2025 (8) TMI 371 - AT - Income Tax

Long-Term Capital Loss on Unlisted Shares Allowed Against Slump Sale Gain Under Section 50B

The ITAT Chennai upheld the CIT(A)'s order allowing the assessee to set off Long-Term Capital Loss on sale of unlisted shares against Long-Term Capital ... Long Term Capital Loss on sale of the shares set off against Long Term Capital Gain arose on account of slump sale - whether the Long-Term Capital Loss claimed by the assessee on sale of unlisted shares is from genuine transactions, allowable to be set off against Long-Term Capital Gain arising from a slump sale u/s 50B or whether it is a colourable device to evade tax? HELD THAT:- As undisputed fact that the assessee made investments in preference shares of two unlisted companies during FY 2014-15. These investments are reflected in the audited financial statements of the assessee for AY 2015-16 under “Non-Current Investments” and has been reported in the Directors report of the Company in compliance with Section 186 of the Companies Act, 2013. We note that the assessee is a listed company in BSE and has reported to SEBI the audited financials for the F.Y. 2014-15. As evident from the audited financials as on 31.03.2015 the investments in shares of these two companies have been shown in Schedule No.8 – ‘Non- Current Investments’. These transactions are executed through proper banking channels and substantiated by share certificates, CA valuation reports, and accounting entries. No infirmity in the order of the CIT(A) in deciding the issue in favour of the assessee. Our view is also supported by Walfort Share & Stock Brokers (P.) Ltd. [2010 (7) TMI 15 - SUPREME COURT] held that if a transaction is otherwise valid and permissible under the law, and supported by documentation, the mere tax advantage does not render it a sham. Assessee explained with documentary evidence that the Investment was made based on financial data and business plans of the investee companies. The decision to liquidate the shares at a lower price was taken based on updated financials and diminished prospects of the companies. The loss on investment arose from genuine business decision, not from any sham arrangement. The above argument of the assessee was well supported by the legal principle laid down in S.A. Builders Ltd. [2006 (12) TMI 82 - SUPREME COURT] it was held that commercial expediency must be judged from the perspective of the businessman, not the tax department. There is no evidence of collusion or artificial inflation of sale/purchase value. The AO has not brought any evidence to prove otherwise that the transactions were fictitious or that the consideration was not actually paid. In our considered opinion the AO failed to bring on record any material to prove that the seller or buyer of shares were related parties or accommodation entry providers. The theory of human probability cannot override documentary evidence and audited accounts unless there is a specific finding of collusion or falsity. Based on the above factual matrix, legal principles, and evidentiary material available on record, the addition of Rs. 24.00 Crores by disallowing the Long-Term Capital Loss is unjustified and liable to be deleted. Accordingly, the appeal of the Revenue is dismissed and the order of the CIT(A) is upheld, confirming that: The Long-Term Capital Loss on sale of shares is genuine. The assessee is entitled to set-off this loss against the LTCG arising on slump sale u/s 50B of the Act. Appeal filed by the revenue is dismissed. ISSUES: Whether the Long-Term Capital Loss (LTCL) claimed on sale of unlisted shares is genuine and allowable for set-off against Long-Term Capital Gain (LTCG) arising from slump sale under Section 50B of the Income Tax Act.Whether the transactions involving purchase and sale of shares at high premium in closely held companies lacking genuine business activity constitute sham transactions or a colourable device to evade tax.Whether the test of 'preponderance of human probability' as laid down in CIT v. Durga Prasad More and Sumati Dayal applies to determine genuineness of the transactions.Whether the Revenue has discharged the burden of proving that the transactions are bogus or accommodation entries.Whether penalty proceedings under Section 270A are justified on the ground of underreporting or misreporting due to bogus LTCL claims. RULINGS / HOLDINGS: The Long-Term Capital Loss of Rs. 24.00 Crores claimed on sale of shares is held to be genuine and allowable for set-off against LTCG arising from slump sale under Section 50B of the Act, as the transactions were supported by proper documentation, audited financials, share certificates, and executed through banking channels.The transactions involving purchase of shares at high premium in the two closely held companies are not held to be sham merely on the basis of high premium paid or the companies' financial losses; commercial expediency and business decisions of the assessee were upheld.The application of the test of 'preponderance of human probability' by the Assessing Officer (AO) was found to be misplaced in the absence of any credible evidence of collusion, accommodation entries, or artificial inflation of share values.The Revenue failed to discharge the burden of proving that the transactions were colourable devices or bogus; mere suspicion or speculative inferences without evidentiary support were insufficient to disallow the claim.Penalty proceedings under Section 270A for underreporting due to bogus LTCL claims are not sustained as the LTCL claim was held genuine. RATIONALE: The Court applied the statutory framework under the Income Tax Act, particularly provisions relating to capital gains and slump sale under Section 50B, and principles governing burden of proof in tax proceedings.Judicial precedents were considered, including CIT v. Walfort Share & Stock Brokers (P.) Ltd., which held that a transaction valid under law and supported by documentation cannot be treated as sham merely due to tax advantage.The Court distinguished the facts from cases involving accommodation entries where identity, creditworthiness, and genuineness of transactions were not established, emphasizing that the assessee was a listed company complying with SEBI and Companies Act requirements, and investments were disclosed in statutory filings.The Court underscored that commercial expediency must be judged from the businessman's perspective, relying on apex court decisions such as S.A. Builders Ltd. v. CIT, and rejected the AO's reliance on the 'test of human probability' in absence of concrete evidence of collusion or fraud.The Court reaffirmed that the burden to prove a transaction as a colourable device lies on the Revenue, which was not met in the present case, thus supporting the deletion of the addition and dismissal of the Revenue's appeal.