2014 (12) TMI 793 - AT - Income Tax

Violation of section 40A(2A)(b) or not Assessee being preference shareholder of Company Claim of ampount on capital loss by assessee in sale of old shares not cleared - Held that - Revenue contended that the purchase price paid by these assessees to SSAIL for purchase of shares on 07/12/2007 is excessive because only after 8 days, these shares were sold by the assessee at ₹ 3.15 per share - even if it is noted by the AO that the sale price in respect of fresh purchase of shares to the extent of 19 lac shares of SSAIL on 07/12/2007 on the face value of ₹ 10/- per share was excessive, then he can disallow the Short Term Capital Loss in respect of sale of 19 lacs shares but the loss in respect of remaining old shares has to be allowed as Long Term Capital Loss - It is not understandable as to when 19 lacs shares were acquired by the assessee on 07/12/2007, how the share held in SSAIL on 15/12/2007 was only 10.10 lac shares - the shar holding of Shri Yogendra Mohan Gupta is stated to be 21.60 lac shares including 19 lac shares acquired by the assessee on 07/12/2007 it is not clear as to the correct figure regarding total shareholding and how much long term capital loss was claimed by the assessee in respect of sale of old shares held by the assessee and whether the same was allowed by the AO or not - The order of CIT (A) is without throwing any light on these aspects. The fresh shares should be considered as issued and thereafter sold on such market value per share of the old shares for raising same amount resulting in increase in number of shares issued because whatever loss is incurred by the company and consequently the shareholders, the same was incurred till this date and it cannot be said that further loss was incurred between 07.12.2007 to 15.12.2007 - the loss in the hands of the shareholder should also be in respect of old shares only held by him on 07.12.2007 - more shares were issued to garner enough funds for making repayment of preference shares along with the accumulated dividend and other liabilities - increased long term capital loss on sale of old shares should be allowed to the assessee as long term capital loss - CIT (A) should decide the issue in this manner - the purchase price paid by the assessee for acquiring new shares on 07/12/2007 has to be determined as per the market value of the shares of the company SSAIL on 07/12/2007 - new shares at a price below than the face value, such issue of shares at a discount is permissible as per the Companies Act and hence, there is no problem on that aspect - thus, the matter is remitted back to the CIT(A) for fresh consideration Decided in favour of revenue.

Summary

Issues:
Appeals by Revenue against CIT(A) orders for assessment year 2008-09; Common issue of excessive purchase price of shares leading to disallowance under section 40A(2A)(b) of the IT Act.

Analysis:
The Appellate Tribunal considered six appeals filed by the Revenue against CIT(A) orders for assessment year 2008-09, all concerning the excessive purchase price of shares by different assessees. The issue was whether the purchase price paid by the assessees was excessive, justifying disallowance under section 40A(2A)(b) of the IT Act. The Revenue contended that the shares were bought at a high price and sold at a significantly lower amount, indicating a violation. The Tribunal noted discrepancies in the assessment order regarding the treatment of short-term and long-term capital losses, urging for clarification. The AR of the assessee argued that the transaction was legitimate and as per agreed conditions between unrelated entities, supported by documentary evidence. The Tribunal emphasized the need for a thorough examination of facts and computations to determine the actual market value of shares and the legitimacy of the transaction.

The Tribunal found that the Assessing Officer's objection to the purchase price was based on the subsequent sale of shares at a lower price, leading to a substantial loss. However, due to discrepancies in the assessment order and lack of clarity on the treatment of old shares, the matter was remanded to the CIT(A) for a fresh decision. The Tribunal directed the CIT(A) to calculate the market value of shares on the purchase date and determine the sale price accordingly, ensuring no profit or loss on new shares but allowing an increased long-term capital loss on old shares. The Tribunal set aside the CIT(A) order and instructed cooperation from the assessee in providing necessary details for a revised decision.

Regarding judicial pronouncements cited by both parties, the Tribunal deemed them irrelevant due to incomplete facts before them. The Tribunal clarified the permissibility of issuing shares below face value as per the Companies Act. Consequently, the order of the CIT(A) was overturned, and the matter was sent back for reevaluation based on the Tribunal's guidelines. The assessee was urged to cooperate in providing essential information for a revised decision by the CIT(A). Ultimately, the appeal of the Revenue was allowed for statistical purposes in all six cases due to the common issue and identical facts presented.