2023 (10) TMI 914 - AT - Income Tax

Artificial capital gains loss - colourable device to evade tax - Allegation of transfer of agricultural land to LLP to generation artificial loss to set off with capital gain - LLP created after conversion of Limited Company into LLP - Transfer as capital contribution at a value less than the cost of acquisition - HELD THAT - Firstly, according to the learned AR, the transfer of shares was to LLP wherein the assessee and her relative have stake each whereas transfer of land was to Smilax Corporate Services LLP where the assessee and some others had a stake and, therefore, similar treatment has given in both the cases. It means that if the capital gains arising out of transfer of shares is accepted, the capital loss arising out of transfer of land should also be accepted. This argument is not convincing because, the composition of the LLPs, need, motive and other attendant circumstances of sale of shares need not be identical to the transfer of land. Parties having stakes in both the LLPs are not the same parties. We do not know what considerations weighed the sale of shares. There were no suspicious circumstances attending such a transaction of sale of shares. Authorities, however, delineated certain circumstances raising suspicion in respect of the transfer of land to Smilax Corporate Services LLP and such suspicion needs to be dispelled by the assessee with cogent reasons. Merely because the sale of shares is accepted, that by itself does not absolve the assessee from the need to explain the transaction of transfer of land. There is no such rule that one genuine transaction and one suspicious transaction, if any, have to be set-off against each other on the sole ground that in both the LLPs the assessee is a common partner. Such a concept is alien to law. We, therefore, brush aside this argument. One of the factors that provoked the suspicion of AO is in respect of the transfer of land to Smilax Corporate Services LLP is the conversion of Smilax Corporate Services Pvt. Ltd. into Smilax Corporate Services LLP just before the transfer of land at a value less than the cost of acquisition by the assessee. He held that such a transfer did not bring about any change either from the point of Smilax Corporate Services LLP or from assessee. This factor on an analysis led him to conclude that the conversion is only to bring the transaction within the purview of section 45(3) of the Act, recording of lesser value in the books of LLP in respect of such land than her cost of acquisition is only to introduce the artificial capital loss, and in that way, it is not a case of tax avoiding by proper tax planning, but it is a case of tax evading through a colourable devise. We can understand the genuineness of either conversion of company into LLP or the transfer of land if such conversion/transfer happens in the proximity of such a need. Except to introduce a colourable device, no other meaning is indicated in this transaction. Question here is, therefore, not whether the percentage of stake holding either in company or in the LLP changes the character of a transaction, but it throws some light to view the things in their proper perspective. Having regard to the common course of natural events, human conduct and public and private business, in their relation to the facts of this particular case, we are of the considered opinion that the capital losses said to have been incurred by the assessee are only notional and introduced artificially. Authorities below rightly disallowed the same. With this view of the matter, we do not find any illegality or irregularity in the findings of the authorities below and the same are upheld. Grounds of appeal are accordingly found devoid of merits. Decided against assessee.

Summary

Issues Involved:
1. Legitimacy of the transfer of agricultural land to Smilax Corporate Services LLP.
2. Applicability of Section 45(3) of the Income Tax Act.
3. Alleged use of a colourable device to evade tax liability.

Summary:

1. Legitimacy of the transfer of agricultural land to Smilax Corporate Services LLP:
The assessee transferred agricultural land to Smilax Corporate Services LLP at a value less than the cost of acquisition, creating artificial capital losses to offset capital gains from the sale of MAA TV shares. The authorities, referencing the case of Sunil Siddharthbhai vs. CIT, determined that the transaction was a colourable device to evade tax, as the transfer did not change the assessee's control over the property and lacked genuine business purpose.

2. Applicability of Section 45(3) of the Income Tax Act:
The conversion of Smilax Corporate Services Pvt. Ltd. into Smilax Corporate Services LLP was scrutinized. The authorities concluded that the conversion was done to bring the transaction within the purview of Section 45(3) of the Act, which applies to partnerships and excludes companies. This conversion was deemed a strategic move to introduce artificial capital losses.

3. Alleged use of a colourable device to evade tax liability:
The authorities highlighted several suspicious circumstances, including the timing of the conversion, the valuation of the land, and the lack of business activity in both the company and LLP. The assessee's arguments that the transactions were at Fair Market Value and compliant with Section 50C of the Act were rejected. The authorities concluded that the transactions were designed to evade tax, not genuine business transactions.

Conclusion:
The tribunal upheld the findings of the lower authorities that the capital losses claimed by the assessee were notional and artificially introduced through a colourable device. The appeal was dismissed, affirming that the transactions were meant to evade tax on capital gains from the sale of MAA TV shares.