2015 (10) TMI 2304 - AT - Income Tax

Disallowance of loss under the head capital gain treating the transaction doubtful - whether there is no scope of any fair market value or estimation and in case of sale of shares, the Assessing Officer has no power to replace the value of the consideration agreed between the parties? - Held that - In the present case, the assessee had shown sale of 10 lacs shares of Pioneer Ltd. for a total consideration of ₹ 1 lac only i.e. @ ₹ 0.10 per share. The cost of such shares had been shown at ₹ 4 crores i.e. ₹ 40 per share.The shares were sold to A.S.A. Agencies Pvt. Ltd. @ ₹ 0.10 per share on 31.3.2009. The loss incurred on the sale of shares was ₹ 4,47,75,491. In view of the of Nilofar Singh case 2008 (8) TMI 165 - DELHI HIGH COURT that the expression full value of consideration used in section 48 of the Income-tax Act, 1961 does not have any reference to market value, we are of the view that the Assessing Officer was having no power to replace the value of the consideration agreed between the parties with any fair market value or estimation. Only because the Pioneer Ltd. had shown the book value of shares at the rate of ₹ 3.50 per share, the Assessing Officer was not justified to ignore the price agreed between the parties and to doubt the genuineness of the claimed loss, even ignoring the valuation report. We thus while setting aside orders of the authorities below direct the Assessing Officer to delete the disallowance of ₹ 4,47,55,491 incurred on the sale of shares of the Pioneer Ltd. The issue is thus decided in favour of the assessee.

Issues Involved:
1. Legality and factual correctness of the CIT(Appeals) order.
2. Allowability of loss computed by the assessee on the sale of shares of M/s. Pioneer Ltd.
3. Validity of the purchase and sale consideration of the impugned transaction.
4. Appropriateness of the valuation method used for the shares.

Detailed Analysis:

1. Legality and Factual Correctness of the CIT(Appeals) Order:
The assessee challenged the First Appellate Order on the grounds that it was bad in law and on facts. The Tribunal examined the arguments and found that the CIT(Appeals) had upheld the disallowance of Rs. 4,47,55,491 claimed as a loss under the head "capital gain," treating the transaction as doubtful.

2. Allowability of Loss Computed by the Assessee on the Sale of Shares of M/s. Pioneer Ltd.:
The assessee, engaged in investment and property business, disclosed a capital loss of Rs. 5,21,22,725 in the return of income. The loss included the sale of shares of three unlisted companies, with a significant portion attributed to the sale of shares of M/s. Pioneer Ltd. The Assessing Officer (AO) required detailed documentation, which the assessee partially provided. The AO found the balance sheet incomplete and unverified, leading to the disallowance of the claimed loss of Rs. 4,47,55,491. The CIT(Appeals) upheld this disallowance.

3. Validity of the Purchase and Sale Consideration of the Impugned Transaction:
The AO doubted the genuineness of the transaction due to incomplete documentation and the lack of supporting evidence for the sale consideration of Rs. 1 lac for shares initially purchased at Rs. 4 crores. The assessee argued that the long-term capital loss was computed as per Section 48 of the Income-tax Act, 1961, which does not allow for market value or estimation to replace the agreed consideration between parties. The Tribunal found merit in this argument, citing legal precedents that the AO cannot replace the agreed consideration with a fair market value.

4. Appropriateness of the Valuation Method Used for the Shares:
The assessee contended that the valuation of shares by an independent valuer using the NAV method was overlooked by the authorities. The Tribunal agreed that the valuer's report is a significant piece of evidence and cannot be dismissed without substantial contrary evidence. The Tribunal noted that the valuation report and the auditor's certificate supported the assessee's claimed share value, which was significantly lower than the AO's estimation.

Conclusion:
The Tribunal concluded that the AO had no authority to replace the agreed consideration with a fair market value, especially when the valuation report and auditor's certificate supported the assessee's claim. The Tribunal set aside the orders of the authorities below and directed the AO to delete the disallowance of Rs. 4,47,55,491 incurred on the sale of shares of M/s. Pioneer Ltd. The appeal was allowed, and the issue was decided in favor of the assessee.

Order Pronounced:
The order was pronounced in the open court on 28.9.2015.

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