2018 (5) TMI 36 - AT - Income Tax

Addition made towards long term capital gains - Nature of property sold - Held that - It is clear that the mortgaged property sold, in discharge of the mortgage created by the assessee himself, belonging to the assessee and the price realized there-form belonged to the assessee and capital gain is very much warranted on the full price less admissible deduction . Availing loan itself is consideration and in this case, constructive benefit was very well accrued to the assessee when the loan was availed by MBPPL, which was owned partly by the assessee. Accordingly, we set aside the order of the ld. CIT(A) on this issue and restored that of the Assessing Officer. - Decided against revenue Eligibility to claim cost of improvement for the purpose of computation of long term capital gains - Held that - To admit any claim of expenditure, the assessee is required to furnish bills/ vouchers. However, the ld. Counsel for the assessee has submitted that due to passage of time, the assessee could not produce the bills/vouchers, etc. for the expenditure incurred towards cost of improvement. While executing the mortgage deed in favour of the bank as collateral security, the assessee should have furnished valuation of the property of land and building, against which the bank has sanctioned loan of ₹.1,75,00,000/- to MBPPL. Accordingly, in the absence of evidence for cost of improvement and the fact that cannot be ignored that without spending monies, the assessee could not have raised the building of 7,745 sq.ft., we direct the Assessing Officer to verify the valuation report as the assessee might have submitted at the time of executing the collateral security in favour of the bank and decide the issue afresh after allowing an opportunity of being heard to the assessee. Thus, the ground raised by the Revenue is allowed for statistical purposes. Disallowing the capital loss resulting out of sale of shares of MBPPL - Held that - CIT(A) has not accepted the valuation adopted by the assessee. The assessee is one of the directors in M/s. Minbimbangal Productions Pvt. Ltd. along with his wife Smt. Geetha Kailasam. The beneficial owners of shares holding not less than 10% of the voting power during the previous year relevant to the assessment year are Smt. Geetha Kailasam 58.13% , B. Prasanna, brother 9.27% and Pushpa Kandasamy, sister 10.24% . The company in which the assessee is a director, is a private limited company in which public are not substantially interested. The shareholders are only assessee s family members and more of a family concern. We find that the shares are not quoted, listed or sold through any authorized stock exchange. Thus, we are also of the same opinion that the sale of shares in the value of ₹.10/- as low as a price at ₹.0.10 per share is nothing but a transaction to avoid taxation of capital gain. In view of the facts and circumstances, the objection raised by the assessee stands dismissed.

Summary

Issues Involved:
1. Deletion of addition towards long-term capital gains.
2. Eligibility to claim the cost of improvement for computation of long-term capital gains.
3. Consideration of cost of construction of improvements in computing capital gains.
4. Disallowance of capital loss from the sale of shares.

Detailed Analysis:

1. Deletion of Addition Towards Long-Term Capital Gains:
The Revenue contested the deletion of the addition towards long-term capital gains of ?1.68 crores by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Assessing Officer (AO) had added this amount, arguing that the assessee sold a property for ?1.75 crores, which was not admitted in the return of income. The property was mortgaged to Indian Overseas Bank (IOB) for a loan to Min Bimbangal Productions Pvt. Ltd. (MBPPL), and the bank sold the property to recover the loan. The AO contended that the capital gain must be computed on the full price realized, irrespective of the actual receipt by the assessee. The CIT(A) allowed the assessee's appeal, but the Tribunal, relying on the Supreme Court's decision in CIT v. Attilli N Rao, held that the capital gain must be computed on the full price realized. The Tribunal set aside the CIT(A)'s order and restored the AO's decision.

2. Eligibility to Claim Cost of Improvement for Computation of Long-Term Capital Gains:
The Revenue also challenged the CIT(A)'s decision allowing the assessee to claim ?24.11 lakhs as the cost of improvement. The AO had disallowed this claim due to the lack of evidence. The CIT(A) accepted the claim based on the nature of the property and inferred improvements. The Tribunal directed the AO to verify the valuation report submitted at the time of executing the collateral security in favor of the bank and decide the issue afresh, allowing the Revenue's ground for statistical purposes.

3. Consideration of Cost of Construction of Improvements in Computing Capital Gains:
The assessee's cross-objection argued that the CIT(A) failed to adjudicate the cost of construction of improvements. The Tribunal found that the CIT(A) had considered this issue and rejected the objection, noting that the CIT(A) had acknowledged the improvements but required evidence for the expenditure.

4. Disallowance of Capital Loss from the Sale of Shares:
The assessee claimed a long-term capital loss of ?77,27,840 from the sale of shares of MBPPL to his wife at a significantly low price. The AO disallowed this claim, considering it a colorable transaction to avoid tax. The CIT(A) upheld this disallowance, noting the lack of appropriate valuation of the company's assets. The Tribunal agreed, emphasizing that the sale of shares at a nominal price was an attempt to avoid capital gains tax and dismissed the assessee's objection.

Conclusion:
The Tribunal allowed the Revenue's appeal partly for statistical purposes and dismissed the assessee's cross-objection. The Tribunal's decision emphasized the need for proper evidence and adherence to legal precedents in assessing capital gains and losses. The order was pronounced on March 6, 2018, in Chennai.