2020 (2) TMI 1370 - HC - Income Tax

Capital loss disallowance - assessee could not establish the factum of sale of the shares made to her associate concern and the said transactions of sale were made without intervention of broker - As per tribunal assessee was not having either the possession or the ownership of the shares which were sold to GAFL - HELD THAT - CIT (A) has gone on a tangent in arriving at a finding on presumption that once the purchases have been found to be genuinely made, either there should be corresponding sales or the shares should form part of the closing stock and because the shares are not part of the closing stock, the inference was drawn that corresponding sale is also genuine. As against that, the Tribunal has relied upon only the evidence which is debit note prepared by the assessee which was produced on record. On perusal of such debit note, it was found by the Tribunal that the same were self-prepared giving only the particulars of the credit amount, number of shares, rate of sale and name of the company, without there being any particulars of shares i.e. distinctive number or names of the persons in whose names those shares were standing, etc. Tribunal has also found as a matter of fact that there is no material on record to prove that the shares were actually delivered by the assessee to the GAFL even subsequently as there is total absence of any document to remotely indicate such fact. Tribunal has also found that there is no matching of the shares which were sold and purchased subsequently through some share brokers. It was also found that, even in the broker s voucher, distinctive numbers of those shares were not given and the broker had also not stated that from whom he has purchased these shares for assessee and in whose names such shares were standing. The Tribunal therefore found that there is absence of proof on record to hold that the shares were actually delivered by the assessee to GAFL. Considering the provision of Sections 2(14) r/w. 2 (47) of the Act, 1961, if the estate or interest which it purported to assign had at the date of the deed did not exist, it is well settled that neither at law nor in equity can the assignment of such an interest operate according to its tenor. Similarly, in the facts of the case, when the shares were not in existence on the date of sale, then the same could not have been considered as capital asset, so as to fall within the definition of transfer under Section 2 (47) of the Act. It cannot be said that the Tribunal has committed any error in holding that the assess is not entitled to claim capital loss arising out of the transactions of sale of shares, which were not in actual possession of the assessee. Tribunal was right in holding that if the assessee could not establish the factum of sale of the shares made to her associate concern and the said transaction of sale is made without the intervention of the broker, the capital loss claimed by the assessee is not allowable - Decided against assessee.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal erred in disallowing the capital loss claimed by the assessee due to the inability to establish the factum of sale of shares to an associate concern without a broker's intervention.

Issue-wise Detailed Analysis:

1. Tribunal's Error in Disallowing Capital Loss:
The primary issue was whether the Tribunal erred in disallowing the capital loss claimed by the assessee. The Tribunal's decision was based on the assessee's failure to establish the factum of sale of shares to an associate concern without involving a broker. The Tribunal noted that the sales were supported only by self-prepared debit notes lacking essential details like distinctive share numbers and names of persons in whose names the shares stood. The Tribunal found no material evidence proving the actual delivery of shares to GAFL, the associate concern. Consequently, the Tribunal concluded that the transactions were not genuine and disallowed the capital loss claimed by the assessee.

2. Assessing Officer's Findings:
The Assessing Officer (AO) found that the assessee sold shares before purchasing them, without involving any broker, and at prices below the prevailing market rates. The AO also noted that the transactions were only supported by debit notes without actual delivery of shares. Moreover, the AO treated the transactions as speculative and refused to set off the loss against regular business income.

3. CIT (A)'s Findings:
The CIT (A) allowed the loss claimed by the assessee, except for a minor adjustment regarding Mysore Cement shares. The CIT (A) held that the purchases were made through a broker, confirming their genuineness, and since the shares were not part of the closing stock, corresponding sales were inferred. The CIT (A) also noted that sales without a broker were permissible and not illegal.

4. Tribunal's Counter-Arguments:
The Tribunal countered the CIT (A)'s findings, emphasizing the lack of evidence for actual delivery of shares and the absence of distinctive share numbers. The Tribunal highlighted that transactions with an associate concern without a broker's intervention raised suspicion. The Tribunal cited several legal precedents to support its decision, concluding that the assessee failed to discharge the onus of proving the genuineness of the transactions.

5. Legal Provisions and Precedents:
The judgment referred to various legal provisions and precedents, including:
- Section 2(14) and 2(47) of the Income Tax Act, defining "capital asset" and "transfer."
- The Privy Council's decision in Aveline Scott Ditcham v. James J. Miller, emphasizing that property must exist at the time of transfer.
- The Madras High Court's ruling in Chief Controlling Revenue Authority, Madras v. Sudarsanam Picture, stating that property must be in existence at the time of transfer.
- The Gujarat High Court's decision in Patel Brass Works v. Commissioner of Income Tax, holding that there was no capital asset in existence for claiming capital loss.

6. Assessee's Arguments:
The assessee argued that there was no requirement in the Income Tax Act for physical possession of shares at the time of sale. The assessee also pointed out that similar transactions resulting in profit were taxed, and GAFL had shown profit on the sale of shares, which should validate the transactions.

7. Revenue's Arguments:
The revenue contended that the Tribunal's findings were based on the lack of evidence for actual delivery of shares and the absence of distinctive share numbers. The revenue argued that the assessee failed to prove the genuineness of the transactions and the subsequent delivery of shares.

8. Court's Conclusion:
The Court upheld the Tribunal's decision, stating that the assessee failed to establish the factum of sale and the transactions were not genuine. The Court emphasized that the Tribunal's findings were based on the absence of evidence and the suspicious nature of transactions with an associate concern without a broker's intervention. The Court also referred to legal precedents supporting the Tribunal's conclusion.

Final Judgment:
The appeals were dismissed, and the Tribunal's decision to disallow the capital loss was affirmed. The Court held that the assessee could not establish the factum of sale of shares to the associate concern without a broker's intervention, and thus, the capital loss claimed was not allowable.

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