2017 (5) TMI 917 - AT - Income Tax

Short term capital loss on sale of shares - disallowance of claim as sham transaction - speculation loss - Held that - The transaction of purchases and sales of shares entered in to by the assessee cannot be held to be sham. We have also perused the orders of the ld CIT (A) where in the transaction is held to be speculative in nature and therefore it has been held that these transactions are not sham. Hence we reject the reasons assigned by the ld AO. In the present case it is not held that assessee has purchased the shares as a dealer and subsequently the shares were sold as the plans for which shares have been purchased could not be fulfilled. There is no intention imputed for speculation. Assessee being a company can invest in the shares as it has already made huge capital gains both short term and long term which are not disturbed so far the head of the taxability s concerned. Actual delivery is taken and given. We are not in a position to hold that to the impugned transactions provision of explanation to section 73 applies. Therefore we also cannot uphold the order of the ld CIT (A). In the result we allow ground no 2 of the appeal of the assessee accordingly holding that revenue has failed to establish that transactions are sham and merely book entries and further the explanation to section 73 does not apply to the facts of the case thereby directing the ld AO to allow the short term capital loss to be carried forward.

Summary

Issues Involved:
1. Disallowance of expenses incurred for earning tax-free income under Section 14A of the Income Tax Act.
2. Disallowance of short-term capital loss claimed by the assessee.

Detailed Analysis:

1. Disallowance of Expenses Incurred for Earning Tax-Free Income under Section 14A:
The first ground of appeal concerns the disallowance of ?4,40,663 on account of expenses incurred for earning tax-free income under Section 14A of the Income Tax Act. The assessee did not press this ground, and hence it was dismissed.

2. Disallowance of Short-Term Capital Loss:
The second ground of appeal is the disallowance of short-term capital loss amounting to ?4,88,90,050 claimed by the assessee. The Assessing Officer (AO) disallowed this claim, treating the transactions as sham and carried out to lower the business profits of the company. The AO's findings were based on the following observations:
- Cross-holding of shares between the assessee and the companies involved.
- Transactions were off-market and within closely held companies.
- Lack of contract notes to justify the transactions.

The AO concluded that the transactions were merely for entry purposes to lower business profits and initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income.

CIT(A) Findings:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision but on different grounds. The CIT(A) did not consider the transactions as sham but treated the loss as speculative under the explanation to Section 73 of the Income Tax Act. The CIT(A) noted that the assessee is engaged in the business of supplying manpower, making the provisions of Section 73 applicable. Consequently, the CIT(A) dismissed the claim for carrying forward the short-term capital loss.

Assessee's Arguments:
The assessee argued that:
- The transactions were genuine, supported by banking channels and duly executed transfer deeds.
- The investments were made based on future business prospects, which did not materialize, leading to the sale of shares.
- The main income of the assessee was from capital gains, not business, making Section 73 inapplicable.
- The AO and CIT(A) erred in treating the transactions as speculative or sham.

Tribunal's Analysis:
The Tribunal examined the facts and concluded:
- The transactions were genuine, supported by share transfer forms and banking channels.
- The AO did not challenge the prices at which shares were transacted or examine the parties involved.
- The CIT(A) erred in applying the explanation to Section 73, as the main income of the assessee was from capital gains, not business.
- The Tribunal relied on the Gujarat High Court decision in ACIT v. Biraj Investments (P) Ltd., which held that transactions cannot be deemed sham if conducted through banking channels and proper documentation.

Conclusion:
The Tribunal held that the transactions were genuine and not speculative. The explanation to Section 73 did not apply as the assessee's gross total income consisted mainly of capital gains. The Tribunal directed the AO to allow the short-term capital loss of ?4,88,90,050 to be carried forward. The appeal of the assessee was partly allowed.