2019 (3) TMI 1713 - AT - Income Tax

Bogus Short Term Capital Loss - AO was of the view that assessee had created a colourable device with a motive to avoid the tax and that is why the entire short term capital loss was generated to avoid the tax on the long term capital gain - HELD THAT - AO had not been able to substantiate the conclusion drawn by him because from the factual findings we noticed that the entire long term gain or substantial long term gain was not wiped out by the short term capital loss. The Long Term Capital Gains was to the tune of Rs. 911.84 crores whereas the short term capital loss which had been set-off was only to the tue of Rs. 81.69 crores. Hence in the circumstances it is difficult to ipso-facto attribute any motive to the assessee for avoiding the Tax. Purchase of shares were bona-fide as shares were transferred in name of Assessee and assessee has paid the actual consideration. In this respect the assessee had entered into a duly executed share purchase agreement with the above companies so as to buy out their stake. The said transfers was duly recorded in the Annual Returns of the companies for the year filed with the ROC (Registrar of Companies). Thus in this way as per the assessee the transfer of shares had taken place within the four corners of law. It is important to mention here that the share Purchase agreements bear the signature of witnesses and in case the AO doubted the genuineness of the said share purchase agreements then he could have verified the same by examining the witnesses but the said exercise had not been done by the AO. The other objection raised by the AO was that no actual consideration was paid for the purchase of the shares but the transfer was by merely passing a journal entry and thus there was a book loss or paper loss. In this respect we find from the records that purchase consideration was paid through banking channels and was thus not merely by passing journal entries. Therefore this objection raised by the AO is factually incorrect. In the present case the shares were purchased out of moneys provided by M/s SVJ holdings which is a third party and further shares were purchased at cost to group company and not at a premium. Also such circuitous nature of transactions are not involved in the facts of the present case. We are of the view that the treatment of short term capital loss as not genuine is not in accordance with law. Thus the findings of Lower authorities are based on assumptions and without considering the facts and events in correct perspective. Therefore keeping in view the totality of facts and circumstances of the present case we are of the considered view that the disallowance of short term capital loss is not justified. Resultantly this ground raised by the assessee stands allowed. Disallowance of the claim paid towards software consultancy charges - Allowable revenue expenditure u/s 37(1) - HELD THAT - We are of the view that the expenses incurred by the assessee for carrying out business activity were not personal expenses and were incurred for expanding the business and thus in this way the same were incurred in connection with the business of the assessee. Therefore the same are allowed as revenue expenses.

Summary

Issues Involved:
1. Disallowance of Short Term Capital Loss
2. Disallowance of Software Consultancy Expenses

Detailed Analysis:

1. Disallowance of Short Term Capital Loss:
The assessee challenged the order of the CIT(A) upholding the AO's disallowance of the short-term capital loss of Rs. 81,69,60,025/-. The AO concluded that the short-term capital loss was created as an afterthought to reduce the tax incidence arising on the sale of shares of Asianet Communications Ltd. The AO's findings included:
- The assessee failed to furnish the basis of valuation for the purchase price of the shares.
- The assessee did not provide relevant balance sheets or specific occurrences justifying the huge variation in purchase and sale prices.
- The transactions were reflected only in journal entries, raising doubts about their genuineness.

The CIT(A) confirmed the AO's order, stating that the assessee did not demonstrate how the purchase of shares was a strategic investment and failed to justify the high purchase prices and subsequent sales at face value.

However, the Tribunal found that the AO could not substantiate the conclusion that the short-term capital loss was a tax avoidance measure. The Tribunal noted that the long-term capital gains were significantly higher than the short-term capital loss, indicating no motive for tax avoidance. The Tribunal also observed that the purchase and sale of shares were genuine transactions, supported by documentary evidence, and the purchase consideration was paid through banking channels. The Tribunal concluded that the disallowance of the short-term capital loss was not justified and allowed the assessee's appeal on this ground.

2. Disallowance of Software Consultancy Expenses:
The assessee challenged the disallowance of Rs. 2,42,66,000/- paid towards software consultancy charges to M/s. Axis Aerospace and Technologies (P) Ltd. The AO and CIT(A) disallowed the expenses, stating they were not for the business of the assessee.

The Tribunal, after hearing both parties, found that the expenses were incurred for the purpose of expanding the business activity of the assessee company. The expenses were related to upgrading broadcasting software and integrating various embedded software required for running a channel. The Tribunal noted that the expenditure was incurred purely with a view to expanding the business and was not personal in nature. Citing relevant case laws, the Tribunal concluded that the expenses were revenue in nature and allowable under section 37(1) of the IT Act. Therefore, the Tribunal allowed the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, holding that the disallowance of the short-term capital loss and software consultancy expenses was not justified. The Tribunal directed that the short-term capital loss and software consultancy expenses be allowed as claimed by the assessee.