2015 (10) TMI 1384 - AT - Income Tax

Long-term capital loss (LTCL) arising on sale of shares allowed by CIT(A) - Held that - It is an undisputed fact that the assessee had sold the shares of Suvik Hitech P. Ltd. which is a private limited company and is not listed on the stock exchange. The Commissioner of Income-tax (Appeals) while granting the relief has given a finding that the shares were transferred to the Hindu undivided family of the assessee s father which is a separate legal entity and the consideration of the same was received by the assessee from the said Hindu undivided family through banking channels. He has also noted that the shares were sold at a price which were on the basis of a report of the Government approved valuer. The Commissioner of Income-tax (Appeals) has further given a finding that the decision in the case of McDowell and Co. Ltd. (1985 (4) TMI 64 - SUPREME Court) and the other case laws were not applicable to the facts of the case. He thus relying on the decision of the hon ble apex court in the case of Union of India v. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME Court held that the transaction of sale of shares in the present case cannot be considered as a sham or a device to void tax. Before us, the learned Departmental representative could not controvert the findings of the Commissioner of Income-tax (Appeals) by bringing any contrary material on record. In view of the aforesaid facts, we find no reason to interfere with the order of the Commissioner of Income-tax (Appeals) and thus this ground of the Revenue is dismissed. - Decided in favour of assessee.

Summary

Issues:
1. Allowance of long-term capital loss on sale of shares of a private company.
2. Dispute regarding the genuineness of the transaction for tax evasion.
3. Application of legal precedents in determining tax liability.
4. Transfer of shares to a Hindu undivided family and consideration received.

Analysis:

Issue 1: Allowance of Long-term Capital Loss
The Revenue appealed against the order of the Commissioner of Income-tax (Appeals) allowing the claim of long-term capital loss arising from the sale of shares of a private company. The Assessing Officer initially denied the claim, suspecting tax evasion due to the artificial booking of capital loss. However, the Commissioner of Income-tax (Appeals) found in favor of the assessee, emphasizing that the shares were transferred to a separate legal entity, the Hindu undivided family of the assessee's father, with consideration received through legitimate banking channels. The Commissioner concluded that the transaction was genuine and not a sham to evade tax, citing relevant legal precedents.

Issue 2: Dispute Over Transaction Genuineness
The Assessing Officer contended that the transaction involving the sale of shares was not genuine and was a colorable device for tax evasion, following the decision in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). However, the Commissioner of Income-tax (Appeals) disagreed, noting that the shares were sold at a price supported by a Government-approved valuer's report and transferred to a legally distinct entity, the Hindu undivided family. The Commissioner highlighted the lack of evidence supporting the Assessing Officer's allegations of tax evasion, ultimately allowing the long-term capital loss claimed by the assessee.

Issue 3: Application of Legal Precedents
The Commissioner of Income-tax (Appeals) referenced legal precedents such as the decision in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) to support the conclusion that the transaction was not a sham or a device to avoid tax. The Commissioner differentiated the facts of the case from those in McDowell and Co. Ltd.'s case [1985] 154 ITR 148 (SC), emphasizing the genuine nature of the transaction and the absence of tax evasion motives. This analysis led to the dismissal of the Revenue's appeal.

Issue 4: Transfer of Shares to Hindu Undivided Family
The key point of contention revolved around the transfer of shares to the Hindu undivided family of the assessee's father, which the Commissioner of Income-tax (Appeals) deemed as a legitimate transaction. The consideration for the shares was received through proper banking channels, and the shares were sold at a valuation supported by an approved valuer's report. This transfer to a separate legal entity played a crucial role in establishing the genuineness of the transaction and justifying the allowance of the long-term capital loss claimed by the assessee.

In conclusion, the Appellate Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) to allow the long-term capital loss claimed by the assessee, dismissing the Revenue's appeal based on the genuine nature of the transaction and the absence of tax evasion motives as evidenced by the transfer of shares to a separate legal entity.