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2015 (8) TMI 870 - ITAT CHENNAI

2015 (8) TMI 870 - ITAT CHENNAI - TMI - Disallowance of the long term capital loss - Since loss is arising out of transactions between related parties and in the absence of explanation on how the value of ₹ 0.064 per share was determined, the loss claimed by the assessee was disallowed BY AO and CIT(A) - Held that:- As noted by the CIT(Appeals), the assessee has purchased shares at the rate of ₹ 10 per share from outside and also from company directly, when the net worth of the compa .....

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ch a sale price, as held in the cases of Sumati Dayal v. CIT (1995 (3) TMI 3 - SUPREME Court) and CIT v. Durga Prasad More (1971 (8) TMI 17 - SUPREME Court). Accordingly, we are inclined to say that this loss cannot be considered as capital loss so as to allow the claim of the assessee in the absence of any proper explanation to sell the share such low price. - Decided against assessee.

Disallowance of advances written off - Held that:- In the present case, the assessee was not able t .....

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essee. In other words, though it was treated as an advance, it was not gone into the computation of income while computing the income of the assessee. At best, it could be advanced in the capital field. Being so, the loss of capital cannot be allowed as an expenditure, when it became bad and thereafter, written off. Advance of loans to a sister concern or a subsidiary company cannot be said to be for the purpose of business. It is true that, the assessee is entitled to write off of debt in a yea .....

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ed in confirming the addition made towards bad debt. - Decided against assessee. - ITA No. 2196/Mds/2014 - Dated:- 12-8-2015 - SHRI CHANDRA POOJARI AND SHRI CHALLA NAGENDRA PRASAD, JJ. For The Appellant : Shri Philip George, Advocate For The Respondent : Shri N. Madhavan, JCIT PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by the assessee is directed against the order of the Commissioner of Income-tax(Appeals) dated 26.12.2013. 2. The first ground in this appeal taken by the assessee is that .....

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tal gain Sita Gita Co. 30.3.06 44450 0 444501 28.4.01 6983500 8147417 -8102967 -do- 30.3.06 1082 0 1082 30.9.03 170000 182484 -181402 -do- 30.3.06 318251 0 318251 10.1.03 5000000 5559284 -5527459 77357 77357 12153500 13889185 138118281 The above shares have been sold by the assessee to Ms. Nirmal Mirza, who is the wife of the Managing Director of the assesseecompany. These shares have been sold at the rate of ₹ 0.064 per share. They have been purchased at their face value of ₹ 10/-. .....

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eelankarai, Chennai-4 PAN AACPN1941R 698350 28.04.01 10 30.03.06 0.064 Nirmal Mirza No.15, Casurina Drive, Neelankarai, Chennai-4 PAN AACPN1941R No. of shares Date of purchase Cost Per share Allotment/ purchase 5,00,000 10.01.2003 10/- Allotment 3,62,000 28.04.2001 10/- Purchase from M/s. Apcom Computers Pvt. Ltd. 3,36,350 28.04.2001 10/- Allotment 12,16,350 Total 3.1 Since the shares of M/s. Sita-Gita.Com Ltd. are not listed in any Stock Exchange, the assessee company was asked to explain by th .....

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he assessee company wanted to exit from the above company and to terminate its investments into the said company, it decided to sell the shares. 3.2 After considering the submissions of the AR of the assessee, the question posted by the AO to the AR as to how the value of each share was determined at 0.064 remained unanswered, though he submitted that the capital of M/s. Sita-Gita.com Ltd. has been completely eroded on 31.3.2005. As it is seen from the details given in the table shown above that .....

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y was negative. The assessee company had decided to purchase the shares at the rate of ₹ 10/- at a time when its book value was negative. Such shares purchased at an inflated value have been subsequently sold related party viz, the wife of the Managing Director of the assessee company for a meagre amount of around 6 paise per share. This exercise has been done only to build losses in the books of the company. Since loss is arising out of transactions between related parties and in the abse .....

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evance of the AO was that the shares were 'purchased at ₹ 10 per share from various parties in the earlier years. The AO was of the opinion that the shares were purchased at an inflated value which was subsequently sold to a related party to build losses in the books of the company. Further the ld. AR submitted before the CIT(Appeals) that the AO has failed to appreciate the following facts: a. The assessee company had stopped its leather garment export business way back in 1997-98. Af .....

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come was interest income and dividend income. Hence the main activity carries on by the company was that of investment and financing. The said interest income was also offered as business income which has been accepted by the learned AO. b. Sitagita Corn Ltd was mainly formed for the purpose of taking advantage of the DOTCOM. It was incorporated on 13.01.2000 as a closely held public limited company. Initially it was formed with a Paid up Share Capital of Rs. 2.02 crores wherein the assessee had .....

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business. Hence the assessee was forced to buy out the shares held by Apcom Computers P Ltd. for Rs. 36.20 lakhs as Sitagita was an unlisted company and the same was not saleable in the stock exchange. As already the Dot com had foiled in large number of cases, the assessee company was not able to get outside investors. The learned AO failed to appreciate the fact that all these technology companies initially incur losses. It takes time to turn around the company. This is proved by the fact tha .....

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o exit from the same. The other fact the learned AOfailed to note is that as per Section 79 (1) any issue of shares at a discount is a laborious task, wherein the approval from Company Law Board needs to be taken along with other conditions which needs to be fulfilled. Any company issuing the shares of a discount will find it difficult to sell as well as the number of shares will increase substantially. The learned AO has also failed to appreciate the fact that most of the investments are held f .....

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ve been already transferred to the various companies and, therefore, same cannot be construed only as paper transactions. In view of the above discussion, we are of the view, that the loss claimed by the assessee is allowable and, accordingly, we set aside the order of the Id. CIT(A) and direct the AO to allow the same'. According to the ld. AR, the above case is squarely applicable, as the assessee has also exited the business as it was unable to turnaround the company. When the assessee in .....

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ee company at the rate of Rs. l0 per share from outsiders and from company directly, the net worth of such company was negative. The assessee company had decided to purchase the shares at the rate of Rs. l0 at a time when its book value was negative. Such shares purchased at an inflated value have been subsequently sold to a related party viz, the wife of the Managing Director of the assessee company for a meagre amount of around 6 parse per share. Since loss is arising out of transactions betwe .....

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s dismissed. Aggrieved by this, the assessee is in appeal before us. 5. We have heard both the sides and perused the material on record. As noted by the CIT(Appeals), the assessee has purchased shares at the rate of ₹ 10 per share from outside and also from company directly, when the net worth of the company was in negative. Later the same was sold to the wife of the Managing Director of the assessee company for a meagre amount of 6 paise per share. The assessee has not brought on record a .....

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oss cannot be considered as capital loss so as to allow the claim of the assessee in the absence of any proper explanation to sell the share such low price. Accordingly, this ground is rejected. 6. The next ground is this appeal is that the CIT(Appeals) erred in confirming the disallowance of ₹ 17,50,000/- written off. 7. The facts of this issue are that the assesse company has written off in the books of accounts an amount of ₹ 17.50 lakhs given as advance to M/s. Sita-Gita.Com Ltd. .....

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re are no purchase or sale transactions or transactions in the nature of provision of services between the assessee company and M/s. Sita-Gita.Com Ltd. According to the AO, the money given by the assessee company to M/s. Sita-Gita.Com Ltd. in the above circumstances should therefore be regarded as a loan. The write off of an amount representing loan given by the company should be regarded as a capital expenditure. This sum only represents a loss of capital which does not happen in the normal cou .....

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CIT(Appeals) observed that the assessee company has written off in the books of account an amount of ₹ 17.50 lakhs given as advance to M/s. Sita-Gita.Com Ltd. The said sum has not been added back to the taxable income in the computation statement. The assessee company had given advance to its erstwhile subsidiary company viz., M/s.Sita-Gita.Com Ltd as loan so as to help the said company in meeting its working capital requirements. The CIT(Appeals) further observed that since this advance .....

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ss of capital which does not happen in the normal course of business. The assessee company is not in the business of money lending. Only for such assessees which are engaged in the business of money-lending, loss arising out of irrecoverability of a loan can be allowed as a revenue expenditure. Accordingly, he agreed with the findings of the AO and concluded that since the assessee has not disputed the facts that it does not have any business relations with the company M/s.Sita-Gita.Com Ltd, the .....

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sec.36(1)(vii) and 36(2), which read as under: 36(1)(vii): subject to the provisions of sub-section (2), the amount of [any bad debt or part hereof which is written off as irrecoverable in the accounts of the assessee for the previous year]: 36(2)(i) : No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous .....

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