2018 (12) TMI 1822 - AT - Income Tax

Validity of reopening of assessment u/s 147/148 - validity of reasons to believe - bogus claim of short term capital loss on sale of equity shares requirement to record the satisfaction - Non satisfaction statutory requirement U/s 151 - HELD THAT - AO in the concluding para of reasons recorded, assumed that all the transactions are bogus to form the belief that the income assessable in tax has escaped assessment. There is a wide disconnect between the reasons recorded and formation of belief which shows that the AO has not applied his independent mind while recording the reasons for reopening of the assessment. It is discernable from the record and reasons recorded by the Assessing Officer that the reopening is based on borrowed satisfaction. Hence, we hold that the reopening of assessment is not valid and the same is liable to be quashed Mechanical approval of reopening without application of mind - The satisfaction of the sanctioning authority may be in briefest manner but it shall reflect the application of mind of the authority. The requirement of recording the satisfaction is to reflect the mind of the authority and the same can be ascertained only from the reading of record and not from the reading of mind of the authority. Therefore, in absence of any satisfaction reflect from the record, the statutory requirement U/s 151 of the Act is not satisfied and consequently the notice issued U/s 148 of the Act is not valid for want of jurisdiction. Hence, in view of the peculiar facts of the case and binding precedent we hold that the approval granted U/s 151 of the Act is mechanical and without application of mind renders the notice issued U/s 148 of the Act as invalid and unsustainable in law. Accordingly, we quash the notice issued U/s 148 of the Act on this ground. Lack of jurisdiction of AO u/s 124 at the time of recording the reasons - Jurisdiction of the assessee was shown as transferred from ITO Ward 7(2), Jaipur to ITO Ward 3(1), Jaipur on 30/3/2016 however, the ld CIT-DR has filed copies of order dated 06/01/2015 alongwith letter of the Assessing Officer whereby the jurisdiction of the assessee was transferred from ITO Ward 7(2), Jaipur to ITO Ward 3(1), Jaipur with immediate effect. Order passed U/s 127 of the Act on 06/01/2015 was very much inexistence transferring the jurisdiction of the assessee from ACIT(OSD), Circle-7, Jaipur to ITO Ward 3(1), Jaipur, though, the same was not updated and reflected in the ITBA database maintained by the department. It is nothing but non-updating the information and data in the ITBA website of the department. There is another discrepancy in the record about the order passed U/s 127 of the Act dated 04/10/2016 which is shown in the ITBA database as the date of transfer on 17/10/2016. Therefore, the information available on ITBA database is not matching with the physical orders on record. However, once the physical orders are available on the record then the non-availability of same on the ITBA database would not change the fact of order passed U/s 127 of the Act. No substance or merit on this objection of the assessee and the same is dismissed. Disallowance of short term capital loss on transfer of share - Hon'ble Supreme Court in the case of CIT Vs. Malayalam Plantations Ltd. 1964 (4) TMI 9 - SUPREME COURT has held that it is prerogative of the businessman to organize its affairs in a manner best suited to it and the revenue authority cannot step into the shoes of business man. It is not for the revenue to attack the transaction on the ground that the same was imprudent. Once the transaction is treated as transfer of capital asset then the provisions of Section 40A(2) of the Act cannot be attracted due to the reason that the transaction is between the related parties. since the claim is short term capital loss and not the business loss suffered by the assessee, therefore, it would not attract the provisions of Section 40A(2) of the Act. Moreover, it is otherwise not a payment to the related party so as to fall in the category of transaction between the specified persons as per Section 40A(2) of the Act. We hold that the transaction of transfer of shares in question cannot be treated as non-genuine merely because the assessee incurred loss and set off of the same against the capital gain. Hence, the orders of the authorities below qua this issue are set aside and the addition made by the Assessing Officer is deleted. Disallowance of loss on sale of commercial space - understatement of the sale consideration - HELD THAT - Though the transaction is between the related parties but once the AO has not given a finding that the sale consideration is suppressed or understated then the transaction between the related parties cannot be held as bogus. Even otherwise when it is a transaction of sale of capital asset, there is no provision in the Act to adopt a deemed consideration on the principle of transfer pricing. The provisions of domestic transfer pricing has been brought into statute by the Finance Act, 2012 w.e.f. 01/4/2013, therefore, the said provision U/s 92BA of the Act are not applicable for the year under consideration. Since this is not a business transaction or sale of the stock in trade but it is a transaction falling under the provisions of Section 45 of the Act, therefore, the provisions of Section 40A(2)(b) of the Act are not applicable. There must be a consistency and uniformity of view while taking the decision by the Assessing Officer on the transaction arising and resulting from one common exercise of relinquishment of right by one party and acquisition of the same by another. Thus, the Assessing Officer is not permitted to take two opposite stance; one in the case of one party and another in the case of other party of the same transaction. When the transaction of purchase and sale is real as evident from the record as well as from the facts of payment and receipt of the consideration then the action of the Assessing Officer treating the transaction as sham or bogus is without any tangible material rather contrary to the facts duly supported and substantiated by evidence. The ld. CIT(A) has confirmed the disallowance on the similar lines as it was disallowed by the AO hence in absence of any fact or finding given by the AO that either the purchase price was excessive or the sale price is suppressed the addition made by disallowing the short term capital loss is not justified and the same is deleted. Profit on sale of shares - LTCG or STCG - HELD THAT - Once the plain and simple fact is not in dispute that what is transferred by the assessee is the shares of M/s Advance Automation Process Control Pvt. Ltd. and not the asset owned by the said company then the ownership of the asset held by the company does not effect by change of ownership of the company itself. The change in the shareholdings of the company shall not amount to change of the holding of asset by the company. It is settled proposition of law that the company is separate legal entity then its share holders. The asset owned by the company would remain the asset of the company irrespective of change of shareholding of such company. The changing hands of shares of company would amount the change of ownership of the company and not the change of ownership of the asset held by the company. Tax planning may be legitimate provided its within the framework of law and every tax payer is entitled to arrange its affairs so that his taxes shall be as low as possible and not bound to chose that pattern which will replenish the treasury. We hold that the transaction of sale of shares is a real transaction of transfer of shares and nothing else when there is no allegation of any fraudulent intention behind the transaction and avoidance of tax but the assessee has offered the income as long term capital gain which was proposed by the Assessing Officer to assessee as short term capital gain. Disallowance of short term capital loss on sale of shares invoking the provisions of Section 94(8) - HELD THAT - As regards the applicability of the provisions of Section 94(8) of the Act we note that the said provision is applicable in the case of purchase and sale of units and in between the bonus units were issued and received by the unit holder. There is a distinction in the language employed in Section 94(7) and 94(8) of the Act. The provisions of Section 94(7) are applied to securities as well as units whereas the provisions of Section 94(8) of the Act stipulates the disallowance of loss on purchase and sale of units within the specific period to the record date subject to the condition that the additional units were also allotted without any payment. Thus, the provisions envisage disallowance of loss on purchase and sale of units (Mutual Funds) and not purchase and sale of shares or securities. It is clear that it is not a case of dividend striping as provided in Section 94(7) but it is a case of bonus issue of shares, therefore, the provisions of Section 94(8) of the act cannot be applied in case of purchase and sale of shares/securities. Thus when the subject matter of purchase and sale of shares and not the units, therefore, the provisions of Section 94(8) of the Act are not applicable, accordingly we do not find any error or illegality in the order of the ld. CIT(A) qua this issue, the same is upheld. Appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147/148 of the Income Tax Act.
2. Disallowance of short-term capital loss on sale of shares of SKH Auto Components Ltd.
3. Disallowance of loss on sale of commercial space to M/s Laurel Infrastructure Pvt. Ltd.
4. Treatment of capital gains on sale of shares of M/s Advance Automation & Process Control Pvt. Ltd.
5. Disallowance of short-term capital loss on sale of shares of L&T Ltd.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147/148 of the Income Tax Act:
The Tribunal examined whether the reopening of the assessment was valid. The assessee argued that the reopening was based on borrowed satisfaction from the Investigation Wing without independent application of mind by the Assessing Officer. The Tribunal noted that the reasons recorded for reopening were essentially a reproduction of the information received from the Investigation Wing and did not reflect the Assessing Officer's independent application of mind. Citing decisions from higher courts, the Tribunal emphasized that the Assessing Officer must apply his mind to the materials to form a belief that income has escaped assessment. The Tribunal concluded that the reopening was based on borrowed satisfaction and lacked independent application of mind, rendering it invalid.

2. Disallowance of Short-term Capital Loss on Sale of Shares of SKH Auto Components Ltd.:
The assessee claimed a short-term capital loss on the transfer of shares of SKH Auto Components Ltd. The Assessing Officer disallowed the claim, considering the transaction as a sham. The Tribunal, however, found that the transfer of shares was genuine and supported by documentary evidence, including board resolutions, agreements, and indemnity bonds. The Tribunal emphasized that the transaction was real and the loss incurred was legitimate. The Tribunal also noted that the motive of tax planning within the framework of law is permissible. Consequently, the Tribunal allowed the assessee's claim for short-term capital loss.

3. Disallowance of Loss on Sale of Commercial Space to M/s Laurel Infrastructure Pvt. Ltd.:
The assessee incurred a loss on the sale of commercial space to M/s Laurel Infrastructure Pvt. Ltd. The Assessing Officer disallowed the claim, considering the transaction as not at arm's length and structured to incur a loss. The Tribunal found that the transaction was genuine, supported by agreements, payment receipts, and other documentary evidence. The Tribunal noted that the transaction was accepted in the hands of the purchaser and other parties involved. The Tribunal emphasized that the transaction was real and the loss incurred was legitimate. The Tribunal allowed the assessee's claim for the loss on the sale of commercial space.

4. Treatment of Capital Gains on Sale of Shares of M/s Advance Automation & Process Control Pvt. Ltd.:
The Assessing Officer treated the profit on the sale of shares of M/s Advance Automation & Process Control Pvt. Ltd. as short-term capital gain, considering it as a sale of immovable property held by the company. The Tribunal, however, found that the transaction was a sale of shares and not a sale of immovable property. The Tribunal emphasized that the company and its shareholders are separate legal entities, and the sale of shares does not amount to the sale of the company's assets. The Tribunal upheld the assessee's claim of long-term capital gain on the sale of shares.

5. Disallowance of Short-term Capital Loss on Sale of Shares of L&T Ltd.:
The assessee claimed a short-term capital loss on the sale of shares of L&T Ltd. The Assessing Officer disallowed the claim by invoking Section 94(8) of the Income Tax Act, which deals with bonus stripping. The Tribunal found that Section 94(8) applies only to units of mutual funds and not to shares. The Tribunal emphasized that the provisions of Section 94(8) are not applicable to the purchase and sale of shares. The Tribunal allowed the assessee's claim for short-term capital loss on the sale of shares of L&T Ltd.

Conclusion:
The Tribunal allowed the assessee's appeal in part, upholding the claims for short-term capital loss on the sale of shares of SKH Auto Components Ltd. and L&T Ltd., and the loss on the sale of commercial space. The Tribunal also upheld the assessee's claim of long-term capital gain on the sale of shares of M/s Advance Automation & Process Control Pvt. Ltd. The Tribunal dismissed the revenue's appeal.