2019 (8) TMI 923 - AT - Income Tax

Assessee's Short-Term Capital Loss Allowed, Revenue's Disallowance Rejected

M/s. Essar Teleholdings Limited Versus ACIT-6 (2) (2), Mumbai

M/s. Essar Teleholdings Limited Versus ACIT-6 (2) (2), Mumbai - TMI Issues Involved:1. Disallowance of short-term capital loss on sale of compulsorily convertible debentures (CCDs).2. Deletion of disallowance under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Short-term Capital Loss on Sale of CCDs:The primary issue in the assessee's appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the disallowance of a short-term capital loss of Rs. 69.36 crores on the sale of CCDs, on the grounds that the transaction was not bona fide and was a colorable device.- Facts and Background:- The assessee, a public limited company engaged in investment in shares and securities, declared a total loss of Rs. 3,99,98,822/- for the Assessment Year 2012-13.- The Assessing Officer (AO) observed that the assessee sold CCDs of M/s Imperial Consultants & Securities Pvt Ltd to M/s Kroner Investments Ltd, resulting in a short-term capital loss of Rs. 69.36 crores.- The AO questioned the valuation basis and considered the transaction a colorable device to offset huge capital gains incurred during the year.- The AO also invoked Section 47(v) of the Income Tax Act, disallowing the loss on the grounds that the transaction was not a transfer.- CIT(A) Findings:- The CIT(A) concluded that the transaction did not fall under Section 47(v) as Kroner Investment Ltd did not hold the entire share capital of the assessee company.- However, CIT(A) upheld the disallowance, summarizing that the transactions were with closely related concerns, the purchase price was not justified by a current valuation report, and the sale price was discounted for illiquidity while the purchase price was not.- The CIT(A) noted the timing of the transactions, suggesting a motive to generate a capital loss to offset capital gains.- Tribunal's Analysis:- The Tribunal examined the independent valuation report and found it justified the sale price of Rs. 61.88 per CCD.- The Tribunal noted that the purchase price of Rs. 85 per CCD was based on a High Court-approved merger scheme and was commercially reasonable.- The Tribunal rejected the notion of a colorable device, referencing judicial precedents that transactions between related parties do not automatically imply tax evasion.- It was noted that the assessee had substantial brought forward losses, negating any intent to evade tax.- The Tribunal concluded that the short-term capital loss was genuine and allowed the assessee's appeal.2. Deletion of Disallowance under Section 14A:The issue in the revenue's appeal was the deletion of disallowance under Section 14A of the Income Tax Act by the CIT(A).- CIT(A) Findings:- The CIT(A) found that there was no exempt income claimed by the assessee during the year.- No expenses were debited in the profit and loss account that were claimed as deductions in the return of income.- Tribunal's Analysis:- The Tribunal upheld the CIT(A)'s findings, noting that the factual findings were not contested by the revenue.- The Tribunal referenced the Supreme Court's ruling in the assessee's own case, which held that disallowance under Section 14A cannot be made in the absence of exempt income.- The Tribunal dismissed the revenue's appeal.Conclusion:- The assessee's appeal was allowed, recognizing the short-term capital loss as genuine.- The revenue's appeal was dismissed, upholding the deletion of disallowance under Section 14A.Order Pronounced:The order was pronounced in the open court on 21/06/2019.