Income Tax Appellate Tribunal - Pune
Rajendra L.Agarwal,, Pune vs Income-Tax Officer, (International ... on 31 August, 2018
आयकर अपीलीय अिधकरण "ए" यायपीठ पुणे म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, PUNE
ी डी.
डी क णाकरा राव,ले
राव लेखा सद य,
सद य एवं ी िवकास अव थी,
अव थी याियक सद य के सम
BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No. 2330/PUN/2017
िनधा रण वष / Assessment Year : 2012-13
Shri Rajendra L. Agarwal,
312, Aurora Tower,
Camp, Pune-411 001
PAN : AAPPA6210P .......अपीलाथ / Appellant
बनाम / V/s.
The Income tax Officer,
(International Transaction-I),
Pune ......
यथ / Respondent
Assessee by : Shri Sunil Pathak
Revenue by : Shri Rajeev Kumar &
Shri Ajay Modi,
सुनवाई क तारीख / Date of Hearing : 03.07.2018
घोषणा क तारीख / Date of Pronouncement : 31.08.2018
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
This appeal filed by Assessee is directed against the order of Commissioner of Income Tax (Appeals)-13, Pune dated 17.07.2017 for assessment year 2012-13.
2. The assessee raised various grounds in the appeal running in four pages. Subsequently, during proceedings before us, the assessee raised abridged grounds and the same are extracted as under:
"On facts and in law,
1. The learned CIT(A) erred in denying the deduction of Rs.59,09,972/- u/s. 54F in respect of the following expenses incurred by the appellant.
a. Society transfer fee, development
and Infra Charges Rs.54,38,898/-
2
ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal
b. Advocate Fee Rs.2,68,500/-
c. Improvement Expenses incurred on the house Rs.2,02,574/-
2. The learned CIT(A) erred in disallowing the set off of short term capital loss of Rs.8,39,15,000/- incurred by the appellant on sale of equity shares against the capital gains chargeable to tax.
3. The learned CIT(A) erred in holding that the above transaction of sale of equity shares was sham and not genuine.
4. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal."
3. Briefly stated relevant facts include that the Assessee is a Non-resident and filed return of income declaring total income at Rs.19,43,96,130/-. The assessee is engaged in diverse business activities which include maintenance of race horses, trading in share, promotion and development of real estate properties, horse breeding etc. During assessment proceedings, the Assessing Officer made certain disallowances and determined assessee's income at Rs.28,99,67,172/-. The details of the disallowances, which are the bone of contention before us, include the following:
(a) The claim of deduction u/s.54F of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') in respect of expenditure detailed in ground No. 1 of the appeal. The Assessing Officer added the aggregate sum of Rs.61,71,472/- on this account.
(b) Further, the Assessing Officer noticed that the assessee claimed ineligible short term capital loss and, on this account, the Assessing Officer disallowed the loss of Rs.8,39,15,000/-. Assessed income is computed at Rs.28,99,67,170/- against the return income of Rs.19.44 Crore ( Rounded off).
4. On these additions, the CIT(A) held that the disallowance of Rs.61,71,472/- and another sum of Rs.2,68,500/- should be disallowed. He, accordingly, increased the disallowance on this account the claim u/s.54F of the Act. Further, 3 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal the CIT(A) confirmed the disallowance of Rs.8,39,15,000/-on account of short term capital loss and treated the same as 'income of the assessee'.
5. Aggrieved with all these additions, the assessee is in appeal before us raising abridged grounds as extracted above.
6. We shall now proceed to ground wise adjudication in the following paragraphs.
I. CLAIM OF DEDUCTION U/S.54F OF THE ACT
7. The ground No.1 of appeal relates to claim of deduction u/s. 54F of the Act and deals with all the three such issues i.e. (i) allowability of the Society transfer fee of Rs.54,38,898/-; (ii) Advocate fee of Rs.2,68,500/- and (iii) Improvement expenses incurred on house of Rs.2,02,574/- for the purpose of section 54F of the Act. The Assessing Officer is of the opinion that these amounts are not to be allowed as deductable expenditure qua the cost of acquisition u/s. 54F of the Act. The Assessing Officer did not deal with this aspect much in his order and however, AO held they cannot be considered cost of acquisition of the asset. However, the CIT(A) dealt with this issue in Para 2.3.1 onwards of his order. The facts include that the assessee owned land at Thathawade, Mulshi, Pune and the same was sold by assessee and earned capital gain of Rs.26,37,61,074/-. Out of this amount, the assessee invested Rs.16,36,33,087/- for purchasing a residential bungalow at Sind Co-operative Housing Society in the month of November, 2011 and claimed deduction u/s. 54F of the Act. This amount of Rs.16,36,33,087/- has four segments i.e. Rs.15,73,32,013/- ( DD charge for payment) + Rs.2,68,500/-; (legal fees) + Rs.2,02,574/-; and (fitness expenditure of bungalow) + Rs.58,30,000/- (Society share transfer fees). In the order, the Assessing Officer noted that society share transfer of Rs.58,30,000/- was paid in the financial year 2011-12, the year under consideration and the sum of Rs.2,02,574/- was incurred on bungalow fitness before occupying the same. 4 ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal However, for want of evidence and law to allow such expenditure, the Assessing Officer disallowed the same. The assessee submitted before the CIT(A) that the society share transfer fees was paid to the Sind Co-operative Housing Society through cross account payee cheque and he incurred expenses for making the bungalow fit for occupation of Rs.2,02,574/- and furnished requisite evidence. Further, the assessee submitted that this kind of expenditure is allowable u/s.54F of the Act. The assessee claimed that all the details are available before the Assessing Officer. However, the same was ignored by the Assessing Officer. Further, referring to the remand report of the Assessing Officer on this aspect, Ld. AR submitted that the assessee filed evidences of payment of society transfer charges, transfer of funds through the bank channels, other evidences which were sent to Assessing Officer by the CIT(A) for AO's comments. No adverse finding was given by the Assessing Officer in this respect and therefore, the claim of assessee should have been allowed by the CIT(A) instead of resorting to confirming to the disallowance made by the Assessing Officer. Eventually, the CIT(A) confirmed the addition made by the Assessing Officer on all these accounts as per discussion given in Para 2.3 and its sub Paras. For the sake of completeness, Para 2.3.12 to 2.3.17 are extracted herein below for want of reasons to the decision of CIT(A).
"2.3.12 Further, the legal position may be appreciated that in the absence of the revised agreement, the buyer always has the right to recover this payment made by him from the seller or he may have recovered in cash from the seller. Therefore, the payment cannot be allowed in the hands of the Appellant because the payment of the society charges was the seller's liability according to the agreement. This liability can be enforced anytime under the law by the buyer. In the case of the Appellant enforcing the liability on the seller, the deduction allowed to the Appellant merely because he has paid such expenses would become incorrect as he already may have recovered the amount in cash or even by cheque at a later date. Therefore, the deduction of Rs.54,38,898/- cannot be allowed in the hands of the Appellant in the absence of the Appellant waiving his rights over the seller with respect to this payment.
2.3.13 With respect to the remaining amount of Rs.9,71,472, I find that the learned AO has not questioned the genuineness of the expenditure nor has he doubted the nature of the expenditure. The Appellant has stated that it has incurred the total expenditure of Rs.16,32,41,985 as a cost of purchased residential house property. The break-up of the expenditure is as under:5 ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal Amount (Rs.) Cost of bungalow including stamp duty, 15,73,32,013/-
registration charges and bank charges
Legal expenses 2,68,500/-
Expenses incurred for making the 2,02,574/-
bungalow fir for occupation
Society share transfer fee and 54,38,898/-
infrastructure charges
16,32,41,985/-
2.3.14 With respect to the legal expenses of Rs 2,68,500, it cannot be considered to be payable to the society. There is no provision in law to allow the deduction of the legal expenses incurred towards the investment made in the residential property.
The law grants the deduction of the expenses incurred in connection with transfer or expenses, which are integral part of the investment but the law does not grant the deduction of expenses incurred in connection with the investment made in the property. Legal expenses in my view, cannot be considered as an integral part of the cost of the property. Accordingly, I confirm the decision of the learned AO to not to grant the deduction of the legal expenses of Rs 2,68,500.
2.3.15 As far as the expenses of Rs 2,02,574 incurred for making the bungalow fit for occupation is concerned, the learned AO has disallowed it because it has not been incurred towards the transfer of the capital asset of the land sold. However, in my view, the deduction cannot be denied on that ground. According to me, the expenditure incurred to make the residence fit for occupation can be allowed if by incurring such expenditure inhabitable building can be converted in to habitable residence.
2.3.16 Therefore, the issue here is not of the law but of the facts. The Appellant has nowhere mentioned that how the incurring of the expenditure of Rs 2,02,574 made the bungalow fit for occupation, which otherwise was not fit for habitation. Normally, repairs or expenditure incurred on property would make it habitable according to the requirements or taste of the purchaser. However, in order to constitute repairs as a part of the investment in residence, such repairs should be such that it would convert the inhabitable property into the property fit for habitation. Such fact related to the nature of the repairs carried out by the Appellant has not been brought out by the Appellant. Therefore, I consider that the Appellant has incurred expenditure for improvement of the. Property. Accordingly, I agree with the learned AO that the deduction of Rs 2,02,574 cannot be granted. 2.3.17 With the result, I confirm the denial of the total deduction amounting to Rs.61,71,472/- as done by the learned AO."
As per the CIT(A), the Assessee is a buyer of the Bungalow and the society transfer fee needs to be paid by the seller. Further, the legal expenditure + Advocate expenditure + fitness expenditure cannot be included in the cost of acquisition. Aggrieved with the said order of the CIT(A), the assessee filed the present appeal with the grounds extracted above.
6ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal Before the Tribunal
8. Before us, the Ld. Counsel for the assessee submitted that these amounts i.e. Rs.54,38,898/- + Rs.2,68,500/- + Rs.2,02,574/- totaling Rs.59,09,972 /- are required to be allowed as deductable expenditure for the purpose of section 54F of the Act for the following reasons:
A. Referring to the legal expenditure of Rs.2,68,500/-, Ld. Counsel for the assessee submitted that the said amount was paid for (i) title search (ii) property consultancy (iii) legal consultancy. All these were incurred in connection with the investment of capital gains in the residential bungalow located at Sindh Co-
operative Housing Society, Pune. Relying on the decision of Hon'ble Calcutta High Court in the case of CIT Vs. Bengal Assam Investors Ltd., 72 ITR 319, the Ld. Counsel submitted that legal expenses incurred in connection with the asset and title search verification etc. constitutes allowable expenditure as part of the cost of acquisition. It was so decided relying on the Apex Court judgment in the case of Howrah Trading Co. Ltd. Vs. CIT, 36 ITR 215 (SC). Further, the Ld. Counsel for the assessee submitted the decision of Hon'ble Calcutta High Court is very much relevant in the instant case for the following legal propositions:
"Expenditure incurred for getting shares registered in the name of the assessee and for conducting suits filed for amending the rules of the company has to be considered as constituting part of cost of acquisition for purpose of computation of capital gain."
9. The Ld. DR for the Revenue heavily placed reliance on the orders of Assessing Officer and the CIT(A).
10. On hearing both the parties, on the allowability of Rs.2,68,500/-, we are of the opinion that the Assessing Officer disallowed the claim of the assessee for want of evidence. We also find that there was requirement of legal assistance as well as requirement of legal consultancy and other title search activities before 7 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal investment is made in a bungalow. In our opinion, furnishing all the details by assessee the Assessing Officer is the legal requirement when the assessee makes a claim before him. The principles of onus demands that the assessee shall demonstrate, the said expenditure was actually incurred in connection with the asset under consideration and not in connection with other asset, if any. With these observations, we remit this issue back to the file of Assessing Officer for fresh adjudication and allow the claim of assessee subject to furnish all the evidences and details. The Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, first part of ground No.1 raised in appeal by assessee is allowed for statistical purpose.
11. The second part of the ground No. 1 relates to "improvement/Fitness expense incurred on the house at Rs.2,02,574/-. It is the claim of the assessee that this expenditure was incurred for making new asset i.e. residential bungalow of Sind Co-operative Housing Society fit for habitation/occupation of the assessee. Again, it is the case of the Assessing Officer that the assessee failed to furnish requisite evidences. In our view, furnishing all the details by assessee and examining the same by the Assessing Officer, the claim of the assessee should be allowed in principle. However, the assessee is under obligation to furnish necessary documents regarding expenditure incurred before the Assessing Officer and the Assessing Officer with similar directions as given Para 10 of this order, shall allowed the claim of assessee. The Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, second part of ground No.1 raised in appeal by assessee is allowed for statistical purpose.
12. The third part of ground No. 1 relates to allowability of society transfer fee, development and Infra Charges of Rs.54,38,898/-. The Assessing Officer 8 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal disallowed this claim holding that these expenses were incurred in the assessment year 2013-14 and not during the assessment year 2012-13. Further, the assessee failed to produce documentary evidence in support of the claim. The CIT(A) in Para 2.3.12, held that the payment of the society charges were the seller's liability according to the agreement and not that of the assessee. 12.1 Before us, Ld. Counsel for the assessee filed additional evidences, by way of corrected unregistered agreement showing (a) the enhanced consideration to the extent of the said society transfer fees and (b) taking seller's responsibility to make payment to the society transfer charges to Sindh Co-operative Housing Society. It is not the case of the Revenue that the Sindh Co-operative Housing Society paid the amount to assessee in cash outside the books. As per Ld. AR, in view of the additional evidences, the issue may go back to the file of the AO for fresh adjudication. Ld. DR however, submitted that the said corrected agreement constitutes an afterthought and it should not be admitted. Rebutting the same, the Ld.AR filed written notes on this issue and requested for admission as well as adjudication. For the sake of completeness, the same is extracted as under:
"1.2 Society Transfer fee-
The assessee purchased bunglow in Sindh Co-op Society from Shri Dilip Gondhalekar and Shri Pradeep Gondhalekar. For this purpose, they had entered into an understanding ( page 106 and 107) as per which the assessee was to pay a sum of Rs.15,51,00,000/- to the sellers and the sellers were to incur the liability of the society transfer charges. Later on, it was decided between themselves that the assessee would incur society charges and accordingly, he paid a sum of Rs.14,98,02,000/- to the sellers as per the sale deed ( page 71 to 107). However, inadvertently, the sale deed on page 76 mentioned that the sellers would bear the society transfer charges of Rs.52 lakhs out of the above consideration received from the assessee. In fact, the consideration was reduced from Rs.15.51 Crs. earlier agreed, to Rs.14,98,02,000/- for the reason that the assessee would bear the society transfer charges.
1.3] In reality, the assessee has paid these charges of Rs.53,23,000/- to the society and the copies of the demand drafts are enclosed on page 108 and on page 113, the assessee has given the extract of account of this bungalow in his books wherein the withdrawals from ICICI Bank for the purposes of the above DDs are reflected.
1.4] The A.O. and the CIT(A) denied this deduction on the ground that as per the sale deed, the sellers were to incur this liability. The appellant contended that it was a mistake in the sale deed. As the consideration was reduced from Rs.15.51 Crs. as originally agreed (page 106) to Rs.14,98,02,000/-, it was understanding 9 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal between the appellant and the sellers that the appellant would bear the society transfer charges. The CIT(A) held that the appellant had not proved that the liability was to be incurred by him and not by the sellers and thus, he denied the deduction.
1.5] The appellant submits that after the CIT(A) decision he has entered into a supplementary agreement dated 13.09.2017 for correcting the original deed. This agreement is placed on page 211 of Paper Book 2 and the sellers have confirmed in this agreement that they had not borne the transfer fee and it was to be borne by the appellant. As this agreement is made after the decision of CIT(A), it is produced as an additional evidence. The appellant submits that the same may kindly be admitted as it is necessary to decide this ground of appeal. Thus, the appellant requests for allowance of the above deduction of transfer fee u/s 54F.
1.6] In this context, the learned CIT D.R. submitted that the facts not being on record, the additional ground should not be admitted. Secondly, the sale deed is very clear that the sellers had to bear the transfer fee and not the appellant. Secondly, he submitted that the transfer fee is paid in the next year and therefore, the deduction should not be allowed.
1.7] In reply, it was clarified that the assessee is not submitting any additional ground but it is a case of submission of additional evidence in the form of the correction deed. Therefore, there is no necessity that the facts should be on record as contended by the learned D.R. Secondly, even before the CIT(A), the assessee had clarified that he had borne the society transfer fee and not the sellers. Thus, the correction deed is nothing but the confirmation by the sellers of the factual position placed by the assessee in the appellate proceedings. Secondly, it was submitted that the fact that the transfer fee is paid in the next year is irrelevant because for the purposes of computation of capital gains, the year in which such expenditure is incurred is irrelevant. What is material is that this transfer fee is paid for the purposes of acquisition of the new house by the assessee and thus, it is a part of the cost of the house. Lastly, reliance was placed on Bombay H.C. decision in the case of Sushila Zaveri [286 ITR 428] wherein the court has held that subsequent events till the stage of decision must be considered by an authority. In view of these facts, it was submitted that the assessee is justified in making the above claim of transfer fee u/s. 54F."
12.2 On considering the newly filed documents which were not existed at the relevant point of time, we are of the opinion that it is in the interest of justice that these documents are admitted and remitted back to the file of Assessing Officer to consider the same and decide the issue afresh after considering enhanced amount received by the assessee and the fact of making payment of assessee to Sind Co-operative Housing Society towards society transfer fees. 12.3 Further, on perusal of the bank statements, we find that the assessee actually received higher sum than the amount specified in the original sale registered deed and paid the same to the Sindh Co-operative Society as per the demand of Sindh Co-operative Housing Society. It is undisputed fact. Therefore, 10 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal we are of the opinion that in principle, the claim of the assessee should be allowed on the enhancement which was considered by the AO. However, the same is subject to the verification of the evidence and documents filed by assessee before the Assessing Officer during remand proceedings. The Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, third part of the ground No. 1 is allowed for statistical purpose.
13. In the result, ground No.1 raised in appeal by assessee is allowed for statistical purpose.
II. CLAIM OF SHORT TERM CAPITAL LOSS - GROUND NOs. 2 and 3
14. Ground No.2 raised in appeal by assessee relates to disallowance of short term capital loss of Rs.8,39,15,000/-. The background facts of the issue, as per assessment order, include that the assessee purchased 3.50 lakh shares of M/s. Shivalik Golf & Forest Resorts Ltd. (in short 'the Shivalik') from M/s. Instant Autogas Eqpt. Mfg. Pvt. Ltd. (in short 'the Instant'), New Delhi for total consideration of Rs.8,50,00,000/- in October, 2011. However, the total book value of the 3.50 Lakh shares in financial statement of 'the Instant' is Rs.7,00,00,000/- (Rs.200/- per share). The purchase consideration for share works out around Rs.242.86/- paise per share (Rs.8,50,00,000/-/3,50,000 share). Thus, the each share with book value of Rs.200/- per share is purchased by the assessee @ Rs.242.85/-paise. For want of valuation report, the Assessing Officer disbelieved the transaction of purchase of the assessee. Further, assessee sold the said 3.50 lakh shares on 07.03.2012 to Tapti Synthethic Pvt. Ltd. (in short 'the Tapti') for sale value of Rs.10,85,000/- ( Rs.3/- per share). Thus, the assessee sold the share with the loss of Rs.240/- per share approximately with in gap of 5 months only. As such, there is no valuation report to support the sale 11 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal price of the shares as on March, 2012. Consequently the Assessing Officer disapproved the claim of short term capital loss for Rs.8,39,15,000/-. The Assessing Officer discussed this issue at para 7 of the assessment order and the same is extracted as under:
"07. Shares of Shivalik Gold & Forest Resorts Ltd.
The assessee during the year has sold shares as under:
S Details Date of (Qty X rate) Inde Index Sale Sale Selli Exem Book Captial / year of Cost of xed ed date consid ng p profit gain N Acq. Acq. cost impr - expe tions of ove eratio nses Acq. Ment n cost Shivalik 1 Golf & 85000000 31.03.20 N/A N/A 07.03.20 1085000 -83915000 forest Resorts 11 12 0 0 0 Ltd.
Total 85000000 N/A N/A 1085000 0 0 0 -83915000 The 3,50,000 shares of Shivalik Golf & forests Resorts Ltd. was acquired by the assessee from Instant Autogas Eqpt. Mfg. Pvt. Ltd., New Delhi for a total consideration of Rs.8,50,00,000/- in October, 2011. The assessee also submitted Balance Sheet as on 31/03/2006 of Instant Autogas Eqpt. Mfg. Pvt. Ltd. wherein 3,50,000/- shares of Shivalik Golf & forests Resorts Ltd. are reflected as investment. The total value of which as mention is Rs. 7,00,00,000/-). However, no valuation report substantiating the cost of acquisition of these shares as on October, 2011 has been submitted by the assessee. Similarly, no valuation report of the shares as on Mach, 2012 i.e. the date of sale of shares 0 Tapti Syntethic Pvt. Ltd.
has been provided by the assessee. In the absence of a documentary evidence substaning either the cost of acquisition or value of sale consideration the entire loss from short term capital gain of Rs. 8,39,15,000/- has been disallowed and added to the income of the assessee. Penalty, proceedings u/s. 271(1) (c) are initiated separately for furnishing in accurate particulars of income." Therefore, AO suspected the purchase and sale transaction of shares which gave rise to the short term capital loss of Rs.8.39 Crore and treated the same as income of the assessee. Assessed income is determined at Rs.28,99,67,172/-.
15. Before the CIT(A) : During First Appellate proceedings, the assessee furnished Valuation Reports both at the time of acquiring shares and also at the time of sale of share to 'the Tapti'. Further, assessee filed written submissions 12 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal and the same are extracted in Para 2.5.2 of the order of CIT(A). Remanding the same to AO, the CIT(A) called for remand report from him. The said valuation reports were furnished by assessee for the first time before the CIT(A). The assessee also furnished other evidences before the CIT(A). The remand report is extracted in Para 2.5.3 of the order of CIT(A). The Assessing Officer did not accept the said valuation reports and held the assessee did not adopt fair and sustainable methods for valuation of unquoted share sold in 'off' market and therefore, as per Revenue additional evidence was not to be admitted by the CIT(A). In the said valuation reports, the valuer followed NAV method for purchasing of share from 'the Instant' and followed Discounted Cash Flow (DCF) method for sale of the share to 'the Tapti'. The CIT(A) considered the remand report and discussed the contents of valuation report and also took note of the assessee's reply on the remand report prepared by the Assessing Officer. However, as such, there is no categorical rejection regarding valuation report of the assessee in the order of CIT(A). Eventually, CIT(A) is of the opinion that the valuation report furnished by the assessee does not meet the quality standard. In this regard, the CIT(A) discussed the fact that the valuation of shares of 'the Shivalik' was done without physical verification of the premises and also questioned about the prudence of assessee entering into such transactions. The CIT(A) further held that no prudent buyer would purchase share of a company @ Rs.242.85 per share in October, 2011 and sold each share @ Rs.3.10/- paise per share on 07.03.2012 i.e. within gap of 5 months only. He also discussed that within the gap of 5 months, there is no reason for the share price to fall from Rs. 242/-. The assessee explained about the court litigation on the property held by the company i.e. the 'Shivalik' . However, the assessee neither elaborated nor has substantiated the nature of the court litigation faced by the Shivalik before the CIT(A). Eventually, the CIT(A) rejected the contentions of the assessee. Referring to the DCF method, the CIT(A) commented that the assessee's valuation report 13 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal does not provide any basis for using the particular discounting factor of 16.75%. The assessee adopted NAV method while purchasing 3,50,000 shares from 'the Instant'. Eventually, relying on the decision of Hon'ble Supreme Court of India in the case of CIT Vs. Durga Prasad More, 82 ITR 540 (SC), the CIT(A) held that the valuation report of the assessee are unreliable. The CIT(A) further held that the assessee failed to demonstrate correctness of the short term capital loss. For want of genuineness of the valuation report, the CIT(A) confirmed the findings of Assessing Officer on the assessee's claim of short term capital loss of Rs.8,39,15,000/-. Contents of Para 2.5.9 to 2.5.19 of the order of CIT(A) are relevant in this regard and the same are extracted as under:
"2.5.9 I have considered the facts and arguments of the Appellant. According to me the Appellant has established the existence of the seller (Instant Autogas) from whom the Appellant purchased the shares of Shivalik Golf and Forest Resorts Pvt. Ltd. The Appellant has also furnished the photocopies of the share certificates, which have not been doubted by the learned AO. However, according to me, these facts are not relevant as far as the quantum of loss claimed by the Appellant is concerned.
2.5.10 At the outset, the legal position needs to be appreciated that it is the Appellant who has claimed the loss and has reduced his tax liability. Therefore, the onus is on the Appellant to establish that it has indeed incurred loss claimed by him. In this connection, it may be seen that the Appellant has purchased shares @ Rs.242.85 per share of the unlisted company, which has the following financial track record.
Actual financial of Shivalik Golf & Forests Resorts Pvt.Ltd.
Sr. Particulars 31 Mar, 09 31 Mar 10 31 Mar 11
No.
1 Revenue 3,57,785 3,65,745 3,72,500
2 Expenditure (adjusted for loss on 51,21,330 32,72,506 49,38,864
account of share and fixed
assets)
3 Net profit/loss as per profit and (47,63,345) (29,06,761) (45,66, 364)
loss account
Projected financials of Shivalik Gold & Forests Resorts Pvt. Ltd.
Sr. Particulars 31 Mar, 12 31 Mar 13 31 Mar 14
No.
1 Revenue 3,91,125 4,10,681 4,31,215
14
ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal
2 Expenditure (adjusted for loss on 52,84,584 56,54,505 60,50,312
account of share and fixed
assets)
3 Net profit/loss as per profit and (48,93,459) (52,43,824) (56,19,105)
loss account
2.5.11 For the valuation of share, the chartered accountant has used the projected valuation of asset. This valuation has been done on the basis of the data, documents and information provided to the valuer. In other words, the valuation of the shares of Shivalik Golf and Forest Resorts Ltd is apparently done without physically examining the assets, without ascertaining any encumbrances on the assets he company. These facts matter because the Appellant has invested an amount of Rs 8.6 cr in an unlisted company. If the Appellant has invested on the basis of any other information available with him such as bright prospects of the company etc, the Appellant has not specifically discussed as to on what ground he has considered that the loss making company-Shivalik Golf had bright prospects. No prudent buyer would buy shares of a company based in Mumbai without carrying out I own verifications, but only on the basis of the valuation report of the CA, who is based in Pune and merely because seller (Instant Autogas, in this case) had valued shares at high value.
2.5.12 Other important fact to be appreciated is that the Appellant has purchased the share @ Rs 242.85 per share in October, 2011. The same was sold @ Rs 3.1 per share on 07.03.2012. The fall in share price has taken place within 4-5 months from the month of purchase. The Appellant has stated in his comments to the learned AO's the remand report that fall in share price was attrib ted to the news regarding the court litigation on the property held by the company. However, the Appellant has neither elaborated nor has substantiated the nature of court litigation faced by Shivalik on the basis of which, it decided to bear the loss of Rs 8.4 cr.
2.5.13 The Appellant has stated that the variation of Rs1.16 per share has been done on the basis of the DCF. However, the perusal of the report shows that it has been prepared in a very superficial manner to arrive at the result suitable to the Appellant. The Appellant's valuation report does not provide any basis for using the particular discounting factor of 16.75% nor has he explained as to why he has used different methods for the acquisition and sale.
2.5.14 It may not be out of place to mention that the Rule 11 UA of the Income Tax Rules provide for the DCF method for the valuation of the unquoted equity shares for the purpose of the section 56 of the Income Tax Act. The Rule has provided for the determination of fair market value of unquoted equity shares on the basis of the following formula:
A-L x (PV) (PE) 2.5.15 Further, it is known that the working out of value in accordance with the discounted cash flow method requires following steps:
Step 1: Arrive at Projected Profit after Tax Step 2: Add back non-cash costs i.e. depreciation etc Step 3: Subtract capital expenditures.
Step 4: Subtract Increases in working capital.
Step 5: Take into account the effect of changes in Debts. Step 6: Discount the FCFF for each year at the cost of capital. Step 7: Add the terminal value accruing in the final year. Step 8: Arrive at the value of Equity by subtracting the debt value.15 ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal Step 9: Arrive at the Value of Equity Share by diving the number of shares to the value of Equity 2.5.16 The valuer's report arrived at without following the above process cannot be considered to be reliable. Therefore, the fact that the Appellant has genuinely incurred loss cannot be established. In these circumstances, according to me, the fact of the Appellant making all the payments by cheque or the learned AO not conducting any enquiries or not having the evidence of cash coming back to the Appellant are irrelevant. According to me, on the given facts, no prudent person would have invested in a company on the basis of the nature of the valuation reports submitted by the Appellant and considering the financial track record of the company. In view of these facts, I am of he considered opinion that legal from of this arrangement should be disregarded and the arrangement should be labeled as sham only entered for the purpose of booking loss to reduce the Appellant's taxable income.
2.5.17 The honorable Supreme Court has applied the test of 'conduct of person with ordinary prudence' and test of 'human probabilities' in many cases. It may not be out of place to mention that the 5 member bench of the honorable Supreme Court in the case of Sumati Dayal Vs. CIT(1995) 214 ITR 801(SC) applied the test of human probabilities to decide against the assessee. It held that as laid down in CIT v Durga Prasad More (1971) 821TR 540 (SC), the apparent must be considered as real until it is shown that there are reasons to believe that the apparent is not the real and the tax authorities are entitled to look at the surrounding circumstances to find out the realities and the matter has to be considered by applying the test of human probabilities.
2.5.18 According to me, by applying these tests and for the reasons that the Appellant failed to establish the high purchase price of the shares arrived at by the projected valuation of assets and without verifying the assets physically, the reason for fall in share price of the unlisted shares of Shivalik Golf and Forest Pvt Ltd without any valid reason, and hence, the share valuation report submitted by the Appellant does not carry any weight. Further, the Appellant has not explained as to why it prepared the valuation reports of purchase and sale by using different methods. The Appellant has also not explained as to why it did not furnish the valuation reports during the assessment proceedings despite the fact that they were available with him. It might again be mentioned that the onus was on the Appellant to establish that he has indeed incurred loss. This has not been done by the Appellant. Therefore, the genuineness of the loss claimed by the Appellant is not established.
2.5.19 With the result, I confirm the decision of the learned AO to disallow the short term capital loss of Rs 8,39,15,000."
16. Before us, narrating the above referred facts from the orders of AO/CIT(A), the Ld. Counsel for the assessee submitted that there is no dispute about the facts of the present case. Ld. Counsel for the assessee questioned on conclusion of order of CIT(A) on the following issues: (i) Physical verification by visiting the premises of the Company and the asset while valuation report is being made; (ii) Assessee purchased the share @ Rs.242.85 per share and sold the same @ 3.10/- paise and the fall in share was attributed to the news regarding the Court 16 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal litigation; (iii) Quality of valuation report and; (iv) Correctness of NAV method adopted by assessee and DCF method adopted by the Assessing Officer in valuation report.
17. Written Submissions of the Ld. Counsel for the Assessee on these issues:
a. The Ld. Counsel for the assessee further submitted that these are the business decisions and the Assessing Officer again questioned about the said business decisions of the assessee. Further, the Ld. Counsel mentioned that it is not the case of the Revenue, the assessee has not made payment to 'the Instant' for buying shares.
b. Mentioning book value of share of Rs.7,00,00,000/- in their balance sheet submitted that the assessee only increased the value of share while making the payment to 'the Instant'. Relying on the assessment order filed by 'the Instant' to the Department, Ld. Counsel submitted that the Revenue Authorities accepted the book value of the share of 'the Instant' Company and therefore, questioned on the findings of Assessing Officer in rejecting the claim of assessee. In this regard, Ld. Counsel submitted financial statement of 'the Instant' before us which indicates the investment of 'the Instant' in Shivalik and sold the same to the assessee.
c. Referring to the valuation report, the Ld. Counsel for the assessee submitted that NAV method of valuation was one of the approved methods and therefore, the said method cannot be rejected out-rightly.
d. Referring to the value of land which was increased the price value of the share from Rs.200/- to Rs.243/- per share, the Ld. Counsel submitted that all these are matter of fact and the Assessing Officer failed to verify the same and found discrepancies against the claim of the assessee. Ld. Counsel further submitted that the Assessing Officer failed to bring any incriminating evidence against the assessee in connection with the purchase of share from 'the Instant' and sold the share to 'the Tapti'.
e. Ld. Counsel also submitted that it is not a case of the Revenue that there is a huge cash flow in the pocket of the assessee and therefore, the claim of assessee is proper and should have been accepted by the Assessing Officer without rejecting the same. Further, Ld. Counsel for the assessee relying on the various decisions mentioned that in the instant case as documentation is fully proved and all the payments are made through banking channels, claim of the assessee cannot be rejected just like that by the Assessing Officer and the CIT(A).
f. Referring to the open market transactions by the assessee with 'the Instant' on one side and to 'the Tapti' on other, Ld. Counsel submitted 17 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal that the same are in proper method of transaction as specified by CBDT Circular No.4 of 2007 dated June, 15.
g. Further, responding to the DR's demand for remanding and mentioning that there is no case for remitting the issue back to the file of Assessing Officer for second round, Ld. Counsel submitted remitting the issue back to the file of Assessing Officer is only required when certain facts are needed for adjudication are missing. In this case, no such case is made out by the Revenue. The request of Revenue, if any, for remitting the issue back should not be entertained.
h. Referring the request for remitting the issue back by the Revenue to invoke the provisions of section 49(4) and 56(viia) of the Act, Ld. Counsel submitted that these provisions shall not be applicable to facts of the instant case as the Assessing Officer has co-terminus power and is free to take any action to 'the Tapti' for tax as per statute.
17.1 Subsequently, Ld. AR filed another note replying to the contention of the Ld. DR. The contents of Para 2.1 to 2.5 of the note are relevant. The same are extracted as under:
"2. Ground No.1 and 3--Claim of short term capital loss on sale of shares of Shivalik Golf and Forest Resorts Ltd.-Rs.8,39,15,000/-
2.1 The assessee had income from capital gains against which the assessee claimed the set off of loss on sale of shares of Shivalik Golf and Forest Resorts Ltd. of Rs.8,39,15,000/-. The A.O. and the CIT(A) held that this loss is not genuine and thus, they disallowed the set off of this loss against the capital gains. The facts relating to this issue are stated hereunder -
a. The assessee IS an NRI staying III Dubai. The investment consultants advised him for purchase of shares of Shivalik Golf and Forest Resorts P Ltd. (Shivalik) Accordingly, the assessee purchased 3,50,000 shares from Instant Auto Gas Equipment Mfg. P Ltd. (Instant) at a cost of Rs.8,50,00,000/- and the same were registered in assessee's name on 06.10.2011. Instant had purchased these shares for Rs.7 Crs. as per its balance sheet as on 31.03.2008 (page 134). Shivalik was to set up a Golf Course with various amenities. The assessee considered that Shivalik would have a good potential for its business and therefore, he purchased the shares.
b. Thereafter, the assessee made enquiries with Shivalik and found that there were disputes about the land and also amongst the family members of the promoters who were from Maharaja Gaikwad Family of Baroda.
c. The assessee decided to dispose of this investment as he found that the shares will not have any potential to grow and he did not make a good investment. Accordingly, he found a willing buyer for his shares in Tapti Synthetic P Ltd. (Tapti) which was already a shareholder of Shivalik. The assessee sold his shares to Tapti for Rs.10,85,000/- and the shares were transferred in the name of Tapti on 07.03.2012 as noted in the share certificates (125 to 129) and claimed short term capital loss of Rs.8,39,15,000/-.18 ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal d. The assessee submitted the share certificates of Shivalik on pages 124 to 129 which clearly indicated that the assessee became the owner of the shares on 06.10.2011 and sold them to Tapti on 07.03.2012. In support of the genuineness of the transaction the assessee submitted the following arguments.
2.2] a. Firstly, the assessee is not related to any of these three concerns i.e. Shivalik, Instant, Tapti. Thus, the transactions were at Arm's Length.
b. The share certificates on page 124 to 129 clearly prove that the assessee had purchased these shares from Instant and sold them to Tapti on 07.03.2012.
c. Instant has shown the consideration of Rs.8.50 Crs. on sale of its shares in the return (page 144). On page 134, Instant has shown the cost of these shares at Rs.7 Crs. in its balance sheet as on 31.03.2008. From this fact, the assessee considered that the price of Rs.8.50 Crs. was reasonable.
d. Shivalik Balance Sheet is given on page 152 to 174. Shivalik belonged to Gaikwad Family i.e. Maharaja of Baroda and therefore, the assessee thought that the company is having good promoters and the good potential and therefore, he invested in these shares.
e. When the assessee realized that because of the disputes, Shivalik won't be able to develop the Golf Course for long time, he decided to sell the shares of Shivalik and get out of the investment. Tapti was already a shareholder of Shivalik and it purchased the shares. The confirmation of Tapti is given on page 151 and the share certificates on pages 124 to 129 clearly show that the assessee sold the shares on 07.03.2012 to Tapti. The assessee has given the balance sheet of Shivalik as on 31.03.2017 as an additional evidence. It is downloaded from the internet and it shows that even today, Shivalik has not developed the Golf course. This shows that the assessee's judgment that Shivalik will not be able to develop the Golf Course for a long time was correct.
f. Thus, the assessee proved the capital loss was incurred during the year. There is no reason to hold that these transactions of purchase and sale of Shivalik shares are not genuine as done by CIT(A) and the A.O. The share certificates clearly indicate that the assessee purchased the shares from Instant and sold them to Tapti. Secondly, the dept. had not proved that the assessee received any consideration in cash from Tapti over and above Rs.10,85,000/- shown by the assessee.
g. The assessee has given various case laws in its legal compilation. A note regarding these case laws is also submitted separately during the course of hearing. In short, these case laws lay down the following principles.
h. In the case of Azadi Bachao Andolan (Sr. No.1), SC held that the tax planning is legally permissible if it is done without any motive to evade taxes through colourable devices. In this case, it is submitted that the assessee did not have any relation with Instant and Tapti and thus, their transaction were not colourable at all and secondly, the share certificates clearly prove that the assessee had purchased and sold the shares of Shivalik and hence, there is no warrant to disallow the capital loss.
i. In the case laws (Walfort, Raghvendra Singh, Bhoruka Engineering and Eveready) at Sr. No.2, 3, 4, 5 of legal compilation, it has been held that if the legal form of transfer of share is accepted, the capital loss is allowable. Secondly, in the case of Walfort, SC held that even if the assessee has intentionally sold the shares in order to book capital loss, the same is allowable as per law because assessee has resorted to use of law and not abuse of law. This view is also accepted in the cases of Bhoruka and Eveready. Accordingly, the assessee submits that even if, it is considered that the assessee intentionally sold the shares to book the capital loss in 19 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal this year because he had capital gains, still as the transactions of purchase and sale of shares of Shivalik are real, the capital loss has to be allowed.
j. In the case of Oberoi Hotel (page 111) the assessee purchased the shares for Rs.8,78,11,500/- and sold them immediately at a nominal price of Rs.18,33,752/- as the company was not doing well, it was held that the capital loss was allowable for set off against the capital gains. Similarly, in the case of Shrikant Pittie (121), the assessee converted the debentures into shares of Rs.100/- each and sold them to the concern of his accountant at Rs.0.1 per share immediately and booked the capital loss. IT AT held that the transaction was genuine and therefore, allowed the loss. On same principles, in our case also, the loss is allowable.
k. In the case of Arun Kumar & CO. (page 175), Bombay H.C. held that the sale consideration shown by the assessee has to be accepted unless the dept. proves that the assessee has received some higher consideration. Similar is the ratio of ITAT, Mumbai decision in the case of Kamat Club (page 165) and Delhi H.C. decision in Arjun Malhotra (page 182) wherein the courts have followed the SC decision in the case of KP Verghese [131 ITR 597] in which SC held that as per section 48, the consideration shown by the assessee has to be accepted unless the A.O. proves that the assessee actually received higher consideration than what is shown. Thus, in our case also, the dept. has not proved that the assessee has received a higher amount from Tapti than what is shown, the consideration shown by the assessee must be accepted.
l. In view of the above legal position, the assessee submits that the capital loss incurred by him on sale of Shivalik shares should be allowed to be set off against the capital gains.
2.3 In reply, the learned CIT. DR made the following pointed by Ld. DR-
a. The valuation reports (146 to 149) submitted by the assessee in support of the valuation of share price of Shivalik are totally sketchy and they are not reliable.
b. The balance sheet of Shivalik on page 163 has not shown the additional purchase of these shares as on 31.03.2012 and therefore, the transaction is not genuine.
c. The sale of Shivalik shares at a very low pnce made by the assessee shows that the transaction is not genuine. Assessee has not proved that there were disputes in Shivalik so that Golf Course would not be developed.
d. The consequences of section 56(2)(viia) have not been looked into in this case and therefore, he requested for set aside of the asst.
2.4] In reply, the following points were submitted-
a. The assessee has not purchased and sold Shivalik shares after consulting any valuer and therefore, even if, the valuer's reports are vague, they have no bearing on the allowance of capital loss incurred by the assessee.
b. As already clarified the assessee was not related to Instant, Shivalik or Tapti and therefore, the question of doubting the purchase and sale price of the shares does not arise. For this purpose, the assessee is submitting copy of the affidavit confirming that he had no relation / connection with any of these entities. Thus, the valuer's reports are not relevant for deciding this issue.
c. When the assessee purchased the shares of Shivalik, he considered that Instant had purchased the same shares for Rs.7 Crs and thus, the purchase price ofRs.8.50 Crs was reasonable. Secondly, when he found, on enquiries that Shivalik won't be 20 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal able to develop the Golf Course in near future, he sold the shares at a nominal value. Thus, his judgment was bona fide. The assessee has given the chart regarding the fall in share of Gitanjali Gems. It was quoted around Rs.100/- but when the news came that the promoter Shri Choksi has committed frauds with the banks, the share price came down to Rs.2.80 per share in a day. Hence, the valuation in such cases is based on one's judgment. Thus, the transaction of the assessee was genuine.
d. Shivalik on page 163 has not shown these purchases of shares by Tapti as on 31.03.2012. In this context, the assessee submitted the balance sheet of Shivalik as on 31.03.2016 and therein also, the company has not shown these shares of Tapti. Hence, for the mistake committed by the accountant of Shivalik, assessee cannot be held responsible. The assessee has purchased and sold the shares as per the share certificates on pages 124 to 129 and received the consideration. This itself establishes the genuineness of sale of shares to Tapti.
e. The assessee has not proven the disputes about the land and management of Shivalik as assessee is not a party to these disputes and therefore, he cannot get the evidences from Shivalik. But the fact that even today, Shivalik has not been able to develop the Golf Course itself shows that the assessee's contention that the disputes are there is correct.
f. The question of applying the provision of section 56(2)(viia) in the assessee's case does not arise. It may be applicable in the case of Tapti. Hence, no purpose would be served by setting aside the asst. of the assessee.
2.5] Accordingly, the assessee submits that his case is totally genuine and the capital loss on sale of Shivalik shares should be allowed."
18. Per contra, the Ld. DR for the Revenue heavily placed reliance on the orders of the Assessing Officer and CIT(A). The Ld. for the Revenue further submitted that the valuation reports furnished by assessee both for acquiring share as well as selling the shares, are not reliable once. Ld. DR submitted that valuation reports fall short of Arm's Length principle and therefore, they were rejected by the Assessing Officer and CIT(A). Ld. DR, however, submitted that this issue requires revisit to the file of Assessing Officer for examining entire transactions and purchase of shares qua likely withdrawal of cash at some point of time which is plausible for examining to unearth the layer of various transactions. Referring to the decision of Hon'ble Jurisdictional High Court in the case of Ultratech Cement Ltd., ITA No.1060 of 2014 dated 18th April, 2017, Ld. DR submitted that the additional grounds could not raise before the Appellate Authority, when no claim for deduction was made before the Original Authority. 21 ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal We find this decision is not fit and proper to apply on the narrated facts of the case.
DECISION OF THE TRIBUNAL
19. We heard both the parties on the issue relating to allowability of claim of short term capital loss of Rs.8,39,15,000/-. In this regard, we perused the paper book on one side and the written submissions of both the parties on the other. The AO disallowed the claim of said short term capital loss and consequential set off against the capital gains. Originally AO applied the tax rate of 30% on the disallowance and the same was rectified u/s.154 of the Act. Resultantly, AO applied the tax rate of 20% applicable to the capital gains. CIT(A) confirmed the conclusions of the AO.
The essential facts that led the officers to take such extreme decision against the assessee include that the assessee, an NRI purchased 3.50 lakh shares of M/s. Shivalik Golf & Forest Resorts Ltd. from M/s. Instant Autogas Equipment Manufacturing Pvt. Ltd., New Delhi @ Rs.242.85 per share in the off- market against the Net Asset Value of the shares of the 'Instant' (the seller) of Rs.200/- per share. AO did not raise any issue on the purchase transaction of shares. After holding period of 5 months, these shares were sold to Tapti Synthetic Pvt. Ltd. @ Rs.3.10 paise per share. "Tapti" and "Shivalik" are related concerns and shares the common address and also the Directors. However, considering the extremely low sale price, AO disbelieved the sale transaction and therefore assessee's claim of short term capital loss of Rs.8,39,15,000/- was disallowed. By disallowing the loss, in effect, AO rejected the sale price tag of Rs.3.10 paise per share of "Shivalik" and applied the higher figure of Rs.242.85 paise per share. Although AO did not mention the same in so many words, in this case, AO attempted to tax higher consideration of Rs.8,49,97,500 (3.5 lakh shares X Rs.242.85 paise per share) sale of shares of "Shivalik" in place of book 22 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal figure of Rs.10,85,000/-. AO did not possess any direct evidence to substantiate his decision of disbelieving. Further, AO did not reject the sale bills, related financial transaction of Rs.10,85,000/- received by the assessee, bank transaction etc. Therefore, we need to examine if such a decision of AO/CIT(A) is legally sustainable.
20. Based on these facts, as we find, the case of the assessee is that the sale transaction of 3.50 lakh shares of "Shivalik" to "Tapti" is genuine and, under adverse situations of no market for these shares, the said 3.5 lakh shares were to be sold in order to realise whatever the sale proceeds that can be realised out of the sale of shares to minimize the capital loss. In this regard, assessee relies heavily on the credible valuation reports on one side and further, assessee relies heavily on the purchase/sale bills of shares, bank statements, cheque payments/receipts involving the purchase and sale of the said 3.5 lakh shares of 'Shivalik' etc. Revenue did not find any discrepancy in these documentary evidences and the same stands accepted by the AO. Earning Rs.10,85,000/- in this transaction constitutes a wise and prudent decision commercially from the assessee's point of view. Assessee claimed that except disbelieving the entire transaction of sale of shares naming whole this as sham, the AO did not bring any contrary evidence to demonstrate that the (1) sale value is underpriced; (2) the sale linked documents/transaction/evidences are sham or assessee is benefitted by way of receiving the cash from 'Tapti" outside the books; (3) any other swapping of benefits, which is taxable in the assessee's hands etc., As per the assessee, surmises and doubts dominated the mind of AO, which led him to the decision of disallowing the claim of said genuine short term capital loss. Further, assessee submits that the AO is not legally justified in disallowing the loss or transaction as sham. In this regard, Ld. Counsel rely on plethora of decisions which shall be discussed in the later part of this order. 23 ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal
21. Per Contra, the case of the Revenue is that the assessee purchased the shares @ Rs.245.82 per share in the month of October, 2011 and the same are sold to "Tapti" on 07-03-2012 @ Rs.3.10 paise per share, i.e. within a gap of 5 months. According to the AO, no prudent investor in shares shall enter into such loss yielding transaction. Further, as per the AO, the loss, which is generated in the manner mentioned above, only aimed at set off against the long term capital gains earned by the assessee on sale of other asset. Assessee avoided paying capital gain taxes accrued on the transfer of other assets.
Otherwise, it is admitted fact that the AO did not bring any incriminating evidence against the assessee to demonstrate that the said sale transaction is sham and the documentary evidences submitted by the assessee to support his claim is unsustainable for any reason. Before travelling into the discussion on the evidences and the relevant legal proposition, we proceed to summarise the facts diagrammatically as under :
TRANSFER MOVEMENT OF 3.5 SHARES OF "SHIVALIK" AND CONSIDERATION DETAILS - BIRDS EYE VIEW Instant purchased @ Assessee purchased @ Tapti purchased @3.10 Rs.200/- per share for Rs.242.85 per share for per share for sum of sum of Rs.7 crores sum of Rs.7,49,97,500 in Rs.10,85,000/- on October, 2011 07-03-2012
22. Regarding the evidence relating to the sale transaction of 3.5 lakh shares, the Assessee received a sum of Rs.10,85,000/- @ Rs.3.10 paise per share on sale consideration of Rs.3.5 lakh shares. Assessee discharged the onus from his side. The confirmation letters, bank statement, ledger extracts etc., are furnished by the assessee. "Tapti" also confirmed the transaction. Thus, both the seller and the buyer confirmed the sale transaction and the details. Further, 24 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal assessee furnished the sale bills, bank statements, etc. to establish the genuineness of the transaction. AO accepted the same and no discrepancy is made out by the AO. No adverse findings on the genuineness are communicated to the assessee for his explanation or cross examination if any. Therefore, we find assessee discharged the onus and the same is shifted to AO.
On the other hand, on shifting of onus to the AO, there is no direct or indirect evidence garnered by the AO to demonstrate that the sale transaction is sham or fake or fabricated etc. Revenue merely concludes based on surmises that the loss is generated with the intention to avoid payment of long term capital gain tax earned on the sale of other long term capital assets. Otherwise, there is no direct evidence to demonstrate that the assessee received the proceeds in cash outside the books of account from "Tapti". Otherwise, AO is empowered by the statute by virtue of sec 131, 133(6), 133 of the Act etc. for gathering the evidence regarding the concealment of income of furnishing of inaccurate particulars of income. AO did not make use of the said provisions in this case.
Further, Ld. DR for the Revenue laboured hard to defend the order of the AO. Ld. DR highlighted certain errors in the returns filed before the Registrar of Companies under company's Act by the "Tapti". In this regard, Ld. DR submitted that "Tapti" failed to include said transaction of acquisition of "Shivalik" shares of 3.5 lakh. Further, the revenue relies on the said disclosure inconsistencies of "Tapti" with regard to its acquisition of shares from the assessee in its return filed with the Registrar of companies. According to the Revenue, the said returns filed by "Tapti" does not include the 3.5 lakh shares acquired from the assessee by "Tapti". On this issue, the stand of the assessee is that the assessee cannot perform the impossibilities, i.e. filing the proper return to Registrar of Companies including the said 3.5 lakh shares. It is for the "Tapti" to explain the inconsistency and the assessee cannot be held responsible. Ld. DR did not 25 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal inform any action undertaken by the AO of "Tapti" or ROC in the said omissions/errors etc. Thus, it is an admitted fact that there is no direct evidence to demonstrate that the assessee received any other consideration in cash or otherwise from "Tapti" outside the books of account. Otherwise, the circumstances that led the Revenue to decide against the assessee include, the huge price drop from Rs.242.85 per share to Rs.3.10 paise per share in a time span of 5 months and the same is the predominant factor if created doubt in the minds of the assessing authority. Hence, the AO's is unfavourable decision against the assessee is a primary doubt-based rather than fact-based. Further, it is a fact that AO undisputedly undoubted the purchase transaction of 3.5 lakh shares from the "Instant". Therefore, the narrow issue for adjudication is genuineness of the sale transaction only. The cause for sale of shares in the manner that yielded loss is the further drop in the market value of the shares, associated legal litigations, financial doldrums M/s. Shivalik Golf & Forests Resorts Ltd. is undergoing during that period etc. When the assessee visited India various unfavourable details relating to the shares have come to his notice. Therefore, considering the desperate sale proposal of these shares, the "Tapti", which is related one to M/s. Shivalik Golf & Forests Resorts Ltd., came forward to buy the shares probably for their control and management of M/s. Shivalik Golf & Forests Resorts Ltd. Thus, the assessee is not without some reason to sell of these 3.5 lakh shares at throw away price to the "Tapti". As such, it is not the case of the Revenue that the NAV of "Shivalik" is much higher to command higher price than Rs.3.10 paise per share in the open market. AO did not ever referred the matter to the file of DVO for valuation of impugned shares.
Further, we find it is a case of mere doubt and surmises in the minds of AO which made him to deny the benefit of short term capital loss. Yes, there is a 26 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal problem with regard to the drop in the share value and the same is not without any explanation. Further, AO did not make out any case to show why the "Instant" purchased these shares at Rs.200/- and sold them to assessee @ Rs.242.35 per share and they are based on the sound NAV of the "Shivalik". As such, the assessee is an interested party to any of these concerns namely.
"Instant" "Shivalik" and "Tapti". Thus, AO did not have sound proof to deny the claim of capital loss. Otherwise, the documentation maintained by the assessee qua the sale transaction of shares to "Tapti" is free from any controversy. AO has not made out any case that the documentation is bogus and the consideration received by him is also not fake. In fact, AO/CIT(A) failed to discharge "onus" in this matter. In these circumstances, we are of the opinion that the decisions relied upon by the Ld. Counsel for the assessee will help the assessee.
23. On culling out some relevant legal and relevant findings of the Supreme Court/High Court/ITAT, the following are found relevant for the legal propositions in favour of the assessee. The requirement of law for calling a transaction as sham or otherwise are :
"The case laws in support of the assessee's claim that in the present cases, the claim of capital loss is not sham but it is an allowable deduction --
i. Union of India V.Azadi Bachao Andolan [263 ITR 706 (SC)] In this case it has been held that citizen is free to carry on his business within four comers of law and mere tax planning without any motive to evade taxes through colourable devices is not frowned upon. It is further held that MacDowell principle applies to artificial transaction and not a real transaction.
ii. Supreme Court Walfort Shares and Securities [326 ITR 1] In this case, the assessee company purchased the shares cum dividend, received the dividend thereafter, which was tax free and later on, sold the shares ex dividend and claimed the capital loss. It was held that assuming that the assessee made the use of provision of Section 10(33), such use could not be said to be abuse of law. Even assuming that the transaction was pre planned, there was nothing to impeach the genuineness of the transaction and hence, the loss was allowed.
iii. Raghvendra Singh [39 ITD 463 (Del.)] 27 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal In this case, it was held that the legal form of transfer of shares was accepted by the A.O. and therefore, in absence of any finding that the transfer is invalid, capital loss has to be allowed.
iv. Karnataka H.C. in the case of Bhoruka Engineering India Ltd.
In this case, the court held that as long as the arrangement of the assessee to avoid tax payment does not contravene any statutory provision and it is achieved within four comers of law, it cannot be found fault with.
v. Eveready Industries India Ltd. v. CIT [334 ITR 413 ( Cal)] In this case it has been held that citizen is free to carry on his business within four comers of law and mere tax planning without any motive to evade taxes through colourable devices is not frowned upon.
vi. CIT Vs. Oberoi Hotels Pvt. Ltd. [334 ITR 293 (Cal)] In this case, the assessee purchases the shares of the Company SKB in 1991 and later on, also subscribed to the additional shares at a hefty premium of Rs.1800/- per share of Rs.100/- face value. However, immediately thereafter, the assessee sold his shares at the price of Rs.18,33,752/- as against the cost of Rs.8,78,11,500/-. Thus, it booked the short term capital loss of Rs.8,59,77,725/- The same was allowed by the Hon'ble H.C. on the ground that the transaction was genuine. The A.O. had held it to be colourable transaction on the ground that the company could have invested further amount or waited for a reasonable period for the business to grow. This contention of t e A.O. was rejected and the loss was allowed.
vii. ITAT, Pune in the case of Shri Shrikant Pittie-
In this case, the assessee had substantial capital gains. He had given funds to two group concerns Pittie Agro and Pittie Solar Ltd. The loans were converted into shares. These companies were loss making companies. The assessee received the shares of these companies at a face value of Rs.100/-. Because these companies were loss making companies, he sold the shares at a nominal price of Rs.0.1 per share to a concern of his C.A. The loss was disallowed by the A.O. ITAT, has allowed the above capital loss to be set off against the capital gains. The relevant part of the ITAT order is in para 6.5.1 to 6.5.8 (pages 168 to
176). Accordingly, the loss in this case is also allowable.
viii. Bombay H.C. decision in the case of M/s. B. Arunkumar & Co.- In this case, the assessee sold the shares and declared the capital loss. The A.O. substituted the consideration received by a higher figure based on the breakup value of the shares. Accordingly, the loss was disallowed. Hon'ble court held that the revenue has not proved that the assessee has received higher consideration than what is actually shown on sale of shares. Accordingly, the consideration shown by the assessee for sale of shares has to be accepted as there is no provision to substitute the consideration by a different figure. Hence, the court allowed the capital loss.
ix. ITAT Mumbai in the case of Kamat Club Pvt. Ltd.
Herein the same issue was involved as in the above case of B Arunkumar & Co. Accordingly, ITAT allowed the capital loss. It also followed the decision of SC in the case of K P Varghese [131 ITR 597] wherein SC held that for the purposes of section 48, if the dept. wants to tax higher consideration, firstly, it has to prove that the assessee has actually received some consideration over and above, that shown by him.
28ITA No. 2330/PUN/2017
Shri Rajendra L. Agarwal x. Delhi H.C. Arjun Malhotra- The ratio is same as that of Bombay H.C. in the case of Arunkumar & Co."
24. Further, the CBDT Circular No.6/2016 dated 29-02-2016, in spirit, directs the AO not to disturb the claim of the assessee relating to the capital gains ordinarily unless the case of the assessee falls under exceptions in the said circular. In this case, AO did not disturb the head of income and however, supplied higher consideration or denied to claim set off of the loss against the capital gains. Vide the Para No.3(a) of the Circular (supra), the period of holding is given a go by. Therefore, period of holding of 5 months in this case needs to be not considered against the assessee. On examining the facts of the present case, as already stated earlier, the suspicion and surmises are the essential ingredients for the AO to conclude against the assessee in denying the short term capital gains. AO has not brought out brought out anything that the case of the assessee falls under the exceptions mentioned in the circular.
Thus, the legal scope in matters of claim of loss on sale of capital assets and subsequent set off, if any, is settled one by various decisions of Hon'ble Supreme Court/High Court and also by the Coordinate Bench of the Tribunal in the case of Shrikant Pittie (supra). AO is prevented from substituting the sale price by a different figure ( in the case of M/s.Arun Kumar & CO.) (supra). In case, AO want to tax higher consideration, firstly, AO needs to prove that actually assessee received some consideration over and above the recorded one (in the case of K.P. Verghese) (supra). Further, the AO cannot decide the timing of sale of the assets by stating that he should have waited for market to improve (in the case of Oberoi Hotels Pvt. Ltd.) (supra).
On facts also, we find the assessee discharged the onus by furnishing the details of purchase, sale and also the details of buyers for facilitating 29 ITA No. 2330/PUN/2017 Shri Rajendra L. Agarwal investigation if any. On discharge of primary onus, the AO also failed to discharge his side of onus before denying the claim.
Therefore, in our view, the impugned sale transaction of sale of 3.5 lakh shares of "Shivalik" cannot be held sham in the absence of any contrary evidences. As held by the jurisdictional High Court in the case of B. Arunkumar & Co. (supra), AO is not permitted to substitute the higher figure of Rs.242.35 paise per share in place of accounted figure of Rs.3.10 paise per share of "Shivalik". Accordingly, the Ground Nos. 2 and 3 are allowed.
25. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 31st day of August, 2018.
Sd/- Sd/-
िवकास अव थी /VIKAS AWASTHY)
(िवकास डी.
डी क णाकरा राव/D.
(डी राव KARUNAKARA RAO)
याियक सद य/JUDICIAL
सद य MEMBER लेखा सद य/ACCOUNTANT
सद य MEMBER
पुणे / Pune; दनांक / Dated : 31st August, 2018.
SB/Satish
आदेश क ितिलिप अ#ेिषत / Copy of the Order forwarded to :
1. अपीलाथ / The Appellant.
2. यथ / The Respondent.
3. The CIT(Appeals)-13, Pune.
4. The CIT Central, Pune.
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, "ए" ब च,
पुणे / DR, ITAT, "A" Bench, Pune.
6. गाड फ़ाइल / Guard File.
आदेशानुसार / BY ORDER,
// True Copy //
Senior Private Secretary
आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.)