2025 (7) TMI 1436 - AT - Income Tax

Disallowing Short Term Capital Loss incurred in sale of commercial FSI sale of 4659 shares - Counsel submitted that there were compelling circumstances to sell its assets at loss because the assessee was not having any hope that the market would recover from the slowdown and there was no further prospect to make profit from the assets in hands. HELD THAT - We do not able to convince ourselves with the arguments of the Ld. Counsel that the prices of the commercial FSI rights of Sirsa Project and shares of M/s Mansarover Heritage Inn Pvt. Ltd. were based on the prevailing market rates at the time of purchase and sale transactions. It was very surprising to note that neither the purchase price for acquiring the said commercial FSI rights of Sirsa Project and shares of M/s Mansarover Heritage Inn Pvt. Ltd. was paid on the dates of said purchases nor the sale considerations of these assets were received at the time of the sale as no prudent business man would enter in such transactions particularly when the buyers of the said commercial FSI rights of Sirsa Project and shares of M/s Mansarover Heritage Inn Pvt. Ltd. were hand to mouth and had not any money to make such purchases. The genuineness of transactions under reference was not established beyond doubt either before us or the Authorities below. Shares of 4659 shares the issue of pending PIL before the Hon ble Rajasthan High Court was there even at the time of purchase of shares of M/s Mansarover Heritage Inn Pvt. Ltd. by the assessee which is evident from the Writ No. 9497/2007. M/s Mansarover Heritage Inn Pvt. Ltd. was party to that PIL before the shares of M/s Mansarover Heritage Inn Pvt. Ltd. was bought by the assessee. PIL was for encroachment on Nala obstructing free flow of water. Such encroachment if any done by M/s Mansarover Heritage Inn Pvt. Ltd. was not brought to our notice by the Ld. Counsel where the Jaipur Development Authority had taken any action against the assessee which affected the business prospects of M/s Mansarover Heritage Inn Pvt. Ltd. Thus we are not able to persuade ourselves with the contention of assessee has sold shares of M/s Mansarover Heritage Inn Pvt. Ltd. in distress sale due to sluggishness in the market. Appeal of the assessee is dismissed.

Summary

ISSUES:

Whether initiation of proceedings under section 147 of the Income Tax Act was justified despite the original return being processed under section 143(1) and no scrutiny assessment under section 143(3) having been made.Whether the short term capital loss (STCL) of approximately Rs. 27.94 crores, claimed on sale of commercial Floor Space Index (FSI) rights and shares of an unlisted company, was genuine and allowable for set-off against short term capital gains (STCG).Whether the transactions involving purchase and sale of commercial FSI rights and shares constituted sham transactions entered into solely to reduce tax liability.Whether interest levied under sections 234B and 234C of the Income Tax Act was justified.

RULINGS / HOLDINGS:

On the issue of reopening under section 147, the appeal on this ground was not pressed and accordingly dismissed.The short term capital loss of Rs. 27,94,97,000/- was disallowed as the transactions were found to be "sham transactions" entered into to "set off the capital gains" and reduce tax liability; the loss was not allowed to be carried forward, and the corresponding capital gains of Rs. 27,92,30,441/- were added to the income.The transactions involving sale of commercial FSI rights and shares were held to be "arrangements" between group companies using third parties as conduits to create a "colorable device" and "veil of sale" lacking evidentiary value, thereby confirming the Assessing Officer's and CIT(A)'s findings of "sham transactions".The interest levied under sections 234B and 234C was not specifically adjudicated upon in the judgment excerpt and thus no ruling was recorded on this issue.

RATIONALE:

The Court applied the statutory provisions of the Income Tax Act, 1961, particularly sections 139(1), 143(1), 143(3), 147, 148, 234B, and 234C, alongside principles relating to genuineness of transactions and tax avoidance.The Court relied on the factual matrix including the failure to provide a "concrete basis of valuation" for the FSI and shares, absence of payment consideration at the time of purchase and sale, the negative net worth of the companies involved, and the use of non-registered, unstamped agreements as evidence of a "colorable device" and "sham transactions".The Court noted that the purported distress sale explanations were contradicted by lack of financial necessity, absence of immediate payment, and the involvement of related group companies, undermining the genuineness of the transactions.Additional evidence submitted regarding license expiry and litigation affecting asset value was examined; however, documentary proof showed the license was extended beyond the relevant period and no adverse impact from litigation was established, negating the claim of distress sale.The Court emphasized that the burden to establish bona fide nature and valuation of transactions rested on the assessee, which was not discharged satisfactorily.