2018 (6) TMI 91 - AT - Income Tax

Disallowance of long term capital loss on sale of shares - sham transactions or genuine transactions - Held that - Assessee has genuinely entered into the sale of shares which are supported with the transfer deeds, Board resolution and the confirmation of payments for transfer of such shares and were duly shown in the books of accounts of the assessee. Sole issue raised by the revenue is that the price at which these were transferred was not based upon valuation report and thus the AO rejected the setting off the said loss against the long term capital gain. It seems to be a case of tax planning by the assessee, though the transactions having been carried out between the group companies. Both Commissioner of Income Tax (Appeals) as well as the Tribunal have rendered a finding of fact that the consideration of ₹ 750/- and ₹ 936/- per share received on the sale of the shares by the respondent assessee was in fact the full consideration which have been disclosed to the revenue. The revenue has not in any manner shown that the consideration disclosed by the respondent assessee to the revenue is not the correct consideration received by them and that the same should be replaced. Long term loss on sale of shares cannot be allowed to be non-genuine and therefore, we direct the AO to allow the set off such loss against the long term capital gain on compensation received by the assessee upon surrender of tenancy rights by setting aside the order of CIT(A) on this issue.- Decided in favour of assessee. Penalty u/s 271(1)(c) - Held that - Since, we have allowed the long term capital loss on sale of shares to be genuine and allowable to be set off against the compensation received from surrender of tenancy rights and thus allowed the appeal of the assessee in quantum appeal. Consequently, the penalty as levied u/s.271(1)(c) does not survive.

Summary

Issues Involved:
1. Confirmation of disallowance of long-term capital loss on the sale of shares.
2. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Confirmation of Disallowance of Long-Term Capital Loss on Sale of Shares:

The assessee filed an appeal against the confirmation of disallowance of long-term capital loss on the sale of shares in five private limited companies amounting to ?78,55,468/-. The assessee had declared a loss in their return of income, which was processed under Section 143(1) of the Income Tax Act. During scrutiny, the Assessing Officer (AO) observed that the assessee had sold shares to another group company, Vishal Amusement Pvt. Ltd., and claimed a loss set off against compensation received from surrendering tenancy rights. The AO considered these transactions as sham, suspecting them to be designed to generate a long-term capital loss to evade taxes. The AO noted discrepancies in the transaction dates and the realization of sale proceeds, leading to the rejection of the loss set off.

Upon appeal, the CIT(A) upheld the AO’s decision, considering the transactions as sham and intended to evade taxes. The assessee argued that the transactions were genuine, supported by board resolutions, transfer deeds, and balance sheets showing the companies’ losses. The assessee contended that the AO failed to provide adverse evidence proving the transactions as sham.

The Tribunal reviewed the facts and supporting documents, including board resolutions, transfer deeds, and financial statements. The Tribunal found that the transactions were genuine, supported by proper documentation, and the shares were sold based on the companies’ financial positions. The Tribunal referred to various judicial precedents, including the cases of CIT vs. B. Arunkumar & Co., CIT vs. Special Paints Ltd., and CIT vs. Tainwala Chemicals & Plastics India Ltd., which supported the assessee’s position.

The Tribunal concluded that the long-term capital loss on the sale of shares amounting to ?78,55,468/- was genuine and directed the AO to allow the set-off against the long-term capital gain on compensation received from surrendering tenancy rights.

2. Imposition of Penalty Under Section 271(1)(c) of the Income Tax Act:

The assessee also appealed against the imposition of penalty under Section 271(1)(c) amounting to ?15,68,250/-. Since the Tribunal allowed the long-term capital loss on the sale of shares to be genuine and set off against the compensation received, the basis for the penalty was demolished. Consequently, the Tribunal directed the AO to delete the penalty imposed under Section 271(1)(c).

Conclusion:

In conclusion, the Tribunal allowed both appeals filed by the assessee. The long-term capital loss on the sale of shares was deemed genuine and allowed to be set off against the compensation received from surrendering tenancy rights. Consequently, the penalty imposed under Section 271(1)(c) was directed to be deleted. The order was pronounced in the open court on 30/05/2018.