2025 (7) TMI 301 - AT - Income Tax

Disallowance of short-term capital loss on the sale of shares - Onus to prove - HELD THAT - The claim cannot be doubted unless otherwise any of the parties has disputed the same. An oral agreement between the family members reflected in the transactions should be given equal credibility. Only on the basis of certain deficiencies found in the information maintained by the ROC drawing inferences that transaction has not taken place at all is not justified when the movement of consideration even if by way of book entry is accepted by the tax authorities. If such discrepancy in the record maintained by the ROC is made basis for doubting the whole transaction of sale of shares as a sham transaction then that would result into casting an onus on the assessee to prove that what is apparent by way of execution of necessary documents of sale of shares and movement of consideration in the past or present while actually the onus should be on the Revenue to prove that apparent is not real. Suspicion howsoever strong cannot taken place of evidence which support the claim of the assessee. Thus ground no 1 to 8 on merits and other being consequential are sustained. The appeal is allowed.

Summary

The core legal questions considered in this appeal revolve around the genuineness of the share transfer transactions between the assessee and his family members, the validity of the claimed short-term capital loss on sale of shares, and the evidentiary burden required to establish the reality of such transactions under the Income Tax Act, 1961. Specifically, the issues include:

1. Whether the short-term capital loss claimed by the assessee on the sale of shares of a private limited company is admissible, given the familial relationship between the transferor and transferee and the alleged circular nature of the transactions.

2. Whether the lack of contemporaneous entries in bank accounts and discrepancies in the company's records filed with the Registrar of Companies (ROC) can be a basis to disallow the claimed loss and treat the transactions as colorable devices.

3. The evidentiary standard for proving the genuineness of share transfer transactions, including the relevance and sufficiency of documentary evidence such as share transfer forms, board resolutions, valuation reports, and proof of payment or adjustment of consideration.

4. The legal effect of delayed registration of share transfers in the company's books vis-`a-vis the date of actual transfer and its impact on the recognition of capital gains or losses in the relevant assessment year.

5. The role and weight of oral agreements and family business reorganization claims in the absence of formal written agreements or partition deeds.

Issue-wise Detailed Analysis:

1. Admissibility of Short-term Capital Loss on Sale of Shares within Family

The Income Tax Act, 1961, governs the taxation of capital gains and losses arising from transfer of capital assets, including shares. Section 50 and related provisions regulate computation of capital gains, while judicial precedents caution against allowing tax benefits arising from sham or colorable transactions designed solely for tax avoidance.

The Assessing Officer (AO) disallowed the short-term capital loss claimed by the assessee on the ground that the shares were purchased from and sold to family members, specifically from and to a company owned by his parents, and that the transactions were circular, lacking genuine economic substance. The AO also relied on discrepancies in bank account entries and company records to conclude that no real sale had occurred.

The First Appellate Authority (FAA) upheld this disallowance, emphasizing the absence of valuation certificates as per Rule 11UA and lack of formal documentation evidencing family business reorganization, treating the transactions as colorable devices.

The Tribunal examined the detailed documentary evidence filed by the assessee, including share transfer forms (Form SH-4), board resolutions, audited financials, valuation reports prepared by a Chartered Accountant under Rule 11UA, bank statements showing payment adjustments, and confirmations of gift transfers from family members. The Tribunal noted that the AO admitted the existence of shareholdings as per ROC filings and accepted the outstanding loan balances and their adjustment against sale consideration.

The Tribunal held that mere familial relationships or ownership by family members of the companies involved do not ipso facto render transactions non-genuine or colorable. The Tribunal emphasized that the most vital evidence of genuineness is proof of payment or adjustment of consideration, which was satisfactorily demonstrated by the assessee through bank statements and loan account adjustments.

Thus, the Tribunal applied the principle that suspicion or inference of tax avoidance cannot override direct evidence supporting the transaction's reality. The burden to prove sham transactions lies on the Revenue, and in absence of such proof, the transaction must be accepted as genuine.

2. Impact of Discrepancies in Company Records and ROC Filings

The AO relied heavily on the fact that the Annual Return (Form MGT-7) and list of shareholders filed with the ROC did not reflect the share transfers in the relevant financial year but only in the subsequent year. The AO argued that this discrepancy indicated that the sale did not take place during the impugned assessment year.

The Tribunal acknowledged that the shares were transferred on 28.03.2018 but the company registered the transfers only in July 2018 after a Board of Directors meeting. The Tribunal held that the date of transfer for income tax purposes is the actual date of execution of the transfer deed and not the date of registration in company records, provided the transaction is otherwise established.

The Tribunal further noted that the AO himself admitted the shareholdings of the assessee and his family members as per ROC filings, and that the company secretary's possible mistake in filing MGT-7 could not invalidate the transaction. Therefore, discrepancies in ROC filings or delays in registration cannot be a sole basis to deny tax benefits or disallow claimed losses.

3. Evidentiary Standard and Proof of Genuineness of Transactions

The Tribunal extensively reviewed the documentary evidence submitted by the assessee to prove the genuineness of transactions, including:

• Share transfer forms (Form SH-4) evidencing transfer of shares between the assessee and family members.
• Bank statements showing payment or adjustment of sale consideration.
• Valuation report prepared by a Chartered Accountant in compliance with Rule 11UA of the Income Tax Rules, confirming the sale consideration.
• Board resolutions and minutes of meetings authorizing and recording share transfers.
• Confirmation letters from family members regarding gifts of shares.
• Audited financial statements of the company showing consistent losses, negating inflated valuations.

The Tribunal held that the presence of such documentary evidence, coupled with the absence of any adverse findings or contradictions by the Revenue, suffices to establish the reality of transactions. The Tribunal observed that the Revenue failed to discharge its onus of proving that the transactions were colorable devices or sham.

Moreover, the Tribunal recognized that oral agreements among family members, especially in the context of family business reorganization, cannot be summarily dismissed for lack of formal written agreements, unless disputed by the parties involved.

4. Treatment of Family Business Reorganization Claim

The assessee claimed that the share transfers were part of a family business reorganization. The AO and FAA disbelieved this claim due to the absence of any Memorandum of Understanding (MOU), settlement deed, or partition deed.

The Tribunal held that while formal documentation would strengthen such a claim, the lack thereof does not automatically render the transactions invalid or non-genuine. The Tribunal emphasized that the claim cannot be doubted unless any party disputes it, and that the transactions reflected in executed documents and supported by evidence of consideration movement should be accepted.

5. Conclusion on Burden of Proof and Presumption of Genuineness

The Tribunal underscored the legal principle that the onus to prove that a transaction is a sham or a colorable device lies on the Revenue. Mere suspicion or discrepancies in records cannot override positive evidence of execution and payment. The Tribunal held that suspicion, however strong, cannot displace evidence supporting the assessee's claim.

Significant Holdings:

"The most vital piece of evidence about the genuineness of any contractual transaction is the proof of payment of consideration... Now the evidence in this regard is the outstanding advance payable to his father as on 01.04.2017, amounting to Rs. 3,21,00,000/- duly disclosed... The same shows adjustment of the sale consideration. AO has not disputed this opening balance as well as the closing balance."

"Merely because the transactions involve family members... that cannot be a basis to allege that the entire transactions is a colourable device to avoid payment of tax... The claim cannot be doubted unless otherwise any of the parties has disputed the same."

"Only on the basis of certain deficiencies found in the information maintained by the ROC drawing inferences that transaction has not taken place at all is not justified when the movement of consideration even if by way of book entry is accepted by the tax authorities."

"If such discrepancy in the record maintained by the ROC is made basis for doubting the whole transaction of sale of shares as a sham transaction, then, that would result into casting an onus on the assessee to prove that what is apparent by way of execution of necessary documents of sale of shares and movement of consideration... while actually the onus should be on the Revenue to prove that apparent is not real."

"Suspicion howsoever strong cannot take place of evidence which support the claim of the assessee."

The Tribunal thus established the core principle that in transactions involving related parties, the genuineness of the transaction must be judged on the basis of substantive evidence of execution and consideration, rather than on presumptions arising from familial relationships or procedural irregularities in company filings. The Tribunal allowed the appeal, setting aside the disallowance of the short-term capital loss claimed by the assessee.