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TMI Blog2024 (4) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... has agreed to subscribe to shares of eight companies at face value to recover unpaid/ unsecured loans from said companies, but said claim was unsubstantiated. From the above and also from the reasons given by the PCIT in their order u/s. 263 it is abundantly clear that although, the assessee and eight investment companies are not directly related by virtue of shareholding, but because of control and management, they can be considered as related parties. Since, the transactions between the assessee and eight companies were not at arm s length price the resultant loss declared by the assessee from transfer of equity shares can at best be treated as structured transactions to derive undue benefit of short term capital loss . Although, the assessee has claimed excessive loss from sale of equity shares of eight companies and allowed to carry forward to subsequent years, the AO has failed to carry out required enquiries he ought to have been carried out in light of Explanation-2 to Sec. 263 of the Act, and thus, in our considered view, the assessment order passed by the AO u/s. 143(3) definitely becomes prejudicial to the interest of the Revenue. Therefore, no error in the findings reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the proposal for revision. D. To justify the revision, the PCIT has concluded that the amounts due by the eight companies were in default for more than a decade and the eight companies right from the inception are not credit worthy and that no company (appellant) with sensible persons would accept shares with a negative value in lieu of loans advanced. However the PCIT has here again failed to appreciate that issue of shares at a discount is not permitted under the Companies*Act and further by virtue of accepting the shares allotted by the defaulting companies in lieu of the loans advanced and in turn transferring the same to another entity, the appellant had in fact recovered more than 20% of the loans advanced which would have otherwise been written off as bad debts. In other words the appellant has offered to tax 20% of the loan recovered instead of writing off the entire 100% as bad debts. Therefore the transaction is bonafide and permissible and the appellant is entitled to the claim the resultant short term capital loss. E. The PCIT is also wrong in finding fault with the computation of the fa:-market value as per Rule 11UA(1)(c) of the IT. Rules at the time of sale of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessee is barred by limitation for which necessary petition for condonation of delay explaining the reasons for the delay has been filed. The learned counsel submitted that assessee could not file appeal within the time allowed under the Act, therefore delay may be condoned. Having heard both sides and considered the petition filed by the assessee for condonation of delay, we are of the considered view that reasons given by assessee for not filing the appeal within the time allowed under the Act comes under reasonable cause as provided under the Act for condonation of delay and hence, delay in filing of above appeal is condoned and appeal filed by the assessee is admitted for adjudication. 4. The brief facts of the case are that the assessee is engaged in the business of leasing of immovable properties, investments and man power supply services. The assessee formerly known as M/s. MCC Finance Ltd., had provided unsecured loans to eight investment companies prior to 1999. M/s. MCC Finance Ltd., went into liquidation and was under the control of the official liquidator during the period August, 2000 to October, 2012. The said company was revived during December, 2012 under a Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the interest of the Revenue, and thus, called upon the assessee to explain as to why the assessment order passed by the AO dated 21.12.2019, shall not be revised in terms of provisions of Sec. 263 of the Act. In response, the assessee vide letter dated 21.02.2022 submitted that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue, because, the assessee has rightly computed short term capital loss derived from sale of equity shares of unlisted companies, even though, as per Valuation Report carried out under Rule 11UA of the Income Tax Rules, 1962, fair value of the shares sold during the range of Rs. 0.50 to Rs. 6/- per share because of certain restrictions under the Companies Act, 2013, more particularly, u/s. 53(1) (2) of the Companies Act, 2013, the assessee cannot issue shares at discount except as provided in Sec. 54 of the Act. Since, the companies could not issue shares at discount, it has got allotment of shares at face value for recovery of outstanding loans from those companies, and thus, genuine capital loss declared by the assessee cannot be treated as structured transactions to derive undue benefit. The AO after co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, further referring to the order of the PCIT dated 31.03.2022 submitted that no doubt, the Fair Market Value of shares of unquoted equity shares of eight investment companies, when the shares were sold is ranging from Rs. 0.50 to Rs. 6/- per share and such value has been arrived at in terms of Rule 11UA of the Income Tax Rules, 1962. But, fact remains that the assessee has explained the reasons for not issuing shares at discount, because of restriction imposed u/s. 53(1) (2) of the Companies Act, 2013. The assessee had also explained reasons for subscription of shares of eight investment companies at face value and according to the assessee, the loans advanced to eight investment companies were overdue and those companies were unable to repay the loans, because of their financial distress. Therefore, the assessee decided to convert the loans into equity shares and accordingly, took allotment of shares in eight companies on face value. Since, the companies were not doing well, the assessee decided to liquidate the investment in shares and accordingly, sold the shares on Fair Market Value to another company and received consideration through proper banking channel which result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. We find that the assessment order passed by the AO u/s. 143(3) dated 21.12.2019, is totally silent on the issue of short term capital loss declared by the assessee from transfer of unquoted equity shares of eight investment companies. Although, the assessee has claimed short term capital loss from sale of unquoted equity shares of eight investment companies and claimed partial set off of said loss, but the AO has not applied his mind to relevant facts in right perspective of law which is evident from the assessment order passed by the AO, where, the AO has not carried out required enquiries he ought to have been carried out in respect of short term capital loss declared by the assessee. To this extent, it can be safely concluded that the assessment order passed by the AO is erroneous. 12. Having said so, let us com back whether assessment order passed by the AO is prejudicial to the interest of the Revenue. The order passed by the AO can be prejudicial to the interest of the Revenue, in case, the AO allowed excessive expenditure/allowance or loss, even though, said expenditure/allowance/loss is not allowable as per law. In the present case, as per facts brought on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought on record by the PCIT clearly indicates collusion of parties to arrange structured transactions so as to derive undue benefit of short term capital loss . Further, as admitted by the Ld.Counsel for the assessee itself, the Fair Market Value of unquoted equity shares of eight investment companies were not on par with face value of Rs. 10/- per share when the shares were allotted in the month of January/February, 2017. Therefore, when Fair Market Value of the shares when allotted was not on par with face value of shares, in our considered view, no prudent businessman will venture into subscribe to said shares. Further, the analysis financial statements of eight companies as explained by the PCIT clearly reveals that the valuation has been done to arrive at Fair Market Value of shares, is not in accordance with Rule 11UA of the Income Tax Rules, 1962. Although, the assessee claims that it has agreed to subscribe to shares of eight companies at face value to recover unpaid/ unsecured loans from said companies, but said claim was unsubstantiated. From the above and also from the reasons given by the PCIT in their order u/s. 263 of the Act dated 31.03.2022, it is abundantly clear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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