Commissioner of Income Tax vs Hindustan Tin Works Ltd.

This is an appeal preferred by the revenue u/s 260A of the Income Tax Act, 1961 (hereinafter referred to in short as the Act) against the judgment dated 7-12-2007 passed by the Income Tax Appellate Tribunal (hereinafter referred to in short as the Tribunal) in ITA No. 1101/Del/2005 pertaining to assessment year 2001-02.

1.1 In this appeal, the revenue has essentially raised two issues. The first issue being that the Tribunal 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.

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.

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 (Appeals) ((hereinafter referred to in short as the Commissioner (Appeals)) and the Tribunal have misdirected themselves in law in view of the fact that insofar as the first issue is concerned, the said authorities overlooked the fact that 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.

In order to dispose of the appeal and the issues raised therein, the following facts require to the noted.

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 assessees case was picked up for scrutiny. Accordingly, notices under Sections 143(2) and 142(1) of the Act were issued. The assessing officer after examining the response to queries raised by him assessed the assessees 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 aforementioned mutual fund amounting to Rs. 19,67,450.

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 9-3-2001 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 12-3-2001. Therefore, he concluded that the purchase of the aforesaid units was made on 12-3-2001;

(ii) the mutual fund seemed to have paid dividend to the assessee in the sum of Rs. 15,65,762 on 12-3-2001. But, the books of account of the assessee showed the same as having been credited on 15-3-2001 while the mutual fund as per its statement had reinvested the same on 12-3-2001. 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 12-3-2001 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 Commissioner (Appeals). The Commissioner (Appeals) 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 Commissioner (Appeals) in paras 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 9-3-2001. An application along with a cheque dated 9-3-2001, drawn on Punjab National Bank, Mumbai was deposited with the mutual fund on 9-3-2001 at 2:45 p.m. It is important to note that in the application the assessee had opted for "dividend "plan and reinvestment payout". The date of 12-3-2001 cropped up as the mutual fund enchased the cheque on the said date. The statement of the mutual fund dated 11-3-2001 showed that the assessee was allotted 6,95,894.224 units on 9-3-2001 at the rate of Rs. 14.37 per unit.

(ii) The mutual funds statement dated 13-3-2001 indicated that the assessee had received dividend of Rs. 15,65,762 on 12-3-2001 which, as per the reinvestment plan opted by the assessee was reinvested 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 12-3-2001 held a total number of 8,30,525.222 units. As per the mutual funds statement dated 14-3-2001 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. Insofar as the first cheque was concerned, the Commissioner (Appeal) 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 14-3-2001 to 16-3-2001 it may have been credited either on 15-3-2001 or 16-3-2001. The second cheque, however, was found credited in the bank statement of Punjab National Bank, Mumbai branch on 15-3-2001.

7.1 Based on the aforesaid findings, the Commissioner (Appeals) came to the conclusion that the transaction was genuine. The Commissioner (Appeals) 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 with effect from 1-4-2002.

Aggrieved by the order of the Commissioner (Appeals), the revenue preferred an appeal to the Tribunal. The Tribunal sustained the view taken by the Commissioner (Appeals). The Tribunal after examining the order of the Commissioner (Appeals), as well as the assessing officer came to the conclusion that nothing had been brought to its notice to controvert the findings of the Commissioner (Appeals). 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 Commissioner (Appeals), 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 cases of Commissioner of Income Tax Vs. Vimgi Investment P. Ltd., and Commissioner of Income Tax Vs. Vikram Aditya and Associates P. Ltd., rejected the argument based on Section 94(7) of the Act.

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 Commissioner (Appeals) which was not permissible. Aggrieved by the impugned judgment the present appeal was preferred before us.

In our view, insofar 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 is concerned, the same does not involve any infraction as contended by the revenue. Both the Commissioner (Appeals) 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 9-3-2001. 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 crore. This was reflected in the mutual funds statement dated 11-3-2001. It has also come on record that even though the assessee had made an application accompanied by a cheque on 9-3-2001, the mutual fund encashed the cheque on 12-3-2001. There was thus no discrepancy with regard to the date of purchase of units. It has also come on record that on 12-3-2001 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 reinvested 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 13-3-2001. On 14-3-2001 the assessee redeemed both, the units purchased originally and those obtained out of reinvestment 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 14-3-2001. 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 15-3-2001 whereas in case of the first cheque since the statement of Punjab National Bank, Mohan Nagar, Ghaziabad branch was available from 14-3-2001 to 16-3-2001, it was taken that it was credited on 15/16-3-2001.

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 Commissioner (Appeals) 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 and 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.

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 Commissioner (Appeals) 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 with effect from 1st April, 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 Vikrcun Aditya & 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.

As regards the second issue, that is, the rejection of the revenues plea insofar 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 as the order of the Commissioner (Appeals) 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 Commissioner (Appeals) with respect to expenditure which the assessee incurred for earning income, i.e., dividends from units which are admittedly exempted u/s 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.

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. Commissioner of Income Tax, 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 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.

In view of our discussion above, we are of the opinion that the findings returned by the Tribunal as well as the Commissioner (Appeals) 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.