Appeal Partly Allowed; Remanded for Reassessment of Short-Term Capital Loss; Bad Debts and Book Profits Grounds Dismissed.

The Tribunal partly allowed the revenue's appeal for statistical purposes. It remanded the issue of short-term capital loss back to the AO for denovo adjudication, permitting the assessee to submit additional evidence. The Tribunal dismissed the grounds related to bad debts and the consequential computation of book profits under Section 115JB. The order was pronounced on 08/07/2020, with delays acknowledged due to the COVID-19 pandemic.

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Issues Involved:
1. Deletion of disallowance of short-term capital loss on sale of shares.
2. Claim of deduction towards bad debts under Section 36(1)(vii) of the Income Tax Act.
3. Consequential impact of the above issues on computation of book profits under Section 115JB of the Income Tax Act.

Issue 1: Deletion of Disallowance of Short-Term Capital Loss on Sale of Shares

The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance of short-term capital loss on the sale of shares amounting to Rs. 2,41,33,673/-. The assessee, a company incorporated in 1946, diversified into renewable energy in 2011 and purchased two companies, S.J. Green Parks Pvt. Ltd. and Euro Solar Power Pvt. Ltd., which had valid Power Purchase Agreements (PPAs). Due to insufficient financing, the assessee sold the shares of these companies in February 2012, resulting in a significant loss.

The Assessing Officer (AO) disallowed the loss, arguing that the value of shares could not be determined by excluding the value of land, as the land was transferred to the assessee company by ESPL at book value after the sale of shares. The AO observed that the share sale consideration of Rs. 50,000/- adopted by the assessee was not acceptable.

The Tribunal found that the AO’s observations were factually incorrect and noted that the assessee had provided various documents, including shareholders' agreements and Banakhat agreements, which were not discussed by the AO. The Tribunal decided to remand the issue back to the AO for a denovo adjudication, allowing the assessee to provide additional evidence if necessary.

Issue 2: Claim of Deduction Towards Bad Debts Under Section 36(1)(vii)

The second issue involved the observation of the CIT(A) that the assessee had not made any claim of deduction towards bad debts amounting to Rs. 2,27,62,719/-. The assessee had voluntarily added back this amount in the return of income under normal provisions to avoid litigation. The AO added back this amount while computing book profits under Section 115JB, reasoning that it would impact the carry forward of book loss.

The Tribunal found that adding back the bad debts was not justified as it was not an item listed in the Explanation to Section 115JB(2). The Tribunal cited the Supreme Court’s decision in Apollo Tyres Ltd., which held that the AO cannot disturb the net profit as per the profit and loss account prepared according to the Companies Act, except for specified items. Therefore, the Tribunal dismissed the revenue’s ground on this issue.

Issue 3: Consequential Impact on Computation of Book Profits Under Section 115JB

The third issue was consequential and depended on the outcome of the second issue. Since the Tribunal dismissed the revenue’s ground regarding the bad debts, this issue was also dismissed.

General Grounds

The fourth and fifth grounds raised by the revenue were general and did not require specific adjudication.

Pronouncement Delay Due to COVID-19

The Tribunal acknowledged the delay in pronouncing the order beyond 90 days due to the COVID-19 lockdown, citing the decision in the case of JSW Ltd. and the unprecedented situation caused by the pandemic. The Tribunal extended the time limit for pronouncement, aligning with the directives from higher judicial authorities.

Conclusion

The appeal of the revenue was partly allowed for statistical purposes. The Tribunal remanded the issue of short-term capital loss back to the AO for denovo adjudication and dismissed the grounds related to bad debts and consequential computation of book profits. The order was pronounced by placing the details on the notice board on 08/07/2020.

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