2007 (10) TMI 234 - HC - Income Tax

Capital gain arising on the transfer of capital assets has to be worked out from date of the agreement under which the assessee was put in possession of property, hence impugned capital gain are only long term capital gain shares transfer transaction was found not genuine, loss not deductible as capital loss genuineness of cash credits not proved, hence assessable not proved that films were exhibited, hence loss relating to distribution of films not deductible appeal partly allowed

Summary

Issues Involved:
1. Rejection of the appellant's claim of loss arising from two movies, "Kannamma" and "Uzaikum Karangal."
2. Treatment of Rs.1,26,000/- as unexplained cash credit under Section 68 of the Income Tax Act, 1961.
3. Disallowance of loss arising from the film "Kasthuri Vijayam."
4. Disallowance of the claim of loss of Rs.3,60,000/- arising out of sale of shares of M/s. Sudershan Clay and Ceramics Limited.
5. Determination of whether the capital gains arising on the sale of immovable property at 35, Nungambakkam High Road is a short-term or long-term capital gain.

Detailed Analysis:

1. Rejection of Loss Claim from Movies "Kannamma" and "Uzaikum Karangal":
The Tribunal found that the assessee could not provide evidence for the identity of middlemen and exhibitors. Confirmatory letters were not traceable or addresses were incorrect. The Tribunal upheld the Assessing Officer's finding that there were no exhibition receipts and the films were not in demand. The explanation given by the General Manager, Mr. C. V. Velayudham, was found to be unconvincing. The Tribunal concluded that the films were not exploited during the year and the entire cost of acquisition should be carried forward as per Rule 9-B(4) of the Income Tax Rules, 1962.

2. Treatment of Rs.1,26,000/- as Unexplained Cash Credit:
The Assessing Officer treated the collection of Rs.1.26 lakhs as unexplained cash credits under Section 68 of the Income Tax Act, 1961, due to lack of evidence regarding the mediators and exhibitors. The Tribunal upheld this view, noting that the primary onus to prove the genuineness of the transaction was on the assessee, which was not discharged satisfactorily. The mere production of confirmatory letters was insufficient without further substantiation.

3. Disallowance of Loss from "Kasthuri Vijayam":
The Tribunal noted that Rule 9-B(4) provides for the carry forward of the cost of acquisition if the film is not exhibited on a commercial basis. The assessee's claim that the film was abandoned during the accounting year 1987-88 was not substantiated with evidence. The Tribunal found no material to support the claim of expenditure and upheld the disallowance of the loss. The Tribunal also noted that Rule 9-B was applicable and the deduction was available only subject to the exhibition of films for a particular number of days.

4. Disallowance of Loss from Sale of Shares:
The Tribunal found that the purchase of shares from M/s. Sudarsan Clay and Ceramics Limited lacked commercial rationale. The shares were from a loss-making company and were sold at a price that did not reflect their negative value. The Tribunal concluded that the transaction was a colorable one to evade capital gains tax. The claim of short-term capital loss was rejected as the transaction lacked genuine commercial principles.

5. Determination of Capital Gains on Sale of Immovable Property:
The Tribunal initially held that the sale of the property resulted in short-term capital gains as the sale deed was registered on 26.9.1986, and the property was sold on 30.9.1986. However, the High Court disagreed, noting that the assessee was put in possession of the property as early as 1.1.1976 under an agreement dated 16.9.1975. The Court referred to various High Court decisions and the Supreme Court's interpretation that possession under an agreement for sale constitutes holding the property. The Court concluded that the capital gain should be treated as long-term, arising from the date of the agreement. The Tribunal's decision was reversed on this issue, and the gain was to be assessed as long-term capital gains.

Conclusion:
- Questions 1 to 4: The Tribunal's order was confirmed, and no interference was found necessary.
- Question 5: The Tribunal's order was reversed, and the gain from the sale of the immovable property was to be treated as long-term capital gains.

Final Judgment:
The Tax Case (Appeal) was partly allowed, with no costs awarded.