2011 (3) TMI 596 - HC - Income Tax

Carry forward and set-off of loss - Whether short term capital loss attributable to colourable transaction could be set-off against the long term capital gains - Question of applicability of decision of the Supreme Court in the case of McDowell & Company Ltd. (1985 -TMI - 40038 - SUPREME Court) and ignore the subsequent decision of the Supreme Court explaining the said decision on the ground that the latter ones were delivered by a Bench consisting of two Judges. - Held that - If the subsequent decision of the smaller Bench explaining the larger Bench is placed before a High Court, the latter is bound to follow the subsequent one by the smaller one which interprets the decisions of the larger Bench because that is the interpretation of the larger Bench by a Bench of Supreme Court and the High Court cannot make a different interpretation than the one made by the subsequent decision of the Supreme Court which is binding upon it. Genuine transaction or colourable transaction - Held that - the reason of the Assessing Officer that the assessee company could have easily waited for a reasonable period of time for watching the market and could also have invested a further amount of Rs.9 to 10 crore to revive the business of M/s. SKB is not acceptable. - It is not within the province of the Assessing Officer to ignore an otherwise genuine transaction and to brand it as a colourable one on the ground that it was the duty of the company to invest further amount or it should have waited for a reasonable period. - Decided in favor of assessee. Expenditure on exploring the possibility of the hotel business - revenue expenditure or capital expenditure - Section 35D - Held that - in the Income-tax Act itself there is specific provision dealing with the aforesaid nature of the expenditure but none of the authorities below cared to look into the said aspect. - matter remanded back.

Summary

Issues Involved:
1. Set-off of short term capital loss against long term capital gains.
2. Disallowance of consultancy fees.

Detailed Analysis:

Issue 1: Set-off of short term capital loss against long term capital gains

The primary issue in this case was whether the short term capital loss of Rs. 8,59,77,748/- attributed to a "colourable transaction" could be set-off against the long term capital gains of Rs. 4,03,89,154/-. The Revenue argued that the sale of shares by the assessee was a device to offset the long term capital gains, citing the decision in M/s. McDowell & Company Ltd. vs. Commercial Tax Officer. However, the Tribunal and the Commissioner of Income-tax (Appeals) found the transaction to be genuine, albeit resulting in a short-term capital loss rather than a long-term one.

The court noted that the assessee had acquired shares of M/s. Shri Krishna Bottlers (Vijayawada) Pvt. Ltd. (SKB) and later sold these shares at a significant loss due to various business challenges. The Assessing Officer initially viewed this as a colourable transaction aimed at offsetting long-term capital gains. However, the Tribunal upheld the genuineness of the transaction, consistent with the Supreme Court's interpretation in Union of India vs. Ajadi Bacho Andolon, which explained the scope of the McDowell decision.

The court emphasized that it is not within the Assessing Officer's province to disregard a genuine transaction based on subjective expectations about the company's investment decisions. Thus, the Tribunal's view that the transaction was genuine and the loss should be treated as short-term was affirmed.

Issue 2: Disallowance of consultancy fees

The second issue concerned the disallowance of Rs. 8,03,985/- paid as consultancy fees for a market/feasibility survey to explore setting up a hospital in Seychelles. The Assessing Officer argued that since the assessee was engaged in a different business, this expenditure should not be considered as revenue expenditure related to the existing business.

The Tribunal and the CIT (Appeals) had allowed this expenditure as revenue expenditure without detailed analysis, relying on precedents such as Keshoram Industries & Cotton Mills Ltd. vs. CIT and CIT vs. Graphite India. The court found that neither authority had adequately considered the specific provisions of the Income-tax Act, particularly Section 35D, which deals with such expenditures.

The court set aside the Tribunal's order on this issue and remanded the matter back to the Assessing Officer for reconsideration in light of the applicable provisions of the Act and relevant materials.

Conclusion:

The appeal was partly allowed. The court affirmed the Tribunal's finding that the transaction resulting in short-term capital loss was genuine. However, it remanded the issue of consultancy fees back to the Assessing Officer for fresh consideration based on the provisions of the Income-tax Act, including Section 35D. No order as to costs was made.