2012 (3) TMI 175 - HC - Income Tax

Transaction being sham and not genuine cannot be considered to be a part of tax planning - Assessee borrowed Rs. 48 crores from the G. K. Rathi group and bought shares in four 100% subsidiary companies shares purchased at unreasonable premium price (at Rs 150 per share when average value is less than Rs 25 per share) - amount received by the said subsidiary companies was transferred back to another company of the G.K. Rathi group said shares sold for Rs. 5 each in subsequent A.Y. - short-term capital loss claimed set-off of such loss against other long-term capital gains AO, CIT (A) & Tribunal rejected the transaction of investment into, and sale of, shares as a sham dis-allowance of capital loss and its set off dis-allowance of loss arising out of the business of providing guarantees Held that - Whenever there are reasons to believe that the apparent is not real; then the taxing authorities are entitled to look into surrounding circumstances to find out the reality and apply the test of human probabilities. Supreme Court in case of Vodafone International vs. UOI (2012 - TMI - 208574 - Supreme Court Of India) made it clear that a colourable device cannot be a part of tax planning. Where a transaction is sham and not genuine, it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. In the present case the purchase and sale of shares, so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. See (Sumati Dayal vs CIT (1995 - TMI - 5469 - Supreme court) Decided against the assessee. In respect of guarantees Held that - The surrounding circumstances can be looked at, but not without considering the evidence led by the party in support of its stand. Hence, it would be proper to remand the matter to the Tribunal to reconsider the issue in respect of loss on account of business of providing guarantees and pass an appropriate orders thereon.

Issues Involved:

1. Violation of principles of natural justice and fair play.
2. Disallowance of short-term and long-term capital losses on the sale of shares of specific companies.
3. Disallowance of short-term loss related to the sale of shares of Killick Halco Limited.
4. Conversion of short-term loss into a short-term gain.
5. Disallowance of long-term capital loss from the sale of shares of Pelican Paints Ltd.
6. Rejection of business loss from providing guarantees.
7. Tribunal's order being perverse and contrary to the weight of evidence.

Issue-wise Detailed Analysis:

1. Violation of Principles of Natural Justice and Fair Play:
The appellant argued that the Tribunal relied on the Supreme Court's decision in Sumati Dayal without prior notice, violating natural justice. The Tribunal applied the theory of surrounding circumstances and human probabilities to weigh evidence, which is a well-settled legal principle. The court found no prejudice to the appellant as this principle is widely accepted in civil proceedings. The proviso to Rule 11 of the Income Tax Appellate Tribunal Rules, 1963, was deemed inapplicable since the Tribunal did not base its decision on an unargued ground. Thus, no substantial question of law arose on this issue.

2. Disallowance of Short-term and Long-term Capital Losses:
The Tribunal confirmed the disallowance of capital losses arising from the sale of shares of Matterhorn Investment Ltd., Mountblanc Investments Ltd., Fircrest Investment Pvt. Ltd., and Galactia Investments Ltd. The Assessing Officer found these transactions to be sham, designed to create artificial losses to offset capital gains. The appellant's investments in these subsidiaries at a high premium were transferred back to the G.K. Rathi Group, indicating a circular transaction without real economic substance. The Tribunal's findings were based on substantial evidence, and no question of law arose.

3. Disallowance of Short-term Loss Related to Killick Halco Limited:
The appellant converted a loan to Killick Halco Ltd. into equity at an exorbitant premium, later selling the shares at a significant loss to a group company. The Assessing Officer found this transaction to be a sham, aimed at creating artificial losses to offset capital gains. The Tribunal upheld this finding, considering the surrounding circumstances and the lack of economic justification for the high premium. The appellant's argument that the shares were genuinely purchased and sold was not substantiated by the evidence. No question of law arose.

4. Conversion of Short-term Loss into Short-term Gain:
The Tribunal affirmed the conversion of the short-term loss of Rs. 3,09,26,000 into a short-term gain of Rs. 80,80,540. The Assessing Officer found the transactions involving Killick Halco Ltd. to be sham, with the appellant retaining control over the shares sold to a group company. The Tribunal upheld this finding, concluding that the transactions were not genuine and were designed to create artificial losses. The appellant's argument was not supported by the evidence, and no question of law arose.

5. Disallowance of Long-term Capital Loss from Pelican Paints Ltd.:
The Tribunal upheld the disallowance of the long-term capital loss of Rs. 1,68,37,861 from the sale of shares of Pelican Paints Ltd. to Snowcem India Ltd., a group company. The Assessing Officer found the sale to be a sham, with the shares sold at a nominal price without considering the true value of the company's assets. The Tribunal concluded that the transaction was self-serving, designed to create artificial losses. The appellant's argument was not substantiated by the evidence, and no question of law arose.

6. Rejection of Business Loss from Providing Guarantees:
The appellant claimed a business loss of Rs. 105 crores from providing guarantees. The CIT (Appeal) and the Tribunal found the claim to be not genuine, as the appellant had not accounted for commission income from the guarantee business and had not pursued recovery of the amounts due. The Tribunal noted the close relationship between the appellant and the G.K. Rathi Group, concluding that the transaction was not genuine. However, the court found that the Tribunal did not consider evidence of suits filed by the appellant to recover the amounts. The matter was remanded to the Tribunal for reconsideration.

7. Tribunal's Order Being Perverse and Contrary to Weight of Evidence:
The appellant argued that the Tribunal's order was perverse and contrary to the weight of evidence. The court found that the Tribunal had considered all the evidence and surrounding circumstances, reaching a possible conclusion based on the facts. The Tribunal's findings were supported by substantial evidence, and no question of law arose.

Conclusion:
The court set aside the Tribunal's order dated 6 April 2010 only to the extent of the business loss of Rs. 105 crores on account of providing guarantees. The Tribunal was directed to reconsider the issue and pass appropriate orders. The appeal was disposed of, with no order as to costs.

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