ACIT, NEW DELHI vs. MS. PIYA SINGH, NEW DELHI

ORDER PER O.P. KANT, A.M.: This appeal by the Revenue is directed against order dated 29/03/2011 of learned Commissioner of Income-tax (Appeals)-XXX, New Delhi for assessment year 2006-07, raising following grounds: “i) deleting the Assessing Officer to allow the long term capital loss and thereby deleting the addition of Rs.2,09,90,799/- made by the AO on account of long term capital gain on sale of apartment: ii) concluding the fact that the assessee incurred capital loss first in point of time and capital gains were arrived at much later date not considering that it was not only on 01.03.2006 i.e. on the date of sale that the assessee came to know that she was going to earn profit on her investment in the apartment rather it was well within her knowledge that the value of investment in the property was appreciating and as she invested in the property only for the purpose of earning profit, the sale of shares seven months before the sale of apartment, to the company controlled by herself and her family members and incurring loss thereon is nothing but a contrived transaction to unjustly claim the benefit of long term capital losses; iii) directing the Assessing Officer to allow the brokerage expenses while computing the capital gains on sale of apartment ignoring the fact that the assessee surrendered back the apartment to the builder and not sold it in the open market which is evidenced from the fact that the instrument of evidencing sale is only a letter dated 01.03.2006 from the builder and no separate agreement or sale deed was entered into which substantiate the fact that expenditure was not actually incurred by the assessee on account of brokerage. The appellant craves the right to alter, amend , add or substitute the grounds of appeal.”

(v) In view of the above finding, the Assessing Officer did not allow the long-term capital loss claimed with assessee and assessed the long- term capital gain on sale of the apartment is income of the assessee.

(vi) The Assessing Officer also disallowed the claim of brokerage of Rs.10,21,342/- paid on sale of the apartment on the ground that it was surrendered back by the assessee to the builder and it was not sold in the open market. (vii) After considering the submission of the assessee, the learned Commissioner of Income-tax (Appeals) on the issue of allowability of long-term capital loss, observed which is summarized as under: a) the assessee purchased the preference shares by making payment through cheque. The sale consideration was also received by the assessee through cheque and the shares were delivered physically to the transferee.

The preference shares were unquoted and there was no market available for the same and therefore the assessee could not have realised anything more than the consideration for which the shares were sold considering that no dividend was declared by the said company and there was no premium payable on sale of shares. c) The purchase price and sale price of the shares sold was not disputed by the Assessing Officer and there was no finding by the Assessing Officer that consideration received by the assessee was not the actual consideration received. d) The loss was on account of the indexation of the cost of the shares. e) The sale of apartment in the same year in which the shares are sold would not result in denying the claim of set off of long-term capital loss to the assessee. (vi) In view of above observations, the learned Commissioner of Income Tax (Appeals), set-aside the order of the Assessing Officer and directed to allow the long-term capital loss claimed by the assessee. On the issue of brokerage expenses, he was of the view that said expenditure was bonafide and supported by the brokers receipt, payment by cheque etc. and, therefore, he allowed the said expenses while computing the capital gain on sale of the apartment. 2.1 Aggrieved with the above finding of the learned Commissioner of Income-tax (Appeals), the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

3.6 In the case of CIT Vs. Hede Consultancy Company (P) Ltd. (supra) the learned Commissioner of Income Tax (Appeals) noted that the transaction in respect of sale of shares of Hede Navigation Ltd. resulted in long-term capital loss had preceded the transaction involving the Short from capital gains selling the shares of Mackhinon and Mackenzie Company Limited. The Hon’ble Bombay High Court did not find the transaction colourable. The finding of the Hon’ble High Court is reproduced as under: “6. We have considered the submissions of the learned counsel and we have also gone through the records. The CIT(A) whilst disposing of the appeal preferred by the respondents, by order dt. 18th Oct., 2002, upon appreciating the material on record, has come to the conclusion that the .price at which the respondents had purchased the shares and thereafter has sold the shares, is not in dispute. The learned CIT(A) has also noted that the transaction in respect of the sale of shares of Hede Navigation btd., resulting in long-term capital loss had preceded the transaction invoking the short-term capital gains selling the shares of Mackhinon & Mackenzie Co. Ltd. The CIT(A) also noted that the loss transactions therefore cannot be said to have been influenced by the gain transactions. The CIT(A) has also noted that the AO has not disputed about any of the transactions that have been duly completed' under the law nor that the consideration received was not the market price. It is further noted that the shares of Mackhinon & Mackenzie Co. Ltd. were Sold at the price quoted at the stock exchange whereas low price of M/s Hede Navigation Ltd.’s shares @ 10 paisa per share stands explained by the fact admitted by the AO that the said company was in red. The CIT(A) also noted that even in case the second transaction had not taken place, the long-term capital loss would have been accepted by the AO and the company would have been allowed to carry forward the said loss. The learned C1T(A) has also noted that where transactions were genuine, such long-term capital loss can be allowed to be set, off. In the appeal preferred before the Tribunal, the said findings of facts arrived at by the CIT(A) have been upheld and it has been held that the learned CIT(A) has given cogent reasons for coming to the conclusion that both the transactions were genuine and that it is not the case of the Department that the shares of Hede Navigation Ltd., had a higher price than the price at which it has been sold. In the present appeal, we find that there is no challenge by the appellants to the findings of the Tribunal that the transactions were genuine and that the price at which the shares were sold were not inflated. In such circumstances, the contention of Shr. Y.V. Nadkarni, learned counsel appearing for the respondents, that as the genuineness of the transactions has not been disputed by the appellants nor has been assailed in the present appeal, the question of contending that the transactions were colourable transactions (does not arise) has to be accepted. The findings of facts arrived at by the Tribunal cannot be reassessed by this Court in the present appeal. The apex Court in the said judgment in the case of M. Janardhana Rao vs. Jt. CIT (supra) has observed at paras 10 and 18 (sic-15) thus : “10. Some of the provisions of s. 260A are in pari materia with various sub. sections of s. 100, CPC. The provisions are ss. 260A(1), 260A(2)(c), 260A(3), 260A(4) of the Act corresponding to ss. 100(1), 100(3), 100(4) and 100(5) of CPC………………………..

3.7 In the case of CIT Vs. Enam Securities Private Limited (supra) also the issue of sale of preference shares was involved and the Assessing Officer held that there was no transfer and the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The Hon’ble Bombay High Court in the case observed as under:

“4. The assessee had subscribed to the purchase of 4 lakh preference shares each of Rs.100/- of an aggregate value of Rs.4 crores from a company by the name of Enam Finance Consultants Pvt. Ltd. in 1992. The preference shares were to carry a dividend of four percent per annum and were to be redeemable after the expiry of ten years from the date of allotment. During the course of Assessment Year 2001-02, the assessee redeemed three lakh shares at par and claimed a long term loss of Rs. 2.73 crores after availing of VBC 4 itxa5372.10-27.4 the benefit of indexation. The Assessing Officer disallowed the claim of set off of long term capital loss that arose on redemption against long term capital gain on the sale of other shares on the ground that (i) Both the assessee and the Company in which the assessee held the preference shares, were managed by the same group of persons; and (ii) There was no transfer and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The CIT(A) on the other hand, allowed the benefit which was claimed by the assessee. The Tribunal has affirmed the view of the CIT(A) holding that the genuineness and credibility of the capital transaction was not disputed for the previous ten years. Both the Companies were juridical entities; the fact that the Companies were under Appellate Authority was purely based on surmises and conjectures. The Tribunal has followed the judgment of the Supreme Court in Anarkali Sarabhai vs. CIT,1 in holding that the redemption of preference shares results in a transfer within the meaning of Section 2(47). Finally, the Tribunal has held that the non-cumulative redeemable preference shares cannot be equated with debentures or bonds. According to the Tribunal, share capital issued in the form of non-cumulative redeemable preference shares can never be regarded as debentures or bonds. A debenture is a loan taken by the Company. The Companies' Act, 1956 envisages two types of capital, equity share capital and preference share capital. Hence, the Tribunal came to the conclusion that since redeemable preference shares are not bonds or debentures, the assessee 1 (1997) 224 ITR 422 (SC) VBC 5 itxa5372.10-27.4 would not be deprived of the benefit of indexation under Section 48 of the Income Tax Act, 1961.” 3.8 In the instant case, we find that the assessee was holding preference shares in group companies and sold those shares to the company, which is owned by the assessee and her family members. The assessing officer observed that even after sale, the shares remained with the family and thus it was a contrived transaction to unjustly claim the benefit of long-term capital loss and it was a calculated device to generate the loss for being set of against the capital gain. In view of the Assessing Officer, the transaction has been carried out to neutralize, the long-term capital gain on transfer of apartment. We are not agreed with the contention of the learned Senior Departmental Representative supporting the order of the Assessing Officer. The learned Commissioner of Income Tax (Appeals) has observed that the assessee purchased the shares through cheque payment and also received the payment through cheque on sale of shares. The CIT(A) has further observed that shares were delivered physically to the purchaser company and thus the assessee has transferred the shares in accordance with law. In our opinion, the transaction is within the parameters of law and in such Assessing Officer cannot hold the transaction as a contrived transaction merely because the sale was to a company in which the assessee and her family members are having controlling stake. Further, it cannot be also considered as contrived transaction because the transaction of sale of shares was done prior to sale of apartment and assessee was aware of increasing prices of the apartment. The assessee can plan to reduce its tax liability through legitimate means. Before the Commissioner of Income Tax (Appeals), the assessee relied on the judgment of the Hon’ble Supreme Court in the case of union of India versus Azadi Bachao Andolan and another (263 ITR 706). The Hon’ble Supreme Court in the said judgment has held that merely because the transaction is entered into by the assessee with the motive to save the tax, the transaction cannot be regarded as colourable device so long as the transaction is valid in law. We have observed that similar finding has been given by the Tribunal in the case of Parry and Co. Limited (supra). In the case of Hede Consultancy Company Private Limited (supra), the Hon’ble Bombay High Court has observed that merely capital loss preceded before the capital gain, cannot be a ground for holding the transaction as a colourable. The Ld. Commissioner of Income-tax (Appeals) has decided the issue in dispute with the observations, as under: “j. I have considered the submissions made by the appellant and also persued the assessment order passed by the Assessing Officer. I find merit in the contention of the learned Authorized Representative for the appellant. The appellant had acquired 1,00,000 preference shares each of M/s. Medicare Investment Ltd., M/s. Maxopp Investment Ltd. and M/s. Chem Invest Ltd. @ Rs. 100 per share in the assessment year 1996-97. The amounts were paid by way of cheque and consideration had actually moved from the coffers of the appellant in lieu whereof the preferences shares were allotted to the appellant which was evident from the confirmation certificates issued by each of the three companies confirming the issue of such shares for consideration of Rs.1 crore, respectively.

The confirmation certificates clearly establishes the factum of payment of consideration by the appellant. The sale consideration was also received by the appellant through cheque and the above shares were physically delivered to the transferee. k. It is the case of the assessing officer that the purchaser company, M/s Trophy Holdings(P)Ltd was a closely held company owned and controlled by the members of the appellant and therefore the loss arising on sale of shares was not genuine. However, it is noticed that the preference shares were unquoted and there was no market available for the same. Therefore, the appellant could not, in my view, have realized anything more than the consideration for which the shares were sold considering that no dividend was declared by the said company and there was no premium payable on sale of shares. The appellant has sold the above shares to realize its investment by transferring the shares at book value. l. In these circumstances, in my considered opinion, it would not be correct to hold the transaction as non genuine merely because the shares were transferred to a group company. It has been noticed that the purchase price and sale price of various shares sold during the relevant assessment year 2006-07 was not disputed by the assessing officer. There was no finding by the assessing officer that the consideration received by the appellant was not the actual consideration received. The cost incurred by the appellant in the year of acquisition is also not in dispute.The appellant had sold the shares at the book value and as a result of cost inflation index provided in the statute to compute indexed cost of acquisition, the actual cost of Rs.3,00,000/- was indexed and indexed cost of acquisition of Rs.5,30,60,499/- was arrived at by the annellant which resulted in long term capital loss. m. It is further the case of the assessing officer that the set off of the long term capital loss arising on sale of preference shares against the long term capital gain on sale of apartment was a calculated device to generate the capital losses for being set off against the capital gain income. There is no dispute that the gain arising on sale of flat resulted in long term capital gains to the appellant. The only dispute is whether the long term capital loss arising on sale of the above preference shares was genuine or not; if not the same could not be set off against long term capital gains as has been done by the appellant. On a careful consideration of facts, it has been noticed that the appellant had sold the flat in DLF city in March, 2006 while the shares in respect of which the loss was incurred were transferred on 17.08.2005. Therefore, the capital loss was incurred first in point of time and capital gains were arrived at much later date. The assessing officer could have, if at all, denied the claim of loss in a case where capital gain was first earned and in order to reduce the capital gain tax liability the shares were sold to generate capital loss, so as to set off the gains against the loss. On the contrary, the appellant has incurred capital loss first in point of time. Therefore, merely the appellant sold the aforesaid apartment in the same year in which the shares were sold would not result in denying the claim of set off of long term capital loss to the appellant. n. In view of the aforesaid, in my view the assessing officer erred in not allowing the long term capital loss to be set off against the long term capital gain arising on sale of apartment. The order of the assessing officer is set aside and he is hereby directed to allow the long term capital loss claimed by the appellant. The ground of appeal is accordingly allowed.”

3.9 In our opinion, the finding of the learned Commissioner of Income- tax (Appeals) on the issue in dispute is comprehensive and well reasoned and no interference on our part is required. Accordingly, we uphold the finding of the Ld. Commissioner of income tax appeals on the issue in dispute and dismiss the grounds No. 1 and 2 of the appeal.

4.4 We find that, the assessee submitted explanation about the general role of brokers in sale deals of properties and stated that the broker played a role in negotiating the deal. The learned Commissioner of Income-tax (Appeals) on the basis of said explanation, allowed the appeal of the assessee. We have perused the order of the Assessing Officer as well as the impugned order of the learned Commissioner of Income-tax (Appeals). In our opinion, no documentary evidences in support of services of negotiating the deal by the broker Sh. Rajeev Mathur, in the present deal of surrendering the flat back to the builder, were submitted by the assessee either before the Assessing Officer or before the learned Commissioner of Income-tax (Appeals). In the circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer for deciding afresh after taking into account the evidence in support of services rendered by the broker. It is nevertheless to mention that assessee shall be afforded sufficient opportunity of hearing. The ground of the appeal is accordingly allowed for statistical purpose.