2006 (2) TMI 499 - AT - Income Tax

Tribunal Partially Allows Appeal, Directs Reassessment with Proper Evidence

The Tribunal allowed the appeal partially, directing the AO to re-adjudicate certain issues with proper evidence. The Tribunal held that the disallowed ... Capital gains, Expenditure incurred in relation to income not includible in total income Issues Involved:1. Disallowance of loss on sale of shares of NOCIL.2. Disallowance of loss on sale of shares of Mafatlal Burlington Industries Limited.3. Assessment of amount received from British Asia Pacific Holding (P.) Ltd. under the head 'Income from other sources' instead of 'Capital gains'.4. Disallowance of interest under section 14A of the Income-tax Act.5. Charging of interest under section 234B of the Income-tax Act.6. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act.Issue-wise Detailed Analysis:1. Disallowance of Loss on Sale of Shares of NOCIL:The assessee incurred a capital loss of Rs. 11,40,72,556 on transferring 22 lakh shares of NOCIL to M/s. Sumish Associates, a firm where the assessee was a partner. The Assessing Officer (AO) disallowed the loss, treating the transaction as sham due to lack of physical delivery, shares being pledged, and no physical transfer of money. The CIT(A) upheld this view. The Tribunal, however, found that the transactions were duly recorded in the books of both the assessee and M/s. Sumish Associates, and the shares were sold at market price. The Tribunal cited the Sales of Goods Act, emphasizing that physical delivery is not always necessary if the intention of the parties is clear. The Tribunal also referenced a similar case (Mafatlal Holdings Ltd.) where such transactions were deemed genuine. Consequently, the Tribunal held the transactions as genuine and directed the AO to allow the capital loss.2. Disallowance of Loss on Sale of Shares of Mafatlal Burlington Industries Limited:The assessee also incurred a capital loss of Rs. 5,40,00,000 on transferring 60 lakh shares of Mafatlal Burlington Industries Limited to M/s. Sumish Associates. The Tribunal noted that the nature of this transaction was similar to the NOCIL shares transaction and, following the same reasoning, held the transaction as genuine. The Tribunal directed the AO to allow the capital loss.3. Assessment of Amount Received from British Asia Pacific Holding (P.) Ltd.:The assessee received Rs. 1,99,50,554 from British Asia Pacific Holding (P.) Ltd. on transferring shares of Gujarat Gas Company Limited, which was shown as capital gains. The AO treated this amount as 'Income from other sources,' stating it was interest accrued on the sale price. The Tribunal examined the agreements dated 2nd July 1997 and 5th March 1999. It found that the primary agreement (2nd July 1997) did not effectuate the sale of shares but set conditions for future transactions. The Tribunal concluded that the interest component was part of the sale consideration and not separate interest income. The Tribunal set aside the CIT(A)'s order and directed the AO to reassess the issue considering both agreements.4. Disallowance of Interest under Section 14A:The assessee claimed an interest expenditure of Rs. 8,01,611, which the AO disallowed under section 14A, stating the assessee did not prove that the borrowed funds were not used for investments. The Tribunal found that the assessee failed to provide evidence that investments were made from personal funds or a common pool. The Tribunal set aside the CIT(A)'s order and directed the AO to re-adjudicate the issue with proper evidence from the assessee.5. Charging of Interest under Section 234B:The Tribunal noted that this issue is consequential and does not require independent adjudication.6. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal dismissed this ground, stating it is not maintainable.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the AO to re-adjudicate certain issues with proper evidence and following the Tribunal's guidance on the genuineness of transactions.