Facts of the case
The taxpayer company, engaged in the business of leasing of equipment, purchased shares of WSIL on 4 April 1996 for a sum of INR 79.27 million which were sold on 30 December 1999 for INR 7 8.87 million. After applying the cost inflation index, the cost of the shares, for the purpose of computation of capital gain, worked out to INR 101.1 million which resulted in capital loss of INR 22.22 million.
The taxpayer had also purchased shares of Gillette Diversified Operations Private Limited (GDOPL) on 4 April 1996 for a consideration of INR 84 million and had sold those shares to Gillette Group India Private Limited (GGIPL) on 30 December 1999 for a sale consideration of INR 83.6 million, which resulted in capital loss of INR 23.58 million after applying cost inflation index. From 1 January 2000, the taxpayer company amalgamated with GDOPL and filed return of income declaring loss of INR 47.15 million.
The Assessing Officer disallowed the capital loss on sale of shares on the ground that these shares were purchased from the funds made available by the group companies and observing that the taxpayer company had entered into these transactions on the same day only to create capital loss of investment held by it.
The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the loss on account of sale of WSIL shares but upheld the dis allowance of loss in respect of shares of GGIPL on the ground that the sale proceeds were used to reduce liabilities prior to amalgamation with GDOPL.
The Income-tax Appellate Tribunal (the Tribunal) allowed the loss incurred by the taxpayer on sale of shares of WSIL on account of failure to provide possible objection by the tax department. As regards sale of shares of GDOPL, the Tribunal observed that the taxpayer company did not adjust the capital loss against other long term capital gains. Even in the assessment of 2002- 03, the amalgamated company had brought forward the losses of earlier years. Therefore, the Tribunal held that had the shares been sold as a device to obtain any unfair tax benefit, the taxpayer or the amalgamated company would have immediately adjusted it against income from LTCG.
Further, it was immaterial whether the loan was due to a group company or to an outsider. The actual loss of sale of shares was only INR 418,324 and it was only on account of indexation that the amount of capital loss had increased. Accordingly, the Tribunal held that the transaction could not be thrown out merely because it was carried out a few days before amalgamation of the company.
Taxpayer’s contention:- The taxpayer contended that Gillette Company having suffered huge losses was not in a position to carry on its manufacturing activities and wanted to reduce its liability, prior to amalgamation by paying all funds to its group.
High Court’s ruling
The High Court observed that the taxpayer company was entitled to sell the shares held by it at any time, which it considered to be appropriate for such sale. It was for the holder of the shares and not for the tax department to decide, when to sell the shares held by the taxpayer. There was nothing illegal in the taxpayer company selling shares held by it, for the purpose of reducing its liabilities.
It was also immaterial as to who the purchaser of the shares was, so long as the shares are not sold at a price which was higher or lower than their fair price and there was no restriction on sale of such shares to a group company. All these factors would have been relevant had the Tribunal found that the transactions undertaken by the taxpayer company were a colourable device with a view to cause a loss to the tax department.
It was also observed that neither the taxpayer company nor the amalgamated company adjusted the capital loss on account of sale of these shares against any long-term capital gain even till the assessment year 2002-03. No tax benefit was, therefore, obtained by the taxpayer company for at least two years after the capital loss was booked by it. Hence, it cannot be said that the transactions in question were a color able device, meant to gain some unfair tax advantage.
Accordingly, the High Court held that it cannot interfere with the finding recorded by the Tribunal, being a final fact finding authority, unless it was shown to be perverse by the tax department.
Our Comments:- This is an important ruling by the Delhi High Court where it has been held that the taxpayer can sell shares at any time, which it considers to be appropriate for such sale and there was nothing illegal in the taxpayer company selling shares held by it, for the purpose of reducing its liabilities. This ruling will provide relief to the taxpayers who have planned its affairs in a similar manner under the scheme of restructuring.
