Disallowance of STCL was justified in case of drastic decrease in share rate

O3 Capital Global Advisory Pvt. Ltd. Vs DCIT (ITAT Bangalore)

Conclusion: Purchase and sale of shares were arranged transactions to create bogus capital short term capital loss in the garb of real transactions with the sole motive to claim short term capital loss so as to evade tax. Hence the same was not allowable under section 28.

Held: Assessee advanced a sum of Rs.5.64 crores to Morpheus Capital Advisors Pvt. Ltd. (MCAPL), a company incorporated by the assessee itself. The said company stated to be deriving its revenue primarily from the investment advisory and consultancy services provided to Morpheus Media Funds. Assessee had converted said advances of Rs.5.6 crores into shares and subsequently within a period of 7 days sold the very same shares of 79.54% stake for a lumpsum consideration of Rs.15 lakhs, thereby booked a short-term capital loss of Rs.4.48 crores. During the course of assessment proceedings, AO disallowed short term capital loss of Rs.4,43,24,751/- rejecting the submissions provided by assessee and completed the assessment. Against which assessee preferred appeal before the first appellate authority which upheld the disallowance. Assessee submitted that the short term capital loss incurred on sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd. needed to be allowed as capital loss, the pint investments in M/s. Morpheus Capital Advisors Pvt. Ltd. were purely on account of commercial expediency for enhancing the business activities of the assessee and therefore, loss incurred on sale of such shares represent business loss which was allowable under section 28. It was held that purchase and sale of shares were arranged transactions to create bogus capital short term capital loss in the garb of real transactions with the sole motive to claim short term capital loss so as to evade tax. Therefore, the shor term capital loss was not allowed as purchase and sale of shares of that company MCAPL was a bogus transaction so as to get the bogus short term capital loss at astronomical rate.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by assessee is directed against the order of CIT(A) dated 8.12.2017 for the assessment year 2013-14. The assessee raised following grounds (revised):-

“(In conformity with rule 8 of the income tax appellate tribunal Rules, 1963)

1. That the order of the Learned Commissioner of Income Tax (Appeals) [“CIT (A)”] to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. (Corresponding to the original ground of appeal 1)

2. That on the facts and circumstances of the Case, the Learned [“CIT (A)”] erred in law and on facts in confirming and upholding the order of the Learned Assessing Officer [“AO”] wherein, he disallowed the Capital Loss of Rs 4,43,24,751 on the sale of 56,00,000 shares of Morpheus Capital Advisors Ltd (MCA) by the appellant. (Corresponding to the original ground of appeal 2 – 4)”

2. Facts of the issue are that the assessee is a private limited Company engaged in the business of providing advisory service and for the above assessment year filed its return of income on 3011.2013 declaring total income of Rs.74,49,380/-. In response to various notices issued, the assessee appeared from time to time and furnished the details and information called for by the Assessing officer. The Assessing Officer has completed the assessment by disallowing the short term capital loss of Rs.4,43,24,751/- rejecting the submissions provided by the assessee. Against this assessee went in appeal before Ld. CIT(A).

3. The Ld. CIT(A) was of the view that in respect of short term capital losses the Assessing Officer has given a findings that the assessee has claimed short term capital loss of Rs.4,43,24,751/- on sale of shares of its subsidiary company and made an advanced/loans of Rs.5.64 Crores to Morpheus Capital Advisors Pvt. Ltd, a company incorporated by the assessee itself in the year 2008. The incorporated company M/s. Morpheus Capital Advisors Pvt. Ltd, is stated to be deriving its revenues primarily from the investment advisory and consultancy services provided to Morpheus Media Fund, a SEBI registered Venture Capital fund. The assessee has furnished the financials of the company for the three years ending 2010, 2011 and 2012. In the initial year, the company has incurred only pre operating expenses and subsequently, it has been incurring salary, legal and professional costs resulting in huge losses. There has been no income declared to substantiate the expenses incurred. For the year ending 2012 Rs.1.50 Cr has been spent on legal and professional fees and Rs. 2 Cr on salaries. The income from sale of services is only Rs. 6,82,411/-. as against the huge expenses. Hence the question that arises is what is the nexus between the income earned and the expenses incurred? O3 Capital is itself into the business of advisory having robust staff and commensurate income. Then, it defies logic and reason to invest large amounts in professional fees and salaries towards apparently earning no income. Hence pumping money into such a shell company lends no commercial expediency in so far as the assessee is concerned. It could have done the same work of Morpheus directly to Morpheus Media Fund instead of creating another company and incurring expenses on it. The Assessing Officer further observed that in the light of the above, the assessee has converted its advance/loan of Rs.5.60 Crores to Morpheus into shares at face value of Rs. 10 each by way of a Board Resolution dt:18/2/2013 and subsequently on 25/2/2013. by an another Board’s Resolution, sold the very same shares of 79.54% stake for a lump sum consideration of Rs.15 lakhs. Thereby has booked a short term capital loss of Rs.4.48 Cr. It is mentioned that the net worth of the company, Morpheus Capital Advisors Pvt. Ltd. had completely eroded. It is seen from the balance sheet of Morpheus Capital that the company had no worth, no assets. Its assets were the advances to others and its director and rental deposits. Hence, there were no assets as such for the company’s worth to get eroded. All that was being wasted was the money being pumped in by the assessee in the guise of salary and professional fees. Hence the sale of the assessee’s stake for a small consideration of Rs. 15 lakhs within a week before it bought the very same shares at face value without any independent valuer’s report valuing the shares of Morpheus, appears to be a colourable device. In view of the foregoing the short term capital loss booked was disallowed by the Assessing Officer. During the appellate proceedings the assessee was asked to furnish the copies of the Balance-Sheet for the last three years of both the companies, board resolution for allotting the shares converting the loans to equity etc. The assessee has submitted that M/s. Morpheus Capital Advisor Pvt. Ltd. for incorporated to act as investment advisor to Morpheus media- fund, a SEBI registered venture fund. The assessee company being the promoter advanced loans to M/s. Morpheus Capital Advisor Pvt. Ltd. out of commercial expediency. However, the nature of commercial expediency and the purpose of incorporation was not explained even during the appellate proceedings. Further, the reasons as to why the loans converted to equity which resulted in increase in the shareholding assessee company when the M/s. Morpheus Capital Advisor Pvt. Ltd continued to be in losses. Subsequently sold the stake of 79.54% for meager amount of Rs.15 lakhs only could not be explained. As the Assessing Officer has rightly given the finding that the assessee has adopted a colourable device by pumping huge money into a shell company in the guise of commercial expediency and subsequently converting the loans to equity and then sold the same for a lump sum consideration of Rs.15 lakhs thereby booking short term capital loss of Rs.4.48 Cr and therefore not allowing the capital loss was upheld by the Ld. CIT(A). Against this assessee is in appeal before us.

4. Now the contention of the Ld. A.R. here is that M/s. 03 Capital Global Advisory Pvt. Ltd. is a SEBI registered. Category I Merchant Banker, engaged in the Investment banking business. It renders wide range of services including raising of capital, mergers & acquisitions, private equity and restructuring advisory services to multinational corporates in the domestic and international markets.

4.1 It is submitted that the assessee along with Mr. Balaraman Nayar had incorporated M/s. Morpheus Capital Advisors Pvt. Ltd. during the financial year 2008-09 to provide investment advisory and consulting services to M/s. Morpheus Media Fund, a SEBI registered Venture Capital Fund (VCF). The shareholding pattern in M/s. Morpheus Capital Advisors Pvt. Ltd. was as under:

4.2 During the financial years 2008-09 to 2013-14. the assessee had advanced more than 6 crores to M/s. Morpheus Capital Advisors Pvt. Ltd. for business purposes. In spite of best efforts of the management, M/s. Morpheus Capital Advisors Pvt. Ltd. continued to incur losses. Since, the assessee had advanced more than 6 crores, both the shareholders felt that the beneficial interest of the shareholders should be readjusted to provide a larger shareholding to the assessee. Accordingly, the unsecured loan amounting to Rs.5,64,00,000/-provided by the assessee was converted to equity share capital vide resolution passed by the Board of Directors of M/s. Morpheus Capital shareholding of the assessee to 99.95% and only 0.05% of the paid up capital was left with Mr. Balaraman Nayar.

4.3 It is submitted that due to the economic slowdown during the financial -year 2012-13, M/s. Morpheus Capital Advisors Pvt. Ltd. was finding it very difficult to source appropriate investment opportunities in M/s. Morpheus Media Fund and further the company incurred losses. Since, the assessee also experienced a slowdown during the financial year 2012-13, the management opined that it is not feasible to continue funding M/s. Morpheus Capital Advisors Pvt. Ltd. Therefore, the assessee decided to either shut down the business of M/s. Morpheus Capital Advisors Pvt. Ltd. or to sell the same to any interested third party.

4.4 Subsequently, in February 2013, an expression of interest from Mr. Rajiv Singhal was received for taking over the business of M/s. Morpheus Capital Advisors Pvt. Ltd. Considering the significant time and money invested by the assessee in sustaining M/s. Morpheus Capital Advisors Pvt. Ltd., the assessee had negotiated to retain 20% of the stake in the company to benefit from any potential upside in future. Accordingly, it was agreed to sell 79.54% of stake in M/s. Morpheus Capital Advisors Pvt. Ltd. to Mr. Rajiv Singhal & Mrs. Ritu Singhal for a total consideration of Rs.15,00,000/- thereby incurring a short term capital loss of Rs.4,34,75,954/-.

4.5 However, the learned assessing officer disallowed the Short Term Capital Loss of Rs.4,43,24,751/- as against the actual Short Term Capital Loss of Rs.4,34,75,954/- by alleging that the impugned transaction appears to be a colorable device. Further, the learned CIT(A) upheld the disallowance made by the learned assessing officer. The action of the learned authorities below in disallowing the Short Term Capital Loss amounting to Rs.4,43,24,751/- is against the factual foundation of the case.

4.6 Commercial Expediency: It is submitted that the assessee has advanced the amount to M/s. Morpheus Capital Advisors Pvt. Ltd. as a matter of commercial & business expediency and thus the authorities below ought not to have disallowed the short term capital loss of Rs.4,43,24,751/- incurred on sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd. under the facts & circumstances of the case. Reliance is placed on the decision of Hon’ble Supreme Court in the case of Hero Cycles (P) Ltd vs. CIT reported in 379 ITR 347 wherein it was observed as follows:

“……….. … once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.”

Reliance is placed on the decision of Delhi High Court in the case of PCIT vs. Gaursons Realty (P.) Ltd. reported in 422 ITR 123 and also on the decision of Jurisdictional High Court in the case of CIT vs. Gokaldas Images Pvt. Ltd., reported in 429 ITR 526. It is submitted that the learned assessing officer has stated that the assessee could have done the same work of Morpheus directly to Morpheus Media Fund instead of creating another company and incurring expenses on it. In this regard, the assessee wishes to submit that the assessee is engaged in Private Equity Fund Management Business in varied sectors. With the objective to develop sector specific capabilities, the assessee is required to have various advisory arms for catering to the needs of varied sector specific funds. Accordingly, M/s. Morpheus Capital Advisory Pvt. Ltd. was formed as a result of the very niche requirement of the Group. Further, owing to multiple regulations governing the services offered by the Group including necessary registrations, the Group operates each business under a separate and independent vehicle to enable a focused concentration and ring fence the liabilities and extreme consequences which may arise due to unanticipated defaults under other businesses.

4.7 Considering the nature of business in which the assessee is engaged, a separate entity was essential. Therefore, there is no iota of doubt that incorporating a separate company to render services to the fund was backed by sufficient commercial rationale.

4.8 The assessee wish to state that department cannot assume the arm chair of the assessee in deciding as to whether the assessee can create another company for commercial expediency or not. It is submitted that how assessee conducts its business is its prerogative and it is not for the revenue authorities to decide what is necessary for the assessee and what is not.

Reliance is placed on the decisions of the Supreme Court in the case of S A Builders Ltd. vs. CIT, reported in 288 ITR 1 and in the case of CIT vs. Edward Keventer Private Limited, reported in 115 ITR 149. Reliance is also placed on the following decisions in support of the contentions canvassed supra:

• PCIT vs. V.S. Dempo Holding (P.) Ltd., 130 taxmann.com 456 (Born.)

B. Nanji & Co. vs. DCIT, 124 taxmann.com 357 (Gujarat)

• CIT vs. Alapatt Brothers, 73 taxmann.com 43 (Kerala)

4.9 lt is further submitted that the authorities below have opined that M’s. Morpheus Capital Advisors Pvt. Ltd. has declared a meagre income as against the huge expenses incurred. The authorities below have further stated that it defies logic and reason to invest large amounts towards professional fees and salaries in a company which apparently earns no income and hence, pumping money into such a shell company lends no commercial expediency. It is submitted that ability to earn income from a business must be understood based on the specific industry practice. For a fund advisor/ manager, typically, carried interest forms a critical and substantial part of the revenue. Carried interest is the share of any profits of fund that the advisor receives. It acts as a compensation and motivates the manager’s overall performance. The carried interest is often only paid if the fund’s returns meet a certain threshold. Accordingly, the income of fund advisory arm in the initial years are meagre when compared with the expenditure incurred in rendering such services. In other words, in the initial years, the company incur losses and there will be expectation that the company makes profit in the near or foreseeable future. It is submitted that the presumption that a particular expenditure result in profit for the assessee in the immediate proximity cannot form the basis of its disallowance.

5. Reliance is placed on the decision of Madras High Court in the case of PCIT vs. Managed Information Services (P.) Ltd. in Tax Appeal No. 137 of 2017 reported in 396 ITR 490 wherein it has been held that:

“ … ….Further the fact that a particular expense does result in a profit for the assessee in the immediate proximity cannot form the basis of its disallowance. In incurring an expense, a business person could have a short and a long term perspective. The fact that in the short term the expense incurred does lead to a profit, cannot rule out the possibility of accretions of profits to the assessee in the long run. These are business decisions best left to the wisdom of those who run and manage the business. Therefore, as long as expense is incurred, wholly and exclusively for the purpose of the business carried on by the assessee, it ought to be, ordinarily, allowed under section 37 of the Act” (Refer Pages 152 and 153 of the Case Laws Compendium)”

5.1 In this regard, it is contended that once an expenditure is found to be bonafide and further the same relates to business activity, the said transactions cannot be treated as bogus. Further, the assessee wishes to submit that merely because a company earns a little or negligible income after incurring huge expenditure, it could not be said that the transactions lacked commercial expediency.

5.2 Reliance is placed on the decision of Gujarat High Court in the case of CIT vs. City Ahmedabad Spg. & Wvg. Mfg. Co. reported in 207 ITR 427. (Refer Page 143 of the Case Laws Compendium) In view of the above, it is submitted that the action of assessing officer in assuming the arm chair of the assessee and to decide the method of conducting the business is patently illegal and therefore, toe order needs to be set aside on this count alone.

5.3 The sum of Rs.4,43,24,751/- needs to be allowed as a business loss/expense: Without prejudice to the contention that the short term capital loss incurred on sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd. needs to be allowed as capital loss, it is submitted pint investments in M/s. Morpheus Capital Advisors Pvt. Ltd. were purely on account of commercial expediency for enhancing the business activities of the assessee and therefore, loss incurred on sale of such shares represent business loss which is allowable under section 28 of the Act under the facts and circumstances of the case.

5.4 It is submitted that the assessee had advanced the amounts wholly and exclusively for the purpose of business and the loss arising from sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd. being an amount advanced by the assessee for the purpose of business is entitled to be allowed as business loss. It is further submitted that the authorities below failed to appreciate that the amounts were advanced for the purpose of business activity and the assessee had set up M/s. Morpheus Capital Advisors Pvt. Ltd. only due to commercial expediency which the assessee could not have done directly without setting up M/s. Morpheus Capital Advisors Pvt. Ltd. The authorities below ought to have appreciated that business operations were undertaken by the assessee and amounts were advanced only to cover operational expenses.

5.5 Without prejudice, assuming but not admitting that the authorities below can disregard the conversion of advances to Equity Shares, then the entire amount of advance ought to have been allowed as deduction under the facts and circumstances of the case.

5.6 It is submitted that the investment in M/s. Morpheus Capital Advisors Pvt. Ltd. is nothing but a measure of commercial expediency to further business objectives which is primarily related to the business operations of the assessee. The authorities below failed to appreciate that an amount of Rs.5.64 crores was advanced over a period of 5 years to M/s. Morpheus Capital Advisors Pvt. Ltd. purely for business purposes on account of commercial expediency and therefore. disallowance is not warranted under the facts and circumstances of the case. Therefore, the loss of Rs.4,43,24,751 needs to be allowed as a business loss under section 28 or as an expense under section 37(1) of the Act under the facts and circumstances of the case.

5.7 Reliance is placed on the decision of Jurisdictional High Court in the case of Ace Designers Ltd. vs. Additional CIT, reported in 275 Taxman 138 wherein it has been observed as follows:

-Where assessee-company made investment in its wholly owned subsidiary outside India for business purpose i.e for enhancement of its business activity in global market, however, said subsidiary could not perform upto company’s expectations and same was wound up, loss arising from investment made in subsidiary was to be allowed as business loss of assessee”

5.8 Reliance is further placed on the decision of Bombay High Court in the case of CIT vs. Investa Industrial Corporation Ltd. reported in 119 ITR 380.

5.9 Reliance is also placed on the decision of Bombay High Court in the case of CIT vs. Colgate Palmolive (India) Ltd. reported in 370 1TR -28.

5.10 In view of the above, it is submitted that since the assessee has suffered actual losses by advancing the amounts to M/s. Morpheus Capital Advisors Pvt. Ltd. the loss claimed by the assessee needs to be allowed under the facts and circumstances of the case.

5.11 Set-off of losses in subsequent years: It is submitted that as per the return of income filed by the assessee for the impugned assessment year. the assessee had declared the long term capital loss of R.s..7.64.841/- and short term capital loss of Rs.4,34,75,954/- on sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd. However, the authorities below have disallowed the Short Term Capital Lass of Rs.4,43,24,751/- (Rs.4,34,75,954/-on sale of shares of his. Morpheus Capital Advisors Pvt. Ltd. and Rs.8,48,797/- on other capital assets) by alleging that the impugned transaction appears to be a colorable device.

5.12 It is submitted that the authorities below failed to appreciate that the amounts were advanced to M/s. Morpheus Capital Advisors Pvt. Ltd. aver a period of 5 years i.e., during financial years 2008-09 to 3Dl 2-1 3 and not during the impugned assessment year alone. Further, the kiss incurred on sale of shares of M/s. Morpheus Capital Advisors Ltd. was adjusted with capital gains earned during the assessment years 2016-17 to 2019-20 and not in the immediate succeeding assessment year and the fact may kindly be noted.

5.13 It is relevant to note that it has taken around 6 years from the impugned assessment year to set-off the carried forward losses and in fact, the majority amount of Rs.2,60,32,644/- i.e., around 58% of the total losses were adjusted only during the assessment year 201920 which fortifies the fact that the impugned transaction is not a colorable device. The copies of the income tax return along with computation statement and audited financial statements of the assessee for the financial years 2015-16 to 2018-19 relevant to assessment years 2016-17 to 2019-20 are enclosed for your Honours ready reference. The details of the set-off of carried forward short term capital loss amounting to Rs.4,43,24,751/- are tabulated below for ease of reference:

5.14 Without prejudice, even for arguments sake if it is assumed that the transaction is a colorable device, the losses are set-off in the duration of 6 assessment years and not in the immediate assessment and infact sound 58% of the total losses are adjusted in the assessment year 2019-20 and therefore, the allegation of authorities below that the sale a[ des of M/s. Morpheus Capital Advisors Pvt. Ltd. is a colorable device is arbitrary and hence, the disallowance of short term capital bus is unwarranted under the facts and circumstances of the case.

5.15 It is submitted that on sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd., the assessee had incurred a short term capital loss of Rs.4,34,75,954/-. The details of the same are tabulated below for ease of reference.

5.16 However, the learned assessing officer has disallowed an amount of Rs.4,43,24,751/- which includes the loss incurred on other capital assets amounting to Rs.8,48,797/-. Without further prejudice to the contentions canvassed supra, it is contended that the authorities below ought to have restricted the disallowance towards short term capital loss on sale of shares of M/s. Morpheus Capital Advisors Pvt. Ltd. to Rs.4,34,75,954/- instead of Rs.4,43,24,751/- under the facts and circumstances of the case.

6. Ld. D.R. strongly relied on the order of Ld. CIT(A) and drew our attention to the various findings of CIT(A)/AO.

7. We have heard the rival submissions and perused the materials available on record. As seen from the order of the lower authorities, assessee has advanced a sum of Rs.5.64 crores to Morpheus Capital Advisors Pvt. Ltd. (“MCAPL”), a company incorporated by the assessee itself in the year 2008. The said company stated to be deriving its revenue primarily from the investment advisory and consultancy services provided to Morpheus Media Funds, SEBI registered venture capital funds. Assessee has converted said advances of Rs.5.6 crores into shares at Rs.10/- each by way of Board Resolution dated 18.2.2013 and subsequently on 25.2.2013 i.e. within a period of 7 days by another Board Resolution, sold the very same shares of 79.54% stake for a lumpsum consideration of Rs.15 lakhs, thereby booked a short term capital loss of Rs.4.48 crores. It has been observed by the lower authorities that net-worth of the company MCAPL had completely eroded and have no net-worth, no assets and its assets were advanced to others and its directors and rental deposit. Hence, there were no assets as such for the company’s net-worth to get eroded. Considering this, lower authorities was of the opinion that this is the bogus loss booked by the assessee so as to claim benefit under the Act. When we examine this fact with the date of acquisition of shares i.e. 18.2.2013and subsequent sale on 25.2.2013, it becomes clear that this is merely providing accommodation entries in the form of short term capital loss in order to evade the taxes. The contention of the assessee that it has purchased the shares on account of commercial expediency and subsequent shares cannot be questioned. In our opinion, this argument of the assessee is not tenable because the entire transaction of purchase and sale is to be seen in its entirety in the light of surrounding circumstances, particularly when the net-worth of the MCAPL was negative. The fact that the net-worth of that company was completely eroded and the company’s financials are as follows:-

8. As seen from the above balance sheet of MCAPL, as on 31.3.2012 & 31.3.2013, the total assets and liabilities are as follows:

9. As on 31.3.2012, the net-worth of the company is at (-) Rs.4,43,85,289/-. Thus, the company is having negative net-worth on the basis of that the assessee taken a decision to convert advance of Rs.5.60 crores as shares of Rs.10/- each on 18.12.2013 and subsequently, the same was sold on 25.2.2013 for an amount of Rs.15 lakhs and short term capital loss of Rs.4.48 crores was booked stating that this was done on commercial expediency. We are of the considered opinion that in the ordinary course of business, no one can be expected to invest the amount in a company having no profile in public domain. First of all, anybody who makes an investment in the company by way of purchase of shares, one has to pursue the profile and go through the balance sheet of the company. The Ld. A.R. expressed his inability to explain what commercial expediency the assessee is having to convert the advance given to the assessee into shares on 18.2.2013 and selling of the same on 25.2.20132 within a span of 7 days. The assessee also not explained how the value of shares has gone drastically to such low by way of selling shares worth of Rs.5.6 crores to meagre amount of Rs.15 lakhs, which resulted short term capital loss of Rs.4.48 crores. The improper decline in the price of the shares when examined in the light of the fact that the MCAPL is not at all doing good performance during this period and what forced the assessee to make investment of Rs.5.60 crores in the form of share capital in that company. We also gone through the revenue generation of that company in these two years as below. The total revenue in the year ended on 31.3.2012 & 31.3.2013 are as follows:

10. As seen from above, the MCAPL is loss making company whose net-worth was completely eroded inspite of this assessee made investment of Rs.5.6 crores as share capital on 18.12.2013 and within a span of 7 days the same was sold on 25.2.2013 at Rs.15 lakhs and value fixed for the shares not commensurate with the net-worth of those shares. So, in these circumstances, merely because of the fact that initial advance has been made by the assessee as loan, the entire transaction cannot be considered as genuine transaction, wherein the value of the shares has gone down by 3733% i.e. Rs.5.6 crores became Rs.15 lakhs within a span of 7 days. In the given circumstances, the assessee has failed to prove that these transactions as genuine and the assessee has not indulged in any bogus activity of booking short term capital losses. Even for argument sake, if we consider purchase of shares as genuine, the sale of shares from astronomically low price which is far from reality in the market itself shows that transaction was bogus, sham and ingenuine one. Even steep decline in the price of the share within a period of 7 days itself prove that it was merely a bogus transaction for claiming bogus short term capital loss so as to claim benefit in subsequent assessment years, whereby assessee could set off the short term capital loss with long term capital gain. The Bench put a specific query to the Ld. A.R. whether the assessee has earned any capital gain in subsequent years for which the answer is “silence”. The Ld. A.R. pressed so hard with regard to the commercial expediency. In our opinion, making investment in MCAPL may be required by the assessee but sale of the same within span of 7 days cannot be considered as commercial expediency when there was a decline of share price by 3733%. We further of the opinion that price rigging of share can only be determined from the circumstances in which shares have been bought and sold with such astronomical decline in price because direct evidence in such circumstances is not available. Further, we are of the view that the documents submitted by assessee or argument made by the assessee before us to prove the genuineness of transactions are themselves found to serve as smoke screen to cover up the true nature of the transactions in the facts and circumstances of the case as it has revealed that purchase and sale of shares are arranged transactions to create bogus capital short term capital loss in the garb of real transactions with the sole motive to claim short term capital loss so as to evade tax. At this point it is pertinent to mention Hon’ble Supreme Court decision in the case of McDowell & Company Ltd. (154 ITR 148), wherein it was held that “tax planning may be legitimate prove itself within framework of the law and any colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the plea that it is honourable to avoid the Payment of tax by dubious methods. The Ld. A.R. relied on the various case laws, which cannot be applied to the present set of facts of the case. Hence, not considered.” Further, MCAPL which had negative net-worth and reported losses and buying of shares of such company naturally raises suspicion in the minds of the authorities. Having regard to these circumstances, we are of the opinion that the assessee has meticulously completed the paper work but the results thereof are altogether beyond human probabilities. So, we are of the considered view that what is apparent is not real when we examine the whole facts of purchase and sale of these transactions. Further, Hon’ble Supreme Court in the case of CIT Vs. Durga Prasad More (82 ITR 540) while deciding the similar issue, where apparent was not real and in those circumstances, the taxing authorities were held entitled to look into the surrounding circumstances to find out the reality of such recitals/transactions by observing as follows:-

“(iii) that though an apparent statement must be considered real until it was shown that there were reasons to believe that the apparent was not the real, in a case where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals: the taxing authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals;

(iv) though it was true that neither the principle of res judicata nor the rule of estoppel was applicable to assessment proceedings, the fact that the assessee included the income of the premises in his returns for several years, after objecting to its inclusion in the year 1942-43, was a circumstances which the taxing authorities were entitled to take into consideration, in the absence of any satisfactory explanation”.

11. Further, Hon’ble Supreme Court in the case of Sumati Dayal Vs. CIT (214 ITR 801) wherein, dismissing the appeal, held that “the Settlement Commission after considering the surrounding circumstances and applying the test of human probabilities had rightly concluded that the appellant’s claim about the amount being her winnings from races was not genuine”.

11.1 Thus, it is essential on the part of AO to look into the real nature of transaction of what happens in the real world and contextualize the same to such transaction in the real market situation. In view of the above, the irresistible conclusion in this case is that the assessee only prepared the paper work in making investment in shares in net-worth fully eroded company so as to create artificial short term capital loss and by selling the same at very exorbitant low price only to claim short term capital loss thereby evade tax which is bogus transaction and the assessee has failed to dispel all the doubts to establish that the transaction in question was real not beyond human probabilities. In view of the above discussion, we are of the considered view that purchase and sale of shares of that company MCAPL is a bogus transaction so as to get the bogus short term capital loss at astronomical rate. Accordingly, we uphold the order of lower authorities on this issue and dismiss all the grounds taken by the assessee before us.

12. In the result, the appeal filed by the assessee is dismissed. Order pronounced in the open court on 8th June, 2022