1. At the instance of the revenue the following question has been referred to us for our determination :
'Whether, on the facts with and in the circumstances of the case, the provisions of section 44E were attracted ?'
2. The question relates to the assessment years 1952-53, 1953-54 and 1954-55, the corresponding accounting periods being the financial years ending March, 1952, March, 1953, and March, 1954, respectively. The assessee is an individual and in the reassessment proceedings for these years one of the questions that was raised pertains to the above questions.
3. The assessee and his wife were directors of a private limited company, called Bombay Chemicals Private Ltd. There were only nine shareholders, including the assessee and his wife. There were three employees at the material time by names M. B. Chitre, D. R. Ajgaonkar and B. J. Dandekar. They are on very intimate terms with the assessee. Chitre and Ajgaonkar were the classmates of the assessee for a long time.
4. On October 17, 1950, Chitre purchased 256 shares of the above company from on F. S. Kerr, who was also a director at the material time, for the price of Rs. 25,600 at the fact value of Rs. 100 per share. This purchase was effected by him after borrowing money from one Ranade, who was also a director of the company. Ranade was repaid the amount, partly by borrowing Rs. 17,000 from the assesssee and the balance of Rs. 8,600 from out of his savings. On July 11, 1951, Chitre purchased 160 shares from the assessee, at Rs. 125 per share. The price was not paid by cash, but was regarded as having been paid by taking a loan from the assessee. As and when dividends in respect of these shares were declared, part payments were made by Chitre to the assessee towards the amount borrowed. Some amounts other than dividends were also paid. In all an aggregate sum of Rs. 23,940 was paid by Chitre towards the total borrowing of Rs. 37,000 made at the time of purchase of 160 shares as well as for repayments of the amounts borrowed from Ranade. A balance of Rs. 13,060 remained outstanding on which the assessee did not receive any interest from Chitre. On June 2, 1954, the said shares, aggregating to 416 shares, where sold by Chitre to the assessee at the respective purchase proves. After adjusting the amounts due to the assessee, a balance of Rs. 32,540 remained due and payable in respect of the price of the said shares, and the assessee passed a promissory note in favour of Chitre for the said amount on September 31, 1954. On the amount of promissory note, He did not pay any interest to Chitre. Part payments were made by the assessee to Chitre as under :
Rs. 10,000 on December 10, 1954;Rs. 2,000 on August 6, 1955;Rs. 3,000 on March 3, 1957;Rs. 3,000 on May 7, 1959;Rs. 8,000 on November 19, 1960; and the balance ofRs. 6,540 on April 3, 1962.
5. The assessee sold 190 of the said company D. R. Ajgaonkar on July 11, 1951. The amount (sic) payable by way of price of these shares, except Rs. 2,500, which was advanced by was of loan by the assessee to Ajgaonkar. Ajgaonkar received by way of dividends Rs. 7,600 on September 14, 1951, Rs. 1,900 on August 18, 1952 and Rs. 950 on June 10, 1953. The balance of price was paid by Ajgaonkar as under :
Rs. 7,800 on September 10, 1951;Rs. 3,500 on August 20, 1952; andRs. 1,100 on June 12, 1953.
6. On June 2, 1954, these 190 shares were resold by Ajgaonkar to the assessee at Rs. 125 per share. The assessee withdrew a sum of Rs. 14,900 form his account with the State Bank of India on September 13, 1954, and paid the same to Ajgaonkar in respect of the balance due relating to the said shares.
7. On July 11, 1951, the assessee sold 180 shares of the said company to Dandekar at Rs. 125 per share. Dandekar was also advanced a part of the amount by the assessee for the assessee for the purchase of these shares. He received dividends as under :
Rs. 7,200 on September 14, 1951;Rs. 1,800 on August 18, 1952; andRs. 900 on June 10, 1953.
8. At the time of the purchases he made part payment of Rs. 2,500 and the balance of the price was paid by him as under :
Rs. 7,400 on September 26, 1951;Rs. 2,500 on August 20, 1952; andRs. 1,500 on June 12, 1953.
9. These shares are sold by Dandekar to the assessee on June 2, 1954, at Rs. 125 per share. On September 30, 1954, the assessee withdrew a sum of Rs. 13,900 from his account with the State Bank of India and paid the same to Dandekar, the balance of the price payable to him.
10. The company had adopted the calendar year as its accounting period. The accounts for the year 1950 were audited on June 30, 1951, and the director's report to the shareholders was made on the same day. In the director's report, they recommended payment of dividend for the year 1950 at Rs. 40 per share. The payment of dividend was approved by the shareholders at the annual general meeting held on July 20, 1951.
11. On these facts, a question arose before the taxing authorities and the Tribunal, whether Chitre, Ajgaonkar and Dandekar were only benamidars of the assessee in respect of the above shares or, in the alternative, the transactions between them in respect of sale of shares of the assessee to these three persons and the repurchase in 1954 attracted the provisions of s. 44E of the Indian I.T. Act, 1922. The ITO took the view that all the three transactions between the assessee on the one hand Chitre, Ajgaonkar and Dandekar respectively on the other were benami transactions and the dividends received by these three parsons should really be treated as income of the assessee. In the alternative, the held that in my event the provisions of s. 44E were clearly attracted and the amounts of dividend paid to these three persons were accordingly taxed as income of the assessee for all the three years.
12. In the three separate appeals preferred by the assessee, the AAC confirmed the finding of the ITO that the transactions between the assessee on the one hand and the three employees, Chitre, Ajgaonkar and Dandekar, respectively, on the other, were benami transaction. He also confirmed the finding of the ITO that the provisions of s. 44E were clearly attracted.
13. In a further appeal preferred by the assessee before the Tribunal, two questions arose for determination, viz.,
(1) Whether Chitre, Ajgaonkar and Dandekar or any one of them held the shares as benamidars of the assessee and
(2) Whether, on the facts and the circumstances of the case, the transactions of the sale and repurchase by the assessee of the three sets of shares would be covered by the provisions of s. 44E of the Indian I.T. Act, 1922
14. The Tribunal took the view that the shares held by Chitre, Ajgaonkar and Dandekar were held by them on their own account and not an benamidars of the assessee. It also found upon appreciation of the facts that the provisions of s. 44E were not attracted in the present case.
15. In the application for reference on behalf of the revenue the questions were sought to be raised on the findings of the Tribunal. The question as to whether Chitre, Ajgaonkar and Dandekar were not the benamidars of the assessee was not allowed to be raised on the ground that the same was based upon a finding of fact, and the only abovementioned question was referred to us for our determination.
16. Mr. Joshi, on behalf of the revenue, contended that if regard be had to the facts of the case, then it is quite evident that the provisions of s. 44E of the Indian I.T. Act, 1922, are clearly attracted. He pointed out that all the three persons, viz., Chitre, Ajgaonkar and Dandekar, were the employees of the company, that the purchase of shares was effected by them on the same day and the resale was also effected by them on the same day. He also emphasised that none of the persons paid the price of the shares in cash. Actually, as and when the dividend was received, the whole of the dividend, or, with some alterations, the amount, was either immediately or, in a short time, repaid to the assessee. Apart from the resales being made on the same day, they were even effected at the same price. When the resale was effected, the assessee did not pay the price in cash, but sometimes he paid in driblets, while on other occasions, he paid them after a lapse of time. He, therefore, submitted that this case in which the provisions of s. 44E were clearly attracted and the Tribunal was in error in reversing the findings of the ITO and the AAC on that question.
17. Section 44E of the Indian I.T. Act, 1922, provides for avoidance of tax by certain transactions in securities. This section includes stocks and shares and were are concerned, in the present case, clearly with provisions of sub-s. (1) thereof. The said provisions is as under :
'(1) Where the owners of any securities (in this sub-section and in sub-section (2) referred to as 'the owner') agrees to sell or transfer those securities, and by the same or any collateral agreement -
(a) agrees to buy back or re-acquire the securities, or
(b) acquires an option, which he subsequently exercises, to buy back or re-acquire the securities,
then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owners, the interest payable as aforesaid shall, whether it would or would not have been chargeable to tax apart from the provisions of this section, be deemed for all the purposes of this Act to be the income of the owner and not to be the income of any other person......'
18. The submission of Mr. Joshi is that if regard be had to the facts of the present case, then the provisions of sub-s. (1) of s. 44E, referred to above, are clearly attracted. He emphasised that all the three persons, Chitre, Ajgaonkar and Dandekar, were the employees of the limited company, in which the assessee was vitally interested and was a director. The shares were sold to each one of the employees on the same day and the same were repurchased on the same day; even the price was the same. He, therefore, submitted that this is case to which the provisions of sub-s. (1) of s. 44E would be directly applicable. He submitted that if the answers given by the assessee and the employees in the evidence before the taxing authorities are property scrutinised, then there was either an agreement on the part of the assessee to buy back the shares or in any event he acquired an option to buy back the said shares, which he subsequently exercised.
19. The shares, which were the subject matter of the transactions between the assessee and the three employees, were those of a private limited company. There are restrictions in respect of transfer of shares of a private limited company and a transfer can be effected only in the manner permitted by the company and a transfer can be effected only in the manner permitted by the articles of association of the company. Our attention has been invited to the evidence given given by the assessee and Chitre, Ajgaonkar and Kandekar, and we find that there is nothing which would justify us to take the view that the finding the finding of the Tribunal is either perverse or unreasonable. As found by the Tribunal, there is neither an agreement to buy back the shares on the part of the assessee nor has he acquired an option to buy back the same. Such a conclusion has been arrived at by the Tribunal upon appreciation of evidence and when such is the case the provisions of s. 44E would not be attracted. The evidence that has been given by one of the persons examined before the taxing authorities was that if ever he desired to sell the shares to the assessee he would be under an obligation to purchase the same at the price of Rs. 125 per share. Such an understanding down not amount either to an agreement to buy back the shares or a conferment of an option on the part of the assessee by buy back the shares. Thus, it is quite evident that the Tribunal was right in taking the view that the provisions of s. 44E were not attracted.
20. Accordingly, our answer to the question referred is in the negative and against the revenue. The revenue shall pay the costs of the assessee.