2024 (7) TMI 992 - AT - Income Tax

Short term capital loss - AO has not brought any evidence/ material on record to establish that the sale transaction is not genuine - AO has primarily swayed by the fact that within a short span of time, shares costing Rs. 4.10 crores were disposed at Rs. 42 lakh only - whether the short term capital loss claimed to have been carried forward for the assessment year 2010-11 can be disallowed by the AO holding the same to be bogus and sham? - HELD THAT - As decided in KASHYAP SWEETNERS (P.) LTD. 2004 (5) TMI 250 - ITAT INDORE notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it is not permissible for the court to treat the intervening legal step as non-est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non-est merely on the basis of some under lying motive supposedly resulting in some economic detriment or prejudice to the national interests. Assessee tried to turn the share seller company into good performance company. The directors experience and understanding of the market also tried to be exploited. But the attempt did not gain the desired result. There is nothing illegal or illogical. The purchase of shares cannot be taken as devoid of any business acumens. The purchase of shares of loss making company and becoming the Board member of the company cannot be termed as mere attempt to purchase loss. Considering the facts and circumstances of the case, we are of the view that the addition made by AO and sustained by the CIT(A) is unjustified and deserves to be deleted. Special provision considers fair market value as full value of consideration for transfer of unquoted shares has been brought into effect from assessment year 2018-19 u/s 50CA. This section specifically provides that where consideration for transfer of unquoted shares is less than fair market value of such share determined in accordance with the prescribed manner, the fair market value shall be deemed to be the full value of consideration for the purpose of concluded income under the head capital gain . This amendment will apply from assessment year 2018-19 and subsequent assessment years. It is clear in that assessment year 2010-11 under reference that no addition can be made by resorting to Section 50CA. As u/s 48 of the I.T. Act, 1961, to calculate capital gain , costs of acquisition has to be deducted from full value of consideration. Full value of consideration means the actual consideration received and there was no provision to tinker with such full value of consideration in the impugned year. Accordingly, disallowance has no legal legs to stand upon. We direct the A.O. to delete the same. Accordingly, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of short-term capital loss of Rs. 3.59 crores.
2. Genuineness of the share transaction.
3. Applicability of Section 50CA of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Short-Term Capital Loss of Rs. 3.59 Crores
The primary issue in this appeal is whether the disallowance of the short-term capital loss of Rs. 3.59 crores claimed by the assessee is justified. The assessee claimed this loss on the sale of 2,10,000 shares of M/s. Dayal Energy and Proteins Ltd., which were purchased for Rs. 4.01 crores and sold for Rs. 42 lakhs within a short span of 6-8 months. The Assessing Officer (AO) disallowed the loss, suspecting the genuineness of the transaction due to the low sale consideration and lack of corroborative evidence for the fair valuation of the shares.

2. Genuineness of the Share Transaction
The CIT(A) upheld the AO's decision, emphasizing that the transactions were not genuine. The CIT(A) noted that the shares were sold to family members or existing shareholders of the group, and there was no evidence of any commercial or business exigencies justifying the huge investment and subsequent loss. The CIT(A) also pointed out that the company's financials did not support the drastic reduction in share value and that the transactions were not at arm's length.

3. Applicability of Section 50CA of the Income Tax Act, 1961
The Tribunal examined the applicability of Section 50CA, which was introduced from the assessment year 2018-19 and mandates that the fair market value of unquoted shares should be considered as the full value of consideration if the actual consideration is less. However, since this provision was not applicable for the assessment year 2010-11, the Tribunal concluded that the disallowance of Rs. 3.59 crores had no legal basis.

Tribunal's Findings:
1. Judicial Precedents: The Tribunal referred to various judicial precedents, including the case of Alok Ferro Alloys Ltd., where similar issues were considered. The Tribunal emphasized that the genuineness of the transaction cannot be doubted merely because it resulted in a loss. The Tribunal noted that the transaction was through proper banking channels and the purchase and sale of shares were corroborated by the company's records.

2. Business Decision: The Tribunal recognized that business decisions resulting in losses do not necessarily indicate an intention to defraud the revenue. The Tribunal highlighted that the assessee's decision to invest in shares was a genuine business venture, and the subsequent loss did not invalidate the transaction.

3. Legal Provisions: The Tribunal noted that Section 50CA, which considers the fair market value of unquoted shares, was not applicable for the assessment year under consideration. Therefore, the disallowance based on the fair market value was not legally sustainable.

Conclusion:
The Tribunal concluded that the disallowance of the short-term capital loss of Rs. 3.59 crores was not justified. The Tribunal directed the AO to delete the disallowance, allowing the appeal in favor of the assessee. The Tribunal's decision was based on the lack of legal provisions to support the disallowance and the recognition of the transaction as a genuine business decision.