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ITAT on Set-Off of Capital Loss via Sham Transaction against Capital Gain

DCIT Vs M/s. B S. Infosolution Pvt. Ltd (ITAT Delhi)

ITAT Held that No prudent person with some commercial prudence would pay a hefty premium of Rs. 190/- on a book value of Rs. 82/-, hold it for one year, and then sell the same shares at book value.

Further Though the premium is justified by a valuation report, but the same appears to be a self- serving document because a company which is incorporated in January 2011 cannot fetch a hefty premium of Rs. 190/- in a span of three months.

 The same property was the subject matter of two distinct transactions – one with QIPL and the other with CRPL, though ultimately the property was sold to QIPL. This means that when the assessee received part consideration from QIPL, it was well aware that the transaction is going to result into capital gains and to avoid such capital gains liability the assessee used CRPL and VBPL as conduits to generate loss in shares to be set off against the capital gain. Thus, the surrounding circumstances and human probabilities are to be taken into account while considering the evidences emanating from the records.

Hon’ble Karnataka High Court in the case of WIPRO Ltd 50 Taxmann.com 421 While disallowing the claim of Capital loss the High Court has also held as under:.

“It is a devise adopted to evade payment of tax on the capital gains earned by the assessee company. Though the proximity of the date between the sale of shares and purchase of shares and disinvestment alone cannot be a criteria to hold the transaction is a sham transaction and the profit earned from sale of shares in WNL is real and loss incurred by the sale of shares is also real and though there was no bar for sale of shares at throw away price and sometimes, the businessman act in undue exercise and hasty and without any rationale any one of them is not sufficient to hold a transaction as sham transaction. But the cumulative effect of all these instances unequivocally points out the real intention behind this transaction and leads to a irresistible conclusion that this tax planning is done with the intention to avoid payment of tax on capital gains and it is not a case of legitimate tax planning but a devise to avoid payment of tax. ”

Considering the sequence of events discussed hereinabove,  we have no hesitation to hold that the share transaction is nothing but a sham transaction, a colourable device to avoid capital gains tax liability and, therefore, has to be ignored.

FULL TEXT OF THE ITAT JUDGMENT

With this appeal, the Revenue has challenged the correctness of the order of the Commissioner of Income Tax [Appeals] -2, New Delhi dated 19.02.2016 pertaining to assessment year 2012-13.

2. The sole grievance of the Revenue is that the CIT(A) erred in deleting the addition of Rs. 5,18,68,407/- on account of disallowance of assessee’s claim of long term capital loss.

3. Facts, as emanating from the records, show that during the year under consideration, the assessee has sold a property bearing No. A-8, Sector 68, Noida, Gautam Budh Nagar to M/s Q.A. Infotech Pvt Ltd [QIPL] for a total consideration of Rs. 9.60 crores. On such sale, capital gain of Rs. 3,48,39,960/- was declared. The AO found that the said capital gain was set off against the claim of loss of Rs. 5,18,68,407/- incurred on the sale of shares.

4. The AO examined the sequence of events and came to the conclusion that the purchase and sale of shares was nothing but a colourable device to generate loss to be set off against capital gain.

5. When the matter was agitated before the first appellate authority, the first appellate authority, in his wisdom, accepted the transaction as genuine and allowed the claim of set off of loss.

6. Before proceeding further, let us examine the principles laid down by the Hon’ble Supreme Court in the case of Durga Prasad More 82 ITR 540 [SC]. The relevant findings of the Hon’ble Supreme Court read as under:

“It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.”

7. This was further endorsed by the Hon’ble Supreme Court in the case of Sumati Dayal 214 ITR 801 wherein the Hon’ble Supreme Court held as under:

“dismissing the appeal 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.”

8. Now we will examine how the ratios laid down by Hon’ble Supreme Court [supra] apply on the facts of the case in hand. As mentioned elsewhere, the assessee sold property to QIPL. Though there was no formal agreement between the assessee and QIPL, the assessee first received Rs. 2 crores on 31.12.2010 and another Rs. 2 crores on 30.03.2011. Though for the second transaction, the date mentioned is 30.03.2010, but both the ld. AR and the ld. DR pointed out that the same should be read as 30.03.2011.

9. On 28.02.2011, the assessee entered into a collaboration agreement with M/s Charmwood Realtech Pvt Ltd [CRPL] to develop the property for which the assessee had taken part consideration as mentioned hereinabove.

10. It is not understood that once the property was agreed to be sold to QIPL and part consideration was received, then why the same property was entered into a collaboration agreement with CRPL, which is a group company?

11. Pursuant to the collaboration agreement, the assessee received 10 crores as refundable security deposit/earnest money from CRPL. Rs. 9 crores was received during the F.Y. 2010-11 as under:

Date Cheque No. Amount paid
03.03.2011 44206 1,50,00,000/-
07.03.2011 44209 3,00,00,000/-
07.03.2011 44207 3,00,00,000/-
12.03.2011 44210 1,50,00,000/-
TOTAL 9,00,00,000/-

12. After receiving the sum of Rs. 9 crores from CRPL, the assessee transferred Rs. 7.50 crores immediately to the account of M/s Venkateshwara Buildtech Pvt ltd [VBPL] which is also a group company.

13. Thereafter, on 15.03.2011, VBPL allotted 3,75,000 shares having face value of Rs. 10 per share at a premium of Rs. 190/- per share. This means that the shares of VBPL worth Rs. 7.50 crores were purchased by the assessee out of the fund transferred from CRPL [all group companies].

14. On 22.07.2011, the assessee entered into a deed of cancellation of collaboration agreement with CRPL and the amount received from CRPL was returned back as under:

Date Particulars Amount
20.03.2012 Shares Venkteshwara 375000 @ Rs. 82.50 3,09,37,500.00
30.03.2012 Oriental Bank of Commerce Being amount paid 5,90,62,500.00
TOTAL 9,00,00,000.00

15. Thus, the shares which were purchased for a consideration of Rs. 50 crores were sold/transferred for Rs. 3,09,37,500/- and the loss of sale of shares was generated.

16. At this stage, it is pertinent to note that the assessee paid a premium of Rs. 190/- on the shares of a company which was incorporated on 03.01 .2011 and its first F.Y. ended on 31 .03.2011 and the date of purchase of shares is 15.03.2011. Though the premium is justified by a valuation report, but the same appears to be a self- serving document because a company which is incorporated in January 2011 cannot fetch a hefty premium of Rs. 190/- in a span of three months.

17. On 31.03.2011, the book value of shares of VBPL is mentioned at 82/-

18. No prudent person with some commercial prudence would pay a hefty premium of Rs. 190/- on a book value of Rs. 82/-, hold it for one year, and then sell the same shares at book value. Shares of VBPL were sold on 20.03.2012.

19. The aforestated sequence of transactions has to be considered in the light of the principles laid down by the Hon’ble Apex Court in the case of Durga Prasad More [supra] and Sumati Dayal [supra].

20. The same property was the subject matter of two distinct transactions – one with QIPL and the other with CRPL, though ultimately the property was sold to QIPL. This means that when the assessee received part consideration from QIPL, it was well aware that the transaction is going to result into capital gains and to avoid such capital gains liability the assessee used CRPL and VBPL as conduits to generate loss in shares to be set off against the capital gain. Thus, the surrounding circumstances and human probabilities are to be taken into account while considering the evidences emanating from the records.

21. The Hon’ble Karnataka High Court in the case of WIPRO Ltd 50 Taxmann.com421 has held as under:

“The question whether a transaction is sham or colorable and entered into with the sole intention of evading payment of tax is purely a question of fact. On appreciation of the material on record and thereafter keeping in mind the statutory provisions in particular, the charging section and the section under which the tax is exempted, the Court has to record the finding of fact. Unless the statutory provisions provide for exemption from payment of tax, the question of an assessee trying to take advantage of the said provision would not arise. Therefore, in each case, the question is, the way the assessee has avoided to pay tax relying on the statutory provisions is legitimate or not is to be considered by the Court. The Court has to bear in mind that it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. An obligation is cast on every citizen to pay the taxes without resorting to subterfuges. When the statute provides certain rights, which if properly applied would reduce the tax burden on the assessee or exempts him from the payment of the assessee is entitled to the said benefit. However, if he is invoking the said provisions with the intention of evading payment of tax, then it would be a colorable device to avoid payment of tax, which cannot be entertained by the Court. It is in this context, Court has to find out whether the transaction is real or unreal and then record a finding whether it is a colorable device or sham transaction.

“The aforesaid undisputed and admitted material on record discloses that the purchase of shares of WFL at premium in one breadth and selling the shares of the said company for a pittance at the rate of less than a paisa in other breadth, which clearly shows the intention behind this arrangement Secondly, the said shares are sold to the ex-employees who continued to hold the said shares without bringing any fresh capital for conducting the business of WFL.”

22. While disallowing the claim of Capital loss the High Court has also held as under:.

“It is a devise adopted to evade payment of tax on the capital gains earned by the assessee company. Though the proximity of the date between the sale of shares and purchase of shares and disinvestment alone cannot be a criteria to hold the transaction is a sham transaction and the profit earned from sale of shares in WNL is real and loss incurred by the sale of shares is also real and though there was no bar for sale of shares at throw away price and sometimes, the businessman act in undue exercise and hasty and without any rationale any one of them is not sufficient to hold a transaction as sham transaction. But the cumulative effect of all these instances unequivocally points out the real intention behind this transaction and leads to a irresistible conclusion that this tax planning is done with the intention to avoid payment of tax on capital gains and it is not a case of legitimate tax planning but a devise to avoid payment of tax. ”

23. Considering the sequence of events discussed hereinabove, in the light of the principles laid down by the Hon’ble Supreme Court and also by the Hon’ble Karnataka High Court, we have no hesitation to hold that the share transaction is nothing but a sham transaction, a colourable device to avoid capital gains tax liability and, therefore, has to be ignored. The first appellate authority has accepted the transaction without considering the fact that what is ‘apparent’ is not ‘real’ on the facts of the case in hand. We, therefore, set aside the findings of the CIT(A) and restore that of the AO. The assessment order is upheld. The sole ground raised by the Revenue is allowed.

24. In the result, the appeal filed by the Revenue is allowed.

The order is pronounced in the open court on 23.08.2018.

Categories: Income Tax
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