TaxTMI 
TaxTMI 
2017 (5) TMI 917
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.... with Rule 8D of the Income Tax Rules, 1962 as against Rs. 12,4267-added by the Appellant Company itself while filing the return of income. 2. That the order dated 28-02-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) XII, New Delhi is against law and facts on the file in as much as she was not justified to uphold the action of the Learned Deputy Commissioner of Income Tax, Ward 9(1), New Delhi in disallowing a sum of Rs. 4,88,90,050/- claimed by the Appellant Company as a short term capital loss" 2. The first ground of appeal is against the disallowance of Rs. 440663/- on account of expenses incurred for earning tax free income u/s 14A of the Act and the second ground of the appeal is with respect to disallowance of loss of Rs. 48890050/- claimed by the assessee is a short term capital loss. Ground No 1 of the appeal of the asessee is not pressed and hence it is dismissed. 3. Ground no 2 is against the disallowance of short term capital loss on sale of shares disallowed by the ld AO as sham transaction and which is upheld by the ld CIT (A) not as a sham loss but as speculation loss applying explanation to section 7....
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....stments therein would be profitable venture for it and the prospect of future capital appreciation was high, (d) However it soon became apparent that the claims of the said companies were not based on a realistic assessment of their capabilities and business prospects and as such locking up substantial capital therein would not lead to commensurate profits either m the medium or even the long term. As such the same were sold off in an off market deal, at the best available price with a view to minimize basis and free capital which was otherwise locked up in unprofitable ventures and which could now be used for further more profitable ventures, (e) Even otherwise it cannot be said that the transactions are sham in as much as the sale is through normal banking channels supported by duly executed and valid transfer deeds in accordance with the process of law. The transactions are duly entered into the books of accounts of all the parties concerned whereby the legitimacy of the transactions is conclusively proved. In the instant case the entire transaction is duly supported and documented by all the parties thereto and also supported by the fact of consideration havin....
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.... close held group of companies and routed through banking channels cannot lead to be genuine transactions. 4.4 As per assessee's own submission para {c) & (d) are contradictory. Firstly the assessee has submitted that the investments in the two companies i.e M/s Dependable Transport Pvt, Ltd. and M/s Supreme Placement Services Pvt. Ltd. were made on the basis of future business plans and prospects arising out of personal discussion and that the potential for future growth and resulting capital appreciation were foreseen. On the other hand, it is submitted that the apparent claims of the said companies were not based on realistic assessment of the capabilities and business prospect. This submission of the assessee cannot be accepted by any stretch of imagination as the assessee himself is a stake holder in the two companies and had a fairly good idea and perfect knowledge of the financial affairs of the two companies. Being a substantial shareholder in the above two companies, the assessee had the first hand knowledge of the general affairs of these two companies. The assessee had all the knowledge before making investment in these two companies. Thus, it can be said wi....
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....ssessing Officer had made an addition amounting to Rs. 4,88,90,050/- under the head Short Term Capital Loss. During the year assessee had disclosed capital loss in following companies:- M/s Supreme Placement Services Pvt. Ltd Rs. 3,49,40,050/- M/s Dependable Transport Pvt. Ltd Rs. 39.50.000/ -Rs. 4,88,90,050/- The details of the transactions in the purchase and sale of shares of M/s Supreme Placement Services Pvt. Ltd. and M/s Dependable Transport Pvt. Ltd, resulting in the above loss are as follows:- s. No, Name of the Scrip Date of purchase No of shares Cost Price (Rs.) Date of Sale No of shares Sale Price (Rs.) Loss (Rs.) Total Rate Total 1. (a) M/s Supreme Placement Services Pvt Ltd 23.05.07 170000 17000000 18.1.08 170000 10 1700000 15300000 (b) -do- 08.09.07 48200 4822050 18,1.08 48200 10 482000 4340050 (c) -do- 13.09.07 17....
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....deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. " As per the above explanation, where any part of the business of a company (whether private or public) consists of the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. This Explanation shall not apply to the following companies: a) Investment companies i.e. a company whose gross total income consists mainly of income chargeable under the heads 'Income from House Property', Capital Gains ' and 'Income from Other Sources '. b) A company whose principal business is of banking or granting of loans/advances The above explanation does not apply to the assessee since its main business consists of "Capital Gains. But the assessee on his own w.r.t. his reply to 14A had said that his main business is supply of man power which forms a pre-dominant part of its business activities. (Detail is given at page 4 of this order). This is shows that it ....
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....e investment are made through account payee cheques and sale transaction are also through account payee cheques, neither the purchase price nor the sale price of shares transferred is in question. He further stated that executed transfer form was duly submitted and further the shares purchased were transferred in the name of the appellant company. The assessee has made certain profit and loss in sale of certain shares is on profit and sale of certain shares is at the loss. Therefore, merely when the shares are sold at loss it cannot be said to be a sham transaction. 6. With respect to the order of the ld CIT(A) he submitted that the ld CIT(A) has accepted the claim of the assessee that transaction is not sham but has applied explanation to section 73 of the Act holding that it is speculative loss. He submitted that ld CIT (A) has already held that transactions are not sham. He submitted that acceptance of the transaction of the ld CIT(A) holding it to be a speculative loss proves that order of the ld AO holding transaction of loss in shares is not sham. He submitted that main income of the assessee company is capital gain and not business , therefore provision of that explanatio....
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....me of the appellant. Ld AO has also not questioned the prices at which the shares are transacted. The investee companies being the shareholders of the assessee Company and assessee holding shares in them is of no consequence in absence of challenge to the transaction itself. The consideration of shares has not gone to the coffers of those companies from transacting parties but to the purchaser and sellers. Further „off market transaction‟ as alleged by the ld AO is also not correct as the companies whose shares are purchased and sold are not listed and therefore there shares cannot be traded on stock exchange but „ off market „ only. Therefore merely there is cross holding of the companies, it cannot be said that the transaction purchase and sale is sham. The identical question arose before the Hon Gujarat High court in ACIT V Biraj Investments ( P ) Ltd [2012]24 taxamnnn.com 273 [Guj] where in has been held as under :- "3. The Assessing Officer noted that the shares of Rustom Mills and Industries Ltd., which the assessee sold were pledged with the IDBI Bank. The original share certificates were also lying with the said Bank. The assessee had also h....
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....of share certificates, it could not have completed these formalities. In his opinion, therefore, no sale of shares had been effected. He also concurred with the view of the Assessing Officer that the entire transaction was a colourable device. He noted that the assessee company and the purchaser company had common Directors. Even Rustom Mills and Industries Ltd. whose shares were under contention had common Directors. He was of the opinion that looking to the impediments attached to such shares, the same would hardly have any market value. He was, therefore, of the opinion that the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11 would apply. 6. The assessee carried the matter further in appeal before the Tribunal. The Tribunal by the impugned order reversed the orders passed by the Revenue Authorities. Tribunal placed reliance on a decision of the Madras High Court in the case of A.M.P. Arunachalam v. A.R. Krishnamurthy [1979] 49 Comp. Cas. 662 (Mad) wherein the facts were that R had borrowed a sum of Rs. 35,000/- with security of 5000 shares held by him in a private limited company. The share certificate....
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.... the Companies Act, 1956 to contend that such transfer could not have been registered without following the mandatory requirements contained in sub-section (1) of section 108 of the Companies Act. In this respect, counsel relied on the decision of the Apex Court in the case of Mannalal Khetam v. Kedar Nath [1977] 47 Comp. Cas. 185 wherein the Apex Court held that the requirements of section 108 of the Companies Act were mandatory and not directory. In the said case, finding that despite the shares being under attachment and despite a separate prohibitory order having been issued to the Company, the Company registered transfer of shares, the Apex Court held that such action on the part of the Company was contrary to law. 10. Counsel placed heavy reliance on the decision in the case of McDowell & Co. Ltd. (supra) to contend that transaction itself should be ignored as being a colourable device to avoid tax. Counsel drew our attention to some of the observations made in a recent decision in the case of Vodafone International Holdings B.V. v. UOI [2012] 341 ITR 1/ 204 Taxman 408 /71 taxmann.com 202 (SC) reported in wherein the ratio of the decision in the case of McDowell & Co....
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....the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest. Therefore when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. 14. Having thus heard the learned counsel for the parties, we find that the relevant facts are not in dispute. The respondent assessee sold shares of Rustom Mills and Industries Ltd for a sum of Rs. 4,01,000/- on whic....
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....signed transfer forms, in so far as the assessee's relation with IDBI is concerned, there would be a serious question of validity of such transaction. We are, however, in the present proceedings, not concerned with such internal possible dispute between the assessee and the said financial institution. It may also be that if the purchaser Company desired to have such shares transferred in its name, such attempt would run into serious road block. Primarily, without the original share certificates in possession of the purchaser company, which was in possession of the IDBI Bank, the Company would not, in view of section 108 of the Companies Act, be able to register such transfer. Sub-section (1) of section 108 provides that a company shall not register a transfer of shares in or debentures of, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and further fulfilling the procedural requirements specified therein has been delivered to the company along with the certificate relating to the shares or debentures along with the letter of allotment of shares or debentures. Therefore, it would not be diff....
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....o avoid further loss, if he finds that market value of the shares is fast diminishing. It is equally open for the assessee to effect such sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI is concerned and insofar as the purchaser's right to have shares transferred in its name is concerned. This, however, by itself would not establish that the sale of shares was only a paper transaction and a device contrived by the assessee to claim loss which it did not suffer and thereby seek set off against the capital gain received by it during the year under consideration. 18. In the case of CIT v. Sakarlal Balabhai [1968] 69 ITR 186 (Raj.), a Division Bench of this Court observed that avoidance of tax cannot include every case of reduction of tax liability of ....
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....rovisions of this Chapter, be carried forward to the following assessment year, and- (i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than [2053][four assessment years] immediately succeeding the assessment year for which the loss was first computed. [ Explanation.-Where any part of the business of a company ( [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities" , "Income from house property", "Capital gains" and "Income from other sources"], or a company [the principal business of which is the business of ....
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....f the Explanation is to explain the scheme in the main provision to situations where part of business is from speculative transactions. To that extent the assessee will be deemed to be carrying on speculative business - Aravali Engineers (P.) Ltd. v. CIT [2011] 335 ITR 508/200 Taxman 81 (Mag.)/11 taxmann.com 291 (Punj. & Har.). As there is no business of purchases and sales of the shares, explanation to section 73 does not apply to assessee. Hon Madras High court in [2016] 68 taxmann.com 3 (Madras) Rajapalayam Mills Ltd. v. Deputy Commissioner of Income-tax, Special Range-I, Madurai had an occasion to consider the applicability of explanation to section 73 and it has been held that "7. As held in the decisions relied upon by the learned counsel for the assessee, the facts and circumstances of each case is relevant to find out, whether the transaction alleged would amount to speculative transaction or not. 8. In order to decide that, the nature of the transaction alleged is important, it has been stated the order of Commissioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the....