COMMISSIONER OF INCOME-TAX VS SHEKHAWATI RAJPUTANA TRADING CO. (P.) LTD.
2000 P T D 2833
[236 I T R 950]
[Calcutta High Court (India)]
Before Shyamal Kumar Sen and Bijitendra Mohan Mitra, JJ
COMMISSIONER OF INCOME-TAX
versus
SHEKHAWATI RAJPUTANA TRADING CO.(P.) LTD.
Income-tax Reference No. 180 of 1992, decided on 17/04/1998.
(a) Income-tax---
----Business loss---Loss on sale of shares by assesee-company to its Chairman ---Assessee not proving that transaction was genuine---No evidence that there was no other buyer---Sale not effected through broker---Cheques issued for purchase and repurchase when both parties did not have enough funds in Bank---Transaction of sale was not genuine---Loss on sale of shares was not deductible---Indian Income Tax Act, 1961.
The assessee-company claimed deduction of loss sustained in sale of shares to its Chairman. The claim was negatived by the Income-tax Officer and the Commissioner of Income-tax (Appeals) but allowed by the Tribunal. On a reference:
Held, that the transaction in the instant case was between the assessee-company and its Chairman. Hence, the onus lay heavily on the assessee to prove the genuineness of the transaction. It had not discharged the onus. Cheques were issued simultaneously by the parties in favour of each other for purchase and repurchase on the same day without both the parties having sufficient funds in the bank, and that itself showed that the transaction was not genuine. This aspect, however, could not be explained by the assessee. Regarding sale of shares of three companies particularly J, no evidence was produced on behalf of the assessee that there was no other buyer of the shares except K, its Chairman, although those shares were quoted in the stock exchange. The fact that sale through broker of listed shares is essential under the Securities Contracts (Regulation) Act, 1956 and that it was not done in the instant case was also ignored by th8 Tribunal. The order of the Tribunal was perverse. The Tribunal was not correct in law in directing the Assessing Officer to allow the share of loss of Rs.3,38,651.50 to the assessee-company.
CIT v. S.P. Jain (1973) 87 ITR 370 (SC); Kamani Properties Ltd. v. CIT (1971) 82 ITR 547 (SC); Latilla v. IRC (1943) 25 TC 107 (HL); McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC); (1985) 59 STC 277 (SC) and McDowell & Co. Ltd. v. CTO (1977) 39 STC 151 (SC) ref.
(b) Income-tax---
----Reference---Powers of High Court and Supreme Court---Power to set aside finding of Tribunal---Indian Income Tax Act, 1961, S.256.
The High Court and the Supreme Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language as a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusion on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated.
JUDGMENT
SHYAMAL KUMAR SEN, J.;--In the instant reference under section 256(2) of the Income Tax Act, 1961, the three questions raised at the instance of the Revenue for consideration are as follows:
"(1) Whether, on the facts and circumstances of the case, the finding of the Tribunal that the transactions of sales of shares of two companies, viz., (a) The General Fibre Dealers Ltd., (b) Bhagatpur Tea Co., with Shri R. L. Kanoria, Chairman of the assessee company, had been proved and were done as an act of prudence, was based on no evidence or partly relevant or partly irrelevant evidence and is otherwise perverse and arbitrary?
(2) Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that the revenue failed to establish its case of false sale transaction of shares of Jokai India Ltd. to Shri R.L. Kanoria, Chairman of the assessee-company, and had objected the share loss on surmise and conjectures, was based on no evidence or partly relevant or partly irrelevant evidence and is otherwise perverse and arbitrary?
(3) 'Whether, considering the totality of the facts and in the circumstances of the case, the Tribunal was correct in law in directing the Assessing Officer to allow the share of loss of Rs.3,38,861.50 to the assessee-company ?"
The assessee-company claimed loss of Rs.3,38,861.50 from the following dealings.
| Date of purchase | Shares | No. of shares | Cost | Date of sale | Sale price | Loss |
| | | | Rs. P. | | Rs. | Rs. P. |
| 10-3-1974 | The General Fibre Dealers Ltd. | 5,760 | 1,53,867.50 | 10-7-1981 | 86,400 | 67,467.50 |
| 18-8-1976 17-9-1980 | Bhagatpur Tea Co. Ltd. | 1,448 | 1,45,562.50 | -do- | 21,720 | 1,23,842,50 |
| 23-6-1986 | Jokai India Ltd. | 21,850 | 5,95,486.50 | | 4,47,925 | 1,47,561.50 |
| 17-6-1980 | | | | -do- | | |
| | | | | | 5,56,045 | 3,88,861.50 |
All the aforesaid sales were made by the company with the Chairman of the assessee-company Sri R.L. Kanoria.
The Assessing Officer disallowed the assessee's claim on the following grounds:
(i) Within 66 days, i.e., on September 14, 1981, the assessee-company repurchased all the shares - of Jokai India Ltd. for a sum of Rs.3,82,375.
(ii) On scrutiny of the bank statement of both assessee-company and Shri R. L. Kanoria, it transpires that on July 10,1981, the assessee company issued a cheque for a sum of Rs.5,56,000 to Shri R.L. Kanoria when the assessee-company had only Rs.999.37 in their credit balance.
(iii) On the same date Shri R.L. Kanoria issued a cheque for Rs.6,56,046 to the assessee-company to purchase the above noted shares when Shri R.L. Kanoria had only Rs.434.53 in the bank account for disposal. Both the assessee-company and Sri R.L. Kanoria had their account with United Commercial Bank at No. 2, India Exchange Place, Calcutta, and neither actual transfer of money took place nor the transferee had any source to purchase the share.
(iv) While repurchasing the shares of Jokai India Ltd. again Shri R.L. Kanoria iW7ued a cheque for Rs.3,82,000 to the assessee-company and the assessee-company issued a cheque for Rs.3,82,275 for repurchase. Here also the parties had only petty balance in their bank accounts and had no money for such transaction.
From the above facts the Assessing Officer held that no real business transaction between the assessee-company and Sri R.L. Kanoria took place and the loss shown in the accounts was nothing but an eye-wash. Moreover, the Assessing Officer found that the transactions were not effected through any recognised broker when no private dealings of listed shares within 10 kms. of the place where stock exchange being situated were permissible and were void tinder the Securities Contracts (Regulation) Act, 1956.
The loans taken by the company from Sri R.L. Kanoria and the payments made by the assessee are as follows:--
The assessee took following loans from Sri Kanoria--
| | | Rs. |
| 31-3-1981 | By cheque | 5,000 |
| 4-6-1981 | - do - | 2,00,000 |
| 16-6-1981 | - do - | 1,000 |
| 23-6-1981 | - do - | 1,00,000 |
| 20-7-1981 | - do - | 5,000 |
| 31-7-1981 | -do- | 1,000 |
| 14-9-1981 | - do - | 3,92,000 |
| 29-9-1981 | - do - | 1,000 |
Against the above loan receipt the assessee made the following payments immediately after the receipt.
| | | Rs. |
| 13-4-1981 | By clearing | 5,525.53 |
| 8-6-1981 | -do- | 2,00,000.00 |
| 23-6-1981 | -do- | 1,00,165.00 |
| 21-7-1981 | -do- | 1,081.00 |
| 14-9-1981 | By transfer | 3,82,375.00 |
| 30-9-1981 | -do- | 1,000.00 |
The Commissioner of Income-tax (Appeals) after considering the facts of this case confirmed the order of the Income-tax Officer, inter alia, for the following reasons:
"On the facts of the case the share transactions with the Chairman, Shri R.L. Kanoria, do not appear. to be genuine transactions. They appear to have been entered into with the object of reducing the appellant's liability to tax as per a scheme of tax planning of tax avoidance."
The Commissioner of Income-tax (Appeals) after considering the assessee's submission and the whole facts of the case in respect of shares of Jokai India Ltd. held that the arrangement for sale of shares was a part of well-planned scheme of tax avoidance and there was no commercial prudence in selling away substantial holdings of 21,850 shares to only one person when nobody would try to sell away the shares in a declining market. The above arrangement was a part of tax planning with the ultimate purpose of enabling both the assessee and Sri R.L. Kanoria to claim losses in their respective income-tax assessments. In holding so the Commissioner of Income-tax (Appeals) took support from the decision of the Supreme Court in the case of McDowell & Co. Ltd. (1985) 154 ITR 148.
In respect of the alleged transaction of shares of General Fiber Dealers Ltd. and Bhagatpur Tea Co. Ltd., the Commissioner of Income-tax (Appeals) observed that if there was no prospect of receiving any dividend Sri. R.L. Kanoria who had a thorough knowledge of the working of the assessee-company would not have acquired them. He also pointed out that on June 24,1982, the assessee-company purchased 2,400 shares of General Fibre Dealers Ltd. at Rs. 30 per share from Smt. Urmila Devi Kohthari, sister of Sri R.L. Kanoria and that Sri Kanoria acquired the shares to gain control of the two companies and under these circumstances the assessee-company could have demanded any price for those shares. The Commissioner of Income-tax (Appeals) accordingly disallowed the assessee's claim of losses in respect of the shares of those companies also.
Against the Commissioner of Income-tax (Appeals)'s order, the assessee filed appeal before the Tribunal. The Tribunal accepted the submissions put forward by the assessee-company. The Tribunal held as under:
"We have carefully considered the rival submissions, facts and circumstances of the case and material on record. It is not in dispute that the assessee-company carried on business of share dealings. It is also not in dispute that sale of all shares and repurchase of shares of Jokai India Ltd. are supported by vouchers. The shares of three companies were sold to R.L. Kanoria for a total consideration of Rs.5,56,055 and the amount was received through cheque which was duly credited in the bank account of the assessee. The purchase of shares of Jokai India Ltd. is also reflected in the bank account of the assessee. The assessee's claim that sale of shares was effected through spot delivery has also not been refuted. Thus, prima facie the transactions have been established. For treating these transactions as non-genuine the lower authorities took into account the fact that transactions were carried with the Chairman of the assessee-company. The Commissioner of Income-tax (Appeals) held that transactions to be colourable device claimed at tax avoidance and, therefore, liable to be ignored in view of the decision of the Supreme Court in the case of McDowell & Co. Ltd. (1985) 154 ITR 148.
To examine whether there was any tax avoidance we looked into the relevant. record of the assessee as well as that of Shri R.L. Kanoria. In the assessment year 1982-83, after disallowance of share loss as also interest of Rs.93,622 the net income of the assessee-company. was determined at Rs.9,437. The Commissioner of Income-tax (Appeals) further allowed interest of Rs.93,622 and thus, income of the assessee-company has been assessed at loss without considering the share transactions in question. Thus, no case of tax avoidance is established as for a. the assessee-company is concerned. Turning to the file of Sri R.L.Kanoria, we find that assessment in his case for the assessment year, 1982-83 was made on a total income of Rs.71,530 as per order, dated January 28,1985, by the Income-tax Officer, Central Circle XXVILL, Calcuta. In the said assessment the Income-tax officer disallowed deduction of interest of Rs.3,26,646 and share losses of Rs.81,749 and Rs.43,181. The share loss which included share dealings with the assessee was disallowed on the ground that these transactions were carried on with the companies in which Sri Kanoria was interested. It was further observed that the transactions were carried out without any registered broker. On appeal, the Commissioner of Income-tax (Appeals) as per order, dated February 10, 1988, upheld the disallowance of interest but directed the Income-tax Officer to re-examine similar contentions as advised before us in respect of share loss. The Assistant Commissioner in compliance with above directions reconsidered the matter and as per order, dated July 3, 1989, allowed loss of share dealings to Sri Kanoria. In the said order net income of Sri Kanoria has been taken at Rs.5,740, long term loss of Rs.43,181 has been allowed to be carried forward. Thus, no income has been assessed even in the hands of Sri Kanoria. In other words, no tax avoidance has been proved. It is interesting to note that all the share dealing in question have been accepted by the Assistant Commissioner in the assessment. Thus, when purchase and sale have been accepted in the case of Sri Kanoria, there is hardly any reason and justification for the Revenue to blow hot and cold and not accept them in the case of the assessee-company. In consistence with the order passed in the case of Sri Kanoria, we must hold that the lower authorities were not justified in holding the transactions in question non-genuine and ignoring the loss claimed in share dealings. The share loss has to be allowed and we direct the lower authorities to allow the loss to the assessee.
The lower authorities were not justified in treating the three transactions of different shares as one transaction. The sale of shares of General Fibre Dealers Ltd. and Bhagatpur Tea Co. are required to be considered separately. It is not in dispute that these companies had not declared any dividend for the past several years and had huge accumulated losses. The shares of these companies were not quoted in the market but had nil value by the break-up method on the date of sale. It is also not disputed that Sri Kanoria was a creditor of the assessee-company and on the loan advanced by him, the assessee-company was paying interest at Rs.18 per annum when it was receiving no income from the share holding. The assessee's case that sale of shares was effected to reduce liability to pay interest is borne out from the record. We are also unable to agree with the Commissioner of Income-tax (Appeals) that the assessee-company as "debtor" could dictate and get any price for shares from Sri Kanoria. There is nothing on record to refute the assessee's claim that there was no buyer of the above shares expect Sri Kanoria. As stated by the lower authorities, the price and position of the shares change from day-to-day, and, therefore, the Commissioner of Income tax (Appeals) was not correct in rejecting the transaction in question on account of purchase of shares of General Fiber Dealers Ltd. from Smt. Urmila Devi Kothari at Rs.30 per share, particularly when sale rates have not been challenged. The above independent transaction took place almost above a year after the sale in question. Share transaction was definitely an act of business prudence. The companies did not perform well and, therefore, loss in the shares. occurred due to fall in prices and this fact has not been disputed. The Commissioner of Income-tax (Appeals)'s view that sales should not have been effected by the assessee-company in declining market, in one lot to one person on a single day on facts are unjustified.
Every businessman is entitled to arrange his affaires in the manner he likes. Sri Kanoria paid the share price through cheque and the cheque was duly honoured and, therefore, low balance in the bank account was not material. It has also not been shown on record that spot delivery of shares in question was hit by the provisions of the Securities Contracts (Regulation) Act. On the other hand, the transactions have been accepted in the case of the purchaser, Sri Kanoria. Thus, the transactions of sale of shares of two companies, in our view, had been proved and prima facie looked to be an act of business prudence, as far as the assessse-company is concerned.
The sale of shares of Jokai India Ltd. stands on different footing as these shares were quoted and were repurchased after. 66 days. The Assessing Officer, therefore, viewed the transaction with great suspicion, requiring deeper probe. But here again the assessee's claim that on the date of sale the price of shares had come down to Rs.20 per share had not been disputed. Thus, loss would have occurred even if the shares were also sold to an outsider and not to Sri Kanoria. Likewise repurchase price at Rs.17.50 per share has not been challenged. Without challenging sale and purchase rate, no case of diversion of income or avoidance of tax could be established. The question why the same shares were purchased after 66 days of their sale may not be relevant to a person carrying on the business of share dealing. He may not be able to lead demonstrative evidence to show the transaction to be an act of prudence after a few years although selling and buying of same scrip in short interval, is not uncommon in share dealing business. From Sri Kanoria's account it is evident that in the sale purchase transaction the assessee-company reduced its loan liability at Rs.3 per share and thus had gained, to the above extent. If purchase and then sale and the resultant loss was to be questioned it was to be done in the case of Sri Kanoria. Therefore, as stated earlier, the transactions have been duly accepted. Thus, on totality of circumstances we are unable to hold the transaction as non-genuine. The Revenue has failed to establish its case and rejected share loss on surmise and conjectures:
For the above reasons, we allow loss in share dealing to the assessee as claimed. Accordingly, we set aside the orders of the lower authorities on this point and direct the Assessing Officer to allow. the above loss to the assessee."
Against the said order of the Tribunal, the instant reference has been directed.
The questions raised by the Revenue and referred by, the Tribunal to this Court seek to challenge the aforesaid order of the Tribunal mainly on the ground that the same is passed on no evidence or partly relevant or partly irrelevant evidence or is otherwise arbitrary and perverse. It has been pointed out on behalf of the Revenue that the loss claimed by the appellant at Rs.3,38,868 cannot be allowed for the following reasons:
(a) Sale of the unquoted shares of General Fibre Dealers Ltd. and Bhagatpur Tea Co. Ltd. at a substantial loss was mainly intended to benefit its, Chairman, Sri, Kanoria, to acquire control over the two companies. Accordingly, even assuming for argument's sake that the relevant loss was a business loss, this loss should be disallowed as being on capital account.
(b) The Income-tax Officer questioned the propriety of the appellant in purchasing 2,400 shares of General Fibre Dealers Ltd. at Rs.30 per share on June 24,1982, from a shareholder and a relative of the director, namely, Smt. Urmila Kanbria, when in fact the break up of the value of the share was nil.
(c) Thus, there is absolutely no aspect of commercial prudence involved in selling the unquoted shares to Sri Kanoria at a loss. The impugned sale was effected solely with the object of benefiting the Chairman, Sri Kanoria, to gain control over the other two companies. Accordingly, the item of loss of Rs.67,458 and Rs.1,23,482 cannot be allowed as genuine business loss.
(d) Regarding the sale of shares of Jokai India Ltd. here also there is something fishy about the sale thereof to the Chairman, Sri Kanoria. The main purpose of the sale of shares at Rs.20.50 per share on July 10, 1981, to Sri Kanoria and the subsequent repurchase of the same from him on September,14, 1981, at Rs.17.50 per share appears to be to enable Sri Kanoria to claim shoat-term loss under the head "Capital gain" in respect of the purchase and sale of shares by him respectively on July 10, 1981, and September 14, 1981. In this process the appellant also had tried to claim the benefit of the loss of Rs.1,41,561 for the assessment year 1982-83. This petitioner's arrangement has the character of a well-planned scheme of tax avoidance.
(e) The fact that the cheques were issued simultaneously on the same dates, viz, on. July 10, 1981, and September 14, 1981, by the assessee and Mr. Kanoria in favour of each other does not represent a mere stray coincidence. There was in fact no actual movement of funds from the assessee of Sri Kanoria and cheques were issued by each of them on. the same date had got cancelled against each other. The ultimate purpose of the assessee and Sri Kanoria is to claim loss in their income-tax assessment.
It has further been submitted on behalf of the Revenue that the Tribunal did not consider all the grounds of objection mentioned by the Income-tax Officer or by the Commissioner of Income-tax(Appeals) nor has dealt with the same. The Tribunal mainly based its findings on the ground that the consideration of Rs.5,56,055 was received through cheque and was duly credited in the bank account of the assessee. The Tribunal did not appreciate properly the fact that the transaction was between the company and its Chairman and there was no substantial credit of the parties in the bank, at the time when the cheques were issued by the assessee as well as by its Chairman all upon the same bank, viz., United Commercial Bank. It has also been submitted that all transactions through cheques are not sacrosanct nor do they themselves make the transaction genuine.
It has also been argued on behalf of the Revenue that even assuming that some of the transactions were accepted in case of assessment of Kanoria, it is not conclusive to hold that the transactions should be accepted as genuine, so far as the company is concerned, in view of the facts and circumstances of the case.
It has also been pointed out on behalf of the Revenue that the Tribunal failed to consider several facts as fully mentioned by the Income-tax Officer and the,, Commissioner of Income-tax (appeals) in their respective orders and the said finding of the Tribunal is perverse and cannot be supported in I law.
It has been argued on behalf of the Revenue that the Tribunal failed to consider the following, relevant materials referred to in the order of the Assessing Officer and the Commissioner of Income-tax (Appeals):
(a) Prima facie the transaction being between the assessee-company and its chairman the onus lies heavily on the assessee to prove that the transaction is genuine. The assessee has failed to discharge the said onus. In fact the cheques were issued simultaneously by the parties in favour of each other for -purchase and re-purchase on the same day, i.e, on July 10. 1981 and September 14, 1981, respectively.
(b) The Tribunal failed to deal with the facts that at the time of issuing cheques for Rs.5;56,000 on July 10, 1981, the assessee-company had a credit balance in the bank Rs.999.37 only and at the time of issue of cheques for Rs.5,56,045 by Sri Kanoria he had a credit balance of Rs.434.53 only in the same bank. So, there was no actual movement of funds and the transaction was sham. The Tribunal did not consider this important aspect of the matter.
(c) The fact of sale of shares by the company to its Chairman and the re-purchase thereof within a very short period raises a serious doubt about the genuineness of transaction, which have not been satisfactorily explained by the assessee and not dealt with by the Tribunal.
(d) Regarding the sales of shares of the three companies, particularly, Jokai India Ltd., the assessee produced no evidence that there was no other buyer of the shares expect Mr. Kanoria its Chairman, although those shares were quoted in the stock exchange.
(e) It has been submitted that the assessee has to prove the object of commercial prudence/expediency in the sale/purchase of the shares, which the assessee-company failed to prove, by producing cogent evidence. The Commissioner of Income-tax (Appeals) found that there was no commercial prudence in selling away substantial holding of 21,850 shares of Jokai India Ltd., on the same day to one person. The finding of the Income-tax Officer that the purchase of the same shares by the company after 66 days of sale may not be relevant to a person carrying on business of share dealings is a vague and not a correct finding.
(f) It has also been contended that the Tribunal has not dealt with the objection of the Income-tax Officer that sale through broker of listed shares are essential under the Securities Contracts (Regulation) Act of 1956, and in this case, sale of shares of Jokai India Ltd., was not done through arty broker. There is no finding of the Tribunal on this 'contention expect recording rival submissions.
(g) The Tribunal did not appreciate that by fictitious transactions, the assessee-company and Kanoria tried to claim the assessee-company wanted to help its Chairman, Mr. Kanoria, to gain control over the other two companies and to claim short-term loss under the head "Capital gain" in respect of the shares of Jokai India Ltd.
It has been argued on behalf of the Revenue that this is a case of tax avoidance by resorting to fictitious transactions between the assessee company and its Chairman, Mr. Kanoria, and the principle laid down by the Supreme Court in McDowell's case (1985) 154 ITR 148, applies to the facts of this case.
It has further been submitted on behalf of the Revenue that it is the duty of the Court in the facts and circumstances to lift and/or pierce the corporate veil of the assessee-company to find out the truth as to how by manipulation of transactions of shares of the assessee-company evaded tax.
It has also been argued on behalf of the Revenue that in view of the fiduciary relationship between the assessee-company and its director, Mr. Kanoria, the burden of proving the genuineness of the transaction is on the assessee. It has accordingly been submitted that the question should be answered in favour of the Revenue in the affirmative so far as questions Nos. l and 2 are concerned and question No. 3 in the negative.
We have considered the respective submissions of the learned Advocates for the parties.
Judgment and decision in the case of McDowell & Co. Ltd. v. C.T.O. (1985) 154 ITR 148 (SC) may be taken note of. In the aforesaid decision in McDowell & Co. Ltd.'s case (1985) 154 ITR 148(SC), the appellant company, a licensed manufacturer of Indian liquor at Hyderabad, in appeal by special leave before the Supreme Court questioned the dismissal of its writ petition by the High Court.
Manufacture, sale-wholesale and retail-as also storage and transport of liquor are regulated by the Andhra Pardesh Excise Act, 1968, and the Andhra Pradesh Distillery Rules, the Andhra Pradesh Indian Liquor (Storage in Bond) Rules and the Andhra Pradesh Foreign Liquor and Indian Liquor Rules, all made under the Excise Act. "Excise duty" as defined in section 2(10) of the Excise Act is leviable on the manufacture of liquor and the manufacturer cannot remove the same from the distillery unless the duty imposed under the Excise Act has been paid. Buyers of Indian liquor from the appellant's distillery as alleged by it, obtain distillery passes for release of liquor after making payment of excise duty and present the same at the distillery whereupon the bill of sale or invoice is prepared by the distillery showing the price of liquor, but excluding the excise duty. The appellant's books of account also did not contain any reference to excise duty paid by the purchaser. The appellant paid sales tax payable by it under the Andhra Pradesh General Sales Tax Act, 1957, on the basis of its turnover which excluded excise duty. The company was assessed to sales tax on the basis of its returns, but later, the Commercial Tax Officer was of the view that the company had failed to include the excise duty paid on the liquor sold by it to wholesalers. The taxing authority accordingly called upon the company to show cause why assessments made may not be reopened. The appellant m. -ed the High Court for quashing of such notice and having failed, carried the matter in appeal to the Supreme Court. A Division Bench of the Supreme Court in McDowell & Co. Ltd. v. C.T.O. (1977) 1 SCR 914; (1977) 39 STC 151, 158, examined the provisions of the Excise Act and the Rules made thereunder as also the provisions of the Sales Tax Act. The Supreme Court took the view: (page 162 of 154 ITR) "We hold that intending purchasers of the Indian liquor who seek to obtain distillery passes are also legally responsible for payment of the excise duty which is collected from them by the authorities of the excise Department".
The Supreme Court then proceeded to determine whether excise duty paid directly to the excise authorities or deposited directly in the State exchequer in respect of Indian liquor by the buyers before removing the same from the distillery could be said to form part of the taxable turnover of the appellant distillery. Precedents were referred to and the Court came to the conclusion that excise duty did not go into the common till of the appellant and did not become a part of the circulating capital. Therefore, the sales tax authorities were not competent to include in the turnover of the appellant, the excise duty which was not charged by it, but was paid directly to the excise authorities by the buyers of the liquor. The appellant, therefore, succeeded before this Court and the notices issued by the sales tax authorities were quashed.
The Supreme Court after considering the several earlier decisions held, inter alia, as follows (page 165 of 154 ITR):
"On an examination of the provisions' of the Excise Act, the Rules framed thereunder and the pronouncements referred to above, we are of the view that the conclusion of this Court at page 921 of the reports that intending purchasers of the Indian liquors who seek to obtain distillery passes are also legally responsible for payment of the excise duty is too broadly stated. The 'duty' was primarily a burden which the manufacturer had t0 bear and, even if the purchasers paid the same under the Distillery Rules, the provisions were merely enabling and did not give rise to any legal responsibility or obligation for meeting the burden. We do not propose, however, to examine this aspect any further for the change in rule 76 of the Distillery Rules has clearly affirmed the position that liability for payment of excise duty is of the manufacturer. Provisions of the rules 80, 81, 82, 83 and 84 do not militate against the conclusion that the payment of excise duty is a liability exclusively of the manufacturer. In these rules, detailed provisions have been made regarding obtaining of distillery pass, correct calculation and full payment of excise duty, the manner of depositing such duty and ultimately issue of the spirit under the pass from the distillery. These rules, therefore, do not detract from the position that payment of excise duty is the primary and exclusive obligation of the manufacturer, and if payment be made under a contract or arrangement by any other person, it would amount to meeting of the obligation of the manufacturer and nothing more."
The Supreme Court further held as follows (page 165 of 154 ITR):
" 'Turnover' is defined in section 2(s) of the Sales Act to mean 'the total amount set out in the bill of sale (or if there is no bill of sale, the total amount charged) as the consideration for the sale or purchase of goods (whether such consideration- be cash, deferred payment or any other thing or value) including any sums charged by the dealer for anything done in respect of goods sold at the time of or before the delivery of the goods and any other sums charged by the dealer, whatever be the description, name or object thereof'.
The definition clearly indicates that the total amount charged as the consideration for the sale is to be taken into account for determining the turnover. Where a bill of sale is issued (and obviously the bill has to state the total amount charged as consideration) the total amount set out therein is to be taken into account. In every transaction of sale, there is bound to be seller at one end and a buyer at the other, and transfer of title in the goods takes place for a consideration."
Considering the relevant provisions of the statutes, the Supreme Court, as aforesaid, dismissed the appeal of the writ petitioner.
The Supreme Court in this connection recalled the observations of Viscount Simon in Latilla v. IRC (1943) 25 TC 107 (HL) (171):
"Of recent years much ingenuity has been expended in certain quarters in attempting to devise methods of disposition of income by which those who were prepared to adopt them might enjoy the benefits of residence in this country while receiving the equivalent of such income, without sharing in the appropriate burden of British taxation. Judicial dicta may be cited which point out that, however, elaborate and artificial such methods may be, those who adopt them are 'entitled' to do so. There is, of course, no doubt that they are within their legal rights, but that is no reason why their efforts, or those of the professional gentlemen who assist them in the matter, should be regarded as a commendable exercise of ingenuity or as a discharge of the duties of good citizenship. On the contrary, one result of such methods, if they succeed, is, of course, to increase protanto the load of tax, on the shoulders of the great body of good citizens who do not desire, or (lo not know how to adopt these manoeuvres. Another consequence is that the Legislature had made amendments to our Income-tax Code which aim at nullifying the effectiveness of such schemes."
The Supreme Court further observed 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 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.
The judgment and decision in the case of CIT v. S.P. Jain (1973) 87 ITR 370 (SC), may be taken note of. The facts involved in the aforesaid case are that the assessee, who held certain shares in Rohtas Industries Ltd., and S. K.G. Sugars Ltd., sold them in July, 1952, to two companies D.J.C. Ltd., and M.C. Ltd. These two companies sold those shares to a Rana of Nepal in two lots each on May 30, 1953, and August 28, 1953. One Wood, general manager of the Allahabad Bank, was said to have delivered the shares to the Rana after collecting the sale price of Rs.10,80,000 in cash on those two days and given the amount to one Durga Prasad on loan against two promissory notes and receipts. There was no official record of the transaction, no prior correspondence, no broker and no receipt for the cash payment of Rs.10,80,000. Neither D.J.C. Ltd., nor M.C. Ltd., nor the Rana nor Durga Prasad had any account with the Allahabad Bank in May or August, 1953, the shares were not in the bank's custody, the sale transactions were not through the bank, and no reason was given for the unusual procedure of routing the money through Wood. The letters of Wood produced by the assessee, confirming the transactions, though written on official note-paper of the bank, gave no reference number of the bank and there were no office copies of the letters with the bank. The Rana never attended any general meeting of the shareholders nor appointed any proxy in this behalf, and did not take any steps till April, 1955, to have the shares registered in his name or to collect the dividends amounting to Rs.2 lakhs. It was only in April, 1955, when the price of those shares went up in the market and they had to be sold, that the Rana opened an account with the Allahabad Bank anti in that account were credited sums amounting to Rs. 38 lakhs got by the sale of those shares. Practically the entire sum of Rs. 38 lakhs was encashed by nine bearer cheques for large amounts by Das, a peon of Ashoka Marketing Co., a company controlled by the assessee, and Das was said to have handed over the cash to the Rana at the premises of Sahu Jain & Co., a company with which the assessee was closely associated. The Rana had been introduced to Dujari (Accountant of Ashoka Marketing Co.) by the assessee and Dujari had asked Das to render the service to the Rana. The,, share certificates were found to be in the possession of Ashoka Marketing Co., after their sale to the Rana. Though several opportunities were given, the Rana did- not appear before the authorities to explain the circumstances-under which he purchased those shares, but only his letter was produced." Wood was not produced and there was nothing to show that the letters 'were written by him. The; Income-tax officer held that the Rana merely a name-lender for the assessee, and that the sum of Rs. 10,80,000 belonged to the assessee, and the source of that amount not having been explained by the assessee, assessed the sum as the assessee's income from undisclosed sources. The Appellate Assistant Commissioner upheld the order of the Income-tax Office, but. further appeal in the Tribunal held that the purchase by the Rana was. not. a benami transaction and directed the deletion of the sum of Rs. 10,80,000 from the total income. In arriving at its conclusion, the Tribunal, inter alia, treated the transactions of sale by the vendor companies. to the Rana as having been established by the letters of Wood, and as not having been challenged by the Department, and speculated as to the manner in which the Rana came to make a definite offer for the purchase of the shares and actually purchased the shares across the counter of the bank.
On the Tribunal's findings, the following questions were referred to the High Court
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in declining to consider the documents which were already on record and which the Department wanted to adduce as evidence?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the purchase of the shares by the Rana was not a benami transaction was legally valid?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 10,80,000 from the total income of the assessee by holding that the Rana was not the benamidar of the assessee?."
The Supreme Court observed that what has to be considered in this case is whether the sale of shares by the vendor companies to the Rana on the date when it is alleged to have taken place was a sham and bogus one; and if it was, and the Rana was merely a name-lender; whether the loan alleged to have been advanced by the vendor companies to Durga Prasad of Tumsur was in fact advanced by the assessee. Both are inter-linked and unless the connection of the assessee with the loan is established, the assessment in respect of that amount as income from undisclosed sources cannot be sustained.
The Supreme Court further observed, inter alia, at page 380 of the said report as follows
"The two primary questions that arise for a decision in these appeals are;
(1) Whether the findings of fact reached by the Tribunal are liable to be interfered with on any of the grounds recognised by law? and
(2) Whether the Department has been able to establish that the shares alleged to have been purchased by the Rana were actually purchased by the assessee and that the Rana was a mere benamidar for the assessee?
The findings reached by the Tribunal are, prima facie, findings of fact. Before rejecting those findings, we must be satisfied that there are grounds in this case recognised by law which empower us to interfere with those findings. If the Department succeeds in crossing this hurdle, it has to further establish not merely that, the Rana was not the real purchaser of those shares but that he was the benamidar of the assessee. The question which naturally arises at the very threshold is whether it is permissible for this Court to go behind the findings of fact as found by the Tribunal upon which it had come to the conclusion that the Rana was the real purchaser. "
The Supreme Court took into consideration its earlier decision in Karnani Properties Ltd. v. CIT (1971) 82 ITR 547, 554 (SC), wherein the Supreme Court had indicated the limitations imposed on the High Court and the Supreme Court from interfering with the findings of fact arrived at by the Tribunal. The assessee in that case owned a number of residential flats and was providing various services and amenities. It claimed that its income should be assessed under the head "Business". The Income-tax Officer split the receipts into two parts, one part being treated as rent and the other as "income from other sources" taxable under section 12 of the Act. The Appellate Tribunal, however, held that the second part was assessable as income from the business under section 10. Neither the Department nor the assessee contended that that part was assessable under section 9. The High Court thought that some of ,the facts found by the Tribunal were not correct and on a reappraisal of the material on record came to the conclusion that the income was assessable under section 9 of the Act. This the High Court could. not do as it had no jurisdiction to go behind or question the statements of fact made by the Tribunal unless a reference challenging the findings of fact arrived at by the Tribunal were made to it. It appears that in that case the question whether the findings of fact urged by the Tribunal were vitiated for any reason was not before the High Court. In those circumstances, the Supreme Court pointed out (page 551 of 82 ITR (page 380):
"The jurisdiction of the High Court in dealing with a reference under section 66 is a very limited one. It must take the facts as stated in the statement of the case unless the question whether the findings of the Tribunal are vitiated for one or the other of the reasons recognised by law is before it. "
After considering the case, the Supreme Court held that there can be no doubt that unless the Tribunal has been asked to refer a question impugning the validity of the findings sustainable on any principle of law, the facts stated in the statement of the case would form the basis on which the legality or otherwise of the assessment would alone require to be considered by the High Court. In this case before the Supreme Court the specific question raised on behalf of the Revenue for reference was as follows (page 381):
'"Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that a sum of Rs. 10,80,000 paid for the purpose of the shares was not the assessee's own income was a perverse finding having regard to the, evidence on the record ?
The Supreme Court held that the two questions on which reference has been made impugn the findings and the validity of the Tribunal's conclusion that Rs. 10,80,0110 was not an income from undisclosed sources, but was the product of a genuine sale by the vendor-companies. Dealing with the questions, the Supreme Court further held and observed as follows (page 381):
"In our view, the High Court and this Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper contraction of the statutory language as a matter of law or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted op material partly, relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record. or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated."
The next question that the Supreme Court considered in the aforesaid decision was whether the Department established that the Rana was a benamidar for the assessee. The Supreme Court held that it is not sufficient if the Department establishes that the Rana was the benamidar for some body. It must go further and establish that the Rana was the benamidar of the assessee. There are good reasons to come to a conclusion that the Rana was the benamidar of the assesses.
These are, as have been noted already:
(1) The close association of the assessee with the Rana, which is evident from the record. It was the assessee who introduced the Rana to Nandlal who was a close associate of the assessee and it was Nandlal who introduced the Rana to the Allahabad Bank.
Tote Supreme Court took into consideration several other facts which, according to the Supreme Court, clearly established that the Rana was benamidar of the assessee. The Supreme Court accordingly reversed the decision of the High Court and answering questions Nos. 1 and 2 in the negative and in favour of the Revenue.
Following the aforesaid decisions it appears that the Tribunal has failed to take into account material facts and the same is based on no evidence for the following reasons
(i) The Tribunal failed to take note of the fact that the sale of the unquoted shares of General Fibre Dealers Ltd. and Bhagatpur Tea Co. Ltd., at a substantial loss was mainly intended to benefit its Chairman, Sri Kanoria, to acquire control over the two companies. Accordingly, even assuming for argument's sake that the relevant loss was a business loss, this loss should be disallowed as being on capital account.
(ii) The propriety of the appellant-assessee in purchasing 2,400 shares of General Fibre Dealers Ltd., Rs. 30 per share on June 24, 1982, from a shareholder and a relative of the director, namely, Smt. Urmila Kanoria, when the fact that the break up of the value of the share was nil was ignored by the Tribunal.
(iii) The Tribunal also failed to take into consideration that there is absolutely no aspect of commercial prudence involved in selling the unquoted shares to Shri Kanoria at a loss. The Tribunal followed the effect that the said sale was effected solely with the object of benefiting the Chairman, Sri Kanoria, to gain control over the other two companies. Accordingly, there is no scope for considering the said items of loss of Rs. 67,458 and Rs. 1,23,482 as genuine business loss.
(iv) The Tribunal failed to take note of the fact that the main purpose of the sale of shares at Rs. 20.50 per share on July 10, 1981, to Sri Kanoria and the subsequent repurchase of the same from. him on September 14, 1981 at Rs. 17.50 per share appears to be to enable Sri Kanoria to claim short-term loss under the head "Capital gain" in respect of the purchase and sale of shares by him respectively on July 10, 1981, rind September 14, 1981. In this process, the appellant also had tried to claim the benefit of the loss of Rs.1,41,561 for the assessment year 1982-83. This arrangement has the character of a well-planned scheme of tax avoidance.
(v) Further consideration should have been with regard to the fact that no actual movement of funds took place from the assessee to Kanoria and the cheques were issued by each of them without sufficient funds in their respective bank account which go to show that the transaction was sham and not genuine. This aspect of the matter was also ignored by the Tribunal.
It also appears that the Tribunal did not consider all the points of objection mentioned by the Income-tax Officer or the Commissioner of Income-tax (Appeals) nor has dealt with the same. The Tribunal mainly based its findings on the ground that the consideration of Rs. 5,56,056 was received through cheque and was duly credited in the bank account of the assessee. The Tribunal did not appreciate properly the fact that the transaction was between the; company and its chairman and there was no substantial credit of the parties in the bank, at the time when the cheques were issued by the assessee as well as by its chairman all upon the same bank, viz., United Commercial Bank. It has been submitted that all transactions themselves make: the transaction genuine.
The transaction in the instant case is between the assessee-company and its chairman, the onus lies heavily on the assessee to prove that the transaction is genuine which, in out view, was not discharged by the assessee. In the instant case, cheques were issued simultaneously by the parties, in favour of each other for purchase and repurchase on the same day without both the parties having sufficient funds in the bank, that itself goes to show that the transaction was not genuine. This aspect, however, could not be explained by the assessee.
Regarding sale of shares of three companies particularly Jokai India Ltd., no evidence was produced on behalf of the assessee that there was no other buyer of the shares except Mr. Kanoria its chairman, although those shares were quoted in the stock exchange.
The fact that though the sale through broker of listed shares is essential under the Securities Contracts (Regulation) Act, 1956, it was not done in the instant case was also ignored by the Tribunal. The Tribunal failed to take note of the fact that the assessee-company and Sri Kanoria tried to claim loss in their respective assessment for tax avoidance by fictitious transactions.
For the reasons aforesaid, we are of the view that the order of the Tribunal is perverse and as such question No. 1 is answered in the affirmative in favour of the Revenue. Question No. 2 is also answered in the affirmative in favour of the Revenue. Question No. 3 is answered in the negative and against the assessee-company and in favour of the Revenue.
M.B.A./4174/FCReference answered.