TaxTMI 
TaxTMI 
1986 (5) TMI 45
X X X X Extracts X X X X
X X X X Extracts X X X X
....rculating the capital of this company, assessee-firm had advanced certain funds. These advances date back to 1973. The company had been crediting the assessee's loan account with interest. 3. This company never did well. In fact, by 1977, their accumulated losses were of Rs. 10 lakhs as against the capital of Rs. 18 lakhs. He had never declared any dividend. By 3-3-1977, the company owned the assessee Rs. 2,80,000 and odd. 4. On 29-12-1977, the company purported to issue fresh shares and the credit balance standing in the name of the assessee was treated as the payments to be effected towards acquisition of these shares. Thus, the assessee was allotted 2,800 shares of the face value of Rs. 100 each and the credit balance of Rs. 2,80,0....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 5 per share within four months. The assessee fully know that the shares of the company were worthless and that it was continuously running into loss and it was in best interest of the assessee to retrieve whatever it could out of the loan amount instead of going in four further advances; that the assessee was fully aware of the situation was clearly proved by the fact that immediately within four months of the acquisition the assessee sold these shares at a nominal value. 8. The assessee is on further appeal before us. Shri Anil Harish, appearing on behalf of the assessee, submitted that the inferences drawn by the Commissioner (Appeals) from the material evidence of the case are erroneous. He pointed out that one of the partners of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erefore, not possible for them to show that the advances made to the company were in the course of financing business. It could be considered only as an investment to earn interest. As a matter of fact, they did earn interest therefrom which had been subjected to tax in the years. It is an accepted position that the company has completely depleted their paid-up capital and their carried forward loss was about Rs. 10 lakhs. Such a company will never be able.to pay back the principal or interest to the assessee. 10. There had been some change in the composition of the company and it appears that among the three groups, who controlled the company, it was decided that one group will take over and two other groups will leave the company. Cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 5 per share, later, the assessee could claim that there is a short-term capital loss. Now the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 had stated that whereas tax planning made may be legitimate, provided it is within the framework of the law, colourable devices can not be a part of tax planning and it is wrong to encourage or entertain the plea that it is honourable to avoid the payment of tax by dubious methods. At p. 160, the Supreme Court observed 'in our view, the proper way to consider taxing statute while considering a device to avoid tax is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but....