2010 (4) TMI 1088 - AT - Income Tax

Tribunal decision: capital losses, sub-tenancy compensation upheld. Interest issue remitted. Gains enhancement partly allowed.

The Tribunal upheld the disallowance of capital losses, compensation for redemption of sub-tenancy rights, and secret commission. The issue of interest on ... - Issues Involved:1. Disallowance of short-term and long-term capital loss on sale of shares.2. Disallowance of short-term capital loss on sale of shares of Killick Halco Ltd.3. Disallowance of long-term capital loss on sale of shares of Pelican Paints Ltd.4. Valuation of Chandivali land and enhancement of long-term capital gains.5. Disallowance of compensation for redemption of sub-tenancy rights.6. Disallowance of trading loss on guarantee provided to Vysya Bank.7. Disallowance of secret commission.8. Disallowance of interest on borrowed funds.9. Levy of interest under sections 234B and 234C.Detailed Analysis:1. Disallowance of Short-term and Long-term Capital Loss on Sale of Shares:The assessee claimed short-term and long-term capital loss on the sale of shares of four companies: Matterhorn Investments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd., and Montblanc Investments Ltd. The AO disallowed these losses, considering the transactions as sham. The AO found that the investments were made at a huge premium in non-active companies, and the funds were routed back to the assessee through circular transactions. The CIT(A) upheld the AO's decision, agreeing that the transactions were not genuine and were designed to create artificial losses to offset capital gains.2. Disallowance of Short-term Capital Loss on Sale of Shares of Killick Halco Ltd.:The assessee claimed short-term capital loss on the sale of shares of Killick Halco Ltd., which were purchased at a high premium. The AO disallowed the loss, considering the investment at a premium as sham. The CIT(A) upheld the AO's decision, noting that the company was loss-making and on the verge of closure, and there was no justification for the high premium.3. Disallowance of Long-term Capital Loss on Sale of Shares of Pelican Paints Ltd.:The assessee claimed long-term capital loss on the sale of shares of Pelican Paints Ltd. The AO disallowed the loss, noting that the shares were sold to a sister concern at a nominal price, and the valuation did not consider the market value of land and buildings. The CIT(A) upheld the AO's decision, agreeing that the transaction was designed to create artificial losses.4. Valuation of Chandivali Land and Enhancement of Long-term Capital Gains:The AO adopted the fair market value of the Chandivali land as Rs. 11.10 crores as on 01.04.1981, subject to rectification upon receipt of the DVO's report. The CIT(A) enhanced the long-term capital gains based on the DVO's report, which valued the land at Rs. 1.70 crores. The CIT(A) rejected the assessee's valuation report, considering it self-serving and not credible.5. Disallowance of Compensation for Redemption of Sub-tenancy Rights:The assessee claimed compensation for redemption of sub-tenancy rights. The AO disallowed the claim, noting that the payment was not made during the year, and there was no proof of the amount being payable. The CIT(A) upheld the AO's decision, agreeing that the claim was not substantiated.6. Disallowance of Trading Loss on Guarantee Provided to Vysya Bank:The assessee claimed a trading loss on giving a guarantee to Vysya Bank for a loan taken by Geekay Exim (India) Ltd. The AO disallowed the claim, noting that the guarantee was not given in the normal course of business, and the assessee did not take necessary precautions to secure its obligations. The CIT(A) upheld the AO's decision, agreeing that the loss was not genuine and was an afterthought.7. Disallowance of Secret Commission:The assessee claimed secret commission paid to various dealers. The AO disallowed the claim, noting that the names and addresses of the recipients were not furnished. The CIT(A) upheld the AO's decision, agreeing that the expenditure was not substantiated and relying on judicial precedents.8. Disallowance of Interest on Borrowed Funds:The AO disallowed interest on borrowed funds, noting that some interest-bearing funds were diverted for other purposes. The CIT(A) confirmed the disallowance. The Tribunal set aside the issue to the AO for re-examination in light of directions given in previous years.9. Levy of Interest Under Sections 234B and 234C:The levy of interest under sections 234B and 234C was considered consequential, and the AO was directed to levy interest as per the provisions of the Act.Conclusion:The Tribunal upheld the disallowance of capital losses, compensation for redemption of sub-tenancy rights, and secret commission. The issue of interest on borrowed funds was remitted to the AO for re-examination. The enhancement of long-term capital gains based on the DVO's report was upheld, but the CIT(A) was directed to consider the objections raised by the assessee regarding the valuation. The appeal was partly allowed for statistical purposes, and the revenue's appeal was allowed for statistical purposes.