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2013 (7) TMI 448 - HC - Income TaxCapital loss from sale of shares - tax planning versus tax avoidance - colourable device - whether the shares were sold at a correct price or at the price which was artificially arrived at to inflate the loss Held that - the transactions would fall within the legitimate tax planning and would not amount to colorable device for tax avoidance. He found that the assessee had relied on the report of the valuer, who had adopted correct parameters. The assessee had sufficient justification for sale of these shares - CIT A as well as the Tribunal both had gone to the factual findings pertaining to the methodology adopted by the valuer in valuing the shares - UNION OF INDIA V AZADI BACHAO ANDOLAN & ANR. (2003 (10) TMI 5 - SUPREME COURT) - We have also noticed that the Assessing Officer except for doubting such valuation, on the basis of circumstances, did not have anything concrete at hand to hold that was not the correct price - In the circumstances, we do not find that the Tribunal had committed any error appeal decided against the department. Once the transaction is genuine merely because it has been entered into with a motive to avoid tax, it would not become a colourable devise and consequently earn any disqualification.
Issues Involved:
1. Justification of the Tribunal in deleting the addition of Rs. 6,43,81,967 by not considering the tax exploitative scheme. 2. Justification of the Tribunal in not appreciating the lack of commercial purpose in the transaction of Cumulative Convertible Preference Shares (CCPS) to avoid tax. Detailed Analysis: Issue 1: Justification of the Tribunal in Deleting the Addition The Revenue appealed against the judgment of the Income Tax Appellate Tribunal (ITAT), which deleted the addition of Rs. 6,43,81,967. The Revenue argued that the assessee adopted a tax exploitative scheme to defraud the revenue. The factual background involved the assessee, a limited company, selling its plant and machinery for Rs. 8.95 Crores, resulting in a short-term capital gain of Rs. 6.37 Crores. Concurrently, the assessee sold 12,00,000 CCPS at Rs. 6.25 per share, incurring a long-term capital loss of Rs. 6.34 Crores, which was set off against the capital gain. The Assessing Officer (AO) disallowed the loss, citing it as a colorable device for tax avoidance, referencing the McDowell & Company Limited case. However, the CIT (A) reversed this decision, stating the transactions were legitimate tax planning. The Tribunal upheld the CIT (A)'s decision, confirming the valuation report's validity. The High Court observed that both the CIT (A) and the Tribunal found the valuation report did not suffer from any infirmity. The AO doubted the valuation but did not obtain an independent valuation. The High Court noted that merely because the assessee claimed set off of capital loss against capital gain, it could not be branded as a colorable device if both transactions were genuine and traded at proper valuation. The Tribunal's decision was upheld, confirming no error was committed. Issue 2: Justification of the Tribunal in Not Appreciating the Lack of Commercial Purpose The Revenue contended that the Tribunal failed to appreciate the lack of commercial purpose in the transaction of CCPS, aimed solely at tax avoidance. The AO highlighted several defects, including the sale of shares at a heavy loss despite being acquired at a high cost and the lack of liquidity crisis. The AO concluded the transaction had no commercial purpose apart from tax avoidance, branding it a colorable device. The CIT (A) addressed each objection, confirming the valuation report's correctness and the necessity of the transaction despite the liquidity argument. The Tribunal affirmed this, detailing the valuation methods used, including the Net Assets value method and Profit earnings method, concluding the valuation was accurate and legitimate. The High Court emphasized that the AO's primary concern was the timing of the transactions, which alone could not presume tax avoidance. The Court reiterated that genuine transactions, even if aimed at tax planning, are permissible if achieved through legitimate means. The Tribunal's detailed examination of the valuation method and the absence of concrete evidence from the AO against the valuation led the High Court to dismiss the Revenue's appeal. Conclusion: The High Court dismissed the Revenue's appeal, confirming that both the CIT (A) and the Tribunal correctly validated the valuation report and the transactions' legitimacy. The Court held that genuine transactions aimed at tax planning do not constitute a colorable device, and the Revenue's objections lacked substantial evidence. The appeal was dismissed, with no question of law arising.
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