TaxTMI 
TaxTMI 
2014 (12) TMI 760
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.... similar circumstances, we prefer to discuss the facts in appeal No.400/LKW/2012, according to which the assessee filed its return of income declaring the income of Rs. 1,12,03,795/-, against which a short term capital loss amounting to Rs. 7,85,92,860/- was claimed on transfer of certain shares which was disallowed by the Assessing Officer and assessed the income at Rs. 1,12,03,795/- after treating the entire transaction of sale and purchase of shares as sham. While doing so, the Assessing Officer has made detailed enquiry and clarification with regard to the purchase of shares at higher rate i.e. @ Rs. 27/- per share on 11.9.2007 and its sale on 15.12.2007 @ Rs. 3.02 per share. For the sake of reference, we ex tract the relevant portion of the order of the Assessing Officer as under:- "4. From the computation of income filed in the course of assessment proceedings it was noticed that assessee company had inter-alia disclosed short term capital loss amounting to Rs. 7,85,92,860/-. Accordingly, vide para-4 of order sheet entry dated 09.11.2010 assessee was specifically required to furnish complete details pertaining to the loss shown on account of sales of short term capital ass....
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....ained as to why the shares of said company which were purchased at the face value just only few days before the same were sold at highly discounted price and transaction resulted in the substantial long term & short term losses. " 4.2 In response the assessee vide written submission dt. 16.11.2010 and 29.11.2010 made following submissions:- "The shares were acquired a few days before the same were sold by subscribing to the fresh issue of capital by the company and if these were not subscribed, there would have been a dilution of my holding in the company resulting in further depletion in value of my stake. The reason for fresh issue of capital as communicated by the company was necessitated by need to redeem the preference shares which under law can be redeemed either out of the proceeds of the fresh issue of capital or out of the profits. Since /he company had huge accumulated losses, the company did not have any option but to raise the capital. It may also be noted that the company being a closely held company and having huge accumulated losses of around Rs. 28 crores as at 31.10.2010 could not have raised this capital from anyone else than the existing shareholders. 4.....
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....ailed above for Rs. 1,69,27,140/- @ Rs. 3.05/- per share and the transaction resulted in short term capital loss of Rs. 7,85,72,319/-. The reason tendered by the assessee for acquiring the shares of the said M/s Shakumbari Sugar & Allied Industries immediately before the same were sold was stated to be the fact that the assessee had to subscribe to the shares capital of the company immediately before the date of sales of shares because the company had to redeem the preference shares as also had to repay the unsecured loan which could be possible only out of the accumulated profit of the company in the shape of reserves and surplus or by raising the shares capital. Since, company had heavy accumulated losses, it was submitted, therefore the only option available with the seller was to raise the funds through the fresh issue. Further, since the company was running into heavy losses therefore no outsider would have subscribed to the capital of the company therefore the same had to be subscribed by the existing share holders including the assessee. As regards the adoption of sale price of shares @ Rs. 3.05/- per share, the same was fixed as per the working appearing in the share purcha....
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.... character and therefore the loss resulting from such sham transaction is obviously not allowable and therefore will not be allowed. Penalty proceedings u/s 271(1) (c) are initiated separately." 4. Aggrieved, the assessee has preferred an appeal before the ld. CIT(A) with the submission that the assessee has filed copy of account before the Assessing Officer evidencing the said payment towards acquisition of shares and the shares were sold to M/s India Glycol Ltd. as per agreement wherein consideration of each share of the company i.e. M/s Shakumbari Sugar and Allied Industries Limited (hereinafter called in short "SSAIL") was fixed at Rs. 3.02 per share. It was further contended before the ld. CIT(A) that the Assessing Officer has not disbelieved the documents placed on record. He has simply doubted the transactions, since the same had taken place at a short period of time. The fact that these shares were sold at much lower rate to M/s India Glycol Ltd., cannot make the purchase transaction as bogus or sham. Being convinced with the explanations of the assessee, the ld. CIT(A) has deleted the addition and directed the Assessing Officer to allow capital loss as computed to be ca....
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.... loss, as the company shares are not listed shares. 6. The ld. D.R. has further invited our attention to the Resolution of the Board of SSAIL appearing at page 67 of the compilation, with the submission that vide resolution dated 7.12.2007, SSAIL has allotted 1900000 shares to the assessee, Shailendra Mohan Gupta, but as per record and the contentions of the assessee, these shares were purchased only on 12.12.2007. Therefore, before purchase how these shares were allotted to the assessee. These facts reflect that the transaction of purchase and sale of shares is a sham transaction and is only managed to book the short term capital loss in the hands of the assessee. 7. The ld. counsel for the assessee, besides placing reliance upon the order of the ld. CIT(A), has contended that the assessee is one of the promoter Directors of SSAIL, which although a Public Limited Company, had been a closely held Company ever since its inception as is borne out from the list of shareholders. When all efforts to revive the sale had failed, its promoters entered into share purchase agreement with M/s India Glycol Ltd. wherein they represented shareholding of 3,21,24,200 fully paid up equity sha....
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.... shown to have purchased 10.10 lakhs shares on 7.12.2007 @ Rs. 10/- per share for a total consideration of Rs. 1,01,00,000/-, but before the ld. CIT(A) it was submitted vide letter dated 10.2.2012 that actually the rate/share paid was Rs. 27/- and the total consideration paid was Rs. 2,72,70,000/-. Thus, the total number of shares of SSAIL purchased by the assessee from M/s Crown Alba Pvt. Ltd., Mumbai were 24,60,000 + 10,10,000 i.e. 34,70,000. The assessee has also applied and got 19.10 lakhs shares of SSAIL @ Rs. 10 per share for a total consideration of Rs. 1.90 crores. Thus, the total numbers of shares of 53.70 lakhs were sold on 15.12.2007 after a gap of a short period to M/s India Glycol Ltd. @ Rs. 3.02 per share. According to the assessee, the purchase and sales are verifiable from the record and the assessee has suffered a short term capital loss; whereas the Revenue has contended that there cannot be a short term capital loss within a short period. Total 29.10 lakhs shares were purchased in the month of December, 2007 and were sold within a period of 10 days. Therefore, there cannot be a decline in the market value of the shares from Rs. 27/- to Rs. 3.02 per share. It was ....
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....he value of shares, as it was purchased and sold within a period of three months. In that case, the Tribunal has only allowed long term capital loss to the assessee and not short term capital loss. The relevant observations of the Tribunal are extracted hereunder:- "5. We have considered the rival submissions, perused the material available on record and the judgments cited by both the sides. We find that the objection of the Assessing Officer is that the purchase price paid by these assessees to SSAIL for purchase of shares on 07/12/2007 is excessive because only after 8 days, these shares were sold by the assessee at Rs. 3.15 per share. The Assessing Officer did not find the explanation of the assessee satisfactory and consequently, he held that this transaction of purchase and sale of shares is bogus in respect of fresh 19 lacs shares purchased on 07/12/2007 for Rs. 190 lacs, which were sold on 15/12/2007 for a sale consideration of Rs. 59,84,119/- resulting in loss of Rs. 1,30,10,881/-. However, it seems that the Assessing Officer allowed the Long Term Capital Loss in respect of sale of old shares at the same price @Rs.3.15 per share but this is also not clear because of spe....
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.... sale of old shares held by the assessee and whether the same was allowed by the Assessing Officer or not. The order of learned CIT (A) is without throwing any light on these aspects. Hence, in our considered opinion, the matter has to go back to the file of the learned CIT (A) for fresh decision after examining all these facts but such decision should be as per these guidelines. 6. Since the assessee was also holding 2.60 lac shares as on 07/12/2007 (if the figures given on pages 30 & 31 of paper book are correct) before acquiring further shares of SSAIL, the market value of these shares should be worked out on the basis of net assets value of the company SSAIL on 07/12/2007 by dividing total net assets value on that date by total number of shares of that company before further issue of shares on that date. The fresh shares should be considered as issued and there after sold on such market value per share of the old shares for raising same amount resulting in increase in number of shares issued because whatever loss is incurred by the company and consequently the share holders, the same was incurred till this date and it cannot be said that further loss was incurred between 07.....