2010 (7) TMI 1099 - AT - Income Tax

Summary

Issues Involved:
1. Whether the forfeiture of partly paid-up shares constitutes a short-term capital loss.
2. Whether the forfeiture of shares was a colorable device for tax avoidance.

Summary:

Issue 1: Whether the forfeiture of partly paid-up shares constitutes a short-term capital loss.

The appellants, founders and shareholders of companies under the KPR group, sold 9.17% of their holdings in M/s. KPR Mills Ltd. and invested the proceeds in M/s. KPR Sugar Mills P. Ltd. Due to litigation with M/s. Renuka Sugar Mills, the sugar factory project was abandoned, and the shares were forfeited due to non-payment of the first and final call money. The appellants claimed the forfeiture as a capital loss to set off against long-term capital gains. The Tribunal noted that the appellants had invested significantly in M/s. KPR Sugar Mills P. Ltd., which failed to set up its factory. The Tribunal found that the forfeiture was a business decision to limit further losses, not a colorable device. The Tribunal held that the loss from the forfeiture of partly paid-up shares should be treated as a short-term capital loss.

Issue 2: Whether the forfeiture of shares was a colorable device for tax avoidance.

The Assessing Officer and CIT(A) had disallowed the claim, considering the forfeiture a colorable device for tax avoidance, invoking the decision in McDowell & Co. v. Commercial Tax Officer. The Tribunal disagreed, stating that the appellants' decision to forfeit the shares was a prudent business decision given the remote possibility of setting up the factory. The Tribunal emphasized that the loss was genuine, with no evidence of the forfeited amount being returned to the appellants. The Tribunal concluded that the forfeiture was not a colorable device and directed the Assessing Officer to accept the appellants' claim of short-term capital loss.

Conclusion:

The Tribunal reversed the CIT(A)'s order and allowed the appeals, recognizing the forfeiture of partly paid-up shares as a short-term capital loss and rejecting the notion that it was a colorable device for tax avoidance. The order was pronounced on 30-07-2010.