Income Tax Appellate Tribunal - Pune
Zambad Infrastructure Ltd.,, Pune vs Assessee on 28 September, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
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BEFORE SHRI R.K. PANDA, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.2031/PN/2014
#नधा&रण वष& / Assessment Year : 2010-11
Zambad Infrastructure .......... अपीलाथ / Appellant
Limited,
MZSK & Associates,
Level 3, Business Bay,
Plot No.84, Wellesley Road,
Pune - 411001
PAN : AAACZ0651M
बनाम v/s
ACIT (HQ) Admn. Aurangabad .......... यथ /Respondent
अपीलाथ क ओर से / Assessee by : Shri J.P. Bairagra
यथ क ओर से / Respondent by : Shri P.L. Kureel
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing :29.08.2016 Date of Pronouncement:28.09.2016
आदे श / ORDER
PER R.K.PANDA, AM :
This appeal filed by the Assessee is directed against the order dated 31-10-2014 of the CIT(A), Aurangabad relating to Assessment Year 2010-11.
2. Ground of appeal No.1 by the assessee reads as under :
"1. The Learned taxing authorities below had erred in disallowing loss on share transaction of Rs.3,28,00,000/-. Just and proper relief may be granted to the appellant."2 ITA No.2031/PN/2014
3. Facts of the case, in brief, are that the assessee is a company engaged in the business of Civil Construction. It filed its return of income on 15-10-2010 declaring income of Rs.7,19,07,807/-. The said return was revised on 25-04-2011 declaring income of Rs.7,19,49,505/- due to change in claim of depreciation. During the course of assessment proceedings the AO noted that sales of Rs.16,11,75,432/- has been credited to the profit and loss account. From the details furnished by the assessee the AO noted that the same includes a sum of Rs.82,00,000/- received on sale of shares of Western Medical Solutions Pvt. Ltd. Further, the AO noted that a sum of Rs.4,10,00,000/- has been debited to the profit and loss account with the narration "purchase of shares". He, therefore, asked the assessee to furnish details of said purchase and sale of shares during the year relevant to the assessment year 2010-11. In response to the said query it was replied by the assessee as under which has been reproduced by the AO in the body of the assessment order :
"6.1 During F.Y. 2008-09 relevant to A.Y. 2009-10 the assessee company had invested Rs.4.10 crores in equity shares of Western Medical Solutions Pvt. Ltd., Mumbai with the objective to realize better price in due course and gain reasonable amount as profit on funds invested.
6.2 After making the investment, the assessee company found that the company where the money was invested, i.e. Western Medical Solutions Pvt. Ltd., Mumbai is not performing well and the projections and proposal given in 2007 could not be achieved to a large extent. The assessee company found that the investment has become dead. Considering these negative developments the Board of Directors of the assessee company has decided to sale these shares and accordingly passed a resolution on 05-01-2010. Copy enclosed.
6.3 During F.Y.2009-10 relevant to A.Y. 2010-11, the assessee company had sold these shared to Dev Construction Pvt. Ltd. at negotiated price of Rs.82,00,000/-, i.e. Rs.2/- per share. The amount credited to Sale of Shares A/c."3 ITA No.2031/PN/2014
4. The assessee also enclosed a copy of the resolution passed by the Board of Directors of the assessee company for buyback of shares allotted to the company.
5. However, the AO was not satisfied with the above explanation given by the assessee. In order to verify the genuineness of the loss claimed by the assessee at Rs.3,28,00,000/- on account of sale of shares the AO obtained a search report from the Ministry of Corporate Affairs in respect of Western Medical Solutions Pvt. Ltd. From the said search report he noted that assessee had purchased 41,00,000 equity shares of Rs.10/- each of Western Medical Solutions Pvt. Ltd. on 20-11-2008 for a consideration of Rs.4,10,00,000/-. These shares have been sold by the assessee to M/s. Dev Construction Pvt. Ltd. on 06-01-2010 during the previous year relevant to the assessment year 2010-2011 for a consideration of Rs.82,00,000/-, thereby, incurring a loss of Rs.3,28,00,000/-. The assessee is in the business of buying and selling of Land & development of land and the purchase of the shares of Western Medical Solutions Pvt. Ltd. is in no way connected with its business activities.
6. The AO noted that the assessee has not given any justification for the investment of Rs.4,10,00,000/- made in an unlisted company in the F.Y. 2008-09 and has also not furnished any evidence to show how it expected to realize better price in due course of time and gain reasonable amounts of profit on funds invested in the shares of an unlisted company. From the copy of balance sheet filed of Western Medical Solutions Pvt. Ltd. for A.Y. 2009-10 and 2010-11 he observed that the company does not have any assets other than the capital. Further, in the short span of 14 months the assessee has realized 4 ITA No.2031/PN/2014 that the company it had invested was not performing well and therefore it decided to sell its shares at a negotiated price of Rs.2/- per share as against its purchase price of Rs.10/- per share. He observed from the records that the purchase price of the 41,00,000 share for Rs.4,10,00,000/- has been debited to the profit and loss account of the previous year 2009-10 whereas the shares had been acquired on 20-11-2008 which falls in the previous year 2008-09. According to the AO the purchase price of the shares should have been debited to the profit and loss account of the earlier year whereas the purchase price of Rs.4,10,00,000/- has been shown in the balance sheet of the earlier assessment year, i.e. 2009-10 as advance towards purchase of shares.
7. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Bombay Oil Industries Ltd. Vs. DCIT reported in 82 ITD 626 where it has been held that tax planning can be tolerated, however, tax evasion by dubious modes cannot be countenanced, the AO disallowed amount of Rs.3,28,00,000/- claimed by the assessee on account of sale of shares of Western Medical Solutions Ltd. during the year by holding that the same is not a genuine business loss. He held that both the purchase and sale of transaction of shares of Western Medical Solutions Ltd. have been given in the profit and loss account for the A.Y. 2010-11 to reduce the taxable income of the assessee company and to evade payment of tax. Without prejudice to the above, the AO further noted that if the loss of Rs.3,28,00,000/- on the purchase and sale of shares of Western Medical Solutions Ltd. is to be allowed it will have to be treated as a capital loss since buying and selling of shares is not business of the assessee company. He noted that the assessee has also stated that the investment was made 5 ITA No.2031/PN/2014 with the objective to realize better price in the course of time and gain reasonable amount as profit on funds invested. He, therefore, held without prejudice that the loss of Rs.3,28,00,000/- will have to be assessed as long term capital loss as the shares of Western Medical Solutions Ltd. have been held for a period of more than 12 months and the long term capital loss can only be carried forward and set off against long term capital gains in the following assessment years as per the provisions of section 74 of the I.T. Act.
8. Before CIT(A) the assessee more or less reiterated same submissions. It was submitted that the conclusion arrived at by the AO is not correct. First of all, these shares were held as stock in trade and not as investment. Secondly, these shares were allotted by Western Medical Solutions Pvt, Ltd, Mumbai to the assessee company on 20-11-2008. These shares were sold to M/s. Dev Construction Pvt. Ltd on 6-01-2010. Holding period is 412 days. To qualify to become long term asset as per definition u/s 2(42A) the holding period should be more than 36 months. As stated by the AO the holding period of 12 months is applicable to listed shares dealt with on recognized stock exchange and on which securities transaction tax has been paid. Here both these conditions are missing. These shares were not listed shares on any recognized stock exchange. Hence, these shares are not dealt with on recognized stock exchange and no securities transaction tax has been paid on the sale of transaction of these shares.
9. It was submitted that during the F.Y. 2009-10 relevant to A.Y. 2010-11, the assessee company had sold the land at Gut No. 78, Katvi and Land at Gut No. 138 Pisadevi and the above referred equity 6 ITA No.2031/PN/2014 shares. All these assets were sold and accordingly these have been considered in Sales account. The AO had given different treatment to these sales. Nature of both these assets is capital assets. The assessee company has treated both shares and lands as stock in trade and profit/loss from sale has been treated as business income/loss. The AO had applied different principles to two transactions having same nature. The sale of shares of Western Medical Solutions Pvt. Ltd has been treated as investment and loss has been computed as long term capital loss. Sale of land has been treated as business transaction and profit has been treated as business income. It was further submitted that if at all the treatment of stock in trade is not possible then same treatment be given to both assets. Considering the facts of the case and provisions of law, it was requested to allow business loss of Rs. 3,38,00,000/- on sale of shares.
10. However, the CIT(A) was also not satisfied with the arguments advanced by the assessee and upheld the action of the AO by observing as under :
"6.3 I have carefully considered the facts of the case and rival contentions. On perusal of the same, it has been noticed that the appellant company has purchased 41 Lakh shares of M/s. Western Medical Solutions Pvt. Ltd., on 20/11/2008 for consideration of Rs.4,10,00,000/- out of total shares issued and subscribed Rs.4,12,00,000/-. Therefore, about all the shares i.e. 99.51% shares were held by the appellant company. Therefore, the appellant company has got full control over the company M/s. Western Medical Solutions Pvt. Ltd. From the audited balance sheet of the company as at 31/03/2009, 31/03/2010 & 31/03/2011 available in the assessment record, it has been noticed that the amount of share capital of Rs.4,12,00,000/- and share application money of Rs.1,00,00,000/- totaling to Rs.5,12,00,000/- have been mainly invested in the following assets -7 ITA No.2031/PN/2014
Particulars of main assets As on As on As on
31/03/2009 31/03/2010 31/03/2011
Investment in Jupiter Lifeline Hospitals 3,67,00,000 3,60,00,000 4,34,10,575
Loans and advances 1,42,42,840 1,42,00,000 60,00,000
Total 5,09,42.840 5,02,00,000 4,94,10,575
From the audit reports and Director's reports, it has been noticed that the Directors and the Chartered Accountant of M/s. Western Medical Solutions Pvt. Ltd., have certified that the loans and advances and current assets have realizable value as appearing in the balance sheet. The Auditors of the company have also certified that the balance sheet of the company reflects true and fair view of its financial position. The Auditors/Directors have not pointed out that either the loans and advances or the investment in jupiter Lifeline Hospitals have meager realizable value. Further, from the balance sheet as at 31/03/2011 i.e. after sale of shares of the above mentioned company by the appellant, the said company has recovered substantial loans and advances and has invested the same in jupiter Lifeline Hospitals. Therefore, it is evident that the said loans and advances and investment in jupiter Lifeline Hospitals has not become value less.
As mentioned above, the appellant company having share holding of 99.51% in M/s. Western Medical Solutions Pvt. Ltd. has full control over the company including the assets of the company. Therefore, there is no justification for the appellant company to sell the 41 Lakh shares of M/s. Western Medical Solutions Pvt. Ltd. for Rs.82,00,000/- i.e. @Rs.2/- per share on 06/01/2010 to M/s Dev Construction Pvt. Ltd.
In view of the above facts and discussion, I am of the considered view that the loss of Rs.3,28,00,000/- claimed by the appellant on sale of shares is non-genuine loss and the transaction is sham transaction. The A.O. is justified in disallowing the said loss of Rs.3,28,00,000/- as business loss. The addition of Rs.3,28,00,000/- made by the AD. is confirmed. Ground No.2 is dismissed."
11. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
12. The Ld. Counsel for the assessee strongly opposed the order of the CIT(A). He submitted that whenever a profit is shown on the purchase and sale of shares the department normally treats the same as business income while the assessees contend that it is a capital gain. Referring to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gopal Purohit reported in 336 ITR 287 he 8 ITA No.2031/PN/2014 submitted that the Hon'ble High Court in the said decision has held that assessee can do both trading in shares as well as investment in the shares. The difference between both is depending on the intention of the assessee at the time of purchase of the shares and entries passed in the books of account. He submitted that the SLP filed by the department has been rejected by the Hon'ble Supreme Court as reported in 333 ITR (statute) 308. Referring to the Circular No.4/2007 dated 15-06-2007 issued by the CBDT he submitted that the CBDT in the said circular has given or issued guidelines to the Assessing Officers that there is a distinction between shares held as investment and shares held as stock in trade. Whether a particular holding of shares is by way of investment or forms part of the stock in trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock in trade and those which are held by way of investment.
13. Referring to the decision of Hon'ble Supreme Court in the case of CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. reported in 100 ITR 706 he submitted that the Hon'ble Supreme Court in the said decision has held that a single transaction can constitute adventure in the nature of trade. Referring to the decision of Hon'ble Supreme Court in the case of G. Venkataswami Naidu & Co. Vs. CIT reported in 35 ITR 594 he submitted that the Hon'ble Supreme Court in the said decision has held that even an isolated single transaction may be an adventure in the nature of trade if some of the essential features of trade are present in such a transaction. He submitted that in the instant case the assessee is engaged in the business of infrastructure, i.e 9 ITA No.2031/PN/2014 construction of buildings etc. and decided to invest in the business of hospital and hotel. Since for running of these businesses big chunk of funds are required, therefore, the assessee decided to purchase the shares of Western Medical Solutions Pvt. Ltd., who inturn holds shares of Jupiter Lifeline Hospital which is engaged in the business of running of hospitals and hotels.
14. Referring to pages 45 to 50 of the paper book he submitted that the company had received a proposal vide letter dated 10-07-2007 from Western Medical Solutions Pvt. Ltd for investment of funds. As per the said proposal Western Medical Solutions Pvt. Ltd had identified Jupiter group as leading group in Healthcare and Hotel industry and which had the proposal for constructing 200 bedded tertiary care hospital along with 55 studio apartment hotel at Thane. He submitted that as per the said letter Jupiter Lifeline Hospital proposed to extend its activities by building more and more hospitals together with hotels and therefore the assessee saw a good opportunity of buying the shares of Western Medical Solutions Pvt. Ltd which inturn was holding shares of Jupiter Lifeline Hospitals which could be disposed off in a short span and earn profit. He submitted that the assessee company found the proposal to be worthwhile and therefore it passed a resolution during the board meeting held on 26-07-2007, a copy of which is placed at page 51 of the paper book. In the said resolution it was resolved to invest in upcoming hospital project of Jupiter group through purchase of shares of Western Medical Solutions Pvt. Ltd. He submitted that the proposal of the assessee company was accepted and Western Medical Solutions Pvt. Ltd. passed a resolution in the board meeting held on 20-11-2008 for issue of 41,00,000 shares of Rs.10/- each at par to 10 ITA No.2031/PN/2014 the assessee. He submitted that in the impugned assessment year the assessee was in need of funds for its own construction projects and also received information that Jupiter Hospital is not able to build more hospitals and hotels as planned due to non-availability of the funds and hence the assessee decided to dispose off these shares at loss. He submitted that the shareholders and directors of the assessee company are not relatives of either Western Medical Solutions Pvt. Ltd or Jupiter Lifeline Hospitals and therefore these 2 companies are not the associate concerns of the assessee. Referring to pages 342 to 344 of the paper book he drew the attention of the Bench to the details of the shareholding and list of directors of the 3 companies namely the assessee, Western Medical Solutions Pvt. Ltd and Dev Constructions Pvt. Ltd.
15. Referring to the pages 63, and 66 to 74 of the paper book he submitted that when the assessee purchased shares of Western Medical Solutions Pvt. Ltd the same has been shown in the books under the head loans and advances which is clear from the schedule No.7(e) of the balance sheet for the year ending 31-03-2009. He submitted that during the impugned assessment year the assessee has shown purchase of shares and sale of shares in its profit and loss account. The purchase of shares were not shown under the head "Investment" as it was the intention of the assessee to re-sell the shares within a short span of period. Further, no dividend or income was received by the assessee from the Western Medical Solutions Pvt. Ltd. In view of these facts the AO as well as the CIT(A) are wrong in not allowing the business loss and in treating the same as loss under the head capital gain.
11ITA No.2031/PN/2014
16. Referring to pages 43 and 44 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the copies of the memorandum of association of the assessee company and submitted that the same clearly mentions the main objectives of the assessee company as development and construction of land. As per clause 19 page 44 of the paper book the company is also authorized to acquire/take up and hold shares/debentures, stock bonds, securities etc. Therefore, it cannot be said that the assessee was not in the business of purchase and sale of shares. Moreover the assessee had purchased and sold futures and options of shares in the previous year and the loss incurred of Rs.7,79,122/- in that year was disclosed as business loss which was accepted in the order passed u/s.143(3) of the I.T. Act. For the above proposition he referred to the profit and loss account enclosed as page 63, computation of income at pages 60 to 62 and the assessment order for A.Y. 2009-10 at pages 77 and 78. He submitted that during A.Y. 2010-11 the assessee was in need of funds for its own construction projects. Since Jupiter Lifeline Hospital was not able to build more hospitals and hotels as planned due to non-availability of funds the assessee decided to dispose of the shares. Therefore, the company first requested Western Medical Solutions Pvt. Ltd. for buyback of shares allotted. Since Western Medical Solutions Pvt. Ltd. expressed its inability to buyback of shares the assessee resolved to sell the share capital of Western Medical Solutions Pvt. Ltd. to a prospective buyer. In the board meeting held on 05-01-2010 it was decided to sell the shares at a value of Rs.82,00,000/- to the willing buyer being Dev Construction Pvt. Ltd. The minutes of the meeting is placed at page 53 of the paper book. He submitted that the projects proposed in 2007 by Western 12 ITA No.2031/PN/2014 Medical Solutions Pvt. Ltd. taken up by Jupiter Lifeline were still not taken up and there was huge gestation period for that company to make profits. Only assets held by Western Medical Solutions Pvt. Ltd. were shares in Jupiter Lifeline Hospitals and advances given. Profits of the company were negligible. Moreover the hotel project of the investee, i.e., Jupiter Lifeline Hospital did not take off. In such circumstances it was difficult for the company to find a suitable buyer as it was unknown whether the company would make profits and the duration of gestation period involved.
17. Referring to the following decisions he submitted that the AO cannot enter into the shoes of the assessee and it is the businessman, who knows better about the business decision :
1. CIT Vs. Dalmia Cement Pvt. Ltd. reported in 121 taxmann 706
2. Aditya Medisales Ltd. Vs. Department of Income Tax vide ITA No.3974/Ahd/2007 order dated 02-02-2011.
3. CIT Vs. Salitho Ores Ltd. reported in 194 taxmann 410 Bombay High Court He submitted that the AO in the instant case has failed to appreciate the real business facts that nobody can predict that every business decision will invariably result into the profitable success.
18. So far as the observation of the AO and the CIT(A) that the loss incurred by the assessee on sale of shares as non-genuine loss he submitted that the assessee has fully submitted all details regarding purchase and sale of shares of Western Medical Solutions Pvt. Ltd, being copy of Board resolutions passed for purchase, allotment and for subsequent sale of shares. The assessee has also submitted details of payments made for shares allotted by Western Medical Solutions Pvt. Ltd., accounting treatment in the audited books and payments received from Dev Construction on sale of shares. Further, 13 ITA No.2031/PN/2014 the assessee and the party to whom the shares were sold are unrelated parties.
19. Referring to the decision of Hon'ble Madras High Court in the case of CIT Vs. Spencers and Co. Ltd. reported in 359 ITR 644 he submitted that the Hon'ble High Court in the said decision has held where the assessee has produced all required primary evidence relating to sale of shares, loss suffered by assessee in such transaction has to be allowed. He submitted that in that case the AO had disallowed the assessee's claim as capital loss on sale of shares of the group companies treating it as manipulated or bogus loss. The Tribunal found that the assessee had produced all the required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share particulars etc. The appellate authority also found that the AO did not prove these documents or evidences to be false or bogus. Accordingly, the claim of loss made by the assessee was allowed. He submitted that the principles laid down in the above decision are squarely applicable to the facts of the present case since in the instant case also the AO has not proved that the details submitted by the assessee are false or bogus.
20. So far as the decision relied on by the AO and the CIT(A) in the case of Bombay Oil Industries (Supra) is concerned he submitted that the said decision is not applicable to the facts of the present case and is distinguishable. In that case the assessee had resorted to device of manipulated transaction by preparing certain documents and agreement so that it can book substantial capital loss in order to set off capital gains that arose from liquidation of one of its fully owned subsidiary company. Further, the sale was made to the related party, 14 ITA No.2031/PN/2014 who was under the control and influence of the assessee company because of the business connection and was the main distributor of the products of M company in which the directors of the assessee had majority stake. Further, the AO had also pointed out irregularities in the documentation and flow of funds between the parties. However, in the instant case, no such facts were noted. The assessee, the investee and the purchase company are unrelated and hence, there was no motive behind the transaction of sale of shares at lower price.
21. Even the search report of Western Medical Solutions Pvt. Ltd. obtained by the AO from the Ministry of Corporate Affairs also confirmed that shareholders and directors of the company are not related to shareholders and directors of M/s. Western Medical Solutions Pvt. Ltd. and Dev Construction.
22. As regards the argument of the AO without prejudice that even if loss of Rs.3,28,00,000/- is to be allowed to the assessee it should be treated as long term capital loss since buying and selling of shares is not the business of the assessee company, the Ld. Counsel for the assessee referring to Clause No.19 at page 44 of the paper book drew the attention of the Bench to the memorandum of association of the assessee company which authorises purchase, holding and sale of shares and securities, therefore, the contention of the AO on this issue is wrong. Further, whether the loss is business loss or capital gain depends on the intention of the assessee when acquired and its treatment in the books of account. He submitted that in the instant case the intention of the assessee company was always to resell. For the above proposition he relied on the following decisions and 15 ITA No.2031/PN/2014 submitted that the business loss of Rs.3,28,00,000/- arising on account of sale of shares should be allowed.
1. New Prahlad Mills Pvt. Ltd. Vs. CIT reported in 85 ITD 480
2. ITO Vs. Bunty Holdings Pvt. Ltd. reported in 60 SOT 70
23. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). He submitted that the Ld.CIT(A) has given justifiable reasons for rejecting the claim of business loss at Rs.3,28,00,000/- as non genuine loss and the transaction as sham transaction. Therefore, the order of the CIT(A) on this issue be upheld and the ground raised by the assessee should be dismissed.
24. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has shown loss of Rs.3,28,00,000/- on account of sale of shares of Western Medical Solutions Pvt. Ltd. which were purchased for Rs.4,10,00,000/- on 20-11-2008 and sold on 06-01-2010 at Rs.82,00,000/-. The AO disallowed the claim of the assessee on the ground that the same is not a genuine business loss and both the purchase and sale transactions of shares of Western Medical Solutions Pvt. Ltd. have been given in the profit and loss account to reduce the taxable income of the assessee company and to evade payment of tax. For the above proposition, the AO relied on the decision of the Mumbai Bench of the Tribunal in the case of Bombay Oil Industries Ltd. (Supra). Further, without prejudice to the above the AO held that the loss of Rs.3,28,00,000/- will have to be assessed as long term capital loss as the shares of Western Medical Solutions 16 ITA No.2031/PN/2014 Pvt. Ltd. have been held for a period of more than 12 months and the long term capital loss can only be carried forward and set off against the long term capital gain in the subsequent assessment years as per provisions of section 74. We find the Ld.CIT(A) upheld the action of the AO by holding that the claim of loss of Rs.3,28,00,000/- made by the assessee on sale of shares is a non-genuine loss and the transaction is sham transaction. The relevant observation of the CIT(A) has already been reproduced in the preceding paragraphs.
25. It is the submission of the Ld. Counsel for the assessee that the share transaction effected by the assessee is a genuine transaction. According to him, an assessee can hold the shares either as investment or as stock in trade. Further, in view of the decision of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd. (Supra) a single transaction can constitute an adventure in the nature of trade. It is also the contention of the Ld. Counsel for the assessee that full details were given before the AO as well as the CIT(A) substantiating purchase and sale of shares and the justification for sale of shares at a loss. It is also the submission of the Ld. Counsel for the assessee that the AO cannot enter into the shoes of the assessee and it is the businessman who knows better how to conduct the business. It is also the submission of the Ld. Counsel for the assessee that every business decision may not invariably result into profit.
26. We find some force in the above arguments of the Ld. Counsel for the assessee. We find the assessee before the AO had submitted that the company had received a proposal vide letter dated 10-07-2007 from Western Medical Solutions Pvt. Ltd. for investment 17 ITA No.2031/PN/2014 of funds. As per the said proposal Western Medical Solutions Pvt. Ltd. had identified Jupiter group as leading group in healthcare and hotel industry which had the proposal for constructing 200 bedded tertiary care hospital along with 55 studio apartment hotel at Thane. The assessee saw a good opportunity to buy the shares of Western Medical Solutions Pvt. Ltd. which inturn was holding shares of Jupiter Lifeline Hospitals. Necessary resolution was passed by the board meeting held on 26-07-2007, a copy of which is placed at page 51 of the paper book. The Board of Directors of Western Medical Solutions Pvt. Ltd. had passed a resolution in the board meeting held on 20-11-2008 for issue of 41,00,000 shares of Rs.10/- each at par to the assessee. Since subsequently the assessee had information that Jupiter Lifeline Hospitals is not able to build more hospitals and hotels as planned and since the assessee was in need of funds it decided to dispose of the shares at loss. Since Western Medical Solutions Pvt. Ltd. expressed its inability to buyback the shares the assessee sold the shares to the prospective buyer M/s. Dev Constructions Pvt. Ltd. Under these circumstances, we have to see as to whether the claim of loss by the assessee has to be allowed as a genuine business loss or the loss to be disallowed as none-genuine and sham transaction.
27. From the details furnished by the assessee in the paper book we find the shares of Western Medical Solutions Pvt. Ltd. were shown in the books under the head "loans and advances" as on 31-03-2009 which is evident from pages 63 and 66 to 74 of the paper book. On being questioned by the Bench as to why the shares are shown under the head "current assets loans and advances" the Ld. Counsel for the assessee submitted that shares were allotted to the assessee on 18 ITA No.2031/PN/2014 12-12-2009 with distinct numbers 2000 to 41,20,000 vide Registered Folio No.5 Certificate No.22. We find clause 19 of the Memorandum of Association of the company authorizes the assessee to acquire, take up and hold shares, stocks, debenture stock bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in India etc. etc. We find during the impugned assessment year the assessee has shown the purchase of share and sale of shares in the profit and loss account. As mentioned earlier, in the preceding year the shares were shown under the head "loans and advances" and not under the head "investment". No dividend or other income was received by the assessee from Western Medical Solutions Pvt. Ltd. It is also an admitted fact that none of the Directors of the assessee company are in no way related to the Directors of Western Medical Solutions Pvt. Ltd. or M/s. Dev Constructions Pvt. Ltd. It is also noticed from the submissions made by the assessee that during A.Y. 2009-10 the assessee had claimed loss in futures and options share trading at Rs.7,79,122/- as per page 64 of the paper book which is the profit and loss account for the year ended 31-03-2009. We find the AO in the order passed u/s.143(3) dated 15-12-2011 has accepted such loss as business loss and nothing was brought on record that any action either u/s.147 or 263 has been taken. Therefore, we find merit in the argument of the Ld. Counsel for the assessee that the loss incurred by the assessee on sale of shares cannot be treated as non-genuine loss.
28. It has been held in various decisions that AO cannot enter into the shoes of the assessee and it is the businessman who knows better how to conduct its business. The Hon'ble Bombay High Court in the case of CIT Vs. Salitho Ores Ltd. (Supra) has held that an 19 ITA No.2031/PN/2014 expenditure incurred for purpose of business cannot be refused on the ground that the expenditure was imprudent. The Hon'ble High Court held that when it was not the case of the revenue that the expenditure was not bonafide or that it was incurred by way of diversion of profits to a related person or a sister concern of the assessee the revenue could not have gone into the question of expediency of expenditure incurred and/or expediency of hiring of 4 dozers that was a matter of commercial expediency and the assessee was the best judge of it. It was accordingly held that the expenditure was an allowable expenditure.
29. We find in the case of CIT Vs. Spencers and Co. Ltd. (No.3) (Supra) the AO had disallowed the assessee's claim as capital loss on sale of shares of the group companies treating it as a manipulated or bogus loss. The Tribunal found that the assessee had produced all the required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share price etc. relating to the sale of shares. The appellate authorities also found that the AO did not prove these documents or evidence to be false or bogus. Accordingly, the claim of loss made by the assessee was allowed. On further appeal by the Revenue the Hon'ble High Court has held as under :
"21. We have given our anxious consideration to the reasons given and findings arrived at by the appellate authority and the Tribunal. We find from the order of the appellate authority that with the material available on record he had proceeded to adjudicate the claim of the assessee. The appellate authority on scrutiny of the material available on record found that the assessee had produced all the required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share particulars, etc., relating to the sale of shares. The appellate authority also found that the assessing authority did not prove these documents or evidence to be false or bogus. On appreciation of the factual aspects of the matter, the appellate authority held that the assessing authority was not justified in holding the sale of shares as bogus and the claim was made with a motive to avoid payment of tax. The appellate authority was found to be satisfied with the materials available on record that the loss 20 ITA No.2031/PN/2014 suffered by the assessee in sale of shares was a genuine loss and, therefore, entitled to claim the loss under "Capital gains". The finding of the appellate authority was based on the materials available on record and, therefore, is a finding of fact. The Tribunal, concurring with the said finding, held that there was no convincing material put forth by the Revenue to establish that the assessee was claiming loss on ostensible sale of shares belonging to the group companies with the motive of tax avoidance. The Tribunal also confirmed the finding of the appellate authority that all the required primary evidence relating to sale of shares were produced before the assessing authority and that the assessing authority did not point out any infirmity in those evidence. The Tribunal also found that the assessing authority could not accept a transaction in part and reject or disbelieve the rest only for the purpose of assessment of loss. On a careful analysis of the orders of the appellate authority and the Tribunal in the light of the material available on record and the arguments made, we see no reason to interfere with the concurrent findings of fact recorded by the authorities below. -There is no infirmity in the order passed by the Tribunal confirming the order of the appellate authority directing the assessing authority to assess the loss on sale of shares under the head "Long-term capital gains". We are also not convinced that the decision cited by the Revenue in the case of McDowell Co., cited supra, in any way support the case of the Revenue and the claim of loss on account of sale of shares, in our view, does not appear to be any "colourable device" as an instrument for avoidance of tax as wrongly argued on the part of the Revenue. On the contrary, the decision relied upon by the assessee in Azadi Bachao Andolan's case, cited supra, would show that the test to determine whether the claim is a colourable device or not is to determine whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. The Tribunal has analysed the materials on record to come to a conclusion that the loss on account of sale of shares was a genuine and that the said loss has occurred in the course of business and cannot be added to the income of the assessee in any manner. Furthermore, the Revenue has failed to demonstrate as to how the loss on account of sale of shares is not genuine but a colourable device. We, therefore, answer the substantial question of law No.4 raised by the Revenue against them and in favour of the assessee."
30. Since in the instant case the assessee has submitted all the details and the revenue authorities have not proved these documents as false or untrue, therefore, we do not find any reason as to why the loss of shares should not be allowed as business loss.
31. We find the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd. (Supra) has held that a single transaction of purchase and sale outside the assessee's line of business may constitute an adventure in the nature of trade. It is not necessary to 21 ITA No.2031/PN/2014 constitute trade that there should be a series of transactions of purchase and sale. Similar view has been taken by the Hon'ble Supreme Court in the case of G. Venkataswami Naidu and Company (Supra). It has further been held that question as to whether a transaction is adventure in nature of trade is a question of mixed law and fact. Even an isolated single transaction may be adventure in nature of trade if some of essential future or trade are present in such a transaction. It has been held that decision about character of a transaction as to whether it is in the nature of trade cannot be based solely on application of any abstract rule, principle or test and must in every case depend upon all relevant facts and circumstances.
32. We find the Hon'ble Bombay High Court in the case of New Prahlad Mills Pvt. Ltd. Vs. CIT reported in 85 ITR 480 has held as under (short notes) :
"Held, that the loss of Rs.5,44,580/- suffered by the assessee on the sale of shares was a trading or revenue loss which was allowable in computing its business income. The three relevant annual general meetings of Jupiter were on July 17, 1947, June 7, 1948, and September 15, 1949. On none of those dates did the assessee have control over more than 50 per cent of the voting rights in Jupiter, even if the holding of East and west in Jupiter was taken into account, the Tribunal having found that the assessee had complete control over East and West. What was even more significant was that though the assessee, through its own holding and the holding of East and West in Jupiter, had to control more than 50 per cent voting rights in Jupiter in February, 1948, it sold 70,000 shares of East and West in April, 1948, and it also sold 63,000 ordinary shares and 25,000 preference shares of Jupiter in January, 1949. Those sales falsified the theory that the assessee had purchased the shares for acquiring control over the affairs of Jupiter purchased the shares with a view to boosting up their prices and selling them at an inflated price. The assessee succeeded in selling the shares at an inflated price but it had made its own purchases at such a high price that the adventure landed it in a loss of Rs.5,44,580/-.
Whether an assessee's transaction amount to dealing in shares or to investment is a mixed question of fact and law and the legal effect of the facts found by the Tribunal, on which the assessee could be treated as a dealer or an investor, is a question of law.."22 ITA No.2031/PN/2014
It was accordingly held that the loss of Rs.5,44,580/- suffered by the assessee on the sale of Jupiter shares and East and West shares is a trading or revenue loss which is allowable in computing its business income (page 488 and 489)
33. It has been held in various decisions that every business decision by an assessee may not result into profit. Sometimes the assessee may have to incur loss also. Therefore, merely because the assessee has incurred loss on account of purchase and sale of shares the same cannot be treated as non-genuine and sham especially when the various other documents furnished by the assessee have not been proved to be false of bogus.
34. So far as the decision of the Mumbai Bench of the Tribunal in the case of Bombay Oil Industries Ltd. (Supra) which has been relied on by the AO and CIT(A) is concerned we find the said decision is not applicable to the facts of the present case and is distinguishable. The Tribunal has given a finding that in that case the assessee had resorted to device of manipulated transaction by preparing certain documents and agreement so that it can book substantial capital loss in order to set off capital gain that arose from liquidation of one of its own company. Further, the sale was made to a related party who was under the control and influence of the assessee company because of the business connection and was the main distributor of the products of the company in which the Directors of the assessee had a majority stake. The irregularities in the documentation and flow of funds between the parties was also pointed out by the AO. However, in the instant case neither the transactions are between related parties nor the revenue has pointed out that the assessee has 23 ITA No.2031/PN/2014 resorted to device of manipulated transaction by preparing manipulated documents. As mentioned earlier, neither the assessee nor the investee nor the purchaser company are related to each other. Therefore, the decision relied on by the AO and the CIT(A) in our opinion are not applicable to the facts of the present case.
35. So far as the argument of the AO without prejudice that the loss can be allowed as a long term capital loss since buying and selling of shares is not the business of the assessee company is concerned, we have already noted from clause 19 of the memorandum of association of the assessee company (copy of which is placed at page 44 of the paper book) that the assessee can acquire, take up and hold shares, stocks, debenture stock bonds, obligations and securities or guaranteed by any company constituted or carrying on business in India etc. etc. Since the shares are of unlisted company and have been held for less than 36 months, therefore, it is not a capital asset. In view of the above discussion, we are of the considered opinion that the CIT(A) was not justified in disallowing the claim of business loss of Rs.3,28,00,000/-. We, therefore, set aside the order of the CIT(A) and direct the AO to allow the claim of business loss. The ground raised by the assessee is accordingly allowed.
36. Ground of appeal No.2 by the assessee reads as under :
"1. The Learned taxing authorities below had erred in rejecting the revaluation of stock of land at Hyderabad at net realizable value and making an addition of Rs.90,62,325/-. Just and proper relief may be granted to the appellant."24 ITA No.2031/PN/2014
37. Facts of the case, in brief, are that during the course of assessment proceedings, the AO noticed that the assessee has claimed opening stock of land at Hyderabad as on 01-04-2009 at Rs.90,63,325/- whereas the closing stock of the said land as on 31-03-2010 has been shown at Rs.1,000/- only. The AO, therefore, asked the assessee to justify the above claim which has resulted into claim of business loss of Rs.90,62,325/-. The assessee contended that it has purchased land from various agriculturists at Hyderabad after obtaining opinion from retired High Court Judge with the object to develop the said lands by way of future projects. However, on a later date it was found that the title of the said land is not clear and various litigations were pending in respect of the said lands. Considering these facts, the land has been valued at token amount of Rs.1,000/-.
38. However, the AO was not satisfied with the explanation given by the assessee and disallowed the claim of loss of Rs.90,62,325/- by observing as under :
"I am unable to accept the fact that the assessee who has been in the Reality business would have made an investment of Rs. 90,63,325/- in the land at Hyderabad without ascertaining whether it was getting a clear title. No documentary evidence has been filed by the assessee to establish that it does not have a clear title to the land purchased in Hyderabad and the recourse it had taken to recover its money or obtain a clear title to the land. As in the case of purchase and sale of share of Western Medical Solutions Pvt. Ltd, the downward revision of the value of the land at Hyderabad to a token value of Rs. 1,000/- appears to have been done primarily to reduce the taxable income of the assessee and evade payment of tax."
In support of the above decision, of holding the claim of loss of Rs.90,62,325/- as non-genuine, the A.O. has relied on the ratio laid down in the case of Hela Holdings Pvt. Ltd, Vs. CIT [2003] 263 ITR 129 (Calcutta) and also on the ratio laid down by Hon'ble Supreme Court in the case of UOI Vs. Azadi Bachav Andolan [2003] 263 ITR 706 (SC). 25 ITA No.2031/PN/2014
39. Before CIT(A) it was submitted that the assessee company had valued stock-in-trade i.e. work-in-progress on account of Hyderabad land project shown in statement of WIP as per consistent method of stock valuation i.e. at cost or market price whichever is lower, as stated in Form No. 3CD Sr. No. 12(a). Before purchase of these lands the assessee company had obtained an opinion from Retired High Court Justice. As per this opinion the assessee company had invested the funds in these lands with the objective to develop these lands for future projects. After purchase of these lands and filing of application for mutation entry in land records with local land revenue authorities, it has been revealed that the titles for the land produced by the sellers were defective and there were problems of ownership. The assessee company had filed petition with High Court, Aurangabad.
40. After going through the back history of the land it has been revealed that there is no possibility of getting the titles rectified and there is remote possibility of getting the lands registered in the name of the assessee company in the records of land revenue authorities. Considering the legal and factual position the assessee company had taken a decision to value the land as stock in trade at a nominal value of Rs. 1000/-. Accordingly the value has been reflected in Work-in- Progress. It was accordingly requested to allow the reduced value of stock of Hyderabad land project at Rs. 1000/- and delete the addition of Rs. 90,62,325/- made by the AO.
41. However, the CIT(A) also was not satisfied with the arguments advanced by the assessee and upheld the order of the AO by observing as under :
26ITA No.2031/PN/2014
"7.3 I have carefully considered the facts of the case and rival contentions. On perusal of the same, it has been noticed that the appellant has claimed to have purchased land at Hyderabad for consideration of Rs.90,63,325/-. The appellant has claimed that the said land which is under litigation and title of which is not clear has been purchased on the basis of opinion of retired High Court Judge. The appellant has further claimed that in the year under appeal, it has been noticed that the said land is not having clear title and is under litigation and hence the value of the said land has been claimed by the appellant as closing stock at Rs.1,000/- as token amount. The above contentions of the appellant are not supported by any evidence as no evidence in support of the above claims has been filed either before the A.O. or before the undersigned. It is settled position of law that the claims of expenditure, business loss, deductions are to be supported by evidence and the assessee is duty bound to prove the said claims with evidence. Therefore, in the absence of any evidence in support of the above mentioned revaluation of closing stock of land which has resulted into business loss of Rs.90,62,325/-, the claim of the appellant is rejected. The addition of Rs.90,62,325/- is accordingly confirmed. Ground No.3 is dismissed."
42. The Ld. Counsel for the assessee submitted that the assessee is in the business of construction and development of lands. Accordingly, the assessee holds lands at various places which were purchased from time to time for the purpose of development, the assessee had purchased plots of land from 8 parties in total. The details of which are enclosed at pages 80 to 233 of the paper book. He submitted that these lands were purchased on various dates in the year 2007 and were held as stock in trade in the books of the assessee which is clear from Schedule 10 and 11, copy of which is placed at page 21 of the paper book and the details of closing stock are as per page 34 of the paper book. He submitted that after purchase of the lands these lands were registered in the land records in the name of the assessee. Thereafter the assessee received notices of caveat application filed by Smt. K. Rajitha, wife of K. Ventaiah Reddy and others against the assessee and various other persons for cancellation of sale deeds under which land was purchased by the assessee company by contending that the tiles for land produced by 27 ITA No.2031/PN/2014 the sellers were defective and there were problems with the ownership of land.
43. Referring to pages 321 to 341 of the paper book, the Ld. Counsel for the assessee submitted that the Govt. of Andhra Pradesh, Registration and Stamp Department passed its order dated 12-08-2008 wherein the registration of land in the name of the assessee and various other persons were cancelled. He submitted that the cancellation of the land in the name of the assessee company are mentioned on page no 329 and 330 of the paper book. In the said order the Ld Authority has observed on page 2 (Page 322 of the paper book) that the alleged land grabbers (being the parties who have sold plots of the land to the assessee) without any interest, right, title and in collusion with the concerned registration authority and in conspiracy for extraneous consideration to grab the properties have brought into existence the registered sale deeds in respect of properties mentioned in Annexure II (which is inclusive of the assessee's property) and that the concerned registering authority without strictly following the mandatory provisions of the Registration Act 1908 and instruction of the governments from time to time to be followed for registration of documents and much less without following the mandatory provisions under section 6D of the A.P. Rights in Pattedari Pass Books Act 1971 proceeded with registration of such documents even without verifying the title documents and link documents of the executants in the document in Annexure II in question.
28ITA No.2031/PN/2014
44. The Authority further observed in page 7 of the order (Page 327 of the paper book) that it is alleged in all the documents in Annexure II represented Vendees who were recently arrested in Vikarabad town, by Police for creating false and fake documents of original land owners and others vide list in Annexure II. The parties therefore requested the authorities to cancel all the documents registered without titles illegally. Thereafter the Authority has examined the case in detail including the documents obtained from Sub registrar.
45. From the records it was noticed that the 38E certificate holder ownership has not been updated in Revenue Records in MRO Shamirpet (Page 334 of the Paper book). Further the Authority has also observed that certain parties were misled by Broker Guru Swami who took them to the registration office and obtained their signatures and told them that they have title and that they have received consideration. (Page 336 of the Paper book)
46. It is further noted that few purchasers as per deposition No (8) purchased properties without verifying title and made their decision to purchase properties purely on the strength and reputation of the individual. (Page 337 of the Paper book). The Authority has concluded that the above parties have cashed on the lacunas in pahani updating and the lack of proper scrutiny before registration by the Sub- Registrar and registering authority which precipitated the issue.(page 338 of the Paper book). Thus from the above order it is evident that the assessee and many other purchasers were fooled into purchasing land from certain imposters who had claimed to have complete ownership/ title to the property. Further since there was lack of updating of records of registration by the Sub-Registrar, the assessee, 29 ITA No.2031/PN/2014 even though tried his best, could not have foreseen the level of scheming involved.
47. On receipt of the above order, the assessee realised that there was no possibility of getting the titles rectified and there was remote possibility of getting the land registered in its name. Hence the assessee decided to revalue the land at token value of Rs 1000/- after taking the facts and legal issues into consideration.
48. The Ld. Counsel for the assessee submitted that the assessee is a developer cum builder and the plots of land are stock-in-trade for the assessee which has also been noted by the AO in the assessment order. Thus the loss incurred on account of defect in title of the ownership of the land and subsequent cancellation of ownership of land in assessee's name by the registering authority is clearly a business loss which is correctly reflected in the opening and closing stock of the land. The decision relied by the AO has no applicability to facts in assessee's case. To substantiate his case the Ld. Counsel for the assessee filed certain additional evidences and requested the Bench to admit the same as they go to the root of the matter and clarify all doubts raised by the AO and CIT(A).
49. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
50. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has shown the opening stock of land at Hyderabad as on 01-04-2009 30 ITA No.2031/PN/2014 at Rs.90,63,325/- whereas the closing stock of the said land as on 31-03-2010 was shown at Rs.1000/-thereby claiming business loss of Rs.90,63,325/-. We find the AO disallowed the claim of the assessee treating the loss as non-genuine on the ground that assessee could not produce any documentary evidence to establish that it does not have a clear title of the land purchased in Hyderabad and the recourse which it had taken to recover its money or obtain a clear title of the land. We find the Ld.CIT(A) upheld the action of the AO on the ground that the assessee could not substantiate with any documentary evidence to support its claim that the said land is not having clear title and is in litigation for which the value of the said land was shown at Rs.1000/- as against Rs.90,63,325/- shown as the opening value. It is the submission of the Ld. Counsel for the assessee that the Government of Andhra Pradesh, Registration and Stamp department has passed an order dated 12-08-2008 wherein the registration of the land in the name of the assessee and various other persons were cancelled. We find the assessee during the course of hearing before the Tribunal has also filed the following documents as additional evidence :
"1. Copy of caveat filed by Smt. K. Rajitha & Others for cancellation of the sale deeds under which the land was purchased by the assessee company (Page 234 to 313 of paper book).
2. Copy of notices and order passed by the Commissioner and Inspector General of Registration and Stamps Department, Hyderabad for cancellation of registration of land in favour of assessee company as vendor had no title for the land sole to assessee company (Page 314 to 341 of paper book).
51. Since these additional documents were not produced before the AO and the CIT(A) and since these documents go to the root of the matter, we admit the same. Considering the totality of the facts of the 31 ITA No.2031/PN/2014 case, we are of the considered opinion that the matter requires a re- visit to the file of the AO in view of the above additional evidences. The AO shall decide the issue afresh and in accordance with law after giving due opportunity of bearing heard to the assessee. We hold and direct accordingly. Ground of appeal No.2 by the assessee is accordingly allowed for statistical purposes.
52. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 28-09-2016.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
पण
ु े Pune; "दनांक Dated : 28 September, 2016.
th
सतीश
आदे श क) *#त,ल!प अ-े!षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A), Aurangabad
4. The CIT, Aurangabad $वभागीय 'त'न(ध, आयकर अपील य अ(धकरण, "बी" पण ु े/
5. DR, ITAT, "B" Pune;
5. गाड+ फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, // True Copy // //स या$पत 'त //True व-र.ठ 'नजी स(चव / Sr. Private Secretary आयकर अपील य अ(धकरण, पण ु े / ITAT, Pune