K.R. Dixit, Judicial Member - (1.) IN all these appeals the material facts are substantially the same giving rise to the same question and therefore, they are disposed of by this common order.
(2.) The assessee had purchased certain quantity of silver and sold it at a loss claiming short-term capital losses. The Income-tax Officer disallowed these losses on the ground that the sales were "colourable devices so as to reduce the incidence of tax in the company belonging to Sarabhai group of cases." For this conclusion he has relied upon the following facts: - (i) The sale was to another company in the same group. (ii) It had taken place just three days before the close of the accounting year. (iii) The buyer sold the silver to its subsidiary company and the surplus was claimed as exempt Under Section 47(iv) by the buyer. In the case of the assessee Darshita this last fact i.e. the sale to a subsidiary is absent. The Commissioner has allowed the assessee's appeals observing that "the order passed by the Income-tax Officer can at best suggest a suspicion about the alleged tainted nature of the transaction. However, no facts had been brought on record to establish that this was a collusive sale. On the contrary the Income-tax Officer has found that the sale price of the silver was at the market rate. Therefore, it cannot be held that this was a bogus transaction. In view of the absence of any specific facts or findings, the stand taken by the Income-tax Officer cannot be upheld". (Emphasis supplied) Before us, the learned Departmental Representative contended that this was a device to avoid tax relying upon the well-known decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. He argued that the sale was not for commercial consideration which according to him could be only on two grounds (a) intention to sell for commercial benefit i.e. in the case of need, such as a distress sale or (b) a sale for profit. He argued that no such case had been made out here. He further pointed out that the time gaps between the purchase by the assessee and the sale were small and that the sale was within the same group. Lastly he pointed out that the purchaser had sold it to the subsidiary claiming the said exemption. On the other hand, the assessee's learned counsel pointed out that (1) the purchaser and seller companies were investment companies accepted as such by the Department for several years before and after the years before us, (2) the time gap between the purchase and the sale was not small. It was about 20 months, (3) the sales were at the market price, (4) they were duly authorised by the resolution of the Board of Directors, (5) the silver was held on capital account, (6) the silver was not treated as an asset of the assessee-company by the Department for wealth-tax purposes for the subsequent assessment years, (7) the silver was sold because the markets were falling and this was the commercial consideration i.e. to save further loss, (8) the claim to exemption Under Section 47(iv) was not rejected so far and in any case that subsequent sale by the purchaser and the claim to exemption had nothing to do with the assessee's claim, and (9) regarding the revenue's emphasis on the fact that the sales had taken place only 3 days before the close of the accounting period the assessee's counsel pointed out that there was no motive to evade tax because the incomes were very low, i.e. Rs. 9,443, Rs. 743 and Rs. 933 in the cases of assessees Glacier, Darshita and Garnet respectively. Finally, he relied upon the latest decision of the Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479/39 Taxman 368 particularly the observations in the judgment of Justice Mukharji as follows: - 3. It is true that tax avoidance in an underdeveloped developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy, J. that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary taxpayers very often in a country of shortages with ostentatious consumption and deprivation for the large masses ask, is does he with taxes buy civilization or does he facilitate the wastes and ostentatiousness of the few. Unless wastes and ostentatiousness in the Government's spendings are avoided or eschewed, no amount of moral sermons would change people's attitude to tax avoidance.
(3.) IN any event, however, where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made it has to be noted and rejected. With these observations I agree. He contended that in McDowell's case (supra) the Supreme Court has made only certain observations regarding tax avoidance which were not even obiter and that therefore they did not constitute any precedent for deciding this case. The learned Departmental Representative rejoined that the Supreme Court in the case of Kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509/23 Taxman 1400 had laid down that the INcome-tax Officer was entitled to look into all the facts and circumstances in order to decide the question whether a certain transaction was a ruse or device to avoid tax. 4. We find here that (i) the sellers and the purchasers of the silver are two distinct entities, (ii) it is not disputed that the sales were at the market rate, and (iii) it is not disputed that at the time when the sales took place the market prices were falling. IN view of this, first of all it must be said that the sales were real and effective resulting in the property in the goods passing from the seller to the buyer. The learned Departmental Representative was specifically asked this question by the Bench whether this particular conclusion could be denied. He said that it could not be denied. He could not deny that after the transaction the silver was no longer the property of the seller but that it was the property of the buyer. He however put forward an argument which although may not be valid or convincing had the merit of novelty and ingenuity. He said that although the transaction of sale had other normal consequences, for the purpose of income-tax it could not be considered to be effective. According to him, the result was ambiguous and that this ambiguity was the content of device or ruse. This argument though interesting, particularly in the manner in which it has been put, suffers from a basic fallacy that the consequences of transaction in the sphere of taxation law are different from the consequences in other laws. IN our view, when the transaction of sale is genuine, it must follow that the loss resulting from that transfer has to be considered as a short-term capital loss. The Departmental Representative has relied upon the Supreme Court decision in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 but in that case the court regarded the appellant's action as a device because what was truly the liability of the appellant for excise duty was made to appear as the liability of others by an agreement with them. The liability of the appellant which arose under the statute could not become the liability of someone else merely by an agreement with that person. IN other words, a false colour was given to the facts. It was in that context that the word 'device' had been used. That is not the situation here. As stated above, the property in silver has passed to the buyer and the sale is genuine. Therefore, the said decision of the Supreme Court in McDowell & Co. Ltd.'s case (supra) has no application here. IN the case of a device the attempt is to avoid tax without suffering any disadvantage. To put it plainly, it is an attempt to get something for nothing. But that is not so in an honest attempt to save tax. For example, no one would say that an investment in National Savings Certificate even on the last day of the accounting period to get a deduction from the income is a device or a ruse. IN such a case, the assessee pays a price by investing for a long period and accepting a lower rate of interest than that prevailing in the market. IN the present case, the assessee by selling the silver has foregone the possible benefit of a rise in price of silver at a future date. So it has taken the benefit of reduction in its tax liability. It has also suffered a disadvantage for the future. The Supreme Court in its judgment in the case of Arvind Narottam (supra) has specifically repelled a similar argument by stating that the decision in McDowell's case (supra) could not advance the case of the revenue because the language of the deeds of settlement was plain and admitted of no ambiguity. This means that the Supreme Court gave effect to a document evidencing a legal transaction. The legal transaction being valid and effective the Supreme Court drew the logical conclusion therefrom. We must do the same in this case. The transactions of sale being genuine the conclusion that they have resulted in short-term capital loss has to be drawn. Further, it is an important factor that the price of silver at the time of the sale were falling and that the sales were at the market price. This is a commercial consideration and even on that ground the assessee is entitled to the claim of short-term capital loss.;