2013 (10) TMI 1236 - HC - Income Tax

Genuineness of long term capital loss - tax planning - Whether transaction of transferring the shares of the group companies at low price causing long term capital loss and sale of shares of Mackhinon & Mackenzie Co. Ltd., at high price, making short term capital gains, thereby setting off the short term capital gains against the long term capital loss, is a colourable device to evade tax Held that - Price at which the Respondents had purchased the shares and thereafter has sold the shares, is not in dispute - The transaction in respect of the sale of shares of Hede Navigation Ltd, resulting in long term capital loss had preceded the transaction involving the short term capital gains selling the shares of Mackinon & Mackenzie Ltd. The Commissioner also noted that the loss transactions therefore cannot be said to have been influenced by the gain transactions - Assessment Officer has not disputed about any of the transactions that have been duly completed under the law nor that the consideration received was not the market price. It is further noted that the shares of Mackinon & Mackenzie Ltd., were sold at the price quoted at the Stock Exchange whereas low price of M/s. Hede Navigation Ltd., shares at the rate of 10 paisa per share stands explained by the fact admitted by the Assessing Officer that the said Company was in red. The Commissioner also noted that even in case the second transaction had not taken place, the long term capital loss would have been accepted by the Assessing Officer and the Company would have been allowed to carry forward the said loss - Where transactions were genuine, such long term capital loss can be allowed to be set off. In the Mcdowells case 2009 (5) TMI 27 - SUPREME COURT , it has been held that approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on separate entity principle i.e. treat a company as a separate person. The Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies and other entities subject to income tax. Companies and other entities are viewed as economic entities with legal independence vis- -vis their shareholders/participants. It is fairly well accepted that a subsidiary and its parent are totally distinct taxpayers. Consequently, the entities subject to income tax are taxed on profits derived by them on stand-alone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders/participants. Furthermore, shareholders/participants that are subject to (personal or corporate) income tax, are generally taxed on profits derived in consideration of their shareholding/ participations, such as capital gains. Nowadays, it is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct taxpayers. In the present case, Tribunal has not committed any error in coming to the conclusion that the transaction arrived at by the Respondents was legitimate within the framework of law. As such, there is nothing on record to assume that the transaction was dubious and that the exercise was to avoid tax by a colourable device. The Tribunal found that the transactions were in accordance with law and have been duly implemented Decided against the Revenue.

Issues Involved:
1. Whether the ITAT was justified in holding that the transaction of transferring shares at a low price causing long-term capital loss and the sale of shares at a high price making short-term capital gains, thereby setting off the short-term capital gains against the long-term capital loss, is a colourable device to evade tax.

Issue-wise Detailed Analysis:

1. Substantial Question of Law:
The core issue revolves around whether the Income Tax Appellate Tribunal (ITAT) was correct in determining that the transactions in question were not colourable devices aimed at tax evasion. The transactions involved the transfer of shares at a low price, causing long-term capital loss, and the sale of shares at a high price, resulting in short-term capital gains, which were then set off against each other.

2. Facts of the Case:
The Respondent, a company engaged in travel agency and consultancy, filed a return of income on 02.12.1996. The assessment was reopened under Section 147 of the Income Tax Act, and the Respondent's claim of long-term capital loss was disallowed, leading to additional tax. The Commissioner of Income Tax (CIT) reversed this decision, stating that the transactions were genuine and not colourable. The ITAT upheld the CIT's decision, leading to the present appeal under Section 260A of the Income Tax Act.

3. Appellant's Arguments:
The Appellant's counsel argued that the transactions were misconstrued by the lower authorities and were indeed colourable, aimed at evading tax. The shares were sold at a farcical price to group companies managed by the same persons, solely to evade tax on the sale of other shares. The counsel cited the Supreme Court's decision in Mc Dowell & Co. Ltd. vs. CIT, arguing that the transactions were a device to avoid capital gains tax.

4. Respondent's Arguments:
The Respondent's counsel contended that the appeal was admitted without a hearing and that the substantial question of law does not arise. The findings of the ITAT, which declared the transactions genuine and the prices not inflated, were not challenged. The counsel cited Supreme Court judgments in Vijay Kumar Talwar vs. Commissioner of Income Tax and M. Janardhana Rao vs. Joint Commissioner of Income Tax to support their argument that the transactions were legitimate and not colourable.

5. High Court's Analysis:
The High Court examined the findings of the CIT and ITAT, noting that the transactions were genuine and the prices at which the shares were sold were not disputed. The shares of Mackinon & Mackenzie Ltd. were sold at market price, and the low price of Hede Navigation Ltd. shares was justified by the company's financial condition. The Court emphasized that the findings of fact by the CIT and ITAT were based on substantial evidence and could not be re-assessed.

6. Legal Precedents:
The Court referred to the Supreme Court's observations in M. Janardhana Rao vs. Joint Commissioner of Income Tax, which clarified that an appeal under Section 260A can only be in respect of a substantial question of law. The Court also cited the Supreme Court's decision in Vodafone International Holdings BV vs. Union of India, which distinguished between legitimate tax planning and colourable devices.

7. Conclusion:
The High Court concluded that the transactions were legitimate within the framework of law and not dubious or aimed at tax evasion. The substantial question of law framed by the Court was answered against the Appellants, and the appeal was dismissed.

Final Judgment:
The appeal was dismissed, affirming the decisions of the CIT and ITAT that the transactions were genuine and not colourable devices to evade tax.

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