2016 (11) TMI 599 - AT - Income Tax

Short term capital loss - sale of land at Hasteda(Rajasthan) - sham transaction - Held that - The assessee in its agreement to sale dated 10-03-2008 with Siyaram Exports India Private Limited for purchase of the said land for ₹ 171.50 lacs wherein cash advance of ₹ 10 lacs was only paid by the assessee on 10-03-2008 had an exit clause in the said agreement wherein the assessee could have asked the Siyaram Exports India Private Limited to forfeit advance of ₹ 10 lacs paid by the assessee on 10-03-2008 if the assessee was not able to complete the transaction of purchase of land of its own by 31-12-2008 due to any reasons whatsoever and the loss would have been limited and restricted to ₹ 10 lacs only, but the manner in which the assessee went ahead in January 2009 and entered into two sales deed both dated 16-01-2009 for sale of aforesaid land to Smt Anju Yadav and secondly to Smt Savitri Yadav and Smt. Nirmala Yadav for a meager sum of ₹ 58.40 lacs to self prejudice itself by saddling with an avoidable and unwarranted capital loss of ₹ 114 lacs instead of restricting the said capital loss to ₹ 10 lacs as described above by asking the seller Siyaram Exports India Private Limited to forfeit the advance, clearly defies all logic, rationality and principles of commercial expediency known to the business world which clearly indicates to irresistible as well one and only one conclusion that the whole transaction for purchase and sale of afore-stated land Were accommodating in nature whereby interests of both the purchaser and seller in receiving or giving sale consideration through consideration amounts recorded in books of accounts were duly looked by the assessee wherein seller was accommodated with making of higher payments on record and buyers were accommodated to give lesser price on record for the same parcel of land , and on the touchstone of preponderance of probabilities it reflects that the rest of the money purportedly exchange hands as on-money which were not brought to tax on record . The transactions for sale and purchase of land were entered into by the assessee and once the Revenue has doubted the transactions as being not genuine for the reasons as set out above, then the onus shifts back to the assessee to prove by cogent evidences and explanations that the transactions for purchase and sale of land were in fact genuine which the assessee in the instant case failed to do so. Thus, these transactions for purchase and sale are not proved by the assessee to be genuine transactions and are held by us to be sham and colorable devices and short term capital loss of ₹ 114 lacs incurred by the assessee cannot be allowed under the provisions of the Act. - Decided against assessee.

Issues Involved:
1. Calculation of loss from the sale of plywood/furniture.
2. Disallowance of rebate and claim for defective material.
3. Application of Rule 8D pursuant to Section 14A.
4. Treatment of Short Term Capital Loss on the sale of land as a sham transaction.

Issue-wise Detailed Analysis:

1. Calculation of Loss from Sale of Plywood/Furniture:
The assessee company claimed a loss of ?3,83,03,181 from the sale of plywood/furniture, which was disputed by the AO. The AO observed that the assessee did not take physical delivery of goods, acting only as a conduit/agent, and thus disallowed the loss, attributing it to the principals rather than the assessee. The CIT(A) upheld this disallowance, noting inaccuracies in the audit report and the lack of evidence to contradict the AO's findings. The Tribunal, considering the assessee's contention of an auditor's mistake, set aside the issue for re-verification by the AO, directing a comprehensive examination of the matter.

2. Disallowance of Rebate and Claim for Defective Material:
The assessee claimed a rebate of ?1,86,79,300 for defective materials supplied to a customer. The AO disallowed this claim, arguing that the assessee, acting as a conduit, should not bear the loss for defective materials supplied by its suppliers. The CIT(A) upheld this disallowance due to the lack of evidence proving the assessee's responsibility for the defects. The Tribunal, in the interest of justice, set aside this issue for de-novo determination, directing the AO to verify the genuineness and quantification of the claim.

3. Application of Rule 8D Pursuant to Section 14A:
The AO applied Rule 8D to disallow ?6,52,727 under Section 14A, related to the assessee's exempt dividend income. The CIT(A) confirmed this disallowance, noting the assessee's failure to show a direct nexus between interest expenditure and exempt income. The Tribunal, while agreeing with the application of Section 14A, directed the AO to exclude shares held as stock-in-trade from the calculation and to ensure the disallowance does not exceed the exempt income, following relevant judicial precedents.

4. Treatment of Short Term Capital Loss on Sale of Land as a Sham Transaction:
The AO disallowed a short term capital loss of ?1,14,27,420 on the sale of land, deeming the transaction as sham. The assessee's purchase agreement and subsequent sale at a significantly lower price raised suspicions. The CIT(A) upheld the disallowance, citing the lack of evidence for the land's valuation drop and the absence of 7/12 extracts. The Tribunal confirmed this view, noting the transactions defied commercial logic and appeared as colorable devices, thus sustaining the disallowance.

Conclusion:
The Tribunal allowed the appeal for statistical purposes for the assessment year 2008-09, directing a re-verification of the loss and rebate claims. For the assessment year 2009-10, the appeal was partly allowed, directing a re-calculation of disallowance under Section 14A and confirming the disallowance of the short term capital loss on the land sale.

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