2017 (3) TMI 200 - AT - Income Tax

Short term capital loss - whether a sham transaction or speculative in nature - all these transactions were executed off market and not through recognized Stock Exchange. - transactions with related parties - Held that - Respectfully following the judgment in the case of ACIT v. Biraj Investment Pvt. Ltd. (2012 (8) TMI 805 - GUJARAT HIGH COURT ) and Hasmukh M. Patel vs. ACIT (2011 (4) TMI 643 - ITAT, AHMEDABAD) we are of the view that assessee has rightly claimed short term capital loss which is eligible to be set off against long term capital gain and the impugned transaction is neither sham nor speculative in nature - Decided in favour of assessee Disallowance of interest paid on unsecured loan - Allowance of interest expense as against interest free advance to group company - Held that - Assessing Officer has made an estimated addition without proving the nexus between the interest bearing funds and interest free advances whereas assessee had sufficiently demonstrated to have enough interest free reserve and surplus and interest free unsecured loan to cover up the interest free advances along with order of Hon. Gujarat High Court about merger of assessee with Suraj Stainless Ltd. to whom interest free advances were given. We, therefore, set aside the order of ld. CIT(A) and allow this ground of assessee.- Decided in favour of assessee Rent Exp. Of Mumbai Office - treated as Business expenses - Held that - There is fair possibility of situation when a company plans its future business trend and may have to explore various avenues with relation thereto. It seems that assessee with the fore-sightedness and in order to improve and expand business and also to save extra hotel charges thought it amicable to take flats on lease in Mumbai. In the given facts and circumstances of the case and in absence of any contrary reasons brought on record by the Revenue against the impugned expenditure booked by the assessee except a casual approach, we are inclined to believe that assessee has claimed genuine expenditure of rent. We set aside the order of ld. CIT(A) and allow this ground. - Decided in favour of assessee

Issues Involved:
1. Disallowance of Short-Term Capital Loss
2. Disallowance of Interest Expense
3. Disallowance of Rent Expense

Issue-wise Detailed Analysis:

1. Disallowance of Short-Term Capital Loss:
The assessee company claimed a short-term capital loss of ?1,75,50,000/- from the sale of shares of three group companies. The Assessing Officer (AO) considered these transactions as sham and speculative, disallowing the loss. The AO argued that the transactions were off-market and with related parties, thus constituting a colorable device to evade tax by setting off the short-term capital loss against long-term capital gain. The CIT(A) upheld the AO’s decision, emphasizing that the transactions lacked commercial substance and were intended to reduce tax liability.

The Tribunal, however, found that the transactions were genuine and part of a family arrangement due to the impending amalgamation of the company with Suraj Stainless Ltd. The Tribunal noted that there was physical delivery of shares, proper documentation, and movement of funds through account payee cheques. The Tribunal referenced the case of Hasmukhbhai M. Patel vs. ACIT, where similar transactions were deemed genuine. It concluded that the short-term capital loss was legitimate and allowed it to be set off against the long-term capital gain.

2. Disallowance of Interest Expense:
The AO disallowed the interest expense of ?9,18,134/- on the grounds that the assessee had granted interest-free loans to Suraj Stainless Ltd. while incurring interest on borrowed funds. The CIT(A) upheld this disallowance, stating that the assessee failed to prove the nexus between interest-free funds and the borrowings.

The Tribunal observed that the assessee had sufficient interest-free funds amounting to ?22.12 crores, which could cover the interest-free advances. The Tribunal referred to the decision in Torrent Financial vs. ACIT, which held that if interest-free funds are sufficient to cover the advances, no interest disallowance is warranted. The Tribunal found no evidence of a direct nexus between the borrowed funds and the interest-free advances, thus allowing the interest expense.

3. Disallowance of Rent Expense:
The AO disallowed the rent expense of ?9,00,000/- for a guest house in Mumbai, arguing that the assessee’s business was conducted online, and there was no need for a physical office space. The CIT(A) upheld the disallowance, stating that the assessee failed to prove the business necessity of the guest house.

The Tribunal found that the assessee had entered into a legitimate leave and license agreement for the guest house, paid rent through proper banking channels, and deducted TDS. The Tribunal noted that the directors frequently visited Mumbai for business purposes, and the guest house was a cost-saving measure compared to hotel expenses. The Tribunal concluded that the rent expense was genuine and allowable as a business expense.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities on all the disputed issues. The short-term capital loss, interest expense, and rent expense were deemed legitimate and allowable.

← Previous Next →