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2019 (4) TMI 1383 - AT - Income TaxSet off of short term capital loss - tax planning vs tax avoidance - purchase on exorbitant price and after getting ssle at minimal price - HELD THAT - The perusal of Balance Sheet, financials of the said company, wherein the company had not entered into any major transactions of carrying on the business reflects that there was no merit in purchase of shares at face value with premium of ₹ 9,900/- per share after few days of incorporation of the said company. Further, this purchase was on 13.01.2010 and on 27.01.2010 bonus shares were issued and on 29.01.2010 the shares were sold at face value of ₹ 100/- plus premium of ₹ 760/- per share. The assessee has failed to justify first the cost of purchase i.e. with premium of ₹ 9,900/- per share and then the sale consideration i.e. premium of ₹ 760/- per share. In the absence of the same, the loss claimed by assessee is not justified and we uphold the orders of authorities below in denying the set off of short term capital loss of ₹ 15.08 crores on sale of shares of Vadhivare Specialty Chemicals Ltd. The grounds of appeal No.1 and 3 raised by assessee are thus, dismissed. Denial of set off of capital loss - sale of shares of Pentagon Manufacturing and Marketing Ltd. against long term capital gains arising on sale of shares of FEM - HELD THAT - We thus, find no merit in the stand of AO that the transaction of booking loss by selling shares by the assessee to his daughter is colourable device, cannot be accepted. Once the transaction has been entered into within four corners of law and the transaction has not been doubted; where the shares which were held by assessee for long period were sold at a price which was more than NAV value of shares as on date of sale of shares, then it may be case of tax planning within four corners of law and the same cannot be brushed aside. Applying the ratio laid down by the Hon ble High Court of Punjab Haryana in Porrits Spencer (Asia) Ltd. Vs. CIT 2010 (3) TMI 179 - PUNJAB HARYANA HIGH COURT wherein it has been held that once the transaction is genuine and merely it has been entered into with a motive to save tax, it would not become a colourable device and consequently, earn any disqualification. We direct the AO to allow the claim of assessee and set off of loss on sale of shares of Pentagon against gains arising on sale of shares of FEM. The grounds of appeal No.2 and 4 raised by assessee are thus, allowed. Loss claimed on sale of shares of Reliance Industries Ltd. - HELD THAT - Facts of assessee are similar to the facts before the Hon ble Bombay High Court in Pr. CIT Vs. Adar Cyrus Poonawalla 2018 (11) TMI 1339 - BOMBAY HIGH COURT , we hold that the sale of shares of Reliance Industries Ltd. by the assessee after the announcement of bonus issue at the market price which is available on the stock market and where the transaction has not been doubted, there is no merit in not allowing set off of capital loss on the ground that it was colourable device to evade payment of taxes.
Issues Involved:
1. Disallowance of short term capital loss on sale of shares of Vadivarhe Specialty Chemicals Ltd. 2. Disallowance of long term capital loss on sale of shares of Pentagon Manufacturing and Marketing Ltd. 3. Deletion of addition on account of loss claimed from sale of shares of Reliance Industries Ltd. 4. Determination of whether transactions were genuine or aimed at avoiding tax. Issue-wise Detailed Analysis: 1. Disallowance of Short Term Capital Loss on Sale of Shares of Vadivarhe Specialty Chemicals Ltd.: The assessee claimed a short term capital loss of ?15.08 crores on the sale of shares of Vadivarhe Specialty Chemicals Ltd. The Assessing Officer (AO) and CIT(A) disallowed this claim, concluding that the transactions were not genuine and were undertaken solely to avoid tax. The AO noted that the shares were purchased at a premium of ?9,900 per share and sold shortly thereafter at a significantly lower premium of ?760 per share, resulting in a substantial loss. The AO viewed this as a colorable device to offset capital gains from other transactions. The Tribunal upheld the findings of the AO and CIT(A), dismissing the assessee's appeal on this issue. 2. Disallowance of Long Term Capital Loss on Sale of Shares of Pentagon Manufacturing and Marketing Ltd.: The assessee also claimed a long term capital loss of ?1.93 crores on the sale of shares of Pentagon Manufacturing and Marketing Ltd. The AO disallowed this claim, arguing that the shares were sold to the assessee's daughter at an undervalued price of ?1 per share, while the net asset value (NAV) was determined to be ?3.35 per share. The CIT(A) upheld the AO's decision, viewing the transaction as a tax avoidance scheme. However, the Tribunal found that the NAV should be calculated as on the date of sale, which was ?0.11 per share, and thus, the sale price of ?1 per share was justified. The Tribunal allowed the assessee's appeal, permitting the set off of the long term capital loss against the capital gains. 3. Deletion of Addition on Account of Loss Claimed from Sale of Shares of Reliance Industries Ltd.: The Revenue appealed against the CIT(A)'s decision to allow the loss of ?5.34 crores claimed by the assessee on the sale of shares of Reliance Industries Ltd. The AO had disallowed this loss, considering the transaction as a colorable device to evade taxes. The CIT(A) found the transaction to be genuine and within the framework of legitimate tax planning. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in a similar case, which recognized such transactions as legitimate tax planning and not tax evasion. 4. Determination of Whether Transactions Were Genuine or Aimed at Avoiding Tax: Throughout the judgment, the Tribunal examined whether the transactions in question were genuine or constituted tax avoidance schemes. For the Vadivarhe Specialty Chemicals Ltd. shares, the Tribunal agreed with the lower authorities that the transactions were not genuine and aimed at tax avoidance. Conversely, for the Pentagon Manufacturing and Marketing Ltd. shares and the Reliance Industries Ltd. shares, the Tribunal found the transactions to be genuine and within the scope of legitimate tax planning, thus allowing the claimed losses. Conclusion: The Tribunal dismissed the assessee's appeal regarding the short term capital loss on Vadivarhe Specialty Chemicals Ltd. shares but allowed the appeals concerning the long term capital loss on Pentagon Manufacturing and Marketing Ltd. shares and the loss on Reliance Industries Ltd. shares. The appeals by the Revenue were dismissed, and the orders of the CIT(A) allowing the losses were upheld. The judgment emphasized the distinction between genuine transactions and those aimed at tax avoidance, applying relevant legal principles and precedents to reach its conclusions.
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