2017 (3) TMI 1049 - AT - Income Tax

Allowing set off of long-term capital loss on sale of preference shares against the long term capital gain earned on sale of apartment - AO disallowed the capital loss treating the transaction to be shame in nature - Held that - We find that the assessee was holding preference shares in group companies and sold those shares to the company, which is owned by the assessee and her family members. Shares were delivered physically to the purchaser company and thus the assessee has transferred the shares in accordance with law. In our opinion, the transaction is within the parameters of law and in such circumstances the Assessing Officer cannot hold the transaction as a contrived transaction merely because the sale was to a company in which the assessee and her family members are having controlling stake. Further, it cannot be also considered as contrived transaction because the transaction of sale of shares was done prior to sale of apartment and assessee was aware of increasing prices of the apartment. The assessee can plan to reduce its tax liability through legitimate means. Assessee relied on the judgment of in the case of Union of India versus Azadi Bachao Andolan and another ( 2003 (10) TMI 5 - SUPREME Court) has held that merely because the transaction is entered into by the assessee with the motive to save the tax, the transaction cannot be regarded as colourable device so long as the transaction is valid in law - Decided in favour of assessee Brokerage expenses while computing the capital gain on sale of apartment - Held that - assessee submitted explanation about the general role of brokers in sale deals of properties and stated that the broker played a role in negotiating the deal. The learned Commissioner of Income-tax (Appeals) on the basis of said explanation, allowed the appeal of the assessee. We have perused the order of the Assessing Officer as well as the impugned order of the learned Commissioner of Income-tax (Appeals). In our opinion, no documentary evidences in support of services of negotiating the deal by the broker Sh. Rajeev Mathur, in the present deal of surrendering the flat back to the builder, were submitted by the assessee either before the Assessing Officer or before the learned Commissioner of Income-tax (Appeals). In the circumstances, we feel it appropriate to restore the issue to the file of the Assessing Officer for deciding afresh after taking into account the evidence in support of services rendered by the broker. It is nevertheless to mention that assessee shall be afforded sufficient opportunity of hearing. - Decided in favour of revenue for statistical purpose.

Summary

Issues Involved:
1. Allowing the set-off of long-term capital loss on the sale of preference shares against long-term capital gain on the sale of an apartment.
2. Allowing brokerage expenses while computing capital gains on the sale of an apartment.

Issue-wise Detailed Analysis:

1. Set-off of Long-term Capital Loss:

The Revenue contested the set-off of long-term capital loss on the sale of preference shares against long-term capital gain on the sale of an apartment. The Assessing Officer (AO) observed that the shares were sold to a closely held company owned by the assessee's family, suggesting the transaction was contrived to claim unjust benefits. The AO concluded the transaction aimed to generate artificial capital losses to offset the capital gains from the apartment sale.

The learned Commissioner of Income-tax (Appeals) (CIT(A)) found that:
- The assessee purchased and sold the shares through cheque transactions, and the shares were physically delivered.
- The preference shares were unquoted, had no market, and no dividends were declared, justifying the sale price.
- The AO did not dispute the purchase and sale prices or the actual consideration received.
- The loss arose due to the indexation of the cost of shares.
- The capital loss was incurred before the capital gain, making the set-off legitimate.

The Tribunal upheld the CIT(A)'s findings, stating that the transaction was within legal parameters and could not be deemed contrived merely because it involved a family-owned company. The Tribunal referenced several case laws, including the Supreme Court's decision in Union of India vs. Azadi Bachao Andolan, which held that tax-saving transactions valid in law could not be considered colourable devices.

2. Brokerage Expenses:

The Revenue challenged the brokerage expenses claimed by the assessee while computing capital gains on the sale of an apartment. The AO disallowed the claim, arguing that the apartment was surrendered back to the builder and not sold in the open market, implying no brokerage services were required.

The CIT(A) allowed the brokerage expenses, accepting the assessee's argument that the broker facilitated the sale, negotiated terms, and provided essential market information. The CIT(A) found the brokerage expenses bona fide, supported by broker's receipts and payment by cheque.

The Tribunal, however, noted that no documentary evidence of the broker's services in negotiating the deal was submitted. Consequently, the Tribunal restored the issue to the AO for fresh consideration, allowing the appeal for statistical purposes.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the set-off of long-term capital loss, affirming it as valid and within legal parameters. However, the issue of brokerage expenses was remanded back to the AO for re-evaluation based on documentary evidence of the broker's services. The appeal was partly allowed for statistical purposes.