2012 (11) TMI 1218 - AT - Income Tax

Short term capital loss disallowed - Held that - Such share transactions were not quoted and consequently were not traded through stock exchange. When all the facts and circumstances of the case are viewed in totality it is evident that the assessee appellants failed to discharge the onus to prove the genuineness of the transactions of purchase and sales of such shares. The impugned transactions of shares are preordained one not for legitimate commercial purpose in view but for the purpose of creating non-genuine and artificial short term capital loss with a view to reducing valid taxliability. These transactions of shares were not governed by market factors prevalent at that relevant time in such trade but the same are product of the design and mutual understanding on the part of the appellants and the said Hissar based unlisted company. CIT(Appeals) has failed to bring any cogent and credible evidence to dislodge such finding. Having regard to the peculiar fact-situation of the present case it is evident that such share transactions were close circuit transactions and clearly structured one. No merit in the findings of the CIT(Appeals). Having regard all the findings of the CIT(Appeals) cannot be sustained and hence the same are reversed. Further an offer to surrender the impugned loss subject to no penal action made by the appellants before the AO in the course of assessment proceedings is an important piece of evidence hence cannot be ignored lightly. Consequently the findings of the AO as recorded in the impugned assessment order are restored.

Summary

Issues Involved:
1. Legitimacy of the short-term capital loss claimed by the assessee appellants.
2. Allegation of colorable device to evade tax.
3. Burden of proof regarding the genuineness of the share transactions.
4. Applicability of judicial precedents and statutory provisions.

Detailed Analysis:

1. Legitimacy of the Short-Term Capital Loss Claimed by the Assessee Appellants:
The core issue revolves around the short-term capital loss claimed by the assessee appellants from share transactions with M/s ARCEE Ispat Udyog Ltd., an unlisted company. The appellants purchased shares at Rs. 100 per share on 8.11.2007 and sold them at Rs. 10 per share on 31.3.2008, resulting in significant losses. The shares were later sold by the broker at Rs. 100 per share to a director of the same company, indicating a circular route of transactions.

2. Allegation of Colorable Device to Evade Tax:
The Revenue contended that the transactions were a "colorable device" to artificially create short-term capital loss to offset capital gains from land sales. The transactions were not routed through any stock exchange or recognized broker, and the appellants offered to surrender the claimed loss to avoid penal action, which the Revenue argued was an admission of the sham nature of the transactions.

3. Burden of Proof Regarding the Genuineness of the Share Transactions:
The CIT(Appeals) reversed the AO's findings, stating that the AO did not conduct necessary inquiries to disprove the transactions' genuineness. However, the Tribunal emphasized that the burden of proof lies on the appellants to substantiate their claims. The Tribunal found that the appellants failed to provide credible evidence to prove the genuineness of the transactions, which were deemed premeditated and lacking commercial substance.

4. Applicability of Judicial Precedents and Statutory Provisions:
The Tribunal considered several judicial precedents, including decisions from the Supreme Court and jurisdictional High Court, to conclude that the transactions were not genuine. The Tribunal noted that the CIT(Appeals) misapplied precedents like K.P. Verghese and Union of India v. Azadi Bachao Andolan, which were not relevant to the specific facts of this case. The Tribunal also referenced the principle that the substance of the transaction must be assessed to determine its true nature, as upheld in various judgments.

Conclusion:
The Tribunal reversed the CIT(Appeals) decision, restoring the AO's findings that disallowed the short-term capital loss claimed by the appellants. The Tribunal concluded that the transactions were premeditated and designed to evade tax, lacking genuine commercial intent. The appeals of the Revenue were allowed, and the findings of the AO were reinstated.