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2016 (11) TMI 1242 - ITAT PUNE

2016 (11) TMI 1242 - ITAT PUNE - TMI - Disallowance of loss on share transaction - Held that:- We find during the impugned assessment year the assessee has shown the purchase of share and sale of shares in the profit and loss account. As mentioned earlier, in the preceding year the shares were shown under the head “loans and advances” and not under the head “investment”. No dividend or other income was received by the assessee from Western Medical Solutions Pvt. Ltd. It is also an admitted fact .....

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011 has accepted such loss as business loss and nothing was brought on record that any action either u/s.147 or 263 has been taken. Therefore, we find merit in the argument of the Ld. Counsel for the assessee that the loss incurred by the assessee on sale of shares cannot be treated as non-genuine loss. - It has been held in various decisions that AO cannot enter into the shoes of the assessee and it is the businessman who knows better how to conduct its business. The Hon’ble Bombay High Cou .....

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of expenditure incurred and/or expediency of hiring of 4 dozers that was a matter of commercial expediency and the assessee was the best judge of it. It was accordingly held that the expenditure was an allowable expenditure. - So far as the argument of the AO without prejudice that the loss can be allowed as a long term capital loss since buying and selling of shares is not the business of the assessee company is concerned, we have already noted from clause 19 of the memorandum of associatio .....

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n favour of assessee. - Revaluation of stock of land at Hyderabad at net realizable value rejected - Held that:- Additional documents were not produced before the AO and the CIT(A) and since these documents go to the root of the matter, we admit the same. Considering the totality of the facts of the case, we are of the considered opinion that the matter requires a revisit to the file of the AO in view of the above additional evidences. The AO shall decide the issue afresh - ITA No.2031/PN/20 .....

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d proper relief may be granted to the appellant. 3. Facts of the case, in brief, are that the assessee is a company engaged in the business of Civil Construction. It filed its return of income on 15-10-2010 declaring income of ₹ 7,19,07,807/-. The said return was revised on 25-04-2011 declaring income of ₹ 7,19,49,505/- due to change in claim of depreciation. During the course of assessment proceedings the AO noted that sales of ₹ 16,11,75,432/- has been credited to the profit .....

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he said query it was replied by the assessee as under which has been reproduced by the AO in the body of the assessment order : 6.1 During F.Y. 2008-09 relevant to A.Y. 2009-10 the assessee company had invested ₹ 4.10 crores in equity shares of Western Medical Solutions Pvt. Ltd., Mumbai with the objective to realize better price in due course and gain reasonable amount as profit on funds invested. 6.2 After making the investment, the assessee company found that the company where the money .....

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old these shared to Dev Construction Pvt. Ltd. at negotiated price of ₹ 82,00,000/-, i.e. ₹ 2/- per share. The amount credited to Sale of Shares A/c. 4. The assessee also enclosed a copy of the resolution passed by the Board of Directors of the assessee company for buyback of shares allotted to the company. 5. However, the AO was not satisfied with the above explanation given by the assessee. In order to verify the genuineness of the loss claimed by the assessee at ₹ 3,28,00,00 .....

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essment year 2010-2011 for a consideration of ₹ 82,00,000/-, thereby, incurring a loss of ₹ 3,28,00,000/-. The assessee is in the business of buying and selling of Land & development of land and the purchase of the shares of Western Medical Solutions Pvt. Ltd. is in no way connected with its business activities. 6. The AO noted that the assessee has not given any justification for the investment of ₹ 4,10,00,000/- made in an unlisted company in the F.Y. 2008-09 and has also .....

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d therefore it decided to sell its shares at a negotiated price of ₹ 2/- per share as against its purchase price of ₹ 10/- per share. He observed from the records that the purchase price of the 41,00,000 share for ₹ 4,10,00,000/- has been debited to the profit and loss account of the previous year 2009-10 whereas the shares had been acquired on 20-11-2008 which falls in the previous year 2008-09. According to the AO the purchase price of the shares should have been debited to t .....

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unt of ₹ 3,28,00,000/- claimed by the assessee on account of sale of shares of Western Medical Solutions Ltd. during the year by holding that the same is not a genuine business loss. He held that both the purchase and sale of transaction of shares of Western Medical Solutions Ltd. have been given in the profit and loss account for the A.Y. 2010-11 to reduce the taxable income of the assessee company and to evade payment of tax. Without prejudice to the above, the AO further noted that if t .....

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,00,000/- will have to be assessed as long term capital loss as the shares of Western Medical Solutions Ltd. have been held for a period of more than 12 months and the long term capital loss can only be carried forward and set off against long term capital gains in the following assessment years as per the provisions of section 74 of the I.T. Act. 8. Before CIT(A) the assessee more or less reiterated same submissions. It was submitted that the conclusion arrived at by the AO is not correct. Firs .....

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with on recognized stock exchange and on which securities transaction tax has been paid. Here both these conditions are missing. These shares were not listed shares on any recognized stock exchange. Hence, these shares are not dealt with on recognized stock exchange and no securities transaction tax has been paid on the sale of transaction of these shares. 9. It was submitted that during the F.Y. 2009-10 relevant to A.Y. 2010-11, the assessee company had sold the land at Gut No. 78, Katvi and La .....

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ern Medical Solutions Pvt. Ltd has been treated as investment and loss has been computed as long term capital loss. Sale of land has been treated as business transaction and profit has been treated as business income. It was further submitted that if at all the treatment of stock in trade is not possible then same treatment be given to both assets. Considering the facts of the case and provisions of law, it was requested to allow business loss of ₹ 3,38,00,000/- on sale of shares. 10. Howe .....

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all the shares i.e. 99.51% shares were held by the appellant company. Therefore, the appellant company has got full control over the company M/s. Western Medical Solutions Pvt. Ltd. From the audited balance sheet of the company as at 31/03/2009, 31/03/2010 & 31/03/2011 available in the assessment record, it has been noticed that the amount of share capital of ₹ 4,12,00,000/- and share application money of ₹ 1,00,00,000/- totaling to ₹ 5,12,00,000/- have been mainly invested .....

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ts have realizable value as appearing in the balance sheet. The Auditors of the company have also certified that the balance sheet of the company reflects true and fair view of its financial position. The Auditors/Directors have not pointed out that either the loans and advances or the investment in jupiter Lifeline Hospitals have meager realizable value. Further, from the balance sheet as at 31/03/2011 i.e. after sale of shares of the above mentioned company by the appellant, the said company h .....

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h shares of M/s. Western Medical Solutions Pvt. Ltd. for ₹ 82,00,000/- i.e. @Rs.2/- per share on 06/01/2010 to M/s Dev Construction Pvt. Ltd. In view of the above facts and discussion, I am of the considered view that the loss of ₹ 3,28,00,000/- claimed by the appellant on sale of shares is non-genuine loss and the transaction is sham transaction. The A.O. is justified in disallowing the said loss of ₹ 3,28,00,000/- as business loss. The addition of ₹ 3,28,00,000/- made b .....

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reported in 336 ITR 287 he submitted that the Hon ble High Court in the said decision has held that assessee can do both trading in shares as well as investment in the shares. The difference between both is depending on the intention of the assessee at the time of purchase of the shares and entries passed in the books of account. He submitted that the SLP filed by the department has been rejected by the Hon ble Supreme Court as reported in 333 ITR (statute) 308. Referring to the Circular No.4/20 .....

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its records as to whether it has maintained any distinction between those shares which are its stock in trade and those which are held by way of investment. 13. Referring to the decision of Hon ble Supreme Court in the case of CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. reported in 100 ITR 706 he submitted that the Hon ble Supreme Court in the said decision has held that a single transaction can constitute adventure in the nature of trade. Referring to the decision of Hon ble Supreme Court i .....

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otel. Since for running of these businesses big chunk of funds are required, therefore, the assessee decided to purchase the shares of Western Medical Solutions Pvt. Ltd., who inturn holds shares of Jupiter Lifeline Hospital which is engaged in the business of running of hospitals and hotels. 14. Referring to pages 45 to 50 of the paper book he submitted that the company had received a proposal vide letter dated 10-07-2007 from Western Medical Solutions Pvt. Ltd for investment of funds. As per t .....

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cal Solutions Pvt. Ltd which inturn was holding shares of Jupiter Lifeline Hospitals which could be disposed off in a short span and earn profit. He submitted that the assessee company found the proposal to be worthwhile and therefore it passed a resolution during the board meeting held on 26-07-2007, a copy of which is placed at page 51 of the paper book. In the said resolution it was resolved to invest in upcoming hospital project of Jupiter group through purchase of shares of Western Medical .....

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n-availability of the funds and hence the assessee decided to dispose off these shares at loss. He submitted that the shareholders and directors of the assessee company are not relatives of either Western Medical Solutions Pvt. Ltd or Jupiter Lifeline Hospitals and therefore these 2 companies are not the associate concerns of the assessee. Referring to pages 342 to 344 of the paper book he drew the attention of the Bench to the details of the shareholding and list of directors of the 3 companies .....

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es and sale of shares in its profit and loss account. The purchase of shares were not shown under the head Investment as it was the intention of the assessee to re-sell the shares within a short span of period. Further, no dividend or income was received by the assessee from the Western Medical Solutions Pvt. Ltd. In view of these facts the AO as well as the CIT(A) are wrong in not allowing the business loss and in treating the same as loss under the head capital gain. 16. Referring to pages 43 .....

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he business of purchase and sale of shares. Moreover the assessee had purchased and sold futures and options of shares in the previous year and the loss incurred of ₹ 7,79,122/- in that year was disclosed as business loss which was accepted in the order passed u/s.143(3) of the I.T. Act. For the above proposition he referred to the profit and loss account enclosed as page 63, computation of income at pages 60 to 62 and the assessment order for A.Y. 2009-10 at pages 77 and 78. He submitted .....

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apital of Western Medical Solutions Pvt. Ltd. to a prospective buyer. In the board meeting held on 05-01-2010 it was decided to sell the shares at a value of ₹ 82,00,000/- to the willing buyer being Dev Construction Pvt. Ltd. The minutes of the meeting is placed at page 53 of the paper book. He submitted that the projects proposed in 2007 by Western Medical Solutions Pvt. Ltd. taken up by Jupiter Lifeline were still not taken up and there was huge gestation period for that company to make .....

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hat the AO cannot enter into the shoes of the assessee and it is the businessman, who knows better about the business decision : 1. CIT Vs. Dalmia Cement Pvt. Ltd. reported in 121 taxmann 706 2. Aditya Medisales Ltd. Vs. Department of Income Tax vide ITA No.3974/Ahd/2007 order dated 02-02-2011. 3. CIT Vs. Salitho Ores Ltd. reported in 194 taxmann 410 Bombay High Court He submitted that the AO in the instant case has failed to appreciate the real business facts that nobody can predict that every .....

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shares allotted by Western Medical Solutions Pvt. Ltd., accounting treatment in the audited books and payments received from Dev Construction on sale of shares. Further, the assessee and the party to whom the shares were sold are unrelated parties. 19. Referring to the decision of Hon ble Madras High Court in the case of CIT Vs. Spencers and Co. Ltd. reported in 359 ITR 644 he submitted that the Hon ble High Court in the said decision has held where the assessee has produced all required primar .....

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e AO did not prove these documents or evidences to be false or bogus. Accordingly, the claim of loss made by the assessee was allowed. He submitted that the principles laid down in the above decision are squarely applicable to the facts of the present case since in the instant case also the AO has not proved that the details submitted by the assessee are false or bogus. 20. So far as the decision relied on by the AO and the CIT(A) in the case of Bombay Oil Industries (Supra) is concerned he subm .....

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f the business connection and was the main distributor of the products of M company in which the directors of the assessee had majority stake. Further, the AO had also pointed out irregularities in the documentation and flow of funds between the parties. However, in the instant case, no such facts were noted. The assessee, the investee and the purchase company are unrelated and hence, there was no motive behind the transaction of sale of shares at lower price. 21. Even the search report of Weste .....

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the assessee company, the Ld. Counsel for the assessee referring to Clause No.19 at page 44 of the paper book drew the attention of the Bench to the memorandum of association of the assessee company which authorises purchase, holding and sale of shares and securities, therefore, the contention of the AO on this issue is wrong. Further, whether the loss is business loss or capital gain depends on the intention of the assessee when acquired and its treatment in the books of account. He submitted t .....

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hat the Ld.CIT(A) has given justifiable reasons for rejecting the claim of business loss at ₹ 3,28,00,000/- as non genuine loss and the transaction as sham transaction. Therefore, the order of the CIT(A) on this issue be upheld and the ground raised by the assessee should be dismissed. 24. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions ci .....

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d loss account to reduce the taxable income of the assessee company and to evade payment of tax. For the above proposition, the AO relied on the decision of the Mumbai Bench of the Tribunal in the case of Bombay Oil Industries Ltd. (Supra). Further, without prejudice to the above the AO held that the loss of ₹ 3,28,00,000/- will have to be assessed as long term capital loss as the shares of Western Medical Solutions Pvt. Ltd. have been held for a period of more than 12 months and the long .....

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Ld. Counsel for the assessee that the share transaction effected by the assessee is a genuine transaction. According to him, an assessee can hold the shares either as investment or as stock in trade. Further, in view of the decision of Hon ble Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd. (Supra) a single transaction can constitute an adventure in the nature of trade. It is also the contention of the Ld. Counsel for the assessee that full details were given before the AO as .....

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for the assessee. We find the assessee before the AO had submitted that the company had received a proposal vide letter dated 10-07-2007 from Western Medical Solutions Pvt. Ltd. for investment of funds. As per the said proposal Western Medical Solutions Pvt. Ltd. had identified Jupiter group as leading group in healthcare and hotel industry which had the proposal for constructing 200 bedded tertiary care hospital along with 55 studio apartment hotel at Thane. The assessee saw a good opportunity .....

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at Jupiter Lifeline Hospitals is not able to build more hospitals and hotels as planned and since the assessee was in need of funds it decided to dispose of the shares at loss. Since Western Medical Solutions Pvt. Ltd. expressed its inability to buyback the shares the assessee sold the shares to the prospective buyer M/s. Dev Constructions Pvt. Ltd. Under these circumstances, we have to see as to whether the claim of loss by the assessee has to be allowed as a genuine business loss or the loss t .....

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the assessee on 12-12-2009 with distinct numbers 2000 to 41,20,000 vide Registered Folio No.5 Certificate No.22. We find clause 19 of the Memorandum of Association of the company authorizes the assessee to acquire, take up and hold shares, stocks, debenture stock bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in India etc. etc. We find during the impugned assessment year the assessee has shown the purchase of share and sale of shares in .....

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by the assessee that during A.Y. 2009-10 the assessee had claimed loss in futures and options share trading at ₹ 7,79,122/- as per page 64 of the paper book which is the profit and loss account for the year ended 31-03-2009. We find the AO in the order passed u/s.143(3) dated 15-12-2011 has accepted such loss as business loss and nothing was brought on record that any action either u/s.147 or 263 has been taken. Therefore, we find merit in the argument of the Ld. Counsel for the assessee .....

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hat when it was not the case of the revenue that the expenditure was not bonafide or that it was incurred by way of diversion of profits to a related person or a sister concern of the assessee the revenue could not have gone into the question of expediency of expenditure incurred and/or expediency of hiring of 4 dozers that was a matter of commercial expediency and the assessee was the best judge of it. It was accordingly held that the expenditure was an allowable expenditure. 29. We find in the .....

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e false or bogus. Accordingly, the claim of loss made by the assessee was allowed. On further appeal by the Revenue the Hon ble High Court has held as under : 21. We have given our anxious consideration to the reasons given and findings arrived at by the appellate authority and the Tribunal. We find from the order of the appellate authority that with the material available on record he had proceeded to adjudicate the claim of the assessee. The appellate authority on scrutiny of the material avai .....

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hares as bogus and the claim was made with a motive to avoid payment of tax. The appellate authority was found to be satisfied with the materials available on record that the loss suffered by the assessee in sale of shares was a genuine loss and, therefore, entitled to claim the loss under "Capital gains". The finding of the appellate authority was based on the materials available on record and, therefore, is a finding of fact. The Tribunal, concurring with the said finding, held that .....

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sessing authority could not accept a transaction in part and reject or disbelieve the rest only for the purpose of assessment of loss. On a careful analysis of the orders of the appellate authority and the Tribunal in the light of the material available on record and the arguments made, we see no reason to interfere with the concurrent findings of fact recorded by the authorities below. -There is no infirmity in the order passed by the Tribunal confirming the order of the appellate authority dir .....

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sion relied upon by the assessee in Azadi Bachao Andolan s case, cited supra, would show that the test to determine whether the claim is a colourable device or not is to determine whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. The Tribunal has analysed the materials on record to come to a conclusion that the loss on account of sale of shares was a genuine and that the said loss has occurred in the cour .....

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refore, we do not find any reason as to why the loss of shares should not be allowed as business loss. 31. We find the Hon ble Supreme Court in the case of Sutlej Cotton Mills Supply Agency Ltd. (Supra) has held that a single transaction of purchase and sale outside the assessee s line of business may constitute an adventure in the nature of trade. It is not necessary to constitute trade that there should be a series of transactions of purchase and sale. Similar view has been taken by the Hon bl .....

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f any abstract rule, principle or test and must in every case depend upon all relevant facts and circumstances. 32. We find the Hon ble Bombay High Court in the case of New Prahlad Mills Pvt. Ltd. Vs. CIT reported in 85 ITR 480 has held as under (short notes) : Held, that the loss of ₹ 5,44,580/- suffered by the assessee on the sale of shares was a trading or revenue loss which was allowable in computing its business income. The three relevant annual general meetings of Jupiter were on Jul .....

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in Jupiter in February, 1948, it sold 70,000 shares of East and West in April, 1948, and it also sold 63,000 ordinary shares and 25,000 preference shares of Jupiter in January, 1949. Those sales falsified the theory that the assessee had purchased the shares for acquiring control over the affairs of Jupiter purchased the shares with a view to boosting up their prices and selling them at an inflated price. The assessee succeeded in selling the shares at an inflated price but it had made its own .....

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trading or revenue loss which is allowable in computing its business income (page 488 and 489) 33. It has been held in various decisions that every business decision by an assessee may not result into profit. Sometimes the assessee may have to incur loss also. Therefore, merely because the assessee has incurred loss on account of purchase and sale of shares the same cannot be treated as non-genuine and sham especially when the various other documents furnished by the assessee have not been prove .....

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in order to set off capital gain that arose from liquidation of one of its own company. Further, the sale was made to a related party who was under the control and influence of the assessee company because of the business connection and was the main distributor of the products of the company in which the Directors of the assessee had a majority stake. The irregularities in the documentation and flow of funds between the parties was also pointed out by the AO. However, in the instant case neithe .....

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llowed as a long term capital loss since buying and selling of shares is not the business of the assessee company is concerned, we have already noted from clause 19 of the memorandum of association of the assessee company (copy of which is placed at page 44 of the paper book) that the assessee can acquire, take up and hold shares, stocks, debenture stock bonds, obligations and securities or guaranteed by any company constituted or carrying on business in India etc. etc. Since the shares are of u .....

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d taxing authorities below had erred in rejecting the revaluation of stock of land at Hyderabad at net realizable value and making an addition of ₹ 90,62,325/-. Just and proper relief may be granted to the appellant. 37. Facts of the case, in brief, are that during the course of assessment proceedings, the AO noticed that the assessee has claimed opening stock of land at Hyderabad as on 01-04-2009 at ₹ 90,63,325/- whereas the closing stock of the said land as on 31-03-2010 has been s .....

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in respect of the said lands. Considering these facts, the land has been valued at token amount of ₹ 1,000/-. 38. However, the AO was not satisfied with the explanation given by the assessee and disallowed the claim of loss of ₹ 90,62,325/- by observing as under : "I am unable to accept the fact that the assessee who has been in the Reality business would have made an investment of ₹ 90,63,325/- in the land at Hyderabad without ascertaining whether it was getting a clear t .....

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ade payment of tax." In support of the above decision, of holding the claim of loss of ₹ 90,62,325/- as non-genuine, the A.O. has relied on the ratio laid down in the case of Hela Holdings Pvt. Ltd, Vs. CIT [2003] 263 ITR 129 (Calcutta) and also on the ratio laid down by Hon'ble Supreme Court in the case of UOI Vs. Azadi Bachav Andolan [2003] 263 ITR 706 (SC). 39. Before CIT(A) it was submitted that the assessee company had valued stock-in-trade i.e. work-in-progress on account of .....

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ion entry in land records with local land revenue authorities, it has been revealed that the titles for the land produced by the sellers were defective and there were problems of ownership. The assessee company had filed petition with High Court, Aurangabad. 40. After going through the back history of the land it has been revealed that there is no possibility of getting the titles rectified and there is remote possibility of getting the lands registered in the name of the assessee company in the .....

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vanced by the assessee and upheld the order of the AO by observing as under : 7.3 I have carefully considered the facts of the case and rival contentions. On perusal of the same, it has been noticed that the appellant has claimed to have purchased land at Hyderabad for consideration of ₹ 90,63,325/-. The appellant has claimed that the said land which is under litigation and title of which is not clear has been purchased on the basis of opinion of retired High Court Judge. The appellant has .....

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iture, business loss, deductions are to be supported by evidence and the assessee is duty bound to prove the said claims with evidence. Therefore, in the absence of any evidence in support of the above mentioned revaluation of closing stock of land which has resulted into business loss of ₹ 90,62,325/-, the claim of the appellant is rejected. The addition of ₹ 90,62,325/- is accordingly confirmed. Ground No.3 is dismissed. 42. The Ld. Counsel for the assessee submitted that the asses .....

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0 and 11, copy of which is placed at page 21 of the paper book and the details of closing stock are as per page 34 of the paper book. He submitted that after purchase of the lands these lands were registered in the land records in the name of the assessee. Thereafter the assessee received notices of caveat application filed by Smt. K. Rajitha, wife of K. Ventaiah Reddy and others against the assessee and various other persons for cancellation of sale deeds under which land was purchased by the a .....

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name of the assessee company are mentioned on page no 329 and 330 of the paper book. In the said order the Ld Authority has observed on page 2 (Page 322 of the paper book) that the alleged land grabbers (being the parties who have sold plots of the land to the assessee) without any interest, right, title and in collusion with the concerned registration authority and in conspiracy for extraneous consideration to grab the properties have brought into existence the registered sale deeds in respect .....

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verifying the title documents and link documents of the executants in the document in Annexure II in question. 44. The Authority further observed in page 7 of the order (Page 327 of the paper book) that it is alleged in all the documents in Annexure II represented Vendees who were recently arrested in Vikarabad town, by Police for creating false and fake documents of original land owners and others vide list in Annexure II. The parties therefore requested the authorities to cancel all the docume .....

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they have title and that they have received consideration. (Page 336 of the Paper book) 46. It is further noted that few purchasers as per deposition No (8) purchased properties without verifying title and made their decision to purchase properties purely on the strength and reputation of the individual. (Page 337 of the Paper book). The Authority has concluded that the above parties have cashed on the lacunas in pahani updating and the lack of proper scrutiny before registration by the Sub- Reg .....

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t of the above order, the assessee realised that there was no possibility of getting the titles rectified and there was remote possibility of getting the land registered in its name. Hence the assessee decided to revalue the land at token value of ₹ 1000/- after taking the facts and legal issues into consideration. 48. The Ld. Counsel for the assessee submitted that the assessee is a developer cum builder and the plots of land are stock-in-trade for the assessee which has also been noted b .....

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ested the Bench to admit the same as they go to the root of the matter and clarify all doubts raised by the AO and CIT(A). 49. Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 50. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has shown the opening stock of la .....

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