2019 (8) TMI 923 - AT - Income Tax

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

The Tribunal allowed the assessee's appeal, recognizing the short-term capital loss on the sale of CCDs as genuine. The Tribunal rejected the revenue's ... Genuineness of short term capital loss and set off with LTCG - set off of earlier year loss with LTCG - sale of compulsorily convertible debentures (CCD) on the ground that it is not bonafide in nature and is more of a colorable device, in the facts and circumstances of the case - related party transaction - brought forward LTCG and STCG aggregating to ₹ 938.04 - HELD THAT:- Documentary evidences for the purchase and sale of CCDs were not doubted by the revenue. The transactions of purchase of CCDs from related concern and sale of CCDs to related concerns are also not doubted by the revenue. Only the pricing is doubted by the revenue on the ground that it was carried out with related concerns and it had resulted in a loss. The professed intention and the real intention of the assessee is proved in the instant case in the various documents filed before the lower authorities. If the same are to be treated as different, then the onus is on the revenue to prove it, which in the instant case, in our considered opinion, has not been proved by the revenue. AR also made an oral submission that purchase transactions are not disbelieved for other assessee in the same flowchart and that the same is disbelieved only for the assessee herein. We find that the assessee had derived net long term capital gains on sale of equity shares and preference shares of ₹ 1007.40 crores. Out of this huge long term capital gains of ₹ 1007.40 crores, a meager amount of short term capital loss of ₹ 69.36 crores was sought to be set off by the assessee on sale of CCDs of ICSL. Even after this set off, there was substantial net taxable long term capital gains left with the assessee to the tune of ₹ 938.04 crores. This was however sought to be adjusted with the brought forward long term and short term capital losses of the assessee from the earlier years, which is totally different altogether and even after this set off of brought forward losses, there is substantial amount of long term and short term capital losses of earlier years available with the assessee which were also carried forward to subsequent years. Short term capital loss of ₹ 69.36 crores on sale of CCDs of ICSL to related concern is not available to the assessee , then also the net long term capital gains of ₹ 1007.40 crores would be set off with the brought forward long term and short term capital losses from earlier years. No arguments were advanced by the ld DR before us to rebut these facts with regard to the availability of brought forward capital losses of earlier years. It could be safely concluded that there is absolutely no intention on the part of the assessee to evade tax by booking bogus short term capital loss on sale of CCDs to related concern. Hence the transactions carried out by the assessee cannot be construed as a colorable device. Non-availability of brought forward losses from earlier years, we find that the appellate orders for earlier years were passed subsequent to carrying out of the transactions of purchase and sale of CCDs by the assessee, wherein the losses were allegedly converted into nil or into income. We hold that on the date of transaction of sale of CCDs by the assessee, there cannot be any colorable device or a malign intent to evade tax on the part of the assessee as these appellate orders for earlier years were passed subsequent to entering of impugned transactions of sale of CCDs by the assessee herein. We hold that the transactions carried out by the assessee in respect of sale of CCDs to related concern which had resulted in a short term capital loss of ₹ 69.36 crores is to be construed as a genuine loss and cannot be construed as a colorable device. Accordingly, the grounds raised by the assessee in this regard are allowed. Appeal of the assessee is allowed. 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.