THE issue before the Bench is - Whether when the assessee
purchases shares at a price lower than the quoted market price, there is any
provision in the I-T Act to tax the deemed difference between the two. And the
ruling partly goes against Revenue.
Facts of the
case
A) The assessees
are HCL Employees and Investment Company Limited (HEICL) & Associated Techno
Plastics Private Limited (ATPPL). ATPPL had purchased 77929 shares of HCL
Limited, which were sold by HEICL. These shares were purportedly purchased at
the price of Rs.6.02 per share though the market price on the date of sale,
i.e., 16th December, 1988 was Rs.41/- per share, being the quoted price on the
recognised stock exchange. HEICL had originally filed a return
of income on 26th March, 1991 disclosing income of Rs.35,220/-. The return was
processed under Section 143(1)(a) of the Income Tax Act, 1961 and subsequently
the said assessee's involvement in question came to the knowledge of the
department and proceedings under Section 148 of the Act were initiated. The
Assessing Officer noticed that HEICL had transferred 12,70,000 shares of HCL to
62 different persons at prices varying between Rs.18.91 to Rs.6.02, between May,
1988 to November, 1988. The Assessing Officer taking into consideration the
market price on different dates when the sale transactions were entered into and
made an addition of Rs.2,39,86,572/- by bringing to tax the difference between
market price and the sale consideration as declared.
HEICL did not succeed in the first
appeal but succeeded before the tribunal.
B) ATPPL for the
Assessment year 1989-90 had filed its return of income on 17th November, 1989,
declaring income of Rs.10,28,136/-. In the regular assessment proceedings, it
was noticed that investments of ATPPL had increased from Rs.13,85,359/- to
Rs.61,71,068/-. On query, it was explained that assessee-ATPPL had purchased
3,90,181 equity shares of HCL Limited for Rs.41,26,362/-, from different persons
by way of private arrangements and no share broker was involved in the said
transactions. The Assessing Officer took notice of these transactions and
brought to tax an amount of Rs.26,48,017/- on account of difference between the
sale consideration paid by the assessee and the quoted market price on the date
of purchase. The Assessing Officer invoked Section 69B of the Act. These details
are mentioned and recorded in the assessment order in form of a chart.
AIPPL, however, succeeded before
the CIT (Appeals), who held that Section 69B of the Act was not applicable.
Revenue preferred an appeal before the tribunal but did not succeed.
On appeal, the HC held
that,
++ at
this stage, we may notice that the tribunal in the case of ATPPL has not
examined the factual aspect but has recorded a finding that Section 69B cannot
be applied as the Assessing Officer had not disputed that the actual sale
consideration paid as disclosed by the assessee. In other words, it was not the
case of the revenue that the assessee-ATPPL had paid higher sale consideration
than one disclosed by them;
++
facts have been discussed in detail in the case of HEICL. We may note the facts
as found by the tribunal. U.P. Electronics Corporation Limited (UPLC), a State
Government undertaking, was a co-promoter of Hindustan Computers Limited
alongwith Mircrocomp Ltd. The principal promoters of Microcomp Limited were S.S.
Nadar, Arjun Malhotra and Y.C. Vaidya. At the time of incorporation of Hindustan
Computers Limited, UPLC owned 4000 shares of Rs.100/- in Hindustan Computers
Limited and the balance 36,000 shares of Rs.100/- each were owned/held by
Microcomp Limited/principal promoters. Later on, Hindustan Computers Limited
merged with three other companies namely, Hindustan Reprographics Ltd, Indian
Computer Software Co. Ltd and Hindustan Instruments Ltd. to form a new company
HCL Limited. UPLC, however, did not want to continue as a shareholder in the new
company, HCL Limited. A tripartite agreement dated 29th January, 1987 was
entered into between UPLC, Microcomp Limited and Hindustan Computers Limited to
the effect that UPLC shall sell 4,000 shares of Rs.100/ each to Microcomp
Limited or their nominee for consideration of Rs.1.27 crores. Subsequently and
as per the tripartite agreement, SBI Capital Markets Limited paid Rs.1.27 crores
to UPLC on or before 31st December, 1987. It appears that Microcomp Limited did
not have sufficient funds to make the said payment and they entered into an
agreement dated 28th February, 1987 with SBI Capital Markets Limited for payment
of the said amount to UPLC. This agreement was between SBI Capital Markets
Limited, Hindustan Computers Limited and the three principal promoters. 4,000
shares were transferred and registered in the name of SBI Capital Markets
Limited;
++ in
the meanwhile, Directors of HCL Limited, who were also Directors in Microcomp
Limited, negotiated with Citi Bank to take over the loan granted by SBI Capital
Markets Limited. Citi Bank made payment of Rs.1.31 crores to SBI Capital Markets
Limited and discharged their dues/claims. SBI Capital Markets Limited, who were
the registered shareholders, in turn executed blank transfer deeds of the shares
of HCL Limited and gave the blank deeds and shares to Citi Bank;
++ we
note that the originally allotted 4,000 shares of Hindustan Computers Limited
pursuant to the scheme of merger/amalgamation had increased to 12,70,000 shares
of Rs.10/- each in HCL Limited. HEICL claim that they acted as trustees pursuant
to the oral trust and have sold these 12,70,000 shares on different dates to
employees of HCL and others;
++
the chart furnished also mentions the market value of the share on the date,
what the HEICL calls/states was the date of acceptance of offer. This date of
acceptance was not the date on which payment was received from the buyer by
HEICL. The Assessing Officer has taken into consideration the date on which
payment was received by HEICL as the relevant date and accordingly had made
addition of Rs.2,39,86,572/-;
++
the sale consideration collected/received by HEICL of Rs.1,31,90,498/- on the
sale of shares, it was stated was paid to Citi Bank towards payment of the loan
granted by them and their dues were satisfied. HEICL claims that they only
received trusteeship fee of Rs.43,600/- for entering into these transactions.
HEICL was neither the shareholder nor had any other interest in the shares.
Their role was to solely sell the shares as trustees to the employees of HCL
Limited, in accordance with the directions of the settlers, i.e., the principal
promoters of Hindustan Computers Limited;
++
thus, addition of Rs.2,39,86,572/- was made. Commissioner (Appeals) held that
the substance and not form which was relevant and applying the test of human
probabilities, the tax authorities were entitled to look at the surrounding
circumstances and find out the reality. Addition of Rs.2,39,86,572/- was
correctly made by the Assessing Officer and the addition was upheld in
entirety;
++
Tribunal in the impugned order has held that HEICL was incorporated as a
'trustee' to sell or distribute the shares of HCL Ltd. which was earlier held by
the principal promoters of Microcomp Ltd., to the employees of HCL Ltd. as per
directions/instructions of the principal promoters of Microcomp Ltd. HEICL never
acquired title or ownership of the shares. This was accepted and admitted by the
Departmental Representative, who accepted the said legal position but had argued
that HEICL was the best person in whose hands addition could be sustained. This,
as per the tribunal, cannot be a ground to justify addition by treating the
difference between the market price and sale price as taxable income in the
hands of HEICL. The transaction was not sham and the consideration mentioned was
the actual sale consideration received and to that extent there was no dispute.
Revenue had not pleaded or argued that any consideration over and above the
declared consideration was received by HEICL. HEICL could not have acquired
ownership title as no payment was made by them from their own resources or by
way of raising loan. As title of the shares never vested with HEICL, they were
mere custodian of the shares, who had to distribute the shares. The shares were
not registered in the name of HEICL. The principal promoters had paid fee of
3.5% to SBI Capital Markets Limted. HCL Ltd. had raised a loan from Citi Bank
against pledge of shares and on the basis of the guarantee, loan was granted.
Interest on loan was debited to HCL Ltd;
++ we
have considered the contentions of the Revenue in this appeal. In spite of
certain gaps and doubts/suspicion, we do not think that there are sustainable
reasons or grounds to hold that the impugned order passed by the tribunal in the
case of HEICL is perverse and contrary to evidence on record. The primary
contention of the Revenue is that the so-called oral trust, under which the
shares were sold, is sham. HEICL could not have sold or transferred the shares.
The fact is that the shares were sold and transferred and HEICL had acted as a
'trustee'. The said transfers/sales were made between the period 1st August,
1988 to 16th December, 1988. The sales were made as many as to 62 parties as per
the details mentioned in paragraph 15 above. The sales were duly recorded and
there is no allegation that money or under table consideration was paid. There
is no such finding by the Assessing Officer and the tribunal has categorically
stated that there is no evidence or material to the said effect;
++ in
fact there is contradiction between the contention and the argument of the
Revenue. If we accept the contention that HEICL did not have any right to sell
the shares or deal with them, then it is obvious that no addition or income can
be made in their hands. They were not the beneficiaries. Further, once
consideration received is accepted as the actual amount paid, there cannot be
any notional addition to the income of HEICL on the ground that they could have
and should have received the market price. It is obvious that the shares were
not transferred and sold for commercial considerations but at the behest and at
the interest of the promoter directors of Hindustan Computers Limited as well as
Microcomp Ltd. But there is no provision or mandate in law, under which
concession or difference can be taxed as deemed or notional income in the hands
of HEICL;
++
the agreement with Citi Bank has not been placed on record and it appears was
also not filed before the tribunal. The clauses therein are not known. The
Assessing Officer also did not call for the said agreement and the same is not
referred to in the assessment order. The date on which payment was made to SBI
Capital Markets Limited is not indicated or stated in the Tribunal's order and
is not on record. It is an undisputed position that the processing fee of 3.5%
paid to SBI Capital Markets Limited was paid by principal promoters. The
interest paid to Citi Bank was paid by HCL Limited but the quantum thereof has
not been indicated or mentioned in the order of the tribunal.
++ it
was stated before us that shares of HCL Ltd. were listed in the stock exchange
on 18th July, 1987 and it is apparent that share prices of HCL Ltd. had jumped
or escalated between September and December, 1988. HCL Ltd. had declared
dividend, it appears, in the Annual General Meeting held in November/December,
1988, but the details are not available and have not been ascertained by the
Assessing Officer, Commissioner (Appeals) or were put to and agitated before the
tribunal by the departmental representative. Relevance of these details was not
argued even before us. Similarly, Y.C. Vaidya it has come on record was a
non-resident living in the United States. However, relevancy of these facts is
not highlighted or stated. If there was something more than what was stated or
was appearing on record, further investigation and inquiries were required on
the said aspect, but these have not been undertaken and brought on record. On
the aspect of transfer of 77929 shares to Y.C Vaidya or ATPPL however, there are
enquiries and this aspect is being examined separately below while dealing with
the case of ATPPL.
++
what is clearly discernible from the facts stated above is that the Revenue
started inquiries but were not able to cut through and ascertain affirmatively
and conclusively whether there was any clandestine objective and purpose in the
entire transaction, whether there was any motive or intention to evade or even
avoid payment of taxes, who was the actual beneficiary; the acquirers to whom
the shares were sold, Microcomp Ltd. or the promoter company of Hindustan
Computers Ltd. who had entered into an agreement with U.P. Electronics
Cooperation Ltd. etc. In fact, there are several questions which remain
unanswered and do raise needle of suspicion; that there could be possibly an
element to avoid or even evade payment of tax or to lower the quantum of
taxation etc. Possibly the scheme or the plan could be to avoid legal and
technical problems as HCL Ltd. could not have acquired and dealt with the its
own shares or could not have ensured purchase of shares at a cheaper price by
their promoter directors or the directors/officer in-charge of the said company.
Possibly, a case of deemed dividend in the hands of the acquirers, who had
procured shares at Rs.6.02/- per share instead of market value of Rs.41 per
share. From the documents placed on record, it is evident that query with regard
to gift was raised by the Assessing Officer but he did not dwell and go into the
said aspect. (See reply dated 16th March, 1995 from R. Kumar Jain and Associates
Chartered Accountants to the Assessing Officer). Yet there is another
possibility that the HCL Ltd. had decided to declare dividend and the same had
to be paid to the registered shareholders on the date of the closure of accounts
and SBI Capital Markets Limited was the registered owner. The book transaction
with regard to sale of shares in favour of ATPPL may have been backdated to
avoid legal complications and to ensure that the dividend is paid and received
by the said company. As Y.C. Vaidya was a non-resident Indian there may have
been prohibition or requirement to obtain permissions etc. under the exchange
regulations or the requirement that the payment should be made in convertible
foreign currency. These aspects have remained unenquired for reasons best know
to the Revenue but it would not be correct and proper to remand the case to the
Assessing Officer stage. The matters pertains to the assessment year 1989-90 and
it was an obligation and duty of the Assessing Officer as an investigator to go
deep and thoroughly;
++ at
this stage on mere suspicion, the matter cannot be remitted to the Assessing
Officer to conduct fresh inquiry without there being any concrete foundation
justifying and asserting a firm apprehension. Even before us during the course
of hearing, the standing counsel for the Revenue did not press or make any
headway. The suspicions raised remained in the realm of conjectures and surmises
and do not have a firm basis. Revenue should have ensured that investigations
were conducted and undertaken at the initial stage in detailed and proper
manner. They should not expect order of remand on mere suspicion without any
foundation or basis for the lapses on the part of the Assessing officer, unless
there is fraud, collusion or relevant facts have come to the knowledge of the
Revenue subsequently;
++ we
would also like to refer to statement of S. Shankar. He had stated that HEICL
had purchased 12,70,000 shares of HCL Ltd. in January, 1988 from SBI Capital
Markets Ltd., but he could not remember the exact date. He had stated that mode
of payment was cheque and funds were arranged by way of pledge loan from Citi
Bank. The said statement is factually incorrect and this is not the stand of the
Revenue before us or in the assessment order. This contention and our attention
was not drawn to the said assertion during arguments. This portion of the
statement was not highlighted and relied upon by the Revenue before the
tribunal. Certainly Citi Bank had granted loan to pay dues of SBI Capital
Markets Ltd. S. Shankar perhaps was not fully aware of the facts as he did not
know how the loan was repaid to Citi Bank and could not also tell why the
transfer of shares was not registered in the name of HEICL and the shares had
continued to be in the name of SBI Capital Markets Ltd.
++ we
have noted that 77,929 shares were allotted to Y.C. Vaidya. These shares have
been registered in the name of ATPPL but without giving full details and
particulars on how, the shares were transferred by Y.C. Vaidya to the said
company ATPPL. The respondent-assessee in their letter dated 25th March, 1992
had stated that these shares were transferred in the records of HCL Ltd. in the
name of ATPPL on 16th November, 1988 and they had also received dividend
declared in the Annual General Meeting of HCL held in December, 1988, but they
had recorded purchase of these shares in their books on 28th February, 1989 but
had received telephonic information about registration of shares from HCL Ltd.
on 24th March, 1992. Sale consideration of these shares was paid on 9th March,
1989 by way of cheque of Rs.4,69,143/- by ATPPL.
++
Ashim Kanth, attorney of Y.C. Vaidya could not answer several questions put to
him in his statement recorded under Section 131 of the Act on the ground that
only directors were aware about the relevant information/facts and could answer.
S.Shankar, principal officer and director of HEICL in his statement recorded on
24th March, 1992 had stated that 77,929 shares were transferred to ATPPL on 16th
December, 1988 and they had received the consideration of Rs.4,67,574/- by way
of cheque but he was not sure as to the date on which the payment was received.
++ to
this limited extent, we remit the matter to the tribunal for fresh adjudication
in the two appeals as facts in this regard are not clear and certainly have not
been examined and gone into by the tribunal.
++ in
view of what is being noted above, we have remanded the transaction relating to
Associated Techno Plastics (P) Ltd. to the tribunal. To the extent permissible
and proper, the tribunal can examine the said question provided that the facts
and materials are on record. In view of the aforesaid findings,
the substantial question of law mentioned above in ITA No. 95/2002 has to be
treated as partly answered in favour of the Revenue and against the respondent
insofar as transfer of 77929 shares by HEICL to V.C. Vaidya or ATPPL is
concerned, on which we have passed an order of remit to the tribunal. However,
on other aspects/transactions of HEICL, the appeal is dismissed and the question
of law is answered in favour of the assessee and against the Revenue.
++ in
view of the aforesaid findings in ITA No. 95/2002, the question of law mentioned
in ITA No. 20/2000 has to be treated as answered in favour of the Revenue and
against the assessee, but with an order of remit to the tribunal for fresh
decision. The tribunal will examine the issues/facts afresh without being
influenced by the earlier order but while keeping in mind the observations made
above. In the facts of the present case, there will be no order as to
costs.
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