TaxTMI 
TaxTMI 
2019 (6) TMI 1414
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.... circumstances of the appellant's case, the learned CIT(A) has grossly erred in treating Ground No. 1 of the appellant's appeal before him challenging the very validity of the assessment order impugned before him, as being general in nature and, therefore, not requiring adjudication by him. 2. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in upholding disallowance of short term capital loss of Rs. 1,80,00,000 suffered by the appellant on the sale of 4,000 equity shares of Anukul Investments Pvt. Ltd. 3. In law and in the facts and circumstances of the appellant's case, the learned Crp(A) has grossly erred in upholding the disallowance of Rs. 10,62,041 on 'account of expenses debited to the appellant's Profit and Loss Account made by the learned Assessing Officer after invoking Section 14A of the Income-tax Act, 1961 and Rule 8D of the Income-tax Rules, 1962. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing Ground No. 8 of the appellant's appeal before him challenging the learned Assessing Officer....
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....ket-related activities. The assessee in the year under consideration has shown short-term capital loss of Rs. 4,73,22,942.00 on the sale of shares of the companies namely Ankul Investment Pvt Ltd. and Anagram Stock broking Ltd. All the transactions for the purchase and sale of the shares were caried out off market. 4.1 The necessary details of the short-term capital loss claimed by the assessee on the sale of shares of the companies stand as under: Name of Security Security sold to Date of Investments No. of Shares purchases Purchase Value Price/ shares Date of Sales No. of share sold Value of sales Sales value per unit Indexed Cost Profit /Loss Anukul Investmets Sanjay Family Trust 5/10/07 4000 5000 20000000 27/03/08 4000 2000000 500 174 -18000000 Anagram Stockbro King Ltd. Anagram securities 20/10/07 7000 280.18 1961260 31/2/07 7000 266000 38 72 -1965260 Anagram Stockbro King LRd Anag Securities Ltd. 23/10/07 8750 280.88 2457704 31/12/07 8750 332500 38 69 -2125204 Anagram Stockbro ....
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.... the shares in the year 2002. Similarly, there was no board resolution made by AIPL in the year 2002 for the allotment of shares to the assessee. iii. The entire transactions for the purchase and sales of the shares were made among the related parties. iv. The assessee had set off the impugned short-term capital loss against the long-term capital gain earned by it in the year under consideration. In view of the above, the AO held that the impugned loss was generated by the assessee in order to reduce the tax liability. Thus such loss represents the bogus loss which was generated using the colorable device. Accordingly, the AO disallowed the same and added to the total income of the assessee. 5. The facts regarding the STCL of Rs. 2,93,33,942.00 in respect of M/s Anagram Stock broking Ltd. ( for short ASBL ) stands as under: i. The assessee purchased 1,20,750 shares of ASBL at Rs. 280.12 per share and sold the same at Rs. 38.00 per share during the year which resulted short-term capital loss of Rs. 2,93,33,942.00 in the year under consideration. ii. The assessee was the major shareholder in ASBL among the other parties. Other parties were....
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.... were sold at a price which was higher than the book value of the shares of AIPL which was determined as per the provisions of rule 11UA of Income Tax Rule 1962. 5.4 The provisions of section 40A(2) of the Act cannot be applied to the instant case. It is because such provisions are applicable to the transactions with the income taxable under the head business and profession. The impugned issue relates to the income determined under the head capital gain. Therefore, there cannot be any disallowance of the loss claimed by the assessee on the ground that it was arising from the transactions carried out with the related parties. 5.5 The assessee also claimed that the impugned loss cannot be disallowed merely on the reason that it has not substantiated its understanding of 2002 with the AIPL for subscribing the shares. It is because there are other circumstantial evidences which are contemporaneous for justifying the understanding between the assessee and AIPL for the acquisition of the shares. 6. However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: "3.3 I have considered the facts of the case;....
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....er, the short-term capital loss claimed by the appellant on account of transactions within the group entities at artificial price is not justified. The disallowance of such loss made by the assessing officer is confirmed." 6.1 The assessee regarding the STCL of Rs. 2,93,33,942.00 in respect of ASBL submitted that the shares were purchased from the employees at the negotiated price as a measure of commercial expediency. As such the assessee was selling the entire shares as held by it of ASBL. Therefore, the shares held by the employees as discussed above were required by it to avoid any possible hurdle in the process of selling the shares of ASBL. 6.2 Even if the shares would have been acquired directly by ACL from these employees, then also the purchase price would not have been disturbed by the Revenue. Moreover, the AO has no role in directing the assessee to conduct its business in a particular manner. It was the decision of the assessee to acquire the shares of ASBL and sell the same to ACL which cannot be questioned by the AO. 6.3 The assessee also claimed that the Revenue on one hand is accepting the long-term capital gain declared by it from the transactions carried....
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....hase consideration at RS 280.88 per share which is also disclosed by the sellers at the same price, the purchase price cannot be ignored. It is true that apart from book value, many other business factors were involved in purchasing shares at higher value. The complete control of the company by purchasing minority shareholders' stake is one of the considerations. After taking control of entire equity capital of the company, appellant sold the same to the group company at a negotiated price of RS 38 per share. Appellant earned substantial long-term capital gains on transfer of its own holding whereas suffered short-term capital loss on shares purchased to gain complete control of the company. There is no provision under the law in which declared sale consideration can be changed for the purpose of computing capital gain. Therefore the sale consideration declared by the appellant in a group company transaction cannot be changed unless it is proved that undeclared consideration has passed. Therefore assessing officer cannot change the long-term capital gain disclosed by the appellant and at the same time the loss suffered in the same transaction cannot be ignored. The decisions re....
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....the extent mentioned above, since the assessee has failed to disclose his true income. The appellant prays that the order of Id. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored. The appellant craves leave or alter any ground or add a new ground which may be necessary. 9. The learned AR before us filed a paper book running from pages 1 to 139 and reiterated the submissions as made before the authorities below. 10. Both the learned AR and the DR vehemently supported the order of the authorities below as favourable to them. 11. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the ITAT in the own case of the assessee involving identical issues in ITA No. 218/AHD/2016 pertaining to the assessment year 2010-11 vide order dated 31st December 2018 has decided the issue in favour of the assessee and against the Revenue. The relevant extract of the order is reproduced as under: 10. We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has sold equity shares of Arvind Ltd at Rs. 28.83 per share which is l....
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.... stock exchange then he would have incurred the cost as stated above. Therefore the difference, to the extent of the cost involved in such transfer, as discussed above, between the market price and actual price requires due consideration for quantifying the loss arising from the sale of shares. 10.6 We also note that there is no provision under the Act prescribing the guidelines for pricing of the shares unlike the provisions contained under section 50C of the Act concerning immovable properties under the head capital gain. Thus in the absence of any specific provision to determine the sale price of the shares of the listed company, we are inclined to hold that the price declared by the assessee is correct and within the provisions of law. 10.7 We also find that a new section 50CA of the Act was inserted by the Finance Act 2018 which is applicable from 1st April 2018, the relevant extract of the section is reproduced as under: "[Special provision for full value of consideration for transfer of share other than quoted share. 50CA. Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being shar....
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....er and above the actual sales consideration. In this regard, we find support and guidance from a recent judgment of Delhi high court in case Arjun Malhotra vs. CIT (403 ITR 354) where the same issue has been dealt and decided in favor of the assessee. The relevant extract of the order reads as under: "24. In view of the aforesaid discussion and pronouncement of law in K.P. Varghese case (supra), we fail to fathom how the tribunal had distinguished the said decision solely and entirely on the ground that in the present case the transaction was not at arm's length (see paragraphs 18 and 19 of the order of the tribunal quoted above in paragraph 16). K.P. Varghese case (supra) case holds that sub-sections (1) and (2) relate to transactions, which were not at arm's length between related parties and third parties respectively, but the two provisions were integrally connected inasmuch as they would apply when there was evidence and material to show that the consideration declared and disclosed was under-stated and not the actual consideration received by the assessee. Only when the said pre-condition was satisfied, the Assessing Officer was entitled to treat the fair mar....
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....ax liability and heavily relied on Honorable Supreme court in case of McDowell & Co. Ltd vs. Commercial tax officer (154 ITR 148) dated 17-4-1985 wherein apex court observed that tax planning within the law is permitted, but colorable devices cannot be part of tax planning. 11.1 In the case of McDowell & Co, the assessee was not collecting the sales tax liability on the excise duty even after the amendment in the distillery rules 76 & 79 w.e.f. 4-8-1981. As such before the amendment in the rules, i.e., distillery rules 76 & 79 w.e.f. 4-8-1981, the buyers were liable to deposit the excise duty directly to the state government. Therefore the assessee did not collect the sales tax on such excise duty. It is pertinent to note that the Hon'ble SC before the amendment in the rules 76 & 79 decided the issue in favor of the assessee reported in 1 SCR 914 dated 25-10-1976. Thus the assessee defaulted in complying the amended distillery rules 76 & 79 w.e.f. 4-8-1981. Thus the Hon'ble Apex Court decided the issue in favor of Revenue. Hence we are of the considered view that the principles laid down by the Hon'ble Apex Court cannot be applied in the case before us as the facts are dif....
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....e subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case (supra). Ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision (supra) leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the frame work of law, unless the same fall in the category of colorable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. It was with this consciousness that the Court has used these expressions while depreciating the schemes of tax avoidance in the name of tax planning. All the expressions used by their Lordships in depreciating the methodology of tax avoidance through tax planning of resorting to &....
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.... 11.4 It is also pertinent to mention here that whenever assessee has two options, any layman will always go for one which reduces its tax liability but to hold that the transaction as a colorable device Revenue needs to see it in entirety, as held by the Hon'ble Gujarat high court in the abovementioned case. 11.5 The AO in his order also relied on the judgment of Supreme Court in the case of workmen vs. Associated Rubber Industry limited (157 ITR 77) (SC) and held that facts of the above case are similar to assessee's case. However, we note that the above decision was in respect to the calculation of bonus payable to workers where an artificial entity was created to divert the income so that bonus liability can be reduced as the bonus was to be calculated at a fixed rate and diverting the income resulted in reducing the bonus liability. Therefore, Hon'ble Supreme Court held that it is not permissible as the artificial entity was later wound up in 2 years. But we find that facts in the case on hand are different from the case as mentioned in the immediately preceding paragraph. Further, we also note that the above case was related to the issue of labors while the pres....
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.... such transaction was an extinguishment of his right, therefore, qualify within the definition of the transfer. Accordingly, the value of such extinguishment of right was determined by the assessee at Rs. 36,19,050/-. However, the AO treated the same as a colorable device on the ground that the transaction was carried out among the related parties which were belonging to the same group. Accordingly, the loss on account of forfeiture of shares as discussed above claimed by the assessee was disallowed by the AO. However, the view taken by the AO was subsequently reversed by the learned CIT (A). 19.2 Now the controversy before us arises whether the loss claimed by the assessee on the sale of shares of AKAL is generated as a tool of a colorable device. It is an undisputed the fact that all the parties involved in such transaction were identifiable and the whole transaction was based on the documentary evidence. Now the question arises to determine the price at which the assessee sold these shares. It is an undisputed fact that the assessee acquired shares of AKAL at a premium of Rs. 490 per share having face value at Rs. 10 per share only. These shares were sold at a price of ....
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....h is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:" 19.6 A plain reading of the above provision reveals that the person being the recipient is subject to tax if it acquires anything at a value lesser than the fair market price. These provisions have been brought under the statute with effect from 01.04.2017. We also note that the same provision was also there in the old provision under clause (vii) to section 56(2) of the Act. However, on reading the same, we note that the tax liability, if any arises will be applicable in the hands of the recipient and no liability, can be imposed on the transferor. Therefore, we are of the view that the assessee being the transferor of shares cannot be subject to tax in the instant case. 19.7 In holding so, we also find support and guidance from the judgment of Asara Sales and Investments Private Limited (ITA No. 1345/PUN/2014) wherein it was held as under: "19. Another aspect of the issue is the allegation of Assessing Officer that as against book value of share as on 31.03.2008 at R....
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....ssessee does not result in any income in its hands. Thus there cannot be any tax in the hands of the assessee on account of the investment in shares in AKAL at a premium. In this regard, we draw the principles from the order of Mumbai Tribunal in the case of Pratik Syntex Pvt. Ltd. Vs. ITO reported in 94 taxmann.com 12 wherein the headnote reads as under: "Section 68 of the Income-tax Act, 1961 - Cash credits (Share capital) - Assessment year 2012-13 - During relevant year, assessee received huge amount from three companies as share capital - Assessing Officer taking a view that transaction of issue of share capital was bogus, added said amount to assessee's taxable income under section 68 - It was noted that even though shares had been issued at a very high premium to new shareholders, yet assessee could not even give correct addresses of three applicant companies where they were located - Further, assessee did not file any cogent material/evidences to justify chargeability of such a huge share premium from three new shareholders vis-a-vis issuing shares at par to original promoters within same relevant year under consideration - It was also undisputed that three comp....
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....o question of working out any taxable income in the hands of the assessee. Thus the value of the investment shown by the assessee in its balance sheet will certainly be accepted by the Revenue. There cannot be any question of any income in the hands of Mr. X on account of investment in ABC Ltd. at a premium. 20.2 However, the provisions of the Act requires ABC Ltd. to justify the share capital & share premium in its hands. ABC Ltd. is required to explain the source of share capital and premium under section 68 of the Act. Similarly, ABC Ltd. is also required to explain the source of share premium in its hands under section 56(2) of the Act. Thus if ABC Ltd. fails to justify the same under the relevant section 68/ 56(2) of the Act, then it will be subject to tax in the hands of ABC Ltd. Thus the value of share price along with premium at the most can be brought to tax in the hands of the ABC Ltd if it fails to justify the same. 20.3 Now Mr. X sales the shares in the financial year 2012-13 say at Rs. 150 per share. The sale price of the shares was determined as per the provisions of rule 11UA of Income Tax Rule. Accordingly, the assessee shall claim the loss of Rs. ....
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....ays left for the expiry of such financial year. The assessee could have planned such transaction by splitting into 2 different financial years as it was the matter of few days only. Thus the action of the assessee does not show any malafide intention to use the sale of shares as the colourable device in creating such a loss. Accordingly, we are of the view that had there been any malafide intention of the assessee then it could have booked such loss in the more planned manner so that there should not have been any doubt. We are forming our view on the basis that the assessee did not set off such loss till the date of passing the order by the learned CIT-A. Had there been any malafide intention of the assessee, then it could have claimed the set off of such loss in the same financial year or the subsequent financial year. 20.7 Similarly, we also note that the future income under the head capital gain cannot be predicted for claiming the set off of such loss. Moreover, there was no allegation of the Revenue that such loss was created to claim the set off of the future income. The future income is unseen and unpredictable and it was not possible to design the same in the rele....
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....as under : "10. After hearing both the parties and perusing the record we find that ld. CIT(A) has given relief to the assessee by holding that the case of the assessee is squarely covered by the Hon'ble Calcutta High Court decision in the case of CIT vs. Smt. Nandini Nopany (230 ITR 679), the relevant portion of which reads as under:- "The genuineness of the transaction of the sale and purchase of the shares between the assessee and Vishwa Mangal Trading Co. Pvt. Ltd., has not been doubted by the Assessing Officer. This has not even been questioned by the Department. It is not disputed that the assessee had transferred those shares at the book value cost maintained by her. It is also not disputed that the book value cost was lower than the market value of the shares. In fact it is admitted that the market value of those shares was to the tune of Rs. 20,67,876/-. Under those circumstances, holding that the assessee had derived any income, being the difference between the market value and the price on which the shares were sold by the assessee, in our opinion, was not correct. We are of the view that the Tribunal rightly upheld the finding of the Commi....
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....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 which transaction, the assessee claimed long term capital loss of Rs. 8,38,790/-. During the same period, the assessee also sold certain shares of Rustom Spinners Ltd. and showed long term capital gain of Rs. 1,46,792 and short term capital gain of Rs. 7,41,563/-. It is also not in dispute that the shares of Rustom Mills and Industries Ltd. were pledged by the assessee with IDBI Bank. The original share certificates along with the transfer form duly signed by the assessee were in possession of the IDBI Bank. The assessee had also undertaken not to transfer such shares. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 17. We are not inclined to accept the Revenue's contention that this was a colourable device and that the entire arrangement was a paper arrangement. Firstly, there is no provision in the Act which would prevent the assessee from selling loss making shares. Simply because such shares were sold during the previous year when the assessee had also sold some shares at pro....
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....ould be diminished and his tax liability reduced. This cannot be regarded as a case of tax avoidance even if the motive of the assessee in making the gift was to save tax on the income from shares at a higher rate applicable to him. 19. Under the circumstances, even without referring to the decision of the Apex Court in the case of Azadi Bachao Andolan (supra) and the observations made in the later decision in the case of Vodafone International Holdingss B.V. (supra), we do not find that this a case which would fall within the parameters of the decision in the case of McDowell & Ltd (supra)." 21.5 In view the above the loss of Rs. 3,50 crores cannot be treated as generated through the use of colrable decvice. The only alleagation of the Revenue was that the loss was generated as a device of coulorable tool. However, we disagree with the reasoning of lower authorities. We also note that the Revenue has taken the different stand by taxing the gain with respect the transaction for the sale of shares within the group but disallowed the loss with respect the transaction for the sale of shares within the group. Thus the stand of the Revenue was contradictory. 12. ....
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....ses. 14.1 The assessee also claimed that all the investments were not giving rise to the exempted income. There were certain categories of investments in the mutual fund which was subject to tax. 14.2 The assessee further submitted that it has claimed total expenses of Rs. 1,24,43,442 in its profit and loss account and it has already made the disallowance to the tune of Rs. 1,13,81,401.00 leaving the balance amount of Rs. 10,62,041.00 which was claimed as deduction. As per the assessee the administrative expenses cannot be linked with the earning of exempt income. 15. However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: Coming to the method of computation of disallowance under section 14 A, assessing officer disallowed expenses relatable to exempt income as per rule 8D which is mandatory from assessment year 2008-09. For interest, proportionate expense is disallowable whereas for other expenses .5% of average investment value is disallowable. Considering the fact that appellant claimed huge administrative and other expenses, the disallowance of administrative expenses made by the assessing....
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.... is no question of making the disallowance on account of interest expenses. 19.1 As regards the administrative expenses we note that the assessee has already made the disallowance of the expenses amounting to Rs.1,13,81,401.00 out of the total expenses of Rs. 1,24,43,442.00 only. As such the assessee claimed that it has claimed deduction of the expenses for Rs. 10,62,041.00 against the other taxable income declared by it in the income tax return. 19.2 The provisions of section 14A of the Act require the AO to make the disallowance after having regard to the books of accounts of the assessee. But in the instant case, we note that the AO has made the disallowance under rule 8D mechanically without referring to the expenses claimed by the assessee in its books of accounts. The expenses claimed by the assessee are only to the tune of Rs. 10,62,041/- under the head administrative expenses in the profit & loss account. This fact has not been disputed by the authorities below. Thus in our considered view, the disallowance cannot be made of the entire amount as the assessee has shown income from other activities which are giving rise to the taxable income. 19.3 However, in the int....
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....ection 14A of the Act." Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra). 19.6 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the disallowance. Therefore in the given facts & circumstances, we feel that adhoc disallowance will service the justice to the Revenue and assessee. We, therefore, are directing for the ad-hoc disallowance to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the ....