2014 (12) TMI 760 - AT - Income Tax

Disallowance on Short term capital loss AO observed that shared purchased by assessee on an extraneous consideration Violation of section 40A(2a)(b) Held that - In the case of Dy. CIT vs. Shri. Sanjay Gupta (2014 (12) TMI 793 - ITAT LUCKNOW) the Tribunal has taken cognizance of all these facts and has held that if the entire shareholdings of the assessee in SSAIL were sold to some other company at a lesser rate in the original shareholdings the assessee may incur long term capital loss but the assessee cannot incur short term capital loss by purchasing fresh shares at an inflated rate and to sell it out at a nominal rate. The Tribunal has also observed in that order that whatever value of the shares are declined it was declined upto September 2007 and thereafter there was no decline in the value of shares as it was purchased and sold within a period of three months. In that case the Tribunal has only allowed long term capital loss to the assessee and not short term capital loss. Following the decision in case of Dy. CIT. -4 Kanpur Versus Shri Sanjay Gupta and others 2014 (12) TMI 793 - ITAT LUCKNOW the assessee has not claimed any long term capital loss. Only short term capital loss was claimed on purchase made between 11.9.2007 to 12.12.2007 and the sales made on 15.12.2007. The purchase and sales were made within a short period therefore there cannot be change in the market value of shares. Therefore there is no question of short term capital loss to be suffered by the assessee. - Decided in favour of revenue.

Summary

Issues Involved:
1. Legitimacy of short-term capital loss claimed by the assessee.
2. Compliance with Section 40A(2a)(b) of the Income-tax Act, 1961.
3. Determination of the market value of unlisted shares.
4. Assessment of transactions as sham or genuine.

Detailed Analysis:

1. Legitimacy of Short-Term Capital Loss Claimed by the Assessee:
The primary issue revolves around the legitimacy of the short-term capital loss amounting to Rs. 7,85,92,860/- claimed by the assessee. The assessee purchased shares of M/s Shakumbari Sugar & Allied Industries Ltd. (SSAIL) at a higher rate and sold them within a short period at a significantly lower rate, resulting in the claimed loss. The Assessing Officer (AO) deemed the entire transaction of purchase and sale of shares as sham, citing extraneous considerations and the benefit to preference shareholders, including the assessee himself, who was a promoter director of the company. The AO's detailed enquiry revealed that the shares were purchased at Rs. 27/- per share on 11.09.2007 and sold at Rs. 3.02 per share on 15.12.2007. The AO concluded that the transactions were not normal and were undertaken to benefit group companies and family members, thus disallowing the claimed loss.

2. Compliance with Section 40A(2a)(b) of the Income-tax Act, 1961:
The AO argued that the transactions violated Section 40A(2a)(b) of the Income-tax Act, which deals with disallowance of expenses incurred for the benefit of related parties. The AO highlighted that the shares were acquired at a face value and a substantially higher price, knowing that the market value was much lower. The transactions were aimed at benefiting preference shareholders and lenders of unsecured loans, who were group companies and family members of the assessee. This led to the conclusion that the transactions were of a sham character and not allowable under the Act.

3. Determination of the Market Value of Unlisted Shares:
The AO emphasized that since SSAIL was a closely held company and its shares were not listed, the market value of the shares should be determined based on the net asset value of the company on specific dates (11.09.2007, 07.12.2007, 12.12.2007, and 15.12.2007). The AO contended that the assessee inflated the purchase price and sold the shares at a nominal rate to book the short-term capital loss. The Tribunal, in a similar case (Dy. CIT vs. Shri. Sanjay Gupta), held that the market value of unlisted shares should be worked out on the basis of the net asset value of the company, and any short-term capital loss should be allowed only if the market value supports it.

4. Assessment of Transactions as Sham or Genuine:
The Tribunal considered the facts and submissions and found that the transactions were not genuine. The Tribunal noted that the assessee, being a promoter director, was fully aware of the company's financial situation and the impending sale. The purchase of shares at an inflated rate and their subsequent sale at a nominal rate within a short period were not normal commercial transactions. The Tribunal concluded that the transactions were undertaken to benefit preference shareholders and lenders of unsecured loans, who were related parties. Consequently, the Tribunal upheld the AO's decision to disallow the short-term capital loss.

Conclusion:
The Tribunal set aside the order of the CIT(A) and restored the AO's decision, disallowing the short-term capital loss claimed by the assessee. The Tribunal emphasized that the market value of unlisted shares should be determined based on the net asset value of the company, and transactions aimed at benefiting related parties and booking artificial losses are not allowable under the Income-tax Act. The appeals of the Revenue were allowed, and the orders of the CIT(A) were set aside.