2016 (4) TMI 384 - AT - Income Tax

Disallowance of short term capital loss - Held that - Right to recover the money from the Indian entity, in the light of the financial difficulties that the Indian entity was traversing through, was valued at Euro 7,31,000. There is no dispute about bonafides of this valuation. As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bonafides or to show that it s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored. The fact remains that the recoverable from the Indian entity is transferred by the assessee and that it was transferred for an amount lesser than the cost at which it is acquired. There is also no dispute that if the capital loss is to be allowed, the loss has to be short term capital loss. In these circumstances, in our considered view, there is no justification in declining the short term capital loss claimed by the assessee.- Decided in favour of assessee

Issues Involved:
1. Disallowance of short term capital loss.
2. Classification of the loan as a capital asset.
3. Determination of whether the transfer of the loan results in a short term capital loss.
4. Validity and logic behind the short term capital loss claim.
5. Factual inaccuracies in the CIT(A)'s observations.
6. Grounds not decided by the CIT(A).

Issue-wise Detailed Analysis:

1. Disallowance of Short Term Capital Loss:
The central issue of the appeal is whether the CIT(A) was justified in upholding the disallowance of the short term capital loss of ?34,68,84,550 claimed by the assessee. The assessee, a non-resident company, had loaned Euros 9 million to its Indian subsidiary, SNISL, which was later sold to Siemens AG at a diminished value of Euros 7,31,000 due to SNISL's financial troubles. The Assessing Officer (AO) disallowed the loss on the grounds that the loan was not a capital asset under section 2(14) and that the assignment of the debt did not constitute a transfer under section 2(47).

2. Classification of the Loan as a Capital Asset:
The CIT(A) upheld the AO's view that the loan was a current asset and not a capital asset, thus denying the claim of short term capital loss. The Tribunal, however, emphasized that the term "capital asset" under section 2(14) includes "property of any kind held by an assessee," except for specific exclusions. The Tribunal referenced the Bombay High Court's definition of property, which includes every possible interest a person can hold or enjoy. Consequently, the Tribunal concluded that the loan, being a property interest, qualifies as a capital asset.

3. Determination of Whether the Transfer of the Loan Results in a Short Term Capital Loss:
The Tribunal examined whether the assignment of the loan to Siemens AG constituted a transfer under section 2(47). The Tribunal noted that the sale of trade debts or loans is common in commerce and confirmed that the rights to recover the money from SNISL were transferred to Siemens AG for Euros 7,31,000. Since the loan was deemed a capital asset, its transfer resulted in a short term capital loss.

4. Validity and Logic Behind the Short Term Capital Loss Claim:
The Tribunal rejected the CIT(A)'s assertion that the short term capital loss claim was illogical and without reasonable basis. The Tribunal highlighted that the assessee had a legitimate right to assign the debt to mitigate further losses and that the transaction was bona fide. The Tribunal found no evidence of tax evasion motives or sham transactions, thus validating the assessee's claim.

5. Factual Inaccuracies in the CIT(A)'s Observations:
The Tribunal addressed the assessee's grievances regarding factual inaccuracies in the CIT(A)'s observations. The Tribunal clarified that the CIT(A)'s observations about the agreement date and the definition of transfer were incorrect and not germane to the context of determining whether the loan was a capital asset.

6. Grounds Not Decided by the CIT(A):
The Tribunal noted that the CIT(A) failed to address certain grounds raised by the assessee, such as the diminution in value of the debt and the allegation of the transaction being a device to reduce tax liability. The Tribunal found these grounds to be relevant and necessary for a comprehensive decision.

Conclusion:
The Tribunal concluded that the loan was indeed a capital asset and its transfer resulted in a short term capital loss. The Tribunal directed the AO to allow the short term capital loss claimed by the assessee, subject to normal verifications. The appeal was allowed, and the judgment was pronounced on 31st March 2016.

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