2016 (12) TMI 673 - HC - Income Tax

Dis-allowance of Long Term Capital Loss on account of sale of shares to a sister concern - Held that - We are of the view that the Assessee had provided an acceptable justification for both transactions of sale of shares including the aspect of valuation of the shares. The Assessing Authority, while accepting the genuineness of the transactions, merely raises a vague suspicion relating to the valuation adopted by the assessee. This, by itself, is insufficient to reject the claim of capital loss. While the Assessing Officer is certainly entitled to question the valuation, he ought to have produced some materials to either disprove the justification offered by the assessee or to substantiate his doubts. A mere suspicion, however strong it might appear, cannot take the form of a substantiated opinion sans supporting materials and hence it cannot form the basis for rejection of the claim. Further more, the question of valuation in itself, is a pure question of fact particularly, when the same has been concurrently accepted by both the lower appellate authorities. No perversity has been either alleged or made out at any stage in appeal. We agree with the conclusions of the ITAT and are of the view that no substantial questions of law arise for consideration. - Decided in favour of the assessee.

Summary

Issues:
1. Interpretation of accounting methods for finance charges.
2. Permissibility of using different accounting systems for different laws.
3. Treatment of additional finance charges for tax purposes.
4. Disallowance of long-term capital loss on share sale.
5. Addition of provision for bad debts while computing book profits.

Interpretation of accounting methods for finance charges:
The primary issue revolved around the accounting treatment of additional finance charges by the assessee. The Income Tax Appellate Tribunal (ITAT) had to determine whether the assessee was entitled to account for these charges on a cash basis despite following the mercantile system of accounting. The Tribunal also had to consider if a hybrid system could be permitted for different laws. The ITAT's decision was challenged by the Revenue under Section 260A of the Income Tax Act, 1961.

Permissibility of using different accounting systems for different laws:
Another significant issue was whether the ITAT was correct in allowing the assessee to follow the mercantile system of accounting for Company Law purposes while using a hybrid system for Income Tax purposes. This raised questions regarding the consistency and permissibility of different accounting methods for various legal frameworks.

Treatment of additional finance charges for tax purposes:
The ITAT had to address whether additional finance charges could be shown on a receipt basis for Income Tax purposes, even if the assessee accounted for them on an accrual basis under regular accounts. This involved considering the applicability of special provisions in Section 43D of the Income Tax Act regarding exclusion of certain classes of debts from taxable business income.

Disallowance of long-term capital loss on share sale:
The case involved the deletion of a disallowance of a long-term capital loss amounting to a significant sum on account of the sale of shares to a sister concern. The ITAT had to determine whether this disallowance was justified, especially in light of relevant legal precedents like the Supreme Court's decision in a specific case.

Addition of provision for bad debts while computing book profits:
Lastly, the issue of whether the provision for bad debts could be added back while computing book profits under Section 115JB was raised. This question centered around the retrospective amendment made by the Finance Act, 2009, and the implications of this change on the computation of book profits.

In the judgment, the Court analyzed each issue in detail. Questions 1 to 3 were found in favor of the assessee based on a previous decision, while Question 5 was decided in favor of the Revenue. Regarding Question 4, the Court examined the facts related to the sale of shares by the assessee and the valuation adopted. The Court found that the assessee provided a justifiable explanation for the valuation of shares, emphasizing that the Assessing Authority's suspicion alone was insufficient to reject the claim of capital loss. The Court upheld the lower appellate authorities' acceptance of the valuation, concluding that no substantial questions of law arose for consideration.

Ultimately, the judgment clarified the interpretation of accounting methods, the permissibility of using different systems for different laws, the treatment of finance charges, the disallowance of capital loss, and the addition of bad debts provision for book profit calculations. The decision provided a nuanced analysis of each issue, highlighting the importance of substantiated opinions and factual evidence in tax assessments and legal interpretations.