2024 (10) TMI 168 - AT - Income Tax

Computation of Short-Term Capital Loss from purchase and sale of shares - Appellant has paid excess price for purchase of shares to group entities and sold very same shares to other group entities at lower rate to book artificial Short-Term Capital loss - HELD THAT - From the facts brought on record by the AO and the CIT (A), it is abundantly clear that the transaction of purchase and sale of shares of SVCL is definitely not for acquiring controlling interest in M/s. SVCL, but only for the purpose of booking Short-Term Capital Loss to offset huge capital gain derived by the assessee from sale of shares of Rasi Cements Ltd. Although the appellant tried to justify the transaction as genuine, but on perusal of the relevant dates and events and also parties to the transaction, it is undisputedly clear that the appellant has arranged transaction in collusion with the related parties to book artificial Short-Term Capital Loss to offset huge capital gain derived from transfer of shares of Rasi Cements Ltd. Appellant entered into a MOU with and M/s. Kalahasteeswar Finance Pvt. Ltd for acquiring shares at Rs.25 per share. Although, as per MOU shares has to be purchased at Rs.25/- per share, why it has paid Rs.109 per share to the above parties is not explained. Therefore, reasons given by the learned CIT (A) to adopt purchase price of Rs.33 per share for all the share purchase from 3 entities is based on well reasonings and on relevant facts. Transaction of the appellant for purchase and sale of shares of M/s. SVCL is not genuine transaction but a transaction designed to avoid payment of taxes arising on capital gain due to transfer of shares of Rasi Cements Ltd. CIT (A) after considering the relevant facts has rightly recomputed the Short-Term Capital Loss on sale of shares by adopting the cost of purchase at Rs.33/- per share. Thus, we are inclined to uphold the findings of the learned CIT (A) and rejects the grounds taken by the assessee. Disallowance of interest expenditure u/s 14A - AO disallowed interest paid on loan on the ground that the appellant has utilized interest bearing fund for making investment in shares and securities which yield exempt income - HELD THAT - On perusal of the reasons given by the assessee, in our considered view, the assessee could not substantiate its argument that the investments in shares of other companies is for strategic business purpose is not provided with relevant evidences. Assessee itself has admitted fact that the interest bearing funds has been used for investment in shares and also for non-business purpose. CIT (A) after considering the relevant facts has rightly sustained disallowance of interest and thus, in our considered view, there is no error in the reasons given by the CIT (A) on this issue to take a contrary view. Thus, we reject the argument of the assessee and uphold the findings of the learned CIT (A). Assessee appeal dismissed.

Summary

Issues Involved:

1. Disallowance of Interest Expenditure under Section 14A of the Income Tax Act, 1961.
2. Computation of Short-Term Capital Loss from Purchase and Sale of Shares.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 14A of the Income Tax Act, 1961:

The first issue pertains to the disallowance of interest expenditure under Section 14A of the Income Tax Act, 1961. The assessee had borrowed funds from various banks and financial institutions and paid interest on these loans. It was also noted that the assessee invested in shares of various companies. The Assessing Officer disallowed the interest paid on loans under Section 14A, arguing that the interest-bearing funds were utilized for investments in shares and securities yielding exempt income. The CIT (A) reviewed the details of the loans and investments and disallowed a proportionate interest amount of Rs. 25,79,642, while providing relief for Rs. 9,81,105. The assessee contended that the investments were not made for dividend income, thus Section 14A should not apply, and the entire interest expenditure of Rs. 35,60,747 should be allowed. However, upon review, it was found that the assessee did not provide sufficient evidence to substantiate that the investments were for strategic business purposes. The Tribunal upheld the CIT (A)'s decision, agreeing that the disallowance of Rs. 25,79,642 was justified, as the interest-bearing funds were indeed used for non-business purposes.

2. Computation of Short-Term Capital Loss from Purchase and Sale of Shares:

The second issue concerns the computation of Short-Term Capital Loss from the purchase and sale of shares of M/s. Shri Vishnu Cements Ltd (SVCL). The assessee purchased shares at a significantly higher price than the market rate from related parties and sold them at a lower price, claiming a Short-Term Capital Loss of Rs. 4,24,29,003. The Assessing Officer disallowed this loss, suspecting it was artificially booked through transactions with group entities to offset capital gains. The CIT (A) recalculated the Short-Term Capital Loss by considering the purchase cost at Rs. 33 per share, following a precedent set by the ITAT Hyderabad Benches in a similar case. The assessee argued that the transactions were genuine and supported by evidence, including SEBI-approved open offers and MOUs. However, the Tribunal found that the transactions were not for acquiring controlling interest in SVCL but were arranged to book artificial losses. The Tribunal noted inconsistencies, such as the rapid resale of shares at a loss and the lack of actual consideration transfer, supporting the view that these were not genuine transactions. The Tribunal upheld the CIT (A)'s recomputation of the Short-Term Capital Loss to Rs. 42,08,226, affirming that the transactions were designed to avoid tax on capital gains.

Conclusion:

The appeal filed by the assessee was dismissed, with the Tribunal affirming the CIT (A)'s findings on both issues. The disallowance of interest expenditure under Section 14A was upheld, and the recomputation of Short-Term Capital Loss was deemed appropriate, given the evidence of non-genuine transactions.