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Mafatlal Holdings Ltd. Vs. Additional Commissioner of - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(2004)85TTJ(Mum.)821
AppellantMafatlal Holdings Ltd.
RespondentAdditional Commissioner of
Excerpt:
1. this appeal of the assessee is directed against the order of the cit(a)-i, mumbai, dt. 28th feb., 2001, for the asst. yr. 1998-99. the assessee is a company belonging to the mafatlal group. the main objects of the company are to carry on the business of an investment company and to invest in and acquire and hold, sell or otherwise deal in shares, stocks, debentures, debenture-stocks, bonds, units, obligation and securities issued or guaranteed by indian or foreign governments, states, dominion, sovereigns, municipalities or public authorities or bodies or any company corporation, forum or person whether incorporated or established in india or elsewhere. thus, the main object clause of the company is to carry on business of finance and investments.2. the first three grounds of appeal.....
Judgment:
1. This appeal of the assessee is directed against the order of the CIT(A)-I, Mumbai, dt. 28th Feb., 2001, for the asst. yr. 1998-99. The assessee is a company belonging to the Mafatlal Group. The main objects of the company are to carry on the business of an investment company and to invest in and acquire and hold, sell or otherwise deal in shares, stocks, debentures, debenture-stocks, bonds, units, obligation and securities issued or guaranteed by Indian or foreign Governments, States, Dominion, Sovereigns, Municipalities or public authorities or bodies or any company corporation, forum or person whether incorporated or established in India or elsewhere. Thus, the main object clause of the company is to carry on business of finance and investments.

2. The first three grounds of appeal taken up by the assessee pertain to the disallowance of interest of Rs. 1,74,12,682. The AO observed that the assessee-company has not given out any new finances during the accounting year relevant to assessment year under consideration.

However, the company has increased its investments as compared to the earlier assessment years. The AO further noticed from the balance sheet of the company that it has a share capital of Rs. 5,37,50,000 unsecured loans of Rs. 1,30,00,000 and reserves and surplus of Rs. 1,09,77,650.

As against this total amount of Rs. 7,77,23,650, the assessee-company has invested Rs. 90,96,60,103 in the share of group companies. Thus, according to the AO, the entire fund available with the company has been mainly invested in the shares of the group companies and group partnership firms only. The AO has also referred to the P&L a/c of the assessee firm and has stated that the assessee is having income from dividend on long-term investments of Rs. 71,19,180 which has been taxed as income from other sources and profit on sale of long-term investments of Rs. 17,06,579 which has been taxed as capital gains.

Thus, according to the AO, this income does not include any business income or operational income. He has stated that for earning this type of income, the assessee is not required to do anything special. The AO has also observed that the assessee-company has not carried out any business activity, yet the assessee-company has debited an expense of Rs. 1,76,64,882 out of which the interest paid is Rs. 1,74,12,682. The AO, therefore, concluded that there was no business activity in the case of this company during the assessment year under consideration.

The AO referred to the provisions of Section 28 of the Act and has stated that salient features of any business or trade or commerce should be as follows : The AO has thus stated that the business connotes any adventure or concern in the nature of trade, commerce or manufacture. The AO has made reference to the definition of business given in Section 2(13) of the Act and has stated that business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

3. The AO has made reference to the provisions of Section 36(1)(iii) of the Act and has stated that the deduction under Section 36(1)(iii) can be claimed if the following three conditions as laid down by the apex Court in the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) are satisfied : (i) that the money, i.e., capital must have been borrowed by the assessee; (ii) that it must have been borrowed for the purpose of business; and (iii) that the assessee must have paid interest on the borrowed funds.

Thus, the AO has mentioned that the assessee has not carried out any worth-mentioning business activity, thus, according to him the assessee is not eligible to claim interest expenses on funds borrowed for long-term investment and not for the purpose of resale of investment.

The AO has further stated that the assessee would get the benefit of indexation in the resale of investments and hence, it would not be entitled for claim of interest. The AO has also mentioned that the assessee-company is investing in its own group companies, therefore, the assessee-company is carrying on the business with itself, which is not business at all.

4. During the course of assessment proceedings, the assessee-company explained that the assessee-company borrowed money and paid interest on such borrowings, therefore, such interest paid is eligible for deduction under Section 36(1)(iii). According to the assessee, the money has been borrowed, the same has been borrowed for the purpose of business of the assessee. The third condition laid down in Section 36(1)(iii) is also satisfied because the interest has been paid and the same has been claimed as deduction. But according to the AO, the assessee has not fulfilled the main condition that "it must have been borrowed for the purpose of the business". The AG, therefore, came to the conclusion, that the assessee-company was not carrying on any business activity and therefore, it cannot be said that the various amounts invested in the shares of group concerns are advances out of the funds borrowed for the purpose of business. The AO also referred to the decisions of the Gujarat High Court in the case of Sarabhai Sons (P) Ltd v. CIT (1993) 201 ITR 464 (Guj), wherein the High Court has held that when the shares are purchased by the assessee not for earning business income but for other purposes, the expenditure incurred on interest is not allowable. He also referred to another decision of the Gujarat High Court in the case of H.K. (Investment) Co. (P) Ltd. v. CIT (1995) 211 ITR 511 (Guj) wherein the High Court has held that the expenditure incurred on interest should be apportioned between business income and dividend income. He further referred to the decision of the Orissa High Court in the case of Indian Metals & Ferro Alloys Ltd. v.CIT (1992) 193 ITR 344 (On), wherein the High Court has held that the assessee is not entitled to interest under Section 36(1)(iii) in respect of borrowed capital which was invested in subsidiary company.

The AO, therefore, disallowed the interest of Rs. 1,74,12,682 paid by the assessee- company on borrowed capital and claimed the same as expenditure incurred for the purpose of its business.

5. The learned CIT(A) has stated that the shares are held by the assessee-company as long-term investments. Therefore, even if dividend is taxable, it cannot be considered as having the character of business income. Therefore, according to him, the interest will not be allowable under Section 36(1)(iii) of the Act. The learned CIT(A) has further observed that the accounts of the assessee-company show that it has borrowed Rs. 130 lakhs in this year. The long-term investment in shares has increased by Rs. 6,940.89 lakhs. Such investment in this year alone was Rs. 8,525.98 lakhs. After setting off the sale of long-term investment in shares in this year of Rs. 1,585.09 lakhs; the net increase is Rs: 6,940.89 lakhs. All the companies, whose shares are held by the company are domestic companies and as such, the dividend income from them will be exempt under Section 10(33) of the Act. Thus, according to the learned CIT(A) all the investments are in assets which produce non-taxable income. The CIT(A) has thus, stated that the interest expenditure which mainly arises out of long-term investments in shares out of borrowings cannot be allowed. The learned CIT(A) referred to the Madras High Court decision in the case of M.S.P. Raja v. CIT (1976) 105 ITR 295 (Mad), wherein the High Court has held "that any business, expenditure has to be related to a business which is taxed or taxable before it can be deducted and there is no scope for deduction of interest in the instant case, as there is no business income taxed or taxable to which it relates". The learned CIT(A) also referred to the statement of tot-al income of the assessee especially to the expenditure claimed and has stated that the expenditure incurred pertains only to purchases and sales of shares and dividend income.

Thus, according to him, there is no business income or loss as such; that can be computed under Section 28 of the Act, therefore, the interest under Section 36(1)(iii) or 37(1) cannot be allowed. He has further stated that the interest under Section 57(iii) also cannot be allowed because the dividend income is exempt. The learned CIT(A) has also justified the action of the AO for assuming that the assessee had earned profit from itself by stating that the AO has implied the principle of piercing the veil of corporate personality where interlaced transactions between group companies produce reduction of tax liability. In this connection, he has referred to various decisions of the Supreme Court on this subject, According to him, the accounts of the assessee-company indicate that the company had acted as a mere conduit for fund flow between the group companies on a large scale and transfer of shares of group companies from one to another. He made reference to the losses of the asst. yrs. 1997-98, 1998-99 and has stated that the loss has been generated only through inter-group operations. The CIT(A) thus, concluded that the interest is not allowable under Section 36(1)(iii) or 37 or 57(iii) of the Act. He, therefore, confirmed the disallowance made by the AO.6. The learned counsel for the assessee contended that the company actually carried out business activity during the year under consideration, which can be evidenced from the balance sheet for the financial year ended on 31st March, 1998. He argued that from the balance sheet, it could be observed that there were various business transactions carried out by the assessee during the financial year of the nature of selling its investments. He invited our attention to Schedule IV and Schedule V of the balance sheet and contended that the assessee-company has procured unsecured loans during the financial year and has also utilised the said funds for its business purposes. Thus, according to him, the assessee-company had carried on activities in respect of all the ingredients of an investment and finance company. He argued that even single or isolated transaction form business transactions. The assessee-company had carried out activities of the nature of purchase and sale of shares and earned dividend income and had also incurred various business expenditures like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc. It was thus, contended that the interest payment made by the assessee-company during the course of its business activities should be allowed as deduction either under Section 36(1)(iii) or under Section 37(1) of the Act. The learned counsel contended that the judicial decisions referred by the AO in his order are distinguishable from the present case. He contended that the facts of the present case do not correspond to those of the cases cited by the AO. The learned counsel pointed out that both the AO as well as the CIT(A) have accepted deduction of the other business expenditure like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc., by way of not making any attempt to disallow such expenses. According to him the allowance of such expenses pre-supposes the existence of the business.

He further argued that it is not understandable why the other expenses incurred during the course of business like interest income should not also be allowed as business expenses on the background of non-existence of business. The learned counsel further argued that in the alternative, even if the contention of the AO about non-existence of business during the year be accepted, still expenditure incurred by the assessee will have to be allowed as deductions. He placed his reliance on the following Court cases : 7. Regarding the remarks of the AO that the interest is not allowable on funds borrowed for the purpose of long-term investments and not for sale, the learned counsel invited our attention to the detailed discussion made by Chaturvedi and Pithasaria at p. 1980 for their Treatise of Income-tax Law (5th Edn., Vol. II) discussing the legal principle that there is no difference in the utilisation of borrowing for the acquisition of a capital asset or revenue asset. So far as the question of allowability of interest on such borrowings is concerned, he referred to some of the judgments, which have been cited in that connection, out of which some have been mentioned as follows :State of Madras v. G.J. Coelho 8. Regarding the observations of the AO that the investment was made by the assessee-company in shares of other group companies and hence the business was with itself only, the learned counsel contended that the fact that investment might have been made only in group companies is irrelevant to the issue under consideration. He argued that a transaction between two companies, both of which are separate entities cannot be regarded as transaction with itself. In this connection, the learned counsel relied on the judgments of Patna High Court in the case of Maharajadhiraj Sir Kameshwar Singh v. CIT (1963) 48 ITR 483 (Pat) which was subsequently approved by the Supreme Court in the case of Pandit Lakshmikanta Jha v. CIT (1970) 75 ITR 790 (SC) holding that the doctrine that no man can make a profit out of himself is not applicable to transaction between a person and a limited company, even though all the shares in the company are owned by that person; because from a legal point of view, a company is an entity entirely distinct from its shareholders. Regarding the observations of the learned CIT(A) of lifting the corporate veil for the purpose of busting the practice of rotating funds, shares, etc., by public limited companies belonging to a group within themselves, the learned counsel has argued that there has not been any transgression either of income-tax law or of any other law in the course of transaction undertaken by the assessee-company as well as its other group companies/associate firms. All the transactions are within the four corners of law and neither the AO nor the CIT(A) has been able to point out any single instance of violation of any law at all.

9. The CIT(A) has also raised the issue that the dividend income being exempt in the hands of the assessee-company, no taxable income arose out of the business activity during the year implying that any expense incurred for earning dividend income will not be allowable. In this connection, the learned counsel argued that the assessee-company carried on the business as an investment and finance company. Ample activities were undertaken in the process of carrying on such business.

The expenses have also been claimed not against any particular income like dividend, etc. but on the entire background of the assessee being engaged in the business activities as an investment and finance company. No exact business income might have been generated during the year but that has not prevented the Department from allowing other business expenses. The learned counsel contended that the main activity of the assessee is to purchase shares of various companies mostly for the purposes of acquiring controlling interest therein in conjunction with other group companies. That is why the shares acquired by the assessee-company have been shown under investment portfolio and not as stock-in-trade. He referred to the decision of Gujarat High Court in the case of Addl. CIT v. Laxmi Agents (P) Ltd. (1980) 125 ITR 227 (Guj), wherein the High Court held that interest paid by the responded company on the amounts borrowed for purchasing shares of its managed company would be allowable under Section 36(1)(iii) of the Act. He also referred to the decision of the Calcutta High Court in the case of CIT v. Jardine Henderson Ltd. (1994) 210 ITR 981 (Cal), wherein the High Court held that interest paid on borrowings utilised for purchase of shares in order to retain managing agency by the assessee-company was allowable as business expense. He also referred to another decision of the Calcutta High Court in the case of CIT v. Rajeeva Lochan Kanoria (1994) 208 ITR 616 (Cal), wherein, the High Court held that the interest paid on borrowed capital utilised for the purchase of shares of different companies in order to acquire controlling interest not only for earning dividends but for managing, administering, financing and rehabilitating companies under control would be allowable under Section 36(1)(iii).

10. The learned counsel argued that it is also not correct to say that the dividend income earned by the company is fully exempt under the Act. During the year under consideration, dividend income received by the shareholder and as referred to in Section 115-O was exempt under Section 10(33) of the Act. As per the provision of Section 115-O, however, a company declaring, distributing or paying any dividend was liable to pay tax at certain rate on the amount of dividend declared, distributed or paid and whether out of current or accumulated profits.

He argued that as soon as a company declares, dividend in favour of its shareholders, the dividend amount thus declared becomes monies receivable by the shareholders. If tax is paid out of such dividend declared whether by the shareholder directly or by a company in an indirect manner, it is the dividend income, which suffers tax. Thus, the learned counsel contended that since the dividend income earned by the assessee-company suffered tax as paid by the company itself, it cannot be said that the dividend income was actually exempt from tax, According to him, the matter is analogous to deduction of tax at source from certain items of income by the payer. Hence, although technically the dividend income is stated to be exempt from tax, however, actually it is not so.

11. The learned counsel also made the alternative claim which is based on facts of this case. He contended that, if the original claim of the assessee-company about allowability of the interest as business expense is not accepted, then reference may be made to the order of the learned CIT(A) dealing with the details of the claim of the interest payment under consideration. He found out that the said claim consisted of an amount of Rs. 162.82 lakhs to M/s Mafatlal Industries Ltd. (MIL) and Rs. 11.30 lakhs to M/s Sushmita Holdings Ltd. (SHL). So far as the main amount of Rs. 162,82 lakhs is concerned, the CIT(A) found out that the said interest payment was made to M/s Mafatlal Industries Ltd. on Rs. 15,81,00,000 @ 21 per cent for the period from 1st April, 1997 to 27th Sept., 1997. Thus according to the learned counsel, the CIT(A) himself admits, thereafter, that the liabilities towards interest payment arose mainly out of share transfer between the group companies passed through journal and ledger entries. The learned counsel has stated that in the details of long-term/short-term capital gain on sale of shares of Gujarat Gas Company Ltd. (GGCL) filed along with the returns of the income for this year was shown that total number of 16,82,500 shares of GGCL were sold by the assessee-company during the year under consideration and that is how the long-term capital gains of Rs. 14,70,11,801 arose. Again the CIT(A) has discussed this point at p. 37 of his order, although he states therein that the assessee-company sold 12,00,000 shares of GGCL in this year. In its submissions dt. 10th Oct., 2000, made by the assessee-company before the AO, it was submitted that 4,82,500 equity shares of GGCL were purchased by the assessee-company at total cost of Rs. 13,02,75,000 during the financial year 1997-98 and that M/s Mafatlal Industries Ltd. had made payment in that regard on behalf of the assessee. It was also stated that the account of MIL was credited accordingly. Again, in its submission dt.

21st March, 2001, before the AO, it was stated that on 27th Sept., 1997, MIL account was credited with an amount of Rs. 15,81,000 by way of transfer of the balance in the advance subscription received account to current account. The learned counsel, therefore, argued that the purchase of shares of GGCL in the financial year 1997-98 was made solely through the credit provided by MIL on which considerable amount of interest payment of Rs. 162.82 lakhs was made. Thus, at the worst, this interest payment to MIL should have been added to the cost of the GGCL shares and the long-term/short-term capital gain on sale of such shares during the year under consideration should have been reduced accordingly. The learned counsel, thus, contended that if the claim of the assessee-company towards allowance of interest payment under the head business is not found entertainable, thus at least, such allowance be directed to be made against the computation of long-term/short-term capital gain on sale of GGCL shares.

12. The learned Departmental Representative referred to the main object clause of the company and contended that mere presence of object clause is not sufficient to prove that the company carried on the business of finance and investments. He placed his reliance on the decision of the Hon'ble Supreme Court in the case of Oriental Investment Co. Ltd. v.CIT (1957) 32 ITR 664 (SC), wherein it has been held that the mere fact that a company has within its objects the dealing in investment in shares, does not give to the company the characteristics of a dealer in shares, but if other circumstances are proved, it may be relevant for the purpose of determining the nature of the activities of the company.

The learned Departmental Representative also referred to the decision of the Madras High Court in the case of Ace Investments (P) Ltd v. CIT (2000) 244 ITR 166 (Mad), wherein the Hon'ble High Court has laid down that the mere presence of the object clause would not be sufficient to hold that the assessee was carrying on moneylending business. The learned Departmental Representative argued that the company did not arrange new finances during the previous year relevant to the assessment year under consideration, The assessee-company has sold one of its old shares held as long-term investment in the books of account.

There was no operational income during the relevant previous year.

Thus, according to him, the assessee was not carrying on any business activity during the previous year relevant to the assessment year under consideration. The learned Departmental Representative contended that the various circumstances have to be taken into consideration for allowing the expenditure. He referred to p. 7 of the CIT(A)'s order and contended that when there is no computation of business income or loss under Section 28 of the Act, no deduction can be allowed under Section 36(1)(iii) or Section 37(1) of the Act. He placed his reliance on the Calcutta High Court decision in the case of Brooke Bond & Co. Ltd. v.CIT (1970) 77 ITR 220 (Cal), wherein the High Court, while dealing with the case of set off of unabsorbed loss, depreciation, etc., held that "the question of allowance of unabsorbed depreciation would only arise when there is a computation of business income under Section 10 in the current year. If there is no assessment under Section 10 there could be no question of any allowance under the proviso to Section 10(2)(vi)(b).

It could not, therefore, be said that the CIT has failed to appreciate the ratio of the decision in Jaipuria China Clay case". He also placed his reliance on the Supreme Court decision in the case of CIT v.Rajendra Prasad Moody (1978) 115 ITR 519 (SC). He, therefore, contended that in the present case, the dividend income, when taxable, is to be assessed under the head "other sources". He further argued that the dividend income, if taxable, may partake the character of business income, if the shares are held on stock-in-trade. He contended that in the present case, the shares are held as long-term investments; therefore, even if the dividend is taxable, it cannot be considered as having the character of business income, He further contended that the interest was being allowed in the past because the assessee was disclosing income from business but in the present assessment year interest is not allowable under Section 36(1)(iii) or under Section 37(1) of the Act, because there is no business income. The learned Departmental Representative also referred to p. 13 of the CIT(A)'s order and contended that Section 14A has been inserted by the Finance Act, 2001, retrospectively w.e.f. 1st April, 1962 and under that section any expenditure not only interest on earning of exempt income cannot be allowed. The learned Departmental Representative also fully relied on the findings of the tax authorities. Regarding the alternative claim, the learned Departmental Representative argued that cost of acquisition of the shares has to be determined as per the provision of Section 55 of the Act. He referred to the provision of Section 48 of the Act and contended that the additional cost, if any, has to be determined as per the provisions of Section 48 of the Act. He placed his reliance on the Supreme Court decision in the case of Challapali Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC), wherein the apex Court has held that interest paid on the loan on the unpaid purchase price upto the, date of commencement of production where a plant is constructed out of borrowed money or where part of the purchase price of the plant remains unpaid forms part of the cost. In reply, the learned counsel contended that the Court cases relied upon by the learned Departmental Representative are not relevant to the facts of the present case. The learned counsel contended that the assessee is an investment company and has made various investments. Therefore, the money has been borrowed for the purpose of the business. He also argued that the interest was allowed in the asst. yr. 1995-96. He also placed his reliance on the written submission filed during the course of hearing.

13. We have carefully considered the submissions made by the rival parties. We have also gone through the written submission filed by the learned counsel. The assessee-company paid interest of Rs. 1,74,12,687 on its borrowings during the assessment year under consideration. The assessee made the claim that the interest payment was eligible for deduction under Section 36(1)(iii) or alternatively under Section 37(1) of the Act. The AO has made the disallowance of interest mainly on the ground that the assessee had not carried out any business activity during the previous year relevant to the assessment year under consideration. Thus, the main issue for consideration is that whether the assessee was carrying on any business during the previous year relevant to asst. yr. 1998-99 or the business of the assessee-company was completely discontinued. We have gone through the balance sheet and P&L a/c for the year ended on 31st March, 1998. As per the balance sheet, the assessee carried on various business transactions during the previous year relevant to the assessment year under consideration.

These transactions are of the nature of selling its investments, utilisation of the opening cash and bank balance, procuring unsecured loans during the financial year and utilisation of the said funds for its business purposes. The assessee is an investment company and it had carried on activities in respect of all the ingredients of an investment and finance company. During the year, the assessee-company had carried on activities of the nature of purchase and sale of shares.

The assessee-company also earned dividend income out of the investments made. It is also noticed that the assessee had also incurred various business expenses like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc., which clearly indicate that the business of the assessee had continued during the year. We have also gone through the statement of total income for the assessment year under consideration (compilation p. 164). The assessee had shown net profit at Rs. 88,39,173, the dividend income at Rs. 71,19,180 and profit on sale of investments of Rs. 17,06,529. Thus, it makes abundantly clear that the assessee was carrying on the business during the previous year relevant to the assessment year under consideration, otherwise, there would have not been any profit on sale of investments, which is the main business of the assessee. Under the circumstances, we do not find any substance in the findings of the tax authorities that the business of the assessee was discontinued during the relevant year under consideration.

14. For claiming deduction under Section 36(1)(iii), the basic requirements are--(i) the money (capital) must have been borrowed by the assessee; (ii) it must have been borrowed by the assessee for his business, profession or vocation; and (iii) the assessee must have been paid interest on the amount and claimed it as an allowance.

The language used in Clause (iii) of Section 36(1) is the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. It has been held by the Courts that the expression "for the purpose of the business" is wider in scope than the expression for the purpose of earning profits. It has been laid down in the following Court cases that it is not necessary that the business may be carried on in the year in which the capital was borrowed. It is sufficient that the money was utilised for the purpose of acquisition of capital asset : It has been held by the Hon'ble Bombay High Court in the case of Calico Dyeing & Printing Works (supra) that it is not necessary whether the investment yielded any profit in the year or whether the investment was remunerative or unremunerative. It has also been held by the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) that it is not the requirement of Section 36(1)(iii) that the assesses must show that the borrowing of the capital was necessary for the business. In the present case, the assessee was carrying on various business transactions during the financial year such as selling its investments, utilisation of the opening cash, and bank balances, procuring unsecured loans and utilisation for the said fund for its business purpose. Thus all the three conditions for claiming deduction under Section 36(1)(iii) are fulfilled. The money has been borrowed by the assessee; it has been borrowed by the assessee for its business and the assessee has also paid interest on the amount so borrowed.

Therefore, the claim made by the assessee of the payment of interest of Rs. 1,74,12,682 is allowable under the provisions of Section 36(1)(iii) of the Act. This expenditure is even otherwise allowable under the provisions of Section 37(1) of the Act because the same has been incurred for the purpose of the business of the assessee. It has been, held by various Courts that in order to sustain the claim for deduction by way of business expenditure, the expenditure must have been incurred for the purpose of the business, which was in existence in the year of account, the profits of which are under assessment, If during the relevant period there was, in fact, no business, no question of computation of its income after deduction of expenses can possibly arise. In the present case, the money borrowed has been utilised for purchasing the shares out of which the assessee has earned dividend income. The assessee has also incurred various expenses during, the year. As we have stated above, the assessee has also made computation of its business income. Therefore, the interest payment made by the assessee-company is for the purpose of its business, which was in existence during the relevant assessment year and the same is, therefore, allowable even under Section 37(1) of the Act.

15. Both the AO and the CIT(A) have accepted deduction of the other various expenses like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc. Both the authorities have not made any attempt to disallow such expenses. The learned counsel has rightly pointed out that these were also business expenses and if the business of the assessee was not in existence as has been held by both the authorities, these expenses were also not allowable. By allowing these business expenses, the Department, in fact, has accepted that the business of the assessee was in existence during the year under consideration. The payment of interest is also part of the business expenditure incurred by the assessee during the assessment year under consideration. The Department is, not empowered by law to indulge in the practice of allowing a part of the expenditure on the basis that business was in existence and disallowing the remaining expenditure on the basis that business was not in existence. These findings of the authorities are contradictory and bad in law. We also find substance in the arguments of the learned counsel that the expenditure incurred by the assessee will have to be allowed as deduction even if the business was in dormant condition during the relevant assessment year. The contention of the learned counsel is fully supported with the Court cases relied upon by him. The contention of the Department that the interest is not allowable on funds borrowed for the purpose of long-term investments and not for resale is also without any substance.

It appears that the Department is of the view that initial payment is not allowable if the borrowed funds have been spent for the acquisition of goods on capital account; The Gujarat High Court in the case of Dy.

CIT v. Core Health Care Ltd. (2001) 251 ITR 61 (Guj) has held that Section 36(1)(iii) nowhere stipulates that borrowing has to be on revenue account. For giving the benefit of Section 36(1)(iii) to the assessee, what, is necessary to examine is whether the assessee has used the borrowed capital for the purpose of business. If that is found to be true, then one need not examine as to whether the asset purchased with the borrowed capital has been, in fact, used by the assessee. This issue is also squarely covered with the various decisions relied upon by the learned counsel. We also do not find any substance in the contention of the Department that the interest is not allowable because the investment has been made by the assessee-company in shares of other group companies; and hence the business was with itself only. The law does not prevent transactions among group companies unless such transactions are made for the evasion of tax. Each company is an independent entity different from its shareholders. Therefore, transaction between two companies, both of which are separate entities, cannot be regarded as transaction with itself. This issue is also covered with the decision of the Hon'ble Supreme Court in the case of Pandit Lakshmikanta Jha (supra), relied upon by the learned counsel wherein it has been laid down that doctrine that no man can make a profit out of himself is not applicable to transactions between a person and a limited, company, even though all the shares in the company are owned by that person because from a legal point of view, a company is an entity distinct from its shareholders.

16. The issue raised by the learned CIT(A) regarding the necessity to lift the corporate veil for the purpose of busting the practice of rotating funds, shares, etc., by public limited companies belonging to a group within themselves is also without any basis. The learned CIT(A) has not brought any material on record to prove there has been transgression either of income-tax law or of any other law in the course of transactions undertaken by the assessee-company as well as its other group companies/associate firms. The learned CIT(A) has referred to the lifting of veil without bringing any evidence on record to prove that the group companies have actually indulged in the device of evasion of tax by rotating the funds/shares, etc., within themselves, There is -nothing on record to prove that the group companies have indulged in the practice of evasion of tax by adopting illegal means. The onus is on the Department before lifting the veil to support their case with illegal practices in which the group companies are indulging to defraud the Revenue. The remarks of the learned CIT(A) are irrelevant as such remarks are not based on any material on record.

The learned CIT(A) has raised another issue regarding the dividend income which is being exempt in the hands of the assessee-company.

According to him, no taxable income arose out of the business activity during the year therefore, any expense incurred for earning dividend income will not be allowable. These findings of the learned CIT(A) are also not supported by any material on record. The assessee-company is carrying on the business as an investment and finance company. The assessee-company has undertaken many activities in the process of carrying out such business. The expenses have also been claimed not against any particular income like dividend, etc., but on the basis of entire background of the assessee being engaged in business activities as investment and finance company. The Department has already allowed other business expenses, though, according to the Department no business income has actually been generated during the year. We have already discussed above the Department cannot adopt two different standards for the allowability of the expenses incurred for the same business. Therefore, the interest expenditure is also allowable on the same basis on which the other expenses have been allowed. The assessee is purchasing shares of various companies mostly for the purpose of acquiring controlling interest on such companies. That is why, the shares acquired by the assessee-company have been shown under investment portfolio and not as stock-in-trade. We find force in the arguments of the learned counsel. The learned counsel gets full support from the decisions of Gujarat High Court in the case of Laxmi Agents (P) Ltd. (supra) and also from the Calcutta High Court decision in the cases of Jardine Henderson Ltd. (supra) and Rajeeva Lochan Kanoria (supra). We would also like to refer to the decision of the Supreme Court in the case of CIT v. Indian Bank Ltd. (1965) 56 ITR 77 (SC), wherein the apex Court has held that it would not be correct to say that if a part of the profits of a business was not taxable, no expenditure incurred for the purpose of earning these profits could be allowed as deduction. Thus, where a bank utilised part of the deposits mobilised by it on investment in tax-free securities, interest paid on such deposits was deductible.

17. We also do not find any substance in the contention of the Department that dividend income earned by the assessee is fully exempt under the IT Act, 1961. During the relevant assessment year, dividend income received by the shareholder and as referred in Section 115-O was exempt under Section 10(33) of the IT Act, 1961. As per the provision of Section 115-O, a company declaring, distributing or paying any dividend is liable to deduct tax at certain rate on the amount of dividend declared, distributed or paid. As soon as an company declares dividend in favour of its shareholder, the dividend amount declared becomes income receivable by the shareholder. Thus, if tax is paid out of such dividend declared whether by shareholder directly or by the company in an indirect manner, it is the dividend income which has suffered tax. In fact, dividend declared by the company is the income of the shareholder. Before the existing provisions of Section 115-O, the dividend income was taxable in the hands of the shareholders. Now as per the provisions of Section 115-O the tax is being deducted by the company out of dividend declared, distributed or paid to the shareholder. Thus, the dividend income, which belongs to the shareholder has suffered tax either in the hands of the company or in the hands of the shareholder. The shareholder has received the net income in both the cases. For, example, if the total dividend declared by the assessee-company is Rs. 1,000 and the tax paid by the shareholder on this amount is @ 10 per cent then the net income remains in the hands of the shareholder is Rs. 900 only. But as per the provisions of Section 115-O, if the company is deducting tax @ 10 per cent out of the dividend declared of Rs. 1,000 the shareholder in that case would also get income of Rs. 900. Thus, in both the cases the shareholder is getting the net income of Rs. 900 after the deduction of tax whether the tax is deducted in the hands of the shareholder or in the hands of the company. Under the circumstances, it cannot be said that the dividend income received by the shareholder is exempt. The only difference, which has been made by the provisions of Section 115-O is that the incidence of tax is shifted from the shareholder to the company. We, therefore, find force in the arguments of the learned counsel that the dividend income received by the assessee is in fact not exempted from tax but the incidence of tax has been shifted from the shareholder to the company. Ultimately it is the income of the shareholder, which is being assessed either in his own hands or in the hands of the company. The contention of the Department that the dividend income is exempted from tax and, therefore, no expenditure can be allowed against that income is without any substance.

18. The various Court cases relied upon by the learned Departmental Representative are not relevant to the facts of the present case. In the case of Oriental Investments Co. Ltd. (supra), the Hon'ble apex Court held that the mere fact that the company has within its objects the dealing in the business of investment in shares, does not give to the company the characteristics of a dealer in shares, but if other circumstances are proved, it may be relevant for the purpose of determining the nature of the activities of the company. In the present case, the assessee-company actually carried out business activity during the year under consideration, which can be evidenced from the balance sheet for the financial year ending on 31st March, 1998. It could be observed from the balance sheet that there were various business transactions carried on by the assessee-company during the financial year of the nature of selling its investments, utilisation of the opening cash and bank balances, procuring unsecured loans during the financial year and utilisation of the said funds for its business purposes. Thus, the assessee-company had carried on the activities of all the ingredients of investment and finance company. Thus, the assessee-company was not only having its objects in dealing with the investment shares but there were other circumstances as stated above which proved undoubtedly that the assessee-company was an investment company. Therefore, the above Supreme Court decision has moreover supported the case of the assessee-company that the company was actually dealing in the business of investment in shares. In the case of Challapalli Sugars Ltd. (supra), the Hon'ble Supreme Court laid down that, if the interest paid on the amount borrowed for acquiring and installing machinery and plant for a period prior to commencement of production, the same would actually form part of the actual cost of machinery and plant. In the present case as we have discussed above in detail, the assessee-company carried on the business as a investment company during the year under consideration. The assessee-company had carried on the activities of the nature of purchase and sale of shares, had earned dividend income and had also incurred various business expenditure like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc., which have also been allowed by the AO.Therefore, the interest expenditure incurred by the assessee is also allowable under the provisions of Section 36(1)(iii) as the assessee-company was in fact carrying on the business activities during the year under consideration. In the case of Ace Investments (P) Ltd. (supra), the Madras High Court has held "that the mere presence of the objects clause would not be sufficient to hold that the assessee was carrying on moneylending business. It was clear on the facts that "the amounts advanced were short-term advances and they were advanced only to the fourteen trusts. The assessee had not advanced money to any other person. The rate of interest charged was 6 per cent which the Tribunal considered low when compared to the market rate of the interest prevalent at the time. Moreover, the interest was collected only after the payment of the principal sum. The Tribunal also found that the persons to whom the advances were made were closely connected with the assessee. There was no systematic or organised activity carried on by the assessee in dealing with the money, Therefore, the Tribunal was right in holding that the income of the assessee could not be regarded as income derived from moneylending business and it was derived from the deposits or investments made." In the present case, the company carried on the business activities during the year under consideration; there were also various business transactions as we have stated above. The assessee procured unsecured loans during the financial year and these sums were utilised for the purpose of the business of the assessee. The assessee-company also made investments in shares and also earned dividend income, therefore, it cannot be said that the assessee-company made short-term advances. It also cannot be said that the assessee-company was not carrying on the business systematically or in an organised manner. The assessee-company was carrying on the business as an investment and finance company and these activities of the company were systematic. Therefore, the facts of the above case of the Madras High Court are not relevant to the facts of the present case. In the case of Brooke Bond & Co. Ltd. (supra), the Hon'ble Calcutta High Court held that the dividend earned by the assessee-company from investments in shares of companies carrying on tea business would never be said to be part of its business income because investment in shares were not incidental to the assessee's business activities and they were not held as trading assets. But in the present case, the main business of the assessee was investment in shares. The assessee-company carried on the activities in respect of all the ingredients of an investment and finance company. Therefore, the main business of the assessee was to deal in investments and hence, the dividend income earned by the assessee was income from the main business carried on during the relevant assessment year. The facts of the abovesaid case are not relevant to the facts of the present case because in the abovesaid case the assessee was earning the dividend income from its investment in shares; which was not the part of the business income of the assessee. In the case of Rajendra Prasad Moody (supra), the Hon'ble Supreme Court held that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as deduction under Section 57(iii) of the IT Act, 1961 in computing its income from dividend under the head "income from other sources". We do not find any relevance of this case to the facts of the present case. In the present case, the question of deduction under Section 57(iii) of the Act does not arise because in the present, case deduction has to be allowed under the provisions of Section 36(1)(iii) or under Section 37(1) of the Act. The dividend income earned by the assessee is out of its investment in shares and this is the main activity of the assessee-company. Therefore, the dividend income earned during the year is income of the assessee from business and not income from other sources. In view of the discussion above, the disallowance made by the tax authorities is not justified. We, therefore, allow the claim of allowance of interest payment as business expense and the disallowance made by the AO and confirmed by the CIT(A) is deleted. As we have allowed the claim of the assessee (supra), therefore, the alternative claim made by the learned counsel, does not require 'any consideration, These grounds of appeal are, therefore, decided in favour of the assessee.

19. The fourth, fifth, sixth and seventh grounds of appeal pertain to the disallowance of the loss of Rs. 21,33,53,989 on sales of 1,04,16,530 shares of National Organic Chemical Industries Ltd. (NOCIL). It is submitted by the assessee that the CIT(A) erroneously held that the sale of 1,04,16,530 shares of NOCIL was sham and that the loss of Rs. 21,33,53,989 was not a real loss. Without prejudice, the assessee has also submitted that the CIT(A) ought to have allowed the loss on sale of 6,16,530 shares of NOCIL, which were in the name of the assessee. It is further stated that the CIT(A) has erroneously rejected the assessee's submission that the provisions of Section 45(3) were applicable to the sale transaction. The learned CIT(A) has held that this issue is infructuous.

20. During the assessment year, the assessee-company has claimed loss of Rs. 6,63,42,188. The AO observed that, during the previous year relevant to the assessment year under consideration, the assessee-company sold shares of Gujarat Gas Co. Ltd., in which it has earned long-term capital gain of Rs. 14,70,11,801. Vide agreement dt.

2nd July, 1997, the entire shares of Gujarat Gas Co. Ltd., belonging to the assessee-company and two other group companies namely Mishapar Investments and Sushmita Holding Ltd. has been sold out to British Gas Asia Pacific Holding (P) Ltd. The shareholding of the assessee-company in Gujarat Gas Co. over the years from financial year 1997-98 totalling to 16,82,500 has been sold and on these sale proceeds long-term capital gain has arisen which is of Rs. 14,70,11,801. The AO has also stated that the assessee-company has sold shares totalling to 6,16,530 on 30th July, 1997 to a partnership concern namely M/s Arvi Associates @ Rs. 24.50 per share. Subsequently on 24th July, 1997, the assessee-company has purchased shares numbering to 2,28,00,000 from its group companies @ Rs. 43.01 per share. On 24th Aug., 1997, the assessee-company has sold 98,00,000 shares to its partnership firm, M/s Arvi Associates, @ 27.50 per share.

21. The AO found that the assessee-company had not received any sale consideration of the shares sold to the partnership firm M/s Arvi Associates. As per the partnership deed dt. 12th Oct., 1995, the original partners of M/s Arvi Associates were Sushripada Investment (P) Ltd. and Suvin Trexchem (P) Ltd., both are group companies of Mafatlal Group. Subsequently, vide deed of partnership dt. 1st July, 1997, two new partners which are also group companies of Mafatlal Group were admitted, i.e., Mafatlal Holding Ltd. and Mafatlal Finance Co. Ltd. The AO noticed that deed of partnership dt. 1st July, 1997 was not registered with the Registrar of Firms. Therefore, this is an unregistered firm. The AO also found that the original partnership deed dt. 12th Oct., 1995 between Sushripada Investment (P) Ltd. and Suvin Texchem (P) Ltd. was not registered with the Registrar of Firms. The AO also noticed that as on 31st March, 1996, the capital of the partners of the firm was of Rs. 5,000 each and the total assets of the firm was Rs. 10,154. According to him, the firm did not carry out any business activity during the year and there was a loss transferred to the partners current account amounting to Rs. 746 only. Further as on 31st March, 1997, the total assets had remained at Rs. 10,154 and during the year, the assessee-company had carried out no activity and as per the P&L a/c, the loss was Rs. 100 only. As per the balance sheet as on 31st March, 1998, the firm had received capital of Rs. 1,00,000 from Mafatlal Finance Co. Ltd. and Rs. 5,000 from Mafatlal Holding Ltd. The firm had shown investment of Rs. 1,34,16,530 equity shares of Rs. 10 each of NOCIL fully paid. As per the P&L a/c, the firm had received Rs. 2,450.23 as profit on sale of investments. Thus, according to the AO, the firm from asst. yr. 1996-97 to asst. yr. 1997-98 remained unregistered and it did not carry on any business activities and the shares sold by Mafatlal Holding Ltd. had been shown as investment in the hands of the firm. It is further observed by the AO that the share certificates were not filed before him as according to the assessee, the shares sold to M/s Arvi Associates had been pledged to finance company on behalf of the Mafatlal Industries Ltd. and Mafatlal Industries had obtained loan against the above shares. The AO has also stated the assessee-company was introduced in this partnership firm only on 1st July, 1997. The first lot of shares totalling to 6,16,530 of NOCIL were sold to Arvi Associates on 3rd July, 1997 and the balance were sold on 24th Aug., 1997. Thus, according to the AO, the fact of joining of the assessee-company as a partner on 1st July, 1997 and subsequently selling of first lot of shares on 3rd July, 1997 cannot be mere coincidence.

22. The AO made enquiries with the assessee-company regarding the genuineness of the transaction of transfer of shares of NOCIL to Arvi Associates. The assessee-company explained that the shares of NOCIL totalling to 1,04,16,530 had been transferred to M/s Arvi Associates as a consideration towards the capital contribution of the assessee-company, therefore, it was not required for the assessee-company to receive the sale consideration of the shares. The AO, however, did not accept the contention of the assessee and had stated that as per the balance sheet of Arvi Associates as on 31st March, 1998, the capital amount shown against Mafatlal Holding Ltd. under the heading "partners capital account" was Rs. 5,000 only. Thus, according to the AO, the amount of capital alleged to have been introduced through the sale of shares had not been shown in the balance sheet of the firm. The AO further observed from the balance sheet of the assessee firm that the investment made by the assessee-company in the partnership firm was only Rs. 5,000. The AO has thus, stated that the contention of the assessee-company that the sale consideration of NOCIL shares to Arvi Associates was not received on the ground that the same were introduced as capital was not found correct. The AO further noticed that in the balance sheet as on 31st March, 98 of the assessee-company under Schedule VI, under the heading "loans and advances" the assessee-company had shown this amount as an advance receivable from M/s Arvi Associates. Thus, according to the AO, this amount cannot be stated as the capital, contribution of the assessee-company and the same was an afterthought of the assessee-company. The AO, therefore, concluded that there was no introduction of the capital by the assessee-company in Arvi Associates in the shape of transfer, of subject shares of NOCIL.

23. Regarding the sale of shares, the AO had observed that the transfer deed of shares was not produced by the assessee. The shares had not been sold through stock-exchange. The shares transferred continued to remain in the name of original holder even after the shares had been sold twice, once to assessee-company by Sushmita Holdings and Mishapur Investments and secondly to M/s Arvi Associates by the assessee-company. The AO had also observed that 1,30,000 shares were held by Sushmita Holdings Ltd. on behalf of the Mafatlal Holdings Ltd. Further 30 lakhs shares and 98 lakhs shares were held by Mishapur Investments Ltd., and 6,16,530 shares were held by Mafatlal Holdings Ltd. on behalf of the Arvi Associates. The total of the shares comes to 1,34,16,000 which is equal to the number of shares claimed to have been sold by the assessee-company to Arvi Associates. Thus, the AO had stated that the shares were also not in the name of the assessee-company who is a partner in the Arvi Associates but in the name of Mishapur Investment Ltd., which was not partner of Arvi Associates. The AO, therefore, has concluded that the transfer deeds simply do not exist in the case of these shares till date, therefore, the share transaction of the shares of NOCIL was bogus and sham.

24. The AO has also made some further observations. According to him, the second major lot of the shares was sold on 24th Aug., 1997, which was Sunday, According to him, it was not known as to what was the hurry on the part of the assessee-company to carry out a sale transaction of 98,00,000 of shares on Sunday. The AO has further stated that keeping in mind, the normal business prudence and normal business acumen of any business concern, if these shares would have been sold at the stock exchange in bulk, the same would have definitely fetched a huge amount of premium over the market price. According to him, since this amount of shares consists of a substantial percentage of shares of NOCIL, the outside parties would have competed fiercely for these bulk of shares and would have paid much more as it would have enabled the decided purchasing, party to have a control over the management of the group company. Thus, according to the AO, the assessee never intended to sell the subject shares but merely wanted to claim the benefit of loss arising to it on a technical ground due to change of ownership of shares on paper. The AO has thus, finally concluded that the alleged share transaction of the assessee-company is nothing but a bogus and share transaction. According to him, it is a paper transaction carried out between the group companies of the Mafatlal group and the assessee has the role play a conduit in the channelisation of funds of the group companies. Hence, the loss claimed on account of sale of 1,34,16,530 shares of NOCIL amounting to Rs. 21,33,53,989 is disallowed by him.

25. The learned CIT(A) in his order has observed that the entire lot of 1,04,16,530 shares were not in the possession of the assessee, because they had been pledged with finance companies and banks for a loan to Mafatlal Industries Ltd. According to him, the details regarding the pledging of shares were not furnished before the AO. Thus, the assessee-company has not made the full disclosure about the pledge of the self-same shares which were allegedly sold to M/s Arvi Associates.

It has been stated by the CIT(A) that the assessee was not the owner of shares. The ownership over the shares is through the entry in the register of members maintained by the company which issued the shares.

The learned CIT(A) referred to the decision of the Calcutta High Court in the case of CWT v. Sumitra Devi Jalan, wherein the High Court has discussed the issue of ownership. The learned CIT(A) also referred to the decision of the Supreme Court in the case of Howrah Trading Co.

Ltd. v. CIT (1959) 36 ITR 215 (SC) and contended that the assessee-company was not the legal owner of the shares. According to him, one can sell, what one owns, not through book entries, but by following the procedure prescribed for transfer of shares in the Companies Act. The learned CIT(A) has stated that in the assessee's case, it has been admitted that no valid transfer deed was executed and handed over along with the original share certificates to the assessee by Mafatlal Industries Ltd. (MIL) and Sushmita Holding Ltd. (SHL) on sale of 228 lakhs shares, the assessee has no legal or even equitable title to transfer 98 lakhs shares out of that lot. The learned CIT(A) referred to the decision of the Delhi High Court in the case of CIT v.Bharat Nidhi Ltd. (1982) 133 ITR 447 (Del) wherein the Hon'ble High Court has held that "reversing the decision of the Tribunal (i) that an agreement to transfer shares in a company accompanied with the actual instrument of transfer which had not been completed so far as the transfer could complete, it did not amount to a transfer deed sufficient to cause the title to pass. By itself it would be nothing more than an enforceable agreement to convey and until the transfer endorsement was signed, the shares would be unascertained goods and would not be in a deliverable state, (ii) that since there was not even a suggestion that any transfer forms or the share scrips were handed over to the purchasers, equitable ownership in the shares could not be said to be transferred to them by the assessee. (iii) that there was a complete sale on 5th Feb., 1948 and, therefore, the difference received by the assessee pursuant to the settlement of 5th Feb., 1952, was liable to be included in its income and taxed for the asst. yr.

1953-54." 26. According to the learned CIT(A), the original share certificates were not produced before the AO on the plea that they were pledged. But at least, the assessee could have given the identifying certificate numbers of those huge lot of shares. It is further stated that the assessee also did not give any information regarding the date of pledging. The assessee also did not file any information whether the pawnee was informed about the sale and whether its consent was taken for the sale. According to the learned CIT(A), it was not taken and precisely for this reason; it has been claimed that no valid transfer deed was executed and handed over to the purchaser along with the shares. The learned CIT(A) also made reference to Section 82 of the Companies Act which reads as under : "Section 82. Nature of shares.--The shares or other interest of any member in a company shall be moveable property, transferable in the manner provided by the articles of the company." Thus according to the learned CIT(A), the transfer of shares in a company has to conform to the provisions of the Companies Act first and then only one can look into the provisions of the Sale of Goods Act.

Since the assessee has admitted that it was not in possession of the shares, nor did it execute a valid transfer deed as required under the company law, the alleged sale has no legal sanctity and no sale exists in the eyes of law. The learned CIT(A) has also pointed that no money passed between parties for these transactions which according to the assessee is not relevant. The learned CIT(A) has also stated that the firm M/s Arvi Associates is a concern of small means. Therefore, this kind of transaction could not have been taken place between any two prudent business concerns, at any length. It is also pointed out by the learned CIT(A) that transactions worth crores of rupees have been carried out without any real transfer of money and all through book entries between the group companies, taking advantage of the corporate person. According to the learned CIT(A), the fluctuation in the share price of NOCIL on the BSE, i.e., Rs. 43.01 on 24th July, 1997 and Rs. 27.50 on 24th Aug., 1997 has been taken advantage of for creating a book loss, through a series of book entries.

27. The learned CIT(A) has also made reference to the documents given by the assessee to the AO to explain the investment. The assessee filed letter dt. 28th March, 2001 before the AO to prove the purchase of 228 lakhs shares of NOCIL. The assessee invited the attention of the AO to the letter dt. 17th June, 1998 furnished by NOCIL addressed to NSE, BSE, Ahmedabad Stock Exchange and Calcutta Stock Exchange furnishing details about the promoters, shareholders, financial institution holding more than 5 per cent of equity and shareholding of promoters as per register of members of NOCIL. From these details, the learned CIT(A) has observed that Mishapur Investments is shown as holding 3,00,87,320 shares of NOCIL. According to him, this confirms, that as per the register of members, Mishapur Investments holds the entire lot of shares, also as financial institution it holds the entire lot of 3,00,87,320 shares. In the first list titled "list showing details of shareholding as received from the promoters and/or persons having control over the company as on 31st March, 1998", however, there is a break up of shares held by Mishapur Investments as under : (i) Mishapur Investments 1,07,87,320 shares(ii) Mishapur Investments (a) Beneficial owner Shripad 30,00,000 shares Associates (b) Beneficial owner Shripad 35,00,000 shares Associates (a) Beneficial Owner Arvi 30,00,000 shares (b) Beneficial Owner Arvi 98,00,000 shares -------------------- According to the learned CIT(A), the same break up has been given by Shri Arvind Mafatlal by his letter dt. 13th April, 1998 addressed to NOCIL wherein, he has stated that along with others hold 5,32,98,700 equity shares of NOCIL, equivalent to 43.47 per cent of the paid up capital of NOCIL. The CIT(A), therefore, came to the conclusion that in reality, no share transfer has taken place, insofar as NOCIL is concerned up to 31st March, 1998, in respect of 98,00,000 shares allegedly sold first by Mishapur to the assessee and then again by the assessee to Arvi within a month. It is further stated by the CIT(A) that it is obvious that another group company has sold 30,00,000 shares to Arvi after buying it from Mishapur and, again, one or more other companies of this group have bought 30 and 35 lakhs shares from Mishapur and sold it to Shripad Associates. The CIT(A) has also referred to the agreement dt. 2nd July, 1997 to sell the shares of GGCL (Gujarat Gas Co. Ltd.) to the Singapore based British Gas Asia.

According to this agreement, the following companies of Mafatlal Group have sold the shares : 28. The learned CIT(A) has stated that one or two abovenoted companies have also claimed loss on sale of shares of NOCIL as the assessee has done. Thus, according to the CIT(A), the promoters shares held by the group companies are being systematically rotated among the group companies to generate book losses, only on the basis of market fluctuation in the share prices of NOCIL. The CIT(A) has thus stated that for all purposes, the promoter group as a whole still holds 43.47 per cent of the paid up capital of NOCIL but only for income-tax purposes shares are being bought and sold within the closed circuit, through book entries, with the object of avoiding tax on the excuse that each corporate personality is separate, independent and sacrosanct. The CIT(A) also observed that the facade of corporate veil has to be within limits, without resulting in tax avoidance. The learned CIT(A), thus, came to the conclusion that the loss of Rs. 2,133.54 lakhs is not a real loss but a paper loss, apparently created to set off the capital gains on sale of shares of Gujarat Gas Co. Ltd. 29. So far as the issue of Section 45(3) is concerned, the learned CIT(A) has stated that this issue has arisen because one of the reasons shown by the AO to believe the sale to Arvi as sham, is the non-receipt of consideration by the assessee from Arvi for the sale of shares. The assessee has taken the stand that Arvi treated this as capital contribution by the newly joined partner and that, therefore, there is no need for Arvi to pay the consideration. According to the CIT(A), the AO has disproved this through confirmation from Arvi and the entries in the audited annual accounts of the assessee itself. The learned CIT(A), thus agreed with the findings of the AO on the basis of material collected by him. The learned CIT(A) has further stated that the assessee's contention that it is a capital contribution is in a way self-contradictory. According to him, in order to claim the loss, the assessee has claimed that it is a sale, but in order to explain why no consideration was received, it is claiming that it is a capital contribution. He has also mentioned that in the assessee's own audited accounts, it is advance outstanding against Arvi and the capital invested in Arvi is only Rs. 5,000. According to him, Arvi itself has confirmed that it purchased the shares from the assessee, and it has not shown the sale price as capital of the assessee, but an investment in its books. Thus, the learned CIT(A) considered the contention of the assessee as untenable and rejected the same. He has further stated that this issue is infructuous in view of the fact that the alleged sale itself has been held as sham. He, therefore, confirmed the disallowance of the said loss and dismissed the grounds of appeal of the assessee pertaining to this issue.

30. At the time of hearing, the learned counsel for the assessee took us first through the purchases and sales of shares of the assessee-company, which are as follows :Purchases (i) In the year 1993-94 4,69,600 sharesIn the year 1994-95 1,46,930 shares(ii) Opening stock for the year in appeal 6,16,530 shares (iii) On 24th July, 1997, the assessee-company purchased 228 lakhs shares from Mishapur Investment Ltd. and M/s Sushmita Holdings Ltd. @ 43.01 per share.

Sales : (i) 6,16,530 shares were sold to M/s Arvi Associates on 3rd July, 1997 @ 24.50 per share (ii) Out of the 228 lakhs shares purchased from Mishapur Investment Ltd. and Sushmita Holdings Ltd., 98,00,000 shares were sold to M/s Arvi Associates @ Rs. 27.50 shares.

The learned counsel further explained that the purchases made by the assessee-company in the years 1993-94 and 1994-95 were transferred in its name and they still continue to remain in the name of the assessee-company even after sale of the same to M/s Arvi Associates.

The purchases from M/s Mishapur Investments Ltd. and M/s Sushmita Holdings Ltd. on 24th July, 1997 were made through a stock broker, i.e., M/s Mafatlal Securities Ltd. Only a part of the purchases made on 24th July, 1997 was sold to M/s Arvi Associates on 24th Aug., 1997. The balance remained in the stock. He further explained that the shares purchased by the assessee-company on 24th July, 1997 including those sold to M/s Arvi Associates on 24th Aug., 1997 still remains in the name of M/s Mishapur Investments Ltd. on the ground that the shares stand pledged by M/s Mafatlal Industries Ltd. Further, the prices at which the shares were purchased and sold by the assessee-company were at the market rates on the relevant dates and no issue has been raised by the Department with regard to the prices. The learned counsel also explained that the following documents were furnished to prove the genuineness of sale transactions before the AO at the time of assessment : (i) copies of journal entry in the books of account of the assessee for the transfer (ii) copy of ledger account of NOCIL's shares in the ledger account of the assessee evidencing the transfer (iii) copy of the account of Arvi Associates in the ledger accounts of the assessee evidencing transfer (iv) copies of Journal entries in the books of Arvi Associates for the transfer (v) copy of the assessee's current account in the books of Arvi Associates evidencing the transfer (vi) copies of the balance sheet of Arvi Associates as on 31st March, 1997 and 31st March, 1998.

31. Regarding the registration of the firm M/s Arvi Associates of which the assessee-company itself became the partner w.e.f. 1st July, 1997, the learned counsel contended that not only proper application was made by M/s Arvi Associates for its registration but that receipt of such application which is still pending for disposal was also acknowledged by the Registrar of Firms (compilation p. 138). The learned counsel, therefore, argued that so far as M/s Arvi Associates is concerned, it made sincere efforts to get itself registered as a partnership firm with the Registrar of Firms. He contended that whether M/s Arvi Associates is registered with the Registrar of Firms or not is of little consequence with regard to the issue of sale of shares to that concern. According to him, under the IT Act, there is no distinction between a firm which is registered with the Registrar of Firms and another which is not so. It is also not mandatory for the existence of a partnership firm to get itself registered with the Registrar of Firms and the genuineness of the partnership firm under the IT Act cannot be challenged simply on the ground that it is not registered with the Registrar of Firms.

32. Regarding the payment of sale of shares by M/s Arvi Associates to the assessee-company, the learned counsel argued that no cash money was paid by M/s Arvi Associates to the assessee-company in respect of purchase of shares under consideration by that concern from the assessee. The capital account of the assessee-company in the books of the firm was not affected on account of this purchase. The learned counsel contended that the entire amount of purchase consideration was credited to the current account of the assessee-company in the books of the said firm. He contended that there is no requirement under any law relating to sale of goods or even of immovable property that the purchase consideration has necessarily got to be paid in cash. On the other hand, if the vendor is treated as a creditor of the purchaser and corresponding debit and credit entries are made in the respective books, that would sufficiently serve the purpose of payment of consideration money for the same. The learned counsel invited our attention to the provisions of Section 43(2) of the Act and contended that as per the provisions of this section "paid" includes amounts incurred according to the method upon the basis of which profits or gains are computed. He also brought to our notice that the assessee-company follows mercantile system of accounting and hence, crediting the account of the assessee-company in the books of the firm and debiting the account of the firm in the books of the assessee-company suffices the purpose of actual payments towards sale of shares to the firm. He further stated that there is no requirement under law that in case of transfer of an asset by a partner to the firm in which he is a partner, the amount of sale consideration has got to be credited to his capital account. On the other hand, since the capital account has already been fixed at the time of formation of the firm, the sale consideration, if not actually paid, should be credited to the current account of the partner. The learned counsel argued that the partnership deed having been framed on the date of formation of the firm, i.e., 1st July, 1997 and the sale under consideration having taken place subsequently, i.e., 24th July, 1997, there was no question of mentioning the sale in the partnership deed. The learned counsel also pointed out that there being no provision in the partnership deed of M/s Arvi Associates about payment of interest on the credit balance of a partner in his account, no interest has been paid by M/s Arvi Associates to the assessee-company on the outstanding balance. The learned counsel argued that the AO himself has acknowledged at p. 18 of the assessment order that the transaction should be of the nature of a sale consideration. The learned counsel contended that the assessee has relied on the provisions of Section 45(3) of the Act and according to which the profits and gains arising from the transaction of a capital asset by a partner with a firm by way of capital contribution or otherwise shall be taxable in the year of transfer and the amount recorded in the books of account of the firm as the value of the capital asset shall be deemed to be the full value of the consideration as a result of transfer of the capital asset. The learned counsel, therefore, contended that the transaction under consideration cannot be considered to be a capital contribution at the time of inception of the firm. At the same time again, this is certainly a case of transfer of capital asset by the assessee-company being a partner to Arvi Associates, the firm. He argued that since in the books of the firm, the value of the capital assets has been recorded at the amounts at which it is shown to have been sold in accordance with the provisions of Section 45(3), for the purpose of computation of capital gains/loss on the transaction, the amount recorded in the books of account of the firm shall have to be considered to be the full value of the consideration of the shares transferred.

33. According to the AO, the shares under consideration have not been transferred in the name of M/s Arvi Associates and they still continue to be either in the name of the assessee or of M/s Mishapur Investments Ltd. In this connection, the learned counsel brought to our notice that, since those shares stood pledged with the bank and financial institutions by M/s Mafatlal Industries Ltd., the shares could not be transferred either to the assessee-company or to M/s Arvi Associates.

He further contended that M/s Arvi Associates being a partnership firm is not capable of holding any shares in its name and that is why according to the usual business practice, part of its shareholding continues to be in the name of the assessee-company, which happens to be a partner in the said firm. The learned counsel further pointed out that it is acknowledged by both the sides that though legally the assessee-company may still continue to hold the shares in its name, at the same time, the beneficial owner of the shares under consideration is none but M/s Arvi Associates. The learned counsel further brought to our notice that the dividend on the shares declared in the name of M/s Mishapur Investments Ltd. or the assessee-company, have duly been passed on to M/s Arvi Associates, the real beneficial owner of the shares, The learned counsel, therefore, contended for all practical purposes and also for the purpose of IT Act, M/s Arvi Associates has become the real owner of the shares under consideration, the nominal shareholding being with either M/s Mishapur Investment Ltd. or the assessee-company. He contended that for assessing the income arising out of the transactions or holding of shares, the same will have to be assessed in the hands of M/s Arvi Associates and not the nominal owners in the books of the company. The learned counsel contended that the fact that the shares are still being held in the name of original holders, is of little importance in determining the genuineness of the transfer of the shares. He argued that there is nothing in law which prevents the shares still being held in the name of transferor, while the shares have duly been transferred to the transferee. So far as the involvement of share broker is concerned, the learned counsel argued that since the transaction was one between independent parties and had not been carried out in a recognised stock exchange it was not necessary that the dealing in shares should be through any registered broker of the stock exchange. The learned counsel referred to the provisions of Section 108 of the Companies Act which provides that the shares of, listed companies shall be freely transferable and hence it was not necessary that the transactions under consideration should have been carried through a recognised stock exchange or broker. Regarding the pledging of shares by M/s Mafatlal Industries, the learned counsel argued that the shares had already been pledged on behalf of M/s Mafatlal Industries Ltd. who had obtained loans against the above shares. The learned counsel contended that there is nothing wrong in the sale of pledged articles, The transaction of sale will be subject to pledge. He pointed out that even in case of immovable properties also, properties in mortgaged condition are saleable and the law does not prohibit such sales. Since both the purchaser and the seller agreed to the transaction by way of sale of shares in pledged condition and since such transaction is permitted under law, no objection can be raised by the Department on this account. He pointed that simply because shares had already been pledged by M/s Mafatlal Industries Ltd. it cannot be said that neither the assessee-company nor M/s Arvi Associates benefited from the transaction under consideration. M/s Arvi Associates had been benefited by enjoying dividend on the shares purchased by it. He also contended that genuineness of a transaction does not depend on the benefit enduring to all parties concerned.

34. Regarding the production of original share certificates (scrips), the learned counsel argued that since the shares under consideration stand pledged with the banks and financial institutions, it was not possible to produce the said share certificates before the Departmental authorities. The learned counsel contended that in the face of other documentary evidences in support of the genuineness of the sale transaction, it is not necessary to examine the share certificates for ascertaining whether the sales had actually taken place or not, especially when it is admitted that the shares were not transferred in the books of the company in the name of the transferee.

35. So far as the issue of the execution of transfer deeds in respect of shares sold by the assessee-company is concerned, the learned counsel has argued that as per the definition of "goods" in Section 2(7) of the Sale of Goods Act, meaning every kind of moveable property other than auctionable claims and money, and including stocks and shares, etc. a transaction for transfer of shares would be covered under the said Sale of Goods Act, 1930. The learned counsel also made reference to the provisions of Section 5(2) of the aforesaid Sale of Goods Act which reads as follows : "(2) Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties." The learned counsel, thus, contended that in accordance with the said provisions, even an oral contract would also suffice for the purpose of sale of shares. The learned counsel submitted that in the present case, the transactions had been confirmed by the transferee, necessary accounting entries had duly been given effect to in the books of both the assessee-company as well as the transferee and furthermore the fact that the transferee had become a beneficial owner of the shares had been reported to the Government and also to the stock exchanges. The learned counsel brought to our notice that in this connection, the following evidences furnished under the letter of the assessee-company dt. 28th March, 2001, were produced before the lower authorities.

(i) A copy of letter dt. 13th April, 1998, issued by Shri A.N. Mafatlal addressed to NOCIL under Regulation 8 of the SEBI Regulations. In the statement annexed to the letter dt. 13th April, 1998 (at pp. 1 and 2 of the additional paper book) Sl. Nos. 31 and 32 clearly show M/s Arvi Associates to be the beneficial owner of 98 lakhs shares and 6,16,530 shares, respectively of NOCIL.

(ii) A letter dt. 17th June, 1998 issued by NOCIL addressed to the Stock Exchange, Mumbai and other stock exchanges under regn. 6 of the SEBI taken over regulation. In the list of details of share holding annexed with the letter dt. 17th June, 1998 (at pp. 3 to 6 of the additional paper book), the name of M/s Arvi Associates finds place at Sl. Nos. 31 and 32 as beneficial owner of 98 lakhs shares and 6,16,530 shares, respectively of NOCIL.

Thus, the learned counsel contended that apart from the formalities of transfer of shares between the assessee-company and the purchaser, i.e., M/s Arvi Associates followed by due entries thereof in their respective books of account, even the company concerned, i.e., NOCIL and SEBI also took note of the beneficial ownership in the shares under consideration having been transferred to M/s Arvi Associates. The learned counsel also referred to the observation of the learned CIT(A) regarding the transfer of shares. According to the CIT(A), since the shares were not duly transferred in the name of the purchaser by executing paper transfer deed as required under the Companies Act, the transaction cannot be considered as a valid transaction. To support his contention, the learned CIT(A) placed his reliance on number of decisions. According to the learned counsel, these decisions relied upon by the CIT(A) are distinguishable on facts of the present case.

The first decision relied upon by the CIT(A) was in the case of CWT v.Sumitra Devi Jalan (1974) 96 ITR 35 (Cal).

This was an appeal under the WT Act. The assessee had acquired shares of a company but transfer of the shares had not been registered in the name of the assessee in the share register. The High Court held that pending registration of the shares in the books of the company, the shares could not be considered to be belonging to the assessee. In this connection, learned counsel contended that the decision having been one under the WT Act, the question involved was whether the shares should be considered to be belonging to the assessee or not. The High Court held that the rights conferred on the transferee by virtue of sale clothed her with an equitable ownership but were not sufficient to make the transferee a full owner. It is thus clear that the Court did not challenge the genuineness of the transfer and even considered the assessee to be the equitable owner of the shares. So far as the instant case is concerned, the learned counsel argued that the beneficial ownership in the shares under consideration has been sold and the transaction involved transfer of such beneficial ownership only. Thus, according to the learned counsel, this judgment is not relevant to decide the issue under consideration. According to the learned counsel, the CIT(A) got confused between the formalities under the Companies Act relating to registration of transfer of shares in the event of such transfer with the transfer process itself. So far as the transfer of shares is concerned, the same is guided solely by the provisions of Sale of Goods Act, 1930, and the Companies Act merely provides for the mechanism in which such shares already transferred in the eyes of law, will be mutated in the books of the company. The process is similar to the question of mutation of the name of the transferee in place of the vendor in the books of municipal authorities in respect of immovable properties, The mutation of name in the books of the municipal authorities may take long-time but once the property is transferred by following the requirements of the Transfer of Properties Act, 1982 read with the relevant section of Registration Act, the genuineness of the transfer itself cannot be challenged even though the transferor may still be shown as the owner of the property in the books of the municipal authorities. Thus, the learned counsel has contended that the arguments of the CIT(A) on this issue are not at all valid. The learned counsel has also argued that so far as the transfer of shares is concerned, it is quite usual for the shares to pass hands successively without the names of the intervening owners being brought in the books of the company as holder of the shares. Such transfer of shares is very much recognised by the stock exchange and under the IT Act, each transaction of transfer will rope in the transferor to the process of levy of capital gains tax or even business income, as the case may be.

Registration of the shares in the books of the company is a mere formality to acknowledge the name of the transferee in the records of the company. It has got nothing to do with the validity of the transfer as such.

36. Regarding the date of transfer of the shares on 24th Aug., 1997 to M/s Arvi Associates being Sunday, the learned counsel has contended that since the transactions of share were between private parties, therefore, such transactions on Sunday are not forbidden by law.

Regarding the findings of the Department that if the shares would have been sold in the open market, they would have fetched much more price by way of premium, the learned counsel has contended that this is only an opinion or surmise. According to him, the shares were transferred by the assessee-company at the prevailing market rate on the relevant date and it is, therefore, not possible to say that any extra price would have been available had they been sold to some outside party. He contended that it is not for the Department to advise the assessee as to how to conduct its business. The learned counsel also brought to our notice that the Department has accepted the purchase of the shares in similar conditions of remaining pledged by M/s Mafatlal Industries Ltd., as genuine. Thus, according to him, the sale of shares in the same condition cannot be considered by the Department as bogus. He further argued that there is nothing wrong in carrying on transactions of shares between the members of the group provided, all the legal requirements are complied with. He has further contended that there is nothing on record to show that any of such legal requirements was lacking in the present case. According to him, the Department has not raised any objection about the sale price as such or any manipulation thereof. He has further stated that the Department seems to be prepared to accept that, on the date of the sale, the shares were liable to be sold at a price at which they have actually been sold. He has further argued that the various issues raised by the tax authorities are merely peripheral in nature and may at best raise some points of suspicion.

The learned counsel referred to the decision of the Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC) wherein Hon'ble Supreme Court has laid down that a surmise based on suspicion cannot take the place of documentary evidences on record and an addition cannot be made simply on the basis of surmises neglecting the evidences on record and contended that in the present case, the lower authorities have chosen to ignore the documentary evidences and have proceeded merely on the basis of suspicion, surmise and conjecture.

37. The learned Departmental Representative referred to the provisions of s; 45(3) of the Act. According to him, this provision was brought on the statute book only in 1987 to bring to tax capital gains on transfer of firms, assets to partners and vice versa. The learned Departmental Representative referred to Circular No. 495, dt. 22nd Sept., 1987, issued by the CBDT. One of the devices used by the assessee to evade tax on capital gains is to convert an asset held individually into an asset of the firm in which the individual is a partner. The learned Departmental Representative referred to the decision of the Supreme Court in the case of Kartikeya V. Sarabhai v. CIT (1985) 156 ITR 509 (SC) which has set at rest the controversy as to whether such a conversion amounts to transfer. The Court held that such conversion fell outside the scope of capital gain taxation. The rationale advanced by the Court is, that the consideration for the transfer of the personal asset is indeterminate, being the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets. With a view to blocking this escape route for avoiding capital gain tax, the Finance Act, 1987, has inserted new Sub-section (3) in Section 45, The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For the purpose of computing the capital gains; the value of the asset recorded in the books of the firm on the date of transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset. After referring to the scope of the provisions of Section 45(3) of the Act, the learned Departmental Representative contended that there was no genuine firm as the partnership deed was not registered as has been pointed out by the AO in his order.

Therefore, according to him, the provisions of Section 45(3) are not applicable to the present case.

38. The learned Departmental Representative contended that the firm is an unregistered firm and it virtually carried out no business activity and the shares sold by the assessee-company had been shown as investments in the hands of the firm. He made reference to p. 12 of the AO's order and argued that the original partnership deed dt. 12th Oct., 1995, between Sushripada Investments (P) Ltd. and Suvin Texchem (P) Ltd. was also not registered with the Registrar of Firms. The learned Departmental Representative also referred to p. 16 of the AO's order and contended that the assessee-company introduced only Rs. 5,000 in the partnership firm, Arvi Associates, and the firm has treated this amount as advance. Therefore, according to the learned Departmental Representative, it was not capital contribution as the same has been shown under the heading "loans and advances". The learned Departmental Representative also made reference to p. 17 of the AO's order and argued that M/s Arvi Associates had stated that they had purchased 1,04,16,530 equity shares of NOCIL from the assessee-company. The learned Departmental Representative, therefore, contended that there was no introduction of the capital by the assessee-company in Arvi Associates. The learned Departmental Representative, also supported the findings of the AO that the assessee-company did not receive any payment for the sale of shares. The assessee-company also did not produce the original shares for examination. Therefore, according to him, the transaction was not genuine. He further argued that the shares are still in the name of Mafatlal Industries Ltd. He contended that the assessee-company also did not file any information regarding the shares sold to Arvi Associates.

39. The learned Departmental Representative also made references to CIT(A)'s order on p. 28 and contended that the entire lot of shares 1,04,16,530 was not in the possession of the assessee. In fact, they had been pledged with finance companies and banks for a loan to Mafatlal Industries Ltd. The learned Departmental Representative argued that the price of the shares was also influenced by the fact that the shares were pledged with financial institutions and banks. Thus, according to him, the loss in the sale of shares was supported by the fact that the market price of the shares was influenced by the pledging of such shares. The learned Departmental Representative also argued that the assessee- company was not the legal owner of the shares and the specific provisions of the Companies Act had not been taken into consideration. He referred to the decision of the Calcutta High Court in the case of CWT v. Smt. Sumitra Devi Jalan (supra), wherein the High Court has laid down that according to regn. 18 of Table A of the Companies Act, 1956, the transferor of shares shall be deemed to remain the holder of the shares until the name of the transferee is entered in the register of members in respect thereof, 40. The learned Departmental Representative also pointed out that the transactions are within the Mafatlal group of companies. He has also argued that the assessee-company became partner of the firm, Arvi Associates, later on and the transaction of sale of shares was at the time when the assessee-company was not the partner of the firm, Therefore, according to him, the provisions of Section 45(3) are not attracted in the case of the assessee. He again reiterated that the shares were pledged with financial institutions and banks, therefore, the question of the transfer of such shares does not arise. He contended that the transactions were within the group companies and the shares have been transferred without any transfer deed. The learned Departmental Representative referred to Sections 4 and 5 of the Sale of Goods Act and contended that contract of sale is important word used in the said Act. He further argued that the property is to pass from seller to the buyer as per agreement of sale. According to him, there was no agreement of sale, hence the transaction is not valid. He referred to the provisions of Section 5 of Sale of Goods Act and contended that the sale becomes final only when there is a transfer of property. In the present case, the property has not been transferred.

Moreover, the shares were not in the name of the assessee-company, therefore, the assessee-company did not have the right to sell, He also contended that the sale would be valid only if the goods were in the possession of the assessee. In the present case, the shares were pledged with financial institutions and banks, therefore, such pledged shares cannot be sold because share cannot be passed on to the buyer.

41. The learned Departmental Representative argued that the sale of shares has to be made as per the Companies Act. He made reference to p.

32 of the CIT(A)'s order and contended that no valid transfer deed was executed and handed over to the purchaser along with the shares. He further made reference to p. 30 of the CIT(A)'s order and contended that one can sell what one owns, not through book entries, but by following the procedure prescribed for the transfer of shares in the Companies Act, According to him, in the present case, since it has been admitted that no valid transfer deed was executed and handed over along with the original share certificates to the assessee by Mafatlal Industries Ltd. and Sushmita Holdings Ltd. on sale of 228 lakhs of shares, the assessee-company has no legal right or even equitable title to transfer 98 lakhs shares out of the lot. He referred to the decision of the Delhi High Court in the case of CIT v. Bharat Nidhi Ltd. (1982) 133 ITR 447 (Del), wherein the Hon'ble High Court has held "(i) that an agreement to transfer shares in a company accompanied with the actual instrument of transfer which had not, been completed so far as the transferor could complete it, did not amount to a transfer deed sufficient to cause the title to pass. By itself, it would be nothing more than an enforceable agreement to convey and until the transfer endorsement was signed, the shares would be unascertained goods and would not be in a deliverable state, (ii) that since there was not even a suggestion that any transfer forms or the share scrips were handed over to the purchasers, equitable ownership in the shares could not be said to be transferred to them by the assessee, (iii) That there was not completed sale of 5th Feb., 1948 and, therefore, the difference received by the assessee pursuant to the settlement of 5th Feb., 1952, was liable to be included in its income and taxed for the asst, yr.

1953-54". The learned Departmental Representative, therefore, contended that there was no independent evidence for transfer of shares. He has further argued that the market value of the shares has not been taken into consideration. The learned Departmental Representative also fully supported the findings of the tax authorities.

42. In reply, the learned counsel contended that all the points raised in the orders of the AO, and the CIT(A) and endorsed by the learned Departmental Representative have already been fully met. Regarding the provisions of Sections 4 and 5 of the Sale of Goods Act, the learned counsel contended that these provisions are moreover in favour of the assessee. He referred to the provisions of Section 20 of the Sale of Goods Act and contended that there is no bar on such sales. He further argued that the learned Departmental Representative has not contradicted any of his arguments. The learned counsel also invited our attention to p. 2 of the second compilation filed by him especially to item Nos. 30, 31 and 32 of the statement of share holding which is given as follows :30. Mishapur Investments Ltd. 30,00,000 2.45(beneficial owner Arvi Associates)31. Mishapur Investments Ltd. 98,00,000 8.00(beneficial owner Arvi Associates)32. Mafatlal Holdings Ltd. 6,16,530 0.50(beneficial owner Arvi Associates) The learned counsel, therefore, contended that Arvi Associates were beneficial owner of 98,00,000 shares of NOCIL and this information was in connection with continual disclosure of share holding and control in a listed company as on 31st March, 1998, as required by regn. 8 of Securities and Exchange Board of India Regulations, 1997. Thus, the learned counsel contended that the information regarding the share holding was filed with SEBI from time to time. The learned counsel also brought to our notice that Stock Exchange, Mumbai was also informed vide letter dt, 17th June, 1998, of NOCIL regarding the share holding of Arvi Associates (compilation pp. 3 and 4 of second compilation).

Therefore, the learned counsel contended that the endorsement of the views of the tax authorities by the learned Departmental Representative is not correct. The learned counsel also contended that the statement of the learned Departmental Representative that the assessee-company became partner of Arvi Associates after the sale of shares is also not correct because the assessee-company became partner of the firm, Arvi Associates, before the sale of shares. The assessee-company became partner of Arvi Associates on 1st July, 1997 whereas 98 lakhs shares purchased from Mishapur Investments Ltd. were sold on 24th Aug., 1997 to M/s Arvi Associates. The learned counsel also argued that money was shown as advance in the books of the assessee because the same was due after the transaction was entered. Due endorsement was there that the shares have been passed on to the firm Arvi Associates, therefore, the assessee was entitled to the benefit of Section 45(3) of the Act. The learned counsel contended that the physical delivery is not essential, the ownership of the shares by the Arvi Associates, has been accepted by all the parties. The learned counsel further argued that the Delhi High Court decision in the case of Bharat Nidhi Ltd. (supra) relied upon by the learned Departmental. Representative is not relevant to the facts of this case. According to him, partnership firm is not a person in the Companies Act.

43. We have carefully considered the submissions made by the rival parties. We have also gone through the various documents filed before us during the course of hearing. The assessee-company is a public limited company undisputedly by belonging to Mafatlal group of Mumbai.

In the return filed by the assessee-company, it claimed business loss of Rs. 1,76,64,887 and also net loss under the head "capital gains" at Rs. 6,63,42,188. In arriving at the business loss, the assessee-company. adjusted (by way of addition) against the net loss of Rs. 88,39,173 as per P&L a/c, the dividend income of Rs. 71,19,180 and also profit on sale of investment at Rs. 17,06,579 both for separate consideration. The dividend income being exempt from income-tax, was ultimately not taken into consideration in the computation of total income. On the other hand, the net loss under the head "capital gains" was arrived as follows :(i) Long-term/short-term capital gains 14,70,11,801 on sale of GGCL shares(ii) Adjusted long-term/short-term 21,33,53,989 NOCIL shares capital loss on transfer of Net long-term/short-term capital 6,63,42,188 loss to be carried forward The Department has disallowed the loss of Rs. 21,33,53,989 claimed by the assessee-company on the basis that the assessee was not owning the shares which it has transferred to the firm M/s Arvi Associates. Thus, according to the Department the transfer of shares was not valid and the assessee-company is not entitled to benefit of Section 45(3) of the Act. On the other hand, the assessee-company submitted that the transfer of NOCIL shares to the firm Arvi Associates was as per the provision of law, therefore, the assessee-company is entitled to the benefit of Section 45(3) of the Act.

44. The AO has challenged the genuineness of the sale transactions of the shares under consideration for various reasons. The first reason is regarding the registration of the firm, M/s Arvi Associates, with the Registrar of Firms. In the case of Dulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC), the Hon'ble Supreme Court held that Section 4 of the Indian Partnership Act, 1932, clearly requires the presence of three elements to constitute a firm namely (i) that there must be an agreement entered into by two or more persons; (ii) that the agreement must be to share profits of business; and (iii) that the business must be carried on by all or any of those persons acting for all. Thus, to form a valid firm, it is not necessary to get it registered with the Registrar of Firms. But in the present case, proper application was made by M/s Arvi Associates for its registration. Receipt of the application was also acknowledged by the Registrar of Firms. This evidence was produced before the lower authorities. Thus, the firm, M/s Arvi Associates, made sincere efforts to get itself registered as a partnership firm. We do agree with the learned counsel that whether M/s Arvi Associates was registered with the Registrar of Firms or not is of little consequence with regard to the issue of sale of shares to that concern. As we have mentioned above, it is not mandatory for the existence of a partnership firm to get itself registered with the Registrar of Firms and the genuineness of the partnership firm under the IT Act cannot be challenged simply on the ground that it is not registered with the Registrar of Firms, Hon'ble Supreme Court in the case of CIT v. Juggilal Kamlapat (1964) 63 ITR 292 (SC) has laid down that a deed evidencing the transfer of an interest of a partner in partnership assets does not require registration even though the partnership assets are comprised of moveable as well as immoveable property. Therefore, for the sale transactions, it is not necessary that the partnership firm must have been registered with the Registrar of Firms. This contention of the Department is, therefore, without any substance and cannot be taken into consideration for considering the sale transaction in shares as non-genuine.

45. The next contention of the Department is that neither the consideration amount was paid by M/s Arvi Associates to the assessee-company nor was the amount credited to the capital account of the assessee-company. It is a fact that no cash money was paid by M/s Arvi Associates to the assessee-company in respect of purchase of shares under consideration by that concern to the assessee-company. It is also a fact as pointed out by the learned counsel that the capital account of the assessee-company in the books of the firm was not affected on account of this purchase. However, at the same time the entire amount of consideration was credited to the current account of the assessee-company in the books of the said firm. The learned counsel also rightly pointed out that there is no requirement under any law relating to sale of goods or even of immovable property that the purchase consideration has necessarily got to be paid in cash. The meaning of word "paid" has been defined in Section 43(2) of the Act as follows : "The word 'paid' is defined to mean the amounts actually paid or incurred according to the method of accounting followed by the assessee, for the purpose of computing profits or gains under the head 'profit or gains of business or profession'." In the present case, the assessee is following mercantile system of accounting, and hence crediting the account of the assessee in the books of the firm and debiting the account of the firm in the books of the assessee is sufficient for the purpose of actual payments towards sale of the shares to the firm. The learned counsel has also rightly pointed out that there is no requirement under the law that in case of transfer of an asset by a partner to the firm in which he is a partner, the amount of sale consideration has got to be credited to his capital account. Sub-section (3) of Section 45 provides when a "capital asset" owned by the person, is introduced as the said person's capital contribution into a firm wherein such person was a partner or becomes a partner, such introduction of the capital shall be deemed to be a transfer of the said capital asset for the purposes of Section 45(1).

The value recorded in the books of account of the said firm shall be deemed to be the face value of the consideration of the said capital asset for computing the chargeable capital gains. The provisions of Section 45(3) are abundantly clear on this issue that the value of the capital asset has to be recorded in the books of account maintained by the said firm and it is not necessary that the value of capital asset should be credited to the capital account of the partner. In the present case, the sale consideration has been credited to the current account of the partner and that is exactly as per the provisions of Section 45(3) of the Act. We also do not find any substance in the contention of the Department that the sale has not been mentioned in the partnership deed because the firm was formed on 1st July, 1997 and the sale under consideration had taken place on 24th July, 1997, therefore, the question of mentioning the sale of shares in the partnership deed does not arise, There is also no provision in the partnership deed of M/s Arvi Associates about payment of interest on the credit balance of a partner in his current account, thus, no interest has been paid by M/s Arvi Associates to the assessee-company on the outstanding balance. In view of what is stated above, the transaction under consideration cannot be considered to be a capital contribution at the time of inception of the firm. It is certainly a case of transfer of a capital asset by the assessee-company being a partner to M/s Arvi Associates, the firm. The assessee-company has relied on the provisions of Section 45(3) of the Act, according to which when a capital asset owned by the person is introduced as the said person's capital contribution into a firm wherein such person was a partner, such introduction of the capital shall be deemed to be a transfer of the said capital asset for the purpose of Section 45(1).

The value recorded in the books of account of the said firm shall be deemed to be the full value of consideration of the said capital asset for computing the chargeable capital gains. In the present case, in the books of the firm the value of the capital assets have been recorded at the amounts at which it is shown to have been sold, in accordance with the provisions of Section 45(3) for the purpose of computation of capital gains/loss on the transaction. The aforesaid amount recorded in the books of account of the firm have to be considered to be the full value of the consideration of the shares transferred.

46. The genuineness of the sale transactions of the shares is also challenged by the Department on the basis that the shares under consideration have not been transferred in the name of M/s Arvi Associates and they still continue to be either in the name of assessee-company or M/s Mishapur Investment Ltd. In this connection, the learned counsel explained that the shares purchased by the assessee-company from M/s Mishapur Investments Ltd. and sold to M/s Arvi Associates stood pledged with the bank and financial institutions by M/s Mafatlal Industries Ltd., therefore, the shares could not be transferred either to the assessee-company or to M/s Arvi Associates, We find force in the arguments of the learned counsel that M/s Arvi Associates being a partnership firm is not capable of holding any shares in its name and that is why as per the business practice, part of the share holding continues to be in the name of the assessee-company which happens to be a partner in the firm. In the present case, as we have stated above, the beneficial owner of the shares under consideration is M/s Arvi Associates. The dividend declared in the name of M/s Mishapur Investments Ltd. or the assessee-company have been passed on to M/s Arvi Associates. Thus, M/s Arvi Associates is the real beneficial owner of the shares. Therefore, for all practical purposes and also for the purpose of income-tax, M/s Arvi Associates has become the real owner of shares under consideration. For assessing the income arising out of the transaction or holding of shares has to be assessed in the hands of M/s Arvi Associates and not the nominal owners in the books of the company. We find substance in the arguments advanced by the learned counsel that the fact the shares are still being held in the name of the original holders is of little importance in determining the genuineness of the transfer of shares. In the case of CIT v. Narang Dairy Products (1996) 219 ITR 478 (SC), the Hon'ble Supreme Court has laid down that there are different shades of meaning of the word 'transfer', i.e., to make over possession of to another, a delivery of title or property from one person to another, to displace from one surface to another, removal, displace. Definition of transfer in Section 2(47) is an inclusive one and does not exclude the contextual or the ordinary meaning of the word 'transfer'. In the present case, the shares have been transferred by the delivery of the title of the shares as evidenced from the various documents discussed above. Therefore, the shares under consideration have been transferred in the name of M/s Arvi Associates. The Delhi and Andhra Pradesh High Courts in the cases of Addl. CIT v. Manjeet Engineering Industries; (1985) 154 ITR 509 (Del) and CIT v. A.V.Bhanoji Rao and Ors. (1983) 142 ITR 706 (AP) have held that no particular mode or form is provided for bringing in a separate property of the partner into the stock of the firm and no deed whatsoever registered or otherwise is required to be executed by the partner for doing so.

47. The contention of the Department that no broker was involved in the sale of shares, therefore, the transaction of sale is not genuine, is also without any basis. The transaction of sale of shares was between two independent parties and had not been carried out in a recognised stock exchange as it was not necessary that dealing in shares should be through any recognised broker of stock exchange. The learned counsel rightly invited our attention to the provisions of Section 108 of the Companies Act which provide that the shares of listed company shall be freely transferable hence it was not necessary that the transactions under consideration should have been carried through a recognised stock exchange or broker. The learned Departmental Representative could not produce any evidence before us to contradict the arguments of the learned counsel. The Department has also not supported the findings of the AO and the learned CIT(A) with any material on record or any Court case wherein it has been stated that the transactions of shares of a listed company should be through a broker of a stock exchange or such transactions should be carried out only in a recognised stock exchange.

In our opinion, it is not a mandatory condition that the transactions of sale of shares between independent parties should be carried out in recognised stock exchange.

48. The findings of the learned CIT(A) that neither the assessee-company nor the purchaser, M/s Arvi Associates, were benefited from the transactions of sales and purchases because the shares had been pledged by M/s Mafatlal Industries Ltd., are also not supported by any material evidence. The learned CIT(A) has not supported his findings with any legal provisions either in the IT Act or in any other law. In our opinion, there is no embargo for selling the pledged goods.

Such goods are kept as a security for getting the loan but these goods can always be sold after the undertaking or the promise is fulfilled.

The learned counsel rightly pointed out that even immoveable properties, which have been mortgaged are saleable and the law does not prohibit such sales. Moreover, in the present case, both the purchaser and the seller agreed to the transaction by way of sale of shares in pledged condition and since such transactions are permitted by law, no objection can be raised by the Department on this account. The allegation of the learned CIT(A) is also without any basis in view of the fact M/s Arvi Associates has actually been benefited by enjoying dividend on the shares purchased by it. In any case, the genuineness of the transaction does not depend on the benefit enduring to the parties concerned. Neither the lower IT authorities nor the learned Departmental Representative has brought any evidence on record to contradict the arguments of the learned counsel except making some wild assumptions and presumptions. As the shares were pledged with the banks and financial institutions, it was not possible to produce the said share certificates before the Departmental authorities as required by them. The share certificates were required by the Departmental authorities to prove whether such share certificates had actually been transferred or not in the names of M/s Arvi Associates. This exercise of the Department would have been futile in view of the fact that it is already admitted, that the shares were not transferred in the books of the company. In our view, this exercise by the Department was not necessary in the face, of other documentary evidences in support of the genuineness of the sale transaction. But, if the authorities, below were very keen to examine the share certificates, they could have summoned the concerned bankers and other financial institutions with whom the shares have been pledged by resorting to the provisions of Section 131 of the Act for producing such documents. The approach of the Department in this connection appears to be quite casual. Under the circumstances, the Department has not brought any evidence on record to prove that the transaction of sale of shares is not genuine.

49. The learned CIT(A) referred to the provisions of Companies Act and has contended that the transactions were not genuine in shares because the transfer deeds were not executed in respect of the shares sold by the assessee-company. In this connection, we would like to refer to some of the provisions of Sale of Goods Act. Section 2(4) of the Sale of Goods Act, 1930, pertaining to definitions reads as follows : "Document of title of goods includes a bill of lading, dock-warrant, warehouse keeper's certificate, wharfingers' certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise, either by endorsement or by delivery the possessor of the document to transfer or receive goods thereby represented." Further Section 2(7) of Sale of Goods Act defines goods meaning every kind of moveable property other than actionable claim and money and including stocks and shares, etc. Thus, a transaction for transfer of shares would be covered under the said Sale of Goods Act, 1930. Madras High Court held that "If shares could be transferred by issuing document whereby the seller purports to assert his title to the goods and authorises the buyer to receive such goods represented thereby, may be from third party, yet it would operate as a valid delivery of such goods notwithstanding the non-co-operation of the person in physical possession of the goods by refusing to attorn or acknowledge to the buyer that he holds goods on his behalf. (1979; 49 Comp Cas 662 (671) (DB) (Mad)".

In the present case, the assessee-company authorised M/s Arvi Associates to receive the shares from Mafatlal Industries who pledged it with banks and financial institutions by an agreement, therefore, it is a valid delivery of the shares as has been laid down in the above case. Therefore, execution of transfer deed in respect of the shares sold by the assessee-company was not necessary. The learned Departmental Representative referred to Section 4 of Sale of Goods Act, 1930, and contended that the contract of sale used in that section is important and according to it the property must pass from seller to the buyer as per agreement of sale. In this connection, we would like to refer to the decisions of Delhi High Court wherein it has been laid down that sale can be complete without effecting immediate delivery or even without immediate payment AIR 1967 Del 88(91). In the present case, the assessee-company made an agreement of sale of shares with M/s Arvi Associates, whereby the assessee-company transferred the shares to M/s Arvi Associates though the immediate delivery of the shares was not given because the shares were pledged with banks and financial institutions. In view of the decision of the Delhi High Court (supra), it does not make the transaction non-genuine. Thus, the provisions of Section 4 of Sale of Goods Act, 1930, are moreover in favour of the assessee. The learned Departmental Representative also made reference to Section 5 of Sale of Goods Act, 1930 and contended that the sale becomes final only when there is a transfer of property. Section 5(2) of the aforesaid Sale of Goods Act reads as under : "Subject to the provisions of any law for the time being in force a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties." Thus, in view of the above provisions of Sale of Goods Act, even an oral contract would also suffice for the purpose of sale of shares. In the present case, the transactions have been confirmed by the transferee and necessary accounting entries had duly been given effect to in the books of both the assessee-company as well as the transferee.

Moreover, the transferee had become a beneficial owner of the shares and this fact had been reported to the Government and also to the stock exchanges. The evidence regarding this was also filed before the tax authorities (supra). In addition to the formalities of transfer of the shares, between the assessee-company and the purchaser and also the entries in their respective books of account, even the company concerned, i.e. NOCIL, and SEBI also took note of the beneficial ownership in the shares under consideration. Thus, the shares have been transferred to M/s Arvi Associates as per the provisions of law. The provision of Sale of Goods Act, 1930, relied upon by the learned Departmental Representative are moreover in favour of the assessee. The genuineness of this transaction, therefore, cannot be challenged.

50. The learned Departmental Representative also referred to the provisions of Section 20 of the Sale of Goods Act, 1930, and argued that the sale should be unconditional. We do not find any force in the arguments of the learned Departmental Representative. The provisions of Section 20 of Sale of Goods Act are moreover in favour of the assessee-company. Section 20 of the Sale of Goods Act, 1930, reads as follows: "Section 20 Specific goods in a deliverable state--where there is an unconditional control for the sale of specific goods is a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods or both is postponed." In the present case, the proposal for the sale of shares which were in a deliverable state had been accepted by M/s Arvi Associates, but the actual delivery had been postponed because the shares were pledged with the banks and financial institutions, but shares have been passed on to M/s Arvi Associates as the firm accepted the proposal of sale. The Madras High Court has held that "when there is an unconditional contract for sale of specific goods in a deliverable state, property in goods passes to buyer when contract is made and it is immaterial whether the time of payment of the price or the time for delivery of goods or both is postponed. Where goods are already in custody or control of buyer, all that is required is that, there should be an appropriation of goods by buyer in respect of particular contract. AIR 1948 Mad 122 (127, 128) (DM).

51. During the previous year under consideration, the assessee-company purchased 228 lakhs equity shares of NOCIL at the total cost of 98,06,39,400, 98,00,000 shares were purchased from Mishapur Investments and 1,30,00,000 shares were purchased from Sushmita Holdings Ltd. The assessee-company did not make any payments to them. These shares were purchased on 24th July, 1997 through Bombay Stock Exchange, which is a recognised stock exchange. Thus, the ownership of 228 lakhs shares of NOCIL by the assessee-company cannot be doubted. Therefore, the shares of NOCIL owned by the assessee were in a deliverable state. Therefore, in the present case, there was an unconditional contract for sale of specific shares, which were in deliverable state, therefore, the shares as per the provisions of Section 20 of Sale of Goods Act, 1930, were passed on to M/s Arvi Associates as soon as there was contract between the assessee-company and M/s Arvi Associates. The shares remained no longer of the ownership of Mafatlal Holdings Ltd. Dividend on the shares after the sale transaction has been passed on to M/s Arvi Associates, thus confirming the fact of sale. Therefore, the reference to the above said provisions of the Sale of Goods Act by the learned Departmental Representative is not relevant to support the case of the Department, moreover, these provisions support the contention of the learned counsel.

52. We also find substance in the arguments of the learned counsel that the transfer of shares is guided solely by the provisions of Sale of Goods Act, 1930, and the Companies Act merely provides for the mechanism in which such shares already transferred in the eyes of law will be mutated in the books of the company. The process is similar to the question of mutation of the name of the transferee in place of vendor in the books of municipal authorities in respect of immovable properties. The mutation of name in the books of the municipal authorities may take a long time but once the property is transferred by following the requirements of the Transfer of Properties Act, 1982 read with the relevant section of Registration Act, the genuineness of the transfer itself cannot be challenged, even though the transferor may still be shown as the owner of the property in the books of the municipal authorities. Thus the formalities under the Companies Act relating to registration of transfer of shares in the event of such transfer are different from the process of transfer itself. So far as the transfer of shares is concerned, it is quite usual for the shares to pass hands successively without the names of the intervening owners being brought in the books of the company as holder of the shares. Such transfers are very much recognised by the stock exchange and under, the IT Act, each transaction of transfer will rope in the transferor to the process of levy of capital gains tax or even business income as the case may be. We agree with the learned counsel that registration of shares in the books of the company is a mere formality to acknowledge the name of the transferee in the record of the company, it has got nothing to do with the validity of the transfer as such. In other words, the registration of shares in the books of the company, is only meant for keeping account of the shares and in whose name the shares have been finally transferred. The objection of the Department that the shares have been sold on Sunday, therefore, the sale cannot be considered as genuine is also without any substance. These transactions of sale of shares were between private parties and therefore, the rules of stock exchange were not applicable to them. There is nothing in law which prevents conducting of transactions on Sunday between private parties. The learned Departmental Representative did not bring on record any material or evidence to support the contention of the Department that even private parties cannot enter into such transactions on Sunday.

53. Now the only point remains for consideration that whether the shares, if sold in the open market, would have fetched more price by way of premium. The Department has not produced any evidence to support their case. The Department has also not contradicted the contention of the learned counsel that the shares, were transferred by the assessee-company at the prevailing market rate on the relevant date.

The opinion expressed by the Departmental authorities cannot be considered unless they are based on some evidence. The assessee-company has furnished documentary evidence in support of the genuineness of the sale transactions. It was also brought to our notice that the Department has accepted the purchase of the shares in similar conditions of remaining shares pledged by M/s. Mafatlal Industries Ltd. as genuine. Therefore, the Department cannot indulge in double standards to call the sale of shares in the same condition to be bogus.

There is nothing wrong in carrying on the transactions of shares between the members of the group provided all legal requirements are complied with. The Department has not brought any evidence on record to prove that any of such legal requirements was lacking in the present case. The Department, in fact, has accepted that on the date of sale of the shares, the assessee-company has actually sold the shares at the proper price because the Department has not brought anything on record to prove that the shares have been sold at lower price. The various issues raised by the tax authorities are merely based on suspicion and surmises without any support of evidence on record. The documentary evidences produced by the assessee have not been looked into properly by the lower authorities and they have proceeded merely on the basis of suspicion, surmise and conjecture.

54. The various Court cases relied upon by the learned counsel are not relevant to the facts of the present case. In the case of Bharat Nidhi (supra) there was merely agreement to sell. No transfer deed was also executed. The shares were not handed over and the price was not received. In these circumstances, the Delhi High Court held that transfer was not complete. But in the present case, the entire amount of purchase consideration was credited to the current account of the assessee-company in the books of the firm. There is no requirement under the law relating to sale of goods and even of immoveable property that purchase consideration has necessarily got to be paid in cash.

Thus, as per the provisions of Section 5(1) of the Sale of Goods Act, 1930, where the parties to a contract agreed that the payment for and delivery of the goods are to be postponed, the property in goods passes to the buyer as soon as the proposal for sale is accepted. In the present case, there was an agreement to sell. The entire amount of purchase consideration was credited to the current account of the assessee-company in the books of the firm. The other various conditions were also fulfilled for the transfer of shares as we have discussed above. Therefore, there was a complete transfer of shares. This Court case, therefore, is not relevant to the facts of the present case.

Moreover, the transfer in the present case is under the provisions of Section 45(3) of the Act, hence the above Court case is different on facts and the same, therefore, does not have any application to the present case. The case of Kartikeya V. Sarabhai (supra) is also not relevant because of amendment to Section 45(3) of the Act w.e.f. 1st April, 1988. This case pertains to the year 1981. Sub-section (3) of Section 45 was brought on the statute by the Finance Act, 1987 w.e.f.

1st April, 1988. The Hon'ble Supreme Court in the above case held that when a partner contributes his capital asset to the firm, the capital gain tax will not be leviable since the value of the consideration is not ascertainable, The new Sub-section (3) of Section 45 has statutorily superseded to the effect of the said judgment. Therefore, the ratio of the above judgment and similar other judgments would apply only up to asst. yr. 1987-88. Under the circumstances, the above judgment is not relevant to the facts of the present case, as the assessment year under consideration is 1998-99. The Calcutta High Court decision in the case of Sumitra Devi Jalan (supra) pertains to wealth-tax. The assessee had acquired shares of a company but transfer of the shares had not been registered in the name of the assessee in the share register. The Hon'ble Calcutta High Court held that pending registration of the shares in the books of the company, the shares could not be considered to be belonging to the assessee. Therefore, this decision was under the wealth-tax and main question before the Hon'ble Court was to decide about the ownership of the shares, i.e., whether the shares could be considered to be belonging to the assessee or not. The Court held that the rights conferred on the transferee by virtue of the sale clothed her with an equitable ownership, but were not sufficient to make the transferee a full owner. Thus in this case, the Court did not challenge the genuineness of the transfer and even considered the assessee to be the equitable owner of the shares. So far as the present case is concerned, the beneficial ownership in the shares under consideration has been sold and the transactions involved transfer of such beneficial ownership only. Therefore, this judgment is also not relevant to the facts of the present case.

55. In view of the discussion above, we find that the sale of NOCIL shares by the assessee-company to M/s Arvi Associates, the firm in which the assessee-company is also a partner, is genuine one and, therefore, the provisions of Section 45(3) are applicable to the sale transaction by the assessee. The disallowance made of the loss of Rs. 21,33,53,989 is, therefore, deleted and these grounds of appeal are decided in favour of the assessee.

56. The grounds of appeal pertaining to the deemed dividend under Section 2(22)(e) are not pressed by the learned counsel, the same are, therefore, dismissed as not pressed. The ground of appeal pertaining to penalty proceedings is not the subject-matter of the appeal and, therefore, the same is dismissed treating the same as infructuous. The additional grounds filed by the assessee are also dismissed as not pressed.


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