2015 (8) TMI 870 - AT - Income Tax

Disallowance of the long term capital loss - Since loss is arising out of transactions between related parties and in the absence of explanation on how the value of ₹ 0.064 per share was determined, the loss claimed by the assessee was disallowed BY AO and CIT(A) - Held that - As noted by the CIT(Appeals), the assessee has purchased shares at the rate of ₹ 10 per share from outside and also from company directly, when the net worth of the company was in negative. Later the same was sold to the wife of the Managing Director of the assessee company for a meagre amount of 6 paise per share. The assessee has not brought on record any evidence, even before us to establish that the loss was incurred by the assessee on genuine reason and as such, the same cannot be said to be genuine loss. The sale of shares of such lowest price is shocking conscious of the Bench and all human probability shows a prudent person never to sell the shares at such a sale price, as held in the cases of Sumati Dayal v. CIT (1995 (3) TMI 3 - SUPREME Court) and CIT v. Durga Prasad More (1971 (8) TMI 17 - SUPREME Court). Accordingly, we are inclined to say that this loss cannot be considered as capital loss so as to allow the claim of the assessee in the absence of any proper explanation to sell the share such low price. - Decided against assessee. Disallowance of advances written off - Held that - In the present case, the assessee was not able to establish that the loan was advanced during the normal course of business carried on by it. There is no evidence to show that the assessee was carrying on money lending business and merely because, the assessee advanced the money to its sister concern, it cannot be said that the assessee is carrying on money lending business. Therefore, non-recovery of that loan cannot be treated as business loss. This is not an advance given to M/s. Sita-Gita.Com Ltd. in ordinary course of business of the assessee. In other words, though it was treated as an advance, it was not gone into the computation of income while computing the income of the assessee. At best, it could be advanced in the capital field. Being so, the loss of capital cannot be allowed as an expenditure, when it became bad and thereafter, written off. Advance of loans to a sister concern or a subsidiary company cannot be said to be for the purpose of business. It is true that, the assessee is entitled to write off of debt in a year in which the assessee feels that debt becomes irrecoverable. However, it cannot be said that it is an advance made in normal course of business of the assessee and also the assessee has not produced any evidence to show that the loan was advanced in the normal course of business. Hence, the mandatory conditions of sec.36(2) have not fulfilled for a claim of bad debt. In our opinion, these conditions have not been fulfilled by the assessee and therefore, we hold that the CIT(Appeals) is justified in confirming the addition made towards bad debt. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of long-term capital loss of Rs. 1,38,11,828.
2. Disallowance of Rs. 17,50,000 written off as irrecoverable advance.

Detailed Analysis:

1. Disallowance of Long-Term Capital Loss of Rs. 1,38,11,828:

The first issue concerns the disallowance of a long-term capital loss amounting to Rs. 1,38,11,828, which the assessee claimed due to the sale of shares of M/s. Sita-Gita.Com Ltd. The shares were sold to a related party at a significantly lower price than their purchase value. The shares, purchased at Rs. 10 per share, were sold at Rs. 0.064 per share to the wife of the Managing Director of the assessee company. The assessee argued that the valuation was based on the audited financials of the company, which showed a negative net worth due to accumulated losses.

The Assessing Officer (AO) disallowed the loss, questioning the valuation method and suggesting that the transaction was designed to create artificial losses. The AO noted that the shares were purchased at an inflated value despite the company's negative net worth and later sold to a related party at a meager price without a satisfactory explanation for the valuation.

Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing the lack of a convincing explanation for the valuation of Rs. 0.064 per share and the related party nature of the transaction. The CIT(A) concluded that the loss was not genuine.

The Tribunal concurred with the CIT(A), noting that the assessee failed to provide evidence to substantiate the loss as genuine. The Tribunal referenced Supreme Court cases (Sumati Dayal v. CIT and CIT v. Durga Prasad More) to support its decision that the loss could not be considered genuine without proper justification. Consequently, the claim for the capital loss was rejected.

2. Disallowance of Rs. 17,50,000 Written Off:

The second issue pertains to the disallowance of Rs. 17,50,000, which the assessee wrote off as an irrecoverable advance to M/s. Sita-Gita.Com Ltd. The AO treated this amount as a capital expenditure, arguing that the assessee did not have any business relations with M/s. Sita-Gita.Com Ltd., and the advance was not given in the ordinary course of business. The AO further noted that the assessee was not in the money-lending business, and thus, the write-off could not be allowed as a revenue expenditure.

The CIT(A) upheld the AO's decision, agreeing that the advance represented a capital loss and not a business loss. The CIT(A) emphasized that the assessee failed to demonstrate that the loan was advanced in the normal course of business and noted that the assessee was not engaged in money lending.

The Tribunal confirmed the CIT(A)'s findings, stating that the conditions under Section 36(1)(vii) and Section 36(2) of the Income Tax Act were not met. Specifically, the Tribunal highlighted that the assessee did not establish that the loan was part of its regular business activities. The Tribunal concluded that the non-recovery of the loan could not be treated as a business loss, and therefore, the write-off was correctly disallowed.

Conclusion:

The appeal by the assessee was dismissed on both grounds. The Tribunal upheld the disallowance of the long-term capital loss due to the lack of a genuine transaction and the disallowance of the write-off as the conditions for claiming it as a business loss were not satisfied. The judgment emphasized the importance of substantiating claims with proper evidence and adhering to the conditions prescribed under the Income Tax Act.