Delhi High Court

Commissioner Of Income Tax vs Siel Ltd. on 24 July, 2014

$~19 & 20
*    IN THE HIGH COURT OF DELHI AT NEW DELHI

                                          Date of decision: 24th July, 2014


+                      INCOME TAX APPEAL 1616/2010


       COMMISSIONER OF INCOME TAX            ..... Appellant
               Through   Mr. Sanjeev Sabharwal, Sr. Standing
               Counsel.

                            versus
       SIEL LTD.                                           ..... Respondent
                       Through       Mr. Mayank Nagi, Advocate.

+                      INCOME TAX APPEAL 1619/2010


       COMMISSIONER OF INCOME TAX            ..... Appellant
               Through   Mr. Sanjeev Sabharwal, Sr. Standing
               Counsel.

                            versus
       SIEL LTD.                                           ..... Respondent
                       Through       Mr. Mayank Nagi, Advocate.

       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J. (ORAL)

These two appeals by the Revenue pertain to one assessment year

2000-01 and the challenge is to acceptance of book loss of Rs.10.12

crores/indexed loss of Rs.13.62 crores on sale of shares @ Rs. 2.02 per

share of Siel Tizit Ltd. on the ground that the sale was a colourable device.

The said shares were sold by the respondent assessee to the joint venture

partner Plansee Tizit Aktiengesellschaft, (Plansee, for short), an Austrian

company.

2. Plansee and the assessee had entered into a joint venture agreement

dated 20th June, 1994, followed by first amendatory agreement dated 6th

August, 1996 for setting up and forming the company Siel Tizit Ltd. for

carrying on business of manufacture, sale, distribution, export and other

dealings in hard metals. The two joint venture partners equally acquired

the paid up equity capital of 15000000 equity share of Rs.10/- each

aggregating to Rs.1500 lakhs i.e., the two joint venture partners had 50%

share holding.

3. In the previous year i.e., assessment year 1999-2000, the

respondent-assessee renounced in favour of Plansee their entitlement to

subscribe 3000000 equity shares of Rs.10/- each in the rights issue.

Plansee's share holding increased to 58.3% and while respondent

assessee's share holding got decreased to 41.7%. Thereupon, the

respondent-assessee and Plansee had entered into an agreement dated 31 st

March, 1999. The agreement records that Seil Tezit Ltd. had proposed to

offer one crore fresh equity shares of Rs.10/- each for cash at par on rights

basis, but the respondent assessee due to financial difficulties, was unable

to subscribe to 40166667 shares which would be offered to them by way

of rights offer and had decided to renounce the same in favour of Plansee.

Further, Plansee on request agreed to buy the assessee's shareholding

consisting of 12700000 equity shares for consideration of USD 600000,

which on conversion, came to Rs.2.02 per share of face value of Rs.10/-

each.

4. This, resulted in book loss of Rs.10.12 crores or indexed loss of

Rs.13.62 crores on capital account. The Assessing Officer did not accept

the said capital loss recording the following reasons:-

"(1) There was a close connection between the two joint venture partners who shared between themselves the control over shares of STL in a ratio.

(2) Different rates - when the rights were renounced at cash at par the sales should have been made also at par. If the two parties "can agree for the buyback at mutually agreed prices then . the prices at which the shares were sold also seem to be mutually agreed. upon. It is also a fact through self concession by the assessee that Rights were renounced without any price orpayment of premium. It is more than clear that this arrangement finds echo in the low prices being paid' for by Plansee on the purchase of 1,27,00,000 shares from Siel Ltd. The premium pr the prices which Plknsee would have been liable to pay has been built into the low costs it has incurred on the purchase of share from its JV partner.

(3) The dates of agreement (31.3.99) and slate of valuation (sighed- on 22nd April, 99) and the RBI approval received vide letter. dated 29th April, 1999 prove that this was part of an arrangement. It was already agreed in the agreement which was placed as evidence (as discussed above) that Plansee would buy 127 lakh shares held by Siel for US $. 6,00,000/-. *The valuation is dated April, 1999. It more than proves that the valuation was an afterthought and only a ploy to get RBI's approval

for remitting, the amount otherwise it was not possible for the two JV particulars to arrive at the value of $ US 6,00,000 before the valuation.

(4) It is for reasons best known to the JAP partners that where the need for getting the valuation done was when the rate was already available. Rights renunciation and the sale of shares which have been done by Siel Ltd in favour of Plansee Tizit has taken place in such span of time where the rates could not have varied much. Rights renounced at Rs. 10 at cash at par was the ideal rate which would have formed the basis of sale of shares to Plansee tizit.

(5) The fact of the matter is that the assessee had retained with him the optiim to buy back shares but this time at prices mutually agreed. It is also corroborated that in the valuation that the shares were held only by the two JV partners and that it was not guided by market forces.

(6)It has been done on the pretext that Siel Tizit was in need of funds. The rationale behind infusing additional funds at low prices defies logic. If the company's fund crunch was ,to-be met by this sale it should have been done at higher prices or at least at par on which the rights have been renounced.

(7) No premium was received from Plansee Tizit. Its likely the premium was built into the low prices which were received by Siel Ltd.

(8) Through this arrangement the assessee has been able to pass off capital losses without parting with its funds. The option retained for buy back point to a scheme which would be effectuated later.

Going by the above it is established that the assessee has used the mutuality involved in the dealings between the two JV partners to sell shares at prices deliberately made lower than comparable prices at which the rights renunciation was offered. The sale should have been made at Rs 10 per share at which the rights were renounced. If this was the case the assessee would not have incurred any loss on the sale of shares or

Siel Tizit Limited to Plansee Tizit. It has been laid by the Honourable Supreme Court in the case of Mcdowell and Co. Ltd. Vs. Commercial Tax Officer, 154 ITR 148 (1985), that it is for the court to expose the real nature of the 'device adapted by the tax payer, whether it is legitimate avoidance of tax or evasion of tax under cloud of avoidance. It has been further held that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

5. The appellant did not succeed before the first appellate authority,

but on further appeal, succeeded before the tribunal.

6. At the very outset, we first note that it is not the case of the

Revenue that the transaction relating to sale of shares in question was

bogus transaction having no commercial or business reasons. It is not

disputed that shares were transferred by the assessee to Plansee. In these

circumstances, we do not think that the principle of colourable device as a

part of tax evasion plan would be applicable. It is not the case of the

revenue that sale transaction was a cover up, a device and the de facto or

real transaction was different. The real issue and question is whether the

sale price received by the respondent assessee was the true and correct

price or there was some undeclared consideration paid, which was not

brought in the books.

7. The Assessing Officer primarily relies upon the fact that Plansee

had acquired shares in Seil Tezit Ltd. in the assessment years 1999-2000

and 2000-01 at the face value of Rs.10/- each and not at the discounted

price of Rs.2.02 per share. This, we do not think, can be a ground or

reason to disregard and hold that sale of shares @ Rs.2.02 per share does

not represent the true and correct price. Rights issue was for the purpose

of generating and augmenting the capital in the loss making company.

The share application money paid, became paid up share capital. The

price paid for acquiring rights shares, cannot be equated with the price

paid to acquire shares from shareholders in the present case. Due to non-

subscription of right shares by the respondent assessee, their share holding

had come down from 50% to 41.7% in the last year. As further capital

infusion was required in the loss making venture, one crore equity shares

of the face value of Rs.10/- each for cash at par on rights basis were

offered for subscription, which the respondent assessee did not want to

subscribe because of their financial difficulties. On subscription of the

fresh issue of one crore shares, the share holding of the assessee would

have got reduced to mere 5% with Plansee becoming 95% shareholder.

8. In the assessment order, it is not recorded or stated that Siel Tizit

Ltd. had not incurred substantial and huge loses. It was not contested that

the respondent assessee was facing financial crunch. It is correct that the

respondent assessee and Plansee were joint venture partners, but they

were not controlled and under the same management. It is not a case of

the Revenue that the two parties had common shareholders or common

directors. In case of sale of this nature, the seller would like to get the

best price and the buyer would like to purchase the shares on the

depressed or lowest price, specially, when there were losses and further

capital had to be inducted. It is, therefore, incorrect to hold that it was not

a case of arms length transaction as such.

9. In the present case, the respondent assessee was required to obtain

approval/permission of the Reserve Bank of India and Ministry of

Industry, Department of Industrial Policy and Promotion to enable

Plansee to purchase existing share holding of the respondent assessee.

Ministry of Industry, Department of Industrial Policy and Promotion by

their letter dated 20th April, 1999, examined the request made by Siel Tizit

Ltd. by letter dated 31st March, 1999 and granted approval, subject to the

following conditions:-

"2. The approval is subject to the condition that no royalty would be payable and the Indian company will continue to have the option for purchasing such number of shares in the joint venture company in one or more tranches at a price to be mutually agreed between the parties within a period of 3 years from the date of acquisition of such shares by Plansee either from company or Siel, which will enable Siel to have 50% share holding in the joint venture company.

3. Further, the above approval is also subject to the condition that issue/transfer/pricing of shares shall strictly be as per SEBI/RBI Guidelines."

10. Thereafter, Reserve Bank of India by their letter dated 29th April, 1999,

accorded approval in the following words:-

"2. We note that the Department of Industrial Policy and Promotion, Ministry of Industry, Government of India, Foreign Collaboration Section-II have vide their letter No.FC II 833(96)/837(96)-Amend dt. 20th April, 99 approved increase in the foreign equity participation in the paid up capital of Seil Tizit Ltd. New Delhi (STL) by Plansee Tizit Aktiengesellschaft, Austria (Plansee) from 58.3% to 95%. Having regard to the above, we advise that we have no objection under Section 29(1)(b) of Foreign Exchange Regulation Act, 1973 to Plansee acquiring 1,27,00,000 eq. Shrares of Rs.10 each (35.28%) of STL from Siel Ltd. New Delhi (SL) for an aggregate consideration of US$ 600,000.

11. The aforesaid said letter also mentions that the conditions, which

had been imposed including the conditions contained in the letter dated

20th April, 1999 of Ministry of Industry, Department of Industrial Policy

and Promotion would apply.

12. Thereafter, Reserve Bank of India, Exchange Control Department

by their letter dated 16th June, 1999 gave their no objection to the

transaction in question under the provisions of the Foreign Exchange

Regulation Act permitting Plansee to acquire shares in Seil Tizit Ltd. from

the respondent assessee for US$ 600000. The relevant portion of the said letter

reads as under:-

"2. We advise that we have no objection to Siel Ltd. New Delhi (SL), the resident shareholders Siel Tizit Ltd. New Delhi (STL) transferring 1,27,00,000 shares of Rs.10 each of STL in favour of Tizit Aktiengesellschaft, Austria (Plansee) for an aggregate consideration of US$ 600,000.

3. This permission may also be treated as Reserve Bank's permission u/s 29(1)(b) of FERA 1973 to Plansee for acquiring the above shares STL from SL, the above resident shareholders of STL.

4. This permission may also be treated as our permission of STL under Section 19(4) for effecting consequential changes in its Register and under Section 19(1)(a) of the FERA 1973 for the export of relevant share certificates of Plansee.

5. Please note that his permission shall remain valid for 3 months during which period all transfer formalities in respect of the above shares shall be completed."

13. The assessee had relied upon the valuation report, which was

accepted by the Reserve Bank of India, Exchange Control Department

when they granted express permission vide letter dated 16 th June, 1999.

Learned counsel for the Revenue submitted that the valuation report was

ambiguous and mentions that the Seil Tizit Ltd. was not a listed company

and the market price was not available. We do not think that on this basis

we can hold that the consideration declared and paid was sham and not the

correct amount, which was paid. It was open to the Assessing Officer to

go into the books of account and balance sheet and, if required and

necessary, make his own valuation. It is not the case of the Revenue that

there was secondary or additional evidence to show or corroborate the

finding that the sale consideration mentioned was not the genuine or true