IN THE HIGH COURT OF DELHI AT NEW DELHI
ITA 55/2009
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COMMIISONER OF INCOME TAX, DELHI-IV ?.. Appellant
Through: Mr R D Jolly, Advocate
Versus
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HINDUSTAN TIN WORKS LIMITED ?.. Respondent
Through: Mr Prakash Kumar, Advocate
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CORAM
HON?BLE MR JUSTICE VIKRAMAJIT SEN
HON?BLE MR JUSTICE RAJIV SHAKDHER
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1. Whether the Reporters of local papers may
be allowed to see the judgment ? No
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported Yes
in the Digest ?
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ORDER
13.02.2009
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1. This is an appeal preferred by the Revenue under Section 260A of the
Income Tax Act, 1961 (hereinafter referred to in short as the ?Act?) against the
judgment dated 07.12.2007 passed by the Income Tax Appellate Tribunal
(hereinafter referred to in short as the ?Tribunal?) in ITA No. 1101/Del/05
pertaining to assessment year 2001-02.
1.1 In this appeal, the Revenue has essentially raised two issues. The
first issue being that the ITAT misdirected itself in law in deleting the
disallowance of a loss of Rs 19,67,450/- claimed by the assessee on account of
purchase and redemption of units of Kothari Pioneer Mutual Fund, Mumbai
(hereinafter referred to in short as the ?mutual fund?). The second issue
pertains to the rejection of the plea of the Revenue for permitting it to
canvass submissions with reference to Section 14A of the Act.
2. At this stage, we may also point out that in the impugned judgment of
the Tribunal there is a reference to a submission made on behalf of the Revenue
to the effect that the loss of Rs 19,67,450/- claimed by the assessee could not
have been allowed in view of the provisions of Section 71(3) of the Act which
prohibits the set off of loss against income of the assessee under a head other
than ?capital gains?. We may point out that the Tribunal has noted that the
Assessing Officer has himself treated the loss as ?business loss? and,
therefore, there was no question of applying the provisions of Section 71(3) of
the Act. Perhaps advisedly the Revenue has neither raised it as a ground before
us nor has the same been urged by the learned counsel for the Revenue Mr R D
Jolly before us.
3. Coming back to the two issues referred to hereinabove, the learned
counsel for the Revenue Mr R D Jolly has contended that both the Commissioner of
Income Tax (Appeals) [(hereinafter referred to in short as the ?CIT(A)?] and the
Tribunal have misdirected themselves in law in view of the fact that in so far
as the first issue is concerned, the said authorities overlooked the fact that
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the Assessing Officer had, based on documents placed before it, come to a
conclusion that the entire transaction between the assessee and the mutual fund
was a ?collusive arrangement? to purchase a loss of Rs 19,67,450/- and that the
said mutual fund had provided an ?accommodation entry? so as to enable the
assessee to claim a loss. He further contended that the transaction did not
involve physical delivery of units. He submitted that it was really a case of
?dividend stripping? whereby an assessee avoids tax by purchasing units at a
cum-dividend price and sells the same immediately thereafter at ex-dividend
price to purchase an artificial loss. The transaction, according to the learned
counsel, is really entered into for the purposes of tax avoidance. In support of
these submissions, the learned counsel for the Revenue has relied upon the order
of the Assessing Officer.
4. In order to dispose of the appeal and the issues raised therein, the
following facts require to the noted:-
5. The assessee is engaged in the business of manufacturing of tin/metal
containers/components required for packing of different commodities like Ghee,
Coffee, Baby Food, Processed Food, etc. On 31.10.2001, the assessee had filed a
return declaring an income of Rs 1,74,32,909/-. The assessee?s case was
picked up for scrutiny. Accordingly, notices under Section 143(2) and 142(1) of
the Act were issued. The Assessing Officer after examining the response to
queries raised by him assessed the assessee?s total income at Rs 1,94,65,360/-.
In doing so, the Assessing Officer made several disallowances. We are in the
appeal concerned with the disallowance with respect to loss incurred on account
of purchase and subsequent redemption of units of the afore-mentioned mutual
fund amounting to Rs 19,67,450/-.
6. In arriving at the conclusion that the transaction was ?collusive? and
really in the nature of an ?accommodation entry? provided by the mutual fund to
the assessee, and hence the loss was not allowable; the Assessing Officer took
into account the following apparent discrepancies:-
i) the units worth Rs 1 crore which the assessee had purchased as
indicated in the statement of the mutual fund dated 09.03.2001 evidently were
not purchased on the said date as the bank statement produced by the assessee
indicated that the cheque for the units got cleared on 12.03.2001. Therefore,
he concluded that the purchase of the aforesaid units was made on 12.03.2001;
ii) the mutual fund seemed to have paid dividend to the assessee in the
sum of Rs 15,65,762/- on 12.03.2001. But the books of account of the assessee
showed the same as having been credited on 15.03.2001 while the mutual fund as
per its statement had re-invested the same on 12.03.2001. There was no cheque
of equivalent amount on record which the assessee ought to have in the normal
circumstances issued to the mutual fund;
iii) on 12.03.2001 initially purchased units and those purchased out of
the dividend income were redeemed at a value of Rs 95,98,312/-. The bank
statement furnished by the assessee did not indicate as to when out of the
redeemed amount a cheque of Rs 80,32,550.46/- which was received from the mutual
fund was deposited by the assessee with the bank.
7. The assessee being aggrieved by the reasoning adopted by the Assessing
Officer which, according to him, was contrary to facts, preferred an appeal to
the CIT(A). The CIT(A) examined the reply of the assessee in detail with
respect to the apparent discrepancies pointed out by the Assessing Officer in
his assessment order. After examining the plea of the assessee, the CIT(A) in
Paragraphs 4.2 to 4.6 of his judgment unraveled the discrepancies by taking note
of the following facts:-
i) the assessee had recorded the purchase of the units worth Rs 1 crore on
09.03.2001. An application alongwith a cheque dated 09.03.2001 drawn on Punjab
National Bank, Mumbai was deposited with the mutual fund on 09.03.2001 at 2:45
pm. It is important to note that in the application the assessee had opted for
?dividend plan and re-investment payout?. The date of 12.03.2001 cropped up as
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the mutual fund encashed the cheque on the said date. The statement of the
mutual fund dated 11.03.2001 showed that the assessee was allotted 6,95,894.224
units on 09.03.2001 at the rate of Rs 14.37 per unit.
ii) The mutual fund?s statement dated 13.03.2001 indicated that the
assessee had received dividend of Rs 15,65,762/- on 12.03.2001 which, as per the
re-investment plan opted by the assessee was re-invested in units. Accordingly,
the assessee was issued additional units numbering 1,34,631.298 at Net Asset
Value (NAV) of Rs 11.63 per unit. Resultantly, the assessee on 12.03.2001 held
a total number of 8,30,525.222 units. As per the mutual fund?s statement dated
14.03.2001 the assessee redeemed 6,95,894.224 units at NAV of Rs 11.54 per unit
and similarly, 1,34,631.298 units at NAV of Rs 11.63 per unit. Consequently,
the assessee received a total amount of Rs 95,98,312.46.
iii) The assessee received the redeemed amount by way of a cheque in the sum
of Rs 80,32,550.46/- drawn on ABN Amro Bank and a sum of Rs 15,65,762/- by
another cheque drawn on ABN-Amro N.V. These cheques had been deposited in the
Punjab National bank. In so far as the first cheque was concerned, the CIT(A)
observed in his order that even though the date of realisation was not given in
the bank statement since the bank statement was for a period from 14.03.2001 to
16.03.2001 it may have been credited either on 15.03.2001 or 16.03.2001. The
second cheque, however, was found credited in the bank statement of Punjab
National Bank, Mumbai branch on 15.03.2001.
7.1 Based on the aforesaid findings, the CIT(A) came to the conclusion
that the transaction was genuine. The CIT(A) also rejected the submission of
the Revenue with regard to the aspect of ?dividend stripping? on the ground that
sub-section (7) of Section 94 of the Act was not attracted in respect of the
assessment year as the said provision was brought on the statute book by virtue
of the Finance Act, 2001 w.e.f. 01.04.2002.
8. Aggrieved by the order of the CIT(A), the Revenue preferred an appeal
to the Tribunal. The Tribunal sustained the view taken by the CIT(A). The
Tribunal after examining the order of the CIT(A), as well as, the Assessing
Officer came to the conclusion that nothing had been brought to its notice to
controvert the findings of the CIT(A). The Tribunal concluded that the loss was
genuine and hence, had to be allowed. The Tribunal concluded that based on the
evidence which was placed on record by the assessee and examined by the CIT(A)
it could not be held that the transactions were not real but were make-believe.
It observed that there was a real and genuine flow of funds between the assessee
and the mutual fund. The Tribunal also rejected the submission of the Revenue
that the entire transaction was entered by the assessee with the mutual fund to
purchase a loss and to avoid tax. The Tribunal said that the transaction
between the assessee and the mutual fund was real and having been carried out at
arms length could not be deemed as a collusive arrangement and, therefore, loss
which had arisen ought to be treated as a genuine loss. The Tribunal relying
upon the judgments of the Delhi High Court in the case of CIT vs Vimgi
Investment (Pvt.) Ltd: (2007) 290 ITR 505 and CIT vs Vikram Aditya and
Associates (Pvt.) Ltd: (2006) 287 ITR 268 rejected the argument based on Section
94(7) of the Act.
9. The Tribunal on the second issue rejected the plea of the Revenue that
they should be allowed to raise an issue pertaining to Section 14A of the Act on
the ground that this could only be done if there were facts on record on the
basis of which the provisions of Section 14A of the Act could be invoked. That
not being the situation allowing the additional ground would result in
authorizing a fresh investigation into the matter by the CIT(A) which was not
permissible. Aggrieved by the impugned judgment, the present appeal was
preferred before us.
10. In our view, in so far as the first issue with regard to allowability
of loss incurred by the assessee on account of the impugned transaction
involving the purchase and thereafter redemption of the units of the mutual fund
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is concerned, the same does not involve any infraction as contended by the
Revenue. Both the CIT(A), as well as, the Tribunal have examined the
transactions in respect of the said issue in detail. Briefly, the analysis of
the transaction revealed that the assessee had purchased a certain number of
units by making an application to the mutual fund on 09.03.2001. The said units
were purchased at a price of Rs 14.37 per unit. The number of units purchased
were 6,95,894.224. The total purchase value was Rs 1 crores. This was
reflected in the mutual funds statement dated 11.03.2001. It has also come on
record that even though the assessee had made an application accompanied by a
cheque on 09.03.2001 the mutual fund encashed the cheque on 12.03.2001. There
was thus no discrepancy with regard to the date of purchase of units. It has
also come on record that on 12.03.2001 the assessee had received dividend on
the said units amounting to Rs 15,65,762/- as per the option given by the
assessee while making the application for purchase of units. The said dividend
was re-invested to purchase more units. Accordingly, the mutual fund allotted
additional units numbering 1,34,631.298 at a value of Rs 11.63 per unit. This,
as per the record, is reflected in the statement of the mutual fund dated
13.03.2001. On 14.03.2001 the assessee redeemed both, the units purchased
originally and those obtained out of re-investment of dividend. The assessee on
redemption received a sum of Rs 95,98,312.46/-. The mutual fund in respect of
the redeemed units issued two cheques in the sum of Rs 80,32,550.46/- and Rs
15,65,762/-. Both these cheques were drawn on ABN Amro Bank and were dated
14.03.2001. It has also come on record that the assessee had deposited both
these cheques with Punjab National Bank. The second cheque was found credited
in the statement of Punjab National Bank, Mumbai branch on 15.03.2001 whereas in
case of the first cheque since the statement of Punjab National Bank, Mohan
Nagar Ghaziabad branch was available from 14.03.2001 to 16.03.2001 it was taken
that it was credited on 15/16.03.2001.
10.1 In view of these findings of fact, it cannot be said that the
transaction between the assessee and the mutual fund was a sham and that there
was no purchase and subsequent redemption of the units in issue. We, therefore,
do not find any fault with the findings of fact returned by both the CIT(A), as
well as, the Tribunal that the arrangement was not collusive or that the mutual
fund had not provided accommodation entries to the assessee to purchase a loss.
It is not disputed that the mutual fund has an approval from the Securities
Exchange Board of India (SEBI). Furthermore, nothing has been brought on record
to show that the transaction between the assessee and the mutual fund was not an
arms length transaction.
11. As regards the submission of the Revenue that the loss incurred by the
assessee had to be disallowed as it was in the nature of a ?dividend stripping?
transaction which was undertaken only to avoid payment of tax, in our view, both
the Tribunal and the CIT(A) have rightly come to the conclusion that at the
relevant time there was no provision under the Act which could be invoked to
disallow a loss of the nature incurred by the assessee. As correctly held by
the Tribunal the provisions of Section 94(7) of the Act were inserted in the Act
w.e.f. 01.04.2002 and hence, would impact, if at all, transactions undertaken in
assessment year 2002-03. The assessment year which is under consideration in
the present appeal is assessment year 2001-02. A Division Bench of this Court,
as correctly noted by the Tribunal, in Vimgi Investment (supra) and Vikram
Aditya and Associates (supra) has sustained such transactions which were
undertaken prior to insertion of Section 94(7) in the Act. On this count too,
we find no fault with the decision of the Tribunal.
12. As regards the second issue, that is, the rejection of the Revenue?s
plea in so far as the Tribunal did not permit the Revenue to take up an
additional ground pertaining to Section 14A of the Act, it is our view that the
Tribunal has put the matter in the correct perspective while rejecting the plea
of the Revenue. It is noticed upon perusal of both the assessment order as well
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as the order of the CIT(A) that no such plea was taken before the two
authorities. A perusal of the two orders would also show that there is no
material on record based on which the provisions of Section 14A of the Act could
be invoked. Section 14A provides that for the purposes of computation of total
income of an assessee under Chapter IV of the Act no deduction is to be allowed
in respect of the expenditure incurred by the assessee in relation to income
which does not form part of the total income under the Act. There is no whisper
of any expenditure either in the assessment order or in the order of the CIT(A)
with respect to expenditure which the assessee incurred for earning income i.e.,
dividends from units which are admittedly exempted under Section 10(33) of the
Act. Nothing has also been indicated in the appeal which would lead us to
believe that there was material which could have been looked into had the
Tribunal permitted the Revenue to take up the said additional ground pertaining
to Section 14A of the Act. Therefore, in our view, the Tribunal rightly
rejected the plea.
13. In order to buttress his submission on this aspect of the matter, the
learned counsel for the Revenue referred to the judgment of the Supreme Court in
National Thermal Power Co Ltd vs CIT: (1998) 229 ITR 383. It is the submission
of the learned counsel that the Tribunal has vast powers to entertain an
additional ground even though the same was not raised before the authorities
below. While we do not disagree with this broad proposition the necessary
caveat is found in the very judgment of the Supreme Court i.e National Thermal
Power (supra) wherein the Supreme Court has clearly observed that this power can
be exercised so long as there is material on record. As observed by us above,
there is not even an averment in the appeal filed before us that there is any
such material on record of the Assessing Officer. In these circumstances, we
are inclined to agree with the reasoning of the Tribunal.
14. In view of our discussion above, we are of the opinion that the
findings returned by the Tribunal as well as the CIT(A) are pure findings of
fact which do not call for our interference. No question of law much less a
substantial question of law has arisen for our consideration. In the result,
the appeal is dismissed.
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VIKRAMAJIT SEN, J.
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RAJIV SHAKDHER, J.
February 13, 2009
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ITA 55/2009 Page 12 of 12
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