Facts of the Case

The assessee, Siel Ltd., and an Austrian company, Plansee Tizit Aktiengesellschaft, had entered into a joint venture agreement for incorporation of Siel Tizit Ltd. for manufacturing and dealing in hard metals. Both parties initially held equal shareholding in the joint venture company.

Subsequently, during Assessment Year 1999-2000, the assessee renounced its entitlement in the rights issue due to financial difficulties, resulting in reduction of its shareholding from 50% to 41.7%, while Plansee’s shareholding increased to 58.3%.

Thereafter, the assessee agreed to sell 1,27,00,000 equity shares to Plansee for a consideration of USD 600,000, equivalent to approximately Rs.2.02 per share against face value of Rs.10 each. This resulted in a book loss of Rs.10.12 crores and indexed capital loss of Rs.13.62 crores.

The Assessing Officer disallowed the capital loss on the allegation that the transaction constituted a colourable device intended to evade taxes.

Issues Involved

  1. Whether the sale of shares by the assessee to its joint venture partner at Rs.2.02 per share was a genuine transaction.
  2. Whether the transaction constituted a colourable device for avoidance of tax.
  3. Whether the capital loss claimed by the assessee was allowable under the Income Tax Act.
  4. Whether the Assessing Officer could disregard the declared consideration without evidence of additional or undisclosed consideration.

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The assessee and Plansee were closely connected joint venture partners and therefore the transaction was not conducted at arm’s length.
  • Since rights shares had been renounced at par value of Rs.10 per share, the sale of existing shares at Rs.2.02 per share was artificial and manipulated.
  • The valuation report was obtained subsequently only to secure RBI approval and was merely an afterthought.
  • The transaction structure indicated a pre-arranged mechanism for generating artificial capital losses without actual economic loss.
  • Reliance was placed on the Supreme Court judgment in McDowell & Co. Ltd. vs. Commercial Tax Officer (154 ITR 148) to argue that colourable devices adopted for tax avoidance are impermissible.

Respondent’s Arguments (Assessee)

The assessee submitted that:

  • The transaction was genuine and shares were actually transferred to Plansee.
  • The joint venture company was incurring heavy losses and required substantial capital infusion.
  • The assessee itself was facing financial constraints and was unable to subscribe to further rights issues.
  • The valuation was supported by an independent valuation report accepted by RBI authorities.
  • Necessary approvals had been obtained from the Ministry of Industry and Reserve Bank of India under FERA regulations.
  • There was no evidence of any undisclosed or additional consideration received by the assessee beyond the declared amount.

Court Findings / Court Order

The Delhi High Court dismissed the Revenue’s appeals and upheld the Tribunal’s decision in favour of the assessee.

The Court held that:

  • The Revenue itself had not alleged that the transaction was bogus or fictitious.
  • Mere relationship between joint venture partners could not automatically establish that the transaction was not genuine.
  • The price paid for rights shares could not be equated with the value of shares transferred between shareholders in a loss-making company.
  • The company was suffering substantial losses and further capital infusion was necessary.
  • RBI and Ministry approvals supported the genuineness of the transaction and pricing mechanism.
  • The Assessing Officer failed to produce any evidence showing payment of undisclosed consideration or falsity in the valuation data.
  • Suspicion alone could not justify rejection of the declared sale consideration.
  • In absence of evidence proving sham consideration or tax evasion, the capital loss claimed by the assessee could not be disallowed.

Accordingly, the appeals filed by the Revenue were dismissed.

Important Clarification

The Delhi High Court clarified that:

  • A genuine commercial transaction cannot be treated as a colourable device merely because it results in tax benefit.
  • Unless the Revenue establishes with evidence that the declared consideration is false or that additional consideration has passed, the transaction value cannot be disregarded.
  • Regulatory approvals from RBI and other authorities significantly support the genuineness of cross-border share transfer transactions.
  • The principle laid down in McDowell & Co. Ltd. cannot be mechanically applied without proving sham or fraudulent conduct.

Sections Involved

  • Section 45 of the Income Tax Act, 1961 – Capital Gains
  • Section 48 of the Income Tax Act, 1961 – Mode of Computation of Capital Gains
  • Section 29(1)(b) of the Foreign Exchange Regulation Act, 1973 (FERA)
  • SEBI/RBI Guidelines relating to transfer/pricing of shares


Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:3488-DB/SKN24072014ITA16162010.pdf

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