Issue – Whether the transaction of sale of shares of a group company at a loss could be treated as a non-genuine transaction intended solely to create a loss to adjust against taxable income?
Held in favour of Assessee :-
It is observed that the claim of the assessee for long term capital loss arising from sale of shares of was disallowed by the A.O. by treating the relevant transactions of purchase and sale of shares as a colourable device adopted by the assessee with an ultra motive to claim the long term capital loss. His allegation of the colourable device having been used by the assessee was mainly based on circular transactions allegedly made between different companies belonging to the same group whereby the shares sold had again come back to the same group. In this regard, the ld. D.R. has contended that the case made out by the A.O. of circular transaction was accepted even by the ld. CIT(A) but still he allowed the claim of the assessee for long term capital loss holding that the circularity was extremely weak. It is, however, observed that a very specific and categorical finding was given by the ld. CIT(A) in his impugned order that it was not a case of circularity where the assessee had re-purchased the shares after sale. He observed that the shares under consideration, on the other hand, had never come back to the assessee. Having held so, the ld. CIT(A) considered the case made out by the A.O. on the basis of controlling factor and observed in this context that even if this factor had been taken into consideration, it was not a circularity amongst only group companies and if at all such circularity was in existence, the same was extremely weak. It, therefore, cannot be said that the case of circularity made out by the A.O. was accepted by the ld. CIT(A) as sought to be contended by the ld. D.R. On the other hand, it was specifically rejected by the ld. CIT(A) observing that the shares in between were purchased by the third parties absolutely un-connected with the assessee group. He also noted that the shares purchased by the said third parties were held by them for a substantial time before selling the same at profit. It was also noted by the ld. CIT(A) that 50% of the shares sold by the assessee were held by outside corporate entity totally un-connected with the assessee even at the time he passed his impugned order. He observed that the said entity was a public limited company and the assessee having no stake in the said company, it cannot be said that any benefit was derived by the assessee from the transactions of purchase and sale of shares. As regards the rate at which the shares had been sold by the assessee, the ld. CIT(A) found that the valuation of shares was done by an independent Chartered Accountant and the same was not challenged by the A.O. by bringing in his own valuation. He held that the principle laid down by the Hon’ble Supreme Court in the case of MacDowell (supra) thus was not
applicable in the case of the assessee as there was no benefit derived either by the assessee or even by the group. In support of the Revenue’s case on the issue under consideration, the ld. D.R. has relied on the decision of Hon’ble
Calcutta High Court in the case of L.N. Dalmia (supra) and of Kolkata Bench of ITAT in the case of Edward Keventer (P.) Ltd. (supra). On perusal of the orders passed in these two cases, we find that the facts involved were entirely different than the facts involved in the present case. In the case of L.N. Dalmia, two companies were formed by the assessee, one was LNE where he and his nephew were shareholders and directors. The other company was K where shareholders and directors were assessee and his wife. The assessee, his wife and his nephew were also directors of PPM. By the transfer of shares of PPM by the assessee to LNE and K, the transferor did not loose his control either over the transferred shares or the concerned company namely PPM. The transfers had taken place without any ready cash and the entire sale was made on credit. There was no positive proof that the purchasing company had sufficient funds to acquire the shares for the agreed consideration. The assessee, on the other hand, had incurred huge interest on borrowed funds allegedly utilized for the acquisition of shares and in the relevant year such interest amounted to Rs. 1,46,501/-. Keeping in view all these vital aspects, which were considered to be not disclosong any normal business like behavior, the transaction of sale of shares was held to be not genuine by the Hon’ble Calcutta High Court and the claim of the assessee for resultant loss was held to be not allowable. In the present case, the facts involved, as already discussed, are materially different inasmuch as the shares in question were not only transferred to third parties totally unconnected with the assessee but the same were also held by the said party for a considerable time. Similarly, in the case of Edward Keventer (P.) Ltd. (supra), the facts involved were different than the facts of the present case inasmuch as the five companies involved in the share transactions belonged to the same group with the assessee having influence over them and transactions of sale of shares and thereafter acquiring the same back were found to be made within the same group. It was also apparent that the five companies had acted only at the dictation of the assessee company in purchasing the shares as and when the assessee company had intended to sell and then the selling of shares back to the assessee company when the assessee wanted so without showing or explaining any commercial consideration in support thereof. Keeping in view all these facts of the case, it was held by the Tribunal that the composite transactions of first purchasing the shares and then re-selling the same at the same rate were fit to be disregarded as there was no commercial purpose and the same were artificially inserted to enable the assessee company belonging to the same group to book loss for acquiring the benefit for the tax purpose. The cases relied upon by the ld. D.R. thus are distinguishable on facts and the same cannot be of any help to the Revenue in the present case.
As submitted by the ld. Counsel for the assessee and remained undisputed by the ld. D.R., capital gains arising from subsequent sale of shares by Mr. Mahendra T. Bhammer and family was declared by them in their returns and the same was even accepted by the Department. In the case of Vishal P. Mehta (supra) cited by the ld. Counsel for the assessee, it was held by the Tribunal that where subsequent sale is accepted by the Department as genuine, there is no reason or justification to doubt the earlier transaction. It is also observed that Mr. Mahendra T. Bhammer confirmed on oath of having purchased the shares from the assessee company and having made the payment against such purchase. The ld. Counsel for the assessee has also furnished the relevant details to show that the long term capital loss claimed in the year under consideration has not been sett off by the assessee against any long term capital gain till 2012-13 and the same has finally lapsed, which again goes to show that there was no ulterior motive in selling the shares at loss as alleged by the A.O. As such, considering all the facts of the case, we are of the view that there is no infirmity in the impugned order of the ld. CIT(A) allowing the claim of the assessee for lose of Rs. 27.67 crores in the year under consideration i.e 2004-05. We, therefore, uphold the impugned order of the ld. CIT(A) on this issue and dismiss the appeal filed by the Revenue.