2017 (11) TMI 1283 - AT - Income Tax

Tribunal allows appeal, directs income recomputation for genuine share transactions.

Smt Chandra N. Hingorani Versus The Income Tax Officer 23 (1) (3), Mumbai

The Tribunal allowed the assessee's appeal, directing the Assessing Officer to recompute income, as it found the transactions genuine and the financial ... Disallowance of the claim of long term capital loss on account of sale of unquoted equity shares - claim of the of the assessee for set off long term capital gain on the sale of property against the long term capital loss on sale of unquoted equity shares has been rejected on the ground that the same is not genuine - Held that:- The investment in the two companies sold was made with a long-term view. These companies were venturing into mining in Goa and had plans to be listed in next 3 to 4 years. As the assessee wanted to exit earlier some differences arose with the majority shareholders who refused to give more than the face value ₹ 10/-. Assessee was therefore at the mercy of the Purchaser as the assessee was a minority shareholder. Hence assessee had no option but to exit at face value. Assessing Officer has not accepted the transaction as genuine since these companies were having decent profit. However Assessing Officer has not alleged that the assessee has received back cash on account of the sale. The Purchasers of the shares from the assessee are not related in any way to the assessee. The Purchaser have not been examined by the Assessing Officer to verify the genuineness of sale. The Assessing Officer has failed to appreciate that shares of private limited companies cannot be sold in the open market and hence the seller is at the mercy of the Purchaser. Merely because the assessee had sold the shares at face value in a distressed situation it cannot be presumed that the assessee had engineered the transaction is to manage its tax liability. The assessee states that the sale is genuine out of urgent financial needs and also on account of the fact that differences had arisen between the assessee and the majority shareholders. Assessee also produced even the date of payment for purchase of shares, which was made only at the time of purchase of shares. Also the assessee has transferred the shares back to the Ankola Paper Mills Private Limited and VRKP Steel Industries Private Limited and received the payment of ₹ 10,00,000/-. This ₹ 10,00,000/- was invested by the assessee in international export corporation of ₹ 32,00,000/-. It means that the assessee was in need of money and hence, for this purpose he sold the investments. As the transaction is genuine, we find that the lower authorities erred in disallowing the long term capital loss incurred by the assessee in the sale of unquoted equity shares. We allow the claim of the assessee and direct the AO to recompute the income accordingly - Decided in favour of assessee. Issues Involved:1. Confirmation of addition as Long Term Capital Gain.2. Rejection of claim of loss on account of sale of shares.3. Rejection of setoff of Long Term Capital Loss against Long Term Capital Gain.Issue-wise Detailed Analysis:1. Confirmation of Addition as Long Term Capital Gain:The assessee reported a capital gain of Rs. 1,43,09,331 from the sale of properties and claimed a setoff against a capital loss of Rs. 1,45,50,000 from the sale of unquoted shares. The Income Tax Officer (ITO) questioned the logic behind selling shares purchased at Rs. 250 per share for Rs. 10 per share, especially when the companies were performing well. The ITO concluded that the transactions were engineered to manage tax liability and disallowed the capital loss claim. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, noting that no prudent investor would sell shares at such a significant loss without any fundamental change in the valuation of the companies.2. Rejection of Claim of Loss on Account of Sale of Shares:The ITO and CIT(A) found no justification for the assessee incurring such a huge loss and suspected the transactions were arranged to defraud revenue. The assessee claimed the need for funds due to financial requirements and differences with majority shareholders. However, the authorities did not find the assessee's explanation credible, noting that the application of sale proceeds did not justify a distress sale. The CIT(A) emphasized that the assessee failed to prove any drastic change in the companies' valuation to warrant such a loss.3. Rejection of Setoff of Long Term Capital Loss Against Long Term Capital Gain:The authorities rejected the setoff claim, arguing that the sale of shares at face value was not justified given the companies' good performance. The assessee argued that shares of private limited companies cannot be sold in the open market, making the seller dependent on the purchaser. The Tribunal found that the assessee had provided sufficient evidence of the financial need and the genuine nature of the transactions. The Tribunal noted that the Assessing Officer did not allege any cash transactions or examine the purchasers to verify the sale's genuineness.Tribunal's Decision:The Tribunal, after reviewing the facts and circumstances, found the assessee's transactions to be genuine. The Tribunal noted that the assessee had invested in start-up companies with a long-term view, and the need for funds was substantiated by the sale proceeds being used for other investments. The Tribunal disagreed with the lower authorities' view that the transactions were engineered to manage tax liability. Consequently, the Tribunal allowed the assessee's claim for long term capital loss and directed the Assessing Officer to recompute the income accordingly.Conclusion:The appeal by the assessee was allowed, and the Tribunal directed the Assessing Officer to recompute the income, acknowledging the genuine nature of the transactions and the financial need for the sale of shares. The Tribunal's decision emphasized the importance of considering the assessee's financial context and the nature of investments in private limited companies.