(1) The assessee was a dealer in shares and securities. During the account year relevant to the assessment year 1951-52, the assessee sold certain shares and declaimed that a loss of Rs. 20,016 was incurred thereby. These sales were transacted through a firm of brokers to a private limited Company called Udaya Ltd. These transactions were at the close of the account year. Early in the following account year, the assessee purchased back these shares, but that is not immediately relevant. In his assessment, the claim to take into account the loss sustained by the sale transaction was disallowed. The view of the Income-tax Officer was that they were sham transactions. He took note of the fact that the purchasing company was one in which only the assessee's wife and sister-in-law held the entire interest, that initial sales were at rates lower than market rates and the subsequent purchases were made at rates higher than the market rates. The disallowance by the Income-tax Officer of this alleged loss was taken in appeal successively to the Appellate Assistant Commissioner and the Tribunal. The former agreed with the Income-tax Officer that the loss claimed is not a genuine one and the latter held that the loss had not been incurred in the course of the ordinary carrying on of the business. It may be mentioned that the assessee's attempt by way of applications under Ss. 66(1) and 66(2) of the Income-tax Act failed.
(2) To a notice issued by the Income-tax Officer why a penalty under S 28(1)(c) should not be levied, the assessee claimed that the loss had in fact been sustained and that since he did not show a loss which did not exist, the proceedings under S. 28 could not be initiated. The Income-tax Officer however held that the provisions of S. 28(1)(c) were attracted and levied a penalty of Rs. 14,000. His order was, 'I levy a penalty of Rs. 14,000, which is the tax sought to be avoided by a fabricated claim of speculation loss'. The imposition of this penalty was appealed against. The Appellate Assistant Commissioner agreed with the Income-tax officer's view, though he expressed himself somewhat differently. In a further appeal, to the Tribunal, the Tribunal referred to the fact that the assessee had deliberately kept back particulars of income by claiming loss to which he was not entitled and so the penalty was properly imposed.
(3) The application under S. 66(1) failed. The assessee moved this Court under S. 66(2) of the Act, and on the directions of this court, the question,
'Whether the levy of penalty of Rs. 14,000 on the assessee for the year 1951-52 is lawful?'
stands referred to us.
(4) Mr. S. Swaminathan, learned counsel for the assessee, principally bases his contention upon the fact that if the transactions of sale were genuine, though they might have been motivated by a desire to avoid the incidence of tax, it would not mean that the assessee had concealed his income or deliberately furnished inaccurate particulars of his income. He argues that the records clearly show that these sales were in fact effected, that the accounts of the purchasing firm contain entries of these transactions and that the purchasing firm was in fact assessed to income-tax on the profit arising from these transactions. He claims accordingly that since the transactions are genuine, there can be no warrant for drawing an inference that any inaccurate particulars of income were furnished. Learned counsel urges that even if these transactions were inspired by the need to avoid the incidence of tax they could never be transactions which would attract the penalty provisions continued in S. 28(1)(C).
(5) Reference in support of the contention has been made to a decision of the House of Lords in Harrison v. Griffiths. (1961) 40 Tax Cas 261. In that case, the appellant company whose articles included the business of share dealings purchased shares to the value of 16900, upon which there was a deceleration of dividend of 28912. The appellant company later sold the shares for 1000. During that year, no other transactions of purchase or sale of shares were entered into. The claim to a loss on account of the sale of the shares was disallowed by the Commissioners for the reason that the assessee company was not carrying on a trade of dealing in shares during the year in question. Both the High Court and the Court of Appeal found that the decision of the Commissioners was not justified. The only question that was in fact considered by those courts was whether the transactions entered into were in the course of the normal trading activity of the company. In the Court of Appeal Pearce L. J. Observed that the ulterior and unmeritorious object underlying the transaction.
'does not justify the court holding that the transaction was not trade or an adventure in the nature of trade. There is no other fact to justify such a finding. While I sympathise with the view that led the Special Commissioners to so hold, they were not, in my judgment, entitled to do so'.
This passage was relied on by Mr. Swaminathan, who points out that equally in this case, the desire to avoid the incidence of tax is not sufficient to bring the assessee within the penal provision. If what he did was a transaction which he could in law engage upon, it is clear that though the loss might have been disallowed for certain reasons, that is not sufficient to justify the imposition of the penalty.
(6) Certain observations of the House of Lords more pertinent to the question may also be referred to. Viscount Simonds observed:
'Here was a company whose object it was to deal in shares. It entered into a commercial transaction which though it might be given an individual name contained no element of impropriety, much less of illegality. I can find nothing that enables me to say that it is not a trading transaction...............'
Lord Reid said:
'Innominate contracts and transactions are of frequent occurrence, and I would not expect to find appropriate names to denote new kinds of operations devised for the sole purpose of gaining tax advantages. In the present case, the question is not what the transaction of buying and selling the shares lacks to be trading, but whether the later stages of the whole operation show that the first step--the purchase of the shares--was not taken as, or in the course of a trading transaction.'
Lord Denning pointed out that the transaction was what was known as a 'dividend-stripping' transaction. Viscount Simonds further stated:--
'It appears to be wholly immaterial so long as the transaction is not a sham (as was the case in Johnson v. Jewitt, (1961) 40 ATC 314 what may be the fiscal result, or the ulterior fiscal object, of the transaction..............'
This observation of the learned Lord clearly shows that while a transaction although inspired by a motive of tax avoidance may be perfectly legal and the fiscal consequences thereof may be admissible under the tax law, the same result would not follow if the transaction is a sham one, and that is the observation which seems to us to apply to the present case.
(7) The connection between the assessee and Udaya Ltd., cannot be ignored. It has been found by the several courts dealing with the assessee's appeal against the assessment and also against the imposition of the penalty that to all intents and purposes, the Udaya Ltd, is only the alter ego of the assessee himself. The circumstance that immediately after the close of the year, the assessee purchased back these very shares and at higher prices than the prevailing market rates established beyond any doubt that the personality of Udaya Ltd., was only made use of as a devise and that it had no real or independent existence of its own as a true trading concern. In dealing with the application under S. 66(2) of the Act, seeking reference against the judgment of the Tribunal against the assessment to the assessee, this court pointed out that Udaya Ltd., was not a separate entity, that it was practically the alter ego of the assessee and the transactions with it could not be regarded as transactions with an independent party. The finding of the Department and the Tribunal in the instant case was clearly that these transactions were sham ones, and if that is so, there can be very little room for doubt that in submitting the claim to a loss arising out of such transactions, the assessee did indeed furnish deliberately inaccurate particulars of his income.
(8) We accordingly answer the question in the affirmative and against the assessee. The assessee will pay the costs of the department. Counsel's fee Rs. 250.
(9) Reference answered