2016 (2) TMI 499 - AT - Income Tax

Disallowance of short term capital loss on sale of shares - whether entire transaction was sham and arranged with a view to book an artificial loss when in fact the transactions of purchase as also the sale have been carried out at the prevailing market rates by actual payment / receipt of funds Held that - The assessee had no bonafide reason or cause in September 2008 which forced the assessee to sale shares during the lock-in period which resulted into huge loss to the assessee. In this situation we are also inclined to agree with the conclusion of the authorities below that sale of share was effected between two group companies having the same directors about the shares of the group company during the lock-in period wherein the transactions of sale and purchase of these shares were expressly prohibited by the allotting authority during lockin period which was to be expired on 30.03.2009. There was no good cause for the assessee to sale these shares back to HPC group company which was purchased from HPC and thus we have hasitation to hold that the transaction of sale of shares under taken by the assessee company during the relevant financial period with group company was a sham transaction and the loss booked under said transaction cannot be held as allowable claim of short term capital loss for the assessee. Finally we uphold the impugned order which confirm the disallowance and addition made by the AO. - Decided against assessee Disallowance u/s 14A - Held that - When we analyse the facts and circumstances of the present case admittedly and undisputedly the assessee has not claimed any exempt income for AY 2009-10 thus in the view of dicta laid down by Hon ble Jurisdictional High Court of Delhi in the case of Holcim India (supra) we hold that there could be not disallowance u/s 14A read with rule 8D of the Act and respectfully following the same the issue is decided in favour of the assessee

Summary

Issues Involved:
1. Disallowance of Rs. 4,84,73,750/- as short-term capital loss on sale of shares.
2. Disallowance of Rs. 8,48,019/- under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 4,84,73,750/- as Short-Term Capital Loss on Sale of Shares:

The assessee claimed a short-term capital loss of Rs. 4,84,73,750/- on the sale of shares. The Assessing Officer (AO) disallowed the claim, deeming the transaction a sham intended to book artificial losses. The shares in question were purchased from Har Prashad & Company Pvt. Ltd. (HPC) at Rs. 83.79 per share and sold back to HPC at Rs. 53.96 per share during a lock-in period, which was set to expire on 31.03.2009. The AO noted that the shares were not transferable during this lock-in period as per SEBI guidelines, and thus, the transactions were legally prohibited.

The CIT(A) upheld the AO's decision, stating that the tripartite agreement between the group companies could not override statutory conditions, and the transactions were arranged to book artificial losses for tax evasion. The Tribunal agreed with the lower authorities, emphasizing that the transactions between the group companies during the lock-in period were not genuine and were aimed at evading taxes.

The assessee argued that the transactions were genuine and supported by complete evidence, including bank payments and sale invoices. However, the Tribunal found inconsistencies in the assessee's explanations regarding the urgency to sell the shares and noted that the tax payments cited by the assessee were irrelevant to the claimed urgency. The Tribunal concluded that the transactions were sham and upheld the disallowance of the short-term capital loss.

2. Disallowance of Rs. 8,48,019/- under Section 14A of the Income Tax Act:

The assessee contested the disallowance of Rs. 8,48,019/- made by the AO under Section 14A of the Income Tax Act, arguing that no exempt income was claimed during the year. The Tribunal noted that the assessee had not claimed any exempt income for the relevant assessment year and cited the Delhi High Court's decision in CIT vs. Holcim India Pvt. Ltd., which held that no disallowance under Section 14A could be made if there was no exempt income.

Respectfully following the High Court's decision, the Tribunal directed the AO to delete the disallowance of Rs. 8,48,019/- under Section 14A, as no exempt income was claimed by the assessee.

Conclusion:

The Tribunal upheld the disallowance of Rs. 4,84,73,750/- as a short-term capital loss, deeming the transactions as sham and intended to book artificial losses. However, the Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A, directing the AO to delete the addition of Rs. 8,48,019/- since no exempt income was claimed. The appeal was thus partly dismissed and partly allowed.