Case Law Details
CIT Vs Lakshmangarh Estate & Trading Co Ltd (Calcutta High Court)
The case of CIT Vs Lakshmangarh Estate & Trading Co Ltd, adjudicated by the Calcutta High Court, revolves around the assessment of a significant loss claimed by the assessee company on the sale of shares. The dispute arose when the Assessing Officer disallowed the set-off of this loss against long-term capital gains, alleging the transaction to be a colourable one aimed at tax evasion.
The assessee company purchased 13,04,700 shares of M/s. Hindustan Development Corporation Ltd. in July 1994, subsequently selling them at a loss to one of its group companies. The Assessing Officer contended that the sale was orchestrated solely to offset gains, basing his argument on suspicions rather than concrete evidence.
However, both the CIT (Appeal) and the Income Tax Appellate Tribunal (ITAT) upheld the transaction as genuine, supported by:
- Contract notes and bills for purchase and sale.
- Transactions executed at prevailing market rates.
- Payments made through account payee cheques.
- Confirmation by brokers and independent inspectors appointed by the Assessing Officer.
- Discrediting of testimonial evidence against the transaction.
The ITAT specifically highlighted the lack of substantive evidence supporting the Revenue’s allegations of ulterior motives or tax avoidance. Moreover, it emphasized the absence of probative value in the Assessing Officer’s reliance on a witness statement that was later retracted and not subjected to cross-examination.
The appellant, representing the Revenue, raised objections primarily on the grounds of:
- Alleged lack of evidence supporting the genuineness of transactions.
- Misapplication of legal precedents, citing the Shekhawati Rajputna Trading Co. Ltd. case (236 ITR 950).
- Assertions of systematic tax evasion practices based on generalized suspicions.
The High Court dismissed these arguments, reaffirming the ITAT’s findings that the transaction was indeed genuine and not a ploy to evade taxes. It stressed that suspicion alone cannot substitute factual evidence in tax matters. The court highlighted the irrefutable facts presented by the ITAT, underscoring their adherence to evidentiary standards.
In conclusion, the case of CIT Vs Lakshmangarh Estate & Trading Co Ltd exemplifies the judicial scrutiny applied to tax assessments. Despite the Revenue’s persistent allegations, the courts upheld the principles of fairness and evidence-based decision-making. This verdict underscores the importance of substantiating claims with concrete evidence rather than conjecture, ensuring equitable tax administration.
FULL TEXT OF THE ORDER OF ITAT CALCUTTA
The assessee company purchased 13,04,700 shares of M/s. Hindustan Development Corporation Ltd. on 15th July, 1994 from two sellers, one of them was a scam tainted company. The assessee sold the shares on 8th August, 1994 at a loss of Rs.4,50,04,414/- to one of its group companies. The aforesaid loss was sought to be set off against the long term capital gains earned by the assessee company, which was disallowed by the Assessing Officer.
Aggrieved by the order of the Assessing Officer, the assessee went up in appeal. The CIT (Appeal) held that the purchase of the shares was genuine, but the sale was a colourable transaction considering the fact that the assessee purchased the self same scrip after some time and the sale to the group company was financed by the assessee himself. The CIT (Appeal), in the circumstances, upheld the order of the Assessing Officer. The assessee preferred an appeal to the Income Tax Appellate Tribunal. The Tribunal held that both the sale and purchase were genuine transactions. The Tribunal has given the following findings of fact.
a) The transaction of purchase and sale was supported by two contract notes and bills;
b) Both the sale and purchase took place at the prevalent market rate;
c) Payments for purchase and sale were made by account payee cheques;
d) The transactions were duly confirmed not only by the brokers, but also by the Inspector appointed by the Assessing Officer;
e) The statement of one Sri Kejriwal did not relate to the transaction between the assessee and the purchaser of the shares of Hindustan Development Corporation Ltd.
Moreover, the statement of Kejriwal relied upon by the Assessing Officer had no evidentiary value because the said Kejriwal has resiled from his statement and the said Kejriwal was never offered for cross examination by the assessee;
f) Delivery of the shares both at the time of sale and purchase was confirmed by the brokers;
g) Parking of the shares with Jai (the buyer) as alleged by the department was without substance because the purchaser has ever since the assessment year 1995-96 when the shares were transferred to him was continuously receiving dividend and such dividend was assessed to tax;
h) The alleged financing by the seller for purchase of the shares was an insignificant part of the total purchase price. The total purchase price was Rs.18.99 Crore, whereas the financing was restricted to Rs.2.60 Crore on interest on commercial rates;
For the aforesaid reasons, the Appellate Tribunal was of the opinion that the transaction of both purchase and sale was a genuine transaction.
Aggrieved by the order of the learned Tribunal, the department has come up in appeal. The following grounds have been advanced.
“I. That the findings of the learned I.T.A.T. that the transactions of the sale of shares between the assessee company and M/s. Kejriwal & Co. on one hand and those between M/s. Kejriwal & Co. and Jai Commercial Co. Ltd. on the other were genuine were based on no evidence or partly relevant or partly irrelevant evidence and are otherwise perverse and arbitrary.
II. That on the basis of materials on record, the Learned ITAT erred in law in directing the Assessing Officer to allow assessee company to set off the loss of Rs.4,50,04,414/- arising on its sale of the shares of HDC Ltd.
III. That on the basis of materials on record and in view of the decision of the jurisdictional High Court in the case of CIT-I Vs. Shakhwati Rajputna Trading Co. Ltd. (236 ITR 950), the Learned ITAT erred in law in treating the loss arising to the assessee company on sale of its shares of HDC Ltd. as genuine”.
Mr. Dutta, learned Advocate appearing for the appellant Revenue drew our attention to Page-51 of the paper book for the purpose of demonstrating that the assessee has earned substantial capital gain by selling shares of Ingersoll Rand (I) Ltd. and ABB Ltd. He submitted that from the chart appearing at Pge-51 of the paper book which forms the judgment of the Assessing Officer, it would appear that all the companies who profited from the sale of the shares of Ingersoll Rand (I) Ltd. and ABB Ltd. resorted to the same practice of entering into the transaction of buying and selling of shares of Hindustan Development Corporation Ltd. and, therefore, this is a pointer to show according to him that these transactions were deliberately entered into for the purpose of reducing the liability to pay capital gain tax.
On the basis of a suspicion howsoever strong it is not possible to record any finding of fact. As a matter of fact, suspicion can never take the place of proof. What were the individual facts and circumstances in the case of other investors indicated in the chart appearing at Page-51 of the paper book are not known to us. In so far as the assessee is concerned, the facts and circumstances are before us which we have also tabulated. The finding arrived at by the Tribunal indicated above was not even alleged by Mr. Dutta to have not been based on evidence. In the teeth of the aforesaid findings made by the Tribunal on the basis of evidence, it is difficult, if not impossible, to hold that the transaction of buying and selling of shares of Hindustan Development Corporation Ltd. was a colourable transaction or was resorted to with any ulterior motive of reducing the tax payable for long term capital gain. The first ground of appeal is regarding perversity of the judgment of the learned Tribunal. Mr. Dutta did not cite one example to show that the judgment of the learned Tribunal is not based on evidence.
The second ground is no ground at all. If the finding of the learned Tribunal is factually correct, the Tribunal had no option but to direct the Assessing Officer to give the benefit of the losses suffered by the assessee, which he had disallowed.
The third ground is based on a judgment of this Court in the case of CIT vs. Shekhawati Rajputana Trading Co. (P) Ltd., reported in 236 ITR 950. What had happened in that case was that the losses were suffered by the assessee by selling the shares to its chairman and the assessee had failed to prove that the transaction was a genuine transaction. Therefore, that judgment can have no manner of application to the case in hand. Before us, in order to show genuineness of the transaction, more than 10 grounds have been assigned by the Income Tax Appellate Tribunal and not one of them was even commented upon by Mr. Dutta.
We are, as such, of the opinion that this appeal does not raise any question of law and is also unmeritorious altogether.
We, therefore, refuse to admit the appeal.
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