Supreme Court makes it very clear that a colourable device cannot be a part of tax planning. Therefore where a transaction is sham and not genuine as in the present case then it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. The Supreme Court in fact concluded that there is no conflict between its decisions in the matter of McDowell (supra), Azadi Bachao (supra) and Mathuram Agarwal (supra). In the present case the purchase and sale of shares, so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham.
HIGH COURT OF BOMBAY
INCOME TAX APPEAL NO. 5518 OF 2010
Killick Nixon Limited Vs. DCIT
Dated- 06th march 2012
JUDGMENT: (Per M.S.SANKLECHA, J.)
This appeal by the assessee under Section 260A of the Income Tax Act, 1961 raises the following questions of law:
i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was in error in confirming the additions projected in questions (ii) to (vi) in infringement of the principles of natural justice and fair play?
ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in confirming the dis allowance of short term and long term capital losses arising out of the sale of shares of Matterhorn Investment Ltd, Mountblanc Investments Ltd, Fircrest Investment Pvt. Ltd. and Galactia Investments Ltd?
iii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in approving the dis allowance of short term loss Rs. 3,09,26,000/- in connection with the sale of shares of Killick Halco Limited?
iv) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in affirming the conversion of the above mentioned short term loss Rs. 3,09,26,000/- projected in question no (iii) into a short gain Rs. 80,80,540/-?
v) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in ratifying the dis allowance of the long term capital loss Rs. 1,68,37,861/- emanating from the sale of shares of Pelican Paints Ltd?
vi) Whether on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in sanctioning the rejection of the business loss Rs.105 crores emerging from the Appellant’s business of providing guarantees? and
vii) Whether on the facts and in the circumstances of the case and in law, the Tribunal’s order dated 06.04.2010 is perverse, contrary to weight of evidence adduced by the Appellant and founded on irrelevant considerations and therefore, all its conclusions, findings and holdings are vitiated and plagued by infirmities inasmuch as no person acting judicially and properly instructed as to the relevant law would have come to the inferences arrived by the Tribunal insofar as questions (i) to (vi) supra are concerned?
2 Counsel for the Appellant submitted at the out set that the order of the Income Tax Appellate Tribunal dated 6 April 2010 needs to be set aside and the proceedings remanded for fresh consideration, as the Tribunal has relied upon a decision of the Supreme Court in Sumati Dayal reported in (1995) 214 ITR 801 (SC) without any party to the proceedings relying upon the same before the Tribunal. Consequently, it is submitted by Counsel that there was a violation of the principles of natural justice. It was submitted that the Appellant would have been able to distinguish the applicability of the decision to the facts of its case.
3 During the course of the hearing, we had suggested to Counsel for the Appellant that since it is settled law that what is recorded in the order of the Court is normally accepted as correct record of what transpired at the hearing, therefore, if the Appellant is of the view that that the impugned order does not reflect the proceedings before the Tribunal correctly then in such a case he may move the Tribunal either by an application for rectification or review. This was particularly in view of the fact that the Appellant was represented by different Counsel before the Tribunal. However, the learned Counsel for the Appellant informed us that he would press this appeal and was not inclined to move the Tribunal by way of application for rectification and/ or review.
4 In view of the above, the appeal was taken up for consideration. The facts leading to this appeal are as under :
(a) On 31 October 2001, the Appellant filed its return of income declaring a total loss of Rs.26.87 lakhs for assessment year 200 1-02. In its return the Appellant had claimed long term capital gain of Rs.49.72 crores, being the profit earned on the sale of land. This land was sold to Vysya Bank Ltd. to discharge the Appellant’s liability as a guarantor for loans advanced by Vysya Bank Ltd. to Geekay Exim (India) Ltd. a company belonging to G. K. Rathi Group. The appropriate authority had issued a certificate on 7 February 2000 under the Urban Land Ceiling Act, granting its no objection to the transfer of the land by the Appellant to Vysya Bank Ltd. The capital gain on the sale of land was set off by a long term capital loss and short term capital loss of Rs.1.45 crores and of Rs.49.73 crores respectively on account of sale of shares. The Assessing Officer doubted the genuineness of the capital loss/gain on account of shares and therefore, inter alia called upon the appellant to explain, why the losses on account of shares should not be disallowed, as they appeared to be sham. The Assessing Officer has on investigation of facts, found that during a period of three days from 28 March 2000 to 30 March 2000 the Appellant company which was otherwise a cash starved company, decided to invest a sum of Rs.48 crores in four companies i. e. Matterhorn Investments (P) Ltd., Mountblance Investments (P) ltd., Fircast Investments (P) ltd and Galactia Investments (P) Ltd which were its 100 per cent subsidiaries by subscribing to its shares at a premium. The share held prior to 28 March 2000 and the further purchase of shares at a premium during the period 28 March 200 to 30 March 2000 are as under :
