2014 (9) TMI 164 - AT - Income Tax

Genuineness of loss on sale of shares Consideration of Cost of acquisition of shares sold against recomputed capital gain Held that - The assessee is engaged in the business of share broking, trading and dealing in shares and securities - without giving any justification, the CIT(A) has directed the AO to allow loss of ₹ 2 crore against capital gains earned on sale of BSE shares - CIT(A) has also mentioned merger of GDSS in the assessee company as one of the reason for sale of shares at a loss - this aspect was not stated before the AO nor there was any argument on this point - since the sales was to the close relative, the actual price of the share as on the date of sale is required to be seen for determining the true profit or loss on sale of shares - the GDSS is a private limited company, the value of share is to be determined as per the NAV, which has not been done by the CIT(A) - The finding of the CIT(A) was to the effect that since dividend was not declared by GDSS, the discount is to be allowed while valuing the price of shares at the time of sale, is not correct insofar as record shows that GDSS earned sold profit of ₹ 1.40 crores in the financial year 2005-06 and ₹ 1.95 crores in the financial year 2006-07 relevant to the AY 2007-08 - there was no justification in the order of CIT(A) for allowing any discounting factor while working out price of shares so sold the order of the CIT(A) in directing the AO to allow bogus loss of ₹ 2 crores is set aside and the matter is remitted back to the AO for fresh adjudication after finding out value of share of GDSS as per NAV in the year of sale. Share allotted to the assessee by BSE in lieu of its membership card was sold by the assessee during the year - long term capital gain arose thereon was computed by the AO by taking the WDV of membership card so allotted - The CIT(A) deleted the addition so made by observing that u/s 55(2)(ab) was introduced by Finance Act, 2001, according to which in case of sale of capital asset being equity share allotted to the shareholder of a recognized stock exchange in India under scheme of demutualization, shall be the cost of acquisition of its original membership of the exchange - CIT(A) found that the original cost of acquisition of membership card at ₹ 91,23,000 - the CIT(A) directed the AO to recomputed the capital gain on sale of shares of BSE by taking the cost of acquisition at ₹ 91,23,000/- and allowing indexation thereon as per provisions of law there was no infirmity in the order of CIT(A) for directing the AO to re-compute capital gain by taking cost of acquisition at ₹ 91,23,000/- Decided partly in favour of revenue.

Summary

Issues Involved:
1. Whether the loss of Rs. 2 crores on the sale of shares of M/s GDSS should be considered genuine.
2. The appropriate cost of acquisition for 9123 shares sold and the recomputation of capital gain.
3. Validity of the CIT(A)'s order and whether it should be set aside in favor of the Assessing Officer's (AO) findings.

Issue-wise Detailed Analysis:

1. Genuineness of the Loss on Sale of Shares of M/s GDSS:
- The assessee purchased 1,000,000 shares of M/s GDSS at Rs. 30 per share (including a Rs. 20 premium) and sold them for Rs. 10 per share, resulting in a claimed capital loss of Rs. 2 crores.
- The AO disallowed the loss, considering it bogus, arguing the shares were unquoted and sold to family members, and the loss was artificially created to offset short-term capital gains.
- The CIT(A) allowed the loss, noting the shares were sold at a justified price considering the lack of dividend declaration by GDSS and the impending merger that would have nullified the shares.
- The Tribunal found that the CIT(A)'s justification for discounting due to non-declaration of dividends was incorrect, as GDSS had profits in previous years. The case was remanded to the AO to determine the share value based on Net Asset Value (NAV) at the time of sale.

2. Cost of Acquisition for 9123 Shares Sold and Recomputed Capital Gain:
- The AO calculated the long-term capital gain based on the written-down value (WDV) of the BSE membership card, which was converted into shares, arguing that taking the original cost would result in double deduction.
- The CIT(A) disagreed, stating that under Section 55(2)(ab), the cost of acquisition should be the original cost of the BSE membership card, not the depreciated value.
- The Tribunal upheld the CIT(A)'s decision, directing the AO to recompute the capital gain using the original cost of Rs. 91,23,000 for the BSE shares and allowing indexation from the date of acquisition of the membership card.

3. Validity of CIT(A)'s Order:
- The Tribunal found that the CIT(A) had erred in allowing the loss on the sale of GDSS shares without proper justification and directed the AO to reassess the value based on NAV.
- However, the Tribunal upheld the CIT(A)'s decision regarding the cost of acquisition for the BSE shares, agreeing that the original cost should be used for capital gain computation.

Conclusion:
- The appeal was partly allowed for statistical purposes. The AO's decision regarding the GDSS shares was set aside, and the matter was remanded for reassessment based on NAV. The CIT(A)'s decision on the cost of acquisition for BSE shares was upheld, requiring the AO to recompute the capital gain accordingly.