TaxTMI 
TaxTMI 
TaxTMI 
1999 (8) TMI 108
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....cted to the initiation of penalty proceedings under s. 271(1)(c). 2. Briefly the facts are that the assessee-company was incorporated at Ahmedabad on 10th Dec, 1993. It filed its return, of income for asst. yr. 1994-95 declaring an income of Rs. 1,01,866 on 5th Oct., 1995. The return was processed under s. 143(1) of the Act on 21st Nov., 1995. Thereafter, the case was selected for scrutiny and notice under s. 143(2) and 142(1) alongwith the questionnaire were issued to the assessee seeking information with regard to the various items of income shown in the computation of income filed along with the return. The AO found that the assessee has shown the break-up of its income as under: Rs. (i) Interest on stock investment 77,676 (ii) Interest income 1,79,507 (iii) Service charges 25,000 --------- 2,82,183 Less: Expenditure 1,80,297 -------- 1,01,886 -------- The AO also found that the assessee had shown receipt of unsecured loan of Rs. 4,11,04,732 and it also had cash and bank balances of Rs. 3,90,99,226. Accordingly, the AO required the assessee-company to give details of these items along with the copies of accounts, confirmation, agreements, etc. 3. In response to the query....
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....s for allotment of shares in specified public issues as selected by the financing company. 4. During the accounting year relevant to asst. yr. 1994-95 the assessee-company was successful in getting allotment of 1,900 equity shares of Nirma Ltd. and 5,100 partly convertible debentures of Lupins Laboratories Ltd. although it applied for seven public issues as noted by the AO at p 3 of the assessment order: the other companies being Supreme Petrochem Ltd., Binani Zinc Ltd. Torrent Pharmaceuticals Ltd., Federal Bank Ltd. and Delta Industries Ltd. The partly convertible debentures (PCDs) of Lupins Laboratories Ltd. were converted into equal number of shares on allotment i.e. 5,100 and the same were transferred to VAL on 21st Feb., 1994, by passing a journal entry at a price of Rs. 118 per share. Part B of those PCDs consisting of NCDs (Khokha) only were transferred by another journal entry on 21st Feb., 1994, at a price of Rs. 182 per NCD. Similarly 1,900 shares of Nirma Ltd. were transferred to VIL by passing a journal entry on 21st March, 1994, at issue price i.e. Rs. 110 per share. M/s VAL and M/s VIL subsequently transferred those shares in the market by making a profit of Rs. 19....
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....e said finding. The issues involved and the submissions of the learned authorised representative of the assessee are as under: Legality of the transactions and its effect: According to the AO the transactions between the assessee and VIL/VAL are illegal and, therefore, the profits earned by VIL/VAL is deemed to have been earned by the assessee. According to the AO the agreements entered into between VIL/VAL and the assessee was in contravention of the Benami Transaction (Prohibition) Act, 1988. The learned authorised representative of the assessee has submitted that the provisions of Benami Transaction (Prohibition) Act, 1988 have no application because under the said Act, a benami transaction is a transaction in which "property is transferred to one person for consideration paid or provided by another person". It was submitted: (i) Admittedly the funds for acquiring the shares have been provided by VIL/VAL. (ii) In any case there is no transfer of existing property when shares are allotted. It was submitted that the finding of the AO "that on allotment of shares by investee company to the investor against a price consideration, the property of the company i.e. shares got tran....
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....he transaction is illegal, that does not mean that the AO has a right to displace the transaction and tax the assessee only on that ground. It was pleaded that if there is a breach of any law, the appropriate authority may take appropriate action but the same has no bearing on assessment of income. Reliance was placed on the decisions of the Supreme Court in the cases of CIT vs. Piara Singh (1980) 17 CTR (SC) 111 : (1980) 124 ITR 40 (SC) and CIT vs. S.C. Kothari 1974 CTR (SC) 137 : (1971) 82 ITR 794 (SC). It was submitted that the assessment of income cannot undergo a change depending upon the legality or otherwise of the transaction. 6.3. It was further submitted that while commenting on the commercial rationale and the device for tax avoidance, the AO held that the transactions did not have any commercial rationale and was as a matter of fact, colourable device for avoidance of tax as per the reasoning given by the AO at pp 27 to 36 in paras 13 and 14 of the assessment order. It was submitted that the AO has not appreciated the commercial rationale of the transactions at all and has thoroughly misunderstood the transactions. It was submitted that he has totally erred in holding ....
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....that VIL/VAL transferred these shares in the market and made profits out of the said transfer. Such profits can be regarded as belonging to the assessee if and only if a view is taken that: (i) though the transfer by the assessee to VIL/VAL is at cost, the AO is entitled to substitute for the cost, market value of shares, or (ii) the transfer is to be ignored being contrary to law and, therefore, the assessee continued to be the owner of the shares and, therefore, when VIL/VAL transferred the shares, in reality, it was transfer by the assessee and therefore, the profits would belong to the assessee. It was submitted that both the above propositions are misconceived and contrary to the well settled law. So far as the first proposition is concerned, it was submitted that the law does not oblige a trader to transfer the assets at the maximum price and the mete fact that the transfer is made at a price below the market price does not entitle the AO to tax notional profit. Even in a case where the law entitles the AO to substitute for the sale price, market price [s. 52(1) of the Act] the Hon'ble Supreme Court in the case of CIT vs. Shivakami Co. (P) Ltd. (1986) 52 CTR (SC) 108 : (19....
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....nt of shares provide that a single person should apply in one application, is the same being not circumvented by creating the facade of so many companies? Is the arrangement of so-called agreements between the investment companies and VIL/VAL not violative of Securities & Exchange (Regulation) Act? It was pleaded that all these acts of the assessee-company in collaboration with VIL/VAL are opposed to public policy and the assessee cannot be allowed to reap the benefits of the same. It was submitted that the Hon'ble Supreme Court in the case of ITO vs. Ch. Atchaiah (1996) 130 CTR (SC) 404 : (1996) 218 ITR 239 (SC) has held that the AO must tax the right person and the right person alone in respect of a particular income...... Merely because a wrong person is taxed with respect to a particular income, the AO is not precluded from taxing the right person with respect to that income. Accordingly it was submitted that simply because VIL/VAL has shown the income on sale of shares of Nirma Ltd. and Lupins Laboratories Ltd. in their returns, the AO cannot be debarred from taxing the same profit as the income of the assessee because the shares were acquired by the assessee in public issues ....
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....essee and were transferred to VIL/VAL at cost as per the agreements and thereafter these shares were sold by the financing companies i.e. VIL/VAL and the profits realised therefrom were disclosed by VIL/VAL in their respective income-tax returns. The assessee has also disclosed the service charges received as per the agreements in its return of income. It would, therefore, be seen that the parties have acted according to the terms and conditions of the agreements and accounted for income, that they were entitled to as per the terms of the agreements. The AO has made the impugned addition mainly on the ground that the agreements were entered into between the assessee and VIL/VAL with a view to circumvent various restrictions imposed by SEBI and other authorities regulating the share transaction and, therefore, the transactions were colourable device entered into with a view to avoid payment of tax in the hands of the right person in terms of ratio of the Supreme Court decision in the case of McDowell & Co. Ltd. In this connection, we are of the opinion that the provisions of Benami Transaction (Prohibition) Act, 1988 are not applicable to the facts of the case because: (i) admitted....
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....tment companies for and on behalf of and for the benefit of VIL/VAL. The profits, if any, on such transactions must necessarily belong to VIL/VAL; so also the losses. For making applications the assessee-company was to get fees as service charges. In fact, law as also equity demand that the profits must go to VIL/VAL because the profits were generated only with the help of funds which belonged to VIL/VAL and except for making an application and getting allotment, the assessee-company had done practically nothing. In case the shares allotted to the assessee were not transferred to VIL/VAL at cost and the assessee has made profits and retained the same, the AO having jurisdiction over VIL/VAL would have taken the view, which would have been impossible to resist, that this is a case of diversion of profits by VIL/VAL in favour of a third party (the assessee). Therefore, by transferring the shares at cost to VIL/VAL, the assessee has done what was expected of it in law and in equity and there is nothing wrong and improper about the same. Reliance of the AO on McDowell's decision is misplaced because if VIL/VAL would not have got the shares transferred to them at cost and thereby permit....
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.... owner of the shares and therefore, when VIL/VAL transferred the shares, in reality it was transfer by the assessee and therefore, the profits would belong to the assessee. Both the above propositions are misconceived and contrary to the well settled legal position. As far as the first proposition is concerned, the law does not oblige a trader to transfer the assets at the maximum price and the mere fact that the transfer is made at a price below the market price, does not entitle the Department to tax notional profit. In the case before us the shares of Lupins Laboratories Ltd. and Nirma Ltd. allotted to the assessee were transferred to VIL/VAL at cost in terms of the agreements and even in a case where the law entitles the Revenue to substitute for the sale price, market price [s. 52(1) of the Act] the Supreme Court has held in the case of CIT vs. Shivakami Co. (P) Ltd. and K.P. Verghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) that the sale price can be substituted by market value only when it is found that in reality what is received is higher than the sale price. In the present case, it is not even suggested by the AO in his order that the assessee has receive....
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....tion of Rs. 19,00,500 is directed to be deleted. 9. Coming to ground of appeal No. 12 relating to the addition of Rs. 2,92,274, the AO has discussed the issue in paras 16 to 16.3 of the impugned order as under: "16. Interest on term deposits: 16.1. In its P&L a/c the assessee has shown an interest income of Rs. 1,17,728 as interest on Term Deposit kept with Federal Bank, Fort Branch, Mumbai for the purpose of obtaining stock invest instruments to subscribe in various public issues. However, it is found that the assessee has accounted only for interest received and credited by the bank till the year end and has not accounted for interest which has accrued, though not received, at the year end. The assessee was asked to explain why interest accrued on Term Deposit has not been reflected in the P&L a/c. The assessee vide its letter dt. 5th March, 1997 has replied that interest on FDR is available for the minimum block of 46 days and if FDR is broken before 46 days, no interest is receivable on such FDR and for this reason, they have not taken into account interest on FDRs which was outstanding on 31st March, 1994. 16.2. The above contention of the assessee has been examined and no....