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2016 (2) TMI 499 - ITAT DELHI

2016 (2) TMI 499 - ITAT DELHI - TMI - Disallowance of short term capital loss on sale of shares - whether entire transaction was sham and arranged with a view to book an artificial loss when in fact the transactions of purchase as also the sale have been carried out at the prevailing market rates by actual payment / receipt of funds Held that:- The assessee had no bonafide reason or cause in September, 2008 which forced the assessee to sale shares during the lock-in period which resulted into hu .....

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hares back to HPC group company which was purchased from HPC and thus, we have hasitation to hold that the transaction of sale of shares under taken by the assessee company during the relevant financial period, with group company was a sham transaction and the loss booked under said transaction cannot be held as allowable claim of short term capital loss for the assessee. Finally, we uphold the impugned order which confirm the disallowance and addition made by the AO. - Decided against assessee .....

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3/Del./2014 - Dated:- 20-1-2016 - Sri J.Sudhaker Reddy, AM And Sri C.M.Garg, JM For The Appellant : Sh. R.M.Mehta, CA For The Respondent : Sh. Ashis Mohanty, Sr. DR ORDER PER C.M.Garg, J.M. This appeal has been filed by the assessee against the order of the CIT(A) - IV, New Delhi dated 13.01.2014 passed in appeal no. 307/11-12 for AY 2009- 10. The ground raised by the assessee read as under -: 1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming th .....

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tion by SEBI on sale of shares by the allottee. The learned CIT(A) has neither specified nor confronted the appellant with the relevant provision of the SEBI Act which barred the sale of shares allotted on preferential basis. 3. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of ₹ 8,48,019/- made by the Assessing Officer u/s 14A of the Income-tax Act without appreciating the explanation of the assessee and without ther .....

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377; 6,48,399/- as against declared negative income (loss) of ₹ 5,46,32,189/- as per Profit & Loss of the assessee. The assessing officer made disallowance on account of sale of investment, provision for doubtful debts, diminution in the value of investment written back and disallowance u/s 14A of the Income Tax Act, 1961 (for short Act). 3. Aggrieved assessee preferred an appeal before Ld. CIT(A) which was partly allowed. Now the aggrieved assessee is before this tribunal with this 2n .....

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essee s paper book spread over 48 pages and copies of the order of Hon ble High Court of Gujarat in the case of ACIT vs. Biraj Investment (P) Ltd. 210 Taxman 418 (Gujarat) and judgment of Hon ble High Court of Madras in the case of CIT Madurai vs. M. Ramaswamy 151 ITR 122 (Madras). The ld. Counsel of the assessee reiterating the written arguments dated 19.03.2013 before CIT(A) submitted that the assessee purchased ₹ 16,25,225/- equity shares of Escort Ltd. from HPC at a price of ₹ 83 .....

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conversion of each warrant into equity share. It was also the condition of preferential allotment that that failure to exercise the conversion option before 29.09.2007 would result forfeiture of initial 10% of amount already paid. The ld. Counsel further stated that around the time of conversion of warrants into equity shares the said allottee HPC did not have adequate financial resources to exercise the conversion option and thus, approached the assessee company to finance the payment of balan .....

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er share. The ld. Counsel further elaborated that this was a out of share market transaction carried out between the parties as there was a locking period of 3 years which was expired on 31.02.39 and these shares were not transferable immediately in the name of assessee purchaser but by virtue of purchase from HPC, the assessee company acquired full beneficial interest in the share as an owner. 5. The ld. Counsel further submitted that in financial year 2008-09 relevant to assessment year 2009-1 .....

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t the weighted market price of these shares at the Bombay stock exchange on the date of transaction was ₹ 58.80 per share and the sale price settled by the assessee company was fair price considering the illiquidity of these shares for open market purchase/sale. The ld Counsel pointed out that the loss claimed by the asessee was actually suffered on sale of these shares during the relevant financial period and the same was claimed as short term capital loss. The ld. Counsel vehemently cont .....

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merely because the transaction has been entered into by two group companies does not automatically mean that it is sham. The ld. Counsel reiterating assessee submissions dated 19.3.2013 before Ld. CIT(A), submitted that once the assessee has proved genuineness of the transaction the onus is shifted to the AO to prove that the transaction is sham and the AO has failed to discharge the onus shifted on him. The ld. Counsel also contended that the purchase is supported by an tripartite agreement alo .....

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y acceptable to the present case. The ld. counsel pointed out that till the date of hearing of this appeal i.e. 27.11.2015 the loss declared by the assessee in the relevant assessment year 2009-10 has not been adjusted. 7. The Ld. DR strenuously opposing the above noted contention of the assessee and strongly supporting the action of the AO as well as impugned order submitted that there was lock-in period for transfer of preferential shares allotted to HPC which was to be expired on 30.03.2009 a .....

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prasad & Co. and M/s. Big Apple Clothing Pvt. Ltd. cannot override the statutory conditions of the preferential allotment and since the assessee company could have neither purchased these shares nor could take them for hypothecation or pledged from HPC the claim of the assessee that these shares were purchased @ ₹ 83.79 per share cannot be accepted as that would amount to violation of legal condition as contained and mentioned on the face of the relevant share certificates in question. .....

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ase and sale during the lock-in period was rightly held as sham transaction because the same was legally prohibited during lock in period up to 30.03.2009. The ld. DR vehemently pointed out when the seller has no right to sale the shares during lock-in period then any transaction without any transfer in the name of buyer as to be held as speculative transactions and the same cannot be held as acceptable short term capital loss. The ld. DR lastly pointed out that the case laws relied by the ld Co .....

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case quite dissimilar and distinguishable with these cases. Therefore, propositions laid down by Hon ble High Courts cited and relied by the assessee do not support the case of the assessee in any manner. 8. On careful considered of above rival submissions of both the sides, at the very outset, we observe that undisputedly rather admittedly preferential allotment was made to HPC in March, 2006 as per SEBI guidelines and HPC had an option to convert each share warrant on equity share at a conver .....

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the impugned long term capital loss on this transaction of sale of share during the relevant financial peried. From the assessment order, we note that the assessing officer decline to accept claim of the as sessee with following observations and conclusion :- 1 have gone through the replies of the assessee but do not find merit in it due to the following reasons:- The assessee has claimed short term capital loss amounting ₹ 4,84,73,750/- on account of alleged sale of 16,25,000 shares ol M/ .....

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es in its name and these share were never transferred in the name of the assessee company. Thus the assessee was never became a registered shareholder in respect of these shares in the shareholder roll of M/s Escorts Itd. Even as per the tripartite agreement, the shares could be transferred only after the lock-inperiod, whlch in this case is 31.03.2009. The relevant clause of As per the Tripartite Agreement between M/s HarParshad and Company Pvt. Ltd, AAA Private Ltd and M/s Big Apple clothing P .....

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Pvt. Ltd. on 31/03/2007. Here, the question which needs consideration is that whether the assessee is the owner of the capital asset during the previous year relevant to the AY 2009-10 which it claimed to have transferred and on which it booked short term capital loss. The shares were continued to be held by M/s Harprashad & Co Private Ltd which is also established on the basis of name of M/s Harprashad & co Private Ltd on share certificate. Moreover, these certificates were under a loc .....

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ven in off-market transaction. The market price of M/s Escorts ltd was of ₹ 58.80 per share. Therefore it has resulted in over stated loss of ₹ 78,65,000/- ( 16,25,000X4.84=78,65,000). Without prejudice to the above, it goes without saying that for transfer of shares, the assessee should be the owner of assets in the previous year in which transfer takes place. As the shares belonged to M/S Har Parshad & Co. Pvt. Ltd at the given date, the assessee cannot be allowed to take the b .....

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us loss in the hands of the assessee. The courts have repeatedly held that in such kind of transactions, the AO has the power to go behind the real intention of transactions and lift the corporate veil. The Hon ble Supreme Court in the case of Mcdowell And Co. Ltd. vs Commercial Tax Officer has held as under:- Tax planning may be legitimate provided it is within the framework of law. Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is .....

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iging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer f .....

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res of the same group concern resulting in substantial losses to the assessee cannot be taken to be genuine by any stretch of imagination. The assessee has claimed to have bought and then sold the rights in shares of listed company Escorts ltd., which is also a group concern, outside the share market in the form of a private bulk deal. As may be noted from above, the transaction has taken place at a rate which was lower than the market rate on that day. Hence, it is held that the transaction cla .....

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ssue. 10. The assessee carried out matter before Ld CIT(A) and the CIT(A) confirm the disallowance with following findings and conclusion :- 5.2 Before me, the Id. AR for the appellant submitted that the shares in question were purchased from M/s Harprasad & Co. Pvt. Ltd. in the AY 2008-09 and were sold back to them in AY 2009-10. These shares were allotted by Escorts Ltd. to M/s Harprasad & Co. on conversion of share warrants and were to remain in lock-in period upto 30th March, 2009. T .....

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hare. The equity shares of Escorts Ltd. are listed at the stock exchanges in India. However, this was an off market transaction carried out between the parties when the weighted average price of equity share of Escorts Limited ranged between ₹ 106/- to ₹ 133/- per share during the month of October, 2007 at the stock exchange. b) M/s HPC came to acquire these shares from Escorts Limited in the following Manner:- i) A preferential allotment of share warrants was made by Escorts Ltd. to .....

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, the said HPC did not have adequate financial resources to exercise the conversion option and thus approached the appellant company to finance the payment of balance 90% of the conversion price and in turn acquire the equity shares of Escorts Ltd. at a price of ₹ 83.70 per share. Both the parties were in a win-win situation under this arrangement because HPC would save its 10% amount from forfeiture whereas the appellant company would acquire the equity shares of Escorts Ltd. at a price o .....

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nt year 2009-10, the appellant was faced with huge tax demands for which it had to liquidate its investment in these shares. However, since these shares were neither tradable in the stock exchange nor transferable before 31.03.2009, the appellant negotiated with M/s HPC to purchase these shares from the appellant at around the then market price of the shares at the stock exchange. After negotiation, HPC agreed to buy these shares from the appellant at a price of ₹ 53.96 per share in an off .....

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tion is completely sham transaction to book artificial loss. He held so because the transaction of purchase/sale of these shares was between two group companies. g) During the assessment proceedings, the appellant provided complete evidence to prove the genuineness of the transaction both for the purchase as well as for the sale of these shares. Merely because the transaction has been entered into by two group companies does not automatically mean that it is sham. Once the assessee proved genuin .....

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capital loss of ₹ 4,84,73,750/- deserves to be deleted." 5.3 I have carefully considered the submissions of Id. AR and perused the order pasted by the AO. It is an admitted fact that M/s Harprasad & Co. Pvt. Ltd., M/s Big Apple Clothing Pvt. Ltd. and the appellant company are group companies of Escorts Ltd. having common directors. It is also an admitted fact that the Escorts Ltd. has allotted 16,25,000 equity shares of paid up value of ₹ 10 per share to Harprasad & Co. .....

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s. Since the appellant company could have neither purchased these shares nor could take them for hypothecation or pledge from Harprasad & Co. Pvt. Ltd., the claim of the appellant that these shares were purchased at the rate of ₹ 83.79 per share cannot be accepted as that will amount to violation of law as contained in the share certificates quoted above. Since the appellant could have not purchased these shares from M/s Harprasad & Co. Pvt. Ltd. in the first place as same was lega .....

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in period and the allottee, i.e. M/s Harprasad & Co. Pvt. Ltd. could have not sold these shares to the appellant company or disposed them off in any manner till 30.3.2009, Therefore, there is no question of appellant buying these shares @ ₹ 83.79 and then selling them back to the very same party at the lower rate of ₹ 53.96 per share before the expiry of the lock-in period. The tripartite agreement which is claimed to be the basis for entire transaction is not a enforceable agree .....

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s rejected. Considering the facts and circumstances of the case, I agree with the views of the AO that entire transaction was a sham transaction and arranged with a view to book the artificial loss for tax evasion and the same was not a genuine loss. Therefore, the disallowance made by the AO is confirmed. This ground of appeal is rejected. 11. In view of above from the assessment order we note that the assessing officer disallowed the claim of the assessee by holding that the transaction entere .....

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the market rate on that date, therefore, the transaction s claim to have been entered is a completely sham transactions to book artificial losses and to evade legally payable taxes. 12. The CIT(A) dismissed appeal of the assessee by holding that the claim of the assessee that the transaction was genuine and made as per tripartite agreement between the group companies deserve to be rejected and he agreed with the conclusion of the AO that entered transaction was a sham transaction and oriented w .....

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ice for reducing tax effect. In the present case, there was no transaction of pledging shares before sale resulting into capital loss and there was no lock-in period for transfer of these shares as exists in the present case therefore, facts and circumstances of the present case are quite dissimilar to that case. When we further respectfully consider the facts and dicta laid down by Hon ble Madras High Court in the case of CIT Madurai vs. M.Ramaswamy (Supra) and we observe that in that case ther .....

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was not entered into the share holders register or share roll register of the company, therefore, the assessee is not entitle to claim loss on such transfer of share but the main allegation of the assessing officer and the first appellate authority is that the assessee purchased from HPC and sold back the same shares preferential convertible shares to HPC during the lock-in period and the transaction was affected between group companies about the shares of a group company resulting into huge los .....

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ction and the claim of the assessee is not acceptable which was placed and advanced with an intention to evade taxes. 14. On the careful and vigilant analysis of the ratio of the judgments, as relied by the ld. Counsel of the assessee, in our humble opinion the facts of the present and prevailing circumstances are quite dissimilar and distinguishable from the facts and circumstances of the cited cases, therefore, we respectfully hold that benefit of the ratio of these decisions are not available .....

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sited further amount of ₹ 2.50 crore on 30.12.2009. 2.10 crore on 29.1.2010 copies of challans were placed before us. The ld. Counsel of the assessee also drawn out attention towares para (d) of the written submissions of the assessee placed before CIT(A) dated 19.03.2013 and contended that in the assessment year 2009-10. The appellant was faced with huge tax demands for which it had to liquidate its investments in these shares. The ld. DR vehemently contended that the ld. Counsel of the a .....

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pointed out that in the written submission dated 09.01.2014 the assessee at page 3 first sentence submitted that share were sold back to the HPC in September, 2009 whereas in the written submission dated 17.11.2011 before the AO, the assessee in para 1 mentions the date of transaction as 30.09.2008 and in this letter of the assessee explained the AO about the share price of Escorts Ltd. on Bombay Stock Exchange and National Stock Exchange during the month of October, 2007 and September, 2008. Th .....

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ainst which huge impugned capital loss of ₹ 4,84,73,750/- has been claimed by the assessee. 16. On carefully and vigilant perusal of the assessee s paper book available at 48 pages submissions of the assessee before AO dated 03.11.2011 copies of the 4 challans submitted during the hearing before us at the very outset, we note that as per sample copy of the share certificate available at page 38 of the assessee s paper book the preferential share allot to HPC could not be sold/ hypothecated .....

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ee s paper book and stock prices of the shares of Escort Ltd. during 01.09.2007 to 30.09.2008 available at page 43 of the assessee s paper book it is ample clear that the assessee sold the shares back to HPC Ltd. on 30.09.2008. Whereas in the written submission before the CIT(A) dated 09.01.2014 available at pages 23 to 27 of the assesseeps paper book, we note that at page 3 top line the assessee submitted that the shares were sold back to HPC in September, 2009 based on the prevailing market pr .....

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authority available at pages 16 to 20 of the assessee s paper book, which were also read out and reiterated by the ld. counsel of the assessee during the hearing before us, we observe that the urgency and requirement of the assessee in selling shares before the lock-in period has been stated that in the assessment year 2009-10, the assessee was faced with huge tax demands for which it had to liquidate its investment in these shares but there is no document before us showing the tax demand perta .....

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nnot be held as tenable, acceptable or sustainable in the view of contradictory incorrect and baseless facts narrated by the assessee in its submissions and explanation before the authorities below as well as before this Tribunal. Thus, we decline to accept contention of the assessee that for AY 2009-10 the assessee faced huge tax demand and due to this reason assessee sold the shares. In this regard, we place our serious concern on record about the conduct of the assessee in narrating incorrect .....

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below :- 11. In the present case, while rejecting the argument that the provisions of section 158BC of the Act were not applicable, the Tribunal has observed that it was never the case of the assessed that the document in question (Annexure A-11) was not recovered from its business premises or that it did not belong to it or that the entries regarding expenditure aggregating to ₹ 14,88,754 were not made by its employee; vide letter dated 7-11-1996 the assessed had categorically accepted t .....

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admittedly given different explanations in respect of the same document and, therefore, its yet another explanation that the subject transactions, though typed by its accountant, were made by the said Goenka lacked credence. It is pertinent to note that the assessed had not only owned up the document but had also explained the cheque transactions reflected in the lower portion of the same very document. In view of the factual scenario projected above, we unhesitatingly affirm the view taken by t .....

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sed on clear provisions of law, causing no ambiguity. Thus, no substantial question of law, which is the sine qua non for the exercise of power under section 260A of the Act arises from the impugned order. 19. On careful perusal of the relevant order of the Tribunal in the case of Friends Overseas (P) Ltd. vs. DCIT reported as (2001) 73 TTJ 367 (Delhi Trib.) we observe that the Tribunal has referred the preposition laid down by the Hon ble Kolkata High Court in the case of Amal Kumar Chakraborty .....

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volte face and says that the deposits are from the money supposedly declared in 1971. Therefore, the later statements of the assessee cannot be credited as the source of the deposits. 20. Keeping in view our conclusion in the earlier paras of this order in the light of dicta laid down by Hon ble High Court of Delhi in the case of Friends Overseas (Supra) and Hon ble Kolkata High Court in the case of Amal Kumar (supra), we reject the explanations of the assessee that the assessee sold back the s .....

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t by the taxing provisions of the Act and the law and the said explanation of the assessee in this regard is nothing but ill-contrived fictional story which is baseless and not acceptable. 21. On the basis of foregoing discussion, we reach to a logical conclusion that the assessee had no bonafide reason or cause in September, 2008 which forced the assessee to sale shares during the lock-in period which resulted into huge loss to the assessee. In this situation, we are also inclined to agree with .....

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hasitation to hold that the transaction of sale of shares under taken by the assessee company during the relevant financial period, with group company was a sham transaction and the loss booked under said transaction cannot be held as allowable claim of short term capital loss for the assessee. Finally, we uphold the impugned order which confirm the disallowance and addition made by the AO. Accordingly ground no. 1 and 2 of the assessee being devoid of merit are dismissed. Ground no. 3 and 4 of .....

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