Case Law Details
Trends Pharma Vs ITO (Bombay High Court)
Bombay High Court has dismissed an appeal filed by Trends Pharma Pvt. Ltd. against the disallowance of short-term capital loss amounting to Rs. 70.24 lakh for Assessment Year 2010–11. The High Court upheld the concurrent findings of the Assessing Officer (AO), Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal (ITAT), which had deemed the share transaction in question as a sham and a colourable device employed to evade tax. The court concluded that no substantial question of law arose for consideration.
The case involved a transaction where the assessee purchased shares of Trends Pharma Pvt. Ltd. in February 2010 at Rs. 100 per share and sold them a month later in March 2010 at Rs. 12.20 per share. The resultant short-term capital loss of Rs. 70.24 lakh was set off against capital gains. However, the AO, after examining the sequence and pricing of the transaction, concluded that the arrangement lacked commercial substance and was structured solely to generate an artificial loss. The AO, therefore, disallowed the loss on grounds of tax avoidance.
The first appellate authority, Commissioner (Appeals), upheld the assessment order, stating that the transaction was designed to give the illusion of genuine loss while actually being a colourable device. The Commissioner noted that the sale and purchase of shares occurred within a brief period without any economic rationale, reinforcing the view that the transaction was a sham.
Upon further appeal, the ITAT affirmed the conclusions of the AO and the Commissioner (Appeals), stressing that the transaction had no commercial basis and was executed solely to manipulate taxable income. The Tribunal observed that even the inclusion of statutory submissions by the assessee could not counter the factual findings that indicated deliberate tax avoidance. It concluded that no interference was warranted.
During the High Court hearing, the appellant argued that their intent was not tax evasion and suggested that even a loan would have resulted in tax deductions due to pricing adjustments. However, the Court rejected this hypothetical argument, noting that it was irrelevant to the actual transaction under scrutiny. The court emphasized that concurrent factual findings by all three lower authorities—based on records and evidence—could not be challenged without demonstrating perversity, which was not the case here.
Citing the well-established judicial principle laid down in McDowell & Co. Ltd. v. CTO [(1985) 154 ITR 148 (SC)], the court reaffirmed that colourable devices cannot be part of tax planning. It emphasized that transactions lacking economic substance and meant solely for tax benefits are not permissible. In dismissing the appeal, the court held that the issues raised were purely factual and did not involve any substantial question of law.
The ruling reinforces judicial reluctance to interfere with findings of fact in tax cases, especially where tax avoidance through artificial losses is alleged. The judgment signals a consistent approach among tax authorities and appellate bodies to scrutinize share transactions closely when there are signs of manipulation for tax purposes.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This appeal is filed under Section 260-A of the Income-tax Act (hereinafter referred to as ‘the Act’) for the assessment year 2010-11, challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 10 August 2017.
2. The appeal proposes the following substantial questions of law:-
SUBSTANTIAL QUESTIONS OF LAW
(a) Whether the Tribunal was right in passing an order after more than 10 months of concluding the hearing?
(b) Whether the Tribunal was right in law in dismissing the appeal without considering /dealing with any of arguments urged by the Appellant?
(c) Whether the Tribunal was right in law in holding that the purchase as well as the sale of shares of Trends Pharma Pvt. Ltd., was a colourable device adopted by the Assessee in order to avoid tax?
3. However, the learned counsel for the appellant did not advance arguments on question (a) at the time of the hearing; therefore, it is presumed that he is not pressing for the same. We now propose to deal with questions (b) and (c).
4. The appellant for AY 2010-11 during the assessment year 2010-11 made a short-term capital gain of Rs.69,59,165/- and adjusted short term capital loss of Rs.70,24,000/- on sale of the shares of Trends Pharma Pvt. Ltd. The assessing officer in the assessment order observed that the shares of Trends Pharma Pvt. Ltd. were purchased in February 2010 at Rs.100/- per share and sold in March 2010 for Rs.12.20/- per share. The assessing officer in the assessment order has concluded that the transaction of purchase and sale of the shares is a tax avoidance measure and, after giving detailed reasons, held the transaction to be a sham transaction. The assessing officer disallowed the short-term capital loss of Rs.70,24,000/-.
5. The first appellate authority, Commissioner (Appeals) examined the issue in-depth and after considering the submissions made by the appellant assessee and the reasoning given by the assessing officer in the assessment order, in paragraph 3.3 of his order confirmed the finding of the assessing officer that, the transaction of buying and selling of shares was a sham transaction to generate short term capital loss by using colourable device to evade payment of taxes. The Commissioner (Appeals) gave detailed reasoning for coming to the conclusion in paragraph 3.3.
6. The appellant-assessee carried the matter to the Tribunal who vide order dated 10 August 2017 after hearing and considering the submissions of the appellant-assessee and the revenue confirmed the findings of both the authorities i.e. the assessing officer and Commissioner (Appeals) and agreed with the findings of both the authorities that the transaction of sale and purchase of shares was a colourable device adopted by appellant-assessee to generate loss and to avoid tax. The Tribunal refused to interfere after giving the findings on the transaction being a sham transaction.
7. Mr. Thakkar, learned counsel for the appellant, vehemently objected to the findings of the three authorities and submitted that even if this transaction would not have been entered into but loan would have been given, still he would have been entitled to claim the deduction since in pricing same would have been factored. He submitted that the three authorities’ findings are perverse and prayed for admission of the present appeal. He also produced a compilation of documents during the hearing before us and brought to our attention page 75 of the said compilation which gives the details of the date of transfer and name of transferor and transferee of shares of Trends Pharma Pvt. Ltd.
8. Ms. Sushma, learned counsel for the respondent, submitted that the questions raised in the present appeal do not raise any substantial questions of law. She further submitted that all three authorities have examined the facts and, after considering the material on record, gave a factual finding that the transaction is bogus. She further submitted that the question of perversity is not raised but only argued in the oral arguments before this Court, and in any case, even that is not correct since all three authorities have considered the submissions made by the appellant assessee. Learned counsel opposed the admission of the appeal.
9. We have heard learned counsel for the appellant and the respondent.
10. Insofar as question (b) is concerned, we do not agree that both the appellant authorities have not considered the argument of the appellant-assessee. The assessing officer in the assessment order has reproduced the submissions in the assessment order and, after considering and evaluating the same and examining the transaction, has concluded that the transaction of purchase and sale of shares is a sham transaction. Furthermore, the Commissioner (Appeals) also has reproduced the submissions of the appellant assessee in paragraph 3.2 of his order and, after evaluating the same, has given a detailed reasoning in paragraph 3.3 for confirming the findings of the assessing officer that the transaction is a sham transaction. The Tribunal, in its order after hearing the parties, has confirmed the said findings of the Commissioner (Appeals) and by relying not only on the findings of the Commissioner (Appeals) but also by giving independent findings in paragraphs 8, 9 and 10 and has confirmed the transaction as sham transaction.
11. In light of the above, we do not agree that all three authorities have not considered the submissions made by the appellant assessee. In any case, question (b) deals with the non-consideration of the Tribunal of arguments urged by the appellant assessee. As to what has been urged and what is not urged before the Tribunal, this Court cannot comment on the same. It was for the appellant assessee to have moved the application under Section 254(2) of the Act if the appellant assessee had any grievance in this regard. From the record, we find that all aspects were considered by the three authorities and no case for interference is made out on the ground alleged. Therefore, in our view, no substantial question of law arises from question (b) raised in the appeal memo.
12. Insofar as question (c) is concerned, all three authorities and more particularly the Tribunal, being a final fact-finding authority, have given a finding that the transaction of buying and selling of shares is a colourable device adopted by the appellant assessee to avoid tax. There is no question raised that this finding is perverse. In any case, the three authorities have considered the submissions and have arrived at the conclusion of the transfer being colourable device to avoid tax. This Court cannot reconsider the said findings of facts, which are based upon the records filed before the authorities. In light of the concurrent findings of fact by all the three authorities, in our view, whether the transaction is a colourable device to avoid tax does not raise any substantial question of law but is purely a finding of fact which has been arrived at concurrently by the three authorities. The evidence on record backs this crucial finding. Adequacy of evidence is usually not examined in such appeals dealing with substantial questions of law. In any case, this is also not a matter where the evidence could be said to be inadequate.
13. The belated contention that even without the colourable device the assessee could have advanced a loan and claimed deductions is purely hypothetical. The effect of such a course cannot be envisioned. Such an issue does not arise. In any case, findings of fact that are backed by the material on record cannot be interfered based on such a contention.
14. In view of above, this appeal is dismissed since it does not raise any substantial question of law.
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