2018 (10) TMI 675 - AT - Income Tax

Setoff of short term loss from shares with short term capital gain - Genuineness of loss - share belonging to the RPG group to which the assessee belonged. - revenue claimed that, even though the purchase and sale of investments were carried out within a very short span of time, proper explanation was not furnished by the assessee company as to why there was such difference between the purchase price and sale price. Held that - It was not a case where profits were earned by the assessee in respect of transaction with third parties and thereafter, the loss was artificially created to be set off against such income which is a distinguishing factor. The present case both profit and loss have arisen only from the intra group transactions and, therefore, the AO could not have on one hand accepted the genuineness of the transaction which resulted in gain, but on other hand doubted the genuineness only where the transaction resulted in loss, which action of AO cannot be countenanced because AO being a quasi-judicial authority has to be fair and reasonable. - Set off allowed - Decided against the revenue.

Summary

Issues Involved:
1. Liability of Short Term Capital Loss incurred by the assessee on the sale of investments.
2. Whether the transactions involving purchase and sale of shares within RPG Group entities were genuine or a colourable device for tax avoidance.

Issue-wise Detailed Analysis:

1. Liability of Short Term Capital Loss:
The primary issue in this appeal is the liability of Short Term Capital Loss amounting to ?34,96,00,895/- declared by the assessee on the sale of investments and its set-off against Short Term Capital Gain of ?1,33,67,748/- earned on the sale of shares. The Assessing Officer (AO) disallowed the loss, considering the transactions within RPG Group entities as a colourable device to provide tax benefits.

2. Genuineness of Transactions:
The AO observed that the transactions of purchase and sale of shares were entirely conducted within RPG Group entities and considered them as artificial arrangements for tax avoidance. The AO accepted the profits derived from the sale of investments in RPG Group companies but disallowed the loss declared on the sale of shares/investments of RPG group entities.

Findings of Ld. CIT(A):
- The Ld. CIT(A) scrutinized the accounts and details of capital gains, noting that the assessee transacted in shares of 8 bodies corporate, resulting in gains for some and losses for others.
- The Ld. CIT(A) found that the AO's conclusions were not well-founded and inconsistent, as the AO accepted gains from certain transactions but doubted the genuineness of transactions resulting in loss.
- It was observed that the AO did not bring any material on record to show that the transactions were not genuine or that the purchase and sale transactions were not recorded in the books of the transferors and transferees.
- The Ld. CIT(A) noted that the assessee had maintained identical documentary evidence for all transactions, and the AO's action was inconsistent by accepting transactions resulting in gains but disbelieving those resulting in losses.
- The Ld. CIT(A) also pointed out that the substantial loss claimed by the assessee was not set off against any income in subsequent years due to the demerger of the investment division, which further disproved the AO's contention of a colourable device for tax avoidance.

Judgment:
- The Tribunal agreed with the findings of the Ld. CIT(A), noting that the transactions were carried out within RPG Group entities for restructuring purposes and not as a colourable device for tax avoidance.
- The Tribunal observed that the AO's action of accepting gains but disbelieving losses was inconsistent and unfair.
- The Tribunal found that the assessee did not derive substantial tax benefits in subsequent years, further supporting the genuineness of the transactions.
- The Tribunal dismissed the appeal filed by the revenue, upholding the order of the Ld. CIT(A) to assess the loss on transfer of shares at ?34,96,09,895/- and allow its set-off and carry forward as permissible under Section 74 of the Act.

Conclusion:
The appeal by the revenue was dismissed, and the Tribunal upheld the order of the Ld. CIT(A), allowing the set-off and carry forward of the Short Term Capital Loss declared by the assessee. The transactions within the RPG Group entities were deemed genuine and not a colourable device for tax avoidance.