Deferred Share Transfer Valuation Without Financial Capacity Constitutes Benami Transaction Subject to Provisional Attachment

ORDER

1. This Order disposes of the Appeal No. FPA-PBPT-1476/MUM/2021 filed by the Initiating Officer and Assistant Commissioner of Income Tax, (Benami Prohibition Unit-1), Mumbai, against the Order No. 16/AA/pBPTA/2021-22 dated 29.09.2021 (Impugned Order) passed by the Ld. Adjudicating Authority under Section 26 (3) of the Prohibition of Benami Property Transaction Act, 1988 (PBPTA), Mumbai in Reference No. R-1948/2020 dated 30.01.2020. The Ld. Adjudicating Authority (AA) did not confirm the Provisional Attachment Order (PAO) dated 28.01.2020 passed by the Initiating Officer, BPU, Mumbai under Section 24 (4) of PBPTA. Thus, the attachment of the impugned property comprising of 2,50,00,000 shares of M/s Responsive Industries Ltd. held by M/s Parshvanath Comtrade LLP (PCL) was set aside.

2. Ld. Counsel for the Appellant submitted that an ‘Information’ was received from DDIT (Inv.) which revealed that the shares of M/s Responsive Industries Limited (RIL), i.e. alleged benami property, were sold by M/s Wellknown Business Ventures LLP (hereinafter referred to as ‘WBVL’) to M/s Fairpoint Tradecom LLP i.e. alleged Beneficial Owner (hereinafter referred to as ‘FTL’). It was seen that M/s Fairpoint Tradecom LLP (i.e. alleged beneficial owner) transferred 2,50,00,000 shares to M/s Parshvanath Comtrade LLP i.e. alleged benamidar on 12.04.2018 in pursuance to a Share Purchase Agreement (SPA), at the rate of Rs. 40/- per share even though the closing share price as per stock exchange data was @ Rs. 73.35 on the date of transfer i.e. 12.04.2018. As per the terms of aforesaid share purchase agreement, only Rs. 10 lakhs were paid by M/s Parshvanath Comtrade LLP i.e. alleged benamidar (PCL) to M/s Fairpoint Tradecom LLP (i.e. alleged beneficial owner). It is noteworthy that no further payment had been made by M/s Parshvanath Comtrade LLP i.e. alleged benamidar (PCL) to M/s Fairpoint Tradecom LLP (i.e. alleged beneficial owner) subsequently, even though the ‘Share Purchase Agreement’ stipulated transfer of Rs. 1 Crore before 30.09.2018 and transfer of remaining amount on or before 31.03.2021. Even though the benamidar had poor financial profile and no source of income, FTL (i.e. alleged beneficial owner) chose to transfer shares worth Rs 100 Crores to the alleged benamidar against token amount of Rs. 10 lakh only with balance payable within 3 years i.e. on or before 31.03.2021 defying all business prudence and economic rationale.

3. Ld. Counsel for the Appellant further submitted that the consideration for the purchase of 2.5 crore shares of RIL was provided by FTL to WBVL. These shares were then essentially transferred without any consideration to PCL at meagre initial consideration of Rs. 10 lakhs. No further payment had been made till the relevant date i.e. the day of Search/Survey. The source of initial payment of Rs. 10 lakhs made by PCL to FTL was unsecured loan of Rs. 10 lakhs taken from partner Shri Anil Gupta of PCL. The aforesaid loan was also ultimately repaid through dividend received on the aforesaid RIL shares by PCL. The original SPA was in the custody of FTL as stated by Shri Anil Gupta in his statement recorded during the course of survey. No written notice/letter/ reminder was ever received by PCL from FTL for paying the consideration (i.e. Rs. 100 Crores less Rs. 10 lakhs) for purchase of RIL shares, thereby showing that FTL never intended to recover the aforesaid amount and merely parked the aforesaid shares in the name of PCL for its own benefit. The financials of the PCL revealed that it was not carrying out any business activity and had no creditworthiness but even then FTL chose to execute share purchase agreement transferring shares worth Rs. 100 Crore to PCL, thereby defying all business and economic rationale. As per Clause 2 (i) of the Share Purchase Agreement dated 06.04.2018 between FTL and PCL, the “Sellers [FTL] agree to sell the 2,50,00,000 shares free and clear of all liens to the purchaser.”. However, strangely and contradictorily at Clause 2 (ii) it is stated that, “As the Purchaser [PCL] is not making full payment, the shares shall be transferred in the account of Purchaser but marked with lien/pledge in the depository system. The lien/pledge shall be unmarked/removed only after full payment has been received by the Seller.” In essence, therefore, the shares were transferred in the name of PCL but the shares were of no use to PCL as the lien had been marked on these shares. It is thus clear that FTL continued to be in full control of the shares even though these were held in the name of PCL. Even more strangely, the same Clause 2 (ii) continues, “Notwithstanding anything written above, seller [FTL] can unmark/remove the pledge partially/fully on receipt of partial/full payment anytime during the next three years.” This clause amply demonstrated the fact that the shares were in total control of FTL. By including this condition in the agreement, FTL had essentially kept the option open to unmark/remove the pledge even upon partial payment by PCL, thereby keeping the door open to exercise absolute control on the shares, including in the form of transfer/disposal of the shares, trading in the stock markets through the account of PCL, retransfer of the shares from PCL to FTL, and so on. The same Clause 2 (ii) continues, “In the event the Purchaser fails to adhere to the above payment schedule, the Seller [FTL] shall have full right to cancel this transaction at the cost of the Purchaser [PCL] and transfer back the shares to seller’s own account by invoking the pledge/lien.” It is a matter of fact that PCL has not adhered to the promised payment schedule, thereby leaving the shares liable to be retransferred back to FTL. In essence, the shares were at the disposal of FTL even though these were merely held in the name of PCL. Shri Anil Gupta also admitted in his statement that lien was marked by FTL on the RIL shares transferred by it to PCL and he was not allowed to sell any of these shares till the whole consideration was paid. Under these circumstances when PCL was not carrying out any other business activity, it essentially had no source of revenue or credit worthiness to make the payment of total consideration of Rs. 100 Crores to FTL. This in turn meant that the control over the shares of RIL was with FTL till FTL chose to revoke its lien. The said transaction involving the back-to-back sale of Rs. 2.5 crore RIL shares from WBVL to FTL and finally to PCL (i.e. alleged benamidar) is thus nothing but an arrangement wherein PCL was holding the shares of RIL on behalf of and for the benefit of FTL (i.e. alleged beneficial owner).

4. Ld. Counsel for the Appellant pointed out that the genesis of the transaction price of Rs. 40 per share (as in the SPA) was not through negotiations between two unrelated parties (as had been claimed), but rather the price of Rs. 40 was the price prevailing on the stock exchange on 31.01.2018, i.e., the grandfathering date with respect to calculation of capital gains on shares, as proposed by the Union budget on 01.02.2018. Statement of Shri Krishna Kumar Agarwal (K K Agarwal), Designated Partner in FTL was recorded on oath on 10.12.2019 which corroborates the same. Thus, the claim that the share price of Rs. 40 was agreed after extensive negotiations and keeping in mind book value of the share for the last 6 months average price was incorrect. In fact, all negotiations happened face to face, without any written evidence such as emails, chats, etc. Ld. Counsel stated that if Shri Anil Gupta was not able to find investors for the said 2.50 crore shares within 3 years and/or if the share price fell below Rs 40, then he had not to pay and the transaction would not materialize. In that case, FTL would have simply taken the shares back without him having to pay any compensation or damages. This is something that is nowhere documented in the SPA. It must be mentioned here that Shri Rishab Agarwal in his statement before this office had stated that if PCL was unable to find any investors till the end of the credit period, then either FTL will extend the time or FTL would receive back the shares because of non-payment of dues, as per the agreed terms in the SPA. This strengthens the belief that there was some other informal oral arrangement among the parties, which had led to the subject benami transaction. Shri KK Agarwal in his statement completely failed to mention anything about the so-called MoU dated 27.03.2018. The SPA was the only document pertaining to 2.50 crore shares of RIL which was mentioned. Shri K K Agarwal had stated that the genesis of the transaction price of Rs. 40/- per share (as in the SPA) was the price prevailing on the stock exchange on 31.01.2018, i.e., the grandfathering date with respect to calculation of capital gains on shares, as proposed by the Union budget on 01.02.2018. Thus, the SPA price of Rs. 40/- was not a result of negotiations between two unrelated parties (as had been claimed), but rather it was the price that had been decided by the promoter group based on the convenience of tax implications and then thrust upon PCL/Anil Gupta. This shows that PCL had acted in the interests of the Beneficial Owner FTL in mind and not in its own interest. There were other perfectly legal ways to safeguard interest in a similar situation, for eg, escrow mechanism, etc. However, to take possession of such large quantity of shares taking into account various other factors such as stock exchange reporting, tax implications, etc. merely for the sake of safeguarding one’s interest is highly implausible. Even more importantly, it is not the industry practice/norm in any way.

5. Ld. Counsel for the Appellant Department contended that the promoters did not seem to believe that the market price prevailing on 06.04.2018 of Rs. 49.55/- was the fair market value. The credit period of 3 years practically gave the shares to PCL for 3 years without any payment. Even the initial payment of Rs. 10 lakh was sourced ultimately from dividend received from RIL itself. Further, even if the said payment is considered, it is a fact that PCL had received a total of Rs. 62,50,000/- as dividend from RIL (i.e., Rs. 25,00,000/- in FY 2018-19 and Rs. 37,50,000/- in FY 2019-20), whereas it had paid Rs. 60,00,00/- to FTL towards the SPA tranche payments, i.e., Rs. 10 lakh at the time of SPA and Rs. 50 lakh after issuance of SCN. In other words, the payments made to FTL had all been sourced from dividends received from RIL. Both Shri Anil Gupta and Shri Rishab Agarwal had stated that if the so-claimed fund raising transaction did not materialize within 3 years and/or if the share price fell below Rs. 40/-, then the final consideration shall not be paid and FTL shall simply take the shares back from PCL without PCL having to pay any compensation or damages. This is something that is nowhere documented in the SPA, and shows that there is some other informal oral arrangement among the parties, which has led to the subject benami transaction. Due to these glaring discrepancies, it is clear that the SPA is a non-genuine agreement, and not a commercial agreement as claimed. These documents basically imposed suitable restriction (lien/ pledge) in order to safeguard the interest of promoters even though it was contended that the intention was to sell these shares at a beneficial price to the future investors. The payments received from the investors were to be repatriated to the promoters entity after retaining the compensatory percentage of profit by Shri Anil Gupta. In a way Shri Anil Gupta was to act as an agent/ facilitator only. The so-called MoU and Sale and Purchase Agreement were nothing but afterthought and colourable device created to accord a semblance of credibility and a facade of legality to an otherwise incredulous arrangement. This fact has not been appreciated by the Adjudicating Authority and the Ld. Adjudicating Authority has erred in holding that it is a genuine transaction that too having fallen prey to the bogey of necessity to have corporate structure for sake of liquidating promoters shares. Moreover, the Initiating Officer had clearly stated that while the market price of the share was Rs. 73.35/-, as it was the price prevailing on the stock exchange on 31.01.2018, whereas the transaction price of Rs. 40 per share was arrived at with respect to the grandfathering date after making calculation of capital gains on shares, as proposed by the Union Budget on 01.02.2018. Thus, the price Rs. 40/- per share was decided by the promoter group based on the convenience of tax implications and then thrust upon PCL/Anil Gupta. This shows that PCL had acted in the interests of beneficial owner FTL in mind and not in its own interest. The Ld. Adjudicating Authority has clearly erred while stating that it is a normal business/corporate practice to sell shares valued at market price of Rs. 73.35/- per share for Rs. 40/- per share and transferring 2.5 crore shares for nominal payment of Rs. 10 lakh by PCL on 13.04.2018 and further payment of Rs. 50 lakhs on 22.11.2019 (after the show cause notice under Section 24(1) of the PBPTA was issued on 25.10.2019). The action of transferring 2.5 crore shares of market value Rs. 73.35/- per share at a nominal payment of Rs.10 lakh is just an act to avoid regulatory scrutiny and reporting on BSEI, while effectively having control over these 2.5 crore shares held with the benamidar “M/s. Parshavanath Comtrade LLP”. The Ld. Adjudicating Authority has erred in deciding the matter in favour of the defendants by making general observations, without any reasoned refutation on the itemized basis on which the transaction was held benami. The Ld. Adjudicating Authority erred in not considering the statements of various partners/shareholders of benamidar entities, giving undue weightage to their retraction, without appreciating the facts as stated in their statements, which was given on oath under Section 131 of the Income Tax Act, 1961, voluntarily and spontaneously. Therefore, the retractions were nothing, but convenient afterthought. The Ld. Adjudicating Authority erred in not adjudicating upon itemized detailed and reasoned rebuttal of the retraction of statement of various partners/shareholders made by the I.O. during the proceedings before the Ld. AA. Ld. Counsel for the Department therefore pleaded to allow the Appeal.

6. Ld. Counsel for the Respondent No. 1 M/s Parshvanath Comtrade LLP (PCL) strongly contested the pleadings made in the Appeal. He contended that the Respondent No. 1 had entered into a bona fide contract with the Respondent No. 2 with respect to the subject property. The PAO was not in accordance with the provisions of law, which in turn caused the failure of the Respondent to fulfil its obligation in terms of the SPA. The Impugned Order is a valid speaking order passed in favour of the Respondents. In 2022 as per the terms of the SPA, FTL, Respondent No. 2, proceeded to cancel the SPA when the Respondent No. 1 failed to honor its commitment and this was primarily on account of the judicial entanglements ensuing from the illegal proceedings of the Appellant which led to the cancellation of the SPA whose validity was until 31.03.2021 and the situation was further exacerbated by the COVID pandemic which caused financial turmoil in the markets that went plunging. Respondent No. 1 could not find a potential investor and pay the balance amount as per terms of SPA. The said subject property i.e. shares of M/s Responsive Industries Ltd. were taken back by FTL invoking its rights over the pledged shares and also agreed to return the amounts paid by the Respondent No. 1. Certain amounts have already been refunded back to the Respondent No. 1 and balance amount is likely to be received in due course. Therefore, the said shares are no longer held by Respondent No. 1 and this important fact cannot be ignored and hence placed on record.

7. Ld. Counsel for the Respondent No. 1 contended that the two ingredients of Section 2 (9) (A) have been satisfied and hence the finding of the Ld. AA that there was no benami transaction is correct. He argued that it is abundantly and cogently established without any doubt that the consideration agreed as payable in terms of the SPA for the said 2,50,00,000 shares purchased by M/s PCL had been thus far paid only by PCL, Respondent No. 1 and certainly not in any way sourced from FTL, Respondent No. 2 as is being erroneously assumed. The Appellant failed to comprehend the business transaction and wrongly presumed that the entire consideration had been paid or the transaction got completed in absence of full payment of consideration. The final amount of Rs. 98,90,00,000/- was not even due for payment and the question of its payment was then premature for consideration at that point of time. It was flawed to presume that the balance amount was paid by anyone else leave alone the seller i.e. M/s FTL. It is a flawed logic of the Appellant to rope in all sale transactions for credit as tantamount to being benami transactions. The Appellant failed to show any iota of evidence to the contrary that the consideration was not paid by the PCL, Respondent No. 1 from its own known sources and thus it failed in establishing the first limb of the benami test prescribed in Section 2(9)(A). The 2,50,00,000 shares of RIL were transferred and registered in the name of Respondent No.1 as can also be confirmed from M/s RIL and certified to that effect. This is also reflected and corroborated in the Statement of Holding issued by the NSDL Agent M/s Arch Finance Ltd. The Respondent No. 1 received and utilized the dividends received from M/s RIL against the registered shares, which was duly highlighted in its bank statement. The Appellant has not even made the efforts to find that the voting rights subsisting in the shares of M/s RIL were also in the control of the Respondent No. 1 and thus clearly the beneficial ownership in the subject property has always vested with Respondent No. 1 post registration of the shares with RIL.

8. Ld. Counsel for the Respondent No. 1 argued that M/s PCL was temporarily holding the impugned shares only till sale of the same to the prospective investor within the intended parameters of terms and conditions. Ld. Counsel challenged the Ground of Appeal that the Ld. AA had erred in holding the impugned transaction as a genuine commercial transaction. Ld. Counsel submitted that the Appellant had failed to comprehend the nature of the transaction and further was not willing to see the reasoning in the Impugned Order. Ld. Counsel also contended that the statements recorded under Section 131 of the Income Tax Act, 1961 can be used only for proceedings under the Income Tax Act, 1961. He asserted the Respondents have successfully got the transaction clear from the Income Tax Authority. Ld. Counsel has also challenged the Appeal on the grounds that the Appellant is prejudiced, since it had made the pleading that the Ld. AA made general observations and not gone into itemized details and reasoning. Ld. Counsel therefore pleaded to dismiss the Appeal.

9. Ld. Counsel for the Respondent No. 2 M/s Fairpoint Tradecom LLP (FTL) also submitted that the Impugned Order was well reasoned and comprehensive. He stated that the Memorandum of Understanding (MoU) dated 27.03.2018 and SPA dated 06.04.2018 had been approved by the Ld. CIT (A), 53, Mumbai, vide its Order dated 13.05.2022 and by the Hon’ble ITAT, Mumbai, vide its order dated 23.12.2022. Ld. Counsel contended that the contract of lien of the shares by the Respondent No. 2 did not alter the ownership and enjoyment of benefits by the Respondent No. 1. Ld. Counsel further contended that the Appellant has relied on oral statements without taking into consideration the documents in the form of MoU and SPA. Ld. Counsel contended that the fundamental criterion for categorizing a transaction as benami has not been conclusively established by the Initiating Officer. He stated that the Respondent No. 1 invested in the transaction for purchase of 2.5 crore shares was not as capital provider but as facilitator to bring a strategic investor and to profit from the deal after its fructification. The objective and confidence of the Respondent No. 2 stemmed from the belief that it will be able to bring a strategic partner to the promoters of RIL at a price higher than purchase price of Rs. 40/-, so that it shall be able to exit from its holding of the 2.5 crores shares at a decent profit which will compensate it for all the efforts and professional services. Ld. Counsel contended that nothing adverse could be inferred from the statements recorded as part of the survey proceedings as the same were not in contradiction to what had been averred subsequently.

10. Ld. Counsel for the Respondent No. 2 categorically denied that no written notice/reminder was ever received by PCL from FTL for paying the consideration (i.e. Rs. 100 crores less Rs. 10 lakhs) for purchase of RIL shares. He refuted the allegation that FTL never intended to recover the aforesaid amount and merely parked the aforesaid shares in the name of PCL for its own benefit. Ld. Counsel stated that it is essential to emphasize and has been reiterated here again, through a letter dated 21.07.2022, that Respondent No. 2 (the Answering Respondent) took the explicit step of canceling the Memorandum of Understanding and invoking the pledge over the shares. This decisive action serves as clear evidence that M/s FTL did not retain the RIL shares with M/s PCL for its own gain. Instead, M/s FTL, with the explicit intention of recouping its funds, invoked the MoU and the pledge over the shares. This underscores FTL’s unwavering commitment to addressing the matter in a legal and appropriate manner. Ld. Counsel stated that by virtue of the Order of the Ld. IO the scheme of deferred payment would never be workable just because lien had been created on the assets purchased. He asserted that the lien was created to protect the genuine interest of Shri Anil Gupta, who was respected professional. M/s PCL had not invested in the shares of RIL with a view to make a quick buck. Ld. Counsel asserted that Respondent No. 1 had control over the shares.

11. Ld. Counsel for the Respondent No. 2 submitted that the transaction price was arrived at by adopting the average price of the share on the exchange for a period of 6 months prior to the transaction. The average works out to Rs. 40.45/-, and hence a round figure of Rs. 40/- was adopted after negotiations. The question asked of Sh. K.K. Agarwal, was specifically in reference to the Income Tax Act, and pertained to capital gains that might arise on the transaction. In response, it was stated that the probability of their being taxable income as a result of the transaction was minimal since the recently introduced provisions for computing capital gains on share transactions had introduced the concept of grandfathering price, which coincidentally was close to the transaction price. Ld. Counsel further submitted that Shri Rishabh Agarwal has explained that he had negotiated with Shri Anil Gupta, and that he was unaware that Shri Anil Gupta, was a partner in M/s PCL and that M/s PCL was the instrument through which the transaction was carried out. Further, he had explained that the reason was that in the relevant question, a specific date, specific number of shares, specific 2 entities were mentioned for a specific transaction and therefore, he did not relate to the said transaction. It was also explained that to maintain confidentiality, both Shri Rishabh Agarwal and Shri Anil Gupta, had not mentioned, the MoU, in the absence of specific queries regarding it. It is pertinent to note here that off market transactions of bulk purchase of shares between strategic investors and promoters, are carried out at negotiated prices keeping in view average prices over a period of time, and not at the last quoted price. In a highly volatile market such as the share market, price discovery cannot be on the basis of the last transacted/ quoted price, and the underlying value is best worked out based on a number of factors. It was submitted that the contention of the Appellant that the credit period of 3 years practically gave the shares to M/s PCL for 3 years without any payment was completely fallacious and as such should be put to strict proof. Ld. Counsel further submitted that the M/s PCL issued 2 undated cheques of Rs. 50 lakhs each, towards the payment of second tranche of the SPA, which were being alleged to be a cover up. This conclusion was based on an assumption made by the Appellant and lacked substantiation through any rational argument or supporting evidential documentation. It was further submitted that the Appellant had wrongly concluded that the benefit arisen in terms of dividends of the alleged benami asset had been ultimately returned to the FTL. It was rather submitted that the Appellant failed to realize that WBVL and FTL were part of the promoter group and the shares held by WBVL and transferred to FTL were promoter’s quota shares, and had been held over a long period.

12. Ld. Counsel for the Respondent No. 2 contended that the source of purchase was legitimate, and the purchase as well as such holding had been duly reported. It was an admitted fact that the funds for purchasing the shares were certainly not in any way sourced from Respondent No. 2 as was being erroneously alleged by the Ld. IO. The Ld. IO was confusing the payment of Rs. 100 crores by Respondent No. 2 to WBVL which was another transaction for the purchase made by Respondent No. 2. In the impugned transaction Respondent No. 2 was the seller of the subject shares and entitled to receive the consideration as per the SPA. It is important to further clarify that in any transaction where credit is extended to the buyer, the seller has actually paid the original consideration in the first place to the erstwhile sellers to transfer the ownership rights to itself. It appears that as per the flawed logic of the Ld. IO all sale transactions for credit would tantamount to being benami transactions. Thus, in light of the foregoing it is safe to say that the due consideration as per the terms of the SPA had only emanated and got paid from the Respondent No. 1 and there was no evidence to the contrary that had been brought on record by the Ld. IO and thus he failed to establish the first limb of the benami test prescribed in Section 2(9)(A). The 2,50,00,000 shares of RIL were transferred and registered in the name of the Respondent No. 1 as can also be confirmed from M/s RIL and certified to that effect. This is also reflected and corroborated in the Statement of Holding issued by the NSDL Agent M/s Arch Finance Ltd. The subject asset continues to be held and, in the possession, and control of the Respondent No. 1 as can be seen from the books of accounts of PCL, financial statements and there is no one else making the claims for the subject property. Conclusively, it may be held that the crucial test of being a ‘benami transaction’ has not been established unequivocally by the Initiating Officer and is thus liable to be quashed.

13. We have considered the rival submissions made by the Appellant Department and the Respondent No. 1 (the Benamidar) and the Respondent No. 2 (the Beneficial Owner). We have also taken into account the material on record including the Impugned Order setting aside the PAO as well as the PAO itself. Ld. AA has found that the suspicions of the IO for holding the impugned transaction as benami arose largely because of the statements of Shri Rishabh Agarwal, the Director of RIL, under Section 131 of the Income Tax Act, 1961, expressing his unawareness about Shri Anil Gupta being partner of the M/s PCL even though Shri Gupta had stated that the negotiations for the said transaction had happened with Shri Rishabh Agarwal. Moreover, Smt. Nikita Gupta wife of Shri Anil Gupta even though being partner in PCL had expressed her unawareness about its affairs. Ld. AA stated that these statements and lien on the demat account made the IO conclude that the transaction was benami. Ld. AA went on to observe that the statement of Shri K K Agarwal, Shri Anil Gupta and Shri Rishabh Agarwal, as well as the MoU and the SPA effectively clear the suspicions of the IO. Ld. AA further observed that both parties had agreed to bring in strategic investor and since Shri Anil Gupta had the necessary experience, he was engaged for the purpose. The 2.5 Crores shares were transferred to Shri Gupta on credit basis for a period of three years at the rate of Rs. 40/- per share in accordance with the MoU, of which the SPA was an offshoot. Ld. AA made the following findings in paragraph 14 of the Impugned Order:

“There is no reason to doubt the intention of the promoters of Responsive Industries Ltd. to take services of Shri Anil Gupta, an expert in the relevant domain area to rope in big investors at a price which was to be not less than Rs. 40; 26 weeks average market price as mandated by Rules. The Memorandum of Understanding and Sale and Purchase Agreement (SPA) are testimony to this. There is nothing on record to doubt genuineness of these documents. These documents basically put in suitable restriction (lien/ pledge) in order to safeguard the interest of promoters and the basic intention was to sell these shares at a beneficial price to the future investors. The payments received from the investors were to be repatriated to the promoters entity after retaining the compensatory percentage of profit by Mr. Anil Gupta. In a way Mr. Anil Gupta was to act as an agent/ facilitator only. It is not disputed that his only asset was his professional expertise and he was not expected to arrange for the entire consideration for 2.5 crore shares of RIL. Sale on credit of the shares by the promoter entity to Shri Gupta’s entity was a requisite of the adventure undertaken. Relevant safeguards were built in the SPA to protect the interest of the promoters entity such as condition to sell share not below a determined price beneficial to the promoters of RIL; of putting in loan/ pledge etc. Similarly interests of Shri Gupta were also safeguarded by building in terms such as first right of sale of his quota of shares; ownership over the dividends etc. There is no dispute that the M/s Well known Business Ventures LLP is a RIL/promoter group company which sold share to Beneficial owner at Rs. 40 in order to be available for the impugned SPA. There is also no dispute that both Beneficial Owner and Benamidar were incorporated specially for this purpose. All these actions are naturally required for the typical corporate action to rope in new investors in the company through promoters quota of shares through an expert, professional middle man acting basically as an agent/ facilitator. The Initiating Officer’s suspicions and observations are based on incomplete understanding of the exercise being undertaken by parties involved. 2.5 crore shares already belonging to promoters had been provided to the Benamidar on a conditional credit sale arrangement only for disposing the same to future investors at a mutually beneficial price. The Benamidars is temporarily holding these shares only till sale within intended parameters of terms and conditions are completed. He is entitled to his compensatory profit out of the sale proceeds. The entire transaction is at arms length. The major part consideration for the said share purchase by BD has yet to accrue in the hand of BD which can happen only when sale to angel/ venture investor is accomplished; more so ever, it is a genuine credit sale whose grace period of 3 year is yet to expire. Rs. 1.1 crore has been paid by BD only from his accounts so clearly the consideration has not been arranged by BO. The benefit of these shares, i.e., dividend and voting rights etc. are also in the hand of BD only. Thus, both limbs of 2(9)(A) are not present in the case. I therefore, decline to declare the impugned property as Benami Property u/s 2(9)(A) of the Act.”

14. The critical question is whether the PAO is based upon the suspicions and observations of the Initiating Officer, which in turn are based on incomplete understanding of the exercise being undertaken by parties involved ? The Ld. IO has made a finding that the consideration for the purchase of 2.5 crores shares of RIL was provided by FTL to WBVL which in turn were transferred at meagre consideration to PCL. The Original SPA in this regard was in the custody of the FTL. No reminder was issued by FTL for payment of further consideration of Rs. 1 crore by PCL. In fact, the financials of the M/s PCL revealed that it had no credit worthiness and was not carrying out any business activity which could give business and economic rationale for the said transaction. Ld. IO also noted that the SPA dated 06.04.2018 between FTL and M/s PCL provided for lien on the shares transferred in the account of M/s PCL. Thus, FTL continued to hold effective control over the shares even though on paper it was owned by M/s PCL. Ld. IO concluded the following in paragraph 10.2 of its Order:

“10.2 As discussed in detail in preceding paragraphs the so-called Share Purchase Agreement dated 06.04.2018 between FTL and PCL is nothing but a colourable device created to accord a semblance of credibility and a faqade of legality to an otherwise incredulous and sham transaction. For all purpose, the control over the shares of RIL transferred by FTL to PCL lies with FTL only. The shares of RIL under question are presently at the disposal of FTL even though they are merely held in the name of PCL. Thus, the above referred transaction meets the conditions of being a Benami Transaction as per Section 2(9) (A) of the PBPT Act, 1988 wherein the purchase consideration for the purchase of aforesaid shares have been paid by FTL but the same has been transferred and held in the name of PCL. Accordingly, PCL is a benamidar holding benami property in the form of shares of RIL for the benefit (immediate or future; direct or indirect) of beneficial owner i.e. FTL.”

15. We also observe that the Ld. IO has gone on to make specific findings drawn from the statements recorded during the course of investigation under Section 19 of the PBPTA. Shri K K Agarwal in his statement dated 10.12.2019 did not make any mention of the MoU dated 27.03.2018 leading to the conclusion by the IO that the MoU was an afterthought to accord legitimacy to the benami transaction. Ld. IO has also inferred that the price of Rs. 40/- per share mentioned in the SPA was not a result of negotiation between two unrelated parties, but rather that had been decided by the promoter group based on the expediency for tax implications. In this regard, Shri K K Agarwal had explicitly stated that the genesis of the transaction price of Rs. 40/- per share was the price prevailing on the stock exchange on 31.01.2018 i.e. the grandfathering date with respect to calculation of capital gains on shares, as proposed by the Union Budget on 01.02.2018. From the statements of Shri Rishabh Agarwal and Shri Anil Gupta, Ld. IO has inferred that Shri Rishabh Agarwal was aware of the said transaction, but was unwilling to explain the same. Ld. IO pointed out that Shri Rishabh Agarwal was a partner of FTL until the month of the Benami Transaction. WBVL in turn was partner of M/s FTL and hence it was most unlikely that Shri Rishabh Agarwal was not aware of the Benami Transaction. Further, Shri Rishabh Agarwal had in statement accepted that Shri Anil Gupta and he enjoyed mutual trust. Ld. IO pointed out that Shri Anil Gupta in statement dated 12.12.2019 admitted having arranged various meetings of leading investment banks with the promoters of RIL. Thus, Shri Gupta was merely doing coordination work for which the reward in the form of entering into such transaction was unwarranted. Ld. IO pointed out that Shri Anil Gupta taking possession of 2.5 crores shares to safeguard his interest is in fact against market practice and logic since other alternative means like escrow mechanism were available.

16. We find that the Ld. IO has done analysis of the decisions of the Supreme Court on benami transactions [including Jaydayal Poddar (Deceased) v. Mst. Bibi Hazra 1974 AIR 171, 1974 SCR (1) 701)] and has framed the following six questions:

7.1 In several judgements, the Hon’ble Supreme Court has laid down the following six criteria for evaluating whether a transaction is benami in nature:

a. the source from which the purchase money came;

b. the nature and possession of the property, after the purchase;

c. motive, if any, for giving the transaction a benami colour;

d. the position of the parties and the relationship, if any, between the claimant and the alleged benamidar;

e. the custody of the title deeds after the sale; and

f. the conduct of the parties concerned in dealing with the property after the sale.”

It is interesting to note that the Ld. IO has analysed each of the six questions and its response thereto are reproduced as follows:

“In this case, the 2.50 crore shares of RIL, the market value of which on the date of SPA was more than Rs 125 crores, have been effectively transferred by FTL to PCL for a nominal payment of Rs. 10 lakhs by PCL on 13.04.2018 and further payment of Rs 50 lakhs on 22.11.2019 (after the show cause notice u/s 24(1) of the PBPT Act, 1988). Thus, the shares under question have been transferred at nominal consideration by FTL, thereby providing PCL an asset without any consideration. Moreover, the two payments of Rs 10 lakhs and Rs. 50 lakhs have also been sourced from dividend received from RIL itself.

No written notice/letter/reminder was ever received by PCL from FTL for paying the 2nd tranche of Rs 1 crore on 30.09.2018 for purchase of RIL shares as per the terms of the SPA, thereby showing that FTL never intended to recover the aforesaid amount and merely parked the aforesaid shares in the name of PCL for its own benefit. Further, there is no evidence for any request for an extension sought by PCL for making the stipulated payment as per the SPA.

In the circumstances, it has to be concluded that since FTL has transferred the RIL shares at almost NIL consideration and since FTL didn’t intend to recover the amount from PCL, the consideration for the shares has effectively been provided by FTL.”

“It is an undisputed fact that even after the transfer of the 2.50 crore shares of RIL, FTL has continued to maintain control over these shares by way of lien placed on them. Thus, even after the transfer of shares, FTL remains firmly in control of these shares.”

“By transferring the 2.50 crore shares to PCL, FTL (part of the promoter group of RIL) has effectively ceased to be a promoter in respect of these 2.50 crore shares. This can be verified from the reporting done on BSE, wherein June 2018 quarter onwards, FTL is not reported as the promoter in respect of these 2.50 crore shares. Thus, by way of executing the said sham transfer of shares in off-market transaction, FTL has effectively avoided the spotlight and regulatory scrutiny on these shares.”

“Partner of PCL, Shri Anil Gupta acquired partnership in PCL from Smt. Simple Jain and Smt. Aditi Gandhi (who are both relatives of each other). Smt. Simple Jain has stated on oath in statement u/s 131 of the IT Act dated 22.10.2019 that she knew nothing about the entity PCL and that her husband Shri Amit Jain, who is a CA by profession, knew about it. It must be mentioned here that Shri Anil Gupta, Shri Amit Jain and Shri Rishab Agarwal are all directors in M/s Westbury Tradecom Ltd, which has over 90% shareholding of Shri Rishab Agarwal (as stated by Shri Anil Gupta in his statement u/s 19 of the PBPT Act, 1988 recorded on 12.12.2019). Further, Shri Anil Gupta is also a director in M/s Westbury Securities and Services Ltd along with Shri Rishab Agarwal. Thus, by no stretch of imagination can these three persons Shri Amit Jain, Shri Rishab Agarwal and Shri Anil Gupta be considered as unrelated, especially considering the other facts and circumstances brought out about the alleged benami transaction.”

“As stated by Shri Anil Gupta in his statement recorded on Oath u/s 131 of the IT Act on 22.10.19 during the course of survey proceedings, the SPA was kept in the custody of FTL since FTL was in commanding position during the negotiation of the deal. Further, as noted above, FTL remains firmly in control of these shares even after executing the SPA, by way of placing lien on transfer of these shares.”

“Even though PCL is the legal owner of the RIL shares under question, it has derived effectively no benefit from these shares till date and cannot sell these shares to make a profit, since the shares are still kept under the control of FTL. The current market price of these shares is more than 130% higher than the SPA price of Rs 40 and yet, PCL has not sold any of these shares till date despite getting opportunity to earn handsome returns, which is beyond any economic rationale and business prudence.

It is to be noted that if PCL cannot sell the shares to make a profit, it remains unexplained as to how it will make the due payments to FTL, since PCL has no other income/activity of its own.”

Perusal of the preceding paragraphs of this Order clearly reveals that there has been due application of mind on the part of the IO to the facts of the case, inferences following the statements recorded during the course of the investigation, evaluation of the documents recovered during the course of the investigation and due application of the Judgment of the Hon’ble Supreme Court to the case in hand. We observe that in no way, it can be stated that the IO had an incomplete understanding of the transaction undertaken by the parties. In fact, the IO has dealt with the matter comprehensively.

17. Since the underlying question is whether the transaction entered into by the PCL and the FTL was benami or not, the following definitions/meanings as provided under the PBPTA are reproduced below:

“2. Definitions.— In this Act, unless the context otherwise requires,—

(8) “benami property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property;

(9) “benami transaction” means,—

(A) a transaction or an arrangement—

except when the property is held by—

(10) “benamidar” means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name;

(12) “beneficial owner” means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar;”

18. Before we examine the true nature of transaction, it is important to look at the corporate structure of the participants of the said transaction. Since the property involved is 2.5 crores shares of the Responsive Industries Ltd., it is important to note that the RIL is a Company listed on the share market and its shares are freely tradeable. The alleged Beneficial Owner viz M/s Fairpoint Tradecom LLP is a limited liability partnership having been incorporated on 01.01.2011. The firm has been promoted by the Agarwal family, who are also the promoters of M/s Responsive Industries Ltd., as well as of M/s Wellknown Business Ventures LLP. 99 percent of stake in M/s FTL is held by M/s WBVL. The alleged Benamidar M/s Parashavnath Comtrade LLP is a limited liability partnership between Shri Anil Gupta and his wife Smt. Nikita Gupta. However, the Firm was Registered on 06.05.2015 as partnership between Smt. Aditi Gandhi and Smt. Simple Jain. It was acquired by Shri Anil Gupta and Smt. Nikita Gupta on 05.04.2018 for trading in securities and commodities. Shri Gupta in his statement dated 22.10.2019 stated that the Firm has been used to hold investment in shares of RIL and it had not done any transactions after the share purchase of RIL.

19. The transaction involved prior purchase of 2.5 crore shares of RIL by FTL at the rate of Rs. 40/- per share from WBVL between 26.03.2018 and 03.04.2018. A Share Purchase Agreement was entered on 06.04.2018 between the M/s FTL through Shri Rishabh Agarwal and M/s PCL through Shri Anil Gupta. 2.5 Crores shares of RIL at the rate of Rs. 40/- per share were transferred from RIL to PCL on 12.04.2018. The consideration for such transfer was decided to be Rs. 10 lakhs to be paid by PCL by 14.04.2018, Rs. 1 Crore to be paid by 30.09.2018 and the balance amount of Rs.98,90,00,000/- by 31.03.2021 since the total consideration was Rs. 100 crores for the transfer of the said shares. In view of the full payment having not been made immediately on transfer of the shares, the SPA provided through the clause that the shares transferred to PCL shall be marked with lien/pledge in favour of the FTL till the full payment was received. Given the kind of conditionalities in the said transfer, we observe that the parties had entered into an arrangement rather than a transaction for the transfer of the said shares. It is on record that the property viz 2.5 crore shares of RIL had been transferred from FTL to PCL. It is also not disputed that such transfer had occurred before the full consideration had been paid by PCL to FTL. Further it is not disputed that FTL in turn had paid full consideration for the transfer of the said shares from WBVL to FTL. It therefore follows that except for Rs. 10 lakhs which had been paid immediately by M/s PCL, for the transfer of shares, the consideration for the transferred shares had been provided by M/s FTL.

20. The Respondents have challenged the proposition that for the transfer of shares to PCL the consideration had been paid by FTL. It is contended by the Respondents that any transaction where credit is extended to the buyer, the seller has actually paid the original consideration in the first place to the erstwhile seller, so as to transfer the ownership right to itself. The Respondents have maintained that the transaction for the sale of 2.5 crore shares from WBVL to FTL, was separate and distinct from that of the transfer from M/s FTL to M/s PCL. The argument runs that it is abundantly and cogently established that the consideration as payable in terms of the SPA for the 2,50,00,000 shares had been thus far paid only by M/s PCL, Respondent No. 1 and certainly not in any way sourced from M/s FTL. It would be wrong to presume that the entire consideration had been paid or the transaction got completed in absence of full payment of consideration. The final amount of Rs.98.90 crore was not even due for payment and the question of its payment was then premature for consideration at that point of time and it was flawed to presume that the balance amount was paid by anyone else leave alone the seller i.e. M/s FTL. We do not find this line of argument to be convincing. To compare the said arrangement to sale on credit or hire purchase would be to hoodwink the true nature of the arrangement. It is noteworthy that the immediate payment of Rs. 10 lakhs was just about 0.1 percent of the value of the transferred property and even promise of subsequent payment in near future was Rs. 1 crore which would have been 1 percent of the value of the transferred property. It is significant that the rest of the consideration of Rs. 98,90,00,000/-was payable contingent upon the sale of the transferred shares to the prospective investors failing which the shares would have returned to M/s FTL. The Respondents have attempted to justify the aforementioned arrangement in terms of the objective of the arrangement so that it would be able to bring a strategic partner to the promoters of RIL at a price higher than purchase price of Rs. 40/-, for it to exit from its holding of the 2.5 crore shares at a decent profit which will compensate it for all the efforts and professional services. It is on record that Respondent No. 1 could not find a potential investor and could not pay the balance amount. The impugned property i.e. shares of M/s Responsive Industries Ltd. were taken back by FTL invoking its rights over the pledged shares and agreed to return the amounts paid by the Respondent No. 1. Thus, the objective which was projected for entering into the arrangement was never fulfilled and hence cannot justify the arrangement. Even though the blame for not fulfilling the objective has been attributed by the Respondents to the legal entanglements caused by the Appellant Department and to the Covid, the fact of the matter is that the arrangement did not lead to attainment of the objective. Right from the beginning, there were doubts about the efficacy of the arrangement to attain its aforementioned projected objective. The culmination of the arrangement makes it certain that the projected objective could not have been achieved in this manner. It thus raises serious questions about the bona fides of those who designed and implemented it.

21. The temporal flow of events lends further credence to the arrangement being benami in nature. We find that on 20.03.2018 WBVL became partner of M/s FTL through a Deed. This enabled WBVL to sell 1.25 crore of shares of RIL to FTL on 26.03.2018 and again 1.25 crore of shares of RIL to FTL on 03.04.2018 as capital infusion of Rs. 50 crores on each occasion. Shri Anil Gupta along with his wife acquired M/s PCL on 05.04.2018. On the very next day i.e. 06.04.2018 M/s FTL sold 2.50 crore shares to M/s PCL. On 13.04.2018 on an advance from its partner Shri Anil Gupta, M/s PCL paid Rs. 10 lakhs as the first tranche against the payment for buying 2.50 crore shares worth Rs. 100 crores. On 15.06.2018 M/s PCL received dividend of Rs. 25 lakhs on the impugned shares from M/s RIL. M/s PCL in turn repaid Rs. 15 lakhs to its partner Shri Anil Gupta on 12.07.2018. Again on 30.09.2018 the second tranche of Rs. 1 crore became due from M/s PCL to M/s FTL, yet no payment was made. We observe that the temporal flow clearly brings out a series of measures undertaken to facilitate that the said arrangement comes into place at the earliest. It becomes glaring that M/s PCL made further payment of Rs. 50 lakhs towards the second tranche owed to M/s FTL only on 22.11.2019 when the Responsive Group was put under survey by the Income Tax Department on 22.10.2019.

22. The Respondents have attempted to defend the arrangement in terms of the two documents viz the SPA and the MoU. Even in the Impugned Order the two documents have been regarded as the testimony for the intention of the promoters of RIL. On the other hand, the Appellant has challenged the genuineness of the two documents and held these to be colourable devices to cover the sham transfer of shares in the off-market transaction. The IO in its analysis has brought out that by transferring 2.50 crore shares to PCL, FTL (part of the promoter group of RIL) had effectively ceased to be a promoter in respect of these 2.50 crore shares. This could be verified from the reporting done on BSE, wherein June 2018 quarter onwards, FTL was not reported as the promoter in respect of these 2.50 crore shares. We therefore infer that it was not the projected objective, but by way of executing the said sham transfer of shares in the off-market transaction, M/s FTL had taken steps to effectively avoid the spotlight and regulatory scrutiny on these shares. The Appellant has argued further that the action of transferring 2.5 crore shares of market value Rs. 73.35/- per share at a nominal payment of Rs.10 lakh was just an act to avoid regulatory scrutiny and reporting on BSEI, while effectively retaining control of the Beneficial Owner over these 2.5 crore shares held with the Benamidar M/s PCL by having lien of FTL on the impugned shares. The Appellant has also pointed out that the MoU was an afterthought to justify the arrangement. We observe that any document can justify something only if it is so permissible under the law. None can take advantage of a document created between the parties, so as to justify any deal between them, which is not permissible under the law. The arrangement in itself was questionable under the provisions of the PBPTA. The arrangement, in particular, was unable to meet the essential ingredients of Section 2 (9) (A) of the PBPTA. M/s PCL was not only transferred 2.50 crore shares by M/s FTL, but it also continued to hold the same till 2022, having merely paid an insignificant amount for the shares valued at Rs. 100 crores. The inference that the consideration for the shares had been provided by M/s FTL is obvious. It is an admitted fact by Shri Anil Gupta that M/s PCL did not acquire any share other than 2.50 crore shares of RIL from M/s FTL. Since M/s PCL could not generate any income it had to depend upon the dividend earned from its holding of shares of RIL to even make payments as stipulated under the SPA. We observe that even such dividend would be part of benami property in accordance with the definition in Section 2 (8) of the PBPTA. We also observe that merely transfer of shares in the name of M/s PCL along with right to vote and right to earn dividend could not free the Benamidar from the fetters of the Beneficial Owner, in view of the lien of M/s FTL on the impugned shares. Since, the objective projected by the Respondents was never achieved through an arrangement which was always in doubt as the most efficient way of achieving that objective, the inference that the arrangement was made to avoid the regulatory scrutiny is also inescapable. We thus find that the second ingredient of Section 2 (9) (A) requiring the Benamidar to hold the property for immediate benefit as well as for future benefit, at least for further three years for the Beneficial Owner is also met.

23. In view of the aforementioned discussions and analysis, we set aside the Impugned Order and restore the Provisional Attachment Order dated 28.01.2020 thereby allowing the Reference No. 1948/2020. We therefore allow the Appeal No. FPA-PBPT-1476/MUM/2021 filed by the Initiating Officer and Assistant Commissioner of Income Tax, (Benami Prohibition Unit-1), Mumbai. Applications pending, if any, are disposed of accordingly.