2014 (1) TMI 498 - HC - Income Tax

Disallowance of short term capital loss - assessee appellants purchased shares, on 8.11.2007, @ Rs. 100/- per share and sold the same on 31.3.2008 @ Rs. 10/- per share - book value was Rs. 56 - Held that - The revenue cannot take or accept such make-believe transactions, as presented by the appellants - Truth or genuineness of such transactions must prevail over the smoke screen, created by way of pre-meditated series of steps taken by the appellants, with a view to imparting a colour of genuineness and character of commercial nature, to such share transactions - One has to look at the whole transactions and a series of steps taken to accomplish such share transactions, in an integrated manner, with a view to ascertaining the true nature and character of such purchase and sale of shares - The shares were purchased and sold in these cases, cannot be treated as regular business transactions - Following CIT v. Durga Prasad More 1971 (8) TMI 17 - SUPREME Court - The revenue is entitled to look into the surrounding circumstances, to find out the reality of the recitals made in the documents. In the present case, there is an obvious and plain transaction of tax evasion which has been clothed with the smoke-screen of subterfuges, by the assessee appellants - The facts of the present case clearly reveal that such trading transactions of purchase and sale of shares, had not been effected, for commercial purpose but to create artificial loss, with a view to reducing tax liability Such transactions are not genuine and natural transactions but preconceived transactions, demonstrating creation of such short term capital loss The appellants restored to a preconceived scheme, to procure short term capital loss, for the purpose of neutralizing the short term capital gains by way of price differential, in the said share transactions not supported by market factors The findings of the CIT(Appeals) are not based on relevant, cogent and credible material or evidence - Such share transactions were not quoted and consequently, were not traded through stock exchange - When all the facts and circumstances of the case are viewed, in totality, it is evident that the assessee appellants failed to discharge the onus, to prove the genuineness of the transactions of purchase and sales of such shares - Decided against assessee.

Summary

Issues Involved:

1. Delay in refiling the appeal.
2. Disallowance of short term capital loss on sale of shares.
3. Genuineness and bonafide nature of the transactions.
4. Onus of proof regarding the genuineness of transactions.
5. Impact of the assessee's offer to surrender the loss.
6. Evaluation of the Tribunal's reversal of the CIT(A)'s decision.

Detailed Analysis:

1. Delay in refiling the appeal:

The court condoned the delay in refiling the appeal, allowing the case to proceed on its merits.

2. Disallowance of short term capital loss on sale of shares:

The appellant claimed a short term capital loss of Rs. 22,50,000/- on the sale of shares of M/s Arcee Ispat Udyog Limited. The Assessing Officer (AO) disallowed this loss, asserting that the transactions were not genuine. The Tribunal upheld the AO's decision, reversing the CIT(A)'s order which had allowed the claim. The court found no merit in the appellant's arguments and upheld the Tribunal's decision.

3. Genuineness and bonafide nature of the transactions:

The court scrutinized the transactions and noted several red flags:
- The shares were purchased at Rs. 100/- per share and sold at Rs. 10/- per share within a short period.
- The shares were unlisted and not traded on any stock exchange.
- The transactions were circular, involving the same broker and company officials.
The court concluded that these transactions were not genuine and were structured to create an artificial loss to evade tax, citing the Supreme Court's decision in McDowell and Co. Limited v. CTO.

4. Onus of proof regarding the genuineness of transactions:

The Tribunal found that the assessee failed to discharge the onus of proving the genuineness of the transactions. The court agreed, emphasizing that the surrounding circumstances and the nature of the transactions indicated a lack of commercial substance, aimed solely at reducing tax liability.

5. Impact of the assessee's offer to surrender the loss:

The assessee's offer to surrender the loss, subject to no penal action, was seen as an admission of the non-genuine nature of the transactions. The court noted that such an offer supports the AO's findings and cannot be ignored.

6. Evaluation of the Tribunal's reversal of the CIT(A)'s decision:

The Tribunal's detailed analysis revealed that the CIT(A) failed to consider the integrated nature of the transactions and the surrounding circumstances. The Tribunal rightly reversed the CIT(A)'s decision, restoring the AO's findings. The court upheld the Tribunal's decision, dismissing the appeals.

Conclusion:

The court dismissed the appeals, finding no merit in the appellant's arguments and concluding that the transactions were not genuine, aimed at creating an artificial loss to evade tax. The Tribunal's decision to uphold the AO's disallowance of the short term capital loss was affirmed.