THE DY CIT CC-3, Mumbai v. M/S. KILLICK NIXON LTD, Mumbai

ITA 883/MUM/2005 | 2001-2002
Pronouncement Date: 06-04-2010 | Result: Allowed

Appeal Details

RSA Number 88319914 RSA 2005
Assessee PAN AAACK8526A
Bench Mumbai
Appeal Number ITA 883/MUM/2005
Duration Of Justice 5 year(s) 2 month(s) 2 day(s)
Appellant THE DY CIT CC-3, Mumbai
Respondent M/S. KILLICK NIXON LTD, Mumbai
Appeal Type Income Tax Appeal
Pronouncement Date 06-04-2010
Appeal Filed By Department
Order Result Allowed
Bench Allotted C
Tribunal Order Date 06-04-2010
Date Of Final Hearing 15-04-2015
Next Hearing Date 15-04-2015
Assessment Year 2001-2002
Appeal Filed On 03-02-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI R.V. EASWAR SENIOR VICE-PRESIDENT AN D SHRI T.R. SOOD ACCOUNTANT MEMBER I.T.A.NO. 746/MUM/2005 ASSESSMENT YEAR: 2001-02 M/S. KILLICK NIXON LTD. BASEMENT COMMERCIAL UNION HOUSE 9 WALLACE STREET FORT MUMBAI 400 001. PAN: AAACK 8526 A VS. DY. COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE-3 9 TH FLOOR CGO BUILDING MUMBAI 400 020. (APPELLANT) (RESPONDENT) I.T.A.NO. 883/MUM/2005 ASSESSMENT YEAR: 2001-02 DY. COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE-3 9 TH FLOOR CGO BUILDING MUMBAI 400 020. VS. M/S. KILLICK NIXON LTD. BASEMENT COMMERCIAL UNION HOUSE 9 WALLACE STREET FORT MUMBAI 400 001. PAN: AAACK 8526 A (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY KOTHARI REVENUE BY : SHRI YESHWANT U. CHAVAN O R D E R PER T.R. SOOD AM: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENU E ARE DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) CENTRAL-I MUMBAI DATED 25.11.2004 AND RELATE TO THE ASSESSMENT YEAR 2001-02. THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER. ITA NO.746/M/05 (ASSESSEES APPEAL): 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1 .(A) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF SHORT TERM CAPITAL L OSS OF RS. 46 40 00 000/- ON SALE OF SHARES OF METTERHORN INVE STMENTS LTD. MONTBLANC INVESTMENTS LTD. FIRCREST INVESTMENTS LT D. AND GALACTICA INVESTMENTS LIMITED. (B) THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF LONG TERM CAPITAL LOSS OF RS. 92 41 224/- ON SALE OF SHA RES OF MATTERHORN ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 2 INVESTMENTS LTD. FIRCREST INVESTMENTS LTD. AND GAL ACTICA INVESTMENTS LIMITED. (C) THE LEARNED CIT(A) HAS ERRED IN CONCLUDING THAT SALE OF SHARES OF KILLICK HALCO LTD. RESULTED IN A SHORT TERM CAPITAL GAIN OF RS. 80 80 640/-. HE OUGHT TO HAVE HELD THAT THE SAID SALE RESULTED IN A SHORT TERM CAPITAL LOSS OF RS. 3 09 26 000/-. (D) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF LONG TERM CAPITAL LOSS ON SALE OF SHARES OF PELICAN PAINTS LT D. OF RS. 1 68 37 861/-. (E) THE LD.CIT(A) HAS ERRED IN CONFIRMING THAT INVE STMENT IN SHARES THEIR SALES AND LOAN TRANSACTIONS WERE SHAM TRANSACTIONS. 2. THE LD. CIT(A) HAS ERRED IN ASSESSI NG THE LONG TERM CAPITAL GAIN ON ACQUISITION OF MORTGAGED LAND BY VYASA BANK IN PURS UANCE TO THE AGREEMENT DATED 4.4.1996. WITHOUT PREJUDICE TO ABOVE: (A) THE LD.CIT(A) HAS ERRED IN NOT HOL DING THAT THE REFERENCE MADE BY THE ASSESSING OFFICER TO THE VALUATION CELL U/S.55A(A) WAS NOT IN ACCORDANCE WITH LAW. (B) THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISAL LOWANCE OF RUPEES ONE CRORE BEING THE AMOUNT OF EXPENSES INCURRED FOR THE EVICTION OF UNAUTHORIZED OCCUPANTS OF THE LAND. IT IS SUBMITTED THAT THE SAID AMOUNT CONSTITUTED AN EXPENDITURE FOR THE IMPROVEMENT OF T HE PROPERTY IN QUESTION AND THEREFORE OUGHT TO HAVE BEEN ALLOWED. (C) THE LD.CIT(A) HAS ERRED IN DIRECTING THAT WHILE COMPUTING CAPITAL GAINS FAIR MARKET VALUE OF THE PROPERTY AS ON APRIL 01 1 981 SHOULD BE TAKEN AS DETERMINED BY DISTRICT VALUATION OFFICER AND NOT AS DETERMINED IN THE VALUATION REPORT FURNISHED BY THE APPELLANTS. 3. THE LD.CIT(A) HAS ERRED IN NOT ALLOWING RS.10.5 CRORES BEING THE AMOUNT OF LOSS SUFFERED BY THE APPELLANTS ON ACCOUNT OF IN VOCATION OF GUARANTY AGAINST THEM AND CONSEQUENT TAKE OVER OF THE MORTGA GED LAND BY THE VYSA BANK. 4. THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISAL LOWANCE OF SECRET COMMISSION OF RS. 1 15 25 000/-. THE SAID EXPENDITU RE WAS INCURRED I THE NORMAL COURSE OF BUSINESS FOR FURTHERANCE OF COMPAN YS COMMERCIAL INTEREST. 5. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALL OWANCE OF INTEREST AMOUNTING TO RS. 1 61 33 800/-. IT IS RESPECTFULLY SUBMITTED THAT THE INTEREST FREE LOANS WERE GIVEN BY THE APPELLANTS OU T OF THEIR OWN RESOURCES. 6. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE LEVY I NTEREST U/S. 234B & 234C OF THE INCOME-TAX ACT 1961. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 3 3. AS REGARDS GROUND NO.1 IS CONCERNED THE A.O. DU RING ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD DECLARED LONG TERM CAPITAL GAINS IN THE RETURN AMOUNTING TO RS. 49 73 09 059/- AGAINST WHIC H THE ASSESSEE COMPANY HAD CLAIMED CAPITAL LOSS (LONG TERM) AT RS.1 45 90 951/ - AND SHORT TERM CAPITAL LOSS AT RS. 49 49 26 000/-. THE ASSESSING OFFICER HAD DOUBTS T HAT LOSSES HAVE SIMPLY BEEN GENERATED TO AVOID TAX LIABILITY THEREFORE HE MAD E DETAILED ENQUIRIES IN RESPECT OF THESE CAPITAL LOSES. HE NOTED THAT ASSESSEE COMPANY WHICH WAS A CASH STARVED COMPANY FINALIZED AN IDEA OF INVESTING OF A SUM OF RS. 48 CRORES IN FOUR COMPANIES IN A PERIOD OF 3 DAYS FROM 28.3.2000 TO 30.03.2000 AS PE R THE DETAILS GIVEN BELOW: SR. NO. NAME OF THE PARTY AMOUNT (INCLUDING PREMIUM OF RS.140) NO. OF NEW SHARES SUBSCRIPTION (DURING THE F.Y.1999-2000 31.3.92 (100% HOLDING 31.3.90 (100% HOLDING) TOTAL HOLDING OF KILLICK NIXON LTD. CAPITAL % HOLDING 1. MATTERHORN INVESTMENTS PVT.LTD. 12.03 CR. 800 000 149 998 2 950 000 100% 2. MONTBLANC INVESTMENTS PVT.LTD. 12.03 CR. 800 000 149 998 2 950 000 100% 3. FIRCREST INVESTMENTS PVT.LTD. 12.03 CR. 800 000 149 998 2 950 000 100% 4. GALACTICA INVESTMENT LTD. 12.03 CR. 800 000 149 998 2 950 000 100% 48.12 CR. 4. AS NOTED FROM THE ABOVE CHART THESE INVESTMENTS WERE MADE IN THE COMPANIES WHICH WERE ALREADY 100% OWNED BY THE COMP ANY. THE ASSESSING OFFICER FURTHER NOTED THAT AS PER THE SUBMISSION OF THE ASS ESSEE THE MONEY CAME FROM THE FOLLOWING ENTITIES: 1 GKAK RATHI HUF 34.87 CRORES (28/3 TO 30/3) 2 SUBAHU INVESTMENT LTD. 5.50 CRORES (28/3) 3. VIPLAV TRADING LTD. 1.30 CRORES (30/3) 4. KOSHA INVESTMENTS (BALANCES) 6.325 CRORES (29/3/00) 48.00 CRORES 5. IT MAY BE NOTED THAT THE MAIN PERSON IN ABOVE EN TITIES IS A PERSON NAMED SHRI G.K. RATHI WHO IN TURN HAVING THE CONCERNS BY THE NAME OF M/S. GEEKAY EXIM (INDIA) LTD. AND VIPLAY TRADING LTD. AND SABARA IM PEX LTD. IT WAS ALSO NOTED THAT HE IS THE SAME PERSON IN FAVOUR OF WHOM THE COMPANY HA D ISSUED A GUARANTEE FOR A LARGE ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 4 SUM WHICH WAS ULTIMATELY DEFAULTED AND COMPANY HAD TO SUFFER A HUGE LOSS WHICH FURTHER GENERATED DOUBTS IN THE MINDS OF THE ASSES SING OFFICER AND FURTHER ENQUIRIES WERE MADE. (THIS ASPECT IS DISCUSSED IN DETAIL IN G ROUND NO. 3 WHICH HAS BEEN ADJUDICATED IN LATER PARAGRAPHS). IN THIS RESPECT B ANK ACCOUNTS OF THESE SUBSIDIARY COMPANIES WERE ANALYSED AND THE DETAILS HAVE BEEN N OTED BY THE ASSESSING OFFICER AT PARAS 5.5. 5.5 THE ASSESSEES MONEY WAS THUS INVESTED IN THES E FOUR COMPANIES IN THEIR NEW ACCOUNTS OPENED IN GLOBAL TRUST BANK THE ACCOUNT OF KILLICK NIXON LTD AND ITS GROUP CONCERNS AND G K RATHI GROUP WERE ALREADY THERE. THE RELEVA NT BANK STATEMENT WHEREIN THE SHARE SUBSCRIPTION MONEY WAS DEPOSITED IN THE BANK ACCOUN T OF THESE SUBSIDIARY COMPANIES OF THE ASSESSEE IS REPRODUCED UNDER: (A) MONTBLANC INVESTMENT LTD. GLOBAL TRUST BANK LIMITED YOUR ACCOUNT UPDATE NARIMAN POINT MUMBAI DATE 03-04-2000 PAGE NUMBER 1 M/S MONTBLANC INVESTMENT LIMITED KILLICK HOUSE KILLICK ESTATE BAJI PASAL- KAR MARG CHANDIVALI MUMBAI MAHARASHTRA INDIA -400 072 ACCOUNT CATEGORY CURRENT ACCOUNT - GENERAL ACCOUNT NUMBER 2000101908 INR STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 DATE DETAILS CHEQUE NO. DEBITED CREDITED BALANCE 01-MAR B/F 0 28-MAR CASH DEP 10 000 10 000 28-MAR MICR CHEQUES CHARGES 100 9 900 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF FM KILLICK NIXON 10 375 000 37 884 900 30-MAR TRF TO KOSHA INVEST 479154 27 500 000 10 3 84 900 30-MAR TRF TO KOSHA INVEST 479155 10 375 000 9 90 0 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF TO KOSHA INVEST 479153 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF TO KOSHA INVEST 479151 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF TO KOSHA INVEST 479152 27 500 000 9 90 0 31-MAR L.F. CHARGES 9 800 PAGE TOTAL 120 375 200 120 385 000 9 800 THE ACCOUNT WAS OPENED FROM A CASH DEPOSIT OF RS.10 000/-. THE MONEY IN THIS BANK ACCOUNT CAME ON 30TH MARCH (12.03 CRORES) AND ON THE SAME DAY OF DEPOSIT WAS TRANSFERRED ALL TO M/S KOSHA INVESTMENT AND THE BALANCE LEFT AS ON 31.3.20 00 WAS RS 9 800/-. THE AMOUNT OF RS 10 000/- ALSO CAME FROM M/S KOSHA INVESTMENT LTD. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 5 (B) FIRCREST INVESTMENT PVT. LTD. GLOBAL TRUST BANK LIMITED YOUR ACCOUNT UPDATE NARIMAN POINT MUMBAI DATE 03-04-2000 PAGE NUMBER 1 M/S MONTBLANC INVESTMENT LIMITED KILLICK HOUSE KILLICK ESTATE BAJI PASAL- KAR MARG CHANDIVALI MUMBAI MAHARASHTRA INDIA -400 072 ACCOUNT CATEGORY CURRENT ACCOUNT - GENERAL ACCOUNT NUMBER 2000101906 INR STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 DATE DETAILS CHEQUE NO. DEBITED CREDITED BALANCE 01-MAR B/F 0 28-MAR CASH DEP 10 000 10 000 28-MAR MICR CHEQUES CHARGES 100 9 900 29-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 29-MAR TRF TO KOSHA INVEST 479051 27 500 000 9 90 0 29-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 29-MAR TRF TO KOSHA INVEST 479153 27 500 000 9 90 0 29-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 29-MAR TRF TO KOSHA INVEST 479052 27 500 000 9 90 0 29-MAR TRF FM PRO KILLICK NIX 27 500 000 27 509 9 00 29-MAR TRF TO KOSHA INVEST 479154 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 10 375 000 10 375 000 30-MAR TRF TO KOSHA INVEST 479055 10 375 000 9 90 0 31-MAR L.F. CHARGES 100 9 800 PAGE TOTAL 120 375 200 120 385 000 9800 THE AMOUNT WAS OPENED WITH A CASH DEPOSIT OF RS 10 000/-. THE MONEY IN THIS BANK ACCOUNT CAME ON 29TH MARCH (11 CRORES) AND 30TH MARCH (1.03 CRORE) AND ON THE SAME DAY OF DEPOSIT WAS TRANSFERRED TO M/S KOSHA INVESTMENT AND THE BALANCE LEFT WAS RS 9 800/- (C) MATTERHORN INVESTMENTS PVT LTD. GLOBAL TRUST BANK LIMITED YOUR ACCOUNT UPDATE NARIMAN POINT MUMBAI DATE 03-04-2000 PAGE NUMBER 1 M/S MONTBLANC INVESTMENT LIMITED KILLICK HOUSE KILLICK ESTATE BAJI PASAL- KAR MARG CHANDIVALI MUMBAI MAHARASHTRA INDIA -400 072 ACCOUNT CATEGORY CURRENT ACCOUNT - GENERAL ACCOUNT NUMBER 2000101905 INR STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 DATE DETAILS CHEQUE NO. DEBITED CREDITED BALANCE 01-MAR B/F 0 28-MAR CASH DEP 10 000 10 000 28-MAR TRF FM KILLICK NIXON 27 500 000 27 500 000 28-MAR MICR CHEQUE CHARGES 100 27 509 900 28-MAR TRF TO KOSHA INVEST 479101 27 500 000 9 90 0 28-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 28-MAR TRF TO KOSHA INVEST 479104 27 500 000 9 90 0 28-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 6 28-MAR TRF TO KOSHA INVEST 479103 27 500 000 9 90 0 28-MAR TRF FM PRO KILLICK NIX 27 500 000 27 509 9 00 28-MAR TRF TO KOSHA INVEST 479102 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 10 375 000 10 375 000 30-MAR TRF TO KOSHA INVEST 479105 10 375 000 9 90 0 31-MAR L.F. CHARTGES 100 9 800 PAGE TOTAL 120 375 200 120 385 000 9800 THE ACCOUNT WAS OPENED WITH A CASH DEPOSIT OF RS.10 000/-. THE MONEY IN THIS BANK ACCOUNT CAME ON 28TH MARCH (11 CRORES) AND 30TH MARCH (1.03 CRORE) ON THE SAME DAY OF DEPOSIT WAS TRANSFERRED ALL TO M/S KOSHA INVESTMENT AND THE BALANCE LEFT WAS RS 9 800/-. (D) M/S. GALACTICA INVESTMENTS PVT LTD. GLOBAL TRUST BANK LIMITED YOUR ACCOUNT UPDATE NARIMAN POINT MUMBAI DATE 03-04-2000 PAGE NUMBER 1 M/S MONTBLANC INVESTMENT LIMITED KILLICK HOUSE KILLICK ESTATE BAJI PASAL- KAR MARG CHANDIVALI MUMBAI MAHARASHTRA INDIA -400 072 ACCOUNT CATEGORY CURRENT ACCOUNT - GENERAL ACCOUNT NUMBER 2000101907 INR STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 DATE DETAILS CHEQUE NO. DEBITED CREDITED BALANCE 01-MAR B/F 0 28-MAR CASH DEP 10 000 10 000 28-MAR MICR CHEQUES CHARGES 100 9 900 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF TO KOSHA INVEST 479004 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF TO KOSHA INVEST 479003 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 27 500 000 27 509 900 30-MAR TRF TO KOSHA INVEST 479002 27 500 000 9 90 0 30-MAR TRF FM PRO KILLICK NIX 27 500 000 27 509 9 00 30-MAR TRF TO KOSHA INVEST 579001 27 500 000 9 90 0 30-MAR TRF FM KILLICK NIXON 10 375 000 10 375 000 30-MAR TRF TO KOSHA INVEST 479005 10 375 000 9 90 0 31-MAR L.F. CHARTGES 100 9 800 PAGE TOTAL 120 375 200 120 385 000 9800 PAGE TOTAL 120 375 200 120 385 000 9800 THE ACCOUNT WAS OPENED WITH A CASH DEPOSIT OF RS.10 000/-. THE MONEY IN THIS BANK ACCOUNT CAME ON 28TH MARCH (11 CRORES) AND 30TH MARCH (1.03 CRORE) ON THE SAME DAY OF DEPOSIT WAS TRANSFERRED ALL TO M/S KOSHA INVESTMENT AND THE BALANCE LEFT WAS RS 9 800/-. FROM THE ABOVE IT WILL BE SEEN THAT ALL THE FOUR CO MPANIES ARE HAVING THE SAME ADDRESS AS THE ASSESSEE HAS. THEIR ADDRESS IS STATED AS KILLICK H OUSE. THE MONEY RECEIVED FROM THE ASSESSEE WAS TRANSFERRED TO M/S KOSHA INVESTMENT (A PRACTICA L SISTER CONCERN OF THE ASSESSEE). 6. ACCORDING TO THE ASSESSING OFFICER THIS SUDDEN IDEA OF THE INVESTMENT WAS CLEARLY FLOATED JUST TO SET OFF THE CAPITAL GAINS O N SALE OF LAND BY MAKING INVESTMENT IN THESE FOUR NON-ACTIVE COMPANIES AT A PREMIUM OF RS. 140/- PER SHARE. HE FURTHER ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 7 NOTED THAT IN TURN THESE COMPANIES SUBSCRIBED INT O SHARES OF KOSHA INVESTMENT LTD. WHICH WAS A LOSS MAKING COMPANY. IT WAS ALSO NOTED THAT THE MONEY WHICH HAD GONE TO THE ACCOUNTS OF FOUR COMPANIES VANISHED WITHIN T WO DAYS. TO ASCERTAIN FURTHER DETAILS A STATEMENT OF ONE SHRI G.R. VORA WHO WAS THE DIRECTOR IN ALL THE FOUR COMPANIES WAS RECORDED UNDER SECTION 131 OF THE ACT . THE CONCLUSION REACHED BY THE ASSESSING OFFICER ON THE BASIS OF THIS STATEMENT HA VE BEEN EXTRACTED AT PARA 5.10 WHICH READS AS UNDER: FROM THIS STATEMENT IT IS VERY CLEAR THAT THE DIRE CTOR MR. VORA HAD NO ROLE TO PLAY IN THESE FOUR COMPANIES BEING A NOMINEE AND W AS MERELY FOLLOWING DIRECTIONS OF MANAGEMENT OF KILLICK NIXON LTD. THE HOLDING COMPANY OF THESE FOUR INVESTMENT COMPANY AN D HE HAS ALSO STATED THE ACTIVITIES WERE VERY NOMINAL IN NATURE ALSO AS NON E OF THESE COMPANIES WERE HOLDING ANY VALUABLE ASSET THAT WOULD ATTRACT INVES TMENT AT A PREMIUM. SO THESE COMPANIES CAN BE MERELY CALLED AS A VEHICLE U SED BY M/S.KILLICK NIXON LTD. TO SHOW INVESTMENT AND IT IS ALSO A CONFIRMED FACT NOW THAT THE INSTRUCTIONS OF FURTHER INVESTMENT IN KOSHA INVESTM ENT LTD. WAS ALSO OF THE MANAGEMENT OF KILLICK NIXON LTD. SO IT CAN BE SAF ELY CONCLUDED THAT THERE WERE FRONT COMPANIES WHICH WERE USED AS A VEHICLE F OR INVESTMENT IN LOSS MAKING KOSHA INVESTMENT LTD. SO THAT A DIRECT NEXU S MAY NOT BE APPARENTLY SEEN BETWEEN KILLICK NIXON LTD. AND KOSHA INVESTME NT LTD. AND ONE MORE IMPORTANT THING TO OBSERVE HERE IS THAT THE DIRECTO R IS STILL UNAWARE OF THE STATED TO BE PRESENT HOLDER OF SHARES OF THESE FOUR INVESTMENT COMPANIES (M/S.SHREE RADHA FINANCIAL SERVICES PVT. LTD.). TH E DIRECTOR HAS STATED THE ADDRESS OF THIS PARTY WAS TAKEN FROM MANAGEMENT OF M/S. KILLICK NIXON LTD. WHICH IMPLIES THAT NO REPRESENTATIVE OF SHREE RADHA FINANCIAL SERVICES PVT. LTD. EVER APPEARED INSPITE OF HOLDING MORE THAN 99% SHAR ES OF THIS COMPANY. THIS LEADS TO A DOUBT THAT EVEN THE SHARE TRANSACTIONS THAT IS THE SALE OF SHARES IS A DUBIOUS ONE AND IS DISCUSSED IN THE LATER PARAGRAPH S. 7. WHILE LOOKING INTO SECOND STEP OR THE NEXT LOG O F THE INVESTMENT IN M/S. KOSHA INVESTMENTS LTD. IT WAS NOTICED THAT IN TUR N RETURNED THE SHARE APPLICATION MONEY TO THE FOLLOWING PARTIES: SR.NO. NAME AMOUNT 1. SNOWCHEM INDIA LTD. 110 000 000 2. KILLICK NIXON LTD. 122 025 000 3. GOPAL KRISHNA ANUJKUMAR RATHI HUF 89 00 0 000 4. SUBAHU INVESTMENTS PVT.LTD. 113 100 000 5. SABARA IMPEX LIMITED 46 625 000 6. SHASHAK NOBLE METALS LTD. 6 500 000 7. GEEKAY EXIM PVT. LTD. 7 500 000 8. STALLION INVESTMENTS PVT. LTD. 7 500 000 TOTAL 502 250 000 ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 8 8. THUS FOUR SUBSIDIARY COMPANIES MATTERHORN INVET MENTS LTD. FIRCREST INVESTMENTS LTD. GALATICA INVESTMENTS LTD. AND MON TLBLANC INVESTMENTS LTD. HAD MADE INVESTMENTS IN ANOTHER COMPANY KNOWN AS KOSHA INVESTMENTS LTD. AND KOSHA INVESTMENTS LTD. RETURNED THE MONEY TO VARIOUS PE RSONS NAMELY (1) ASSESSEE I.E. KILLICK NIXON LTD. (2) SABARA IMPEX LTD. (3) GEEK AY EXIM PVT. LTD. (4)SUBAHU INVESTMENTS (5) SNOWCEM INDIA LTD. (6) SHASHAK NOB LE METALS LTD. (7) STALLION INVESTMENTS PVT. LTD. (8) GOPAL KRISHNA ANUJKUMAR RATHI HUF. THE ASSESSING OFFICER WONDERED HOW THE SUM OF RS. 4.66 CRORES COULD BE GI VEN TO SABARA IMPEX LTD. AND ANOTHER SUM OF RS. 0.75 CRORES TO M/S. GEEKAY EXIM PVT. LTD. WHO WERE MAINLY RESPONSIBLE FOR DEPRIVING THE ASSESSEE OF ITS HUGE LAND THROUGH GUARANTEE ISSUED IN THEIR FAVOUR VYASYA BANK LTD. WHICH WAS ULTIMATE LY SETTLED THROUGH SELLING OF LAND. THEN IT WAS NOTED THAT M/S. KOSHA INVESTMENTS LTD. WHO BECAME FLUSH WITH MONEY BUT NOTHING FRUITFUL HAPPENED AND THE MONEY VANISH ED FROM ITS ACCOUNT ALSO. FOR THIS THE ASSESSING OFFICER HAD EXTRACTED THE COPY OF THE BANK ACCOUNT OF KOSA INVESTMENT LTD. WITH GLOBAL TRUST BANK LTD. WHICH READS AS UN DER: GLOBAL TRUST BANK LIMITED YOUR ACCOUNT UPDATE NARIMAN POINT MUMBAI DATE 03-04-2000 PAGE NUMBER 1 M/S. KOSHA INVESTMENTS LIMITED BLOCK NO. 19 ST FLOOR DHANRAJ MILLS COMPOUND SITARAM JADHV ROAD MUMBAI MAHRASHTRA INDIA -400 072 ACCOUNT CATEGORY CURRENT ACCOUNT - GENERAL ACCOUNT NUMBER 2000101644 INR STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 DATE DETAILS CHEQUE NO. DEBITED CREDITED BALANCE 28 MAR CASH DEP 900 000 901 696.69 28 TH MARCH TRF FM MTTERHORN 27 500 000 28 401 696.69 28 TH MARCH TRF TO GKAK RATHI 330768 27 500 000 901 696 .69 28 TH MARCH TRF FM MATTERHORN 27 500 000 28 401 696.69 28 TH MARCH TRF TO SUBAHU INVEST 330770 27 500 000 901 696.69 28 TH MARCH TRF FM MTTERHORN 27 500 000 28 401 696.69 28 TH MARCH TRF TO GKAK RATHI 330767 27 500 000 901 696 .69 28 TH MARCH DD REALISED 50 000 951 696.69 28 TH MARCH TRF FM MTTERHORN 27 500 000 28 4511 696.69 28 TH MARCH TRF TO SUBAHU NVEST 330769 27 500 000 951 6 96.69 29 TH MARCH CASH DE 1 000 000 1 951 696.69 ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 9 29 TH MARCH UNDER TRNS.DAULAT EXIM 330763 1 40 000 551 696.69 29 TH MARCH TRFF FM FIRCREST 27 500 000 28 051 696.6 9 29 TH MARCH TRF TO SUBAHU INVEST 330751 27 500 000 551 696.69 29 TH MARCH TRF FM FIRCREST INVES 27 500 000 28 051 696 .69 29 TH MARCH TRF TO SUBAHU 330752 27 500 000 551 696.69 29 TH MARCH TRF TO FIRCREST INVES 27 500 000 28 051 696 .69 29 TH MARCH TRF TO SUBAHU 330753 27 500 000 551 696.69 29 TH MARCH CASH DEP 800 000 1 351 696.69 29 TH MARCH TRF TO SUBAHU 700 000 2 051 696.69 29 TH MARCH CASH DEP 500 000 2 551 696.69 29 TH MARCH SOURABH 330764 500 000 2 051 696.69 29 TH MARCH SOURABH 330766 2 000 000 51 696.69 30 TH MARCH TRF FM GALACHITA INVEST 27 500 000 27 551 696.69 30 TH MARCH TRF TO GK RATHI 330772 21 000 000 6 551 696 .69 30 TH MARCH TRF TO SASHAK NBLE MET 330771 6 500 000 51 696.69 30 TH MARCH TRF FM GALACIATA INES 27 500 000 27 551 69 6.69 30 TH MARCH TRF TO SABARA IMPEX 330773 27 500 000 51 69 6.69 30 TH MARCH TRF FM GALACIATA INES 27500000 (XI) 27 551 696.69 30 TH MARCH TRF TO SABARA IMPEX 330774 19 125 000( XI) 8 426 696.69 30 TH MARCH TRF TO GK RATHI 330775 8 375 000(XI ) 51 696.69 30 TH MARCH TRF FM GALACTICA 27 500 000 27 551 696.69 30 TH MARCH TRF TO VIPLAV TRADING 330776 27 500 000 51 696.69 30 TH MARCH TRF FM MOUNTBLANC 27 500 000(X 2) 27 551 696.69 30 TH MARCH TRF FM MOUNTBLANC 10 375 000(X 2) 37 926 696.69 30 TH MARCH TRF TO VIPLAV TRADING 330777 12 500 000( X2) 25 426 696.69 30 TH MARCH TRF TO GK RATHI 330778 25 375 000(X 2) 51 696.69 30 TH MARCH TRF FM MATTERHORN 10 375 000 10 426 696.69 30 TH MARCH TRF TO MOUNTBLANC 27 500 000 37 926 696.69 30 TH MARCH TRF TO KLLCK NIXON 330779 37 87 5000 51 69 6.69 30 TH MARCH TRF FM FIRCREST INVEST 10 375 000 10 426 696.69 30 TH MARCH TRF FM MOUNTBLANC 27 500 000 37 926 696.69 30 TH MARCH TRF TO KILLICK NIXON 330780 37 875 000 51 6 96.69 30 TH MARCH TRF FM MOUNTBLANC 27 500 000(X 3) 27 551 696.69 30 TH MARCH TRF FM GALACTIICA 10 375 000(X 3) 37 926 696.69 30 TH MARCH TRF TO GK RATHI 330781 17 500 000( X3) 20 426 696.69 30 TH MARCH TRF TO KILLICK NIXON 330782 17 875 000(X 3) 2 551 696.69 30 TH MARCH TRF FM GK AK RATHI 46 000 000 48 551 696.6 9 30 TH MARCH TRFTO SNOWCEM INDIA 330784 46 000 000 2 551 696.69 30 TH MARCH TRF TO SUBAHU 46 000 000 48 551 696.69 30 TH MARCH TRF TO SNOWCEM INDIA 330785 46 000 000 2 55 1 696.69 30 TH MARCH TRF TO SUBAHU 39 000 000 8 451 696.69 30 TH MARCH TRF TO KILLICK NIXON 330791 3 400 000 5 051 696.69 30 TH MARCH TRF TO GEEKAY EXIM 330792 2 500 000 2 551 6 96.69 30 TH MARCH TRF FRM CONCEPT COMM 2 500 000 5 051 696.69 30 TH MARCH TRF TO STALLION 330795 2 500 000 2 551 696 .69 ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 10 INVEST 30 TH MARCH TRF FM CONCEPT COMMU 2 500 000 5 051 696.69 30 TH MARCH TRF TO STALLLION INVET 330794 2 500 000 2 551 696.69 30 TH MARCH TRF FM CONCEPT COMMU 2 500 000 5 051 696.69 30 TH MARCH TRF TO STALLLION INVET 300796 2 500 000 2 551 696.69 30 TH MARCH TRF FM CONCEPT COMMU 2 500 000 5 051 696.69 30 TH MARCH TRF TO STALLLION INVET 300793 2 500 000 2 551 696.69 30 TH MARCH TRF TO KILLICK NIXON 5 000 000 7 551 696.6 9 30 TH MARCH TRF TO GEEKAY EXIM 330787 5 000 000 2 551 6 96.69 30 TH MARCH TRF FM GK RATHI 23 000 000 25 551 696.69 30 TH MARCH TRF TO SNOWCEM INDIA 330786 18 000 000 7 55 1 696.69 30 TH MARCH TRF FM GK AK RATHI 20 000 000 27 551 696.6 9 30 TH MARCH TRF TO KILLICK NIXON 330797 20 000 000 7 55 1 696.69 30 TH MARCH KOPSHA 330783 2 500 000 5 051 696.69 30 TH MARCH 0220357/BILL NO.10032 68 5 051 628.69 30 TH MARCH DD REALISED 100 000 5 151 626.69 31ST MARCH KILLICK 330798 5 00 000 151 628.69 31 ST MARCH LF CHARGES 400 151 628.69 9. ON THE BASIS OF THE ABOVE BANK ACCOUNT IT WAS CO NCLUDED BY THE ASSESSING OFFICER AT PARA 5.19 AS UNDER: FROM THE ABOVE IT IS CLEAR THAT EVERY DAY THE MON EY WHICH WAS INVESTED BY KILLICK NIXON LTD. WENT TO THE FOLLOWING AS BELO W: (1) ON 28 TH MARCH 11 CRORES INVESTED BY KILLICK NIXON LTD. WEN T TO GK RATHI AND SUBAHU INVESTMENTS LTD. R. 5.5 CRORES EA CH THROUGH KOSHA INVESTMENTS LTD. (2) ON 29 TH MARCH 11 CRORES INVESTED BY KILLICK NIXON LTD. WE NT TO SUBAHU INVESTMENTS LTD. THROUGH KOSHA INVESTMENTS L TD. (3) ON 30 TH MARCH 7.12 CRORES WENT TO GK RATHI (HUF) 4 CRORES TO VIPLAV TRADING LTD. 4.66 WENT TO SABARA IMPEX 0.65 CRORE S TO SHASHANK NOBLE METALS PVT. LTD. THROUGH M/S. KOSHA INVESTMEN TS LTD. 10. ULTIMATELY IT WAS FOUND THAT IN FACT NO ACTUAL SUBSTANTIAL CASH WAS INVOLVED AND IT WAS MERELY A CASE OF ENTRIES WHICH WERE ROU TED THROUGH RECEIPT OF CASH FROM GK RATHI AND OTHERS WHICH WAS INVESTED IN FOUR SUBS IDIARY COMPANIES I.E. MATTERHORN INVETMENTS LTD. FIRCREST INVESTMENTS LTD. GALATIC A INVESTMENTS LTD. AND MONTLBLANC INVESTMENTS LTD. THESE FOUR COMPANIES IN TURN INVES TED THE MONEY IN KOSHA INVESTMENTS WHICH EITHER DIRECTLY OR THROUGH OTHER ENTITIES ROUTED THE MONEY BACK TO ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 11 GK RATHI GROUP AND GROUP COMPANIES. THE FLOW CHART HAS BEEN MADE BY THE AO WHICH READS AS UNDER: GKAK RATHI (HUF)------ ----- KILLICK NIXON LTD. ------- ------MATTERHORN INVESTMENTS LTD. I I I I----------------------------------------- --------- ---------------- KOSHA INVETMENT LTD. SUBAHU INVESTMETS LTD.---------------- -------------------------------------------KILLICK NIXON LTD. I I I I I KOSHA INVESTMENTS LTD. ---------------- ------------------------------ MATTERHORN INVESTMEN TS LTD. FROM THE ABOVE IT IS CLEAR THAT FUNDS ON 28 TH MARCH WERE JUST A MERE ROUTING FROM TWO BANK ACCOUNTS OF GKAK RATHI (HUF) AND SUBAHU INVESTMENTS LTD. THUS THERE WAS NO FUND FLOW ONLY CHEQUES OF RECEIPTS AND PAYMENTS WERE PUT ON SAME DAY SQUARING UP ALL T HE ENTRIES SO THERE WAS IN FACT NO FUND FLOW AND RS.11 CRORES INVESTMEN T ON THIS DAY WAS JUST THERE ON THE FACE OF IT THROUGH MERE MOVEMENT OF CH EQUES WITHOUT ANY AC5TUAL FUNDS AVAILABLE WITH ANY OF THESE PARTIES I NVOLVED. 11. THE SAME PATTERN HAS BEEN FOLLOWED ON ALL THE 3 DAYS. ONLY THE NAMES OF THE COMPANY GOT CHANGED. IT WAS ALSO FOUND THAT OTH ER COMPANIES LIKE M/S. VIPLAV TRADING SUBAHU INVESTMENTS LTD. SABARA IMPEX LTD . SHASHANK NOBLE METAL LTD. WERE ROPED IN TO TRANSFER THE MONEY TO OBTAIN FROM KOSHA INVESTMENT LTD. TO GK RATHI GROUP. 12. EVEN THE RECEIPTS FROM GK RATHI (HUF) WAS DOUBT ED AND IT WAS OBSERVED BY THE AO IN PARAS 5.34 AND 5.35 WHICH READ AS UNDER: THE ASSESSEE HAS SHOWN THAT THE AMOUNTS FOR INVEST MENT MADE HAS BEEN RECEIVED FROM GKAK RATHI HUF AS A LONA/ADVANC E GIVEN TO THE PARTY AS ON 01.04.1999 WAS RS. 39 76 83 593/-. THE ABOVE IS ALSO CREATED IN THE BOOKS OF KILLICK NIXON LTD. BY JOUR NAL ENTRY AS EXPLAINED BELOW: IN THE F.Y 1997-98 THE OPENING BALANCE WAS RS. 1 5 0 000/- ONLY IN THE ACCOUNT OF GKAK RATHI (HUF) AND THEREBY PASSING JOU RNAL ENTRY ON 31.03.1998 A CLOSING BALANCE OF RS. 17 82 07 874/- WAS CREATED AS ON 31.03.1998. FURTHER IN THE YEAR 1998-99 THE JOURN AL ENTRY AS ON 31.03.1999 WAS PASSED OF RS. 23 69 43 162/- AND WIT H MINOR ADJUSTMENT A CLOSING BALANCE OF RS. 39 76 03 393.6 7 WAS ARRIVED AT. IN THESE ACCOUNTS THERE HAS BEEN NO PHYSICAL MOVEMENT OF FUNDS CUMULATIVE FOR BOTH THE PREVIOUS TWO YEARS I.E. 199 7-98 & 1998-99 OF MORE THAN RS. 1 CRORE. THUS IT CAN BE SAID THAT TH ESE WERE JOURNAL ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 12 ENTRIES PASSED TO SHOW A HEAVY BALANCE SHEET BY CRE ATING ASSET WITH EQUAL LIABILITIES IN THE BALANCE SHEET WITH NO MOV EMENT OF FUNDS. THUS THE LOAN/ADVANCE TO GKAK RATHI HUF AS ON 01.04.1999 WAS A SHAM ADVANCE GIVEN BY THE ASSESSEE WITHOUT ANY FUND INVO LVEMENT AND THE RECEIPTS FROM THIS PARTY IS THEREFORE TREATED TO BE OF THE SAME NATURE. THUS THE ASSESSEE CREATED AN INVESTMENT OF RS.48 CR ORES WITHOUT INVESTING A SINGLE PENNY AND BY MERELY ROTATING CHE QUES IN MORE THAN 10 DIFFERENT ACCOUNTS. THE ACTIVITY ALWAYS GOT COMP LETED ON THE SAME DAY OTHERWISE IT WOULD HAVE CREATED AN IMBALANCE IN BANK ACCOUNTS AND THEN IT WOULD HAVE REQUIRED SOME FUNDS BUT AS NO FU NDS WERE THERE DUE CARE WAS TAKEN TO SQUARE OFF THE TRANSACTION ON THE SAME DAY. THE ACTIVITY CAN BE DESCRIBED AS EACH PARTY INVOLVED IN THESE CIRCULAR TRANSACTION DEPOSITING A CHEQUE OF RECEIPT AND ANOT HER ONE OF PAYMENT OF EQUIVALENT AMOUNT SO THAT THEIR ACCOUNT NULLIFIE S ON THE SAME DAY. THE ABOVE CLEARLY IMPLIES THAT THE ASSESSEE HAS CRE ATED AN INVESTMENT OF RS.48 CRORES USING BOGUS TRANSFER AND THEREFORE THE INVESTMENT IN THE SHARE OF FOUR COMPANIES AND SUBSEQUENT TRANSACT IONS IS TREATED AS A SHAM TRANSACTION AND THUS THE INVESTMENT IS NOT TRE ATED AS ELIGIBLE FOR ANY DEDUCTION OR AS COST FOR COMPUTING ANY CAPITAL GAINS. 13. THE A.O. THEN WENT ON TO THE ANALYSIS OF THE VA LUATION OF SHARES IN THE SUBSIDIARY COMPANIES WHERE THE INVESTMENTS WERE MAD E AND SUCH VALUATION WAS ANALYSED ON NET ASSET VALUE BASIS AS WELL AS EARNIN G CAPACITY BASIS IN PARA 6 OF THE ASSESSMENT ORDER AND REACHED THE CONCLUSION THAT VA LUE OF SHARES IN THESE COMPANIES WAS LESS THAN RS.25 PER SHARE THEN WHY INVESTMENT W AS AT A PREMIUM OF RS. 140 TO 150 PER SHARE. TO A QUERY WHY SUCH HEAVY PRICE WAS MADE FROM THE ASSESSEE VIDE LETTER DATED 19.03.2004 THE ASSESSEE REPLIED AS UN DER: DURING THE FINANCIAL YEAR ENDED 31.03.2000 I.E. P REVIOUS YEAR WE INVESTED IN THE SHARES OF THE FOLLOWING COMPANIES O N THE LONG TERM BASIS AS FOLLOWS: SR. NO. DATE OF PURCHASE COMPANYS NAME NOS. AMOUNT (RS.) 1. 25.11.99 KILLICK HALCO LTD. 78 000 1 550 00 0 2. 28.03.00 MATTERHORN INVESTMENT LTD. 800 000 120 000 000 3. 28.03.00 FIREREST INVESTMENTS LTD. 800 000 120 000 000 4. 28.03.00 GALACTICA INVSTMENTS LTD. 800 000 120 000 000 5. 28.03.00 MONTBLAANC INVESTMENTS LTD. 800 000 12 0 000 000 6. 31.03.00 KILLICK HALCO LTD. 50 000 40 000 00 0 7. 28.06.99 ASSOCIATED CEMENT CO. LTD. 90 4 950 8. 28.10.99 JANATA SAHAKARI BANK LTD. 10 1 000 521 555 950 ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 13 AS ON 31.03.99 WE INVESTED THE AMOUNT OF RS. 78 84 0 624/- IN VARIOUS COMPANIES EQUITY SHARES PREFERENCE SHARES AND OTHE R GOVERNMENT SECURITIES. DURING THE YEAR ENDED WE FURTHER INVEST ED RS.52 15 55 950/- IN VARIOUS COMPANIES EQUITY SHARES THE DETAILS OF SA ME ARE GIVEN ABOVE. T THE END OF FINANCIAL YEAR ENDED 31.03.2000 WE INVESTED IN VARIOUS SECURITIES TOTALING R.600 395 574. THE BOARD OF DIRECTORS OF T HE COMPANY HAD INVESTED IN VARIOUS SECURITIES AT PRICE WHICH THEY CONSIDER ED AS A FAIR PRICE AFTER CONSIDERING VARIOUS BUSINESS FACTORS PROFITABILITY GROWTH OTHER BUSINESS CONSIDERATIONS ETC. THE REASON OR INVESTMENT A PREMIUM OF THE INVESTME NT COMPANIES. M/S. KILLICK NIXON LIMITED WERE ALREADY HOLDING 1 5 0 000 EQUITY SHARES OF THE FOLLOWING COMPANIES. 1. MATTERHORN INVESTMENT LTD. 2. FICREST INVESTMENT LTD. 3. GALACTICA INVESTMENTS LTD. 4. MONTBLANC INVESTMENTS LTD. DURING THE YEAR ENDED 31.03.2000 THE COMPANY HAD F URTHER INVESTED IN THE ABOVE COMPANIES AT A PREMIUM OF RS. 150/- PER S HARE. THE BOARD OF DIRECTORS DECIDED AND RESTRUCTURED THE ABOVE FOUR C OMPANIES TO STRENGTHEN THE FINANCES OF COMPANIES. THE COMPANY W ERE HOPEFUL TO REVIVE THE COMPANYS PROSPECTS IN THE BUSINESS. THE REFORE COMPANY HAS INVESTED AT A PREMIUM AS ALL OF THEM WERE 100% SUB SIDIARIES OF KILLICK NIXON LIMITED. 14. THE ASSESSING OFFICER AFTER ANALYZING THE ABOVE REPLY WAS OF THE VIEW THAT IT IS ONLY A SELF-SERVING REPLY AND NO JUSTIFICATION W AS THERE IN THE INVESTMENT. AO ALSO ANALYSED THE PROFITS/LOSS HISTORY OF KOSHA INVESTME NT LTD. WHEREIN THE FOUR SUBSIDIARY COMPANIES NAMELY - MATTERHORN INVESTMENT LTD. FICREST INVESTMENT LTD. GALACTICA INVESTMENTS LTD. AND MONTBLANC INVESTME NTS LTD. HAVE MADE INVESTMENTS WHICH READS AS UNDER: S.NO. ASST.YEAR BOOK PROFIT (RS.) SHARE CAPITAL (RS.) 1. 1996-97 2 520 638 9 000 000 2. 1997-98 - 13 122 926 9 000 000 3. 1998-99 - 41 765 143 9 000 000 4. 1999-00 - 28 848 980 9 000 000 5. 2000-01 - 76 902 385 18 360 000 15. FROM THE ABOVE THE ASSESSING OFFICER NOTED THAT THE ABOVE COMPANY WAS MERELY A FRONT COMPANY. THE ABOVE COMPANY WAS A NBF C AND SHOWING ONLY NON- ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 14 INVESTMENT BEARING ADVANCES AND INTEREST FROM NBFC ACTIVITY WAS LESS THAN RS. 2 LAKHS WHICH MAKES IT CLEAR THAT IT WAS MERELY A FRO NT COMPANY. IN ANY CASE INVESTMENT BY THE FOUR SUBSIDIARY COMPANIES - . MAT TERHORN INVESTMENT LTD. FICREST INVESTMENT LTD. GALACTICA INVESTMENTS LTD. AND MONTBLANC INVESTMENTS LTD IN THIS COMPANY WAS ONLY TO SIPHON OUT THE MONEY AND OTHERW ISE HAD NO JUSTIFICATION. 16. THE ASSESSING OFFICER FURTHER INVESTIGATED THE SALE OF SHARES IN THESE SUBSIDIARY COMPANIES TO M/S. SHREE RADHA FINANCIAL SERVICES PVT. LTD. QUESTIONS WERE ASKED FROM SHRI G.R. VORA DIRECTOR OF THE FOUR INV ESTMENT COMPANIES REGARDING SALES ALSO. FROM THE STATEMENT IT WAS CONCLUDED THAT NO EVIDENCE REGARDING SALE OF SHARES EVEN THE TRANSFER FORM ETC. WERE NOT PRODUCED. EVEN THE STATEMENT OF SHRI DEVI PRASAD BUDHIYA WHO REPRESENTED TO SHREE RADHA FINA NCIAL SERVICES PVT. LTD. WAS ALSO RECORDED. FROM HIS STATEMENT IT EMERGED THAT THE PU RCHASE OF THESE SHARES BY M/S. DIPLOMAT TRADING PVT. LTD. WAS FINANCED BY M/S. KIL LICK NIXON LTD. I.E. THE ASSESSEE COMPANY ITSELF THROUGH SHREE RDHA FINANCIAL SERVICE S P. LTD. 17. FROM THE ABOVE THE ASSESSING OFFICER CONCLUDED THAT THE WHOLE TRANSACTION OF PURCHASE OF SHARES IN FOUR SUBSIDIARY COMPANIES WHICH IN TURN INVESTED THE MONEY IN KOSHA INVESTMENTS LTD. FROM WHERE THE MO NEY WENT INTO SHRI G.K. RATHI GROUP AND OTHERS AND SHARES OF FOUR SUBSIDIARY COMP ANIES WERE SOLD TO SHREE RADHA FINANCIAL SERVICES PVT. LTD. AND M/S. DIPLOMAT TRAD ING PVT. LTD. WHICH IN TURN WERE FINANCED BY THE ASSESSEE COMPANY ITSELF WAS SHAM. H E CONCLUDED THAT NO REAL TRANSFER OR MONEY TOOK PLACE AND THESE WERE ONLY PAPER TRANS ACTIONS JUST TO CREATE SHORT TERM CAPITAL LOSSES IN THE HANDS OF THE ASSESSEE COMPANY . 18. THE ASSESSEE COMPANY HAD ALSO CLAIMED LOSSES FR OM THE SALE OF TRANSACTION OF SHARES OF M/S. KILLICK HALCO LTD. (KHL). THE ASSE SSEE COMPANY HAD CONVERTED ITS LOAN OF RS. 4 CRORES INTO SHARES AS ON 31 ST MARCH 2000 AT THE PRICE OF RS. 800 OPER SHARE (INCLUDING PREMIUM OF 700/-). IT WAS NOTICED THAT KHL WAS A LOSS MAKING COMPANY AS PER THE TABLE BELOW: ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 15 KILICK HALCO LTD: ASST.YEAR TURNOVER BOOK PROFIT PROFIT AS PER INCOME - TAX (ACCRUED) DEBIT BALANCE IN P&L ACCOUNT 1996-97 8 900 219 953 472 NIL NIL 1997-98 255 478 636 -2 144 590 - 2 115 984 542 641 1998-99 30 158 210 -3 135 222 -2 342 205 3 619 332 1999-00 11 105 058 -9 625 462 -28 681 050 13 225 7 94 2000-01 9 583 639 -9 304 145 -4 632 900 22 539 939 19. IT WAS FURTHER FOUND THAT KHL GAVE VRS TO 86 EMPLOYEES ON 16 TH JULY 1998 BY PAYING THEM A SUM OF RS.2.26 CRORES WHICH SHOWED THAT KHL WAS TRYING TO CLOSE ITS OPERATIONS. IT WAS ALSO NOTED THAT THE ASSESSEE -COMPANY HAD EARLIER PURCHASED SHARES OF KHL AT A PRICE OF RS. 19.87 AND THEREFO RE THERE WAS NO LOGIC FOR PURCHASE OF FURTHER 50 000 SHARES AT A PREMIUM OF RS.700/-. IT WAS ALSO NOTICED THAT IN THE ASSESSMENT YEAR 2001-02 KHL TRANSFERRED ALL ITS A CTIVITIES TO THE ASSESSEE COMPANY. NO EFFORT WAS MADE AT ANY POINT TO REVIVE THIS COMP ANY. THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE ASSESSEE WAS AWARE OF THE FORTH COMING CAPITAL GAINS AND THEREFORE AGAIN ARTIFICIAL LOSS WAS CREATED THROUG H JUST CONVERTING THE LOAN OF KHL INTO SHARES AT A HUGE PREMIUM. ON ENQUIRY IT WAS EX PLAINED AS UNDER: (A) DURING THE FINANCIAL YEAR ENDED 31.03.2000 WE PURCHASED 78 0000 EQUITY SHARES AT RS. 19.87 PER SHARE. FURTHER 50 00 0 EQUITY SHARES WERE ACQUIRED AT THE RATE OF RS.800/- PER SHARE. THE POS ITION OF EQUITY SHARES HOLDING WERE AS FOLLOWS: NO. OF EQUITY SHARES BEFORE 31.03.2000 2 22 000 ACQUIRED IN THE F.Y.1999-2000 @ RS.19.87 PER SHARE 78 000 ------------ 3 00 000 ====== AFTER ACQUIRING 3 00 000 EQUITY SHARES OF KILLICK H ALCO LTD. IT BECAME 100% SUBSIDIARY OF M/S. KILLICK NIXON LTD. KILLICK HALC O LTD. WERE SPECIALIZED IN THE MANUFACTURING OF FOLLOWING GOODS: 1. WATER WELL DRILLING RIGS 2. BLAST HOLE DRILLING MACHINES FOR QUARRY WORK/OPEN C AST MINES SUCH AS LIME STONE & COAL MINES. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 16 3. DOWN THE HOLE HAMMERS VIZ. VALVELESS MACH-44 AND MA CH-66 KILLICK HALCO LTD. WERE MAKING LOSSES. BUT AFTER C ONSIDERING ITS SPECIALIZATION OF THE ABOVE GOODS AND MOVEABLE AND IMMOVABLE PROPE RTY THE MANAGEMENT OF KILLICK NIXON LTD. DECIDED AND RESTRUCTURED THE FINANCE OF KILLICK HALCO LTD. THEREFORE KILLICK NIXON LTD. HAS ACQUIRED THE BAL ANCE 50 000 EQUITY SHARES AT THE RATE OF RS.800/- PER SHARE AFTER VERIFYING T HE FUTURE GROWTH AND REVIVAL OF COMPANYS FORTUNE IN THE NEAR FUTURE. AS THE MAN AGEMENT WAS CONFIDENT IN REVIVAL OF COMPANY AT THT TIME IT ACQUIRED ALL EQUITY SHARES OF KILLICK HALCO LIMITED. 20. ASSESSING OFFICER NOTICED THAT ON 25.11.1999 AS SESSEE ACQUIRED 78 000 SHARES AT RS. 19.87 PER SHARE AND ON 3.3.2000 THE SHARES WERE ACQUIRED AT RS. 800/- INCLUDING THE PREMIUM OF RS.700/- PER SHARE. THERE WAS NO CHANGE IN THE CIRCUMSTANCES BETWEEN THESE TWO DATES AND THEREFORE PREMIUM ITSELF WAS NOT JUSTIFIED WHILE INVESTIGATING THE SALE OF THESE SHARES IT WA S NOTICED THAT SHARES WERE SOLD TO SNOWCEM INDIA LTD. IN THIS BACKGROUND THE ASSESSIN G OFFICER DOUBTED THE WHOLE TRANSACTION AND DISALLOWED THE SHORT-TERM CAPITAL L OSS AND RATHER RECOMPUTED THE SALE AND PURCHASE PRICE VIDE PARA 9.2 OF HIS ORDER WHI CH READS AS UNDER: THE GENUINE VALUE OF THE SHARE THUS IS TREATED AS RS.19.87 PER SHARE AND THE BALANCE OF RS.780.13 PER SHARE IS TREATED AS A SHAM INVESTMENT AND SO FAR THE CAPITAL GAIN IS CALCULATED AT A COST OF 19.87 P ER SHARE. THIS IS ALSO DONE KEEPING IN MIND THAT THE SHARES HAVE BEEN TRANSFERR ED TO SNOWCEM INDIA LTD. A GROUP COMPANY UNDER THE SAME MANAGEMENT WHO HAVE ALSO SQUARED UPON THEIR LOANS AS SALE CONSIDERATION OF THESE SHA RES. THE SHORT TERM CAPITAL GAIN IS RECOMPUTED AS UNDER: 1 28 000 SHARES SOLD AT RS.83 PER SHARE RS.1 06 24 000 LESS: COST OF ACQUISITION 1 28 000 AT RS.19.87 PER SHARE RS. 25 43 360 ------------------ - RS. 80 80 640 ========== THE SAME IS CONSIDERED AS SHORT TERM C APITAL GAIN FOR THE RELEVANT YEAR. 21. ASSESSEE HAD ALSO CLAIMED LONG TERM CAPITAL LOS S AMOUNTING TO RS.1 68 37 861/- ON SALE OF SHARES OF PELICAN PAINT S LTD. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASS ESSEE HAD SOLD 42 500 SHARES OF PELICAN PAINTS LTD. AT RS. 10 PER SHARE. THE SAME WERE ACQUIRED AT THE FOLLOWING PRICE. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 17 F.Y. PRICE/SHARE (RS.) NO. OF SHARES PRICE (RS.) 1998-1999 580 2250 1 305 000 1999-2000 375 40 250 15 093 750 THE ASSESSING OFFICER RAISED A QUERY WHY THE VALUE OF THE LAND AND BUILDINGS AT AURANGABAD BELONGING TO PELICAN PAINTS LTD. WAS NOT CONSIDERED WHILE SELLING THE SHARES. IT WAS POINTED OUT THAT SINCE THE LAND WAS LEASEHOLD LAND THE SAME WAS NOT CONSIDERED AND THE BUILDINGS WERE VERY OLD. IN FAC T THE FOLLOWING REPLY WAS GIVEN: NOTE ON PELICAN PAINTS LTD. THE SHARE OF M/S. PELI CAN PAINTS LTD. HAS BEEN VALUED AS PER AVERAGE OF VALUATION AS PER NET VALUE AND PR ICE EARNING VALUE BASIS. SINCE THE COMPANY HAS MADE LOSSES IN THE LAST TWO YEARS THE VALUE AS PER PECV BASIS IS TAKEN AT NIL. THE LAND IS LEASEHOLD LAND FROM MIDC. FURTHER THE BUILDING IS VERY OLD AT ITS WDV AS RS. 5 46 761/-. THEREFORE THE FAI R VALUE OF SHARES AT NIL IS PROPER THE ASSESSING OFFICER AFTER CONSIDERING THESE SUBM ISSIONS OBSERVED AS UNDER: THE ASSESSEE COMPANY WHILE ARRIVING AT A FAIR MARK ET VALUE HAS NOT TAKEN INTO ACCOUNT THE MARKET VALUE OF LAND & BUILDING (W HICH WAS INCIDENTALLY DONE FOR KILLICK HALCO LTD.). THEY HAVE TRANSFERRED THE SAME AT A NOMINAL PRICE OF RS. 10 PER SHARE. THE PERUSAL OF BALANCE SHEET & P&L ACCOUNT OF PELIC AN PAINTS LTD. AS ON 31.03.2000 & 31.03.1999 31.03.1998 SHOWS: (RUPEES IN LAKHS) 1999-200 0 1998-1999 1997-1998 SALES 28.17 35.14 28.96 PROFIT FOR THE YEAR 10.75 0.67 15.26 THE NOTE TO ACCOUNTS AS ON 31.03.1998 31.03.1999 & 31.03.2000 STATES THAT THE COURT HAS BY AN AD-INTERIM ORDER DATED 1 ST JULY 997 APPOINTED A COURT RECEIVER AND RESTRAINED THE COMPANY FROM IN ANY MANNER DISPOSING OF ALIENATING ENCUMBERING OR PARTING WITH THE POSSESSION AND/OR CREATING THIRD P ARTY RIGHTS TITLES AND INTEREST IN THE PROPERTY GOODS BOOK DEBITS MOVABLE AND OTHER ASS ETS. DESPITE OF THESE FACTS THE ASSESSEE KILLICK NIXON LTD. HAS STILL INVESTED IN THE SHARES AT PREMIUM IN THE YEAR 1998-99 1999-2000 AND THUS CAN BE STATED TO BE NOT HING BUT A SHAM INVESTMENT AS ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 18 ALSO EVIDENT FROM THE ACTIVITY IN THE COMPANY IN TH E PAST THREE YEARS. THE SHARES HAVE BEEN FURTHER SOLD TO A COMPANY UNDER THE SAME MANAG EMENT I.E. SNOWCEM INDIA LTD. FOR A SUM OF RS. 4 25 000/-(I.E. AT THE RATE OF RS. 10/- PER SHARE) AND THERE BY NOT LOSING EFFECTIVE CONTROL IN THE COMPANY. THE SALE A MOUNT WAS SETTLED BY CURRENT ACCOUNT ADJUSTMENTS WITH ASSESSEE THEREFORE THE SA LE IS ALSO TREATED AS A SHAM SALE WHICH IS SELF SERVING AND TO BOOK LOSSES TO SET OFF CAPITAL GAIN ON ACCOUNT OF SALE OF LAND. THEREFORE THE LOSS CLAIMED ON ACCOUNT OF SAL E OF SHARES OF PELICAN PAINT IS DISALLOWED TO BE SET OFF AGAINST ANY GAIN FOR THE R ELEVANT YEAR. 22. THE ASSESSING OFFICER FURTHER RECORDED THE STA TEMENT OF SHRI T.B. RUIA WHO IS THE DIRECTOR OF THE ASSESSEE-COMPANY. ON THE BASIS OF THE ABOVE INVESTIGATIONS AND ENQUIRIES THE FOLLOWING CONCLUSIONS WERE REACHED BY THE AO: 10.5.1 MR. T.B. RUIA HAS AGREED COMPLETELY WITH TH E STATEMENT OF MR. G.R. VORA BARRING THE NAME OF THE TRANSFEREE OF SHARES WHICH CLEARLY IMPLIES THE INVESTMENT COMPANIES WERE USED AS A VEHICLE FOR INV ESTMENT IN KOSHA INVESTMENT LTD. AND THE INVESTMENT IN SHARES WAS T HE PLANNING OF THE ASSESSEE TO BE USED FOR FURTHER BENEFITS. MR. RUIA GAVE THE THEORY OF VALUATION OF SHARES AT PREMIUM GIVING SELF SERVING HYPOTHETICAL INCREASE IN VALUE OF SHIVRAJPUR SYNDICATE BUT COULD NOT JUSTIFY THE FACT OF INVESTMENT AT PREMIUM IN THESE FOUR INVESTMENT COMPANIES AS THE ASSESSEE EVEN PRIOR AND AFTER INVESTMENT THEY WERE HOLDING 1005 SHARES OF T HE COMPANY. SO THE INVESTMENT IN SHARE AT PREMIUM IN A 1005 SUBSIDIARY ON ACCOUNT OF THE ABOVE IS AN ABSURD REASON. THOUGH OF NO RELEVANCE TO THIS CASE BUT THE DIMINISHING OF VALUE OF SHIVRAJPUR SYNDICATE ON ACCOUNT OF CERT AIN DEMAND IN A YEAR TIME IS ALSO A CREATION OF THE DIRECTOR AND WITHOUT ANY EVIDENCE TO THE SAME AND ANYWAY AS THE MONEY WENT TO KOSHA INVESTMENT LTD. AND HAD NOTHING TO DO WITH SHIVRAJPUR SYNDICATE THIS IS A DIVERGENT REAS ON GIVEN BY THE ASSESSEE AND IS THEREFORE NEEDS TO BE REJECTED AND IS DONE A CCORDINGLY. 10.5.2) FURTHER THE ASSESSEE HAS STATED IT WANTED T O GUARD ITS MARKETING AGENCY RIGHTS OF SNOWCEM INDIA LTD. IS A LAME EXCU SE AS THE ASSESSEE HAS BEEN MARKETING GOODS OF SNOWCEM INDIA LTD. FOR A LARGE NUMBER OF YEARS AND THE MANAGEMENT OF KILLICK NIXON LTD. AND SNOWC EM INDIA LTD. PER SE IS THE SAME AND SO NO WAY THERE CAN BE A THREAT TO THE ASSESSEE REGARDING ITS LOSING OF MARKETING RIGHTS. 10.5.3) MR. T.B. RUIA HAS DENIED THE STATEMENT GIVE N BY MR. BUDHIYA AND STATED THAT THE TRANSACTION WAS BONAFIDE. THERE ARE NO MERITS IN THE ARGUMENTS OF MR.T.B.RUIA. IF THE TRANSACTIONS WERE BONAFIDE THEN WHY WOULD MR.BUDHIYA DENY THE SAME AND SAY THE FACTS OF THE T RANSACTION. MR. T.B. RUIA COULD NOT JUSTIFY THE FINANCE GIVEN TO SHREE RADHA FINANCIAL SERVICES PVT. LTD. FROM KILLICK NIXON LTD. AND KOSHA INVESTMENT LTD. AND GAVE A LAME EXCUSE THAT HE KNEW THE PERSON FOR LONG AND ALSO IF IT WOU LD HAVE BEEN A LOAN AN INTEREST AMOUNT WOULD HAVE BEEN CHANGED AND MR. BUD HIYA HAS CLEARLY ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 19 HIGHLIGHTED THE MOVEMENT OF FUNDS WHICH ARE ONLY S ELF SERVING IN NATURE FOR THE ASSESSEE AND MR. T.B. RUIA COULD NOT JUSTIFY TH E SAME. 10.5.4) STATEMENT OF SMT. PRATIBHA DANGI:- MR. RUIA HAS ADMITTED THAT HE KNEW MR. MOGRA. THE MOGRA FAMILY HAS RECEIVED VARIO US AMOUNTS FROM M/S. KOSHA INVESTMENT LTD. IN THE RELEVANT YEAR AND PAS T YEAR AS INTEREST FREE ADVANCE/CONSULTANCY CHARGES. THE ASSESSEE COMPANY P ROXIMITY WITH RUIA FAMILY AND MRS. DANGI ADMISSION THAT FUNDING WAS DO NE BY KILLICK NIXON LT.D FOR PURCHASE OF SHARES OF INVESTMENT COMPANY COULD NOT BE DIS-PROVED BY MR. T.B. RUIA BUT FOR HIS VERBAL DENIAL OF THE WHOL E AFFAIR. 10.5.5) VALUATION OF SHARES & INVESTMENT AT PREMIUM : THE ASSESSEE IN ITS SUBMISSION HAVE JUSTIFIED THE S ALE OF SHARES BY GIVING VALUATION METHODS LIKE NET ASSET VALUE AND PRICE EA RNING METHOD BUT WHEN PUT FORWARD IN FRONT OF THE ASSESSEE THAT WHY THE S AME SHOULD NOT BE TAKEN WHILE TAKING INTO ACCOUNT THE INVESTMENT. MR. RUIA COULD NOT GIVE ANY SATISFACTORY ANSWER. MR. T.B. RUIA HAS ALSO STATED THAT SNOWCEM INDIA LTD. HAS BEEN A MAJOR REVENUE EARNER AND KOSHA INVESTMEN T LTD. WAS HOLDING MAJOR SHARES OF THE COMPANY. THE ASSESSEE COMPANY A ND SNOWCEM INDIA LTD. HAS SAME MANAGEMENT FOR AT LEAST MORE THAN A DECADE AND INDIRECTLY HOLDS A LARGE NUMBER OF SHARES IN KOSHA INVESTMENT LTD. SO THE ASSESSEES JUSTIFICATION GIVEN IS FALSE AND INCORRECT AND ALSO MR. RUIA HAS NOT GIVEN ANY DOCUMENTARY EVIDENCE THAT THE THREAT OF LOSING MARK ETING RIGHTS WAS THERE FROM ANY QUARTER. 10.5.6) THE ASSESSEE COMPANY SURRENDERING RIGHTS OF SNOWCEM INDIA LTD. IN THE LATER YEAR WAS MORE BECAUSE OF THE LIABILITIES ARISING IN THE ASSESSEE COMPANY BECAUSE OF ITS INVOLVEMENT WITH SECURITIES SCAM AND SPECIAL COURT PROCEEDINGS WHEREAS SNOWCEM INDIA LTD. IS DEVOID OF ANY LEGAL PROBLEM. SO SURRENDERING OF MARKETING RIGHTS IN THE LATER YEARS WAS THE CONCENTRATION OF REVENUE IN A LEGALLY PROBLEM FREE COMPANY WHICH WAS DECIDED BY THE SAME MANAGEMENT. 10.5.7) INVESTMENT IN KILLICK HALCO LTD. THE ASSESS EE COULD NOT GIVE ANY REASONABLE/SOUND BASIS FOR ITS INVESTMENT AT PREMIU M IN KILLICK HALCO LTD. AND THE PRICE DIFFERENTIAL OF INVESTMENT AT RS. 19. 87 & RS.800 IN A SHORT GAP OF FOUR MONTHS. THE ASSESSEES MAIN INTENTION CAN B E SAFELY DESCRIBED AS THE BOOKING OF LOSS BY THIS TRANSACTION AND TRANSFERRIN G TO THE COMPANY WITH THE SAME MANAGEMENT AND AS MR. T.B. RUIA IS THE MANAGIN G DIRECTOR OF BOTH THE COMPANIES. THUS IT CAN BE SENT HAT BY TRANSFERRING SHARES TO SNOWCEM INDIA LTD. THE GROUP HAS NOT LOST CONTROL IN THE COMPANY AS IT WAS NOT SOLD TO ANY OUTSIDER. THUS THE TRANSFER AND INVESTMENT CAN ONL Y BE SEEN AS A VEHICLE FOR BOOKING LOSSES AND THEREFORE HAS BEEN REJECTED ACCO RDINGLY. 10.5.8) ROTATION OF CHEQUES IN VARIOUS ACCOUNTS OF GLOBAL TRUST BANK: THE DIRECTOR WAS SHOWN THE ACCOUNTS AND HE J UST STATED THAT THE TRANSACTION WAS THROUGH BANK BUT COULD NOT JUSTIFY FURTHER IN VIEW OF THAT IT IS PRESUMED THAT ASSESSEE HAS NO BONAFIDE REASON TO JU STIFY THE SHAM INVESTMENT. 10.5.9) THE ASSESSEE COMPANY HAS NOT REPLIED ANYTHI NG FURTHER IN THIS REGARD AS IN THE LIGHT OF THE BANK STATEMENT AND STATEMENT S U/S.131 OF VARIOUS ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 20 PARTIES INVOLVE DIN THE SHARE TRANSACTION SO IT IS CONCLUDED THAT THE ASSESSEE HAS NOTHING FURTHER TO SAY IN THE ABOVE MATTER. 10.5.10) CONCLUSION ON INVESTMENT: SO TO SUM UP: I) THE INVESTMENTS AS WELL AS ALE OF SHARE IN THE FOUR COMPANIES NAMELY MATTERHORN INVESMENTS LTD. FIRCREST INVESTMENTS LT D. . GALATICA INVESTMENTS LTD. MONTBLANC INVESTMENTS LTD. ARE T REATED AS SHAM SO THE LOSS ON THEM IS DISALLOWED ACCORDINGLY. II) THE SALE OF SHARES OF PELICAN PAINTS IS TREATED AS SHAM THE TRANSFER OF SHARES IS SELF SERVING TO CREATE LOSS SO THE LOSS IS DISALLOWED ACCORDINGLY. III) THE FRESH INVESTMENT IN SHARES OF KILLICK HALCO LTD . AT RS.800/- PER SHARE IS TREATED AS SHAM SO THE BONAFIDE INVESTMEN T IS TREATED AT RS.19.87 PER SHARE AND SHORT TERM CAPITAL GAIN IS W ORKED OUT AS IN PARA 9.2. IV) THE VALUE OF LAND IS TAKEN SUBJECT TO VALUATION RE PORT TO BE RECEIVED BY THIS OFFICE FROM THE RELEVANT DISTRICT VALUATION OFFICER AS THE MATTER HAS BEEN REFERRED U/S.55A. 23. BEFORE THE LEARNED CIT(A) MAINLY LEGAL SUBMISS IONS WERE MADE CONSISTING OF THAT ASSESSING OFFICER WAS REQUIRED ONLY TO SEE WHE THER THE ASSESSEE COMPANY WAS THE OWNER OF THE SHARES AND WHETHER THE SAME WERE T RANSFERRED AND WHAT WAS THE VALUE OF CONSIDERATION AND COST OF ACQUISITION AND ACCORDINGLY AO WAS REQUIRED TO COMPUTE THE CAPITAL GAINS OR CAPITAL LOSS. IT WAS A LSO POINTED OUT THAT ASSESSEE HAD TAKEN VARIOUS STEPS AS PER THE LAW FOR EXAMPLE SHA RES WERE PURCHASED AFTER BEING APPROVED BY THE BOARD OF DIRECTORS. SHARES WERE ALL OTTED TO THE ASSESSEE COMPANY RETURN UNDER THE COMPANIES ACT WERE FILED WITH THE REGISTRAR OF COMPANIES AS PER COMPANY LAW ALL THE TRANSACTIONS REGARDING PAYMENT AND RECEIPTS WERE MADE THROUGH BANK ACCOUNT AND THEREFORE SUCH LOSS COUL D NOT HAVE BEEN DISALLOWED. THE LEARNED CIT(A) ADJUDICATED THIS ISSUE VIDE PARA 4. 10 4.10.1 TO 4.10.4 WHICH ARE AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE B OTH AS PER THE IMPUGNED ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE APPELLANTS AR. AS FAR S THE SHORT TERM CAPITAL LOS S ON SALE OF SHARES OF THE FOUR COMPANIES NAMELY MATTERHORN INVESTMENTS L TD. FIRCREST INVESTMENTS LTD. GALATICA INVESTMENTS LTD. AND MO NTBLANC INVESTMENTS LTD. IS CONCERNED I AM IN TOTAL AGREE MENT WITH THE A.O. THAT THERE WERE NO REAL TRANSACTIONS OF PURCHASE AN D SALE OF SHARES ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 21 RESULTING INTO ANY CAPITAL LOSS TO THE APPELLANT CO MPANY. THE MANNER OF BUYING THESE SHARES AT A PREMIUM OF RS. 140/- PER S HARE WITHIN A SHORT PERIOD OF THREE DAYS AND THE MANNER IN WHICH NEW AC COUNTS WERE OPENED IN GLOBAL TRUST BANK LTD. FOR ROUTING THE C HEQUES MOVEMENT LEAVES NO DOUBT ABOUT THE NON-GENUINENESS OF THE SA ID PURCHASE AND SALE OF SHARES. THE A.O. HAS CONVINCINGLY PROVED TH AT THE SHARES OF THESE FOUR COMPANIES DID NOT DESERVE ON SOUND ECON OMIC REASONS TO BE PURCHASED AT A COST WHICH THE APPELLANT COMPANY HAS ALLEGEDLY PAID AND I AM IN AGREEMENT WITH THE A.O. THAT THE APPELL ANT HAD INDULGED INTO THESE TRANSACTIONS MERELY FOR THE PURPOSE OF I NCURRING SHORT TERM CAPITAL LOSS WITH AN INTENTION TO SET IT OFF AGAINS T THE CAPITAL GAIN ON TRANSFER OF ITS LAND TO VYSYA BANK LTD. THE STATEM ENT OF SHRI G.R. VORA NOMINATED DIRECTOR OF THESE FOUR COMPANIES AS RECOR DED BY THE A.O. CONFIRMS THAT THERE WAS NO BUSINESS ACTIVITY IN THE SE COMPANIES WHICH COULD JUSTIFY THE PAYMENT OF RS. 150/- PER SHARE. T HE SAME STATEMENT OF SHRI G.R. VORA FURTHER CONFIRMS THAT ALL THE DEC ISIONS REGARDING INVESTMENT IN THESE FOUR COMPANIES AND FURTHER INV ESTMENT IN THE OTHER GROUP COMPANY M/S. KOSHA INVESTMENTS LTD. WERE TAKE N BY THE MANAGEMENT OF THE APPELLANT COMPANY WHICH INCLUDED SHRI T.B. RUIA AND SHRI B.R.RUIA. FOR THE REASONS DISCUSSED IN PAR A 5 OF THE IMPUGNED ASSESSMENT ORDER IT IS CLEAR THAT THE APPELLANTS ALLEGED SHARE TRANSACTIONS IN THESE FOUR COMPANIES WERE NOT GENUI NE IN SO FAR AS THERE WAS NO ACTUAL MOVEMENT OF FUNDS BUT A MERE ACCOUNTS ENTRIES OF CIRCULAR NATURE IN THE BANK ACCOUNTS OF G.K.A.K.RAT HI (HUF) APPELLANT COMPANY KOSHA INVESTMENTS LTD. AND THE INVESTMENT COMPANIES OF RATHI GROUP. THESE TRANSACTIONS HAVE BEEN RIGHTLY HELD TO BE SHAM TRANSACTION BY THE A.O. DUE TO THE REASONS DISCUSSE D AT LENGTH IN PARA 5 OF THE IMPUGNED ASSESSMENT ORDER. IN PARA 6 OF THE ASSESSMENT ORDER THE A.O. HAS DISCUSSED THE BONAFIDES OF APPELLANTS INVESTMENTS IN THESE FOUR COMPANIES AND PROVED THAT THE INTRINSIC VALUE OF EACH SHARE OF THESE COMPANIES WAS NOT MORE THAN ITS FACE VALUE AN D THERE WAS NO REASON FOR THE APPELLANT TO HAVE ALLEGEDLY PAID RS. 150/-. THE SAME SHARES WERE ALLEGEDLY SOLD BY THE APPELLANT COMPANY AT RATE OF RS.5/- PER SHARE IN FEBRUARY 2001 AND NO SIGNIFICANT BUSIN ESS ACTIVITY TOOK PLACE IN THE INTERVENING PERIOD TO JUSTIFY AS TO WH Y A SHARE OF RS. 150/- WAS SOLD FOR RS. 5/- IF NOT FOR ENABLING THE APPELL ANT COMPANY TO CLAIM SHORT TERM CAPITAL LOSS. CONSIDERING ALL THESE FACT ORS AND ALSO THOSE DISCUSSED AT LENGTH IN THE IMPUGNED ASSESSMENT ORDE R BY THE A.O. I HOLD THAT THE ALLEGED SHORT TERM CAPITAL LOSS OF RS . 46.4 CRORES AND LONG TERM CAPITAL LOSS OF RS.92 41 224/- ALLEGEDLY SUFFE RED BY THE APPELLANT IN RESPECT OF THE PURCHASE AND SALE OF SHARES OF THESE FOUR COMPANIES IS NOT A GENUINE LOSS AND THE A.O. WAS JUSTIFIED IN TR EATING IT AS SHAM. THE ACTION OF THE A.O. IN REJECTING SUCH LOSSES AND NOT ALLOWING THE SAME TO BE SET OFF AGAINST THE LONG TERM CAPITAL GAIN ON TR ANSFER OF APPELLANTS LAND TO VYSYA BANK LTD. IS UPHELD. SIMILARLY THE APPELLANTS INVESTMENT IN 50 000 SHA RES OF ITS GROUP COMPANY M/S. KILLICK HALCO LTD. @RS.800/- PER SHARE BY CONVERTING ITS LOAN OF RS. 4 CRORE INTO SHARE INVESTMENT IS ALSO T O BE TREATED AS A SHAM TRANSACTION FOR THE REASONS DISCUSSED IN PARA 7 OF THE IMPUGNED ASSESSMENT ORDER. THE SAID LOAN WAS PRACTICALLY IRR ECOVERABLE AS KILLICK HALCO LTD. DID NOT HAVE ANY LIQUIDITY TO REPAY THE LOAN. THE APPELLANT BOUGHT THE SHARE OF THIS COMPANY AT A PREMIUM OF RS . 700/- WHICH APPEARS TO BE A PRE-ARRANGED PRICE AS THE SHARES OF THE SAME COMPANY ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 22 HAD BEEN BOUGHT AT THE RATE OF RS. 19.87 PER SHARE ONLY FOUR MONTHS BEFORE AND NO SIGNIFICANT BUSINESS ACTIVITY TOOK PL ACE IN THAT COMPANY DURING INTERVENING PERIOD TO JUSTIFY SUCH A HIGH PR ICE. I AM THEREFORE OF THE OPINION THAT THE A.O. HAS RIGHTLY ADOPTED THIS PRICE AT RS. 19.87 IN PLACE OF RS. 800/- PER SHARE. ACCORDINGLY FOR THE REASONS DISCUSSED IN PARA 7 OF THE IMPUGNED ASSESSMENT ORDER BY THE A.O) . WITH WHOM I AM IN AGREEMENT THE DISALLOWANCE OF SHORT TERM CAPITA L LOSS OF RS. 3 09 26 000/- ON THE SALE OF SHARES OF KELLICK HALC O LTD. IS UPHELD AND FOR THE SAME REASONS THE TAXATION OF SHORT TERM CAP ITAL GAIN OF RS. 80 80 640/- ON THE SALE OF SAME SHARES IS CONFIRME D. AS FAR AS THE DISALLOWANCE OF APPELLANTS CLAIM REG ARDING LONG TERM CAPITAL LOSS OF RS.1 68 37 861/- IN RESPECT OF SALE OF SHARES OF M/S. PELICAN PAINTS LTD. IS CONCERNED I AM IN AGREEMEN T WITH THE A.O. THAT THE APPELLANTS SALE OF THESE SHARES TO ITS GROUP C OMPANY M/S. SNOWCEM INDIA LTD. AT THE RATE OF RS. 10/- PER SHARE CAN N OT BE TREATED AS A GENUINE TRANSACTION. FOR THE REASONS DISCUSSED IN P ARA 9 OF THE IMPUGNED ASSESSMENT ORDER I HOLD THAT THE APPELLAN T HAS ALLEGEDLY TRANSFERRED THESE 42 500 SHARES TO M/S. SNOWCEM IND IA LTD. ONLY FOR THE PURPOSE OF BOOKING A LONG TERM CAPITAL LOSS FOR BEING SET OFF AGAINST THE LONG TERM CAPITAL GAIN IN RESPECT OF ITS LAND T RANSFERRED TO VYSYA BANK LTD. IN THE SAID TRANSACTION OF TRANSFERRING 4 2 500 SHARES OF M/S. PELICAN PAINTS LTD. THE APPELLANT HAS NOT LOST EFF ECTIVE CONTROL IN THE COMPANY AS THESE SHARES HAVE BEEN TRANSFERRED ONLY TO ITS GROUP COMPANY. HENCE I UPHOLD THE ACTION OF THE A.O. IN T REATING THIS TRANSACTION AS A SHAM ONE AND NOT ALLOWING THE ALLE GED LONG TERM CAPITAL LOSS TO BE SET OFF AGAINST THE LONG TERM CA PITAL GAIN PERTAINING TO THE LAND TRANSFERRED TO VYSYA BANK LTD. IN PARA 8 OF THE IMPUGNED ASSESSMENT ORDER THE A.O . HAS DISCUSSED AT LENGTH ALL THE FACTS WHICH PROVE THAT THE APPELLANT HAD ENTERED INTO THE ABOVE REFERRED SHARE TRANSACTION WITH THE SOLE INTE NTION OF CREATING ARTIFICIAL SHORT TERM AND LONG TERM LOSSES FOR THE PURPOSE OF SETTING OFF THE SAME AGAINST THE LONG TERM CAPITAL GAIN ON TRAN SFER OF ITS LAND TO VYSYA BANK LTD. IN THIS REGARD THE A.O. HAS RECORDE D THE STATEMENT OF SHRI DEVIPRSAD BUDHIYA DIRECTOR OF SHRI RADHA FINA NCIAL SERVICES LTD. TO WHOM THE SHARES OF ABOVE REFERRED FOUR COMPANIES (M ATTERHORN INVETMENTS LTD. FIRCREST INVESTMENTS LTD. GALATIC A INVESTMNTS LTD. AND MONTLBLANC INVESTMENTS LTD) WERE ALLEGEDLY SOLD. TH E STATEMENT OF SHRI BUDHIYA CLEARLY PROVES THAT THE FUNDS FOR INVESTMEN T IN THESE SHARES ORIGINATED FROM AND RETURN BACK TO THE APPELLANT CO MPANY REGARDING THE SHARE TRANSACTIONS MADE WITH SHRI RADHA FINANCIAL S ERVICES LTD. THE STATEMENT OF SMT. PRATIBHA J. DANGI RECORDED U/S.13 1 BY THE A./O. ON 16.3.2004 FURTHER CONFIRMS THIS CONCLUSION AS DRAWN BY THE A.O. MOREOVER THE FACTS STATED BY SHRI T.B RUIA MANAGI NG DIRECTOR OF THE APPELLANT COMPANY IN THIS STATEMENT RECORDED BY TH E A.O. U/S.131 OF THE I/T.ACT 1961 FINALLY MAKES IT CLEAR THAT THE APPELLANTS ALLEGED SHARE TRANSACTIONS RESULTING INTO SHORT/LONG TERM C APITAL LOSS WERE SHAM TRANSACTIONS AND MERELY STAGE MANAGED BY ITS MANAGE MENT. SHRI T.B. RUIA IS THE CHAIRMAN CUM MANAGING DIRECTOR OF THE A PPELLANT COMPANY AND THE MAIN PERSON IN THE APPELLANTS GROUP OF CON CERNS. WHILE RECORDING HIS STATEMENT U/S. 131 OF I.T.ACT 1961 T HE A.O. OFFERED AN OPPORTUNITY TO HIM FOR CROSS EXAMINING SHRI DEVIPRA SAD BUDHIYA AND SMT. PRATIBHA J. DANGI BUT HE EVADED THE SAME BY SA YING THAT SHRI ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 23 BUDHIYA IS TELLING LIES AND THERE IS NO POINT IN C ROSS EXAMINING A PERSON WHO IS TELLING A LIE. IN PARA 10.5 OF THE IMPUGNED ASSESSMENT ORDER THE A.O. HAS ANALYSED THE FACTS AS EMERGING FROM TH E STATEMENT OF SHRI T.B. RUIA AND I AM IN TOTAL AGREEMENT WITH THE A.O. AS FAR AS THE CONCLUSIONS IN THIS REGARD HAVE BEEN DRAWN BY HIM. IN THE WRITTEN SUBMISSIONS MADE BY THE APPELLANTS AR DURING THE COURSE OF PRESENT APPELLATE PROCEEDINGS ONLY THE R OUTINE ASPECTS SUCH AS THE EXECUTION OF SHARE-TRANSFER DEEDS AND PAYMEN TS THROUGH BANKING CHANNELS HAVE BEEN EMPHASIZED BUT THE SAME ARE RELE VANT ONLY IF THE TRANSACTIONS ARE BONAFIDE. IN THE CASE OF THE APPEL LANT COMPANY IT HAS BEEN CONVINCINGLY PROVED BY THE A.O. THAT THESE SHA RE TRANSACTIONS WERE MADE ONLY FOR THE PURPOSE OF BOOKING BOGUS LOS SES AND WITH THE ULTERIOR MOTIVE OF SETTING THEM OFF AGAINST THE APP ELLANTS OTHERWISE TAXABLE LONG TERM CAPITAL GAIN ON TRANSFER OF ITS LAND TO VYSYA BANK LTD. HENCE NO IMPORTANCE CAN BE ATTACHED TO THE FACTS O F SUCH SHARE TRANSFER DEEDS AND PAYMENTS THROUGH BANKING CHANNEL S AS THE APPELLANTS TRANSACTIONS ARE MALAFIDE AND NOT BONAF IDE. THE A.O. HAS PROVED THIS ASPECT BY IRREFUTABLE EVIDENCE. ACCORDI NGLY I UPHOLD THE ACTION OF THE A.O. IN DISALLOWING THE SHORT TERM CA PITAL LOSS OF R.S46.4 CRORES AND LONG TERM CAPITAL LOSS OF RS. 92 41 224/ - ON THE ALLEGED SALE OF THE SHARES OF FOUR COMPANIES (MATTERHORN INVETME NTS LTD. FIRCREST INVESTMENTS LTD. GALATICA INVESTMENTS LTD. AND MON TBLANC INVESTMENTS LTD.) TAXING SHORT TERM CAPITAL GAIN OF RS. 80 80 640/- INSTEAD OF ALLOWING SHORT TERM CAPITAL LOSS OF RS. 3 09 26 000 /- ON SALE OF SHARES OF M/S K9LLICK HALCO LTD. AND DISALLOWING LONG TERM CA PITAL LOSS OF RS. 1 68 37 861/- ON SALE OF THE SHARES OF M/S. PELICAN PAINTS LTD. TO CONCLUDE THE FIRST GROUND OF APPEAL REGARDING THE C APITAL GAIN/LOSS ON APPELLANTS SHARE TRANSACTIONS IS DISMISSED AND THE ACTION OF THE A.O. IS UPHELD. 24. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SHORT-TERM AND LONG TERM CAPITAL LOSS IN MATTERHORN INVESTMENTS LT D. FIRCREST INVESTMENTS LTD. GALATICA INVESTMENTS LTD. AND MONTBLANC INVESTMENTS LTD. HAS BEEN NOT ALLOWED BY THE ASSESSING OFFICER MAINLY ON THE REASONING THAT INVESTMENT IN THESE COMPANIES WAS A SHAM TRANSACTION. IN THE CASE OF M/S. PELICAN PA INTS LTD. THE A.O. HAS TREATED THE SALE OF SHARES AS SHAM TRANSACTION AND IN THE CASE OF KILLICK HALCO LTD. THE LOSS HAS BEEN DENIED BECAUSE INVESTMENT AT THE RATE OF RS. 8 00 PER SHARE HAS BEEN CONSIDERED AS SHAM TRANSACTION. HE ARGUED THAT BASICALLY FOR D ETERMINATION OF CAPITAL GAINS/LOSS THE PROVISIONS OF SECTION 45 TO 55 OF THE ACT HAVE TO BE LOOKED INTO. FURTHER IT HAS NOT BEEN DENIED THAT THE ASSESSEE WAS THE OWNER OF THE CAPITAL ASSET UNDER SECTION 2(14) OF THE ACT THE SAME WAS TRANSFERRED WHICH COMPLY W ITH THE DEFINITION OF THE TRANSFER UNDER SECTION 2(47) OF THE ACT. IT HAS ALSO NOT BE EN DENIED THAT THE ASSESSEE HAD ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 24 RECEIVED FULL CONSIDERATION OF THE SHARES THROUGH B ANKING CHANNELS. HE ALSO POINTED OUT THAT SHARES IN THE FOUR COMPANIES WERE ACQUIRE D AS PER THE BOARD RESOLUTION AUTHORIZING THE DIRECTORS TO SUBSCRIBE SHARES AT A PREMIUM SUCH SHARES WERE ALLOTTED BY DIFFERENT COMPANIES WHICH IS DULY REFLECTED IN THE ANNUAL ACCOUNTS AS WELL AS THE RETURNS FILED WITH THE REGISTRAR OF COMPANIES. HE S UBMITTED THAT THE TRANSACTION WAS HELD TO BE SHAM IN FOUR COMPANIES MAINLY BECAUSE FU NDS WERE BORROWED BUT THERE IS NO BAN OR REQUIREMENT UNDER THE LAW THAT INVESTMENT IN SHARES HAS TO BE MADE OUT OF ASSESSS OWN FUNDS. ACCORDING TO HIM THE TEST OF O WNERSHIP OF SHARES CANNOT BE FURTHER SUBJECTED TO THE TEST OF SOURCES OF INVESTM ENT. IT WAS FURTHER ARGUED THAT THE A.O. HAS NOT REACHED THE RIGHT CONCLUSIONS WHILE D ETERMINING THE VALUE OF SHARES BECAUSE GENERALLY INVESTMENTS ARE MADE ON THE BASIS OF FUTURE GROWTH OF THE COMPANIES. INVESTMENT IN ALL THE FOUR COMPANIES IS DULY EVIDENCED BY ALL THE STEPS REQUIRED TO BE TAKEN WHICH COMPLY WITH VARIOUS REQU IREMENTS OF THE COMPANIES ACT. 25. WITH REFERENCE TO THE OBJECTIONS REGARDING INVE STMENT IN 50 000 SHARES OF M/S. KILLICK HALCO LTD. @ RS.800/- PER SHARE IT W AS ARGUED THAT THE A.O. HAS NO POWER TO SUBSTITUTE THE COST OF ACQUISITION WHICH HAS TO BE DETERMINED IN TERMS OF SECTION 48 READ WITH SECTION 55 OF THE ACT. WITH REFERENCE T O THE SALE OF SHARES IN THE CASE OF M/S. PELICAN PAINTS LTD. WHICH HAS ALSO BEEN DOUBT ED BY THE ASSESSING OFFICER IT WAS SUBMITTED THAT SUCH DOUBTS ARE BASED ON SUSPICION CONJECTURES AND SURMISES BECAUSE NEITHER THE FACT OF INVESTMENT NOR THE FACT OF TRAN SFER OF SHARES HAS BEEN DOUBTED. ONCE THE SHARES WERE PURCHASED AT A PREMIUM AND THI S FACT WAS ACCEPTED BY THE A.O. THEN THE PRICE PAID FOR ACQUISITION OF SUCH SHARES WAS TO BE TAKEN AS COST OF ACQUISITION AND JUT BECAUSE SOME OF THE DIRECTORS OF THE ASSESS EE COMPANY WERE COMMON TO M/S. SNOWCEM INDIA LTD. TO WHOM THE SHARES OF M/S. PELI CAN PAINTS LTD. WERE SOLD IT CANNOT BE SAID THAT THE SALE TRANSACTION WAS SHAM. 26. LASTLY WHILE REFERRING TO THE OBSERVATION OF T HE A.O. IN RESPECT OF SALE OF SHARES AND DOUBTS EXPRESSED IN THAT REGARD IT WAS S UBMITTED THAT THE TRANSFER IS ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 25 COMPLETE IN THE CASE OF SHARES ONCE THE TRANSFER DE ED IS EXECUTED AND ALL THE SUBSEQUENT ACTS BY BROKER AND THE BUYERS ARE NOT RE LEVANT FOR DETERMINING THE SALE/TRANSFER OF SHARES. THE FACT OF EXECUTION OF TRANSFER DEED WAS NOT DENIED AND THE SHARES HAVE BEEN TRANSFERRED BY RESPECTIVE COMPANIE S AND THE NAMES OF TRANSFEREES APPEARED IN THE REGISTER OF SHAREHOLDERS WHICH IS E VIDENCED FROM THE RETURNS FILED WITH THE REGISTRAR OF COMPANIES. 27. WHILE CONCLUDING HE SUBMITTED THAT ALL THE LEGA L STEPS AS REQUIRED BY THE LAW HAVE BEEN TAKEN AND THEREFORE CAPITAL LOSS ARISING ON TRANSFER OF SHARES IN VARIOUS COMPANIES COULD NOT HAVE BEEN DENIED. 28. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE REFERRED TO VARIOUS PARTS OF THE ASSESSMENT ORDER AND SUBMITTED THAT THE A.O. HAS CLEARLY BROUGHT THE CASE AFTER ANALYZING THE BANK STATEMENTS THE B ALANCE SHEET OF THE SUBSIDIARY COMPANIES AND OTHER RELEVANT FACTORS THAT INVESTMEN T IN THE SUBSIDIARY COMPANIES AT A PREMIUM AND ULTIMATELY SALE OF THE SAME WAS A SHAM TRANSACTION WHICH WAS CONDUCTED MAINLY TO REDUCE THE CAPITAL GAINS EARNED BY THE ASSESSEE. HE STRONGLY RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 29. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND HAVE ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS FAR AS THE SHORT-T ERM AND LONG TERM CAPITAL LOSS ON SALE OF FOUR COMPANIES NAMELY MATTERHORN INVESTMEN TS LTD. FIRCREST INVESTMENTS LTD. GALATICA INVESTMENTS LTD. AND MONTLBLANC INVE STMENTS LTD. ARE CONCERNED WE AGREE WITH THE REASONING GIVEN BY THE LEARNED CIT(A ) FOR DISALLOWING THE LOSS. 30. WE WOULD LIKE TO RECALL THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF SUMATI DAYAL V. CIT (1995) 214 ITR 801. IN THAT CASE THE APPELLANT CARRIED ON BUSINESS AS A DEALER IN ART PIECES ANTIQUES AND CU RIOS IN BANGALORE. DURING THE ASSESSMENT YEAR 19710-72 SHE CLAIMED THAT SHE RECE IVED A TOTAL AMOUNT OF RS. 3 11 831/- BY WAY OF RACE WINNINGS IN JACKPOTS AND TREBLE EVENTS IN RACES AT TURF CLUB IN BANGALORE MADRAS AND HYDERABAD. THE SAID AMOUNT WAS SHOWN BY THE APPELLANT IN ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 26 THE CAPITAL ACCOUNT IN THE BOOKS. FOR THE ASSESSMEN T YEAR 1972-73 SHE CLAIMED RECEIPTS OF RS. 93 500 AS RACE WINNINGS IN TWO JACK POTS AT BANGALORE AND MADRAS AND THE SAID AMOUNT WAS CREDITED IN THE CAPITAL ACCOUNT IN THE BOOKS. THE INCOME-TAX OFFICER INCLUDED THESE AMOUNTS AS INCOME FROM OTHER SOURCES AND ASSESSED THEM. THE APPELLATE COMMISSIONER CONFIRMED THE ORDER. THE APP ELLANT REFERRED THE MATTER TO THE SETTLEMENT COMMISSION. THE SETTLEMENT COMMISSION BY A MAJORITY HELD THAT THE EXPLANATION OF THE ASSESSEE WAS NOT GENUINE FOR THE FOLLOWING REASONS: (I) THE APPELLANTS KNOWLEDGE OF RACING WAS VERY MEAGER (I I) A JACKPOT IS A STAKE OF FIVE EVENTS IN A SINGLE DAY AND ONE CAN BELIEVE A REGUL AR AND EXPERIENCED PUNTER CLEARING A JACKPOT OCCASIONALLY BUT THE CLAIM OF THE APPELLA NT OF HAVING WON A NUMBER OF JACKPOTS IN THREE OR FOUR SEASONS NOT MERELY AT ONE PLACE BUT AT THREE DIFFERENT CENTRES NAMELY MADRAS BANGALORE AND HYDERABAD AP PEARED PRIMA FACIE TO BE WILD AND CONTRARY TO STATISTICAL THEORIES AND EXPERIENCE OF FREQUENCIES AND PROBABILITIES (III) THE APPELLANTS BOOKS DID NOT SHOW ANY DRAWINGS ON RACE DAYS OR ON THE IMMEDIATELY PRECEDING DAYS FOR THE PURCHASE OF JACKPOT COMBINAT ION TICKETS WHICH ENTAILED SIZABLE AMOUNTS VARYING GENERALLY BETWEEN RS.2 000 AND RS 3 000. THE DRAWINGS RECORDED IN THE BOOKS COULD NOT BE CO-RELATED TO THE VARIOUS RA CING EVENTS AT WHICH THE APPELLANT MADE THE ALLEGED WINNINGS; (IV) WHILE THE APPELLANT S CAPITAL ACCOUNT WAS CREDITED WITH THE GROSS AMOUNT OF RACE WINNINGS THERE WERE NO DE BITS EITHER FOR EXPENSES AND PURCHASES OF TICKETS OR FOR LOSSES (V) IN VIEW OF T HE EXCEPTIONAL LUCK CLAIMED TO HAVE BEEN ENJOYED BY THE APPELLANT HER LOSS OF INTEREST IN RACES FROM 1972 ASSUMED SIGNIFICANCE. THE SETTLEMENT COMMISSION TOOK THE V IEW THAT WINNINGS IN RACING BECAME LIABLE TO INCOME-TAX FROM APRIL 1 1972 BUT ONE WOULD NOT GIVE UP AN ACTIVITY YIELDING OR LIKELY TO YIELD TO LARGE INCOME MERELY BECAUSE THE INCOME WOULD SUFFER TAX AND THAT THE POSITION WOULD BE DIFFERENT HOWEVER IF THE CLAIM OF WINNINGS IN RACES WAS FALSE AND WHAT WERE PASSED OFF AS SUCH WINNINGS REALLY REPRESENTED THE APPELLANTS TAXABLE INCOME FROM SOME UNDISCLOSED SO URCES. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 27 31. ON APPEAL THE HONBLE SUPREME COURT HELD THAT DISMISSING THE APPEAL THAT THE SETTLEMENT COMMISSION AFTER CONSIDERING THE SUR ROUNDING CIRCUMSTANCES AND APPLYING THE TEST OF HUMAN PROBABILITIES HAD RIGHTL Y CONCLUDED THAT THE APPELLANTS CLAIM ABOUT THE AMOUNT BEING HER WINNINGS FROM RACE S WAS NOT GENUINE. 32. THUS THE TEST OF HUMAN PROBABILITIES WAS ACCEP TED BY THE HONBLE SUPREME COURT. DOCUMENTARY EVIDENCE WAS IGNORED AND HUMAN P ROBABILITY TEST WAS APPLIED. ON THIS TOUCHSTONE WE ANALYZE THE FINDINGS OF THE L OWER AUTHORITIES AND REPLIES GIVEN BY THE ASSESSEE. 33. ASSESSEE HAD NO FUNDS TO START WITH FOR MAKING INVESTMENTS IN FOUR SUBSIDIARY COMPANIES AND THE MONEY WAS BORROWED FROM THE FOLLO WING PERSONS : 1 GKAK RATHI HUF 34.87 CRORES (28/3 TO 30/3) 2 SUBAHU INVESTMENT LTD. 5.50 CRORES (28/3) 3. VIPLAV TRADING LTD. 1.30 CRORES (30/3) 4. KOSHA INVESTMENTS (BALANCES) 6.325 CRORES (29/3/00) 48.00 CRORES NOW LET US LOOK AT WHAT IS THE MATERIAL BEFORE THE A.O. AND HOW HE DEALT WITH THE SAME. 34. IT IS VERY SURPRISING THAT MAJOR CHUNK OF MONEY HAS COME FROM GKAK RATHI HUF WHO IS THE MAIN PERSON BEHIND GEEKAY EXIM (IND IA) LTD. ON WHOSE BEHALF THE ASSESSEE COMPANY HAD GIVEN GUARANTEE TO VYSYA BANK AND ULTIMATELY LOST A SUM OF RS.105 CRORES. THE DISPUTE WITH GEEKAY EXIM (INDIA) LTD. STARTED IN THE YEAR 1998-99 AND ULTIMATELY THE LAND WAS AGREED TO BE TRANSFERRE D ON 29 TH SEPTEMBER 1999 AND STILL THE SAME PERSON WHO IS CAUSING THE LOSS OF RS. 105 CROES TO THE COMPANY IS GIVING RS. 34 CRORES. (DETAILS HAVE BEEN DISCUSSED WHILE ADJU DICATING GROUND NO. 3 IN LATER PARAS OF THE ORDER). THIS FACT IS BEYOND COMPREHENSION OF ANY PRUDENT PERSON. WE FAIL TO UNDERSTAND THAT IF THE ASSESSEE COMPANY COULD TAKE MONEY FROM HIM FOR INVESTMENT IN ITS SUBSIDIARY COMPANIES THEN WHY THE COMPANY C OULD NOT RECOVER ITS DUES. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 28 35. IT IS TO BE NOTED THAT INVESTMENTS IN FOUR SUBS IDIARY COMPANIES HAS BEEN MADE IN A SPAN OF THREE DAYS AT A HUGE PREMIUM OF R S. 140/- OR RS.150/- PER SHARE. IT IS FURTHER TO BE NOTED THAT ALL THESE COMPANIES WERE ALREADY 100% SUBSIDIARIES OF THE ASSESSEE COMPANY AND IF THERE WAS ANY ADVANTAGE LYING ON THOSE COMPANIES THAT IS TO SAY THAT IF ANY GOLD MINE WAS AVAILABLE WITH THESE COMPANIES IT ALREADY BELONGED TO THE ASSESSEE COMPANY BECAUSE OF 100% SHAREHOLDIN G. ASSUMING THAT IF THESE COMPANIES REQUIRES FURTHER MONEY THEN IN THE ABSEN CE OF ANY REAL ASSETS WHERE WAS THE NEED FOR PAYING A HUGE PREMIUM. THE REASON GIVE N BEFORE THE ASSESSING OFFICER WAS THAT INVESTMENT WAS MADE TO STRENGTHEN THE FINA NCE OF THOSE FOUR SUBSIDIARY COMPANIES. IF THAT IS SO WE FAIL TO UNDERSTAND THE N WHY WITHIN A PERIOD OF THREE DAYS THE MONEY INVESTED BY THE ASSESSEE COMPANY HAS DISA PPEARED FROM THE AMOUNTS OF THESE FOUR COMPANIES BECAUSE THESE FOUR SUBSIDIARY COMPANIES IN TURN HAVE INVESTED A SUM OF RS. 48.15 CRORES IN ANOTHER COMPANY KNOWN AS KOSHA INVESTMENT LTD. 36. THE ASSESSING OFFICER MADE FURTHER ENQUIRIES FR OM THE INVESTMENT OF M/S. KOSHA INVESTMENTS LTD. AND FOUND THAT IN THOSE THR EE DAYS THE MONEY HAS FURTHER DISAPPEARED FROM THE ACCOUNTS OF M/S. KOSHA INVESTM ENTS LTD. AND HAS ULTIMATELY RETURNED TO THE ASSESSEE COMPANY M/S. SNOWCEM INDI A LTD. GKAK RATHI GROUP SUBAHU INVESTMENT LTD. AND SABARA IMPEX PVT. LTD . IT IS ALSO TO BE NOTED THAT INVESTMENT IN KOSHA INVESTMENT LTD. BY THESE FOUR SUBSIDIARY COMPANIES WAS ALSO MADE AT A HUGE PREMIUM WHEREAS KOSHA INVESTMENTS LT D. HAD FOLLOWING LOSSES: S.NO. ASST.YEAR BOOK PROFIT (RS.) SHARE CAPITAL (RS .) 1. 1996-97 2 520 638 9 000 000 2. 1997-98 - 13 122 926 9 000 000 3. 1998-99 - 41 765 143 9 000 000 4. 1999-00 - 28 848 980 9 000 000 5. 2000-01 - 76 902 385 18 360 000 THUS THE DESPITE OF LOSSES IN KOSHA INVESTMENTS L TD. THE ASSESSEES FOUR SUBSIDIARY COMPANIES CHOOSE TO MAKE INVESTMENTS AT HUGE PREMIU M (NOMINAL VALUE OF SHARES IS ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 29 RS.22 50 000/- AND PREMIUM IS 11 91 25 000/- IN EAC H OF THE FOUR COMPANIES) AND NO JUSTIFICATION WAS GIVEN BEFORE THE LOWER AUTHORITIE S OR EVEN BEFORE US. 37. THE ASSESSING OFFICER HAS ALSO AGAIN ANALYSED D ATE-WISE TRANSACTION IN VARIOUS BANKS AND ULTIMATELY FOUND THAT NO MONEY AT ALL IN FACT WAS INVOLVED AND IT WAS ONLY CIRCULAR TRANSACTION AND FOR THIS HE HAS D RAWN THE FOLLOWING CHART.: GKAK RATHI (HUF)------ ----- KILLICK NIXON LTD. ------- ------MATTERHORN INVESTMENTS LTD. I I I I----------------------------------------- --------- ---------------------- KOSHA INVETMENT LTD. SUBAHU INVESTMETS LTD.---------------- -------------------------------------------KILLICK NIXON LTD. I I I I I KOSHA INVESTMENTS LTD. ---------------- ------------------------------ MATTERHORN INVESTMEN TS LTD. THE ABOVE FLOW CHART CLEARLY SHOWS THAT ASSESSEE CO MPANY I.E. M/S. KILLICK NIXON LTD. MAINLY GENERATED FUNDS FROM GKAK RATHI (HUF) M/S. SUBAHU INVESTMENTS LTD. AND M/S. KOSHA INVESTMENTS LTD. OVER A PERIOD OF 3 DAYS ON THE SAME DATES WHEN THIS MONEY WAS GENERATED IT WAS SENT TO FOUR SUBSIDIARY COMPANIES I.E. MATTERHORN INVESTMENTS LTD. FIRCREST INVESTMENTS LTD. GALATI CA INVESTMENTS LTD. AND MONTBLANC INVESTMENTS LTD. BY WAY OF INVESTMENT IN THEIR SHAR ES FROM WHERE ON THE SAME 3 DAYS THE MONEY WENT TO M/S. KOSHA INVESTMENTS LTD. AGAIN AS INVESTMENT IN SHARES FROM WHERE THE MONEY AGAIN WENT BACK TO GKAK RATHI GROUP M/S.SUBAHU INVESTMENTS LTD. AND M/S. SABARA IMPEX LTD. AND THE LAST TWO COMPAN IES BELONGED TO GKAK RATI GROUP. THUS NO REAL MONEY WAS INVOLVED AND IT HAS B EEN SIMPLY A CASE OF ENTRIES STARTING FROM A PARTICULAR PLACE AND ENDING AT THE ALMOST THE SAME PLACE BY EMPLOYING MAZE OF DIFFERENT COMPANIES. 38. THUS THE SUBMISSION BEFORE THE ASSESSING OFFICE R THAT INVESTMENT WAS DONE TO STRENGTHEN THE FINANCES OF FOUR COMPANIES IS TO TALLY WRONG BECAUSE ACTUALLY NO MONEY WAS EVER INVESTED AT ALL IN THE SENSE THAT A CHEQUE WAS OBTAINED AND CIRCULATED THROUGH VARIOUS ENTITIES AGAIN AND AGAIN. IN ANY CA SE MONEY NEVER REMAINED WITH FOUR ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 30 SUBSIDIARY COMPANIES BECAUSE THE SAME WAS AFTER THE RECEIPT WAS IMMEDIATELY HANDED OVER TO KOSHA INVESTMENTS LTD. WHICH IN TURN WENT TO OTHER ENTITIES AND THIS HAS BEEN CLEARLY DEMONSTRATED BY THE ASSESSING OFFICER FROM THE BANK STATEMENTS OF VARIOUS COMPANIES REPRODUCED IN HIS ASSESSMENT ORD ER. THE ASSESSING OFFICER HAD ALSO ANALYSED THE TRANSACTIONS REGARDING SALES OF S HARES OF THESE FOUR SUBSIDIARY COMPANIES AND ALSO RECORDED A STATEMENT OF SHRI G.R . VORA DIRECTOR IN THESE FOUR COMPANIES SHRI DEVI PRASAD BUDHIYA OF SHREE RADHA FINANCIAL SERVICES PVT. LTD. AND CONCLUDED THAT EXECUTION OF SHARE TRANSFER FORM WAS NOT PRODUCED BEFORE HIM. EVEN THE FUNDS FOR PURCHASING OF SHARES BY SHREE RADHA F INANCIAL SERVICES PVT. LTD. AND DIPLOMAT TRADING PVT. LTD. WERE INDIRECTLY FINANCE D BY THE COMPANY. THE LEARNED COUNSEL FOR THE ASSESSEE HAS NOT PRODUCED ANY MATER IAL TO SHOW THAT THIS IS NOT CORRECT. IN FACT HE HAS CHOSEN NOT TO SAY ANYTHING ON THIS ASPECT. FROM ALL THE ABOVE FINDINGS IT BECOMES CLEAR THAT ASSESSEE HAD MERELY GENERATED PAPER LOSS THROUGH MEANS OF COLOURABLE DEVICES WHICH ARE STILL NOT PER MISSIBLE IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. LD. VS. CIT (154 ITR 148)(SC). THEREFORE WE FIND NOTHING WRONG WITH TH E ORDER OF THE CIT(A) IN THIS RESPECT AND CONFIRM THE SAME. 39. THE ASSESSEE HAD ALSO CLAIMED SHORT TERM CAPITA L LOSS OF RS. 3 09 26 000/- ON ACCOUNT OF SALE OF SHARES OF KILLICK HALCO LTD. WH ICH HAS BEEN CONVERTED INTO SHORT TERM CAPITAL GAINS OF RS.80 80 640/- BY THE ASSESSI NG OFFICER. THE ASSESSING OFFICER NOTICED THAT ASSESSEE COMPANY HELD 2 22 000 EQUITY SHARES IN ITS SUBSIDIARY COMPANIES KNOWN AS KILLICK HALCO LTD. IN WHICH FURTHER 78 00 0 SHARES WERE ACQUIRED AT THE RATE OF RS.19.87 PER SHARE AFTER WHICH KILLICK HALCO LTD . BECAME 100% SUBSIDIARY OF THE ASSESSEE COMPANY. ASSESSEE HAD ALSO AMOUNT OF LOAN RECOVERABLE FROM THIS COMPANY AMOUNTING TO RS. 4 CRORES WHICH WAS CONVERTED INTO SHARE AT THE RATE OF RS.800/-PER SHARE INCLUDING PREMIUM OF RS. 700/-. THE ASSESSING OFFICER NOTICED THAT PROFIT & LOSS POSITION OF KILLICK HALCO LTD. READS AS UNDER: ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 31 ASST.YEAR TURNOVER BOOK PROFIT PROFIT AS PER INCOME - TAX (ACCRUED) DEBIT BALANCE IN P&L ACCOUNT 1996-97 8 900 219 953 472 NIL NIL 1997-98 255 478 636 -2 144 590 - 2 115 984 542 641 1998-99 30 158 210 -3 135 222 -2 342 205 3 619 332 1999-00 11 105 058 -9 625 462 -28 681 050 13 225 7 94 2000-01 9 583 639 -9 304 145 -4 632 900 22 539 939 MOREOVER IN JULY 1998 ASSESSEE GAVE VRS TO 86 EMP LOYEES WHICH SHOWS THAT KILLICK HALCO LTD. WAS ON THE VERGE OF CLOSURE. NO REPLY W AS GIVEN BEFORE US WHY SHARES WERE PURCHASED AT A PRICE OF RS. RS.800/- PER SHARE IN MARCH 2000 WHEN ASSESSEE ITSELF HAS PURCHASED ANOTHER 78 000 SHARES AT RS. 1 9.87 PER SHARE ON 25.11.1999. NO SUBSTANTIAL CHANGE IN THE INTERVENING PERIOD IS VIS IBLE FROM RECORDS AND THE POSITION OF PROFIT AND LOSS CLEARLY SHOWS THAT KILLICK HALCO LT D. WAS A LOSS MAKING COMPANY AND FURTHER ON THE VERGE OF CLOSURE. THE ONLY PROBABILI TY WHICH SEEMS TO BE THERE FOR MAKING INVESTMENT AT A PREMIUM OF RS.700 EACH IS TH AT THE ASSESSEE WANTED TO GENERATE LOSS THROUGH SALE OF SHARES OF THAT COMPAN Y. THEREFORE THIS TRANSACTION ALSO SEEMS TO THE TOTALLY SHAM AND WE DECLINE TO INTERFE RE WITH THE ORDERS OF THE LOWER AUTHORITIES. 40. ONE MORE LOSS ON ACCOUNT OF SALE OF SHARES IN T HE CASE OF PELICAN PAINTS LTD. AMOUNTING TO RS. 1 68 37 861/- HAS BEEN DENIED BY T HE ASSESSING OFFICER. IN THIS RESPECT WE FIND THAT THE ASSESSING OFFICER CLEARLY NOTICED THAT ASSESSEE HAD 42 500 SHARES IN PELICAN PAINTS LTD. WHICH WAS PURCHASED I N 1998-99 AT RS. 580 PER SHARE AND IN 1999-2000 AT RS. 370/- PER SHARE. THE SHARES WE RE SOLD TO ANOTHER SISTER CONCERN M/S. SNOWCEM INDIA LTD. AT THE RATE OF RS. 10 PER SHARE. 41. THE ASSESSING OFFICER RAISED A QUERY AS TO WHY WHILE DETERMINING THE VALUE OF SHARES NO CREDIT FOR LEASEHOLD LAND FROM MIDC WAS TAKEN AND FURTHER THE BUILDING WAS ALSO CONSIDERED ON ITS WDV BECAUSE IT IS AN OLD BUI LDING. WE FURTHER FIND THE PROFIT AND LOSS POSITION OF THE COMPANY WHICH READS AS UNDER: THE PERUSAL OF BALANCE SHEET & P&L ACCOUNT OF PELI CAN PAINTS LTD. AS ON 31.03.2000 & 31.03.1999 31.03.1998 SHOWS: ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 32 (RUPEES IN LAKHS) 1999-2000 1998-1999 19997-1998 SALES 28.17 35.14 28.96 PROFIT FOR THE YEAR 10.75 0.67 15.26 THE ABOVE CLEARLY SHOWS THE COMPANY IS HIGHLY PROF ITABLE. THE ASSESSING OFFICER HAD DURING THE ASSESSMENT PROCEEDINGS NOTICED THAT A CO URT RECEIVER WHO WAS APPOINTED AND WHO HAD RESTRAINED THE COMPANY FROM ALIENATING ANY OF THE PROPERTY DESPITE OF THESE FACTS THE ASSESSEE CHOOSE TO INVEST AT HUGE P REMIUM AND LATER ON SOLD THE SHARES AT A LOSS. FURTHER WHILE DETERMINING THE SA LE VALUE NO CREDIT HAS BEEN TAKEN BY THE ASSESSEE COMPANY FOR LEASEHOLD AND BUILDING HEL D BY PELICAN PAINTS LTD. WHICH IS NOT CORRECT. BEFORE US NO JUSTIFICATION FOR PURCHAS ING THE SHARE AT A PREMIUM AND SELLING THE SHARES AT RS. 10/- WAS GIVEN AND THERE FORE IN THIS CASE ALSO WE ARE OF THE VIEW THAT THE WHOLE TRANSACTION HAS BEEN CARRIED OU T ONLY WITH A VIEW TO GENERATE PAPER LOSSES BECAUSE THE TRANSACTION WAS BETWEEN SI STER CONCERNS. IN THESE CIRCUMSTANCES WE CONFIRM THE ORDER OF THE CIT(A) I N RESPECT OF THE ISSUE RAISED IN GROUND NO.1. 42. AS FAR AS GROUND NO. 2 IS CONCERNED AFTER HEAR ING BOTH THE PARTIES WE FIND THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSIN G OFFICER NOTICED THAT ASSESSEE HAD CLAIMED THE FAIR MARKET VALUE OF LAND AS ON 01. 4.81 WHICH WAS SOLD DURING THE YEAR AT RS.11.10 CRORES. LATER ON IT WAS STATED V IDE LETTER DATED 25.11.2003 THAT FAIR MARKET VALUE OF THE LAND SHOULD BE TAKEN AT RS. 19 76 00 000/- AS ON 01.04.81 AS PER THE VALUATION REPORT OF ONE SHRI R.J. SETHNA A.O. NOTED THAT THE SAID REPORT WAS DATED 18.3.92 SURPRISINGLY IT HAD VALUED A PART OF LAND WHICH WAS ULTIMATELY TAKEN OVER BY VYSYA BANK AND WHICH WAS TREATED AS SALE BY THE AS SESSEE. THE A.O. OBSERVED THAT THE ASSESSEE HAD GIVEN THE GUARANTEE IN THE YEAR 19 97 THEN HOW THAT SPECIFIED PIECE COULD BE KNOWN IN THE YEAR 1992 TO THE VALUER AND T HEREFORE THE REPORT WAS TREATED ONLY A SELF-SERVING DOCUMENT. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 33 43. HE ALSO WONDERED THAT IF THIS REPORT WAS AVAILA BLE WITH THE ASSESSEE AT THE TIME OF FILING OF THIS RETURN THEN WHY THE SAME WAS NOT FILED ALONG WITH THE RETURN. IN THIS BACKGROUND A.O. REFERRED THE MATTER TO THE VA LUATION OFFICER U/S.55A AND SINCE SOME PARTICULARS WERE NOT FILED BY THE ASSESSEE BEF ORE THE DVO THE REPORT WAS NOT SENT TO THE A.O. IN THIS BACKGROUND THE ASSESSING OFFICER ADOPTED THE FAIR MARKET VALUE OF THE LAND AT RS. 11.10 CRORES AND MADE IT S UBJECT TO RECTIFICATION U/S.154 WHEN THE REPORT OF VALUATION OFFICER WOULD BE AVAILABLE. 44. DURING THE APPEAL PROCEEDINGS THE ASSESSING OF FICER FORWARDED THE REPORT OF THE DVO VIDE HIS LETTER DATED 30.9.2004 IN WHICH TH E VALUATION REPORT DATED 20.9.2004 WAS ALSO SENT WHEREIN THE FAIR MARKET VALUE OF THE LAND WAS VALUED AT RS.1 70 43 890/-. BECAUSE OF THIS DIFFERENCE IT BEC AME CLEAR THAT CAPITAL GAINS COMPUTED BY THE ASSESSING OFFICER WAS REQUIRED TO B E REVISED AND ACCORDINGLY THE CIT(A) ISSUED NOTICE UNDER SECTION 251(2) ON 11.10. 204 WHICH WAS FURTHER REPLACED BY ANOTHER NOTICE DATED 25.10.2004 AND PROPOSED TO ENH ANCE THE ASSESSEES INCOME IN RESPECT OF LONG TERM CAPITAL GAINS. THIS PROPOSAL W AS OBJECTED BY THE ASSESSEE BY LETTER DATED 18.10.2004. IT WAS ARGUED THAT SINCE THE AO HAS MENTIONED IN HIS ORDER THAT ON RECEIPT OF VALUATION REPORT THE ORDER WOUL D BE RECTIFIED UNDER SECTION 154 AND THEREFORE SUCH RECTIFICATION SHOULD HAVE BEEN MADE ONLY BY THE AO. THE LEARNED CIT(A) REJECTED THIS ARGUMENT BY OBSERVING THAT TH E CIT(A)S POWERS ARE CO-TERMINUS WITH THAT OF AO AND FURTHER HE HAS BEEN EMPOWERED T O MAKE ENHANCEMENT SPECIFICALLY AND THEREFORE HE WAS EMPOWERED TO EN HANCE THE TAXABLE CAPITAL GAINS ACCORDINGLY. 45. IT WAS FURTHER ARGUED BEFORE THE CIT(A) THAT VA LUATION GIVEN BY THE APPROVED VALUER SHRI R.J. SETHNA SHOULD BE ADOPTED BUT THE L EARNED CIT(A) OBSERVED THAT NO SUCH REPORT WAS FILED BEFORE HIM AND THEREFORE HE DID NOT TAKE COGNIZANCE OF THIS SUBMISSION. IN FACT THE DETAILED OBSERVATION MADE IN PARAS 3.9.5 AND 3.9.6 IN THE ORDER OF THE CIT(A) READ AS UNDER: ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 34 3.9.5 IN THE SAME LETTER THE APPELLANT REQUESTED F OR ADOPTION OF THE VALUATION REPORT PREPARED BY SHRI R.J. SETHNA ANOT HER GOVERNMENT APPROVED REGISTERED VALUER FOR THE PURPOSE OF VALU ING APPELLANTS LAND IN QUESTION. HOWEVER THE APPELLANT HAS NOT SUBMITT ED ANY COPY OF THE VALUATION REPORT OF SHRI R.J. SETHNA FOR MY CONSIDE RATION AND HENCE I AM UNABLE TO TAKE COGNIZANCE OF APPELLANTS SUBMISS ION IN THIS REGARD. IN THE SAME LETTER DATED 18.10.2004 THE APPELLANT REQUESTED FOR BEING PERMITTED TO APPOINT ANOTHER REGISTERED VALUE R UNDER THE PROVISIONS OF SECTION 287A OF THE I.T.ACT 1961 FOR MAKING SUBMISSIONS WITH REGARD TO THE VALUATION OF THE IMPUGNED LAND. FOR THIS PURPOSE THE APPELLANT WAS GIVEN AN OPPORTUNITY VIDE MY LET TER NO. CIT(A)-C- 1/MISC/2004-05 DATED 10.11.2004 TO REPRESENT THE MA TTER THROUGH THEIR REGISTERED VALUER IN TERMS OF THE PROVISIONS OF SECTION 287A OF I.T. ACT 1961 AND A HEARING WAS FIXED ON 22.11.200 4 IN THIS REGARD. HOWEVER THE APPELLANT HAS SO FAR NOT APPOINTED ANY VALUER FOR THE PURPOSE AND THERE WAS NO REPRESENTATION ON ITS BEHA LF ON THE APPOINTED DATE OF 22.11.2004. HENCE I AM LEFT WITH NO ALTERNATIVE BUT TO ADOPT THE FAIR MARKET VALUE OF THIS LAND AS ON 1 .4.1981 AS FIXED BY THE DVO. 3.9.6. THE ASSESSING OFFICER IS THEREFORE DIRECTE D TO RECOMPUTE THE LONG TERM CAPITAL GAIN ACCRUED TO THE APPELLANT AS A RESULT OF THE TRANSFER OF IMPUGNED CHANDIVALI LAND TO VYSYA BANK BY ADOPTED THE COST OF ACQUISITION OF THE SAID LAND AS ON 1.4.1981 AT RS.1 70 43 890/- AS FOXED BY THE DVO. HENCE THE ADDITIONAL GROUND O F APPEAL IN THIS REGARD STANDS DISMISSED AND THE APPELLANTS INCOME IN RESPECT OF LONG TERM CAPITAL GAIN ON TRANSFER OF ITS LAND IS DIRECT ED TO BE ENHANCED. THE ASSESSING OFFICER IS FURTHER DIRECTED TO ISSUE A NOTICE OF DEMAND UNDER THE PROVISIONS OF SECTION 156 OF THE I.T.ACT 1961 IN RESPECT OF THE ADDITIONAL DEMAND TO BE RAISED AS A RESULT OF T HE REVISION OF TAXABLE LONG TERM CAPITAL GAIN AS DIRECTED ABOVE. T HE A.O. IS ALSO DIRECTED TO INITIATE PENALTY PROCEEDINGS UNDER SECT ION 271(1)(C) OF I.T.ACT 1961 AGAINST THE APPELLANT FOR UNDERSTANDI NG ITS TAXABLE LONG TERM CAPITAL GAIN ON TRANSFER OF CHANDIVALI LAND AN D FOR FILING WRONG PARTICULARS THEREOF IN THE RETURN OF INCOME FILED B Y IT. 46. THE ASSESSEE HAD ALSO MADE A CLAIM FOR A SUM OF RS. 1 CRORE ON ACCOUNT OF COMPENSATION FOR REDEMPTION OF SUB-TENANCY RIGHT. T HIS CLAIM WAS DISALLOWED BY THE A.O.VIDE PARA 11.3 ON THE BASIS THAT BONAFIDE OF TH E CLAIM WERE NOT ESTABLISHED AND THE AMOUNT WAS NOT PAID DURING THE YEAR AND THERE W AS NO PROOF THAT THIS AMOUNT IS REALLY PAYABLE. EVEN THREE YEARS AFTER THE AGREEMEN T NO PAYMENTS HAVE BEEN MADE. THE A.O. ALSO NOTED THAT THE LAND WAS GIVEN AS A GU ARANTEE ON ACCOUNT OF GEEKAY RATHI GROUP WHICH HAD DEFAULTED AND THE LAND WAS UL TIMATELY TAKEN OVER BY THE BANK AND NO PRUDENT BUSINESSMAN WOULD FACILITATE THE VAC ATION OF ILLEGAL SLUM DWELLERS AND INCUR FURTHER COST ONCE HE HAS ALREADY BEEN DUPED. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 35 47. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT VALUATION REPORT OBTAINED FROM SHRI R.J.SETHNA WAS FURNISHED TO A.O. VIDE LETTER DATED DECEMBER 18 2003 AND COPY OF THE SAME WAS FILED BE FORE US. HE SUBMITTED THAT ONCE THE VALUATION REPORT OF THE REGISTERED VALUER WAS A VAILABLE THEN THE A.O. HAD NO POWER TO REFER THE MATTER AGAIN TO THE VALUATION OFFICER IN TERMS OF SECTION 55A OF THE ACT. IN THIS REGARD HE STRONGLY RELIED ON THE FOLLOWING DECISIONS: I) SMT. KRISHNABAI TINGRE V. ITO (101 ITD 317) II) MRS.RUBAB M. KAZERANIV. JCIT (2004) 9 ITD 429 III) URMILA BAWA V. ACIT 16 ITCL (II) 186 IV) ITO V. SMT. LALITABEN B. KAPADIA ( 3 DTR 28) V) SAJJANKUMAR M. HATLAKA V. JCIT (284 ITR 156) HE FURTHER ARGUED THAT IF THE VALUATION REPORT IS N OT AVAILABLE BEFORE COMPLETION OF ASSESSMENT PROCEEDINGS THEN SUCH REFERENCE WOULD BE COME INVALID. FOR THIS PROPOSITION HE STRONGLY RELIED ON THE DECISION OF T HE HONBLE KOLKATA HIGH COURT IN THE CASE OF RELIANCE JUTE AND INDUSTRIES LTD. V. ITO (1 50ITR 643). HE POINTED OUT THAT OBJECTIONS WERE RAISED BEFORE THE DVO AND WERE DULY POINTED OUT BEFORE THE FIRST APPELLATE AUTHORITY WHICH HAVE NOT BEEN DEALT WITH BY THE LEARNED CIT(A). IN THIS REGARD HE REFERRED TO PAGES 66 TO 68 AND PAGE 79 O F THE PAPER BOOK. 48. LASTLY WHILE ARGUING ON THIS GROUND HE REFERR ED TO PAGE 36 OF THE ASSESSMENT ORDER AND POINTED OUT THAT THE ASSESSIN G OFFICER HAS WRONGLY DENIED THE CLAIM OF COMPENSATION FOR REDEMPTION OF SUB-TENANCY RIGHT. HE POINTED OUT THAT CERTAIN PEOPLE HAD OCCUPIED THE LAND BELONGING TO T HE ASSESSEE AND SINCE ASSESSEE WAS DUTY BOUND TO GIVE TO THE BANK THE LAND FREE FR OM ALL ENCUMBRANCES AND THEREFORE THE ASSESSEE WAS REQUIRED TO THROW OUT T HE PEOPLE OCCUPYING THE LAND FOR WHICH PROVISIONS OF RS. 1 CRORE WAS MADE. 49. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE POINTED OUT THAT THE REPORT FROM THE REGISTERED VALUER COULD NOT HAV E BEEN IN EXISTENCE ON 18.3.1992 ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 36 BECAUSE THE REGISTERED VALUER HAD VALUED THE LAND W HICH WAS GIVEN ULTIMATELY TO THE BANK SEPARATELY. SUCH GUARANTEE WAS GIVEN IN THE YE AR 1997 AND THE REGISTERED VALUER COULD NOT HAVE SEPARATED THE UNOCCUPIED LAND IN THE YEAR 1992 ITSELF. HE HAS ALSO REFERRED TO VARIOUS PARAS OF ASSESSMENT ORDER AND APPELLATE ORDER AND STRONGLY RELIED ON THEM AND CONCLUDED BY SAYING THAT THE VAL UATION REPORT HAS ALREADY BEEN RIGHTLY REJECTED. IN RESPECT OF COMPENSATION HE STRONGLY RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 50. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. NO DOUBT THAT IN THE CASES RELIED ON BY THE LEARNED COUNSEL FOR THE ASSE SSEE IT IS CLEARLY HELD THAT IF THE FAIR MARKET VALUE OF THE PARTICULAR ASSET IS SUPPORTED B Y THE VALUATION REPORT PREPARED BY THE REGISTERED VALUER THEN REFERENCE TO SEC.55A THE VALUATION OFFICER IS NOT CORRECT. IT WAS OBSERVED IN THE CASE OF URMILA BAWA V. ACIT(200 7) 16 (II) INCOME-TAX CASE LAW (COPY FILED) THAT NORMALLY IN THE CASE OF SALE OF ASSET ASSESSEE WOULD TEND TO INFLATE THE FAIR MARKET VALUE OF LAND AS ON 1.4.1981 AND IT WOULD BE AN ATTEMPT OF THE A.O. TO PLACE A LOWER VALUE AND THEREFORE FOR SUCH SITUAT ION CLAUSE (A) WOULD NOT BE APPLICABLE AND ONLY CLAUSE (B) TO SECTION 55A WOULD BE APPLICABLE. HOWEVER IN THE CASE BEFORE US THE REFERENCE WAS MADE BECAUSE ACCOR DING TO THE ASSESSING OFFICER THE REPORT GIVEN BY THE REGISTERED VALUER WAS ONLY A S ELF-SERVING DOCUMENT. WE FIND THAT FOLLOWING NOTE WAS GIVEN IN THE STATEMENT SHOWING C APITAL GAINS ATTACHED WITH THE COMPUTATION OF INCOME REGARDING VALUATION REPORT. THIS FIGURE IS SUBJECT TO ADJUSTMENT IN THE LIGHT OF THE VALUATION REPORT WHICH BEING OBTAINED. THE ABOVE NOTE WHICH WAS GIVEN WITH REFERENCE TO TH E ESTIMATED FAIR MARKET VALUE OF LAND CLEARLY SHOWS THAT ASSESSEE WAS IN THE PROCESS OF OBTAINING THE VALUATION REPORT FROM THE SOME VALUER AND IN THE MEANTIME THE ESTIMA TED FAIR MARKET VALUE OF THE LAND AT RS. 11.10 CRORES. LATER ON ASSESSEE FILED THE RE PORT FROM SHRI R.J. SETHNA VIDE LETTER DATED DECEMBER 18 2003. COPY OF THE REPORT IS PLA CED AT PAGE 70 OF THE PAPER BOOK ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 37 WHICH IS DATED 18 TH MARCH 1992. THOUGH IT WAS SUBMITTED DURING THE HE ARING THAT THIS REPORT WAS NOT TRACEABLE AT THE TIME OF FILING OF T HE RETURN AND THAT IS WHY THE ESTIMATE FAIR MARKET VALUE WAS TAKEN IN THE COMPUTATION BUT WE FAIL TO UNDERSTAND THAT IF IT WAS STATED IN THE NOTE TO THE RETURN THAT REPORT IS BEI NG OBTAINED WHICH MEANS ASSESSEE WAS IN THE PROCESS OF RECEIVING A REPORT BUT FILED A REPORT WHICH WAS PREPARED IN MARCH 1992. FURTHER ASSESSEE HAD HUGE AREA OF LAND OUT O F WHICH SOME PORTIONS WERE GIVEN TO SUBSIDIARY COMPANIES AND SOME OTHER PORTIONS WE RE LEASED OUT AS PER LEASE DEED TO BHARAT PETROLEUM AS REFLECTED IN THE VALUATION REPORT. THE VALUATION REPORT DOES NOT MENTION ANY PURPOSE OF VALUATION BUT VERY CONVE NIENTLY SEGREGATE THE LAND WHICH WAS ULTIMATELY GIVEN TO VYSYA BANK AND VALUED THE S AME AT RS. 19.76 CRORES. WHEN THERE WAS NO PARTICULAR PURPOSE OF VALUATION THE PR OPERTY SHOULD HAVE BEEN VALUED AT ONE CONSOLIDATED FIGURE. ALL THESE FACTORS VERY CLE ARLY INDICATE THAT THIS IS ONLY A MAKE BELIEVE STORY AND NO VALUATION REPORT WAS AVAILAB LE ON THE DATE OF FILING OF RETURN. FURTHER PARA 3.9.5 OF THE FIRST APPELLATE AUTHORITY WHICH WE HAVE REPRODUCED EARLIER ABOVE READS AS UNDER: 3.9.5 IN THE SAME LETTER THE APPELLANT REQUESTED FOR ADOPTION OF THE VALUATION REPORT PREPARED BY SHRI R.J. SETHNA ANOT HER GOVERNMENT APPROVED REGISTERED VALUER FOR THE PURPOSE OF VALU ING APPELLANTS LAND IN QUESTION. HOWEVER THE APPELLANT HAS NOT SUBMITTED ANY COPY OF THE VALUATION REPORT OF SHRI R.J. SETHNA FOR MY CONSIDE RATION AND HENCE I AM UNABLE TO TAKE COGNIZANCE OF APPELLANTS SUBMISSION IN THIS REGARD. IN THE SAME LETTER DATED 18.10.2004 THE APPELLANT REQUEST ED FOR BEING PERMITTED TO APPOINT ANOTHER REGISTERED VALUER UNDE R THE PROVISIONS OF SECTION 287A OF THE I.T.ACT 1961 FOR MAKING SUBMIS SIONS WITH REGARD TO THE VALUATION OF THE IMPUGNED LAND. FOR THIS PURPOS E THE APPELLANT WAS GIVEN AN OPPORTUNITY VIDE MY LETTER NO. CIT(A)-C-1 /MISC/2004-05 DATED 10.11.2004 TO REPRESENT THE MATTER THROUGH THEIR RE GISTERED VALUER IN TERMS OF THE PROVISIONS OF SECTION 287A OF I.T. ACT 1961 AND A HEARING WAS FIXED ON 22.11.2004 IN THIS REGARD. HOWEVER TH E APPELLANT HAS SO FAR NOT APPOINTED ANY VALUER FOR THE PURPOSE AND THERE WAS NO REPRESENTATION ON ITS BEHALF ON THE APPOINTED DATE OF 22.11.2004. HENCE I AM LEFT WITH NO ALTERNATIVE BUT TO ADOPT THE FAIR MARKET VALUE O F THIS LAND AS ON 1.4.1981 AS FIXED BY THE DVO. 51. THE ABOVE PARA CLEARLY SHOWS THAT BEFORE THE CIT(A ) A REQUEST WAS MADE FOR APPOINTMENT OF ANOTHER REGISTERED VALUER AND WHEN O PPORTUNITY WAS GIVEN NO SUCH ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 38 APPOINTMENT WAS MADE. IF THE REPORT OF SHRI R.J. S ETHNA WAS CORRECT THEN NORMALLY THE ASSESSEE WOULD HAVE STOOD BY THAT AND PRODUCED THE SAME PERSON. ALL THESE FACTORS VERY CLEARLY SHOW THAT ASSESSEE COMPANY HAD NO REAL VALUATION REPORT AND THEREFORE THE ASSESSING OFFICER WAS RIGHT IN REFER RING THE MATTER TO THE VALUATION CELL. WE WOULD FURTHER LIKE TO POINT OUT THAT IN THE CASE OF POORANMAL VS. DIRECTOR OF INSPECTION (93 ITR 505) THE HONBLE SUPREME COURT WHILE CONSIDERING THE ISSUE REGARDING ADMISSIBILITY OF EVIDENCE COLLECTED IN TH E ILLEGAL SEARCH OBSERVED AT PAGE 528 THAT IT WAS THE RELEVANCY OF THE EVIDENCE WHICH WAS IMPORTANT AND THE TEST OF ADMISSIBILITY OF EVIDENCE LIES IN RELEVANCY AND TH E SAME COULD BE ADMITTED UNLESS THERE IS AN EXPRESS OR IMPLIED PROHIBITION FOR AD MISSION OF SUCH EVIDENCE. THEREFORE IN OUR HUMBLE VIEW THE REFERENCE MADE TO THE VALUAT ION OFFICER WAS CORRECT AND THE LEARNED CIT(A) HAD CORRECTLY ADMITTED THAT EVIDENCE . 52. IT WAS OBJECTED BEFORE THE LEARNED CIT(A) THAT SINCE IT WAS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSESSMENT ORDER WOULD BE RECTIFIED UPON RECEIPT OF VALUATION REPORT THE CIT(A) HAS NO POWER TO CONSI DER THE VALUATION REPORT AND HENCE THE CAPITAL GAINS COULD NOT BE REVISED. WE FIND THI S IS NOT CORRECT BECAUSE IT IS TRITE LAW THAT CIT(A) HAVE CO-TERMINUS POWERS HE CAN NORMALL Y DO WHAT THE A.O. CAN DO. REFERENCE MAY BE MADE TO THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF CIT V. KANPUR COAL SYNDICATE (53 ITR 225). THE ASSE SSEE HAD ITSELF RELIED ON THIS VERY DECISION BEFORE THE CIT(A) FOR ADMISSION OF ADDITIO NAL GROUND [SEE PAGE 11 OF CIT(A)S ORDER]. THEREFORE LEARNED CIT(A) VERY RIGHTLY OBSE RVED THAT HE HAD CO-TERMINUS POWERS AND COULD CONSIDER THE VALUATION REPORT SENT BY THE A.O. THIS ASPECT WOULD MEET THE OBJECTION OF THE LEARNED COUNSEL FOR THE A SSESSEE WITH RESPECT TO THE PROPOSITION THAT IF THE REPORT WAS NOT RECEIVED DUR ING THE PENDENCY OF ASSESSMENT PROCEEDINGS THE SAME WOULD BECOME INVALID (BY REFE RENCE TO THE CASE OF RELIANCE JUTE MILLS). SINCE THE CIT(A) HAS SAME PLENARY POW ERS AS THAT OF A.O. WHICH MEANS ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 39 THE PROCEEDING BEFORE THE CIT(A) ARE IN FACT IN THE NATURE OF CONTINUATION OF ASSESSMENT PROCEEDINGS. 53. HOWEVER WE FIND FORCE IN THE LAST SUBMISSION O F THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS RESPECT THAT THE LEARNED CIT(A) WA S BOUND TO CONSIDER THE OBJECTIONS RAISED BEFORE HIM IN RESPECT OF THE VALUATION REPOR T OF THE DVO. PAGE 66 OF THE PAPER BOOK CLEARLY SHOWS THAT THROUGH LETTER DATED OCTOBE R 12 2004 SOME OBJECTIONS WERE RAISED REGARDING VALUATION PREPARED BY THE DVO. PA RTICULARLY THE OBJECTION REGARDING THAT THE ASSESSEE DOES NOT FALL IN K(E) AREA BUT FE LL UNDER L AREA AS PER NOTIFICATION PACED AT PAGES 79/85 OF THE PAPER BOOK. THEREFORE IN THE INTEREST OF JUSTICE WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) ONLY TO THE E XTENT OF MEETING AND ADJUDICATING THE OBJECTION RAISED BEFORE HIM REGARDING VALUATION TO HIS FILE. NEEDLESS TO SAY THAT ASSESSEE SHOULD BE GIVEN ADEQUATE OPPORTUNITY TO PU T FORTH ITS CASE. 54. COMING TO THE LAST ASPECT OF THE GROUND REGARDI NG DISALLOWANCE OF DEDUCTION ON ACCOUNT OF EXPENSES INCURRED FOR EVICTION OF UNA UTHORIZED OCCUPANTS IS CONCERNED WE FIND THAT THE A.O. HAS OBSERVED IN THIS REGARD A T PARA 11.3 WHICH READS AS UNDER: THE ASSESSEE HAS NOT ESTABLISHED THE BONAFIDES OF PAYMENT AND HAS ALSO NOT GIVEN ANY PROOF OF AMOUNTS PAYABLE THE AGREEMENT REALLY APPEARS TO BE SELF SERVING AND IT IS BEEN ALMOST THREE YEARS SINCE THE DATE OF AGREEM ENTS AND IF THERE WOULD HAVE BEEN ANY PAYMENTS THE ASSESSEE WOULD HAVE GIVEN TH E DETAILS OF THE SAME AND AS THE ASSESSEE WAS A MERE GUARANTOR OF THE LAND WHICH WAS SOLD RATHER IT WAS FORCIBLY TAKEN ON ACCOUNT OF DEFAULT OF THE G.K. RATHI GROUP FOR WHOM THE ASSESSEE WAS A GUARANTOR. THE LAND VALUED MORE THAN RS. 100 CRORES WAS TAKEN AWAY FROM THE ASSESSEE AND IT WOULD NOT BE BUSINESS PRUDENT ANY W AY TO FACILITATE THE EVACUATION IF ANY WAS THERE OF ILLEGAL SLUM DWELLER OR TENANTS A ND INCURS A FURTHER COSTS IN A CASE WHERE ONE HAS GOT DUPED. THIS AGREEMENT AND THE PRO VISION APPEARS TO BE A LAST MINUTE THOUGHT TO REDUCE TAXABLE INCOME AS THE AGRE EMENT IS DATED 15 TH MARCH 2001 WHEREAS THE LAND WAS TRANSFERRED ON 26-04-2000 AS THE LAND WAS ALREADY TRANSFERRED THEN THERE WAS NO REASON FOR THE ASSESS EE TO PAY THE SO CALLED ILLEGAL OCCUPANCY IF ANY AND AS ASSESSEE HAS NOT GIVEN AN Y BONAFIDE PROOF OR JUSTIFICATION SO THE SUM OF RS.1 00 00 000 IS ADDED BACK TO COMPU TATION OF INCOME AND DISALLOWED DURING THE RELEVANT YEAR. 55. WE AGREE WITH THE FINDINGS OF THE ASSESSING OFF ICER BECAUSE NO PAYMENT WAS MADE EVEN AFTER THREE YEARS OF THE AGREEMENT. IN AN Y CASE NORMAL PRUDENT PERSON WHOSE PROPERTY IS GOING FROM HIS HANDS BECAUSE SOME BODY ELSE HAS FAILED TO HONOUR HIS COMMITMENT WOULD NOT LIKE TO FACILITATE THE PE ACEFUL POSSESSION OF THAT PROPERTY TO ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 40 SUCH THIRD PERSON. SUCH PRUDENT PERSON WOULD LIKE T O PROTECT HIS PROPERTY EVEN BY THE MEANS SUCH AS LEGAL ACTION AGAINST UNAUTHORIZED OCC UPANTS AND DELAY THE HANDING OVER OF THE POSSESSION OF LAND. EVEN THE NAMES OF P ERSONS TO WHOM SUCH COMPENSATION WAS PAYABLE COULD NOT BE EXPLAINED TO US AGAINST THE QUERY MADE IN THIS REGARD. THEREFORE WE AGREE WITH THE OBSERVATION OF THE LOWER AUTHORITIES AND CONFIRM THE DISALLOWANCE OF SUM OF RS. 1 CRORE CLAIMED TOWA RDS THE EXPENSES FOR EVICTION OF UNAUTHORIZED OCCUPANTS FORM THE LAND. 56. AS REGARDS GROUND NO.3 IS CONCERNED AFTER HEAR ING BOTH PARTIES WE FIND THAT THIS CLAIM WAS MADE FOR THE FIRST TIME BY WAY OF RA ISING ADDITIONAL GROUND BEFORE THE CIT(A). THIS ADDITIONAL GROUND HAS BEEN REFERRED B Y THE CIT(A) IN PARA 3 WHICH READS AS UNDER: THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX ERRE D IN ASSESSING LONG TERM CAPITAL GAIN ON ACQUISITION OF MORTGAGED LAND BY VYSYA BANK IN PURSUANCE TO THE AGREEMENT DATED 4.4.19996. THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX OUGHT TO HAVE ALLOWED THE ENTIRE AMOUNT OF CONSIDERATION DETERMINED ON AC QUISITION OF LAND BY VYSYA BANK AS BUSINESS LOSS INCURRED BY THE APPELLA NT IN THE COURSE OF CARRYING ON OF BUSINESS OF PROVIDING GUARANTEES. 57. THE ASSESSEE COMPANY WAS THE OWNER OF A PIECE O F LAND CALLED CHANDIVALI LAND ADMEASURING ABOUT 80 827 SQ. MTRS. LOCATED IN POWAI ESTATE ANDHERI (E) MUMBAI. THE ASSESSEE COMPANY HAD GIVEN A GUARANTEE TO THE EXTENT OF RS.100 CRORES IN FAVOUR OF VYSYA BANK OVERSEAS BRANCH OPERA HOU SE MUMBAI. BY GIVING THE SAID LAND AS SECURITY IN RESPECT OF FINANCIAL FACILITIES EXTENDED BY THE SAID BANK TO M/S. GEEKAY EXIM (INDIA) LTD. (IN SHORT GEIL) A COMPA NY BELONGING TO G.K.RATHI GROUP VIDE AGREEMENT DATED 4.4.1996. THIS FACILITY WAS MO DIFIED FURTHER ON 20.12.1997 AND CREDIT GUARANTEE WAS EXTENDED TO VIPLAV TRADING (P) LTD. AND SABARA IMPEX P. LTD. WE FURTHER FIND THAT THE LEARNED CIT(A) NOTED THAT THIS GUARANTEE WAS GIVEN ON THE BASIS OF ONE OF THE OBJECTS OF THE COMPANY AS PER ARTICLE III(W) TO GUARANTEE THE PAYMENT OF MONEY UNSECURED OR SECURED BY OR PAYABLE UNDER OR IN RESPECT OF ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 41 PROMISSORY NOTES BONDS DEBENTURES DEBENTURE-STOC K CONTRACTS MORTGAGES CHARGES OBLIGATIONS BANK OVERDRAFTS INSTRUMENTS AND SECUR ITIES OF ANY COMPANY OR OF ANY AUTHORITY SUPREME MUNICIPAL LOCAL OR OTHERWISE O R OF ANY PERSONS WHOMSOEVER AND GENERALLY TO GUARANTEE OR BECOME SURETIES FOR THE P ERFORMANCE OF ANY CONTRACTS OR OBLIGATIONS. HE HAS ALSO NOTED THAT AN AGREEMENT W AS ENTERED WITH GEIL ON 4.4.96 WHICH INTER ALIA CONTAINED THE FOLLOWING CLAUSES ALSO: M/S. GEEKAY EXIM (INDIA) LTD. HEREBY COVENANTS WIT H M/S. KILLICK NIXON LTD. THEIR SUCCESSORS IN BUSINESS AND ASSIGNS TO I NDEMNITY AND SECURE AND KEEP INDEMNIFIED M/S. KILLICK NIXON LTD. OF F ROM AND AGAINST ALL ACTIONS SUITS PROCEEDINGS CLAIMS AND DEMANDS THAT MAY BE MADE BY VYSYA BANK AGAINST M/S. KILLICK NIXON LTD. AND ALL COSTS CHARGES EXPENSES LOSS OR DAMAGE THAT M/S. KILLICK NIXON LT D. MAY SUFFER AND/OR INCUR UNDER OR IN CONNECTION WITH THE LETTER OF GUA RANTEE (HEREINAFTER REFERRED TO AS THE GUARANTEE) DATED 4 TH APRIL 1996 EXECUTED BY M/S. KILLICK NIXON LTD. IN FAVOUR OF VYSYA BANK (HEREINA FTER REFERRED TO AS THE BANK.) IN ORDER TO SECURE ITS OBLIGATIONS HEREUNDER M/S. GEEKAY EXIM (INDIA) LTD. SHALL WHEN DEMANDED BY M/S. KILLICK NIXON LTD . DEPOSIT AND KEEP DEPOSITED WITH M/S. KILLICK NIXON LTD. SUCH SUM UPT O 10% OF THE FACILITIES SANCTIONED BY THE BANK TO M/S. GEEKAY EXIM (INDIA) LTD. ON THE BASIS OF THE SAID GUARANTEE. THE SAID DEPOSIT SHALL BE AN IN TEREST FREE DEPOSIT AND THE SAME SHALL BE REFUNDED BY M/S. KILLICK NIXON LT D. TO M/S. GEEKAY EXIM (INDIA) LTD. OR THE BANK AS M/S. GEEKAY EXIM (INDI A) LTD. MAY DIRECT ON M/S. GEEKAY EXIM (INDIA) LTD. CEASING TO ENJOY THE BANK FACILITIES OBTAINED BY OR AVAILED OF BY M/S. GEEKAY EXIM (INDI A) LTD. FROM THE BANK ON THE BASIS OF GUARANTEE. IT IS FURTHER AGREED THAT M/S. GEEKAY EXIM (INDIA) LTD. WILL PAY TO M/S. KILLICK NIXON LTD. 2% OF THE GROSS REALIZATION OF T HE EXPORT PROCEEDS AS COMMISSION ON THE BUSINESS WHICH IS FACILITATED BY THE BANK FACILITIES REPAYMENT OF WHICH HAS BEEN GUARANTEED BY M/S. KILL ICK NIXON LTD. AS HEREINABOVE STATED. THE COMMISSION SHALL ACCRUE TO M/S. KILLICK NIXON LTD. ON COMPLETION OF THE AUDIT OF THE ANNUAL ACCO UNTS OF M/S. GEEKAY EXIM (INDIA) LTD. FOR THE PERIOD EXPIRING ON 31 ST OF MARCH IMMEDIATELY PRECEDING AND SHALL BE PAID WITHIN 30 DAYS OF COMPL ETION OF SUCH AUDIT. M/S. GEEKAY EXIM (INDIA) LTD. SHALL FURNISH TO M/S. KILLICK NIXON LTD. LONG WITH PAYMENT A CERTIFICATE OF THEIR AUDITORS AS TO THE GROSS REALIZATION OF THE EXPORT PROCEEDS. PROVIDED HOWEVER THAT IF AT THE TIME OF COMPLETION OF THE AUDIT OF THE ACCOUNTS OF M/S. GEEKAY EXIM (I NDIA) LTD. FOR THE YEAR ENDED 31.3.1999 IT IS ASCERTAINED THAT THE AGGREGA TE AMOUNT OF THE COMMISSION PAID OR PAYABLE FOR THE THREE YEARS ENDI NG 31.3.1999 FALLS SHORT OF SUM OF RS. 6 00 00 000/- (RUPEES SIX CRORE S ONLY) THE AMOUNT OF SHORT FALL SHALL BE ADDED TO THE COMMISSION PAYABLE FOR THE YEAR ENDED 31.3.1999 AND SHALL BE ACCORDINGLY PAID IN THE MANN ER AFORESAID. THE AMOUNT OF SHORTFALL FOR EVERY SUCCEEDING BLOCK OF T HREE YEARS FROM THE YEAR ENDED 31.3.1999 SHALL BE ADJUSTED AND PAID IN THE MANNER AS AFORESAID. IN THE EVENT OF TERMINATION OF THIS AGRE EMENT FOR ANY REASON ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 42 WHATSOEVER IN THE MIDST OF BLOCK OF THREE YEARS TH E AMOUNT OF RS. 6 00 00 000/- WILL BE SUITABLY ADJUSTED ON A PRO-RA TA BASIS. 58. BEFORE ADMISSION OF ADDITIONAL GROUND THE CIT (A) REFERRED THE MATTER BACK TO THE ASSESSING OFFICER WHO OBJECTED FOR ADMISSION OF THE ADDITIONAL GROUND BECAUSE ACCORDING TO HIM IT WAS MERELY AN AFTER THOUGHT AND THE AMOUNT RECEIVABLE WAS NOT WRITTEN OFF. IT WAS ALSO STATED BY THE ASSESSING OF FICER THAT THE ASSESSEE WAS NOT IN THE BUSINESS OF GIVING GUARANTEES AND THERE WAS NO THING COMMON WITH G.K. RATHI GROUP. ACCORDING TO THE ASSESSING OFFICER THE GUARA NTEE TO OTHER PARTIES IS NORMALLY GIVEN AFTER DUE VERIFICATION AND IN THIS CASE NO VE RIFICATION HAD BEEN DONE BY THE ASSESSEE. THIS REPLY WAS SENT TO THE ASSESSEE WHO IN TURN GAVE POINT-WISE REPLY AND ULTIMATELY THE CIT(A) AFTER CONSIDERING THE REPLY A DMITTED THE ADDITIONAL GROUND VIDE PARA 3.8.1 WHICH READS AS UNDER: AS THE ADDITIONAL GROUNDS OF APPEAL SPRING FROM AN ISSUE WHICH HAS BEEN DEALT WITH IN THE ASSESSMENT PROCEEDINGS AND W HICH IS ALSO A SUBJECT MATTER OF THE RETURN OF INCOME FILED BY THE APPELLANT THE SAME ARE REQUIRED TO BE ADMITTED DURING THE APPELLATE PR OCEEDINGS NOTWITHSTANDING THE FACT THAT THE APPELLANT HAD NOT RAISED THIS ISSUE AT THE ASSESSMENT STAGE. I AM SATISFIED BY THE APPELLA NTS SUBMISSION THAT THE ADDITIONAL GROUNDS OF APPEAL COULD NOT BE INCLU DED IN THE MEMORANDUM OF APPEAL (FORM NO.35) EARLIER AS THE AP PELLANT COMPANY WAS NOT ABLE TO GET PROPER LEGAL ADVICE. HENCE IN THE SUBSTANTIAL INTEREST OF JUSTICE. THE ADDITIONAL GROUNDS OF APPE AL AS RAISED BY THE APPELLANT COMPANY ARE HEREBY ADMITTED. 59. THE LEARNED CIT(A) BEFORE ADJUDICATING THE ISSU E ON MERIT RAISED THE FOLLOWING QUERIES: (I) PLEASE SUBMIT A BRIEF NOTE ON THE HISTORY OF BUSINESS RELATIONS BETWEEN M/S. KILLICK NIXON LTD. AND M/S. GEEKAY EXI M (INDIA) LTD. TO WHOM A GUARANTEE WAS PROVIDED IN RESPECT OF THE LOAN TAKEN BY THE LATTER FROM VYSYA BANK LTD. IN THE SAME NOTE P LEASE SPECIFY THE BUSINESS RELATION BETWEEN YOUR GROUP OF COMPANI ES AND G.K. RATHI GROUP OF COMPANIES. (II) PLEASE STATE THE REASONS S TO WHY THE ISSUE RELATIN G TO THE ALLEGED TRADING LOSS SUFFERED AS A RESULT OF PROVIDING GUAR ANTEE TO VYSYA BANK LTD. WAS NOT RAISED BEFORE THE ASSESSING OFFIC ER DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND WHY THE SAME H AS BEEN RAISED FOR THE FIRST TIME DURING THE PRESENT APPELL ATE PROCEEDINGS BY WAY OF AN ADDITION GROUND OF APPEAL. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 43 (III) YOU HAVE SHOWN AN INCOME OF RS. 6 CRORE IN THE PROF IT AND LOSS ACCOUNT (SCHEDULE-I) FOR THE YEAR ENDING ON 31.3.20 01 EXPLAINING THE SAME AS GUARANTEE COMMISSION FOR PRIOR YEARS. PLEASE GIVE THE DETAILS OF THIS INCOME AND SPECIFY THE RELEVANT ASSESSMENT YEARS TO WHICH IT PERTAINS. ALSO EXPLAIN THE REASON S AS TO WHY THIS INCOME WAS NOT DISCLOSED IN THE RELEVANT PREVIOUS Y EARS. (IV) PLEASE SPECIFY THE DATE/DATES ON WHICH THE SAID AMO UNT OF RS. 6 CRORES WAS RECEIVED BY YOU. PLEASE FURNISH A COPY O F YOUR BANK STATEMENT INDICATING THE RECEIPT OF THE AMOUNT FROM M/S. GEEKAY EXIM (INDIA) LTD. (V) ON PAGE 172 OF THE PAPER BOOK (ANNEXURE J) YOU HAV E FILED A COPY OF THE EXTRACT OF THE MINUTES DRAWN AT THE MEE TING OF BOARD OF DIRECTORS HELD ON 28.04.2000. AS PER THE EXTRACT VYSYA BANK LTD. WAS TO RE-TRANSFER THE COMPANYS CHANDIVALI LA ND ADMEASURING 49 911 SQ.MTRS. AGAINST THE PAYMENTS TO BE MADE SUBSEQUENTLY. KINDLY EXPLAIN THE POSITION OF THIS RE-TRANSFER AS ON DATE. (VI) PLEASE EXPLAIN THE REASONS AS TO WHY M/S. GEEKAY EX IM (INDIA) LTD. FAILED TO REPAY IT LOAN TO VYSYA BANK LTD. R ESULTING INTO THE LATTER BEING COMPELLED TO ACQUIRE YOUR CHANDIVALI L AND. DID THE BANK TAKE ANY LEGAL ACTION AGAINST THE ORIGINAL BOR ROWER? (VII) THE SAME LOAN IN RESPECT OF WHICH YOU HAD PROVIDED GUARANTEE TO THE BANK WAS SECURED BY ANOTHER GUARANTEE TO THE E XTENT OF RS.127 CRORES GIVEN IN THE FORM OF AVANTI LAND BELO NGING TO A COMPANY OF THAT NAME. UNDER THESE CIRCUMSTANCES PL EASE SPECIFY AS TO WHY M/S. KILLICK NIXON LTD. HAD TO PART WITH ITS LAND TO THE BANK. 60. AGAINST THIS THE ASSESSEE GAVE THE FOLLOWING D ETAILED REPLY WHICH READ AS UNDER: 3. IN PARA 2(1) YOUR HONOUR HAS ASKED US TO GIVE A BRIEF NOTE ON THE HISTORY OF BUSINESS RELATIONS AS ALSO TO SPECIFY TH E BUSINESS RELATIONS BETWEEN THE TWO GROUPS: IN THIS CONNECTION WE HAVE TO SUBMIT THAT SINCE A N UMBER OF YEARS WE HAD FINANCIAL AND COMMERCIAL RELATIONSHIP WITH VARI OUS ENTITLES OF G.K.RATHI GROUP. BOTH THE KILLICK NIXON GROUP AND G .K. RATHI GROUP ARE INDEPENDENT OF EACH OTHER BUT HAVE CERTAIN COMMON B USINESS INTEREST. THE RELATIONSHIP BETWEEN THE TWO GROUPS WAS QUA JOI NT MANAGEMENT AND CONTROL OF SOME COMMON ENTITIES AS ALSO FINANCIAL A ND COMMERCIAL DEALINGS. 47. IN PARA 2(II) YOUR HONOUR HAS ASKED TO STATE THE RE ASONS FOR NON-CLAIMING OF THE TRADING LOSS IN THE RETURN OF INCOME AS ALSO TH E REASONS FOR RAISING THE SAID CLAIM IN THE ADDITIONAL GROUNDS OF APPEAL. WIT H REFERENCE TO THE SAME WE HAVE TO SUBMIT AS UNDER: ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 44 IN THIS CONNECTION WE HAVE TO SUBMIT THAT WE HAD MA DE A CLAIM FOR DEDUCTION OF THE TRADING LOSS ARISING ON ACCOUNT O F THE GUARANTEE BUSINESS CARRIED ON BY US IN THE RETURN OF INCOME F ILED FOR AY 2000-01. HENCE NO SEPARATE CLAIM WAS MADE IN THE RETURN FOR AY 2001-02 WHICH WAS FILED ON 31.10.2001. WE WITHDREW THE SAID CLAIM ON 28.3.2002 DURING THE ASSESSMENT PROCEEDINGS FOR AY 2000-2001 BY WHI CH DATE THE TIME FOR FILING THE REVISED RETURN OF INCOME FOR AY 2001-02 HAD LAPSED. THE SAID CLAIM WAS WITHDRAWN AS ACCORDING TO THE LEGAL ADVI SE RECEIVED BY US THE LOSS AROSE IN AY 2001-02. DUE TO INADVERTENCE AND O VERSIGHT THE CLAIM REMAINING TO BE SEPARATELY CLAIMED DURING THE COURS E OF ASSESSMENT PROCEEDINGS FOR AY 2001-02. SIMILARLY WHILE PRESE NTING THE MEMORANDUM OF APPEAL BEFORE YOUR HONOUR THE GROUND RELATING TO THE CLAIM OF TRADING LOSS ARISING DURING THE COURSE OF CARRYING ON OF GU ARANTEE BUSINESS INADVERTENTLY REMAINED TO BE RAISED. WHEN THE APPE AL WAS FIXED FOR HEARING WE HAVE RAISED THE ADDITIONAL GROUND IMMED IATELY. THE LAPSE IN NOT RAISING THE GROUND IN THE GROUNDS OF APPEAL FI LED WAS INADVERTENT AND DUE TO OVERSIGHT. 48. IN PARA 2(III) YOUR HONOUR HAS ASKED US TO GIVE THE DETAILS OF GUARANTEE COMMISSION INCOME OF RS.6 CRORES AS ALSO FOR NOT DISCLOSING THE SAME IN EARLIER YEARS. WITH REFERENCE TO THE SAME W E HAVE TO SUBMIT AS UNDER: THE GUARANTEE COMMISSION HAS BEEN EARNED ON ACCOUNT OF THE GUARANTEE EXTENDED TO M/S.GEEKAY EXIM (INDIA) LTD. THE SAID G UARANTEE COMMISSION IS DUE TO US AS PER CLAUSE 3 OF THE AGRE EMENT DATED 4.4.1996. AS PER THE SAID CLAUSE WE WERE TO RECEIV E COMMISSION @ OF 2% OF THE GROSS REALIZATION OF EXPORTS PROCEEDS AS COMMISSION SUBJECT TO A MINIMUM GUARANTEED COMMISSION OF RS.6 CRORES. THE AMOUNT OF COMMISSION WAS TO BE PAID WITHIN 30 DAYS OF THE COM PLETION OF AUDIT OF M/S. GEEKAY EXIM (INDIA) LTD. IN NONE OF THE THREE YEARS M/S. GEEKAY EXIM (INDIA) LTD. HAS GIVEN ANY CERTIFICATE AS REQU IRED UNDER THE SAID CLAUSE. HENCE THE MINIMUM GUARANTEED COMMISSION HAS BEEN REFLECTED IN THE PROFIT & LOSS ACCOUNT FOR THE AY 2001-02. 49. IN PARA 2(IV) YOUR HONOUR HAS ASKED US TO GIVE THE DETAILS OF RECEIPT OF THE GUARANTEE COMMISSION. WITH REFERENCE TOT THE SAME WE HAVE TO SUBMIT AS UNDER: THE AMOUNT OF GUARANTEE COMMISSION IS YET NOT RECEI VED. 50. IN PARA 2(V) YOUR HONOUR HAS ASKED US TO GIVE THE D ETAILS OF THE RE-TRANSFER OF LAND FROM VYSYA BANK. WITH REFERENCE TO THE SAME WE HAVE TO SUBMIT AS UNDER: AS PER THE AGREEMENT ENTERED INTO WITH VYS YA BANK WE HAD AN OPTION OF REACQUIRING THE LAND. WE HAVE NOT EXERCIS ED THE SAID OPINION AND IN FACT WE HAVE GIVEN A RELEASE DEED TO VYSYA BANK . 51. IN PARA 2(VI) YOUR HONOUR HAS ASKED US TO GIVE THE REASON OF M/S. GEEKAY EXIM (INDIA) LTD.S FAILURE TO REPAY IT S LOAN TO VYSYA BANK AND WHETHER THE BANK HAS TAKEN ANY ACTION AGAINST T HE ORIGINAL BORROWER. WITH REFERENCE TO THE SAME WE HAVE TO SUBMIT AS UN DR: ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 45 WE ARE NOT AWARE OF THE REASON S OF M/S. GEEKAY EXI M (INDIA) LTD.S FAILURE TO REPAY ITS LOAN. SIMILARLY WE ARE NOT AW ARE WHETHER ANY ACTION HAS BEEN TAKEN BY THE BANK AGAINST THE ORIGI NAL BORROWER. 9. IN PARA 2(VII) YOUR HONOUR HAS ASKED US TO SPE CIFY THE REASONS WHY HAD TO PART WITH THE LAND SINCE THE LOAN TAKEN BY G .K. RATHI GROUP WAS SECURED BY LAND OFFERED AS SECURITY BY ANOTHER COMP ANY. WITH REFERENCE TO THE SAME WE HAVE TO SUBMIT AS UNDER: IN SATISFACTION OF THE GUARANTEES EXTENDED TO VYSYA BANK BY US AND THE OTHER COMPANY WE HAVE TO SELL OUR LAND FOR THE GUARANTEED AMOUNT OF RS.105 CRORES. THE BASIS OF DETERMINATION OF THE AFORESAID LIABILITY AGAINST US AND THE OTHER COMPANY HAS BEEN CO-RELAT ED WITH THE REALIZATION OF THE SALE PROCEEDS OF PROPERTIES WHIC H WERE MORTGAGED TO THE BANK. 61. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMIS SION DECIDED THIS ISSUE VIDE PARA 3.8.5 WHICH READS AS UNDER: AFTER CAREFUL CONSIDERATION OF ALL THE FACTS OF TH E CASE AS DISCUSSED ABOVE I AM OF THE OPINION THAT THE APPELLANT HAS NOT CAR RIED OUT THE ACTIVITY OF PROVIDING THE IMPUGNED GUARANTEE TO VYSYA BANK LTD. IN THE NORMAL COURSE OF CONDUCTING ITS BUSINESS. THOUGH IT IS TRU E THAT THE APPELLANT COMPANYS MEMORANDUM AND ARTICLES OF ASSOCIATION A UTHORIZES THE BUSINESS ACTIVITY OF PROVIDING GUARANTEES BUT THE A PPELLANT COMPANY HAS ADMITTEDLY NOT CARRIED OUT THIS BUSINESS ACTIVITY A T ANY TIME IN ITS LONG HISTORY EXCEPT IN THE SOLITARY INSTANCE OF PROVIDIN G GUARANTEE TO M/S. GEEKAY EXIM (INDIA) LTD. THE APPELLANT COMPANY AS PER ITS CERTIFICATE OF INCORPORATION WAS INCORPORATED ON 14.11.1947 AND I T HAS NEVER INDULGED IN A BUSINESS ACTIVITY OF PROVIDING GUARANTEES EXCE PT ONCE AS DISCUSSED ABOVE. THEREFORE I AM UNABLE TO ACCEPT THE ARGUMEN T OF THE LEARNED AR THAT THE SAID GUARANTEE TO VYSYA BANK WAS PROVIDED BY THE APPELLANT IN THE NORMAL COURSE OF ITS BUSINESS. THE APPELLANT CO MPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BUT IT HAS NEVER AC COUNTED FOR THE COMMISSION INCOME IN ITS RETURNS OF INCOME FILED AF TER ENTERING INTO THE CONTRACT WITH M/S. GEEKAY EXIM (INDIA) LTD. TILL TH E IMPUGNED ASSESSMENT YEAR WHEN IT HAS SHOWN AN INCOME OF RS. 6 CRORES IN RESPECT OF THE ALLEGED GUARANTEE BUSINESS AND THE SAME HAS BEEN SH OWN AS PERTAINING TO PRIOR YEARS. IF SUCH A BUSINESS WAS GENUINE T HE GUARANTEE COMMISSION INCOME WOULD HAVE BEEN SHOWN BY THE APPE LLANT COMPANY ON A REGULAR BASIS FROM THE DATE OF CONTRACT. THE APPE LLANTS FAILURE TO DO SO PROVES THAT THIS HAS NEVER BEEN A REGULAR BUSINESS ACTIVITY. IT IS EQUALLY IMPORTANT TO NOTICE THAT THE APPELLANT AS PER THE AGREEMENT WITH M/S. GEEKAY EXIM (INDIA) LTD. WAS ENTITLED TO RECEIVE CO MMISSION @ 2% OF THE GROSS EXPORT REALIZATIONS OF THAT COMPANY AND THE A PPELLANT HAS NEVER BOTHERED TO REALIZE EVEN ONE RUPEE BY WAY OF COMMIS SION FROM M/S. GEEKAY EXIM (INDIA) LTD. EITHER UPTO THE STAGE OF P ARTING WITH ITS LAND TO THE BANK OR EVEN THEREAFTER. IN VIEW OF THIS UNDIS PUTED FACT THAT NO INCOME HAS BEEN EARNED BY THE APPELLANT AS A RESULT OF THE ALLEGED BUSINESS ACTIVITY IT IS IMPOSSIBLE TO ACCEPT THAT THE SAID GUARANTEE WAS PROVIDED BY THE APPELLANT I THE NORMAL COURSE OF CO NDUCTING ITS BUSINESS. IT IS NOT REASONABLE TO BELIEVE THAT ANY PRUDENT BU SINESSMAN WOULD RISK ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 46 HIS LAND WORTH RS. 105 CRORES IN A BUSINESS ADVENT URE SUCH AS THE APPELLANT HAD DONE WITHOUT FIRST ASCERTAINING THE RETURNS TO BE RECEIVED. IF THE APPELLANTS ACTION OF PROVIDING SAID GUARANT EE IS TO BE TREATED AS A GENUINE BUSINESS ACTIVITY IT IS NOT UNDERSTANDABLE AS TO WHY THE APPELLANT FAILED TO KEEP A DEPOSIT OF A SUM UPTO 10% OF THE F ACILITIES SANCTIONED BY VYSYA BANK TO M/S. GEEKAY EXIM (INDIA) LTD. ON THE BASIS OF THE GUARANTEE PROVIDED BY THE APPELLANT AS PER THE SEC OND CLAUSE OF THE APPELLANTS AGREEMENT WITH M/S. GEEKAY EXIM (INDIA) LTD. MOREOVER THE APPELLANT HAS BEEN SHOWING THESE COMPANIES OF G.K. RATHI GROUP AS ITS DEBTORS AND SUCH DEBTS HAD AS OBSERVED BY THE ASSE SSING OFFICER NOT BEEN WRITTEN OFF OR TREATED DOUBTFUL IN THE APPELLA NTS BOOKS OF ACCOUNTS. THIS ITSELF GOES TO PROVE THAT THE APPELLANTS THEO RY OF SUFFERING A BUSINESS LOSS IN THE IMPUGNED TRANSACTION IS MERELY AN AFTE RTHOUGHT AND NOT A GENUINE CLAIM. SUCH AN AFTERTHOUGHT HAS COME AS A R ESULT OF THE INVESTIGATION DONE BY THE A.O. TO PROVE APPELLANTS CLAIM REGARDING SHORT TERM CAPITAL LOSS ON SALE OF SHARES AS BEING BOGUS AND THE SAME SHORT CAPITAL LOSS WAS STAGE-MANAGED BY THE APPELLANT FOR SETTING OFF AGAINST THE LONG TERM CAPITAL GAIN ON TRANSFER OF ITS CHAND IVALI LAND TO VYSYA BANK. CONSIDERING ALL THEE FACTS I HOLD THAT THE APPELLA NTS ACTION OF PROVIDING GUARANTEE TO VYSYA BANK IN RESPECT OF THE FINANCIAL FACILITIES PROVIDED TO M/S. GEEKAY EXIM (INDIA) LTD. BY THAT BANK WAS NOT IN THE NORMAL COURSE OF CONDUCTING THE APPELLANTS BUSINESS AND THEREFO RE THE RESULTANT LOSS ALLEGEDLY SUFFERED BY THE APPELLANT CANNOT BE ALLOW ED AS A TRADING LOSS OR A BUSINESS LOSS FROM THE APPELLANTS INCOME AS REQU ESTED IN THE ADDITIONAL GROUND OF APPEAL. THE AMOUNT APPROPRIATED BY VYSYA BANK CAN NOT BE CONSIDERED EVEN FOR THE PURPOSES OF SECTION 48(2) W HILE COMPUTING THE TAXABLE LONG TERM CAPITAL GAIN IN RESPECT OF THE IM PUGNED TRANSFER OF LAND. FOR THIS PURPOSE I PLACE RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. ATTILI N. RAO (252 ITR 880). THE ADDITIONAL GROUND OF APPEAL IN THIS REGARD THEREFORE STANDS DISMISSED. 62. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE MAINLY SUBMITTED THAT THE OBJECT CLAUSE IN THE MEMORANDUM OF ASSOCIATION CLEA RLY PROVIDED THAT ASSESSEE COMPANY WAS ALSO AUTHORIZED TO ENGAGE IN THE BUSINE SS OF PROVIDING GUARANTEES AND THIS HAS NOT BEEN DENIED BY THE DEPARTMENT. FURTHE R A SUM OF RS. 6 CRORES WAS ACCOUNTED FOR IN THE ANNUAL ACCOUNT FOR THE ASSESSM ENT YEAR 2000-01 BUT THE SAME WAS NOT RETURNED AS TAXABLE BECAUSE THE GUARANTEE C OMMISSION WAS NOT RECEIVED BY THE ASSESSEE COMPANY. HOWEVER THE ASSESSING OFFICE R HELD THAT THIS AMOUNT TO BE TAXABLE. AN ADDITIONAL GROUND IN THIS RESPECT WAS R AISED BEFORE THE CIT(A) THAT THIS AMOUNT SHOULD HAVE BEEN ALLOWED TO BE REDUCED FROM THE LOSS SUFFERED BUT HOWEVER THE SAME WAS NOT ALLOWED. THE AMOUNT OF RS. 6 CRORE S ON ACCOUNT OF GUARANTEE COMMISSION WAS HELD TO BE TAXABLE WHICH HAS BEEN CO NFIRMED BY THE TRIBUNAL IN ITS ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 47 ORDER AT PARA 127 (PAPER BOOK PAGE 63). HE SUBMITT ED THAT THE ASSESSEE COMPANY HAS ACCEPTED THIS FINDING AND NOT FILED ANY APPEAL WHICH MEANS GUARANTEE COMMISSION DULY STAND RETURNED. 63. THE ASSESSEE COMPANY HAD GIVEN GUARANTEE TO VYS YA BANK IN FAVOUR OF GEIL M/S. SABARA IMPEX LTD. M/S. VIPLAV INVESTMENTS LTD . FOR GRANTING THE LIMITS BY THE BANK TO THAT COMPANY. SINCE GEIL AND OTHER FINANCIA L COMPANIES FAILED TO HONOUR THEIR COMMITMENT ASSESSEE COMPANY HAD TO PART WIT H ITS LAND AND THEREFORE SUFFERED A LOSS OF RS. 105 CRORES. HE SUBMITTED THA T GUARANTEE WAS GIVEN DURING THE COURSE OF BUSINESS AND THEREFORE IT WOULD AMOUNT TO BUSINESS LOSS. HE ALSO FILED CERTAIN COPIES OF THE SUITES FOR RECOVERY FILED AGA INST GEIL TO SHOW THAT THE ASSESSEE COMPANY WAS TRYING ITS BEST TO RECOVER THE MONEY LO ST IN THE GUARANTEE. 64. HE SUBMITTED THAT ANY AMOUNT LOST IN GIVING THE GUARANTEE IS ALLOWABLE AS A TRADING LOSS AND IN THIS REGARD HE REFERRED TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CT V. F.M . CHENNAI AND CO.PVT . LTD. (74 ITR 780). IN THE CASE OF CIT VS. K.M. MODI (141 ITR 903) WHERE THE ASSESSEE COMPANY WAS ENGAGED IN THE COMPOSITE BUSINESS OF PRODUCTION OF FILMS LEASING OF CINEMA AND FILM BUSINESS AND THEN LOAN TO ANOTHER PRODUCER WAS GUARANTEED DURIN G THE COURSE OF BUSINESS THEN LOSS INCURRED ON SUCH GUARANTEE WAS HELD TO BE ALLO WABLE. SIMILAR VIEW WAS TAKEN IN THE FOLLOWING CASES: (I) LALVANI (T.J.) V. CIT 78 ITR 1766(BOM) (II) CIT VS. S.A.S. RAMASWAMY CHETTIAR (14 I TR 236)(MAD.) (III) ESSEN P. LTD. V. CIT (65 ITR 625) (IV) CIT V. S.P. BALASUBRAMANIAM (250 ITR 127 (MAD.) (V) CIT V. KRISHNASWAMI (TN) (150 ITR 365) HE HAS ALSO SUBMITTED THAT SUCH LOSS WAS TO BE ALLO WED IN A YEAR IN WHICH THE SAME WAS INCURRED. IN THIS REGARD HE RELIED ON THE DECI SION OF ADDL. CIT V. GLASSMINIATURE BULB INDS. (130 ITR 41 (ALLAHABAD) AND THIS DECISIO N WAS CONFIRMED BY THE HONBLE ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 48 SUPREME COURT IN THE CASE OF GLASSMINIATURE BULB I NDS. V. CIT (ADDL.) 204 ITR 352. HE SUBMITTED THAT IT IS WRONG TO QUOTE THAT SINCE THE CLAIM WAS NOT WRITTEN OFF AND THEREFORE THE SAME IS NOT ALLOWABLE BECAUSE IT HAS BEEN HELD BY THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF LAXMI GINNING AND OIL MILLS PVT. LTD.(82 ITR 958) THAT PENDENCY OF LITIGATION OF THE LOSS SUFFERED CA NNOT MILITATE AGAINST THE FACT THAT LOSS WAS SUFFERED BY THE ASSESSEE DURING THE ACCOUNTING YEAR IN QUESTION AND THE AMOUNT OF THAT LOSS CANNOT BE POSTPONED IN VIEW OF THE PEN DENCY OF LITIGATION. 65. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE WHILE STRONGLY SUPPORTING THE ORDER OF THE LOWER AUTHORITIES SUBMI TTED THAT IN THE RELEVANT YEARS THE DEBT WAS TREATED GOOD. HE ALSO ARGUED THAT IF ALL THE FACTORS ARE CONSIDERED TOGETHER IT WOULD CLEARLY SHOW THAT GUARANTEE WAS NOT GIVEN IN THE NORMAL COURSE OF BUSINESS AND IT WAS ONLY A MAKE BELIEF STORY. 66. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PARTIES IN THE LIGHT OF MATERIAL ON RECORD AS WELL AS THE DECISIONS CITED BY THE PARTIES. WE ARE UNABLE TO AGREE WITH THE SUBMISSIONS OF THE LEARNED COUNSEL F OR THE ASSESSEE BECAUSE THE ACT OF GIVING GUARANTEE SEEMS TO HAVE BEEN DONE NOT IN TH E NORMAL CURSE OF BUSINESS. NO DOUBT THERE IS A CLAUSE AS CONSIDERED BY THE LEARNE D CIT(A) IN THE MEMORANDUM OF ARTICLES AUTHORIZING THE COMPANY TO GIVE THE GUARAN TEE BUT IT IS VERY SURPRISING THAT THE ASSESSEE COMPANY WHICH WAS INCORPORATED IN THE YEAR 1947 HAS NEVER ISSUED SINGLE GUARANTEE DURING ITS BUSINESS IN THE LAST 50 YEARS BEFORE ISSUING THIS GUARANTEE. THOUGH THE LEARNED CIT(A) ASKED SPECIFIC QUESTION T HAT WHAT WAS THE HISTORY OF BUSINESS RELATIONS OF THE ASSESSEE COMPANY WITH GEI L IT WAS MERELY STATED THAT THEY WERE HAVING SOME COMMERCIAL RELATIONSHIP. EVEN BEFO RE US TO A POINTED QUERY IN THIS REGARD IT WAS SUBMITTED THAT ASSESSEE COMPANY HAD SOME COMMERCIAL RELATIONS WITH CEIL AND G.K. RATHI GROUP AND THAT THERE WERE COMM ON DIRECTIONS IN SOME OF THE GROUP COMPANIES. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 49 67. THERE WAS A CLEAR COVENANT IN THE AGREEMENT DAT ED 4.4.1996 WHICH READS AS UNDER: IN ORDER TO SECURE ITS OBLIGATIONS HEREUNDER M/S. GEEKAY EXIM (INDIA) LTD. SHALL WHEN DEMANDED BY M/S. KILLICK NIXON LTD . DEPOSIT AND KEEP DEPOSITED WITH M/S. KILLICK NIXON LTD. SUCH SUM UPT O 10% OF THE FACILITIES SANCTIONED BY THE BANK TO M/S. GEEKAY EXIM (INDIA) LTD. ON THE BASIS OF THE SAID GUARANTEE. THE SAID DEPOSIT SHALL BE AN IN TEREST FREE DEPOSIT AND THE SAME SHALL BE REFUNDED BY M/S. KILLICK NIXON LT D. TO M/S. GEEKAY EXIM (INDIA) LTD. OR THE BANK AS M/S. GEEKAY EXIM (INDI A) LTD. MAY DIRECT ON M/S. GEEKAY EXIM (INDIA) LTD. CEASING TO ENJOY THE BANK FACILITIES OBTAINED BY OR AVAILED OF BY M/S. GEEKAY EXIM (INDI A) LTD. FROM THE BANK ON THE BASIS OF GUARANTEE. 68. THE ABOVE CLEARLY SHOWS THAT ASSESSEE COULD HAV E TAKEN A SUM UPTO 10% OF THE FACILITIES MENTIONED BY THE BANK TO GEIL ON THE BASIS OF THE SAID GUARANTEE. NO REASON WHATSOEVER HAS BEEN GIVEN BEFORE THE LEARNED CIT(A) NOT EVEN BEFORE US FOR NOT COMPLYING WITH THIS CLAUSE. WHEN THE ASSESSEE I S GIVING ITS LAND WORTH MORE THAN RS. 100 CRORES AS GUARANTEE TO OUTSIDER BECAUSE ADM ITTEDLY THE OTHER PARTY IS NOT RELATED TO THE ASSESSEE COMPANY THEN ANY PRUDENT P ERSON WOULD TAKE IMMEDIATE PRECAUTION WHICH WAS POSSIBLE UNDER THE AGREEMENT. 69. THOUGH THE GUARANTEE WAS GIVEN VIDE AGREEMENT D ATED 4.4.1996 AND ULTIMATELY THE GUARANTEE WAS GIVEN SOMEWHERE IN 199 7 BUT NO GUARANTEE COMMISSION WAS RECEIVED OR ACCOUNTED TILL ASSESSMENT YEAR 2001 -02. THE ONLY LOGIC WHICH SEEMS TO BE THERE FOR GIVING AWAY THE COMPANYS PROPERTY WAS THE MOTIVE OF EARNING GUARANTEE COMMISSION. IT HAS TO BE KEPT IN MIND THA T THE PROPERTY BELONGED TO THE COMPANY WHICH WAS STATED TO BE LISTED AT THE RELEVA NT POINT OF TIME WHICH MEANS THE DIRECTORS WERE HOLDING POSITION OF FIDUCIARY TRUST EES ON BEHALF OF SHAREHOLDERS AND SHOULD NOT HAVE ALLOWED THE PROPERTY TO BE ALIENATE D WITHOUT TAKING ANY CARE AND IF THE PURPOSE WAS TO EARN GUARANTEE COMMISSION THEN W HY NO GUARANTEE COMMISSION WAS TAKEN ALMOST FOR THREE YEARS IS NOT CLEAR. EVE N THE AMOUNT WHICH WAS ACCOUNTED IN THE ASSESSMENT YEAR 2000-01 WAS NEVER RECEIVED B Y THE ASSESSEE COMPANY AND THERE IS NOTHING ON RECORD TO SHOW THAT ASSESSEE TI RED TO RECOVER THIS MONEY. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 50 70. THE LEARNED CIT(A) RAISED THE FOLLOWING QUERY: ON PAGE 172 OF THE PAPER BOOK (ANNEXURE J) YOU HA VE FILED A COPY OF THE EXTRACT OF THE MINUTES DRAWN AT THE MEETING OF BOARD OF DIRECTORS HELD ON 28.04.2000. AS PER THE EXTRACT V YSYA BANK LTD. WAS TO RE-TRANSFER THE COMPANYS CHANDIVALI LAND ADMEAS URING 49 911 SQ.MTRS. AGAINST THE PAYMENTS TO BE MADE SUBSEQUENT LY. KINDLY EXPLAIN THE POSITION OF THIS RE-TRANSFER AS ON DATE . IN RESPONSE TO THE ABOVE IT HAS BEEN STATED AS UND ER : WE ARE NOT AWARE OF THE REASON S OF M/S. GEEKAY EXI M (INDIA) LTD.S FAILURE TO REPAY ITS LOAN. SIMILARLY WE ARE NOT AW ARE WHETHER ANY ACTION HAS BEEN TAKEN BY THE BANK AGAINST THE ORIGI NAL BORROWER. IT IS NOT CLEAR WHY THIS OPTION WAS NOT EXERCISED. 71. FURTHER CIT(A) RAISED QUERY NO. 6 WHICH READS AS UNDER: PLEASE EXPLAIN THE REASONS AS TO WHY M/S. GEEKAY EX IM (INDIA) LTD. FAILED TO REPAY IT LOAN TO VYSYA BANK LTD. RESULTI NG INTO THE LATTER BEING COMPELLED TO ACQUIRE YOUR CHANDIVALI LAND. DI D THE BANK TAKE ANY LEGAL ACTION AGAINST THE ORIGINAL BORROWER? AGAINST THIS THE FOLLOWING REPLY WAS GIVEN: WE ARE NOT AWARE OF THE REASON S OF M/S. GEEKAY EXI M (INDIA) LTD.S FAILURE TO REPAY ITS LOAN. SIMILARLY WE ARE NOT AW ARE WHETHER ANY ACTION HAS BEEN TAKEN BY THE BANK AGAINST THE ORIGI NAL BORROWER. 72. THE ABOVE EXPLANATION SHOWS THAT ASSESSEE NEVER BOTHERED TO FIND OUT WHY THE OTHER PARTY HAD NOT PAID ITS DUES WHICH SHOWS TOTAL INDIFFERENCE ON THE PART OF THE ASSESSEE COMPANY INDICATING THAT THE WHOLE TRANSA CTION WAS A MAKE BELIEF STORY AND THAT WAS WHY THE ASSESSEE COMPANY NEVER BOTHERED WH Y THE OTHER COMPANY WAS NOT ABLE TO PAY. NOTHING HAS BEEN SHOWN TO US WHETHER T HE ASSESSEE COMPANY OR THE BANK TRIED TO RECOVER THE DUES FROM GEIL THOUGH THE SUIT OF RECOVERY SEEMS TO HAVE BEEN FILED BUT THE SAME HAS BEEN FILED VERY LATE WH EN THE SAID LAND WAS TAKEN OVER BY THE BANK. WE FAIL TO UNDERSTAND WHY THE ASSESSEE CO MPANY WOULD NOT FILE THE SUIT BEFORE HANDING OVER THE LAND TO THE BANK AND TO MAK E EVEN THE BANK A PARTY TO SUCH SUIT IN AN ENDEAVOUR TO SAVE THE LAND OF THE COMPA NY. IT IS INTERESTING TO NOTE THAT THE ASSESSEE COMPANY HAD GONE AHEAD TO REACH A COMP ROMISE WITH UNAUTHORIZED OCCUPANTS OF THE SAID LAND SO AS TO FACILITATE PEA CEFUL HANDING OVER THE LAND TO THE ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 51 BANK AS IS CLEAR FROM THAT A IS CLAIMING SUM OF R S. 1 CRORE TO BE PAID FOR VACATION OF THIS LAND. 73. QUERY NO. 7 RAISED BY THE CIT(A) READ AS UNDER: THE SAME LOAN IN RESPECT OF WHICH YOU HAD PROVIDED GUARANTEE TO THE BANK WAS SECURED BY ANOTHER GUARANTEE TO THE EXTEN T OF RS.127 CRORES GIVEN IN THE FORM OF AVANTI LAND BELONGING TO A COM PANY OF THAT NAME. UNDER THESE CIRCUMSTANCES PLEASE SPECIFY AS TO WHY M/S. KILLICK NIXON LTD. HAD TO PART WITH ITS LAND TO THE BANK. THE REPLY GIVEN BY THE ASSESSEE READS AS UNDER: I N SATISFACTION OF THE GUARANTEES EXTENDED TO VYSYA BANK BY US AND THE OTHER COMPANY WE HAVE TO SELL OUR LAND FOR THE GUA RANTEED AMOUNT OF RS.105 CRORES. THE BASIS OF DETERMINATION OF THE AF ORESAID LIABILITY AGAINST US AND THE OTHER COMPANY HAS BEEN CO-RELATED WITH THE REALIZATION OF THE SALE PROCEEDS OF PROPERTIES WHICH WERE MORTGAGED TO THE BANK. 74. WHEN THE LOAN IN RESPECT OF WHICH THE ASSESSEE COMPANY HAD PROVIDED GUARANTEE WAS ALSO SECURED BY ANOTHER GUARANTEE GIV EN BY ANOTHER COMPANY THEN WHY THE LIABILITY WAS NOT SHARED BY ANOTHER CO MPANY IS NOT CLEAR AND NOTHING HAS BEEN SAID IN THIS REGARD BEFORE US. 75. WE HAVE OBSERVED CERTAIN OTHER VERY INTERESTING FACTS. ON THE ONE HAND IT WAS URGED BEFORE THE LOWER AUTHORITIES AND EVEN BEF ORE US THAT THE ASSESSEE COMPANY HAD GIVEN THE GUARANTEE IN THE NORMAL COURSE OF BUS INESS AND SINCE THE GEIL GROUP FAILED IN ITS COMMITMENT THE ASSESSEE COMPANY HAD T O PART WITH ITS LAND. IT IS TO BE NOTED HERE THAT THE ASSESSEE COMPANY AGREED TO TRAN SFER ITS LAND TO VYSYA BANK VIDE AGREEMENT DATED 29 TH SEPTEMBER 1999 LATER ON WHEN THE ASSESSEE COMPA NY WAS TRYING TO ORGANIZE FUNDS FOR MAKING INVESTMENTS IN THE SUBSIDIARY COMPANIES A SUM OF RS. 34.87 CRORES WAS RAISED FROM GKAK RATHI GROUP RS. 5.50 CRORES FROM SUBHAU INVESTMENT LTD. AND RS.1.3 CRORES FROM VIPLAV TRAD ING LTD. THE LAST TWO MENTIONED COMPANIES ALSO BELONGED TO GKAK RATHI GROUP. ON TH E ONE HAND GKAK RATHI GROUP IS NOT ABLE TO HONOUR THE COMMITMENTS TO VYSYA BANK MA DE BY THEIR COMPANY GEIL AND ON THE OTHER HAND THEY ARE READY TO FINANCE THE ASS ESSEE COMPANY TO THE TUNE OF RS. 40 CRORES FOR BUYING SHARES IN THE SUBSIDIARY COMPA NIES. WE FAIL TO UNDERSTAND IF THE ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 52 ASSESSEE COMPANY HAD GOOD RELATIONS TO ARRANGE THE FINANCE FROM GK RATHI GROUP THEN WHY THE ASSESSEE COMPANY COULD NOT RECOVER TH E OTHER DUES FROM GEIL BELONGING TO GKAK RATHI GROUP. FURTHER WHILE GOING THROUGH THE ISSUE REGARDING ALLOWABILITY OF SHORT TERM/LONG TERM CAPITAL LOSS IT WAS OBSERVED BY THE ASSESSING OFFICER THAT ASSESSEE COMPANY INVESTED IN FOUR SUBS IDIARY COMPANIES WHICH IN TURN INVESTED IN M/S. KOSHA INVESTMENTS LTD. WHICH IS A LSO CONTROLLED BY THE ASSESSEE WHICH IN TURN GAVE A SUM OF RS. 4.66 CRORES TO M/S . SUBARA IMPEX LTD. AND RS. 75 LAKHS TO GEEKAY EXIM (INDIA) PVT. LTD. WHICH ARE TH E COMPANIES RESPONSIBLE FOR CAUSING THE LOSS ON ACCOUNT OF PARTING OF LAND BY T HE ASSESSEE COMPANY. 76. TO SUM UP THE ABOVE ANALYSIS AND APPLYING THE THEORY OF HUMAN PROBABILITIES AS PROPOUNDED BY THE HONBLE SUPREME COURT IN SMT. SUMATI DAYAL (SUPRA) WE ARE OF THE VIEW THAT THESE GUARANTEES GIVEN BY THE ASSESSE E COMPANY IS ONLY A MAKE BELIEF STORY BUT REALITY IS SOMETHING DIFFERENT AND ACCORD INGLY THE LOSS INCURRED BY THE COMPANY ON ACCOUNT OF PARTING OF THE LAND IS ALSO O F A MAKE BELIEF NATURE WHICH HAS BEEN CORRECTLY REJECTED BY THE LOWER AUTHORITIES. 77. SINCE THE WHOLE OF THE CASE LAW RELIED BY THE L EARNED COUNSEL FOR THE ASSESSEE PERTAINS TO BASICALLY TWO POINTS (A) WHETHER THE LO SS IS INCURRED ON ACCOUNT OF PROVIDING GUARANTEE ARE ALLOWABLE OR NOT AND (B) IN WHICH YEAR SUCH LOSSES HAVE TO BE ALLOWED WE HAVE NOT DEALT WITH THEM BECAUSE IN OUR VIEW THE LOSS ITSELF IS NOT GENUINE AND THERE IS NO POINT IN DEALING WITH THE CASE LAW. IN THESE CIRCUMSTANCES WE FIND NOTHING WRONG WITH THE ORDER OF THE LEARNED CIT(A) AND WE CONFIRM THE SAME. 78. AS FAR AS GROUND 4 IS CONCERNED AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING THE ASSESSMENT PROCEEDINGS IT WAS NOTICED T HAT ASSESSEE HAD CLAIMED SECRET COMMISSION OF RS. 1 15 25 000/-.IN RESPONSE TO THE QUERY IT WAS SUBMITTED THAT COMMISSION WAS PAID TO VARIOUS DEALERS OF THE COMPA NY AND THE PAYMENT WAS RESTRICTED ONLY TO THOSE DEALERS WHO WERE LOYAL TO THE COMPANY FOR MANY YEARS. IT WAS ALSO CLAIMED THAT BECAUSE OF THIS COMMISSION THE T URNOVER OF THE ASSESSEE COMPANY ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 53 HAD INCREASED. THE AO AFTER CONSIDERING THE EXPLANA TION OBSERVED THAT SINCE THE NAMES AND ADDRESSES OF THE PERSONS TO WHOM SUCH COM MISSION WAS PAID AND THE NATURE OF SERVICES PROVIDED BY SUCH DEALERS WAS NOT FURNISHED SUCH EXPENDITURE COULD NOT BE ALLOWED AND THEREFORE HE DISALLOWED THE SEC RET COMMISSION. 79. BEFORE THE CIT(A) IT WAS MAINLY SUBMITTED THAT COMMISSION WAS PAID ON THE BASIS OF AUTHORIZATION GIVEN BY THE BOARD OF DIREC TORS AND WAS PAID IN THE INTEREST OF BUSINESS. THE LEARNED CIT(A) DECIDED THIS ISSUE VI DE PARA 6.3 WHICH READS AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. AS PER THE PROVISIONS OF SECTION 37 OF THE I.T.ACT 1961 ANY EX PENDITURE WHICH IS NOT CAPITAL OR PERSONAL NATURE CAN BE CLAIMED AS A DEDUCTION PROVIDED THE SAME HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY F OR THE PURPOSES OF ASSESSEES BUSINESS OR PROFESSION. IN THE CASE OF T HE APPELLANT AN EXPENDITURE OF RS. 1 15 25 000/- HAS BEEN CLAIMED O N ACCOUNT OF COMMISSION PAYMENT BUT THE APPELLANT HAS NOT DISCLO SED THE NAMES OF THE PERSONS TO WHOM SUCH COMMISSION PAYMENT WAS ALL EGEDLY MADE. IN THE ABSENCE OF THE NAMES AND ADDRESSES OF THE RE CIPIENTS OF SUCH COMMISSION IT WAS NOT POSSIBLE FOR THE A.O. TO EXA MINE WHETHER THE COMMISSION PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF APPELLANTS BUSINESS. IN OTHER WORDS T HE CONDITION PRESCRIBED IN SECTION 37 OF THE I.T.ACT 1961 FOR A LLOWING SUCH AN EXPENDITURE AS A DEDUCTION WAS SATISFIED BY THE AP PELLANT. ACCORDINGLY THE A.O. WAS JUSTIFIED IN DISALLOWING THE APPELLANTS CLAIM FOR DEDUCTION ON ACCOUNT OF SECRET COMMISSION. IN T HIS REGARD I PLACE RELIANCE ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GOODLASS NEROLAC PAINTS LTD. V. CIT ( 137 ITR 58 ) WHEREIN IT HAS BEEN HELD THAT THE BURDEN IS ON THE ASSESSEE TO PRO VE THAT THE EXPENDITURE CLAIMED WAS LAID OUT WHOLLY AND EXCLUSI VELY FOR THE PURPOSES OF BUSINESS. I FURTHER PLACE RELIANCE ON T HE DECISION OF HONBLE SUPREME COURT IN THE CASE OF FRENCH DYES AN D CHEMICALS (I) PVT. LTD. V. CIT (201 ITR 253) WHEREIN THE DEDUCTIO N ON ACCOUNT OF SECRET COMMISSION WAS HELD TO BE DISALLOWABLE ON AC COUNT OF THE ASSESSEE REFUSING TO DISCLOSE NAMES OF THE RECIPIEN TS OF SUCH COMMISSION. LASTLY I PLACE RELIANCE ON THE DECISIO N OF HONBLE ORISSA HIGH COOURT IN THE CASE OF TARINI TARPULINE PRODUCT S V. CIT (254 ITR 495) WHEREIN THE QUESTION WHETHER ON THE FACTS AN D IN THE CIRCUMSTANCES OF THE CASE THE TRIBUNAL WAS JUSTIFI ED IN DISALLOWING THE SECRET COMMISSION ALLEGED TO HAVE BEEN PAID BY THE ASSESSEE TO PERSONS WHOSE NAMES IT COULD NOT DISCLOSE OR EVIDEN CE OF ANY SUCH PAYMENT WAS NOT ADDUCED WAS ANSWERED BY THE HONBL E COURT HOLDING THAT SECRET COMMISSION IS NOT DEDUCTIBLE U/ S.37 OF I.T.ACT 1961. ON THE BASIS OF THE ABOVE DISCUSSED FACTS OF THE APPELLANTS CASE AND VARIOUS JUDICIAL PRONOUNCEMENTS I HOLD TH AT THE A.O. WAS JUSTIFIED IN DISALLOWING THE APPELLANTS CLAIM REGA RDING PAYMENT OF SECRET COMMISSION. THIS GROUND OF APPEAL IS DISMISS ED. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 54 80. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SIMILAR DISALLOWANCES WERE MADE IN EARLIER YEARS ALSO AND U LTIMATELY THE MATTER TRAVELED TO THE TRIBUNAL AND THE SAME HAS BEEN REMANDED BACK TO THE FILE OF THE AO. HE PARTICULARLY INVITED OUR ATTENTION TO PAGE 44 TO 49 OF THE PAPER BOOK WHICH IS THE COPY OF THE ORDER OF THE TRIBUNAL WHEREIN THE MATTER WAS SET ASIDE TO THE FILE OF THE A.O. VIDE PARA 85. 81. ON THE OTHER HAND THE LEARNED D.R. STRONGLY SU PPORTED THE ORDER OF THE LOWER AUTHORITIES. 82. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE HAD ASKED THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHAT HAPPENED TO THE SET ASIDE PROCEEDINGS OF THE EARLIER YEARS AND HE FAIRLY ADMITTED THAT SINCE THE ASSESSEE COULD NOT FURNISH THE NAME ADDRESSES OF THE PARTIES TO WHOM SUCH SECRET COMMISSION WAS PAID AND THEREFORE THE ADDITION HAS BEEN REPEATED. WE FURTH ER ASKED THE LEARNED COUNSEL FOR THE ASSESSEE WHETHER IT IS POSSIBLE FOR THE ASSESSE E COMPANY TO FURNISH THE NAMES BEFORE US HE SHOWED HIS INABILITY. SINCE THE ASSESS EE IS NOT IN A POSITION TO FURNISH THE NAMES AND ADDRESSES OF THE PERSONS TO WHOM THE SECR ET COMMISSION HAS BEEN PAID AND THEREFORE FOLLOWING THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF FRENCH DYES & CHEMICALS (I)_ LTD. V. CIT (201 ITR 2 53) RELIED ON BY THE CIT(A) THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 83. AS FAR AS GROUND NO.5 IS CONCERNED AFTER HEARI NG BOTH THE PARTIES WE FIND THAT CERTAIN INTEREST WERE DISALLOWED BECAUSE ACCO RDING TO HIM SOME INTEREST BEARING FUNDS WERE DIVERTED FOR OTHER PURPOSES. ON APPEAL T HE ADDITION HAS BEEN CONFIRMED BY THE CIT(A). 84. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE MAINLY SUBMITTED THAT IDENTICAL ISSUE HAS BEEN SET ASIDE TO THE FILE OF THE AO FOR THE ASSESSMENT YEAR 1999-2000 AND IN THIS REGARD HE REFERRED TO PARAS 111 TO 114 OF T HE TRIBUNAL ORDER PLACED AT PAGE 58 TO 59 OF THE PAPER BOOK. HE ALSO FILED A COPY OF TH E ASSESSMENT ORDER OF EARLIER YEAR ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 55 RELEVANT TO THE ASSESSMENT YEAR TO POINT OUT THAT T HE NATURE OF DISALLOWANCE WAS SIMILAR TO THE ASSESSMENT YEAR IN QUESTION. 85. ON THE OTHER HAND THE LEARNED DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 86. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE ORDERS OF THE TRIBUNAL IN VARIOUS YEARS PARTICULARLY FOR THE ASSESSMENT YEAR 1999-2000 IN ITA NO. 842/M/03 WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND REMIT THE SAME BACK TO THE FILE OF THE AO WITH DIRECTION TO RE-EXAMINE THE WHOLE ISSUE IN THE LIGHT OF THE DIRECTIONS GIVEN IN THE PREVIOUS YEARS. 87. GROUND NO. 6 IS REGARDING LEVY OF INTEREST UNDE R SECTION 234B AND 234C OF THE ACT AND WHICH IS OF CONSEQUENTIAL NATURE AND THE AO IS THEREFORE DIRECTED TO LEVY INTEREST U/S.234B AND 234C AS PER THE PROVISIONS OF THE ACT. 88. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 883/M/05: (REVENUES APPEAL) 89. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLO WING GROUNDS: 1. ON THE FACTS AND IN LAW THE LD.CIT(A) HAS ERRED IN NOT CONSIDERING THE REPORT OF THE DVO IN FULL FOR DETERMINING THE CAPI TAL GAIN ON THE SALE OF THE CHANDHIVLI PROPERTIES. 2. ON THE FACTS AND IN LAW THE LD.CIT(A) HAS ERRED IN IGNORING THE VALUE OF THE CHANDIVLI PROPERTY CONVERTED FROM CAPITAL AS SET TO STOCK-IN- TRADE AS ON 31.3.1997 WHICH WAS SHOWN AT RS. 114.03 CR. IN THE BOOKS OF THE ASSESSEE INSTEAD OF ADOPTING THE VALUE AT RS. 104.30 CR. GIVEN BY THE DVO THEREBY GIVING THE BENEFIT TO THE ASSESSEE ON ACCOUNT OF TAXABILITY OF SALE OF ASSET AS CAPITAL G AIN AS AGAINST THE BUSINESS INCOME. 90. AFTER HEARING BOTH THE PARTIES WE FIND THAT THE RE SEEMS TO BE SOME CONFUSION IN THE GROUND RAISED BY THE REVENUE. PAR A 4.5 OF THE ASSESSMENT ORDER READS AS UNDER: MEANWHILE THE ASSESSEE CONVERTED ITS LAND INTO STO CK IN TRADE BY ITS BOARD RESOLUTION ON 27/3/97 AT A VALUE OF RS.114.03 CRORES. THUS THE LAND OF THE ASSESSEE WAS CONVERTED TO STOCK IN TRADE BU T IT STILL CONTINUED TO BE A SECURITY WITH THE VYSYA BANK. ITA NO.746 & 883/M/08 M/S. KILLICK NIXON L:TD. 56 91. ON CAREFUL PERUSAL OF THE ASSESSMENT ORDER SHOWS TH AT ASSESSING OFFICER HAS COMPUTED THE CAPITAL GAINS AT PARA 4.10 AND THERE H E HAS TAKEN THE VALUE OF CONSIDERATION AT RS.94 79 69 059/- WHICH IS THE SAM E AMOUNT AS RETURNED BY THE ASSESSEE. IT SEEMS THAT THE ASSESSING OFFICER HAS N OT DEALT WITH THE ISSUE REGARDING TAXABILITY OF PROFITS UNDER SECTION 45(2) OF THE AC T. THE LEARNED CIT(A) HAS LATER ON CHANGED THE AMOUNT OF CAPITAL GAINS BUT HE HAS DEAL T WITH ONLY REGARDING THE COST OF ACQUISITION I.E. FAIR MARKET VALUE AS ON 1.4.1981 W HICH HE HAS REVISED AS PER THE REPORT OF THE DVO AND HE ALSO SEEMS TO HAVE NOT DEALT WITH THE ISSUE REGARDING PROFITS U/S.45(2) OF THE ACT. THEREFORE IN THE INTEREST OF JUSTICE WE RESTORE THIS ISSUE BACK TO THE FILE OF THE A.O. WITH DIRECTION TO RE-EXAMINE T HE ISSUE AFTER PROVIDING ADEQUATE OPPORTUNITY TO THE ASSESSEE. 92. IN THE RESULT THE REVENUES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. SD. SD. (R.V. EASWAR) (T. R. SOOD) SENIOR VICE-PRESIDENT ACCOUNTANT MEMBER MUMBAI DATED THE ___-_____MARCH 2010. COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT CENTRAL I MUMBAI. 4. THE CIT(A) CENTRAL -I MUMBAI 5. THE DR C BENCH MUMBAI BY ORDER /TRUE COPY/ KN\ ASST. REGISTRAR ITAT MUMBAI ORDER PRONOUNCED ON THIS 6 TH DAY OF APRIL 2010. SD. SD. (R.V. EASWAR) (B. RAMAKOTAIAH) SENIOR VICE-PRESIDENT ACCOUNTANT MEMBER MUMBAI DATED THE 6 TH APRIL 2010.