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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI B.R. BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against order dated 07/10/2014 passed by Ld. CIT (Appeals)- 34, Mumbai for the assessment year 2010-2011, whereby the Ld. CIT(A) has dismissed the appeal of the appellant/assessee against assessment order passed by the AO u/s143(3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee filed its return of income for the relevant assessment year declaring the total income of Rs. 2,84,820/-. The case was selected for scrutiny. The assessee had shown profits and gains of business, income from other sources, loss on sale of shares and short term capital gain in its return of income. It was noticed that the assessee had immovable property i.e. office having carpet area of 392 sq.ft. along with car 2 Assessment Year: 2010-2011 parking in Matharu Arcade Premises Co-operative Society Ltd., Plot No. 32, Subhash Road, Ville Parle (East), Mumbai and had claim depreciation during the the assessment year under consideration. The assesses during the financial year relevant to the assessment year under consideration sold its business premises and earned short term capital gain of Rs. 69,59,165/- and adjusted against short term capital loss on sale of shares of M/s Trends Pharma Pvt. Ltd. It was further noticed that the short term capital loss on shares had taken place just within one month of the sale of business premises. The assessee had sold 80000 shares to Pragna D. Bharwada @ 12.20 per share against the purchase cost of Rs. 100/- per share resulting in short term capital loss of Rs. 70,24,000/-. Accordingly, the assessee had set off the said loss against the capital gain. AO asked the assessee to explain the transaction and also furnish details of book value of the shares at the time of purchase. The assessee was further asked to explain as to why the capital loss claimed should not be disallowed being a sham transaction. The assessee filed written reply and also tried to prove the transaction as genuine, however, the AO rejecting the contention of the assessee disallowed the capital loss of Rs. 70,24,000/- and added back to the total income of the assessee.
In appeal, the Ld. CIT (A) relying on the judgment of the Hon’ble Supreme Court in the case of Mcdowell & Company Ltd vs. CTO (1985) 154 ITR 148 (Supreme Court) affirmed the action of the AO holding that the transaction of purchase and sale of shares entered into by the appellant and generation of short term capital loss of Rs. 70,24,000/- as same transaction.
Aggrieved by the order of Ld. CIT (Appeals), the assessee has preferred this appeal before the Tribunal on the following effective grounds:-
1. Order dated 7th October, 2014 3 Assessment Year: 2010-2011 The learned CIT (A) erred on facts and in law in confirming the disallowance of capital loss of Rs. 70,24,000/- made by the AO in his Assessment Order dated 14th March, 2013.
2. Conclusion not warranted The learned CIT (A) erred on facts and in law in reaching the conclusion that the transaction resulting in loss of Rs. 70,24,000/- was a same transaction. Relief Claimed: Capital loss of Rs. 70,24,000/- be allowed. 5. Before us, the Ld. counsel for the assessee submitted that the company M/s Trends Pharma Pvt. Ltd. is closely held company with Mr. Amit Parikh and family holding the entire capital of the company. The company had accumulated losses and large unpaid liabilities. Since, the company was in need of funds, issued fresh capital amounting to Rs. 485.00 lakh, out of which the assessee subscribed for Rs. 80 lakh. The shares were sold by the assessee @ 12.20 per share and at that time the book value of the share was @ Rs. 7.01 per share and thus the assessee had sold the shares at a value higher than the book value. On the point of capital loss claimed due to sale of shares, the Ld. counsel argued that in Income Tax proceedings the bona fides of a transaction should be looked into and not the intention and that arms length rules are not applicable to domestic transactions and the assessee is free to deal with his money in the manner he likes so long as it is not prohibited by law. Therefore, the AO cannot sit on the judgment of the assessee over a commercial transaction. Hence, the impugned order is liable to be set aside. The Ld. counsel relied on the following decisions to substantiate his arguments:- i) CIT vs.Sekhsaria Sons Pvt. Ltd. 138 ITR 419,(Bom.) ii) Union of India vs. Azadi Bachao Andolan, 263 ITR 706, (SC), iii) Rapport Trading Ltd. vs. Dy. CIT, 98 Taxman, 278, (Ahd. Trib.)
4 Assessment Year: 2010-2011
On the other hand, the Ld. Departmental Representative (DR) relying on the concurrent findings of the authorities below submitted that the Ld. CIT (A) has passed the order on the basis of evidence on record and in accordance with the principles of law laid down by the courts of law and the various Benches of the Tribunal.
We have heard the rival submissions and also perused the material on record. The only issue to be adjudicated in this case is whether the action of Ld. CIT (A) in confirming the disallowance of capital loss of Rs. 70,24,000/- is legally sustainable or the same is bad in law. To answer this question, it is necessary to ascertain whether the transaction of sale and purchase of the shares in question are genuine as alleged by the assessee or the same is colorable device as has been held by the authorities below. The Ld. CIT (A) has confirmed the action of the AO holding as under:
“3.3 I have perused facts of the case & appellant’s submissions carefully. The appellant, in his submissions, has tried to justify that M/s Trends Pharma Pvt. Ltd., whose shares were subscribed by the appellant, was in financial crisis, and could not have issued shares at a discount as per law, and that the share capital issued by it at face value is not taxable in hands of said company even though the fair market value may be lower. However, I am not impressed by these arguments of the appellant, as these are not relevant to decide the case of the appellant i.e. M/s Trends Pharma, a partnership firm, which is separate legal entity distinct from M/s Trend Pharma Pvt. Ltd, even though the said company might be managed by the partners of the appellant company. I understand that though it is not uncommon to give financial assistance to sister concerns in case of need, however, the same could have been very well given by way of a loan. The appellant has claimed that it had used own funds for subscription to shares, however, the same could have been used for advancing soft loan or completely interest-free loan in such a case, without even attracting any disallowance u/s 36 (1)(iii) of the Act. Therefore, the appellant’s contention that his motive behind the subscription to shares at unrealistic price of Rs. 100 per share was to give financial assistance to 5 Assessment Year: 2010-2011 sister concern does not hold any ground. The method adopted by the appellant is clearly a device to evade payment of legitimate taxes on STCG earned by it at other transactions. The timing of subscription to shares, and that too back dated than recorded as per AGM as demonstrated by AO, and also the sale in short span of time clearly proves that the prime objective of appellant in the whole transaction was only to evade the payment of legitimate tax on STCG, in the guise of financial assistance to a sister concern. In my opinion, such an action on the part of the appellant clearly falls within the preview of a “Colorable Device”. I find that in the case of Mcdowell & Co. Ltd. V. CTO [1985] 154 ITR 148 (SC) relied upon by the AO, the Hon’ble Supreme Court has held that “So far as the contention that it is open to everyone to so arrange his affairs as to reduce the brunt of taxation to the minimum was concerned, the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it”. In the present case, the appellant has framed a colorable device to avoid the payment of tax on other short term capital gains by dubious methods i.e. by arranging the acquisition of shares at unrealistic prices and sale thereof at substantially low prices within a short span of time. Therefore, the appellant’s case is directly covered by the aforesaid decision of Hon’ble Supreme Court.
I further find that the appellant has relied upon the case of Wintax Ltd. (supra), however, the fact of the case are completely different, and in any case, it does not give a blanket permission to enter into any transaction for the sole purpose of tax evasion.
As regards the appellant’s contention that the shares were sold to an unrelated party at a price above the book value, I understand that the said transaction on a standalone basis would not have been questionable, however, it has to be viewed in the light of circumstantial evidences from appellant’s point of view. The acquisition of shares at unrealistic price, & 6 Assessment Year: 2010-2011 subsequent sale within a short span of time at substantially low price, constitutes a complete series of sham transactions, which has been used as a tool to evade payment of legitimate taxes. As far as the evidence from purchaser of said shares i.e. Pragna D. Bharwada is concerned, it only proves one leg of the transaction, and does not any way validate the complete series of transactions in appellant’s hands. Having discussed the above, I uphold the view of the AO that the transaction of purchase & sale of shares entered into by the appellant, generating short term capital loss of Rs. 70,24,000/- is nothing but a sham transaction, and the assessee has used colorable device to evade payment of taxes, and it’s case is directly covered by the decision of Hon’ble Supreme Court in the case of Mcdowell & Co. Ltd. Accordingly, I confirm the disallowance of Short Term Capital Loss of Rs. 70,24,000/-, claimed by the appellant. Therefore, the ground no. 1 is dismissed.”
We notice that the assessee has claimed to have acquired shares of Trend Pharma Pvt. Ltd. @ Rs. 100 per share and sold the same within in one month @ 12.2 per share and has claimed loss of Rs. 70,24,000/-. The assessee has set off the said loss against the capital gain of Rs. 69,59,165/-. As observed by the AO, the assessee and the Trend Pharma Pvt. Ltd. are controlled by the same persons. Under these circumstances, the transaction is required to be seen in the light of the law laid down by the Hon’ble Supreme Court in Durga Prasad More 82 ITR 540 and Sumati Dayal 214 ITR 801, where in it has been held that test of human probabilities should be applied to verify the genuineness of any transaction.
In Mcdowell & Co Ltd. vs. CTO (supra) the Hon’ble Supreme Court has observed as under: “So far as the contention that it is open to everyone to so arrange his affairs as to reduce the brunt of taxation to the minimum, was concerned, the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the 7 Assessment Year: 2010-2011 payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.”
In view of the facts of the case and the cases relied upon by the authorities below, we agree with the findings of the Ld. CIT(A) that the transaction of sale and purchase of the shares in question is a colourable device adopted by the assessee in order to avoid tax on the short term capital gain by purchasing the shares at unrealistic price and selling at substantially low prices within a period of one month. Hence, in our considered opinion, the order under challenge does not warrant any interference as the same is in accordance with the principles of law laid down in the cases discussed above. On the other hand the facts of the cases relied on by the assessee are different from the facts of the present case. We, therefore, uphold the order of the Ld. CIT(A) and dismiss the sole ground of the appeal of the assessee.
In the result, appeal filed by the assessee for the assessment year 2010- 2011 is dismissed.