2017 (3) TMI 1312 - AT - Income Tax

Non-adjustment of long term capital loss on sale of listed shares against taxable long term capital gains of sale of unlisted shares - STT was not paid and the transactions were outside the purview of section 10(32) - Held that - The exercise undertaken by the assessee in selling the listed shares of its group concern GGDL in off market transaction is acceptable mode of selling the shares. Once the transaction has been undertaken by the assessee as business decision then simply because the said transaction could be routed through Stock Exchange does not justify the stand of authorities below in not allowing the set off of loss arising from off market transaction on which no STT was paid against the gain arising on sale of unlisted group companies on which also no STT is to be paid. Applying the rule of li teral interpretation to the provisions of the Act i.e. section 10(38) of the Act and section 88 of the Finance (No.2) Act 2004 it is clear that STT is to be paid on such transaction which are entered into through recognized Stock Exchange. The Section does not provide that each transaction of sale of listed transaction is to be routed through Stock Exchange. Applying the said principle to the facts of the case where the shares of group entity which was a listed company i.e. GGDL were sold in off market transaction then no STT is to be paid and the provisions of section 10(38) of the Act are not to be applied and consequently set off of loss arising on sale of GGDL against the income from long term capital gains arising on sale of unquoted shares cannot be denied. Whether the transaction to be a colourable device adopted by the assessee in order to adjust the loss against the gain arising in its hands during the year wherein the shares were sold to sister concern? - Held that - We have already referred to the factual aspects of the issue where the shares of GGDL were sold to sister concern BVHPL in order to settle the loan raised from the said concern the said concern was not 100% subsidiary of the assessee but the assessee had only 24% shareholding in the said group company. In order to maintain the shares of listed group concern GGDL within group the decision taken by the assessee to arrest the loss arising on account of liability to pay interest on the loan raised from BVHPL cannot be doubted. It is a business decision taken by the assessee to arrest the losses and the same cannot be called as colourable devise. Accordingly we reverse the findings of Assessing Officer and CIT(A) in this regard. Colourable device - whether by selling the shares to its own subsidiary at prices above or below the book value the assessee was manipulating the income to reduce its tax liability? - Held that - First of all as decided in the paras hereinabove the shares have not been sold to subsidiary of the assessee but to a concern from whom the assessee has raised loan to the extent of 18 crores and the decision was taken to repay the loan and arrest the payment of interest on such loans the shares of the group concern were sold in off market transaction to BVHPL. The said transaction is not a colourable device. Further the assessee has sold the shares on the market price prevailing on the date of sale and no fault can be found with such transactions undertaken by the assessee. In case as against the market value the other concern had purchased the shares at a higher value then it would be questionable but it is not so in the present case and hence we find no merit in the orders of authorities below in holding that the loss claimed by selling the shares of GGDL to its 100% subsidiary below the book value should be ignored while setting it off against the other income if any in current year or for carry forward and set off in subsequent years. The loss was worked out at (-) 2, 75, 83, 524/-. We reverse the orders of Assessing Officer and CIT(A) in this regard and hold that the total loss arising on the said transaction can be adjusted against the gain arising on sale of unquoted shares during the year and balance loss can be carried forward and set off against any other gain arising in the subsequent years. Assessee appeal allowed.

Summary

Issues Involved:
1. Non-adjustment of long-term capital loss on sale of listed shares against taxable long-term capital gains from sale of unlisted shares.
2. Determination of whether the transaction was a colorable device.
3. Evaluation of the sale of shares at book value versus market value.

Detailed Analysis:

1. Non-adjustment of Long-term Capital Loss:
The primary issue in the appeal was whether the long-term capital loss of ?8,39,57,040/- on the sale of listed shares could be set off against the taxable long-term capital gains from the sale of unlisted shares. The assessee argued that both transactions were outside the purview of section 10(38) of the Income Tax Act, 1961, as no Securities Transaction Tax (STT) was paid. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, asserting that the listed shares' sale should have been subject to STT and thus fell under section 10(38), making the loss ineligible for set off.

2. Determination of Colorable Device:
The AO and CIT(A) held that the off-market sale of shares to a 100% subsidiary was a colorable device intended to claim a set-off of the loss against the profits from unlisted shares. They noted that the transactions were executed on the same day and involved significant discrepancies between book value and market value, further suggesting manipulation.

3. Sale of Shares at Book Value vs. Market Value:
The AO observed that the shares of GGDL were sold at ?48/- per share, below the book value of ?59.60, while unlisted shares were sold above their book value, resulting in capital gains. This discrepancy led to the conclusion that the transactions were structured to reduce tax liability.

Judgment Analysis:

Non-adjustment of Long-term Capital Loss:
The Tribunal examined whether the sale of listed shares in an off-market transaction, where no STT was paid, could be governed by section 10(38). It was concluded that since the transactions were off-market and no STT was paid, section 10(38) did not apply. The Tribunal emphasized that both market and off-market transactions are recognized, and the decision to conduct an off-market sale was a legitimate business decision to prevent dilution of group holdings. Consequently, the loss from the off-market sale of listed shares was eligible for set off against the gains from unlisted shares.

Determination of Colorable Device:
The Tribunal found no merit in the AO's and CIT(A)'s conclusion that the transaction was a colorable device. It was highlighted that the decision to sell shares off-market to a group concern was a business decision aimed at repaying a loan and preventing further interest liability. The Tribunal noted that the shares were sold to BVHPL, a group company, to maintain control within the group and not to manipulate tax liability.

Sale of Shares at Book Value vs. Market Value:
The Tribunal addressed the AO's concern regarding the sale price of GGDL shares being below book value. It was clarified that the shares were sold at the prevailing market price, and the transaction was a legitimate business decision to settle a loan. The Tribunal rejected the notion that the transaction was a colorable device, emphasizing that the shares were not sold to a 100% subsidiary but to a group concern where the assessee held only a 24% stake.

Conclusion:
The Tribunal allowed the appeal, holding that the long-term capital loss on the off-market sale of listed shares could be set off against the long-term capital gains from the sale of unlisted shares. The decision to sell shares off-market was deemed a legitimate business decision, and the transactions were not considered colorable devices. The Tribunal reversed the findings of the AO and CIT(A), allowing the total loss to be adjusted against the gains and carried forward for future set off.