2012 (5) TMI 817 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of addition of Rs. 42,02,500/- related to share trading loss.
2. Applicability of provisions of sec. 40A(2).

Summary:

Issue 1: Confirmation of addition of Rs. 42,02,500/- related to share trading loss

The assessee filed an appeal against the order dated 11.02.2011 of the CIT-(A)-VI, Kolkata, for A.Y. 2007-08, contesting the confirmation of addition of Rs. 42,02,500/- related to share trading loss. The assessee, engaged in share trading and granting loans, incurred a loss of Rs. 42,02,500/- from share trading while earning Rs. 43,89,942/- as interest income. The AO questioned the business logic behind selling shares at a huge loss and suspected the transactions with sister concerns as a tax evasion tactic. The AO, citing the Supreme Court's decision in Mcdowell & Co. Ltd. vs. CTO [1985] 154 ITR 148 (SC), concluded that the transactions were colorable devices to evade taxes and disallowed the loss.

On appeal, the CIT(A) upheld the AO's decision, stating that the sales were not genuine and were a colorable device to book losses and reduce tax liability. The CIT(A) noted that the shares were sold to sister concerns controlled by the same management, and the transactions were timed to manipulate taxable income.

The assessee argued that the sales were genuine, supported by account payee cheques and subsequent resale of shares by the sister concerns to unrelated parties. The assessee provided valuation reports and sale confirmations to substantiate the transactions.

Issue 2: Applicability of provisions of sec. 40A(2)

The AO initially considered applying sec. 40A(2) but later disallowed the loss on the grounds of the transactions being with sister concerns. The assessee contended that the genuineness of the sales was not disputed and that the provisions of sec. 40A(2) were not applicable.

Judgment:

The ITAT Kolkata, after reviewing the submissions and evidence, found no justification in disbelieving the transactions. The Tribunal noted that the sister concerns had subsequently sold the shares at a loss, and the valuation reports were provided. Therefore, the ITAT set aside the orders of the revenue authorities and directed the AO to delete the addition made on account of sales.

Conclusion:

The appeal of the assessee was allowed, and the addition of Rs. 42,02,500/- was deleted. The judgment emphasized that the transactions were genuine and not colorable devices for tax evasion. The order was pronounced in court on 23.05.2012.