2024 (3) TMI 374 - AT - Income Tax

MAT computation u/s 115JB - whether the said receipt on account of surrender of gift of shares is per se a capital receipt or a revenue receipt? - HELD THAT - We find that admittedly, the receipt of shares due to surrender of gift during the year under consideration is a capital receipt. There is absolutely no quarrel on this point. The orders of the lower authorities also does not even suggest that the same is a revenue receipt. It is not in dispute, the total income of the assessee is determined u/s 115JB of the Act for Asst Year 2015-16. It is not in dispute that the assessee had not sought any benefit with regard to the subject mentioned receipt on account of surrender of gift of shares while computing its income under normal provisions of the Act for Asst Year 2015-16. However, in order to tinker with the audited financial statements read together with the notes thereon, the ld. AO would be empowered to do the same only in respect of items that are specifically mentioned in Explanation 1 to section 115JB(2) of the Act. The law in this regard is very well settled by the decision in the case of Apollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT As stated earlier, the mistake committed by the assessee which stood subsequently endorsed by the revenue was in Asst Year 2012-13 wherein the cost of investment of gift of shares should have been added back in the computation of book profits u/s 115JB of the Act. Even if this item does not fall under any of the items mentioned in Explanation 1 to section 115JB(2) of the Act, still the same ought to have been added back for the purpose of computation of book profits u/s 115JB of the Act for the simple reason that the accounts per se were not in accordance with provisions of section 227(1A) of the Companies Act, 1956 as Capital Expenditure has been debited to Revenue Account . But since revenue had missed the bus in Asst Year 2012-13, the correct treatment given by the assessee in Asst Year 2015-16 which is in accordance with the provisions of the Companies Act and the said receipt not falling under any of the items reflected in Explanation 1 to section 115JB(2) of the Act, the said receipt cannot be taxed u/s 115JB of the Act in Asst Year 2015-16. Accordingly, the ground no.2 raised by the assessee is allowed. Disallowance of long term capital loss - sale transaction is to be considered as ingenuine or sham - as submitted when the prevailing market price is very much available to the assessee to effect the sale transaction through a registered stock broker in a recognized stock exchange, whether it is justified in ignoring the same and effect an off-market trade at a mutually agreed price - HELD THAT - The assessee had chosen to transact the huge volume of sale transactions which is quite abnormal when compared to the average trade that had happened in the last 11 months, by way of off-market by considering the average market price of shares that prevailed in the last 11 months of the same year. Infact the assessee had carried out this transaction with its group company in the larger interest of retail shareholders by ensuring that there is no dilution/reduction of wealth maximization in the hands of retail shareholders. Considering the totality of the facts and circumstances of the case and viewing it from a holistic angle, we do not find any infirmity in the said basis of determination of market price of shares by the assessee. Moreover, the revenue in the instant case had sought to adopt the fair market value of shares in respect of impugned sale transaction. Though the revenue is permitted to do so, it should first find defects in the workings adopted by the assessee, reject the same and thereafter proceed to determine the fair market value. We find that the entire issue has been addressed by the revenue with utmost suspicion by trying to treat the part of the sale transaction as ingenuine and sham as the transaction had happened between group companies, which is totally unsustainable in the eyes of law. In view of the aforesaid observations, we hold that the lower authorities erred in disallowing the long term capital loss.

Summary

Issues Involved:
1. Adjustment in Book Profit under Section 115JB of the Income-tax Act, 1961.
2. Disallowance of Long Term Capital Loss.

Summary:

Issue 1: Adjustment in Book Profit under Section 115JB of the Income-tax Act, 1961

The assessee contested the adjustment of Rs. 2,12,31,641/- in Book Profit for the purpose of Section 115JB of the Act, arguing that the CIT(A) failed to consider the facts and relevant Supreme Court decisions. The Tribunal noted that the assessee had credited the amount directly to the Reserve and Surplus account without routing it through the Profit & Loss account. The assessee argued that the accounts were prepared per the Companies Act and approved by shareholders, thus the AO could not alter them except for items in Explanation 1 to Section 115JB(2). The Tribunal upheld the assessee's position, referencing the Supreme Court's decision in Apollo Tyres Ltd., stating that the receipt was a capital receipt and correctly credited to Reserves and Surplus. The Tribunal concluded that the AO could not tax this amount under Section 115JB in AY 2015-16, as the revenue had missed the opportunity to adjust it in AY 2012-13. Thus, the ground raised by the assessee was allowed.

Issue 2: Disallowance of Long Term Capital Loss

The assessee challenged the disallowance of Rs. 11,04,54,306/- in Long Term Capital Loss. The AO had disallowed this loss, suspecting the transaction to be a sham as the shares were sold to a group company at a price lower than the market price. The Tribunal examined the facts, noting that the assessee sold shares in off-market transactions to avoid market disruption due to the large volume of shares. The sale price was based on the average market rate over the previous year. The Tribunal found no error in the assessee's method and held that the transactions were genuine. The Tribunal directed the AO to allow the long-term capital loss and permit it to be carried forward. Consequently, the ground raised by the assessee was allowed.

General Grounds:

Grounds 1 and 4 raised by the assessee were deemed general and did not require specific adjudication.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal ruling in favor of the assessee on both issues. The order was pronounced in the open court on 05/03/2024.