1988 (9) TMI 68 - AT - Income Tax

Summary

Issues:
1. Disallowance of short-term capital losses claimed by the assessee for selling silver.
2. Allegation of tax avoidance through collusive sale within the same group.
3. Interpretation of the Supreme Court's decision in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148.
4. Examination of the genuineness of the sales and the commercial considerations involved.

Analysis:
1. The Income-tax Officer disallowed the short-term capital losses claimed by the assessee for selling silver, alleging that the sales were "colourable devices" to reduce tax incidence within the Sarabhai group of companies. The Commissioner allowed the appeals, stating that there was no evidence to establish a collusive sale, emphasizing that the sale price was at market rate, and rejecting the Income-tax Officer's stand due to lack of specific facts or findings.

2. The Departmental Representative argued that the sale was a tax avoidance device, citing the McDowell case and contending that the sale lacked commercial consideration. The assessee's counsel countered by highlighting that the companies were recognized as investment companies, the time gap between purchase and sale was significant, sales were at market price, authorized by the Board of Directors, and driven by commercial considerations to prevent further loss due to falling market prices.

3. The Tribunal analyzed the McDowell case and distinguished it from the present situation. In McDowell, the court found a device due to falsely shifting liability, which was not the case here as the silver sale was genuine, and the property had effectively transferred to the buyer. The Tribunal rejected the argument that the transaction was ambiguous for tax purposes, emphasizing that genuine transactions resulting in short-term capital loss should be recognized.

4. The Tribunal concluded that the sales were real, effective, and based on commercial considerations, as the property transfer was genuine, market prices were falling, and sales were at market rates. The Tribunal highlighted that the assessee had foregone potential future benefits by selling the silver, indicating a genuine attempt to reduce tax liability while incurring future disadvantages. Ultimately, all appeals were dismissed based on these findings.