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:
