M/s. Moral Trading & Investment Ltd, New Delhi v. DCIT, New Delhi

ITA 4753/DEL/2009 | 2006-2007
Pronouncement Date: 30-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 475320114 RSA 2009
Assessee PAN OFTHE1922A
Bench Delhi
Appeal Number ITA 4753/DEL/2009
Duration Of Justice 4 month(s) 14 day(s)
Appellant M/s. Moral Trading & Investment Ltd, New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted E
Tribunal Order Date 30-04-2010
Date Of Final Hearing 13-04-2010
Next Hearing Date 13-04-2010
Assessment Year 2006-2007
Appeal Filed On 16-12-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E DELHI BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL I.T.A. NO. 4753(DEL)/2009 ASSESSMENT YEAR: 2006-07 M/S MORAL TRADING & INVESTMENT DEPUT Y COMMISSIONER OF INCOME LTD. C/O VINOD KUMAR BINDAL & VS. TAX C IRCLE 5(1) NEW CO. C.AS SHIV SUSHIL BHAVAN D-219 VIVEK VIHAR PH-I NEW DELHI. PAN-AAACM1076B (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VINOD KUMAR BINDAL & MS. SWEETY KOTHARI RESPONDENT BY: SHRI M.K. GAUTAM DR ORDER PER K.G. BANSAL : AM THIS APPEAL OF THE ASSESSEE EMANATES FROM THE ORDER OF CIT(APPEALS)-VIII NEW DELHI PASSED ON 3.11.200 9 IN APPEAL NO. 89/08- 09 AND IT PERTAINS TO ASSESSMENT YEAR 2006-07. THE CORRESPONDING ORDER OF ASSESSMENT WAS PASSED BY THE DEPUTY COMMISS IONER OF INCOME-TAX CIRCLE 5(1) NEW DELHI ON 26.12.2008 UNDER THE PROVISIONS OF SECTION 143(3) OF THE INCOME-TAX ACT 1961. THE ASSESSEE HAS TAKEN FOLLOWING THREE SUBSTANTIVE GROUNDS IN THE APPEAL:- (1) THE CIT(A) ERRED IN LAW AND FACTS IN C ONFIRMING THE ACTION OF THE AO IN SUBSTITUTING THE FULL VALU E OF CONSIDERATION OF THE SHARES TRANSFERRED BY THE ASSESSEE WITH ITA NO. 4753(DEL)/2009 2 SOME PRESUMED FAIR MARKET VALUE IGNORING THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. GILLANDERS ARBHUTNOT & CO. (1973) 87 ITR 407 A ND CIT VS. NILOFAR I.SINGH (2009) 309 ITR 233 (DEL) AND DEV KUMAR JAIN VS. ITO (2009) 309 ITR 240(DEL). THUS TH E ACTION OF THE ASSESSING OFFICER SHOULD BE REVERSED AND THE CAPITAL GAIN SHOULD BE COMPUTED ON THE BASIS OF FULL VA LUE OF CONSIDERATION. (2) THE CIT(A) ERRED IN LAW AND ON FACTS I N CONFIRMING AN ADDITION OF RS. 37 60 41 886/- AS SHORT-TERM CAP ITAL GAIN ON SALE OF 23 90 000/- SHARES TRANSFERRED ON 10.0 5.05 BY CONSIDERING THEIR DATE OF ACQUISITION AS 27.7 .04 WHEREAS THE SAME WAS 4.4.2004 FOLLOWING THE CIRCULAR NO. 704 DATED 28.4.95 REPORTED AT 213 ITR(ST.) 7. THUS THE SAID LOSS SHOULD BE ASSESSED AS LONG TERM CAPITAL LOSS AS CLAIMED BY THE ASSESSEE. (3) THE CIT(A) ERRED IN LAW AND ON FACTS IN C ONFIRMING THE DISALLOWANCE OF RS. 22 03 822/- UNDER SECTION 5 7(III) OF THE ACT ON INTEREST PAID TO OTHERS IGNORING THE FACTS AND EVIDENCES PLACED ON RECORD. THUS THE ACTION OF THE ASSESSING OFFICER SHOULD BE REVERSED. 1.1 THE FACTS CULLED OUT FROM THE ASSESSMENT ORDER ARE THAT THE ASSESSEE SOLD 32 88 181/- SHARES OF HOTEL QUEEN ROAD PVT. LTD. (THE HQR FOR SHORT) ON 10.5.2005 TO SHRI R.P. MITTAL @ RS. 20/- PER SHARE AT A TOTAL CONSIDERATION OF RS. 6 57 63 620/-. THE COST OF ACQUISITION WAS SHOWN AT RS. 15 21 79 158/-. IN THE RETURN OF INCOME SHORT-TERM CAPITAL LOSS OF RS. 8 64 15 538/- WAS DECLARED ON SALE OF THESE SHARES. OUT OF THE AFORESAID 8 98 181/- SHARES WERE ACQUIRED ON OR ABOUT 8.10.2002 ON ACCOUNT OF DISINVESTMENT IN HOTEL ASHOK YATRI NI WAS BY THE ITDC. THE ITA NO. 4753(DEL)/2009 3 DETAILS OF ACQUISITION SALE BALANCE SHARES E TC. HELD BY THE ASSESSEE ON 31.03.2006 ARE AS UNDER:- DATE PARTICULARS NO. OF SHARES RATE AMOUNT IN (RS.) 08.10.2002 SHARES PURCHASED FROM ITDC 808342 183.63 148438576 SHARES PURCHASED FROM INDIAN HOTELS 89819 183.63 16493711 SHARES PURCHASED FROM OTHER SHARE HOLDERS 20 183.63 3673 898181 164935960 OTHER EXPENSES INCURRED BANK GUARANTEES GIVEN/ PROCESSING FEES ETC. 1019631 STAMP DUTY PAID FOR TRANSFER 825000 AMOUNT OF CLAIM LODGED AGAINST ITDC AS RECEIVABLE FROM THEM 38501433 COST OF 898181 SHARES 128279158 27/07/04 ALLOTMENT OF SHARES OF HOTEL QUEEN ROAD 2390000 10 23900000 07/01/05 ALLOTMENT OF SHARES OF HOTEL QUEEN ROAD 4151648 10 41516480 SALE OF SHARES 10/05/05 3288181 SHARES SOLD AT RS. 20/- EACH 898181 20 17963620 10/05/05 2390000 47800000 3288181 657633620 CLOSING BALANCE OF INVESTMENTS AS ON 31.03.2006 4151648 10 41516480 ITA NO. 4753(DEL)/2009 4 1.2 THE AO EXAMINED THE TRANSACTION OF SALE. HE CAME TO THE CONCLUSION THAT SALE TO SHRI R.P. MITTAL WAS A COLOURABLE TRANSACTION AS SHRI R.P. MITTAL AND SMT. SARLA MITTAL THE HUSB AND AND WIFE DUO CONTROLLED THE ASSESSEE COMPANY. SINCE THE HQ R WAS WHOLLY OWNED SUBSIDIARY COMPANY OF THE ASSESSEE COMPANY IT WAS ALSO CONTROLLED BY THE HUSBAND AND WIFE DUO. IN ORDER TO ARRIVE AT T HIS CONCLUSION HE RELIED ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN T HE CASE OF CIT VS. L.N. DALMIA (1994) 207 ITR 89 IN WHICH IT WAS HELD THAT SALE OF SHARES TO OTHER COMPANY FORMED BY THE ASSESSEE AT A LOW ER RATE WAS A DEVISE TO AVOID TAX AND THUS THE RESULTING LOSS CAN NOT BE ALLOWED. THEREAFTER HE PROCEEDED TO WORK OUT THE FAIR MARKET VALUE OF THE SHARES OF HQR ON THE DATE OF TRANSFER TO SHRI R.P. MITTAL. IN TH IS CONNECTION IT WAS MENTIONED THAT THE BID VALUE OF HOTEL ASHOK Y ATRI NIWAS WAS ABOUT RS. 45.03 CRORE. HOWEVER THE ASSESSEE TOOK O VER ONLY THE LAND AND BUILDING AND SUNDRY CREDITORS AND DEBTORS W ERE TO BE DEALT WITH BY THE ITDC. ON THIS BASIS THE ASSET TOOK OVER BY THE ASSESSEE FROM THE ITDC REPRESENTING BY 8 98 166 SHARES WAS ABOU T RS. 16.49 CRORE. THIS CONSTITUTED 99.97% OF THE EQUITY. THE REST OF THE SHARES WERE ALSO ACQUIRED FROM OTHER SHAREHOLDERS AT ABOUT RS. 1. 65 CRORE. THEREFORE THE COST OF ACQUISITION PER SHARE AT THE TIME O F TAKING OVER HOTEL ASHOK ITA NO. 4753(DEL)/2009 5 YATRI NIWAS WAS ABOUT RS. 183.63. THE ASSESSEE HAD ALSO INCURRED COST ON BANK GUARANTEE PROCESSING FEES AND STAMP D UTY WHICH WAS ADDED TO THE COST OF ACQUISITION LEADING TO VALUATION OF THE SHARES AT THE TIME OF ACQUISITION AT RS. 185.68 PER SHARE. THE AO ADOP TED THIS VALUE FOR WORKING OUT THE CAPITAL GAINS WHICH WORKED OUT TO ABOUT RS. 37.60 CRORE AGAINST THE LOSS OF ABOUT RS. 8.64 CRORE CLAIM ED BY THE ASSESSEE. THE DETAILED WORKING OF THE CAPITAL GAINS COMPUTED BY THE AO IS DESCRIBED AS UNDER:- DATE OF PURCHASE NO. OF SHARES RATE TOTAL VALUE INDEXED VALUE (RS) (RS) (RS.) 8.10.2002 898181 183.63 164932977 183381856 27.07.2004 2390000 10 23900000 24746458 TOTAL 3288181 188832977 DATE OF SALE NO. OF SHARES RATE TOTAL VALUE DIFFER ENCE (RS) (RS) (RS.) 10.05.2005 898181 185.68 166774248 -16607608 10.05.2005 2390000 185.68 443775200 376041886 TOTAL 3288181 610549448 TOTAL CAPITAL GAIN (SHORT-TERM) 376041886 1.3 THE ASSESSEE HAD ALSO CLAIMED DEDUCTION OF RS. 22 03 822/- U/S 57(III) WHILE COMPUTING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. IN THIS CONNECTION IT WAS MENTIONED THAT SHARE CAPITAL AND RESERVE AND SURPLUS AMOUNTED TO RS. 9.60 CRORE O N 31.3.2006. THEREFORE ITA NO. 4753(DEL)/2009 6 ADVANCES OF RS. 9.20 CRORE ON WHICH INTEREST WAS EARNED WERE MADE OUT OF OWN FUNDS. THE BORROWED FUNDS OF RS. 5.50 CRORE WERE THUS DEPLOYED FOR MAKING INVESTMENTS. THEREFORE IT WAS HELD THAT THERE IS NO NEXUS BETWEEN BORROWING AND LENDING. THEREF ORE THE AFORESAID CLAIM WAS DISALLOWED. 1.4 IN THE RESULT THE TOTAL INCOME OF THE ASSES SEE WAS COMPUTED AT RS. 38 50 75 970/- AGAINST THE RETURNED INCOME OF RS . 58 43 540/-. 2. AGGRIEVED BY THIS ORDER THE ASSESSEE MOVED APPEAL BEFORE THE CIT(APPEALS)-VIII NEW DELHI. ONE OF THE GROUN D TAKEN BEFORE HIM WAS THAT ALL THE SHARES HELD BY THE ASSESSEE OUGHT TO HAVE BEEN TREATED AS LONG-TERM CAPITAL ASSET. IT WAS MENTIONED THAT THE ASSESSEE HAD SHOWN THE ASSET AS SHORT-TERM CAPITAL ASSET AND CO NSEQUENTLY DECLARED SHORT- TERM CAPITAL LOSS OF ABOUT RS. 8.64 CRORE. IN THIS CONNECTION THE CLAIM OF THE ASSESSEE IS THAT 23 90 000/- SHARES OF TH E HQR WERE ALLOTTED TO IT ON 4.4.2004 EVEN THOUGH THE DELIVERY OF THE SH ARES WAS TAKEN ON OR AFTER 27.7.2004. IN ORDER TO SUPPORT THIS CONTE NTION THE ASSESSEE WAS REQUIRED TO FILE COPIES OF LETTER OF ALLOTMENT A ND THE BOARD RESOLUTION. THE ASSESSEE EXPRESSED ITS INABILITY TO FILE THE AFO RESAID EVIDENCE. AS AGAINST ITA NO. 4753(DEL)/2009 7 THE AFORESAID EVIDENCE BY WAY OF COPIES OF LE TTER PURPORTEDLY WRITTEN IN CONNECTION WITH ALLOTMENT OF SHARES WERE FILED. ACCORDING TO LETTER DATED 11.11.2003 THE SHARES WERE TO BE ALLOTTED ON THE CONDITION THAT THE ASSESSEE PAID RS. 2.00 TO RS. 2.50 CRORE BY 3 1.3.2004. THE ASSESSEE RESPONDED TO THIS LETTER ON THE SAME DATE. THESE LETTERS WERE SIGNED BY THE ASSESSEE AND HIS WIFE RESPECTIVELY WHO CO RRESPONDED IN THE CAPACITY OF MANAGING DIRECTOR AND DIRECTOR OF THE RESPECTIV E COMPANIES. SUBSEQUENTLY THE HQR VIDE LETTER DATED 4.4. 2004 COMMUNICATED TO THE ASSESSEE COMPANY REGARDING CREATING A RIGHT IN I TS FAVOUR IN 23 90 000/- EQUITY SHARES ON 4.4.2004. THIS LETTER HAS ALSO BEEN SIGNED BY SHRI R.P. MITTAL. THE NECESSARY FORMALITIES WITH R EGARD TO TRANSFER OF SHARES WERE COMPLETED ON 27.7.2004. IN THESE CIRCUMSTA NCES THE LD. CIT(APPEALS) CAME TO THE CONCLUSION THAT THE A FORESAID SHARES CONSTITUTED SHORT-TERM CAPITAL ASSET. 2.1 THE LD. CIT(APPEALS) ALSO CONSIDERED THE MATT ER REGARDING ADOPTION OF FAIR MARKET VALUE IN PLACE OF THE SALE CON SIDERATION AT THE TIME OF TRANSFER OF THE SHARES TO SHRI R.P. MITTAL. IT WAS INTER-ALIA MENTIONED THAT SHRI R.P. MITTAL AND SMT. SARLA MITTAL WE RE IN EFFECTIVE CONTROL OF THE ASSESSEE COMPANY AND THE HQR. THE ASSESSEE CO MPANY MANAGED THE ITA NO. 4753(DEL)/2009 8 AFFAIRS OF THE HQR IN SUCH A MANNER THAT OTHER SHAREHOLDERS WERE KEPT IN DARK NOT ONLY IN RESPECT OF MANAGEMENT OF AFFAIRS BUT ALSO ABOUT THE TRANSFER OF SHARES. IN VIEW THEREOF THE AC TION OF THE AO TO BRING A SUM OF ABOUT RS. 37.60 CRORE TO TAX AS SHORT-TER M CAPITAL GAIN WAS UPHELD. 2.2 IN REGARD TO COMPUTATION OF INCOME UNDER THE RESIDUARY HEAD IT WAS SUBMITTED THAT THE INTEREST PAID TO OTHERS WAS ON ACCOUNT OF SUBSTITUTION OF FUNDS DEPLOYED EARLIER TO EARN INTEREST INCOME. THE MONEY WAS BORROWED TO DISCHARGE THE LOAN D UE TO SHRI R.P. MITTAL WHICH WAS DEPOSITED WITH THE HQR. INTEREST OF ABOUT RS. 90.00 LAKH WAS EARNED ON SUCH DEPOSIT FROM THE HQR. ON M AKING THE BORROWINGS THE LOAN PAYABLE TO SHRI MITTAL WAS REDUCED FR OM RS. 9.65 CRORE ON 31.3.2005 TO RS. 3.29 CRORE ON 31.3.2006. THE A MOUNT WAS DEPOSITED WITH THE HQR AND THE AMOUNT OUTSTANDING FROM T HIS COMPANY ON 31.3.2006 AMOUNTED TO RS. 8.8 CRORE. THE LD. CIT(A) MENTIONED THAT FOR DEDUCTION OF INTEREST IT IS INCUMBENT UPON THE ASSESSEE COMPANY TO SHOW THAT THE BORROWINGS WERE ACTUALLY UTILI ZED FOR EARNING INTEREST INCOME. THE BORROWINGS FROM SHRI R.P. MITTAL H AVE BEEN SUBSTANTIALLY UTILIZED FOR ACQUISITION OF THE SHARES OF TH E HQR. THEREFORE THERE ITA NO. 4753(DEL)/2009 9 WAS NO NEXUS BETWEEN BORROWINGS AND LENDINGS AS CONTEMPLATED U/S 57(III). APART FROM THAT THE ACCOUNT OF S HRI MITTAL WAS DEBITED BY A SUM OF ABOUT RS. 6.58 CRORE TOWARDS THE SHARES TRANSFERRED TO HIM. THIS MAKES THE ABSENCE OF THE NEXUS MORE CLEAR. THEREFORE THE ACTION OF THE AO IN THIS REGARD WAS UPHELD. 3. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE FU RNISHED A BRIEF BACKGROUND IN REGARD TO ISSUES IN DISPUTE. WE THINK IT FIT TO PARAPHRASE THE BACKGROUND AS IT CLARIFIES THE CONTENTIOUS ISSUES. THE ASSESSEE FILED A BID TO TAKE OVER HOTEL ASHOK YATRI NI WAS AS A GOING CONCERN FOR A SUM OF ABOUT RS. 45.33 CRORE. IN CASE THE BID BECAME SUCCESSFUL THE HOTEL WAS TO BE TAKEN OVER FROM THE ITDC BY ACQUIRING THE SHARES OF HQR A SUBSIDIARY OF THE ITDC. THE BID WAS SUCCESSFUL. IN TERMS OF THE BID THE ITDC WAS TO DEAL WITH THE DEBT ORS AND THE CREDITORS AND ONLY THE FIXED ASSETS WERE TO BE TAKEN OVER BY THE ASSESSEE. THE COST TO BE PAID IN RESPECT OF THE ASSETS AFTER MAKING ADJUSTMENT FOR CREDITORS AND DEBTORS WAS ABOUT RS. 16.00 CRORE. S OME SHARES OF THE HQR WERE HELD BY THE OTHERS. SUCH SHARES WERE AL SO ACQUIRED BY THE ASSESSEE. THERE IS NO DISPUTE ABOUT THE COST OF ACQUISITION OF THE SHARES OF THE HQR ACQUIRED FROM ITDC AND OTHERS AN D THE COST OF ITA NO. 4753(DEL)/2009 10 ACQUISITION WORKED OUT BY THE AO AT RS 185.68 PE R SHARE HAS BECOME FINAL. 3.1 HOTEL ASHOK YATRI NIWAS REQUIRED EXTENSIVE REPAIRS AND RENOVATION. THEREFORE FRESH CAPITAL WAS REQUIR ED FOR UNDERTAKING SUCH REPAIRS AND RENOVATION. SUCH CAPITAL WAS INFUSED BY THE ASSESSEE COMPANY BY WAY OF FRESH CAPITAL SUBSCRIPTION AT PAR. TH E ASSESSEE WAS ALLOTTED 23 90 000/- SHARES ON 27.7.2004 AT RS. 2.39 CR ORE. THE ASSESSEE WAS FURTHER ALLOTTED 41 51 648/- SHARES ON 7.1.2 005 AT RS. 4 15 16 480/-. OUT OF ORIGINAL HOLDINGS ACQUIRED FROM ITDC AN D OTHERS AND FRESH ALLOTMENT OF EQUITY THE ASSESSEE SOLD 32 88 181/- SHARES TO SHRI R.P. MITTAL AT RS. 20/- PER SHARE. THESE SHARES CO MPRISED OF 8 98 181/- SHARES ORIGINALLY ACQUIRED AND 23 90 000/- SH ARES ALLOTTED BY THE HQR TO THE ASSESSEE ON 27.7.2004. 3.2 COMING TO THE ARGUMENTS IT IS SUBMITTED THAT THERE IS NO DISPUTE ABOUT THE COST OF ACQUISITION OF THESE SHARES. HOWEVER THERE IS A DISPUTE WHEN THE SALE PRICE WAS SUBSTITUTED BY THE A.O WITH THE FAIR MARKET VALUE. THE ASSESSEE WAS REQUIRED TO SUBSTA NTIATE THE SALE PRICE AS THE ASSESSEE COMPANY AS WELL AS THE HQR WERE CON TROLLED BY SHRI R.P. ITA NO. 4753(DEL)/2009 11 MITTAL AND HIS WIFE. IN THIS CONNECTION A VA LUATION REPORT WAS FILED SHOWING THE FAIR MARKET VALUE OF THE SHARES AT RS. 3.19 PER SHARE ON THE BASIS OF LAST AVAILABLE BALANCE SHEET OF 31.03. 2005. THE VALUATION WAS MADE ON ASSET BACKING METHOD AS THE COMPANY WAS NOT CARRYING OUT ANY BUSINESS. THE VALUE WAS LOW BECAUSE NO BUSI NESS WAS CONDUCTED BY THE HQR BETWEEN JUNE 2003 TO OCTOBER 2008. I N THIS PERIOD THE HOTEL WAS CLOSED FOR EXTENSIVE REPAIRS AND RENOVATION. HOWEVER THE AO DID NOT ACCEPT THE SALE CONSIDERATION AND SUBSTITUTE D IT WITH THE COST OF ACQUISITION AND COST OF IMPROVEMENT WORKED OUT ON THE BASIS OF PAYMENT MADE AT THE TIME OF ACQUISITION OF THE SHARES FROM ITDC AND OTHERS. THIS COULD NOT HAVE BEEN DONE IN THE LIGHT OF VAR IOUS DECIDED CASES IN THE MATTER. 3.3 FURTHER THERE IS A DISPUTE WHETHER THE SH ARES ALLOTTED TO THE ASSESSEE BY THE HQR CONSTITUTED LONG-TERM OR S HORT-TERM CAPITAL ASSET. ACCORDING TO THE EVIDENCE FILED ON RECORD THE HQR THROUGH SHRI R.P. MITTAL INTIMATED TO THE ASSESSEE COMPANY ON 1 1.11.2003 THAT THERE IS A NEED OF FUNDS FOR COMPLETING THE WORK OF RENOVAT ION WITHIN THE STIPULATED PERIOD. THE FRESH LOANS ARE NOT FORTH COMING WHICH NECESSITATES FURTHER INFUSION OF CAPITAL BETWEEN RS. 2.00 TO RS. 2. 50 CRORE. IN LIEU THEREOF ITA NO. 4753(DEL)/2009 12 EQUITY SHARES OF THE COMPANY ARE TO BE ALLOTTE D AT PAR ON CONFIRMED BASIS (P.B. 21). THIS LETTER WAS RESPONDED TO BY THE ASSESSEE COMPANY THROUGH SMT. SARLA MITTAL ON 11.11.2003 THAT TH E NECESSARY SUBSCRIPTION WILL BE MADE IN CASH IN INSTALLMENTS SO AS TO MAKE-UP RS. 2.25 CRORE BY 15.3.2004 FOR WHICH FRESH EQUITY MUST BE ALLOT TED BY 31.3.2004. A CHEQUE OF RS. 50.00 LAKH WAS ENCLOSED WITH THIS LETTER (PB 22). THE HQR WROTE A LETTER TO THE ASSESSEE COMPANY THRO UGH SHRI R.P. MITTAL ON 4.4.2004 ACKNOWLEDGING RECEIPT OF RS. 2.39 CROR E BY CHEQUES UP TO 4.3.2004 BEING CAPITAL CONTRIBUTION TOWARDS 23 90 000/- EQUITY SHARES AND CONFIRMING THAT A RIGHT IN THE SHARES WAS C REATED IN FAVOUR OF THE ASSESSEE COMPANY. THE SHARE CERTIFICATE NUMBE RS TO BE DELIVERED TO THE ASSESSEE SHORTLY WERE ALSO MENTIONED IN THIS LETTER (PAGE 23 OF THE PAPER BOOK). A COPY OF SHARE APPLICATION MONEY ACCO UNT WAS ALSO FILED WHICH SHOWS VARIOUS PAYMENTS BETWEEN 12.11.200 3 TO 4.3.2004. ON THE BASIS OF THE BOARD CIRCULAR NO. 704 DATED 28.4. 1995 AND OTHER CASES IT WAS CONTENDED THAT THE ASSESSEE ACQUIRED THE S HARES ON 4.4.2004 WHEN THE HQR INTIMATED TO IT THE FACTUM OF ALLOT MENT AND THE DISTINCTIVE NUMBERS. 3.4 THERE IS ALSO A DISPUTE REGARDING DEDUCTIO N OF INTEREST PAID TO OTHERS. THE FACTS IN THIS REGARD ARE THAT THE ASSESSEE COMPANY DEPOSITED ITA NO. 4753(DEL)/2009 13 A SUM OF ABOUT RS. 8.80 CRORE WITH THE HQR O N WHICH INTEREST OF ABOUT RS. 90.00 LAKH WAS RECEIVED. BORROWINGS TO THE EXTENT OF ABOUT RS. 9.65 CRORE WERE MADE FROM SHRI R.P. MITTAL TO WHOM NO INTEREST WAS PAID. MONIES WERE BORROWED FROM THE THIRD PARTIES TO DISCHARGE THE LIABILITY TOWARDS SHRI R.P. MITTAL AND INTEREST OF ABOUT RS . 22.00 LAKH WAS PAID ON SUCH BORROWINGS. THEREFORE IT IS ARGUED THAT T HERE WAS A NEXUS BETWEEN BORROWINGS FROM OTHERS AND LENDING TO THE HQR. THUS INTEREST PAID TO OTHERS IS DEDUCTIBLE IN COMPUTING THE INCOME UNDE R THE RESIDUARY HEAD. 4. COMING TO THE ISSUE OF THE PERIOD OF HOLDING T HE ASSET THE LD. DR SUBMITTED THAT THE ASSESSEE HAD ITSELF SHOWN THE DATE OF ACQUISITION AS 27.7.2004 (PB 25) WHILE WORKING OUT SHORT-TERM CAPITAL GAINS. THE ASSESSEE COMPANY WAS CONTROLLED BY SHRI R.P. MITTA L AND SMT. SARLA MITTAL WHO ARE THE DIRECTORS OF THE COMPANY. THE SALES ARE EFFECTED TO SHRI R.P. MITTAL. THE ASSESSEE HAS NOT PLACED ON RECORD THE RESOLUTION OF THE BOARD OR THE MINUTES OF THE BOARD MEETING IN WHICH IT W AS DECIDED TO ALLOT SHARES TO THE ASSESSEE. THUS THE CLAIM OF THE ASSESSEE IS BASED SOLELY ON CORRESPONDENCE BETWEEN THE HQR AND THE ASSESS EE COMPANY. THE THREE LETTERS HAVE BEEN SIGNED EITHER BY SHRI R.P. M ITTAL OR SMT. SARLA MITTAL AND THEY ARE IN CONTROL OF THE AFFAIRS OF THE HQR ALSO. THIS ITA NO. 4753(DEL)/2009 14 CORRESPONDENCE IS NOT SHOWN TO HAVE BEEN PLACED O N THE RECORD OF ANY OTHER PERSON OR AUTHORITY. THEREFORE NO EVIDENT IARY VALUE CAN BE PLACED ON THIS CORRESPONDENCE. RELYING ON VARIOUS CASE LAW IT WAS ARGUED THAT THE DATE OF PAYMENT IS IRRELEVANT AS DATE OF ACQUISITION OF SHARES HAS TO BE ASCERTAINED ON THE BASIS OF ISSUE OF THE SH ARE CERTIFICATES. THE BOARD CIRCULAR DOES NOT DEAL WITH THE SITUATION AT H AND BUT IT DEALS WITH THE TRADING OF SHARES ON THE STOCK EXCHANGE THROUG H BROKERS. SINCE THE SHARES WERE HANDED OVER TO THE ASSESSEE ON 27 .7.2004 THE DATE OF ACQUISITION WILL ALSO BE 27.7.2004. 4.1 IN REGARD TO SUBSTITUTION OF THE FAIR MARKE T VALUE IN PLACE OF SALE CONSIDERATION THE CONTENTION IS THAT THE TRAN SACTION WAS COLOURABLE IN NATURE BEING BETWEEN THE ASSESSEE COMPANY AND I TS SUBSTANTIAL SHAREHOLDER. THE ASSESSEE HAS NOT SHOWN ANY B ASIS FOR CHARGING SALE CONSIDERATION AT RS. 20/- PER SHARE. THESE SHA RES RANK PARI-PASSU WITH THE SHARES ACQUIRED AT THE TIME OF TAKING OVE R HOTEL ASHOK YATRI NIWAS. THE COST OF ACQUISITION AND THE COST OF IMPROVEM ENT OF THE SHARES AT THAT POINT WAS COMPUTED BY THE AO AT RS. 185. 68 PER SHARE. THEREFORE THERE IS NO REASON TO SELL THE SHARES AT A PRI CE BELOW THE AFORESAID AMOUNT. THE CASES RELIED UPON BY THE LD. COUNS EL ARE NOT APPLICABLE ITA NO. 4753(DEL)/2009 15 WHILE THE CASES RELIED UPON BY THE AO AND THE L D. CIT(APPEALS) ARE RELEVANT FOR DECIDING THE CONTROVERSY. THEREFORE IT WAS ARGUED THAT THE COMPUTATION OF CAPITAL GAIN MADE BY THE LOWER AUTHORITIES MAY BE UPHELD. 4.2 IN THE ALTERNATIVE IT IS ARGUED THAT SI NCE ORIGINALLY ACQUIRED SHARES WERE SOLD AT A LOSS SUCH LOSS MAY BE DISALLOWED AS IT WAS NOT A TRANSACTION IN THE NATURE OF BUSINESS BEING A COLOURABLE TRANSACTION. 4.3 IT IS ALSO ARGUED THAT THE MONEY RECEIVE D FROM SHRI R.P. MITTAL WAS LENT TO THE HQR ON WHICH INTEREST WAS EA RNED. THERE WAS NO STIPULATION OF PAYMENT OF INTEREST TO SHRI R.P. M ITTAL. THIS MONEY WAS SUBSTANTIALLY USED FOR ALLOTMENT OF SHARES TO H IM AT PAR. THEREFORE THERE IS NO NEXUS BETWEEN INTEREST EARNED FROM THE HQR AND INTEREST PAID TO THE THIRD PARTIES. 5. IN THE REJOINDER THE LD. COUNSEL SUBMITS THA T THE CORRESPONDENCE BETWEEN THE HQR AND THE ASSESSEE COMPANY WAS NOT REQUIRED TO BE FILE BEFORE ANY OTHER AUTHORITY OR THIRD PARTY. THER EFORE IT IS NOT AVAILABLE WITH ANY ONE EXCEPT THE ASSESSEE AND THE HQR . THE PAYMENTS HAD BEEN MADE BY THE ASSESSEE ON THE BASIS OF THE LET TER OF THE HQR. THE ITA NO. 4753(DEL)/2009 16 ASSESSEE IS NOT IN A POSITION TO PRODUCE THE BOARD RESOLUTION AS IT HAD BEEN EXCLUDED FROM THE MANAGEMENT OF THE HQR AS EVIDENCED BY THE ORDER OF THE LD. CIT(A) AND PAGE 84 OF THE PAPER BOOK BEING THE LETTER DATED 15.10.2009 ADDRESSED TO THE LD. CIT(APPEAL S). IN PARAGRAPH 2 IT IS MENTIONED THAT AT PRESENT THE MANAGEMENT OF THE COMPANY IS WITH THE OPPOSITE GROUP AND MINUTES BOOK OF THE HOTEL C OMPANY IS IN THEIR CUSTODY. IN VIEW THEREOF NO COPY OF THE RESOLUTI ON CAN BE FILED. THE PRIMARY CASE OF THE AO IS THAT FAIR MARKET VALUE SHOULD BE SUBSTITUTED IN PLACE OF THE SALE CONSIDERATION. THEREFORE IT IS NOT A CASE OF DISALLOWANCE OF NON-BUSINESS LOSS BUT COMPUTAT ION OF CAPITAL GAINS BY ENHANCING THE SALE CONSIDERATION. 6. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. 6.1 GROUND NO. 1 IS THAT THE LD. CIT(A) ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE AO REGARDING SUBST ITUTION OF FULL VALUE OF CONSIDERATION OF SHARES TRANSFERRED BY THE AS SESSEE WITH FAIR MARKET VALUE OF THE SHARES. BRIEFLY THE FACTS ARE THAT THE ASSESSEE ACQUIRED 8 98 181/- SHARES OF THE HQR ON OR ABOUT 8.10.200 2 FOR THE CONSIDERATION ITA NO. 4753(DEL)/2009 17 OF RS. 16 67 80 591/-. FURTHER THE ASSESSEE WAS ALLOTTED 23 90 000/- SHARES OF THIS COMPANY ON OR ABOUT 27.7.2004 FO R A CONSIDERATION OF RS. 2.39 CRORE. THESE SHARES WERE SOLD TO SHRI R.P . MITTAL @ RS. 20/- PER SHARE FOR AGGREGATE CONSIDERATION OF RS. 6 57 63 620/-. THE AO WORKED OUT THE FAIR MARKET VALUE OF THE SHARES ON THE BASIS OF ACQUISITION OF 8 98 181/- SHARES AT RS. 185.68 PER SHARE. T HE LONG-TERM AND THE SHORT- TERM CAPITAL GAINS WERE WORKED OUT ACCORDIN GLY BY SUBSTITUTING THE AFORESAID FAIR MARKET VALUE IN PLACE OF THE SALE CONSIDERATION ACTUALLY RECEIVED BY THE ASSESSEE. 6.2 SECTION 48 OF THE ACT PRESCRIBES THE MODE OF COMPUTATION OF THE CAPITAL GAINS. IT READS AS UNDER:- 48. THE INCOME CHARGEABLE UNDER THE HEAD C APITAL GAINS SHALL BE COMPUTED BY DEDUCTING FROM THE F ULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RE SULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOU NTS NAMELY:- (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER. (II) THE COST OF ACQUISITION OF THE ASSET AND THE COST OF ANY IMPROVEMENT THERETO; [THE REMAINING PORTION OF THE SECTION IS NOT RELEVANT FOR OUR PURPOSE]. ITA NO. 4753(DEL)/2009 18 6.3 THE ISSUE AS TO WHETHER FAIR MARKET VALU E CAN BE SUBSTITUTED IN PLACE OF THE SALE CONSIDERATION WAS EXAMINED B Y THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. GILLANDERS ARBUTH NOT & CO. (1973) 87 ITR 407 UNDER SECTION 12B(2) OF THE 1922 ACT WHICH READS AS UNDER:- THE AMOUNT OF CAPITAL GAIN SHALL BE COMPUTED AFT ER MAKING THE FOLLOWING DEDUCTIONS FROM THE FULL VALUE O F THE CONSIDERATION FOR WHICH THE SALE EXCHANGE RE LINQUISHMENT OR TRANSFER OF THE CAPITAL ASSET IS MADE NAM ELY: (I) EXPENDITURE INCURRED SOLELY IN CONNECTION W ITH SUCH SALE EXCHANGE RELINQUISHMENT OR TRANSFER; (II) THE ACTUAL COST TO THE ASSESSEE OF THE CAPI TAL ASSET INCLUDING ANY EXPENDITURE OF A CAPITAL NATU RE INCURRED AND BORNE BY HIM IN MAKING ANY ADDITION OR AL TERATIONS THERETO BUT EXCLUDING ANY EXPENDITURE IN RESP ECT OF WHICH ANY ALLOWANCE IS ADMISSIBLE UNDER ANY PROVISION OF SECTIONS 8 9 10 AND 12: [THE REMAINING PORTION OF SECTION 12B IS NOT RE LEVANT FOR OUR PRESENT PURPOSE] 6.4 WHILE DECIDING THIS CASE THE HONBLE COURT FOLLOWED ITS OWN DECISION IN THE CASE OF CIT VS. GEORGE HENDERS ON & CO. LTD. (1967) 66 ITR 622. IT WAS MENTIONED THAT THE LEGISLATURE HAS MADE A DISTINCTION BETWEEN THE EXPRESSION THE FULL VALUE OF THE CO NSIDERATION AND FAIR MARKET VALUE OF THE CAPITAL ASSET. THE 1922 AC T PROVIDES FOR TWO ITA NO. 4753(DEL)/2009 19 EXCEPTIONS WHICH ARE NOT APPLICABLE TO THE FA CTS OF OUR CASE. IT WAS HELD THAT IF THESE TWO CONDITIONS ARE NOT AP PLICABLE THE MAIN PROVISION WILL BECOME APPLICABLE IN COMPUTING THE CAPITAL GAINS BY TAKING INTO ACCOUNT THE FULL VALUE OF CONSIDERATION FOR THE TRANSFER. THE RELEVANT PORTION QUOTED FROM THE CASE OF GEORGE HENDERS ON & CO. LTD. (SUPRA) BY THE HONBLE COURT WHICH WAS FOLLOWED BY IT IS REPRODUCED BELOW:- IN CASE OF A SALE THE FULL VALUE OF THE CONSI DERATION IS THE FULL SALE PRICE ACTUALLY PAID. THE LEGISLATURE HAD TO USE THE WORDS FULL VALUE OF THE CONSIDERATION BECAUSE IT WAS DEALING NOT MERELY WITH SALE BUT WITH OTHER TYPES OF TRANSFER SUCH AS EXCHANGE WHERE THE CONSIDERAT ION WOULD BE OTHER THAN MONEY. IF IT IS THEREFORE HELD IN THE PRESENT CASE THAT THE ACTUAL PRICE RECEIVED BY THE RESPONDENT WAS AT THE RATE OF RS. 136/- PER SHARE THE FULL VALUE OF THE CONSIDERATION MUST BE TAKEN AT THE RATE OF RS. 1 36/- PER SHARE. THE VIEW THAT WE HAVE EXPRESSED AS TO TH E INTERPRETATION OF THE MAIN PART OF SECTION 12B( 2) IS BORNE OUT BY THE FACT THAT IN THE FIRST PROVISO TO SECTION 12B(2) THE EXPRESSION FULL VALUE OF THE CONSIDERATION IS USED IN CONTRADISTINCTION WITH FAIR MARKET VALUE OF THE CAPITAL ASSET AND THERE IS AN EXPRESS POWER GRANTED TO TH E INCOME-TAX OFFICER TO TAKE THE FAIR MARKET VALUE OF THE CAPITAL ASSET TRANSFERRED AS THE FULL VALUE OF THE CONSIDER ATION IN SPECIFIED CIRCUMSTANCES. IT IS EVIDENT THAT TH E LEGISLATURE ITSELF HAS MADE A DISTINCTION BETWEEN THE TWO EXPRESSION FULL VALUE OF THE CONSIDERATION AND FAIR MA RKET VALUE OF THE CAPITAL ASSET TRANSFERRED AND IT IS PROVI DED THAT IF CERTAIN CONDITIONS ARE SATISFIED AS MENTIONE D IN THE FIRST PROVISO TO SECTION 12B(2) THE MARKET VALUE OF THE ASSET TRANSFERRED THOUGH NOT EQUIVALENT TO THE FULL VA LUE OF THE CONSIDERATION FOR THE TRANSFER MAY BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION. TO GIVE RISE TO THIS FICTION THE TWO ITA NO. 4753(DEL)/2009 20 CONDITIONS OF THE FIRST PROVISO ARE: (1) THAT THE TRANSFEROR WAS DIRECTLY OR INDIRECTLY CONNECTED WITH THE TRANSFEREE AND (2) THAT THE TRANSFER WAS EFFECTED WITH THE OBJECT OF AVOIDANCE OR REDUCTION OF THE LIABILITY OF THE ASSESSEE UNDER SECTION 12B. IF THE CONDITIONS OF THIS PROVISO ARE NOT SATISFIED THE MAIN PART OF SECTION 12B(2) APPL IES AND THE INCOME-TAX OFFICER MUST TAKE INTO ACCOUNT TH E FULL VALUE OF THE CONSIDERATION FOR THE TRANSFER. 6.5 THE LD. COUNSEL HAD ALSO RELIED ON THE DECI SION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SMT. NILOFER I .SINGH (2009) 309 ITR 233. THE HONBLE COURT APPLIED THE DECISION IN THE CASE OF GEORGE HENDERSON & CO. LTD. AND GILLANDERS ARBUTHNOT &CO . (SUPRA). IT WAS HELD THAT FOR THE PURPOSE OF COMPUTING CAPITAL GA INS IN SUCH A CASE AS THE ONE BEFORE US THERE IS NO NECESSITY FOR COMPUT ING THE FAIR MARKET VALUE AND THEREFORE THE AO COULD NOT HAVE REFERRED THE MATTER TO THE VALUATION OFFICER. THIS DECISION WAS FOLLOWED BY THE HONBLE COURT IN THE CASE OF DEV KUMAR JAIN VS. ITO & ANOTHER (2009) 309 ITR 240. 6.6 COMING TO THE CASES RELIED UPON BY THE LD. DR THE FACTS OF THE CASE OF CIT VS. L.N. DALMIA (1994) 207 ITR 89 AR E THAT THE ASSESSEE FLOATED A PRIVATE LIMITED COMPANY CALLED LNE. THE ASSESSEE AND HIS NEPHEW BECAME SUBSCRIBERS TO THE MEMORANDUM AND ARTICLES OF ASSOCIATION. THE CERTIFICATE OF INCORPORATION WAS ISSUED BY THE ITA NO. 4753(DEL)/2009 21 REGISTRAR ON 6.6.1969. THE ASSESSEE SOLD 27 1 62 SHARES OF PUNALUR PAPER MILLS LTD. TO LNE AT RS. 25/- PER SHAR E IN MAY 1969. THE LNE HAD NOT BEEN INCORPORATED TILL THAT DATE. THE LNE DULY RATIFIED THE PURCHASE OF SHARES ON 7.6.1969 I.E. AFTER IT S INCORPORATION. THEREAFTER ANOTHER LOT OF 12 000 SHARES OF THE SAME COMPA NY WERE SOLD BY THE ASSESSEE TO LNE @ RS. 25/- PER SHARE. THE ASSE SSEE SUFFERED A LOSS OF RS. 7/- PER SHARE ON THE SALE OF 39 162 SHARES. THE LOSS WAS DISALLOWED BY THE AO BY TREATING IT TO BE UNREAL AND SHAM. THE AAC AND THE TRIBUNAL ALLOWED THE LOSS. THE TRIBUNAL WAS OF THE VIEW THAT THE TRANSACTION TOOK PLACE BETWEEN THE INDIVIDUAL BEING THE HOLDER OF THE SHARES AND A COMPANY BEING A SEPARATE LEGAL ENTITY. ON TH E FACE OF IT THE TRANSACTION DOES NOT APPEAR TO BE INFLUENCED BY DOUBTFUL FACTORS AND THE TRANSACTION TOOK PLACE AS IF IT WAS A NORMAL TRANSACTION. REVERSING THE ORDER OF THE TRIBUNAL THE COURT OBSERVED AS UNDER:- AS DISCUSSED THE ASSESSEE EFFECTED A TRANS ACTION OF SALE OF SHARES HELD BY HIM TO COMPANIES FORMED BY H IMSELF HOLDING THE MAJOR PART OF SHARES OF SUCH COMPA NIES ALONG WITH HIS NEPHEW AND WIFE WHO HELD ONLY THE SMALLER PART THEREIN AND ARE SHOWN TO HAVE SUFFERED A LOSS BY THE SALE WHICH WOULD BE A CUSHION AGAINST FUTURE TAX LI ABILITY FOR GAIN EITHER UNDER THE REVENUE HEAD OR UNDER THE CA PITAL HEAD. WE HAVE OBSERVED THAT AS FOR THE EXERCISE OF CONTROL OVER THE SHARES MORE PARTICULARLY OVER THE CONTROL OF THE COMPANY (PUNALUR PAPER MILLS LTD.) THERE HAS BEE N NO CHANGE WHATSOEVER. HE CONTINUED TO EXERCISE T HE SAME CONTROL OVER PUNALUR PAPER MILLS LTD. AS BEF ORE. THIS ITA NO. 4753(DEL)/2009 22 SPECIAL ASPECT CANNOT BE OVERLOOKED BY ANY APP ELLATE AUTHORITY DEALING WITH TAX MATTERS. WHEN THE RE WAS NO REAL CHANGE WHATSOEVER THE APPARENT CHANGE BEIN G THE TRANSFER ON THE SURFACE OF SHARES FROM THE IND IVIDUAL TO THE COMPANY A HANDMAID OF THE TRANSFERRING INDIVI DUAL CANNOT BE OVERLOOKED AND WE ARE IN COMPLETE A GREEMENT WITH THE VIEW OF THE TAXING AUTHORITY THAT T HERE WAS NO REAL CHANGE OR TRANSFER AND THE TRANSFER CLA IMED WAS A SHAM TRANSFER. RELYING UPON THE DECISION OF T HE SUPREME COURT IN THE CASE OF WORKMEN OF ASSOCIATED RUB BER INDUSTRY LTD. (1986) 157 ITR 77 WE HOLD THAT IT WAS THE DUTY OF THE TRIBUNAL TO GET BEHIND THE SMOKE-SCREEN A ND DISCOVER THE TRUE STATE OF AFFAIRS IN A CASE LIKE TH E ONE BEFORE US. THIS DUTY THE TRIBUNAL PRE-EMINENTLY FAILED TO DO. ACCORDINGLY THE ISSUE SET OUT EARLIER AT NO. ( II) INVOLVING QUESTION NO. 2 IS ANSWERED IN THE AFFIRMATIVE A ND IN FAVOUR OF THE REVENUE. 6.7 THUS THE RATIO OF THE CASE IS THAT THE APPELLATE AUTHORITIES CAN GO BEHIND THE TRANSACTION AND EXAMINE WHETHER THE TRANSACTION WAS REQUIRED TO BE UNDERTAKEN BECAUSE OF VALID CONSID ERATION OR NOT. IF NOT THE LOSS INCURRED IN THE TRANSACTION CAN BE IGN ORED. HOWEVER WE SHALL DEAL WITH THIS MATTER LATER. 6.8 THE LD. DR HAD ALSO RELIED ON THE DECISION O F HONBLE DELHI HIGH COURT IN THE CASE OF A.S. BHARGAVA VS. CIT (197 3) 88 ITR 14. THE QUESTIONS BEFORE THE COURT WERE AS UNDER:- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE TRIBUNAL COULD HOLD THAT A SUM OF RS. 30 000 /- BEING THE FACE VALUE OF THREE HUNDRED FULLY PAID UP S HARES OF ITA NO. 4753(DEL)/2009 23 MESSERS. DELHI GATE SERVICES (P) LTD. WAS NOT CAPITAL BUT REVENUE RECEIPT IN THE HANDS OF THE PETITIONER L IABLE TO TAX? 2. EVEN IF IT BE HELD THAT THE AFORESAID AMO UNT REPRESENTED REVENUE RECEIPT COULD THE TRIBUNAL IN LAW HOL D THAT THE ENTIRE FACE VALUE OF THE SHARES CONSTITUTED REVENUE RECEIPT WHICH WAS ASSESSABLE TO TAX? 6.8.1 IN THAT CASE QUESTION NO. 1 WAS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. IN REGARD TO QUEST ION NO. 2 THE HONBLE COURT HELD THAT THE TRIBUNAL WAS RIGHT IN ITS OBSERVA TION THAT WHERE INCOME WAS NOT RECEIVED IN MONEY BUT IN MONEYS WORT H ITS VALUE HAD TO BE DETERMINED WITH REFERENCE TO THE MARKET CONDITIO NS PREVAILING AT THE TIME OF RECEIPT OF THE MONEYS WORTH. THEREFORE T HE TRIBUNAL OUGHT TO HAVE DETERMINED THE MARKET VALUE OF SHARES AT THAT POINT AS FACE VALUE OF THE SHARES WOULD NOT CONSTITUTE THE INCOME. THU S THE RATIO OF THE CASE IS THAT IF INCOME IS EARNED IN MONEYS WORTH THE FAIR MARKET VALUE WILL BE THE QUANTUM OF INCOME. SUCH IS NOT THE QUESTIO N BEFORE US. THE ASSESSEE HAD NOT RECEIVED THE CONSIDERATION IN M ONEY. FURTHER THERE IS NO ALLEGATION THAT ANYTHING MORE OVER AND ABOVE RS. 20/- PER SHARE WAS RECEIVED ON SALE TO SHRI R.P. MITTAL. THEREFORE THE RATIO OF THIS CASE IS NOT APPLICABLE. 6.9 THE LD. DR HAD ALSO RELIED ON THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF ORIENT TRADING CO. LTD. VS. CIT (1997) 224 ITA NO. 4753(DEL)/2009 24 ITR 371. THE QUESTION BEFORE THE COURT WAS WH ETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT ON THE FACTS AND IN THE CIRC UMSTANCES OF THE CASE THE EXCHANGE OF ONE SECURITY FOR ANOTHER COULD BE DESCRIBED AS REALIZATION OF THE SECURITY RESULTING IN PROFIT? THE HONB LE COURT HELD THAT HAVING TAKEN SHARES IN THE SECOND COMPANY IN EXCHANGE FOR THE SHARES OF THE FIRST COMPANY THE ASSESSEE HAD MADE REALIZAT ION OF THE VALUE OF SHARES OF THE FIRST COMPANY AND THE DIFFERENCE BETWEEN PRICE OF THE SHARES OF THE FIRST COMPANY AND THE SECOND COMPANY ON THE DA TE OF SUCH EXCHANGE HAS TO BE TREATED AS PROFIT OF THE ASSESSEE. IT MAY BE MENTIONED THAT THE ASSESSEE HAD VALUED THE SHARES OF THE SECOND COMPANY AT RS. 1.45 LAKH BEING THE COST OF SHARES OF THE FIRST COMP ANY. THE AO VALUED THE SHARES OF THE SECOND COMPANY ON THE BASIS OF QUOT ATION AT RS. 5.51 LAKH. THE RATIO OF THIS CASE IS THAT WHERE MONEYS W ORTH IS RECEIVED IN CONSIDERATION FOR TRANSFER OF AN ASSET THE FAI R MARKET VALUE WILL BE THE REALIZATION MADE FOR THE PURPOSE OF COMPUTING THE PROFIT. THE RATIO OF THIS CASE IS ALSO NOT APPLICABLE BECAUSE THE ASSES SEE REALIZED THE CONSIDERATION IN MONEY AND NOT IN MONEYS WORTH. 6.10 ON CONSIDERATION OF THE FACTS AND THE CASE LAWS RELIED UPON BY THE RIVAL PARTIES WE ARE OF THE VIEW THAT THE RATI O OF THE DECISION IN THE CASE ITA NO. 4753(DEL)/2009 25 OF GILLANDERS ARBUTHNOT & CO. NILOFER I. SINGH A ND DEV KUMAR JAIN ARE APPLICABLE TO THE FACTS OF THE CASE. SECTION 5 2 CONTAINING PROVISIONS REGARDING SUBSTITUTION OF FAIR MARKET VALUE IN PLACE OF SALE CONSIDERATION IN THE CASE OF RELATED PARTIES TRANSACTIONS AND UNDERSTATEMENT OF CONSIDERATION STAND OMITTED BY FINANCE ACT 1987 W.E.F. 1.4.1998. THUS NO GROUND SURVIVES FOR SUCH A SUBSTITUTION. THEREFORE IT IS ALSO HELD THAT THE LD. CIT(A) COULD NOT HAVE SUBSTITUTED FAIR MARKET VALUE OF THE SHARES TRANSFERRED IN PLACE OF CONSIDERATION RECEIVED OR ACCRUING. 7. THE LD. DR ALSO RAISED AN ALTERNATIVE ARGU MENT THAT THE TRANSACTIONS WERE BETWEEN THE RELATED PARTI ES. THE ASSESSEE WAS A HOLDING COMPANY OF THE HQR. SHRI R.P. MITTAL AND HIS WIFE WERE CONTROLLING THE AFFAIRS OF BOTH THE COMPANIES. IN SUCH A SCENARIO IT WAS ARGUED THAT THE TRANSACTION OF SALE WAS NOT IN THE NORMAL COURSE OF BUSINESS AND THEREFORE THE LOSS COULD NOT HAVE BEEN ALLOWED. IN THIS CONNECTION WE HAVE ALREADY CONSIDERED THE DECIS ION IN THE CASE OF L.N. DALMIA (SUPRA) IN WHICH IT WAS HELD THAT THE R EAL QUESTION TO BE SEEN IS WHETHER THERE IS ANY MATERIAL CHANGE IN POSITI ON AFTER TRANSFER VIS--VIS THE POSITION BEFORE TRANSFER. THE FACTS OF THE CASE OF L.N. DALMIA ITA NO. 4753(DEL)/2009 26 (SUPRA) WERE DISTINGUISHED BY THE ASSESSEE BEFO RE THE LD. CIT(A) IN LETTER DATED 17.8.2009. RELEVANT PARAGRAPH NOS. 2.15 TO 2.17 ARE REPRODUCED BELOW:- 2.15 THUS MR. MITTAL PRESSURIZED FOR SUCH TR ANSFER AND IT WAS DECIDED BY THE APPELLANT TO TRANSFER A PAR T OF THE EQUITY SHARES HELD BY THE APPELLANT IN HQR TO MR. MITTAL @ RS. 20/- PER SHARE THOUGH TECHNICALLY AT THAT TIME THE NET WORTH OF THE SAID SHARE WAS MUCH LOWER. THE SAID COMP ANY IS A PRIVATE LIMITED COMPANY AND ITS SHARES ARE NOT Q UOTED OR FREELY TRANSFERABLE. SINCE BY PURCHASE OF THE S AID SHARES NO OTHER BUYER COULD GET CONTROLLING INTEREST IN HQR NO OTHER PERSON WAS WILLING TO BUY THE SAME EVEN AT P ART VALUE. THUS THE SAID SHARES WERE TO TRANSFERRED. IN FACT OUT OF THE TOTAL 32 88 181 EQUITY SHARES OF RS. 10/- EAC H SO TRANSFERRED MORE THAN 72% BEING 23 90 000 EQUIT Y SHARES WERE TRANSFERRED AT A GAIN OF RS. 10/- SHARE I.E. AT 100% GAIN AS THOSE WERE ALLOTTED TO THE APPELLANT JUS T A LITTLE MORE THAN A YEAR AGO AT RS. 10/- PER SHARE BUT SOLD AT RS. 20/- PER SHARE. IT IS ONLY THE BALANCE 8 98 181 E QUITY SHARES THE APPELLANT INCURRED LOSS AS DUE TO PASSAGE OF TIME THE VALUE ERODED AND THE PROPERTY GOT STERLISED. IT COULD NOT BE USED FOR ANY OTHER PURPOSE AND IN ABSENCE OF THE FUND S THE SAME COULD ALSO NOT BE COMMISSIONED. ALL THE LICENSE S HAVING BEEN EXPIRED IT COULD NOT BE OPERATED EVEN AS THE OL D BUDGET HOTEL AS ALL THE PERMISSIONS WERE REQUIRED AFRESH. IT WAS AN EXTREMELY ADVERSE SITUATION WITH A BLEAK PR OSPECT THEN. THUS UNDER SEVERAL COMPULSIONS INCLUDING AS A BOVE THE SAID IMPUGNED SHARES WERE TRANSFERRED TO SAV E THE INVESTMENTS MADE BY THE APPELLANT IN THE HOTEL CO MPANY BY LETTING MR. MITTAL ARRANGE FUNDS FOR THE SAID COMPANY AND THEN TO ENABLE IT TO COMMENCE COMMERCIAL OPERAT IONS OF THE HOTEL. ADMITTEDLY THE APPELLANT COULD NOT HAVE ARRANGED MORE FUNDS AND IN ABSENCE OF WHICH THE ENTIRE INVESTMENT WOULD HAVE SUNK. THUS BY THE SAID TRANSFER OF SHARES THE APPELLANT NOT ONLY SAVED ITS INVESTMENT AND R EDUCED THE ITA NO. 4753(DEL)/2009 27 LIABILITY BUT ALSO ENSURED THAT IN DUE COURSE I TS REMAINING INVESTMENT ALSO GAINS WITH RETURNS ON INVESTMEN TS IN THE HOTEL. IT WAS A PRUDENT BUSINESSMAN DECISION TAKEN UNDER THE THEN PREVALENT CIRCUMSTANCES AND COMMERCIAL EXPEDIENCY. IT MUST BE APPRECIATED THAT IT MIGH T BE THAT MR. MITTAL WAS CONTROLLING BOTH THE COMPANIES BUT AS FAR AS THE OWNERSHIP OF EQUITY IN HQR WAS CONCERNED IT WAS THE APPELLANT WHO WAS THE OWNER AND NOT MR. MITTAL TILL THE SHARES WERE TRANSFERRED TO HIM SO THAT HE A CTUALLY BECOMES THE OWNER OF THE SAID SHARES. 2.16 THE ASSESSING OFFICER DID NOT APPRECIATE T HE GROUND REALITY OF THE APPELLANT AND THE THEN PREVALENT CI RCUMSTANCES THAT AS TO WHY THE 23 90 000 AND 41 51 648 EQU ITY SHARES WERE ALLOTTED AGAINST CASH CONTRIBUTION BY H QR TO THE APPELLANT IN 2004/2005 AT PAR VALUE IF THE SAID SHARES COULD BE OFFERED IN THE MARKET AT HIGHER VALU E BY THE SAID COMPANY. ADMITTEDLY THE ONLY BUSINESS BEING TH E HOTEL OF THE SAID COMPANY WAS CLOSED FOR COMPLETION OF RENOVATION FOR WANT OF FUNDS. IT WAS IN DIRE NEED OF MO NEY IN ANY MANNER FROM ANY SOURCE. THE ASSESSING AUTHORIT Y HAS NOT ALLEGED THAT THE SAID SHARES WERE PURCHASED BY T HE APPELLANT BY MAKING UNDERHAND PAYMENTS OR NOT AT THE FAIR MARKET VALUE THEN. EVEN THE APPELLANT COULD HAVE SOLD THE SHARES IN THE MARKET TO SOME BODY ELSE AT A HUGE PREMIUM AMOUNT AS COMPUTED BY THE ASSESSING OFFICER IF THOSE WE RE SO SALEABLE AND WOULD HAVE USED THE SAID LIQUID FUNDS BY FIN ANCING THE HOTEL COMPANY TO ENABLE IT TO COMMENCE COMMERCI AL OPERATIONS OF THE HOTEL. SINCE THESE SHARES DID NOT HAVE ANY MARKET AT ALL AT THAT TIME THOSE COULD NOT FET CH WHAT TO SAY HIGHER BUT ANY PRICE AT ALL AND THEREFORE THO SE WERE SO SOLD TO MR. MITTAL BECAUSE IT WAS ONLY HE WHO COULD BE INTERESTED IN THOSE SHARES IN TERMS OF THE PR EVALENT CIRCUMSTANCES. 2.17 THE ASSESSING OFFICER HAS RELIED ON A JUD GMENT OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V S. L.M. DALMIA 207 ITR 89 TO HOLD THAT THE IMPUGNED LO SS WAS A COLOURABLE TRANSACTION. HOWEVER WHILE ADJUDIC ATING SO THE ASSESSING OFFICER IGNORED THAT THE FACTS OF THAT CASE ITA NO. 4753(DEL)/2009 28 WERE ALTOGETHER DIFFERENT THAN THE FACTS IN THE CASE OF THE APPELLANT. IN THE SAID CASE NO PAYMENT WAS MADE FOR TRANSFER OF SHARES AND THE TRANSACTION WAS ON C REDIT. HOWEVER HERE THE SALE CONSIDERATION HAD ALREAD Y BEEN RECEIVED IN CASH IN ADVANCE FROM THE BUYER EARL IER. FURTHER THERE THE ASSESSING OFFICER NEVER DETERMINED T HE VALUE UNDER ANY PERMITTED METHOD BUT ADOPTED A VALU E AS DECLARED BY THE ASSESSEE. HOWEVER HERE THE L D. ASSESSING OFFICER SUBSTITUTED THE SALE PRICE BY THE VALU E AT WHICH THE APPELLANT COMPANY ACQUIRED THE SAID SHARES IN 2002 WHILE THE HOTEL WAS RUNNING AND THE CIRCUMSTANCES WERE DIFFERENT. IN THE SAID CASE AFTER APPRECIATING VARIOUS FACTS THE LOSS WAS DISALLOWED BUT NO ADDITION WAS MADE. HOWE VER IN THIS CASE AN ADDITION HAS BEEN MADE ON PRESUMPTION P RESUMING RECEIPT OF A HIGHER SALE CONSIDERATION WHICH I S NOT PERMITTED. THUS THE RATIO OF THE SAID JUDGMENT IS NOT AP PLICABLE TO THIS CASE. 7.1 THE FACTS OF THIS CASE ARE THAT 8 98 181 SHARES WERE ORIGINALLY ACQUIRED IN THE YEAR 2002 FOR A CONSIDERATION OF ABOUT RS. 12.82 CRORE IN ORDER TO ACQUIRE CONTROL OVER THE HQR. SINCE THE HOTEL REQUIRED EXTENSIVE REPAIRS ETC. AND MONEY WAS NOT FOR THCOMING FROM THIRD PARTIES SUBSCRIPTION WAS MADE IN THE YEAR 2004 @ RS. 10/- PER SHARE FOR ADDITIONAL CAPITAL OF RS. 2.39 CRORE. FURTHER SU BSCRIPTION WAS MADE IN THE YEAR 2005 @ RS. 10/- PER SHARE AT ABOUT RS. 4.15 CRORE. THE ORIGINAL SHARES AND 23 90 000 SHARES ACQUIRED IN THE YEA RS 2002 AND 2004 WERE SOLD TO SHRI R.P. MITTAL IN THIS YEAR. THE HOT EL WAS NOT FUNCTIONAL AS IT WAS UNDER REPAIRS. THE FUNDS FOR SUBSCRIPTION WE RE RAISED FROM SHRI R.P. MITTAL. THE FURTHER FACTS ARE THAT THE SHAR ES WERE VALUED @ RS. 3.19 ITA NO. 4753(DEL)/2009 29 PER SHARE BY THE AUTHORIZED VALUER. THE REVENUE THOUGH CHALLENGED THE VALUATION HAS NOT PLACED ANY OTHER VALUATION REPORT TO REBUT THE VALUE OF RS. 3.19. WE HAVE ACCEPTED THE VALUE OF RS. 20 /- OF COURSE ON LEGAL GROUNDS WHICH HAS RESULTED IN PROFIT TO THE ASSESSEE ON TRANSFER OF 23 90 000 SHARES. THERE IS ALSO DISPUTE ABOUT CONTROL AND MANAGEMENT OF THE COMPANY BETWEEN TWO RIVAL GROUPS. THE ASSESSEE WAS INDEBTED TO SHRI R.P. MITTAL WHO HAD ADVANCED MONEY WITHOUT STIPULATION OF CHARGING INTEREST. THUS THERE IS A QUALITA TIVE DIFFERENCE IN THE FACTS OF THIS CASE AND THE FACTS OF THE CASE OF L.N. DA LMIA. IN THAT CASE THERE WAS NO DISPUTE BETWEEN THE SHAREHOLDERS IN REG ARD TO MANAGEMENT OF THE COMPANY. HOWEVER AS WE SHALL SEE LATER WHILE DEALING WITH GROUND NO. 2 THAT THERE WERE TWO GROUPS OF SH AREHOLDERS IN THIS CASE ONE MAY BE TERMED AS R.P. MITTAL GROUP AND THE OTHER AS ASHOK MITTAL GROUP THESE PERSONS BEING BROTHERS. LITIGATI ON WAS GOING ON IN REGARD TO MANAGEMENT OF THIS COMPANY AND THE HQR. FURTHE R THERE WERE REASONS TO TRANSFER THE SHARES TO SHRI R.P. MIT TAL AS THE ASSESSEE WAS INDEBTED TO HIM. THE OTHER DIFFERENCE IS THAT THE SALE PRICE OF RS. 20/- PER SHARE IN RESPECT OF 23 90 000 SHARES WAS MORE TH AN THE PURCHASE PRICE OF RS. 10/-. THUS NO LOSS BUT PROFIT OCCURRED IN RESPECT OF SALE OF THESE SHARES. HAVING ACCEPTED THIS SALE CONSIDERAT ION IT WOULD BE DIFFICULT ITA NO. 4753(DEL)/2009 30 TO COUNTENANCE THE ARGUMENT THAT ORIGINAL SH ARES SHOULD BE VALUED AT A MUCH HIGHER VALUE. FURTHER INITIAL 8 98 181 SHARES WERE PURCHASED TO GET COMPLETE CONTROL OVER THE HQR WHICH FINALL Y VESTED IN SHRI R.P. MITTAL. SHARES WERE SUBSEQUENTLY PURCHASED TO ENHANCE THE CAPITAL OF THE HQR REQUIRED FOR EXTENSIVE REPAIRS AND RENOVATION. IN SUCH CIRCUMSTANCES WE DO NOT FIND IT FEASIBLE TO RECORD A FINDING THAT THE SALE WAS A COLOURABLE DEVISE. THEREFORE WE DO NOT THINK IT NECESSARY TO LIFT THE CORPORATE VEIL AS IT CANNOT BE SA ID THAT THE TRANSACTIONS WERE BOGUS OR NON-GENUINE. 8. THUS GROUND NO. 1 IS ALLOWED. 9. GROUND NO. 2 IS THAT THE LD. CIT(A) ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF ABOUT RS. 37.60 CRORE AS SHORT-TERM CAPITAL GAIN ON SALE OF 23 90 000/- SHARES OF THE HQR TRANSFERRED ON 10.05.2005 BY TAKING THE DATE OF ACQUISITION AS 27.7.20 04 IN PLACE OF 04.04.2004. 9.1 THE FACTS IN THIS CONNECTION ARE THAT THE HQR WROTE A LETTER DATED 11.11.2003 THROUGH SHRI R.P. MITTAL MANAGI NG DIRECTOR TO THE ASSESSEE BRINGING TO HIS NOTICE THE MATTER REGARDIN G LACK OF FUNDS NECESSARY ITA NO. 4753(DEL)/2009 31 TO MEET VARIOUS REQUIREMENTS AND REQUESTED TO MAKE NECESSARY ARRANGEMENTS BY 31.3.2004 FOR FRESH CONTRIBUTI ON BETWEEN RS. 2.00 CRORE TO RS. 2.50 CRORE BY WAY OF EQUITY TO BE ALLOTTED AT PAR. THIS LETTER WAS RESPONDED BY THE ASSESSEE VIDE LETTER DATED 11.11.2003 I.E. ON THE SAME DATE THROUGH SMT. SARLA MITTAL DIRECTOR IN WHICH A FIRM COMMITMENT OF SUBSCRIBING RS. 2.25 CRORE WAS MA DE AND PROMISING TO MAKE EFFORT FOR THE BALANCE CONTRIBUTION. IT WAS ALSO MENTIONED THAT THE FRESH EQUITY MUST BE ALLOTTED BEFORE 31.3.2004 . A CHEQUE OF RS. 50.00 LAKH WAS ENCLOSED WITH THIS LETTER. WE MAY TRE AT THESE LETTERS AS PROSPECTUS AND OFFER TO MAKE CONTRIBUTION SUBJ ECT TO THE CONDITION. THE HQR RESPONDED BY LETTER DATED 4.4.2004 THROU GH SHRI R.P. MITTAL ACKNOWLEDGING RECEIPT OF RS. 2.39 CRORE BY WA Y OF VARIOUS CHEQUES AND ALLOTMENT OF 23 90 000/- SHARES AT PAR. IT WA S ALSO MENTIONED THAT A RIGHT WAS CREATED IN HIS FAVOUR AND REQUISITE DISTIN CTIVE NUMBERS OF THE SHARES WERE ALSO MENTIONED. THE SHARE APPLICATION A CCOUNT SHOWS RECEIPT OF THE AFORESAID AMOUNT ON VARIOUS DATES BETWE EN 12.11.2003 AND 4.3.2004. THE SHARE CERTIFICATES WERE HANDED OVER TO SHRI R.P. MITTAL ON 27.7.2004. THE ASSESSEE TREATED THESE SHARE S AS A SHORT-TERM ASSET AND COMPUTED SHORT-TERM CAPITAL GAIN ON TRANSFER OF THESE SHARES AT RS. 2.39 CRORE. HOWEVER THIS POSITION WAS SOUGHT TO BE ALTERED IN THE COURSE ITA NO. 4753(DEL)/2009 32 OF ASSESSMENT. IN THE PROCEEDINGS THE ASSESSEE FAILED TO PRODUCE MINUTES BOOK TO SUPPORT WHETHER ANY RESOLUTION WAS PAS SED BY THE BOARD OF DIRECTORS AT ANY POINT OF TIME FOR ALLOTMENT OF THESE SHARES. WE MAY ALSO ADD THAT THE ASSESSEE HAS NOT FURNISHED AT AN Y TIME ANY COMMUNICATION MADE TO THE REGISTRAR OF COMPANIES IN THIS MATTER O R THE COPY OF SHAREHOLDERS REGISTER SHOWING THE DATE ON WHICH THESE SHARES WERE ENTERED AGAINST HIS NAME. 9.2 THE CASE OF THE ASSESSEE IS BUILT ENTIRE ON PARAGRAPH 2 OF BOARD CIRCULAR NO. 704 DATED 28.4.1995. IT IS CONTE NDED THAT IN CONSONANCE WITH THIS CIRCULAR THE PERIOD OF HOLDING SHOULD BE COUNTED FROM 4.4.2004. THE BOARD CIRCULAR DEALS WITH SECURITIES TR ANSACTION UNDERTAKEN THROUGH STOCK EXCHANGES AND IT HAS BEEN MENTION ED THAT THE PERIOD OF HOLDING SHALL BE RECKONED FROM THE DATE OF THE BROKERS NOTE FOR PURCHASE ON BEHALF OF THE INVESTORS. FOR THE SAKE OF C OMPLETENESS THIS PARAGRAPH IS REPRODUCED BELOW:- 2. WHEN THE SECURITIES ARE TRANSACTED THROUG H STOCK EXCHANGES IT IS THE ESTABLISHED PROCEDURE TH AT THE BROKERS FIRST ENTER INTO CONTRACTS FOR PURCHASE/SALE O F SECURITIES AND THEREAFTER FOLLOW IT UP WITH DELIVERY OF SHAR ES ACCOMPANIED BY TRANSFER DEEDS DULY SIGNED BY THE REGISTERE D HOLDERS. THE SELLER IS ENTITLED TO RECEIVE THE CONSIDE RATION AGREED ITA NO. 4753(DEL)/2009 33 TO AS ON THE DATE OF CONTRACT. THE BOARD AR E OF THE OPINION THAT IT IS THE DATE OF BROKERS NOTE THAT SHOU LD BE TREATED AS THE DATE OF TRANSFER IN CASES OF SALE TRANSACTI ONS OF SECURITIES PROVIDED SUCH TRANSACTIONS ARE FOLLOWED UP BY DELIVERY OF SHARES AND ALSO THE TRANSFER DEEDS. SIMILARL Y IN RESPECT OF THE PURCHASERS OF THE SECURITIES THE HOLDING P ERIOD SHALL BE RECKONED FROM THE DATE OF THE BROKERS NOTE FOR PURCHASE ON BEHALF OF THE INVESTORS. IN CASE THE TRAN SACTIONS TAKE PLACE DIRECTLY BETWEEN THE PARTIES AND NOT THROUGH STOCK EXCHANGES THE DATE OF CONTRACT OF SALE AS DEC LARED BY THE PARTIES SHALL BE TREATED AS THE DATE OF TRAN SFER PROVIDED IT IS FOLLOWED UP BY ACTUAL DELIVERY OF SHARES A ND THE TRANSFER DEEDS. 9.3 THEREFORE THE CASE OF THE LD. COUNSEL IS THAT THE PERIOD OF HOLDING SHOULD BE RECKONED FROM 04.04.2004 WHEN CONFIRMA TION LETTER WAS RECEIVED BY THE HQR. 9.4 AGAINST THE AFORESAID THE CASE OF THE LD. DR IS THAT THE HUSBAND AND THE WIFE DUO ARE CONTROLLING BOTH THE COMPA NIES. THESE LETTERS HAVE NOT BEEN FILED BEFORE ANY AUTHORITY. THEREFORE TH E AUTHENTICITY OF THE LETTERS CANNOT BE RELIED UPON IN THE FACE OF THE FACT THAT THE ASSESSEE ITSELF HAD TAKEN THE SHARES TO BE A SHORT-TERM CAPITAL A SSET IN THE RETURN OF INCOME BY COUNTING THE PERIOD OF HOLDING FROM 27.7.2 004. THE ASSESSEE WAS REQUIRED TO PRODUCE THE MINUTES BOOK WHICH WAS NO T DONE BY STATING THAT THERE WERE DISPUTES WITH THE OTHER GROUP OF S HRI ASHOK MITTAL BECAUSE OF WHICH THE ASSESSEE IS UNABLE TO PRODUCE THE MINUTES BOOK. ITA NO. 4753(DEL)/2009 34 9.5 WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. SECTION 2(42A) DEFINES THE TERM SHO RT-TERM CAPITAL ASSET TO MEAN A CAPITAL ASSET HELD BY AN ASSESSEE FOR NO T MORE THAN 36 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER. THE PROVISO TO THIS SECTION REDUCES THE PERIOD FROM 36 MONTHS TO 12 M ONTHS IN CASE OF A SHARE HELD IN A COMPANY. THE QUESTION IS WHETHER THE ASSESSEE HELD THESE SHARES FOR NOT MORE THAN 12 MONTHS FROM THE D ATE OF TRANSFER? 9.6 NONE OF THE CONTENDING PARTIES REFERRED TO THE PROVISIONS OF THE COMPANIES ACT IN THIS MATTER. WE HAVE DONE A BIT OF RESEARCH TO UNDERSTAND THE SITUATION ON CLEARER FOOTING. UND ER THAT ACT A CONTRACT FOR ALLOTMENT OF SHARES STANDS AT PAR WITH AN EXECUTORY CONTRACT UNDER THE CONTRACT ACT. AN AGREEMENT TO ALLOT SHARES OR TA KE AND PAY FOR SHARES IS SPECIFICALLY ENFORCEABLE AS HELD IN THE CASE OF SRI LANKA OMNIBUS CO. LTD. VS. PERERA (1952) AC 76. THE LEGAL POSSIBILITY OF A VALID EXECUTORY CONTRACT FOR ALLOTMENT OF SHARES IS RECOGNIZED PROVIDED THERE IS AN OFFER TO TAKE UP SHARES WHICH WAS COMMUNICATED TO AND WAS ACCEPTED BY OR ON BEHALF OF THE COMPANY. AN EXECUTORY CONTRACT TO TAKE UP SHARES MAY BE BROUGHT INTO EXISTENCE IN THE SAME MANN ER AND SUBJECT TO THE ITA NO. 4753(DEL)/2009 35 SAME PRINCIPLES AS UNDER THE CONTRACT ACT. TH E COMMUNICATION OF ACCEPTANCE NEED NOT BE IN WRITING. IT MAY BE VERBAL OR MAY BE INFERRED FROM CONDUCT AS HELD IN TRANSPORT COMPANY LTD. V S. TIRUNELVELI MOTOR BUS CO. LTD. (1955) 2 MAD LJ 141 AT 147. THE CO URT MENTIONED AT PAGE 147 THAT A COURT HAS JURISDICTION TO DECREE SP ECIFIC PERFORMANCE OF A CONTRACT EITHER TO TAKE SHARES OR TO ALLOT SHARES SUBJECT TO THE SAME PRINCIPLES WHICH GOVERN SUITS FOR SPECIFIC PERFO RMANCE AS LAID DOWN IN THE SPECIFIC RELIEFS ACT. IT HAS THEREFORE TO BE SEEN WHETHER THE EVIDENCE IN THE CASE ESTABLISHES AN EXECUTOR Y CONTRACT OF EXCHANGE OF SHARES FOR THE BUSES ACCEPTED BY THE DIRECTORS. THE COURT CITED WITH APPROVAL THE OBSERVATION OF FRY LJ IN PORTUGUESE CONSOLIDATED COPPER MINES LTD. RE LR (1889) 42 CH D 160 TO THE EFFE CT THAT THE COMPANY IS ENTITLED TO THE COMBINED WISDOM OF DIRECTORS BUT THAT THE EXERCISE OF COMBINED WISDOM DOES NOT NECESSARILY REQUIRE DI RECTORS MEETING. THOUGH NO PROOF WAS AVAILABLE TO SHOW THAT T HE DIRECTORS ACTUALLY MET TO APPROVE THE TRANSACTION BUT THERE WAS THE ENDORSEMENT BY FIVE OUR OF SEVEN DIRECTORS WHICH SHOWS THAT THEY CONS ULTED EACH OTHER AND THE MAJORITY OF THEM WAS OF ONE MIND AND THIS WAS SUFFICIENT TO SIGNIFY THEIR AGREEMENT ON BEHALF OF THE COMPANY. THE COURT RELIED UPON BONELLIS TELEGRAPH CO. (COLLIES CLAIM) (1871) LR 12 EQ 246 258. ALSO ITA NO. 4753(DEL)/2009 36 BAI MANGU VS BHARATKHAND COTTON MILLS CO. AIR 1930 PC 134 AND IN RE UNIVERSAL BANKING CORPORATION (GUNNS CASE) LR (1867) 3 CH APP 40. 9.7 FURTHER THE ACT USES THE TERM HOLDING OF S HARES IN SECTION 81(1)(A). THE GENERAL UNDERSTANDING UNDER THA T ACT IS THAT THIS TERM IS SYNONYMOUS WITH THE TERM MEMBER. ALTHOUGH TH E TERM HOLDERS OF THE EQUITY SHARES IS USED IN SUB-SECTION (1)(A) AND MEMBERS IN SUB-SECTION (1-A)(B) THE TWO TERMS ARE SYNONYMOUS AND ME AN PERSONS WHOSE NAMES ARE ENTERED IN THE REGISTER OF MEMBERS AS HELD IN BALKRISHAN GUPTA VS. SWADESHI POLYTEX LTD. (1985) 58 COM CASES 563: AIR 1985 SC520; HOWRAH TRADING CO. VS. CIT (1959) 29 COM CASES 2 82: AIR 1959 SC 775; KILLICK NIXON LTD. VS. BANK OF INDIA (1985 ) 57 COM CASES 831 (BOM-DB). 9.8 THE ASSESSEE RELIES ON BOARD CIRCULAR (SUPR A) WHICH DEALS WITH THE TRANSACTION CARRIED ON RECOGNIZED STOCK EXCHANGE S. THE BROKERS NOTE IS A THIRD PARTY EVIDENCE WHICH ALSO GET REGISTER ED WITH THE STOCK EXCHANGE. THUS THESE ARE RELIABLE EVIDENCES. HOWEVER THE WHOLE EVIDENCE HERE IS INTERNAL AND IT IS NOT IN RESPECT OF TRANSAC TION ON A RECOGNIZED STOCK EXCHANGE. CONSEQUENTLY THE CIRCULAR OR THE RA TIO OF THE CASE OF MAX ITA NO. 4753(DEL)/2009 37 TELECOM VENTURES LTD. VS. ACIT (2008) 114 ITD 46 (ASR.) BASED ON IT CANNOT BE APPLIED TO THE FACTS OF THIS CASE. 9.9 ON PERUSAL OF EVIDENCE ON RECORD IT CAN BE SAID THAT THERE WAS AN OFFER MADE BY THE ASSESSEE COMPANY TO THE HQR FOR SUBSCRIBING TO ABOUT 22 50 000 SHARES. HOWEVER IT WAS A CON DITIONAL OFFER THAT THE ALLOTMENT MUST BE MADE BEFORE 31.3.2004. THIS CONDITION HAS NOT BEEN SATISFIED BY THE HQR. IT IS ALSO A MATTER OF FACT ON RECORD THAT THE ASSESSEE HAD PAID RS. 2.39 CRORE TO THE HQR BY 04.03.2004 AS SHARE APPLICATION MONEY. HOWEVER IT IS NOT CLEAR WH ETHER ANY BOARD MEETING TOOK PLACE OR THE DIRECTORS BY MAJORITY CONSENS US DECIDED TO ALLOT 23 90 000/- SHARES TO THE ASSESSEE COMPANY. AS PER THE PROVISIONS OF COMPANIES ACT THE SHARES COULD BE ALLOTTED ONLY IF A MEETING HAD TAKEN PLACE TO CONSIDER THE CONDITIONAL OFFICER AND A D ECISION TAKEN TO ALLOT THE AFORESAID SHARES TO THE ASSESSEE. IN THE CASE OF PORTUGUESE CONSOLIDATED COPPER MINES LTD. (SUPRA) THERE WAS NO PROOF AVAILABLE TO SHOW THAT THE DIRECTORS ACTUALLY MET TO APPROVE THE T RANSACTION BUT THERE WAS ENDORSEMENT OF FIVE OUT OF SEVEN DIRECTORS WHIC H SHOWS THAT THEY CONSULTED ONE ANOTHER AND MAJORITY OF THEM WAS OF ONE MIND AND THIS WAS SUFFICIENT TO SIGNIFY THEIR AGREEMENT ON BEHALF OF THE COMPANY. IN THE ITA NO. 4753(DEL)/2009 38 INSTANT CASE LETTER DATED 04.04.2004 DOES NOT INDICATE WHETHER ANY MEETING TOOK PLACE OR NOT AND IF NOT WHETHER MAJ ORITY OF THE DIRECTORS OF THE HQR WAS OF ONE MIND FOR ALLOTTING 23 90 000 /- SHARES TO THE ASSESSEE ON 4.4.2004. THE DELAY IN ALLOTMENT PROBABLY REQUIRED THE ASSENT OF THE ASSESSEE WHICH IS ALSO NOT PROVED BY ANY EVIDEN CE ON RECORD. THEREFORE EVEN IN A SITUATION WHERE THE REQUISITE AMOUNT WAS PAID BY THE ASSESSEE COMPANY IT CANNOT BE SAID THAT ANY LEGALLY B INDING AGREEMENT CAME INTO EXISTENCE BETWEEN THE ASSESSEE AND THE HQR ON THE BASIS OF LETTER DATED 04.04.2004. IN OTHER WORDS THIS LETTER LOSES E VIDENTIARY VALUE MORE SO BECAUSE IT HAS BEEN WRITTEN BY THE HQR WITHOUT NARRATING THE BACKGROUND DETAILS REGARDING MEETING ETC. AND ALLOTMENT. IN THE CASE OF S.N. ZUBIN GEORGE VS. CIT (2004) 265 ITR 683 RELIED UPO N BY THE LD. DR THE TRIBUNAL HAD RECORDED THE FINDING THAT THERE WAS NO EVIDENCE TO SHOW THAT THE SHARES WERE IN EXISTENCE PRIOR TO 3 1.5.1988. EVEN IF THE MONEY BELONGING TO THE ASSESSEE WAS APPROPRIATED TO SH ARE DEPOSIT ACCOUNT OF THE COMPANY THAT BY ITSELF WILL NOT AMOUNT TO ALLOTMENT OF SHARES. THE REASON BEING THAT THE SHARES CAN BE ISSUED ON LY AFTER COMPANY PASSES A RESOLUTION DECIDING TO ALLOT SHARES. THE ASSE SSEE COULD NOT ESTABLISH THAT THE SHARES WERE ALLOTTED TO HIM EARLIER THAN 31.5.1988. THEREFORE ITS FINDING THAT THE DATE OF ISSUE OF SHARE CERTIFICATES WAS THE DATE OF ITA NO. 4753(DEL)/2009 39 ALLOTMENT WAS UPHELD BY THE HONBLE COURT. AS IN THAT CASE IN THIS ALSO THERE IS NO EVIDENCE REGARDING THE HOLDING O F BOARD MEETING TO CONSIDER ALLOTMENT OF SHARES TO THE ASSESSEE IN TERMS OF ITS CONDITIONAL OFFER DATED 11.11.2003. THE COMPUTATION OF GAIN AS S HORT-TERM CAPITAL GAINS BY THE ASSESSEE IN THE RETURN OF INCOME BY ASSESS EE ITSELF NEGATES THE CONTENT OF LETTER DATED 04.04.2004. WE ARE OF THE V IEW THAT SUCH A COMPUTATION WAS IN ACCORDANCE WITH THE JUDGMENT IN THE C ASE OF S.N. ZUBIN GEORGE (SUPRA). WE MAY ADD THAT THE ASSESSEE HAS NOT P RODUCED COPIES OF RECORD FROM THE OFFICE OF REGISTRAR REGARDING ALLOTMENT OF SHARES AND SHAREHOLDERS REGISTER SHOWING THE DATES ON WH ICH THESE SHARES WERE ADDED AGAINST ITS NAME. THE ABSENCE OF THESE DOCU MENTS THE ONUS OF PRODUCTION OF WHICH FOR SUBSTANTIATING ITS CLAIM WAS ON THE ASSESSEE FURTHER WEAKENS THE CASE OF THE ASSESSEE. IT MAY ALSO BE ADDED THAT UNDER THE COMPANY LAW HOLDER OF EQUITY SHARES IS A TERM SYNONYMOUS WITH THE MEMBER OF THE COMPANY. M ERE ALLOTMENT OF SHARES IN THE MEETING OF THE BOARD DOES NOT MAKE AN INVESTOR TO BE MEMBER OF THE COMPANY. HE BECOMES THE MEMBER ON LY WHEN HIS NAME IS ENTERED IN THE SHAREHOLDERS REGISTER AFTER COMPLET ING NECESSARY REQUIREMENTS UNDER THE COMPANIES ACT. HOWEVER WE MAY NOT TAKE THIS FACTOR INTO ACCOUNT AS THE CASE IS COVERED BY T HE DECISION IN THE CASE OF ITA NO. 4753(DEL)/2009 40 S.N. ZUBIN GEORGE (SUPRA). IN SUCH CIRCUMSTANCES WE ARE OF THE VIEW THAT THE LD. CIT(APPEALS) WAS RIGHT IN HOLDIN G THAT THE ASSESSEE HELD THE SHARES WITH EFFECT FROM 27.07.2004 AND THUS THE CAPITAL GAIN WAS TO BE TREATED AS SHORT-TERM CAPITAL GAINS. 10. THUS GROUND NO. 2 IS DISMISSED. 11. GROUND NO. 3 IS THAT THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 22 03 822/- MADE U/S 57(III) ON INTEREST PAID TO OTHERS. THE FACTS ON RECORD IN REGARD TO THI S GROUND MENTIONED IN THE ASSESSMENT ORDER ARE THAT THE ASSESSEE DID N OT FURNISH ANY EVIDENCE TO PROVE THAT THE INTEREST PAID WAS FOR THE PURPOSE OF EARNING INTEREST INCOME. BEFORE THE LD. CIT(APPEALS) IT WAS S UBMITTED THAT THE MONEY WAS BORROWED FROM SHRI R.P. MITTAL AND DEPOSITE D WITH THE HQR ON WHICH INTEREST OF RS. 90.00 LAKH WAS EARNED. T HIS LOAN WAS REDUCED FROM RS. 9.65 CRORE TO RS. 3.29 CRORE AT THE EN D OF THE YEAR. FOR THIS PURPOSE INTEREST-BEARING LOANS WERE RAISED FR OM OTHERS. THEREFORE THERE WAS A NEXUS BETWEEN INTEREST PAID AND T HE INTEREST EARNED. THE LD. CIT(APPEALS) MENTIONED THAT NECESSARY RECOR DS FOR VERIFICATION OF THE FACT WHETHER BORROWINGS WERE MADE TO PARTLY DISCHARGE THE DEBT IN ITA NO. 4753(DEL)/2009 41 RESPECT OF SHRI R.P. MITTAL WERE NOT PRODUCED. SUBSTANTIAL PART OF THE MONEY RAISED FROM SHRI R.P. MITTAL HAS BEEN UTI LIZED FOR ACQUISITION OF SHARES OF THE HQR. THUS NO SPECIFIC CASE WAS MADE OUT REGARDING THE NEXUS. IT WAS FURTHER MENTIONED THAT ON PERUSA L OF ACCOUNT OF SHRI R.P. MITTAL IT IS FOUND THAT THE SAME HAS BEEN DEBIT ED BY A SUM OF RS. 6 57 63 620/- FOR TRANSFER OF SHARES TO HIM. T HEREFORE THE CLAIM OF THE ASSESSEE IS FACTUALLY INCORRECT. 11.1 BEFORE US IT HAS BEEN SUBMITTED THAT NO Q UESTION WAS ASKED BY THE AO REGARDING DISALLOWANCE OF INTEREST. T HE FACTS ARE THAT THE ASSESSEE HAD RAISED LOANS OF ABOUT RS. 9.65 CRO RE FROM SHRI R.P. MITTAL ON WHICH INTEREST WAS NOT CHARGED. A SUM OF AB OUT RS. 8.80 CRORE WAS DEPOSITED WITH THE HQR ON WHICH INTEREST OF A BOUT RS. 90.00 LAKH WAS EARNED. AS SHRI MITTAL WAS DEMANDING THE RETU RN OF MONEY BORROWINGS HAD TO BE MADE FROM OUTSIDERS ON WHICH INTERE ST OF ABOUT RS. 22.00 LAKH WAS PAID. THEREFORE THERE IS A NEXUS BET WEEN INTEREST PAID AND INTEREST RECEIVED. IN REPLY THE LD. DR R ELIED ON THE ORDER OF THE LD. CIT(APPEALS). ITA NO. 4753(DEL)/2009 42 11.2 WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. SECTION 57(III) IS IN THE NATURE OF A RESIDUARY PROVISION PERMITTING THE DEDUCTION OF ANY OTHER EXPENDI TURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXP ENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNIN G SUCH INCOME. THIS SECTION IS ANALOGOUS TO SECTION 37(1) ALBEIT WITH A NARROWER AMBIT AS THAT PROVISION CONTAINS THE WORDS LAID OUT O R EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING S UCH INCOME AS AGAINST THE WORDS LAID OUT OR EXPENDED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF BUSINESS. THE PROVISION UNDER CONSIDERATION REQUIRES PROOF OF NEXUS BETWEEN EARNING OF INCOME AND THE EXPENDITURE. IN THE CASE OF T.S. KRISHNA VS. CIT (1973) 87 ITR 429 IT WAS HELD THAT PAYMENT OF WEALTH- TAX DID BEAR ANY DIRECT OR INCIDENTAL RELATI ONSHIP WITH EARNING OF DIVIDEND INCOME AND THEREFORE IT IS NOT DEDUC TIBLE IN COMPUTING INCOME UNDER THE RESIDUARY HEAD. IN THE CASE OF S ETH R. DALMIA VS. CIT (1977) 110 ITR 644 (S.C.) ONE OF THE QUESTIO NS BEFORE THE COURT WAS WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE TRIBUNAL RIGHTLY REJECTED ASSESSEES CLAIM FOR DEDUCT ION OF INTEREST PAYMENT OF RS. 2 04 744? IT WAS MENTIONED THAT THE DIVIDEN DS RIGHTS BONUSES ETC. WERE HELD BY THE BANK FOR THE BENEFIT OF THE ASSESSEE AFTER THEY WERE ITA NO. 4753(DEL)/2009 43 DECLARED. IF THE ASSESSEE WOULD NOT HAVE PAID THE INTEREST ON THE LOAN RAISED BY HIM HE WOULD NOT HAVE BEEN ABLE TO G ET THE DIVIDEND INCOME. THUS THERE WAS A DIRECT NEXUS BETWEEN EARNI NG OF DIVIDEND INCOME AND EXPENDITURE OF RS. 2 04 744/-. IN THIS VIEW TH E EXPENDITURE WAS DEDUCTIBLE IN COMPUTING THE INCOME. IN THE CASE OF SMT. PADMAVATI JAIKRISHNA (1987) 166 ITR 176 (S.C) IT WA S HELD THAT INTEREST PAID ON LOAN TAKEN FOR DISCHARGE OF INCOME-TAX AND WEALT H-TAX LIABILITY AND TO PAY ANNUITY DEPOSIT WAS NOT DEDUCTIBLE U/S 57(III ). THE HONBLE COURT REFERRED TO ITS OWN DECISION IN THE CASE OF C IT VS. RAJENDER PRASAD MOODY (1978) 115 ITR 519 IN WHICH IT WAS HEL D THAT THE PURPOSE OF THE EXPENDITURE IS A RELEVANT FACTOR IN DETERMIN ING THE DEDUCTIBILITY OF EXPENDITURE U/S 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. IN THIS CONNECTION IT WAS ALSO MENTION ED THAT SO FAR AS ANNUITY DEPOSIT IS CONCERNED THE TRIBUNAL AND T HE HIGH COURT HAVE COME TO THE RIGHT CONCLUSION THAT THE DOMINANT PURPO SE WAS NOT TO EARN INCOME BY WAY OF INTEREST BUT TO MEET STATUTO RY LIABILITY OF MAKING THE DEPOSIT. THE TEST TO APPLY IS THAT THE EXPEN DITURE SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EAR NING THE INCOME. THE FACT FINDING AUTHORITIES HAVE COME TO THE CONCLU SION THAT NO PART OF THE EXPENDITURE CAME WITHIN THE PURVIEW OF SECTION 57(III). RELYING ON THIS ITA NO. 4753(DEL)/2009 44 DECISION IT WAS HELD THAT THE ASSESSEES APPE AL HAS TO FAIL. IN THE CASE OF JASWANTRAI P.MEHTA VS. CIT (1991) 192 ITR 5 77 IT WAS HELD THAT INTEREST PAID ON LOAN TAKEN FOR THE PURPOSE OF EARNING INCOME WAS DEDUCTIBLE BUT INTEREST ON INTEREST PAID WAS NO T DEDUCTIBLE. IN THIS CONNECTION IT WAS MENTIONED THAT WHETHER INTE REST PAYABLE ON INTEREST IS PART OF THE SAME TRANSACTION AND WHETHER IT BECO MES PART OF PRINCIPAL AMOUNT BORROWED UNDER THE PRINCIPLES OF ACCOUNTAN CY IS OF NO CONSEQUENCE. 11.3 THE FACTS CANVASSED BY THE LD. COUNSEL IN OUR CASE ARE THAT THE ASSESSEE HAD RAISED INTEREST-FREE LOANS FROM S HRI R.P. MITTAL. THE MONEY WAS ADVANCED TO HQR AND INTEREST INCOME WAS EARNED ON THE ADVANCES. THE LOANS TAKEN FROM SHRI R.P. MITTAL WERE DISCH ARGED BY REPAYING THE LOAN FROM BORROWED FUNDS FROM OTHERS RAISED SU BSEQUENTLY. THE REASON IS STATED TO BE THAT SHRI MITTAL WAS DEMAND ING RETURN OF HIS LOAN. SEEN IN THIS CONTEXT THE DOMINANT PURPOSE OF BORROWINGS FROM OTHERS WAS TO RETURN THE LOAN TAKEN FROM SHRI R.P. MIT TAL. THIS WAS DONE TO DISCHARGE A PRE-EXISTING CONTRACTUAL LIABILITY. THE FUNDS WERE NOT BORROWED FROM OTHERS TO INVEST THEM FOR THE PURPO SE OF EARNING THE INCOME. THUS ALTHOUGH THE BORROWINGS FROM OTH ERS MAY HAVE A REMOTE ITA NO. 4753(DEL)/2009 45 CONNECTION WITH THE LENDING TO THE HQR THOUG H REPUDIATED BY THE REVENUE THE DOMINANT PURPOSE OF THE BORROWINGS WAS NOT TO EARN INTEREST INCOME. THEREFORE IT CANNOT BE SAID T HAT MONEYS WERE BORROWED FROM OTHERS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING INTEREST INCOME FROM THE HQR. THUS T HE PROVISION CONTAINED IN SECTION 57(III) IS NOT APPLICABLE TO THE FACTS O F THE CASE AS SUBMITTED TO US AND BEFORE THE LOWER AUTHORITIES. THEREFORE I T IS HELD THAT THE LD. CIT(APPEALS) WAS RIGHT IN DISALLOWING THE EX PENDITURE IN COMPUTING INTEREST INCOME TAXABLE UNDER THE RESIDUARY HEA D. 12. IN THE RESULT THE APPEAL IS PARTLY ALLOWED . THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30 APRIL 2010. SD/- SD/- (RAJPAL YADAV) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 30.04.2010. SP SATIA COPY OF THE ORDER FORWARDED TO:- 1. MORAL TRADING & INVESTMENT LTD. NEW DELHI. 2. DCIT CIRCLE 5(1) NEW DELHI. 3. CIT(A) 4. CIT NEW DELHI. 5. DR ITAT NEW DELHI. ASSISTANT REGISTRA R.