2016 (6) TMI 555 - AT - Income Tax

Short Term Capital Loss on sale of unquoted shares - genuity of expenditure - FIFO method of accounting adopted by AO - Held that - The undisputed facts are that the assessee was already a share holder in said Inter Active Technologies, and after selling about 1/3 share holding remained owner of about 2/3 rd shares in next year, doubts have been raised by ld. Assessing Officer only in respect of this year s sale of shares tow2ards the end of the year. It emerges from the record that assessee in order to protect his earlier share holding purchased the new shares at higher rate to save Inter Active from liquidation and to re-strengthen the company s capital and reserves, which is claimed to be a prudent business decision. Assessee s efforts are proved from the record that the book value of the company went upto ₹ 170/- per share as on 18.12.2010 which was for Rs. (-) 40.23 per share as on 29.12.2007 i.e. before the infusion of funds by the appellant. The aforesaid company had paid the taxes of ₹ 95/- lakhs for the A.Y. 2010-11 after set off of earlier years losses (profit ₹ 614/- lakhs for the A.Y. 2010-11) and also paid advance-tax of ₹ 15/- lakhs for the A.Y. 2011-12. Thus in consideration of all these undisputed facts, ld. CIT(A) rightly observed that the purchase of these shares by the appellant cannot be considered as non-genuine or paper transactions. Assessee produced necessary evidence that Inter Active i.e. company furnished necessary information and no any infirmity was indicated by the ROC qua the impugned purchase and sale of shares and in maintenance of other records relating to share transactions. Thus the adverse inference drawn by ld. Assessing Officer that there were alleged interpolation in the registers of the company are not tenable. The shares were sold by assessee due to crash of the share market adversely resulting in the cascading effect on other investments. In order to minimise the losses as the Inter Active s net worth was reduced from ₹ 800 lakhs to ₹ 400 lakhs. The book value of share of the company slided down to ₹ 38.21 as on 27/03/2008. This was a conscious business decision of the assessee. Besides, the payments for purchase of shares were made by account payee cheques, similarly the consideration for sale of share was also received by account payee cheques. Assessing Officer was not justified in applying FIFO method instead of adopting specific distinctive numbers of shares for the purchase and sale of shares while computing the impugned STCG. Thus we see no infirmity in the order of ld. CIT(A) allowing the impugned STCG loss. We uphold his order on this issue, this ground of the revenue is dismissed. see Union of India And Another Versus Azadi Bachao Andolan And Another 2003 (10) TMI 5 - SUPREME Court - Decided in favour of assessee Disallowance of interest expenditure - AO disallowed expenditure as the assessee failed to provide the nexus of utilization of borrowing for earning offered interest income - Held that - It has been accepted by the Assessing Officer that interest expenditure has been expended to earn interest income. Sec. 56 does not postulate any condition about the rate of charging interest. The appellant explained the reasons and circumstances as to how the lesser interest was charged on old loans. No discernible case for diversion of borrowed funds for non-business purposes has been made out by ld. Assessing Officer. We have carefully considered the submission of the Ld. Counsel as well as the finding of the Assessing Officer recorded in the assessment order. A remand report was also called from the Assessing Officer, which did not impinge on the assessee in effective terms, as the possibility of use of funds in capital investment was not established. Ld. Assessing Officer accepted that the interest expenditure was actually incurred for earning the interest income and loss arose due to charging of lesser rate of interest on old loans and advances and advances given for shorter period. This contention of the appellant was not controverted by the Assessing Officer either during the course of assessment proceedings nor during remand proceedings. Considering all these facts and circumstances ld. CIT(A) deleted the disallowance. In our considered view there is no inconsistency in the order of ld. CIT(A) on this issue, which is upheld.- Decided in favour of assessee

Summary

Issues Involved:
1. Allowance of Short Term Capital Loss on sale of unquoted shares.
2. Deletion of disallowance of interest payment being excess of interest received.
3. Confirmation of disallowance of transfer cost incurred in connection with the transfer of land.
4. Charging of interest under sections 234 A/B/C/D of the Income Tax Act.
5. Initiation of penalty under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Allowance of Short Term Capital Loss on Sale of Unquoted Shares
The Revenue challenged the CIT(A)'s decision to allow the Short Term Capital Loss (STCL) of ?1,82,10,800 on the sale of unquoted shares. The Assessing Officer (AO) had disallowed the loss, suspecting the transaction's genuineness, mainly because the loss amount was close to the Short Term Capital Gain (STCG) on land sale. The CIT(A) found the transaction genuine, noting that the assessee had provided substantial evidence, including allotment letters, bank statements, and ROC filings. The CIT(A) emphasized that the purchase was made to save the company from liquidation, which was substantiated by the company's improved financials post-investment. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO's suspicions were based on assumptions and that the transaction was genuine, supported by documentary evidence and compliance with statutory formalities.

2. Deletion of Disallowance of Interest Payment
The AO disallowed ?9,87,264 of interest expenditure, arguing that the assessee failed to provide a nexus between the borrowing and the interest income earned. The CIT(A) deleted this disallowance, noting that the AO had accepted the interest expenditure was incurred to earn interest income but had questioned the rate of interest charged. The CIT(A) found that the assessee had justified the lower interest rate due to market conditions and the need to avoid idle borrowed funds. The Tribunal upheld the CIT(A)'s decision, stating that the AO had no grounds to challenge the interest rate and that the interest expenditure was indeed incurred to earn interest income.

3. Confirmation of Disallowance of Transfer Cost
The assessee's cross-objection included a challenge to the disallowance of ?5.50 lakhs and ?2.05 lakhs incurred in connection with the transfer of Shella land. However, the assessee did not press this cross-objection, leading to its dismissal.

4. Charging of Interest under Sections 234 A/B/C/D
The assessee also challenged the charging of interest under sections 234 A/B/C/D of the Income Tax Act. This issue was part of the cross-objection, which was dismissed as the assessee did not press it.

5. Initiation of Penalty under Section 271(1)(c)
The assessee contested the initiation of penalty under section 271(1)(c) without recording mandatory satisfaction. This issue was also part of the cross-objection and was dismissed for the same reason as the other cross-objection issues.

Conclusion
The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection. The Tribunal upheld the CIT(A)'s decisions on allowing the STCL on the sale of unquoted shares and deleting the disallowance of interest expenditure. The cross-objection issues raised by the assessee were dismissed as they were not pressed. The Tribunal found no infirmity in the CIT(A)'s order and supported the genuineness of the transactions and the justifications provided by the assessee.