2026 (4) TMI 189 - AT - Income Tax

Genuine debenture loss claim sustained where documentary evidence showed commercial substance and no sham or circular money flow.

Compulsorily convertible debenture transactions were treated as genuine where the surrounding documents showed a real business project, bank borrowings, ... Short-term capital loss arising from sale of compulsorily convertible debentures/CCD - Colourable device - commercial expediency - set-off of capital loss - human probabilities Case of department is that the subscription to Convertible Debenture and generating loss was a colourble arrangement to reduce the tax liability arising out of capital gains earned on sell of property held jointly by the two assessee - HELD THAT: - The Tribunal found that the Department had not disputed the execution of the underlying business project, the borrowings from banks, the mortgage of the jointly owned residential property for raising funds, the subscription to CCDs through banking channels, or the subsequent sale of the CCDs on the basis of an independent valuation report. The investment was held to have arisen from financial compulsion connected with guarantee obligations and settlement of bank liabilities in a distressed family business, and not from deployment of surplus funds. AO had only questioned the wisdom of subscribing to CCDs in a financially stressed company, but had brought no material to show that the transactions were sham, manipulated, collusive, or that funds had reverted to the assessee. In those circumstances, lack of perceived commercial prudence was held insufficient to brand the transaction as a colourable device, and the statutory claim for set-off of the resulting capital loss could not be denied on suspicion alone. [Paras 9, 10, 11, 12] Final Conclusion: The Tribunal held that the CCD transactions were genuine and arose from business and financial distress, and that the disallowance had been made only on suspicion as to commercial wisdom. The Revenue's appeals were accordingly dismissed. Issues: Whether the short-term capital loss arising from sale of compulsorily convertible debentures was genuine and allowable for set-off against long-term capital gains, or whether the arrangement was a colourable device lacking commercial substance.Analysis: The documentary record showed that the company had undertaken a real business project, had borrowed from banks for execution, and that the assessee had raised funds by mortgaging jointly owned property to meet the liabilities. The subscription to the debentures, their transfer, and the later sale were supported by loan documents, bank statements, the subscription agreement, and an independent valuation report by a SEBI-registered merchant banker. The record did not disclose any adverse material proving sham, collusion, or money flow back to the assessee. The mere fact that the debentures were subscribed at par, or that the transaction ultimately produced a loss set off against capital gains, did not by itself establish tax evasion. In the given distress-driven commercial setting, the test of human probabilities did not displace the otherwise credible and evidenced explanation.Conclusion: The short-term capital loss was held to be genuine, and the set-off and carry forward claimed by the assessee were upheld.