2010 (4) TMI 110 - HC - Income Tax

Transfer of shares due to amalgamation capital gain / capital loss tax evasion - The assessee company had purchased shares of WSIL on 4th April, 1996 for a sum of Rs.7,92,70,381/-. Those shares were sold on 30th December, 1999 for a consideration of Rs.7,88,76,000/-. However, due to application of cost index, the cost of these shares for the purpose of computation of capital gain worked out to Rs.10,11,02,224/-, thereby resulting in capital loss of Rs.2,22,26,224/-. - . The Assessing Officer disallowed the capital loss on sale of shares on the ground that these shares were purchased from the funds made available by the group companies and observing that the assessee company had entered into these transactions on the same day only to create capital loss of investment held by it. Held that It is also immaterial as to who the purchaser of the shares was, so long as the shares are not sold at a price which was higher or lower than their fair price and there was no restriction on sale of such shares to a group company. All these factors could have been relevant had the Tribunal found that the transactions undertaken by the assessee company were a colourable device with a view to cause a loss to the Revenue. As noted by the Tribunal, neither the assessee company nor the amalgamated company adjusted the capital loss on account of sale of these shares against any long-term capital gain even till the assessment year 2002-2003. No tax benefit was, therefore, obtained by the assessee company for at least two years after the capital loss was booked by it. Hence, it cannot be said that the transactions in question were a colourable device, meant to gain some unfair tax advantage.

Summary

Issues:
1. Disallowance of capital loss on sale of shares by the Assessing Officer.
2. Appeal against the order of the Income Tax Appellate Tribunal.
3. Justification of the sale of shares by the assessee company.
4. Consideration of capital loss and tax benefits.
5. Final decision by the High Court.

Analysis:
1. The case involved an appeal against the order of the Income Tax Appellate Tribunal regarding the disallowance of capital loss on the sale of shares by the Assessing Officer. The respondent company, engaged in leasing equipment, declared a loss for the assessment year 2000-2001. The shares of WSIL and GDOPL were purchased and sold, resulting in capital losses. The Assessing Officer disallowed the capital loss, alleging a colorable device for tax avoidance.

2. The Commissioner of Income Tax (Appeals) allowed the loss on WSIL shares but upheld the disallowance on GGIPL shares. The Income Tax Appellate Tribunal upheld the Commissioner's decision on WSIL shares, noting no objection justifying disallowance. Regarding GDOPL shares, the Tribunal found the sale similar to WSIL shares and accepted the explanation that the sale was not for unfair tax benefits.

3. The Tribunal emphasized that the holding period of the shares was legal, and the decision to sell was the company's prerogative. The purpose of sale to reduce liabilities, even to group companies, was not illegal. The Tribunal found no colorable device in the transactions, as no tax benefits were obtained for years after the capital loss. The High Court dismissed the appeal, upholding the Tribunal's findings as final.

4. The High Court reiterated that unless a finding is shown to be perverse, they cannot interfere with the Tribunal's decision. No substantial question of law was raised, leading to the dismissal of the appeal. The judgment highlighted the legality of the share sales, the absence of tax benefits, and the lack of colorable devices in the transactions.

In conclusion, the High Court upheld the decision of the Income Tax Appellate Tribunal, emphasizing the legality of the share sales and the absence of any tax avoidance schemes. The judgment reaffirmed the company's right to sell shares to reduce liabilities, even to group companies, and found no evidence of unfair tax advantages.