Shares bought for Rs 5.25 Cr sold for Rs 52.5 lakh in same yr – capital loss allowed by AO – CIT can review order only if it is erroneous and prejudicial to interest of revenue; both ingredients should be present : ITAT
MUMBAI, NOV 09, 2007 : ON perusal of records, the CIT noticed, assessees were allowed short-term capital loss of Rs.2,70,00,000/ – and Rs.2,02,50,000/ – in the case of Mr Noshir D Talati and Smt Rashna N Talati respectively for the assessment year under consideration. According to the CIT, the claim of the assessees of loss was not allowable, mainly for the following reasons: -
1. Assessees invested Rs.3,00,00,000/ – and Rs.2,25,00,000/ – respectively in the shares of Ankush Properties Pvt. Ltd., allotted to them at the rate of Rs.10/- each.
2. During the same previous year assessees sold the shares at the rate of Rs.1/- per share, thus incurring loss of Rs.2,70,00,000/ -and Rs.2,02,50,000/ – respectively.
3. Details in support of sale price of Rs.1/- per share has not been called for and that source of investment in shares allotted to the assessees has also not been examined.
4. The AO has not called for the name and address of the persons to whom shares have been sold by the assessees.
5. The assessees had shown long-term capital gain on sale of shares at Rs.2,69,53,817/ – and Rs.1,92,10,458/ – respectively, which was set off by claiming short-term capital loss. The claim of short-term capital loss was allowed without proper verification and without examining the claim.
6. The issued share capital of Ankush Properties Pvt. Ltd. as on 31.03.2001 was Rs.6,25,00,200/ -. Out of this, assessees’ contribution was Rs.3,00,00,000/ -and Rs.2,25,00,000/ – respectively.
7. Assessees in fact therefore were having full control of the affairs of the company.
8. The loss claimed only on paper was to set off the long-term capital gain earned by the assessees.
9. No expenses towards stamp duty were debited by the company; the payment of stamp duty is a pre-requisite condition for allotment and subsequent sale of shares.
In response to the notice under section 263(1), assessee’s representative appeared and made the following submissions: -
1. initiation of proceedings is erroneous, illegal and without jurisdiction and there is nothing wrong with the assessment order.
2. Assessees sold the equity shares of a limited company; incurred loss, against which the claim was made.
3. The shares have been duly and legally allotted by the company, which is not disputed nor challenged. Mere non-filing of some forms does not vitiate the allotment of equity shares in assessees’ favour nor it leads to an inference that the shares could not have been allotted to the assessees.
4. The shares have been sold to outside parties. The consideration has been received by account payee cheques. It is true, assessees have incurred loss; hence, the claim of set off of loss.
5. The assessment order is neither prejudicial to the interest of the revenue nor erroneous. The order was passed after proper application of mind, considering the Balance Sheet of the company, whose shares were transferred.
6. Ankush Properties Pvt. Ltd. is a Special Purpose Vehicle Company for purchasing an immovable property known as “Samudra Villa” situated at Darabshaw Lane, Mumbai.
7. Assessees purchased the said property through the medium of Ankush Properties P. Ltd. The purchase was funded by the assessees either directly or through their group companies.
8. An agreement was executed between Rungta family (predecessor in title) and Ankush Properties Pvt. Ltd. Rungta family agreed to sell, transfer, assign and convey the said property to Ankush Properties Pvt. Ltd. for a total consideration of Rs.26.00 crores.
9. The property was subject to tenancy rights of one Ms Niyati Yodh, a portion of which was occupied by her. Pursuant to the agreement, application was made to the appropriate authority, Income Tax Department and consequently NOC was obtained as contemplated under Chapter XX-C of the Income Tax Act, 1961.
10. The transaction was completed by way of conveyance dated 11.04.1996 after payment of stamp duty of Rs.2,60,00,000/ – and registration charges incidental thereto.
11. Payment of stamp duty and registration charges was made by Ankush Properties Pvt. Ltd. / assessees. A leasehold plot of land, adjacent to the property, which formed integral part of the entire property, was also purchased by Ankush Properties Pvt. Ltd. / assessees for a consideration of Rs.17,00,000/ – and no development / construction was possible on this leasehold land.
12. After negotiation with the tenant Ms Niyati Yodh, a sum of Rs.5,30,00,000/ – was paid to her for vacating the premises. Since there was delay to payment, interest had to be paid to the tenant. Rungtas in fact had initiated legal proceedings against Ms Niyati Yodh many years prior to the sale to Ankush Properties Pvt. Ltd.
In short, the property was acquired at a cost of Rs.34,00,00, 000/-. Immediately after the conveyance, one of the flat purchasers viz. Ispat Group of companies filed suit in the Hon’ble Bombay High Court, praying for specific performance / alternatively for refund of money, appointment of Court Receiver, etc. Total amount received from Ispat Group of companies was about Rs.11.9 crores. Consequently, assessees were forced to take over this liability as well. The said property was situated within 500 mts. of Coastal Regulation Zone (CRZ). For quite some time, Municipal Corporation was not accepting the plans in respect of properties located in CRZ.
A Court Receiver was appointed. The possession was handed over to the Court Receiver. In fact, Ispat Group of companies not only claimed Rs.11.9 crores but interest thereon at the rate of 36% / 21% per annum. The property was locked in litigation, so property incapable of being developed. It was under these circumstances that the assessees thought it fit to involve some partners and accordingly sold part of the project by selling part of share capital of Ankush Properties Pvt. Ltd. The purchaser paid the market value, which was in fact below the acquisition cost, because of litigations and within CRZ etc. Thus the assessees made a loss by selling the shares, which was disclosed subsequently in the assessment year under consideration. Whatever information called for by the AO during the course of assessment proceedings was furnished by Smt Rashna N Talati (one of the assessee). After verification of the details and proper scrutiny, the claim of the assessees was allowed. Hence, it was contended that the proceedings initiated under section 263 are without jurisdiction.
5. However, the CIT rejected assessees’ contention that the proceedings initiated under section 263 are illegal and without jurisdiction, mainly for the following reasons: -
(a) Assessee company does not have legal sanction as per Companies act to increase the authoriz
ed capital from Rs.1.00 lakh to Rs.7.00 crores.
(b) The issue of share capital by the company cannot be said to be an issue of shares at all.
(c) Company has not filed return of allotment of share capital as required before Registrar of Companies, which is a mandatory requirement.
(d) Assessee company has not produced any evidence to substantiate that necessary fee for increase of share capital has been paid to Registrar of Companies.
(e) As per Profit and Loss Account, Registrar of Companies fee not paid during the relevant previous year.
Aggrieved by the above order, assessees are in appeal before the Tribunal.
The Tribunal observed,
1. The reason for invoking the jurisdiction vested in him under section 263, mainly, is that the AO has not conducted any enquiry, which according to the learned CIT, should have been conducted
before passing the assessment order.
2. The reasoning of the learned CIT that the AO allowed the set off of loss claimed by the assessees on a wrong premise and on the basis of wrong understanding of law, is not borne out of record.
3. The case of the CIT is that the company should have filed the return of allotment of shares before the Registrar of Companies, which is mandatory and the failure to comply with this mandatory provisions makes the issue of shares itself improper and therefore there cannot be set off of loss.
4. reading of section 97 makes it clear that filing of relevant forms with the Registrar of Companies is not mandatory and it is only procedural. If it is mandatory, as presumed by the learned CIT, then by paying additional fees in the form of fine etc. it could not be regularized. But the provision makes it clear that by paying late fee and/or other fines etc. it would be regularized.
5. In the case of Malabar Industrial Co. Ltd. vs. CIT, the Hon’ble Supreme Court had also expressed the same view that unless the order is erroneous and prejudicial to the interest of the
revenue, the CIT could not invoke the jurisdiction vested in him under section 263 suo motu.
6. in the instant case of the assessee, since the assessees had regularized all the proceedings by complying with the law and by paying fine, the order passed by the AO cannot be treated as
7. Even if it is erroneous, it is not prejudicial to the interest of the revenue and unless both the ingredients are present to gather CIT has no jurisdiction under section 263, in view of the decision
of the jurisdictional High Court in the case of CIT vs. Gabriel India Ltd
8. Coming to the finding of the learned CIT that the AO should have conducted more enquiries and only because of this the order passed becomes prejudicial to the interest of the revenue, is
So the Tribunal took the view that the orders passed by the CIT are without jurisdiction and allowed the assessee’s appeal.