2018 (4) TMI 382 - AT - Income Tax

Disallowance of long term capital loss - addition of loss on sale of shares held by the assessee since 1991 by treating the such share transaction as sham transaction - disallow the set off of Long Term Capital loss on sales of shares against the Longterm Capital Gain - Held that - We are convinced that the shares were sold by assessee at the fair market value. In our view the transactions being genuine, merely because the assessee has claimed set-off of capital loss against the capital gain earned during the same period, cannot be said to be a colourable device or method adopted by assessee to avoid the tax. The transactions of sale of share were genuine and transacted at a proper valuation. The lower authority has not disputed the genuinity of transaction. The transactions carried by assessee are valid in law, cannot be treated as non-est merely on the basis of some economic detriment or it may be prejudicial to the interest of revenue. Further, if the period co-existed or permitted the assessee to set off her capital loss against the capital gain earned, would itself not give rise to the presumption that the transaction was in the nature of colourable device. We notice that the assessee has taken indexed case of acquisition of share at ₹ 30,40,400/-. AO has not examined the same and accordingly direct him to verify the computation given by the assessee and allow set off of correct amount of Long Term Capital Loss against Long Term Capital Gain. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the transaction of sale of shares by the assessee to her son was genuine or a sham transaction aimed at avoiding tax.
2. Whether the assessee was entitled to set off the long-term capital loss from the sale of shares against the long-term capital gain from the sale of immovable property.

Issue-wise Detailed Analysis:

1. Genuineness of the Share Transaction:
The assessee sold 900 shares of National Tiles & Industries Private Ltd (NTPL) to her son at ?100 per share, which was their fair market value. The shares were held since 1991, and the transaction was executed through proper channels, including share transfer forms, paying requisite stamp duty, and passing a Board Resolution by NTPL. The consideration was effected through banking channels. The assessee argued that the transaction was genuine and not a colourable device to avoid tax, supported by various case laws, including CIT Vs George Henderson & Co Ltd and Union of India versus Azadi Bachao Andolan, which emphasized that a genuine transaction cannot be deemed non-est merely due to an underlying motive of tax avoidance.

2. Set-off of Long-term Capital Loss Against Long-term Capital Gain:
The assessee claimed a set-off of long-term capital loss of ?29,14,440 from the sale of shares against the long-term capital gain from the sale of immovable property. The Assessing Officer (AO) disallowed this set-off, treating the share transaction as a sham, primarily because the shares were sold to a related party (the assessee's son) and the company’s worth was negative at the time of sale. However, the assessee provided a detailed valuation of the shares as per Wealth Tax Rules, 1957, which was not disputed by the lower authorities. The Tribunal referred to several precedents, including CIT Vs Hede Consultancy Co. (P.) Ltd. and CIT Vs Special Prints Ltd, which upheld that genuine transactions traded at proper valuation, even if entered with a motive to avoid tax, should not be disqualified.

The Tribunal also noted that the lower authorities did not dispute the genuineness of the transaction or the valuation of the shares. The sale was conducted through proper legal and procedural channels, and the assessee’s son had declared the investment in his income tax return. The Tribunal emphasized that the mere fact that the transaction involved related parties and coincided with a period allowing set-off of losses did not automatically render it a colourable device.

Conclusion:
The Tribunal concluded that the share transaction was genuine and conducted at fair market value. It held that the assessee was entitled to set off the long-term capital loss against the long-term capital gain. The AO was directed to verify the computation of the indexed cost of acquisition of the shares and allow the correct amount of long-term capital loss to be set off against the long-term capital gain. The appeal filed by the assessee was allowed.

Order Pronouncement:
The order was pronounced in the open court on the 9th day of March 2018.