2022 (10) TMI 1109 - AT - Income Tax

Disallowance of long Term Capital loss (LTCL) - Whether CIT(A) erred in not upholding the action of the AO in recalculating the purchase price of the shares? - Revenue seeking to disturb the purchase price of acquisition of shares paid by the assessee @15.40 per share in view of the fact that the company in which assessee had invested is a loss making company and did not command any investment at a premium - whether the Revenue could at all disturb the purchase price of acquisition of shares within the mandate provided in the Act? - HELD THAT - The answer is an emphatic no in as much as there is no provision in the Act warranting to disturb the purchase price of shares by the assessee. What is required to be seen is whether the assessee had sufficient sources for making such investment in shares. As stated earlier there is absolutely no dispute that payments for acquisition of shares at Rs.15.40 per share had been duly met out of disclosed sources of the assessee. Moreover it is also pertinent to note that the said investment had been made by the assessee in A.Y.2012-13 i.e. the earlier year. We find that assessee had duly explained the rationale behind making investment in the shares of Pyxis Systems Pvt. Ltd. at a premium based on the advice given by certain parties and after analysing the various reports that are made available to her by her advisors and had also taken cognizance of the strength of the promoters of the said company and their capabilities. The assessee had also furnished the proper reasons for exiting out of her investment from the said company. None of these explanations furnished by the assessee were found to be false by the Revenue. Hence it was only the failed investment deal of an assessee being a private equity investor which had resulted in incurrence of loss for the assessee which is claimed as a long term capital loss by the assessee. There is absolutely no basis for the ld. AO to arrive at the revised book value per share at Rs.2.69 per share based on the financials as on 31/03/2011 of Pyxis Systems Pvt. Ltd. and concluding that the said rate should be the fair market value which the assessee ought to have paid for the purpose of making investment in shares. If this is to be accepted then what will happen to the remaining money paid by the assessee towards acquisition of shares? The order of the ld. AO is completely silent on this aspect. Hence we conclude that the ld. AO does not have any power to substitute the purchase price of shares with a different value than the value at which actually it was paid. We hold that the ld. AR was justified in placing reliance on the decision of the Hon ble Madras High Court in the case of CIT vs. Sriram Investments 2016 (12) TMI 673 - MADRAS HIGH COURT - Decided against revenue.

Summary

Issues Involved:
1. Recalculation of the purchase price of shares and disallowance of Long Term Capital Loss (LTCL).
2. Justification of the assessee's investment and the genuineness of the losses.

Detailed Analysis:

Issue 1: Recalculation of the Purchase Price of Shares and Disallowance of LTCL
The Revenue's primary contention was whether the Ld. CIT(A) erred in not upholding the AO's action of recalculating the purchase price of shares at Rs. 2.69 per share, leading to the disallowance of LTCL amounting to Rs. 2.69 crores. The AO challenged the purchase price of Rs. 15.40 per share paid by the assessee, arguing that the company, Pyxis Systems Pvt. Ltd., was loss-making and did not justify such a premium investment. The AO based this recalculation on a valuation report obtained at the time of sale, which valued the shares at Rs. 0.014 per share. The AO substituted the purchase price with Rs. 2.69 per share, recalculating the LTCL accordingly.

Issue 2: Justification of the Assessee's Investment and Genuineness of the Losses
The assessee provided detailed justifications for the investment in Pyxis Systems Pvt. Ltd., including the company's potential, the advice of investment managers, and the performance of similar start-ups. The investment was made at a negotiated price based on the future growth potential, despite the company's accumulated losses. The assessee also explained the rationale for exiting the investment, citing global market turmoil and the company's inability to acquire targeted orders, leading to financial distress and a significant reduction in employee strength.

The Ld. CIT(A) accepted the assessee's justifications and held that the AO could not disturb the purchase price of shares as there was no provision in the Act warranting such action. The Ld. CIT(A) emphasized that the assessee had sufficient disclosed sources for the investment and that the AO's recalculation lacked a basis. The Tribunal concurred, noting that the AO did not provide an alternative valuation or substantiate the suspicion of overvaluation.

The Tribunal also referenced the decision of the Hon'ble Madras High Court in CIT vs. Sriram Investments, which held that the AO could not reject the sale of shares at a lower price without supporting documents. The Tribunal highlighted that the AO's suspicion alone was insufficient to reject the claim of capital loss and that the AO failed to provide materials to disprove the assessee's justification or substantiate doubts about the valuation.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s decision. It concluded that the AO had no authority to substitute the purchase price of shares with a different value and that the assessee's investment and subsequent loss were genuine. The Tribunal emphasized that the AO's recalculation lacked a legal basis and supporting evidence, affirming the assessee's right to claim the LTCL. The appeal was dismissed, and the order pronounced on 26/10/2022.