2012 (7) TMI 72 - HC - Income Tax

Short term Capital Loss arising from re-purchase and sale of shares - dis-allowance on ground that modus operandi adopted to purchase shares at high price and sale thereof at low price to a sister concern were all colourable device - shares of Premier Mills Ltd purchased from UTI for Rs 30/- per share when market rate was Rs 8.50 per share, subsequently sold within a short span of time to BIPL(sister concern of PML) at Rs. 8.50 - no involvement of the assessee in the negotiation process - no correspondence exchanged between the assessee and UTI - no movement of funds from the assessee for purchase of shares from UTI, paid by PML through adjustment against dues of assessee firm - incentive for the turnover given to the assessee firm by PML to make good the loss resulting from the share transaction, which was withdrawn after the share transactions were completed. Held that - Premier Mills Limited merely used the assessee firm as a special vehicle for the purpose of achieving, what it would not be possible for it to achieve in a legal way. It was found that as PML could not purchase its own shares and in order to circumvent Section 77 of the Companies Act, it decided to repurchase the shares through the assessee herein, which subsequently sold the same to the sister concern, wherein the spouse of Managing Director of Premier Mills Limited was a Managing Director of the sister concern. In the absence of any material explained as regards the repurchase of shares at Rs. 30/- per share and subsequently sold it at Rs. 8.50 paise, same cannot be construed as genuine transactions. Further, there are hardly any material to show that the funds for the purchase of these shares really went from the assessee firm - Decided against assessee.

Summary

Issues:
Disallowance of loss incurred by the appellant arising from purchase and sale of shares.

Analysis:
The assessee, a partnership firm, claimed short term capital loss on the sale of shares for the assessment years 1987-88 and 1988-89. The Commissioner of Income Tax (Appeals) found the modus operandi adopted for the purchase and subsequent sale of shares to be a colorable device, rejecting the claim of capital loss. The Income Tax Appellate Tribunal remanded the matter back for fresh consideration. The shares were purchased at a higher price and sold within a short span of time to a sister concern. The Managing Director of the sister concern was the spouse of the Managing Director of the company from which the shares were purchased. The Assessing Officer concluded that the transactions were not genuine and were aimed at reducing tax liability. The Officer highlighted the lack of involvement of the assessee in the negotiation process and the absence of genuine business activity in the transactions.

For the assessment year 1988-89, the Tribunal confirmed the views of the Commissioner of Income Tax (Appeals) and the Assessing Officer. The Tribunal found that there was no agreement between the assessee firm and Unit Trust of India for the repurchase of shares at a higher price. The Tribunal also noted the lack of material showing the flow of funds from the assessee for the purchase of shares. The Tribunal rejected the appeal based on these findings.

The High Court upheld the Tribunal's order, emphasizing that the assessee firm was merely used as a vehicle by the company to achieve an illegitimate objective. The Court noted the absence of correspondence between the assessee and Unit Trust of India regarding the price agreed upon for the shares. The Court found the transactions lacking in genuineness and dismissed the appeals filed by the assessee.

In conclusion, the High Court affirmed the Tribunal's decision, stating that the transactions were not genuine and lacked material evidence to support the contention of the assessee. The Court highlighted the misuse of the assessee firm as a medium to achieve an illegal objective and the absence of genuine business activity in the transactions. The appeals filed by the assessee were dismissed.