2015 (3) TMI 925 - AT - Income Tax

Treatment to loss - business loss v/s speculation loss - Held that - Ld. Counsel for the assessee has demonstrated that one of the objects of the assessee-company is financing and major portion of the capital is deployed for the purpose of advancing loan. Even in the balance-sheet, the interest income is shown as ₹ 64,98,590/-. Therefore, we do not find any good reason to interfere into the order of the ld. CIT(A) directing the Assessing Officer to treat the loss of ₹ 68,49,965/- as business loss instead of treating the same as speculation loss. - Decided against revenue. Sham transaction - CIT(A) confirming the transaction entered with related parties as sham transaction in respect of loss incurred in share & securities - Held that - The assessee sold the shares prior to purchases. The assessee sold shares at lower rates and within a day or two days purchased at higher rates and claimed losses on such transactions. The assessee could not offer explanation as to why such transactions were required to be executed between the family members leading into artificial losses.All transactions were off market transactions and were not executed through stock exchange.Shares were not actually delivered between the assessee and the concerned persons. All the transactions were only paper transactions, i.e. no delivery was effected for sales/purchases of shares.Bank pass book reveals that the assessee company had paid the difference (loss amount) on such transactions to these persons. No amount was received or paid by the assessee company on sales and purchases of such shares. The assessee has entered into speculation activities to avail the artificial loss created by such alleged transactions which were set off against the interest income. The gain arisen on such transactions have been shown by all these persons as income from other sources in their returns of income. Where purchase and sale of shares were done through cheques, which were not encashed, so that there was no movement of funds, the transactions being as between these persons and the assessee company itself without any explanation as to the need for the circumstances of transactions, such transactions could only be considered suspicious and are to be treated as sham transactions.Without prejudice to above, if at any stage it is held that the sham transactions are genuine, then also, the share transactions are in the nature of speculative transactions as per section 43(5) of the IT, Act, as no delivery was effected in this case on such transactions. These observations of the Assessing Officer have not been controverted by the assessee by bringing any contrary material on record. - Decided against assessee.

Summary

Issues Involved:
1. Treatment of loss as business loss vs. speculation loss.
2. Confirmation of transactions with related parties as sham transactions.

Issue-wise Detailed Analysis:

1. Treatment of Loss as Business Loss vs. Speculation Loss:
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which directed the Assessing Officer (AO) to treat the loss of Rs. 68,49,965/- as business loss instead of speculation loss. The AO had disallowed the adjustments of business loss and made additions treating transactions with related parties as sham. The CIT(A) held that the Explanation to Section 73 applies only after adjustments under Sections 70 and 71 of the Income-tax Act. The CIT(A) found that the assessee's major business was financing, and thus, the loss should be treated as business loss. The Revenue contended that the loss was speculative and thus should not benefit from the provisions of Section 73.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee demonstrated that financing was a significant part of its business, with more than 68% of capital deployed in financing. The Tribunal confirmed that the gross total income should be computed first under Sections 70 and 71, and only then should the applicability of Explanation to Section 73 be considered. The Tribunal found no evidence from the AO to suggest that the loss was intended to reduce tax incidence artificially. Thus, the Tribunal dismissed the Revenue's appeal, affirming the treatment of the loss as business loss.

2. Confirmation of Transactions with Related Parties as Sham Transactions:
The assessee appealed against the CIT(A)'s confirmation of transactions with related parties as sham, involving a loss of Rs. 34,80,608/-. The assessee argued that the transactions were genuine, supported by invoices, debit/credit notes, and payments made through cheques. The assessee also contended that off-market transactions are legal and valid.

The AO had observed discrepancies, such as transactions being executed off-market, sales made prior to purchases, and no actual delivery of shares. The AO treated these transactions as sham, noting that they appeared to be artificial losses created for tax avoidance. The Tribunal found that the assessee did not provide contrary material to dispute the AO's findings. Consequently, the Tribunal upheld the CIT(A)'s decision, confirming the transactions as sham and dismissing the assessee's appeal.

Assessment Year 2008-09:
For the Assessment Year 2008-09, the Tribunal noted that the issues and grounds were identical to those in the previous year (2007-08). Following the precedent set in the earlier year, the Tribunal dismissed both the Revenue's and the assessee's appeals for the year 2008-09.

Conclusion:
In conclusion, the Tribunal dismissed all appeals filed by both the Revenue and the assessee for the Assessment Years 2007-08 and 2008-09, upholding the CIT(A)'s decisions on both the treatment of loss and the confirmation of sham transactions.