2023 (4) TMI 153 - AT - Income Tax

Disallowance on loss on shares - colourable device - shares were sold at loss - short-term capital loss denied on sale of shares - allegation of the Revenue is that the assessee by investing a huge amount in a loss-making entity and thereafter selling the shares at a meagre amount has tried to take advantage of her position in the aforesaid company to reduce her tax liability and thus the entire transaction is a colourable device - HELD THAT - As husband of the assessee is the main director on the board and the aforesaid company was regularly assessed to tax and was a genuine company. The aforesaid facts, as recorded in the order of the lower authorities, have not been disputed by the Revenue. Further, it cannot be denied that it is only due to the fact that M/s I Dream Production Pvt. Ltd. was a loss-making entity, the assessee was required to infuse the funds to pay off the debts incurred by the company, being the promoter holding 99.99% shares of the company. As decided in Biraj Investment Pvt. Ltd 2012 (8) TMI 805 - GUJARAT HIGH COURT As long as the Revenue could not doubt the sale price of the shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suffer. We cannot be oblivious to the fact that the Revenue has not disputed the sale price of the shares and the identity of the purchasers is also not in doubt. Therefore, when all the parties to the transaction are genuine and the intention of the assessee in subscribing to the preferential shares of the company is also supported by the benefits derived by the company, the mere fact that the shares were sold at loss does not result in treating the entire transaction as colourable - Appeal by the Revenue is dismissed.

Summary

Issues Involved:

1. Allowance of short-term capital loss on the sale of shares.
2. Allegation of using a colorable device for tax evasion.

Summary:

Allowance of Short-term Capital Loss on the Sale of Shares:

The Revenue challenged the order allowing the assessee a short-term capital loss of Rs. 23,44,27,385 on the sale of shares of M/s I Dream Production Pvt. Ltd. The assessee, holding 99.99% shares of the company, sold these shares at Rs. 0.21 per share, incurring a substantial loss. The Assessing Officer (AO) disallowed the loss, arguing that the investment in a loss-making company at a high premium was a colorable device to evade taxes. The AO assessed the total income of the assessee at Rs. 24,87,91,087, ignoring the claimed short-term capital loss.

Commercial Justification and Rejection of Colorable Device Allegation:

The learned CIT(A) found commercial justification in the assessee's actions, noting that the infusion of capital was necessary to discharge the company's liabilities, including significant bank loans. The CIT(A) emphasized that no one would incur a loss of Rs. 23.5 crore merely to save Rs. 5.2 crore in taxes. The CIT(A) also highlighted that the company's financials improved significantly due to the capital infusion, and the losses were genuine and not manipulated. The CIT(A) disagreed with the AO's application of the McDowell & Co. Ltd. vs. Commercial Tax Officer case, stating that the losses were actual and not artificial.

Tribunal's Findings and Dismissal of Revenue's Appeal:

The Tribunal upheld the CIT(A)'s decision, noting that the assessee's investment was necessary to honor business commitments and improve the company's financial standing. The Tribunal found no evidence of manipulation or colorable device, as the transactions were genuine and the sale price of shares was not disputed by the Revenue. The Tribunal referenced relevant case laws supporting the assessee's position, including ACIT vs Biraj Investment Pvt. Ltd., and dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s order.

Conclusion:

The appeal by the Revenue was dismissed, and the allowance of the short-term capital loss on the sale of shares was upheld. The Tribunal found the assessee's actions commercially justified and rejected the allegation of using a colorable device for tax evasion.