2022 (7) TMI 262 - AT - Income Tax

Tax tribunal upholds assessee's capital loss claim, rejects tax evasion allegations.

DCIT, Circle-13 (1) New Delhi Versus M/s Jarul Infrastructure Pvt. Ltd.

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the short-term capital loss claimed by the assessee. The ITAT found the ... Additions u/s 68 - Disallowance of short term capital loss aroused on the forfeiture of share warrant money - As per revenue entire transaction is nothing but a colourable device adopted for evasion of tax by the assessee company - HELD THAT:- It is not the case of the assessing officer that the legal claim of short-term capital loss arising out of forfeiture of share warrant money is not legally sustainable. Rather assessing officer in the beginning has questioned the wisdom of assessee is investing. For this he has referred to the share price movement of the investing company. Despite noting that prices were touching Rs. 28, he found Rs. 29 investment a wrong decision. His inference in this regard is not correct as the price movement by no stretch of imagination point out that investment was in a bogus or penny stock company As settled law that AO cannot sit in the shoes of businessman and decides the prudence of business decision. Thereafter AO has wondered why instead of getting the share warrants forfeited assessee did not sell these shares. As informed that as per the agreement there was no clause of selling the shares. As subsequent movement in prices have duly corroborated that the share prices fell and the assessee's decision not to pay the balance amount was not at all unjustified. The prime emphasis of the assessing officer at the end is that the exercise was meant to bring capital receipt in the hands of Indiabulls Power Pvt. Ltd. and thwart examination from the perspective of section 68. This line of reasoning is wholly unsustainable. Firstly assessing officer is not at all seized with the assessment of Indiabulls Power Pvt. Ltd. as to how the capital receipt in his hand is to be examined from the perspective of section 68. Even if assessee had contributed the balance amount that would still be a capital contribution. Moreover, even for exempt capital receipt, there is no law that such credits are outside purview of section 68. Hence, AO's surmise also is without any basis whatsoever. Moreover, the amendment in section 68 providing for examination of source of source for share application money, share capital, and share premium, or any such amount was brought in by Finance Act, 2012 w.e.f. 01.04.2013 is not applicable in this case. Hence the premise of the assessing officer the entire exercise was meant to provide capital receipt in the hands of the said company cannot at all be sustained. Even otherwise, since all the details of the flow of funds was before the assessing officer he has not been able to point out as to which stage and in what respect ingredients of section 68 are not cogently satisfied. There is no mention as to whether the identity is not available, or that the source of funds is not given, or that Assessing Officer has unearthed some other transactions. Hence the assessing officer's order is only based upon surmises and conjecture and hence it is not sustainable in law. Moreover, we note that in identical circumstances, this ITAT in the case of DCIT vs. Azalea Infrastructure Pvt. Ltd. [2021 (2) TMI 31 - ITAT DELHI] had allowed the claim of short term capital loss. Taxation in the hands of the assessee in this case is whether the forfeiture of the convertible warrant amount to a transfer within the meaning of section 2(47) held that AZALEA INFRASTRUCTURE PVT. LTD. [2021 (2) TMI 31 - ITAT DELHI] - Decided against revenue. Issues Involved:1. Whether the CIT(A) erred in deleting the disallowance of short-term capital loss of Rs. 76,12,50,000/- arising from the forfeiture of share warrant money.2. Whether the transaction was a colorable device for tax evasion.Detailed Analysis:1. Deletion of Disallowance of Short-Term Capital Loss:The core issue revolves around the forfeiture of share warrant money amounting to Rs. 76,12,50,000/-, which the assessee claimed as a short-term capital loss. The assessee had invested in share warrants of Indiabulls Power Ltd. (IPL) but chose not to exercise the option, leading to the forfeiture of the upfront payment.Assessing Officer's View:- The AO deemed the transaction as a colorable device for tax evasion, noting that the assessee prematurely decided not to exercise the warrants, resulting in a forfeiture.- The AO questioned the prudence of the investment decision, highlighting that the share price of IPL never crossed Rs. 29, the conversion price.- The AO suggested that the transaction was structured to pass on funds to IPL in the guise of convertible warrants, ultimately benefiting IPL by crediting the amount as a capital receipt.Assessee's Defense:- The assessee argued that the decision not to exercise the warrants was based on market conditions and financial prudence.- The assessee cited legal precedents, including CIT vs. Mrs. Grace Collis & Ors. and CIT vs. Shri Chand Ratan Bagri, to support the claim that forfeiture of share warrants constitutes a transfer under section 2(47) of the Income Tax Act, thereby allowing the loss as a short-term capital loss.- The assessee provided detailed documentation of the transactions, including bank statements, board resolutions, and confirmations from related entities.CIT(A)'s Decision:- The CIT(A) accepted the assessee's explanations and evidence, noting that the AO failed to bring any contradictory evidence.- The CIT(A) emphasized that the decision to forgo the warrants was a business decision based on market conditions and financial prudence.- The CIT(A) also referenced a similar case where the short-term capital loss was allowed, maintaining judicial consistency.2. Allegation of Colorable Device for Tax Evasion:Assessing Officer's Allegation:- The AO alleged that the entire transaction was a sham, designed to transfer funds to IPL and avoid taxation.- The AO referenced the Supreme Court's decisions in Sumati Dayal vs. CIT and CIT vs. Durga Prasad More, arguing that the apparent transaction was not genuine.Assessee's Rebuttal:- The assessee contended that all transactions were transparent, conducted through banks, and properly documented.- The assessee argued that the AO's allegations were based on conjectures and lacked substantive evidence.- The assessee highlighted that the forfeiture was not a bogus transaction, and there was no allegation of the funds being returned to the assessee.ITAT's Conclusion:- The ITAT found that the AO's reasoning was speculative and unsupported by concrete evidence.- The ITAT reiterated that the AO cannot question the business prudence of the assessee's decisions.- The ITAT upheld the CIT(A)'s order, affirming that the forfeiture of share warrants constituted a transfer under section 2(47), thereby allowing the short-term capital loss.Final Judgment:- The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the short-term capital loss claimed by the assessee.- The ITAT emphasized that the AO's allegations of a colorable device were unfounded and based on conjectures.Order Pronouncement:- The order was pronounced in the open court on 23.06.2022.