Escorts Ltd. Vs DCIT (ITAT Delhi)
Summary: The Delhi ITAT partly allowed the appeal filed by Escorts Ltd. against the order of the CIT(A)-II, Delhi dated 11.01.2010 arising from the assessment framed under section 143(3) for Assessment Year 2006-07. The Tribunal allowed the assessee’s claim of long-term capital loss arising from the sale of shares in Esconet Services Ltd. and Escosoft Technologies Ltd., holding that the shares of the unlisted companies could be transferred in physical form during the relevant period and that the date on which the sale consideration was received was not determinative of the date of transfer. The Tribunal noted that the Assessing Officer and CIT(A) had questioned the paltry consideration of Rs.40,000/- but had not evaluated the valuation in terms of the financial statements. It further noted the CIT(A)’s finding that the Assessing Officer had not been able to prove the transaction to be sham and that the AO had not made enquiries or investigations or presented evidence/material to establish that the transaction was bogus. The Tribunal therefore held that the assessee was within its legal right to dispose of its investments in accordance with law, including in the interest of business expediency and to reduce its tax liability, and allowed Ground 2.
Ground 1 was dismissed as not pressed. On the disallowance of prior-period expenses, the Assessing Officer had disallowed Rs.7,00,11,165/-, while the CIT(A) granted relief of Rs.24,50,000/- and sustained the balance disallowance of Rs.6,75,61,165/-. The assessee relied upon the large volume of transactions and substantial turnover of over Rs.3,000 crores and cited decisions in its own case for earlier assessment years. The Tribunal, however, found that the CIT(A) had allowed expenses where evidence was furnished and confirmed expenses where the assessee was unable to establish that they pertained to the current year. It also noted that the CIT(A) had directed the AO to allow Rs.3,83,02,143/- after verification that the amount had been written back and offered in AY 2008-09. As the assessee did not present evidence before the Tribunal establishing that the disputed expenses pertained to the current year, Ground 3 was dismissed.
On Gifts & Presents, the AO had disallowed Rs.10.00 lakh, while the CIT(A) sustained a 10% disallowance of the total expenditure amounting to Rs.5,64,850/-, thereby allowing relief of Rs.4,35,150/-. The assessee contended that the expenditure was incurred for business purposes and that no similar disallowance had been made in numerous preceding years. The Tribunal found that no evidence or material had been presented before it to establish that the expenses were incurred for business purposes and upheld the disallowance sustained by the CIT(A). Accordingly, the appeal in ITA No.792/Del/2010 was partly allowed. The order was pronounced in the open court on 27.07.2026.
Key Takeaway: For AY 2006-07, the Delhi ITAT held that the sale of shares of the unlisted companies in physical form did not violate the law applicable during the relevant period and allowed the claimed capital loss where the Revenue had not established the transaction to be sham or bogus. The Tribunal nevertheless sustained the other disputed disallowances because the assessee did not place sufficient evidence before it to establish that the prior-period expenses related to the current year or that the Gifts & Presents expenditure was incurred for business purposes.
Cases Discussed
- CIT vs Special Prints Ltd. – 356 ITR 404 (Guj.)
- CIT vs Biraj Investment (P) Ltd. – 210 Taxman 418 (Guj.)
- Ajay Guliya vs ACIT – 209 Taxman 295 (Delhi)
- CIT Madurai vs M Ramaswamy -151 ITR 122 (Mad.)
- DCIT vs M/s Jindal Equipment Leasing Consultancy Services Ltd. – ITA No.4474/2009 dated 25.02.2011
- ACIT vs M/s RJ Corp. Ltd. – ITA No.3661/Del/2014 dated 01.10.2018
- Michael E Desa vs Income Tax Officer, International Taxation Ward 1(1), Mumbai – ITA No.4286/Mum/17 dated 20.09.2021
- Order dated 31.01.2006 passed by ITAT, Delhi – ITA No.567/Del/2005 for AY 2001-02
- Consolidated Order dated 06.03.2019 passed by ITAT, Delhi – ITA No.84/Del/2006 and 2350/Del/2010 for AY 2002-03 & 2003-04 respectively
- Order dated 04.09.2018 passed by Delhi High Court – ITA No.961/2018 for AY 2005-06
- Order dated 09.03.2018 passed by ITAT, Delhi – ITA No.4235/Del/2014 for AY 2005-06
- Order dated 19.03.2021 passed by ITAT, Delhi – ITA No.7623/Del/2017 for AY 2009-10
FULL TEXT OF THE ORDER OF ITAT DELHI
This captioned appeal has been filed by the assessee against the order of the Learned CIT(A)-II, Delhi dated 11.01.2010 arising out of the assessment order under section 143(3) of the Act on 31.12.2008 by the Dy. Commissioner of Income Tax, Central Circle-3, New Delhi for Assessment Year 2006-07.
2. The assessee has furnished a written submission that during the relevant assessment year i.e. 2006-07 the assessee had sold its investment in the shares of EHIRC Limited at a substantial gain and in order to minimize the tax liability arising therefrom it planned to dispose off some of its bad investments which were not yielding any gains for several years.
3. The assessee had made certain strategic investments in earlier years to promote new businesses in the area of IT enabled services by promoting independent separate companies as subsidiaries. Unfortunately, these companies could not perform well and over a period of time their net worth was fully eroded and further funds were required to be infused to overcome their financial problems.
4. The assessee divested its stake in these companies namely Esconet Services Ltd. and Escosoft Technologies Ltd. to obtain the benefit of set off of the long term capital loss against the long term capital gain earned on the sale of shares of EHIRC Ltd.
5. Before selling the entire stake in these companies the assessee got a due diligence and equity valuation done by a firm of Chartered Accountants on the basis of their latest audited Balance sheets as also the latest unaudited Balance-sheet as on 10th of March, 2006. On the basis of the assessment of the value which reflected a negative net worth and with no prospect of getting a meaningful equity divestment price, these companies were disposed off for a token consideration of Rs.40,000/- in order to avoid any further liabilities arising in these companies.
6. The AO held that the shareholding got transferred on the basis of a share purchase agreement entered into on the last day of the previous year i.e. 31.03.2006 and the sale consideration was a paltry sum of Rs.40,000/-which was received on 19.05.2006. This shows an attempt by the assessee to reduce its tax liability by taking advantage of a capital loss for no apparent commercial expediency. On the basis of the above inferences, the AO disallowed the loss by treating the transaction as sham and collusive.
7. On appeal, the learned CIT(A) held that the consideration of Rs.40,000/- was far below the real value and that the sale of shares/transfer is not complete during the assessment year 2006-07 and upheld the disallowances.
8. Aggrieved the assessee is before us.
9. Ground 1 was not pressed hence dismissed as not pressed.
10. The ld counsel of the assessee, on ground 2, submits that though both the AO and the learned CIT(A) have referred to the “paltry” sale consideration but have not questioned the valuation and Due Diligence Reports given by an independent qualified Valuer, as also the audited accounts of the two companies. The ld AR submitted that the learned CIT(A) has doubted the transfer solely on the basis that the shares are not held and transferred in demat form. It is stated that it is not compulsory to hold shares or other securities of an unlisted company in demat form as per Section 108 of the Companies Act, 1956. The Section 68B, only makes it mandatory for a listed company which makes a initial public offer for a sum of rupees 10 crore or more, to issue the same only in dematerialized form. Since both the companies whose shares have been transferred by the assessee during the year are unlisted companies, they were not governed by the provisions of SEBI Act or regulations. The assessee relied on the following case laws:
1. CIT vs Special Prints Ltd. – 356 ITR 404 (Guj.)
2. CIT vs Biraj Investment (P) Ltd. 210 Taxman 418 (Guj.)
3. Ajay Guliya vs ACIT – 209 Taxman 295 (Delhi)
4. CIT Madurai vs M Ramaswamy -151 ITR 122 (Mad.)
5. DCIT vs M/s Jindal Equipment Leasing Consultancy Services Ltd. ITA No.4474/2009 dated 25.02.2011.
6. ACIT vs M/s RJ Corp. Ltd. – ITA No.3661/Del/2014 dated 01.10.2018.
11. Per contra, the ld DR relied on the orders of the AO and the CIT(A).
12. We have heard the rival submissions and have perused the materials on record. We find that it is an admitted fact the shares of Esconet Services Ltd. and Escosoft Technologies Ltd were sold within the meaning of section 2(47) read with section 45 of the Income-tax Act. We also find that shares sold in physical form, for an unlisted company, is not violation of law during the period under consideration. The date of the receipt of the sale consideration, is not relevant to decide the date of transfer, as rightly held by the CIT(A). Both the AO and the CIT(A) objected to the paltry consideration but did not evalute the valuation in terms of their financial statements. Most importantly, the CIT(A) has given a crucial and clinching finding of fact that the AO had not been able to prove that the transaction was sham at para 7.3.3 at page 30 of his order. We note that the AO during the assessment proceedings did not make any enquiries or investigation or presented any evidence/materials to show that the transaction was bogus. We are of the considered view therefore, that the assessee is within its legal right to dispose off its investment, within the four walls of law, at any point of time, in the interest of business expediency and to reduce his tax liability. We therefore hold that the claim on account of capital loss pertaining to the sale of shares of the two companies in question, is allowable in assessment year 2006-07. Ground 2 is allowed.
13. On Ground No.3 regarding disallowance on account of Prior Period Expenses, the ld AR submitted that the Assessing Officer made a disallowance to the tune of Rs.7,00,11,165/- on the ground that the assessee company was following the mercantile system of accounting and such a claim was liable to be disallowed. On appeal, the ld CIT(A) allowed relief to the tune of Rs.24,50,000/- upholding the disallowance to the tune Rs.6,75,61,165/-.
14. The ld AR argued that the company transacts its business on a large scale with a heavy volume of transactions on day to day basis; having sales turnover in excess of Rs.3,000 crores comprising of three separate manufacturing divisions; bills of various items of expenditure are also in lacs and it takes time to process these bills through various levels of authority and that in quite a few years, no such disallowance was made whereas in some years, the AO has affected the disallowance on this account. The Ld AR pleaded that totality of facts and circumstances be taken under consideration. The ld AR further pleaded for considering the difficulty which is faced in linking such claims/bills to the date of their actual receipt and sanction by the authority concerned, there are chances that bills of a particular assessment year are claimed in a subsequent assessment year but which is not contrary to the mercantile system of accounting maintained by the assessee. The ld AR relied on following decisions, in the assessee’s own case:
1. Order dated 31.01.2006 passed by ITAT, Delhi in ITA No.567/Del/2005 for AY 2001-02 wherein appeal filed by the Department has been dismissed.
2. Consolidated Order dated 06.03.2019 passed by ITAT, Delhi in ITA No.84/Del/2006 and 2350/Del/2010 for AY 2002-03 & 2003-04 respectively wherein appeal filed by the Department has been dismissed.
3. Order dated 04.09.2018 passed by Delhi High Court in ITA No.961/2018 for AY 2005-06 wherein appeal filed by the Department has been dismissed.
4. Order dated 09.03.2018 passed by ITAT, Delhi in ITA No.4235/Del/2014 for AY 2005-06 wherein appeal filed by the assessee has been allowed.
5. Order dated 19.03.2021 passed by ITAT, Delhi in ITA No.7623/Del/2017 for AY 2009-10 wherein appeal filed by the assessee has been allowed.
15. Rival submissions heard and materials on record perused. We find that the CIT(A) has extensively dealt with issue of prior expenses. Where the assessee could furnish evidences for the expense, the same was allowed by the CIT(A). The CIT(A) confirmed only those expenses where the assessee expressly showed its inability to present conclusive evidence to show that the expenses pertained to the current year. Further we find that the CIT(A) directed the AO to allow the expenses to the tune of Rs 3,83,02,143/-, after verification that the same has written back and offered for in AY 2008-09. Even before us, the assessee made only bland statement that it has heavy volume of transactions; very large sales turnover; and the assessee faces difficulties in processing bills. Apart from this, no evidence or materials are presented to establish that the expenses pertained to the current year. The decision of ITAT in assessee’s own case for earlier years are on their own facts. In view of the facts and circumstances as discussed above, we find no reasons to differ with the decision of the CIT(A). Ground 3 is dismissed.
16. With respect to ground No.4 regarding disallowance on account of Gifts & Presents, the ld AR submitted that the AO disallowed a sum of Rs.10.00 lakh on the ground that most of the expenditure had been incurred other than during the Diwali Festival. The ld CIT(A) upheld disallowance to the extent of 10% of the total expenditure i.e. a sum of Rs.5,64,850/- allowing thereby a relief of Rs.4,35,150/-. The ld AR submitted that the entire expenditure has been incurred for the purposes of business and the ad hoc disallowance sustained by the learned CIT(A) is not justified as no such disallowance has been affected in numerous preceding assessment years.
17. Per contra, learned DR relied on the order of the AO.
18. We have heard the rival submissions and perused the material available on record. Before us, we have not been presented with any evidence or materials to prove the expenses have been made for the business purposes. We there uphold the disallowance sustained by the CIT(A). The ground is dismissed. In the result, appeal filed by the assessee is partly allowed.
19. In the result, the appeal in ITA 792/Del/2010 is partly allowed.
Order pronounced in the open court on 27.07.2026.
