Itc Classic Finance Ltd. vs Deputy Commissioner Of Income Tax ...
2003 Latest Caselaw 550 Bom

JUDGMENT

S.H. Kapadia, J.

1. Assessee is a finance company. It is a public limited company carrying on business of leasing, financing hire-purchase, dealing in shares and other financial activities. We are concerned with financial year ending 31st March, 1991, relevant to the asst. yr. 1991-92 in this appeal preferred by the assessee. Assessee has acquired 1,00,000 equity shares of Rs. 10 each at par from promoters quota-out of total capital consisting of 10,00,000 shares of ITC Agro-Tech Ltd. on 13th May, 1988. The said shares were sold at Rs. 18.90 per share, resulting in a profit of Rs. 8,90,000 during the asst. yr. 1991-92. The assessee offered the whole of the profit to tax. The decision to sell was taken by the assessee as the edible oil industry was not doing well and that ITC Agro-Tech Ltd. had not declared dividend since 1988. Hence, the entire bulk of shares was sold on 18th March, 1991. On 10th June, 1991, the shares of ITC Agro-Tech, which were earlier unquoted, were listed on the Calcutta Stock Exchange. The trading in this counter commenced on 27th June, 1991, and in the very first week, the shares of ITC Agro-Tech Ltd. were quoted at Rs. 59.

Under the above circumstances, before the ITO, the assessee contended that the break-up value of the snares of ITC Agro-Tech Ltd. was Rs. 2.55 and that the assessee had sold those shares at Rs. 18.90 per share. The assessee contended that, under the circumstances, the sale price was reasonable. That, under the circumstances, the decision to sell was a proper financial decision taken by the assessee. That, under the circumstances, unquoted shares were sold on 18th March, 1991, at the best obtainable price of Rs. 18.90 per share. For this purpose, the assessee relied upon the copy of the contract note issued by M/s Vinod Baid & Co., stock & share brokers, dt. 18th March, 1991. However, the AO took the view that the assessee had suppressed the income. That, there was no reason for the assessee, who was a trader, to sell the shares on 18th March, 1991, when the procedure for listing was pending before the Calcutta Stock Exchange. That, the shares obtained were from promoters quota and they were listed on Calcutta Stock Exchange on 10th June, 1991. Therefore, the AO took the sale price at the rate of Rs. 54 per share and made an addition of Rs. 35.10 lacs. This finding was confirmed by the Tribunal. Hence, the assessee has come by way of appeal under Section 260A of the IT Act.

Question to be answered by the Court

Whether, on the facts and circumstances of the case and in law, addition of Rs. 35.10 lacs, being the difference between the sale price of the shares in question at the rate of Rs. 18.90. per share on 18th March, 1991, and the estimated realizable price of Rs. 54, after listing on Calcutta Stock Exchange on 27th June, 1991, as suppressed income, was justified ?

Arguments.

2. Ms. Aarti Vissanji, learned counsel appearing on behalf of the appellant-assessee contended that, in this case, there is no finding that the sale dt. 18th March, 1991, by the assessee at the rate of Rs. 18.90 per share was a sham transaction or that the assessee had received any consideration over and above Rs. 18.90 per share and nor are there any facts which suggest that the transaction was a device for tax evasion and nor is there any evidence to suggest that the transaction was a device for tax evasion. She contended that the only reason for making the above addition given by the AO was that the assessee was a finance company; that it was in the business of buying and selling of shares; that the process of listing was pending before the Calcutta Stock Exchange and, therefore, the assessee should have waited and realised the higher price, which ultimately prevailed in the market at Rs. 54 on 27th June, 1991. Ms. Vissanji vehemently urged that the reason given by the AO was arbitrary. That, even assuming that the assessee was a trader in shares, no addition could be made on the basis of notional income unless the Department was in a position to prove that the sale was sham or that the assessee had received consideration over and above the stated sale price or if the facts or evidence suggest that the transaction was entered into as a device for tax evasion. In this connection, she relied upon the judgments of the Supreme Court and the High Court in various matters which lay down that even in cases of sale of quoted shares, the receipt of sale price cannot be ignored and that the assessee cannot be taxed on notional income unless the sale was held to be a sham transaction or a device for tax evasion. She contended that, in the present case, there is no such finding. She contended that, in the present case, the sale was a transaction at an arm's length. That, there is no finding of fact recorded by the AO in this case that the transaction was between interconnected parties. She contended that, in this case, there is no finding of the AO that no monies had passed and that the transaction was based only on book entries. That, in the absence of any such findings of understatement of price, the assessee cannot be taxed on the basis of notional value. She also relied upon the Law & Practice of Income-tax by Kanga & Palkhiwala, 8th Ed., Vol. 1, p. 1177, and submitted that even in cases of sales at gross undervalue by a company to an associated company, the Department is entitled to find that it is not a transaction made in the course of trade and, therefore, disallow the resulting loss as not being a business loss; but the vendor cannot be assessed on the notional profit which it did not make but could have made by effecting the sale at the market value.

Findings

3. The central argument advanced on behalf of the appellant-assessee is that there is no finding recorded by the authorities below impugning sale dt. 18th March, 1991. That, there is no finding that the assessee has received any consideration over and above Rs. 18.90 per share. That, the only reason for making the above addition was that the assessee was a finance company. That, it was in the business of buying and selling of shares. That, the process of listing of shares of ITC Agro-Tech Ltd. commenced in June, 1991, and in the circumstances the AO was wrong in making the addition. We do not find any merit in this appeal. Firstly, there is a concurrent finding of fact recorded by the authorities below that the shares were obtained through the promoters quota which had a lock-in period. There is a concurrent finding of fact recorded by the authorities below that the income which belonged to the assessee had been earned by some other person. In this connection, it is important to note that the sale took place through the contract note. When we read that sentence in the finding of the Tribunal, we inquired from the assessee as to why the sale had been effected in favour of the broker M/s Vinod Baid & Co. It is interesting to note that no particulars have been given by the assessee with regard to this particular sale. Who paid the consideration for the shares has also not been disclosed. If the shares were not listed on the stock market, why were the shares sold to the broker. The contract note, however, indicates that the sale was through the broker and not to the broker. These queries were raised by the Court as the impugned sale is dt. 18th March, 1991, which has corelation with the assets diverted by Harshad Mehta after being notified under the Special Court (Torts) Act, 1992. In this regard we may mention that one of us (Kapadia, J.) has been presiding over Special Court and Special Court has instituted an enquiry in which. CBI has filed its report which is lying in a sealed cover with OSD attached to the Special Court. We do not wish to go into that inquiry at this stage. However, the transaction does not appear to be overboard. In order to satisfy, our conscience, we called upon the assessee to give us particulars of consideration received by the assessee. We also called upon the assessee to produce any record indicating delivery of shares by the assessee to the broker M/s Vinod Baid & Co. None of these details are forthcoming. We also called for an affidavit of the broker. However, the assesses has refused to obtain the affidavit. Under the above circumstances, we do not wish to interfere with the concurrent finding of fact.

4. In the circumstances, the above question is answered in the affirmative i.e., in favour of the Department and against the assessee.

5. Accordingly, appeal is dismissed with no order as to costs.