337.50 lakhs, is to the account of the assessee. (c) The allotment to/purchase of shares by the assessee at Rs. 100/- per share, i.e., the same rate at which the existing shareholders (h....
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....und as full of intrigue, and the controversy arising as contrived and avoidable. A significant component of the assessee's argument is the repayment of secured and unsecured loans by Manko, i.e., out of the amounts received from VHPL. The same is de hors the SA, and the ld. CIT(A) has misled himself into reading such a condition therein. The accounts of Manko, pressed into service, are seriously wanting in explanation. The interpretation placed thereon, i.e., credit to VHPL, in reducing sale consideration, is without any legal or contractual basis. Rather, in this case the money flows back to the assessee ostensibly against unsecured loans. And which also explains the frantic raising of the assessee's unsecured loan, even through unaccounted money, in the company prior to the receipt of the consideration. The company's account is, in the same manner as the bank OD account (refer paras 4,5 of this order), used by the assessee as conduit. Further, even as there is no doubt on the accrual of income in the instant case, which, on transfer, is chargeable to tax under section 2(24)(vi) r/w s. 45 of the Act, the transfer itself is rendered redundant as income arises to the assessee on r....
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....nanced out of the sale of his stake in Manko, the application of which ought to have been inquired by the ld. CIT(A) before accepting the assessee's claim. In fact, the receipt of the entire sale consideration of Rs. 50 lakhs, i.e., as claimed, on 23.12.2013, itself defies logic as even the purchase of shares by the assessee, which continues up to 17.02.2014, is not complete by then. The receipt of the entire consideration for property without the same being in the assessee's ownership, is without basis in facts. This also underlines the need for, and the inexplicable omission - which we find as deliberate, in not recording the number of shares and their ownership in the SA, as also explains our stating of the entire exercise as being a very planned and carefully though-out affair. So, however, the sum of Rs. 70.50 lakhs having been already brought to tax as unexplained bank deposit, the assessee shall be allowed deduction in computing his income qua shares. Though, true, the subsequent sale of shares is not a concomitant of the income u/s. 56 of the Act, arising on the purchase of shares, the fact of the matter is that the money has been siphoned off through the unsecured loan, w....
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....ee's unsecured loan account being used as a conduit for receipt of sale consideration, he shall, on account of double tax, be allowed a reduction of Rs. 70.50 lakhs separately assessed u/s. 69 of the Act, i.e., while assessing income u/s. 45 or, as the case may be, section 56(2)(vii)(c) of the Act; OR alternatively, no separate addition for Rs. 70.50 lacs u/s. 69 is called for. (e) The assessee shall also explain the apparent difference of Rs. 5 lacs in his loan account with Manko, which shall, where unexplained, deemed as income u/s. 69. However, if the said funds stand transferred during the year thereto, the assessee shall be entitled to like deduction as for Rs. 70.50 lacs. 10.2 We may also clarify that we are conscious that we may be, in view of the manner in which we have decided the instant appeals, charged with having altered the issue under appeal and, thus, exceeded our purview. The charge is misconceived. Capital gain admittedly arises to the assessee on the shares purchased during the year, with the dispute revolving around the sale consideration received, which we have found, on the basis of the material on record; surrounding facts and circumstances; the explanatio....