IN THE ITAT, MUMBAI BENCH

MAHAVIR SINGH, J.M. & N.K. PRADHAN, A.M.

Chandra N. Hingorani v. ITO

ITA No. 2624/Mum/2015

16 November, 2017

Assessee by: Hari S Reheja, Authorised Representative

Revenue by: Aarju Garodia, Departmental Representative

Mahavir Singh, J.M.

This appeal by the assessee is arising out of the order of Commissioner (Appeals)-32, Mumbai, (in short Commissioner (Appeals)) in Appeal No. Commissioner (Appeals)-32/IT-74/23(1)(3)/13-14, dt. 18-2-2015. The Assessment was framed by the Income Tax Officer, Ward-19(3)-1, Mumbai (in short ITO) for the assessment year 2010-11 vide order dated 25-3-2013 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).

2. The only issue in this appeal of assessee is against the order of Commissioner (Appeals) confirming the disallowance of the claim of long term capital loss on account of sale of shares of VRKP Steel Ind. (P) Ltd. and Ankola Papers Mills (P) Ltd. For this assessee has raised following three grounds :–

“On the facts and in the circumstances of the case and in law the Learned Commissioner (Appeals) erred in confirming the addition of Rs. 122,88,426 as Long Term Capital Gain in the hands of the appellant.

On the facts and in the circumstances of the case and in law the Learned Commissioner (Appeals) erred in confirming the rejection of the claim of loss made by the appellant made on account of the sale of the shares of VRKP Steel Ind. (P) Ltd. and Ankola Papers Mills (P) Ltd.

On the facts and in the circumstances of the case and in law the Learned Commissioner (Appeals) erred in rejecting the setoff of the Long Term Capital Loss claimed by the appellant against the Long-Term Capital gain on the sale of property upholding the disallowance made by the assessing officer on account of unquoted shares.”

3. Briefly stated facts are that during the course of assessment proceedings, the assessee officer noticed that the assessee has disclosed capital gain on sale of investment in properties at Rs. 1,43,09,331 and against which the assessee disclosed loss on sale of short term investment in unquoted equity shares at Rs. 1,45,50,000. Thereby the assessee has claimed to set off of this capital gain against the capital loss arising from sale of investment in unquoted equity shares. The assessing officer required the assessee to file the details of purchase and sale of unquoted equity shares and he furnished information in the following chart :–

4. From the above, assessing officer noted that the assessee claimed to have sold 40,000 shares of Ankola Papers Mills (P) Ltd. by a sum of Rs. 10 per share, which was purchased for a sum of Rs. 250 per share. Similarly, 55,000 shares of VRKP Steel Ind. (P) Ltd. were sold at Rs. 10 per share against the purchase price of Rs. 100. The assessing officer noted that in the case of Ankola Papers Mills, earning per share for financial year 2006-07 was at Rs. 9.19 per share, whereas, it was Rs. 30.89 for financial year 2007-08. According to him, there is no logic for the assessee to sale the shares which are purchased for a sum of Rs. 250 per share at Rs. 10. Similarly, in the case of VRKP Steel Ind. (P) Ltd. earning per share for financial year 2006-07 at Rs. 1.76, whereas in financial year 2007-08, it was Rs. 8.56 per share. In view of the above, he reached the conclusion that the assessee has engineered these transactions with a view to manage its tax liability arising out of the Long term capital gain on sale of immovable properties. The assessing officer also recorded the statements of the assessee under section 131 of the Act. The assessee before assessing officer during the statement under section 131 of the Act admitted that he was in needs of the money and hence, this was just a sale of shares and he has set off his bank loan and also needs money for other business needs also. The assessing officer reproduced the entire statement in the assessment order. Finally, the assessing officer was of the view that there was no basis for assessee to incur such huge loss and the transaction was arranged in a manner to defraud the Revenue of its legitimate taxes. Accordingly, by applying the decision of Hon’ble Supreme Court in the case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC), Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) and Mc Dowell & Co. Ltd. v. Commercial Tax Officer (1985) 154 ITR 148 (SC), disallowed the long term capital loss claimed on account of sale unquoted equity shares at Rs. 1,45,50,000 Aggrieved, assessee preferred the appeal before Commissioner (Appeals). The Commissioner (Appeals) after considering the submissions of the assessee confirmed the action of the assessing officer vide Para 2.3 as under :–

“I have perused facts of the case and the appellant’s submissions carefully. I find that in the paper book, the appellant has submitted submissions made before assessing officer vide letter dated 29-1-2013, whereby the appellant had referred to the companies in which she is director/ promoter. The statement of application of sale proceeds shows that against sale proceeds of two unlisted companies/three properties. payments made to such companies in which assessee is promoter/director includes payments made to Ceenik Exports (I) Ltd. at Rs. 8,00,000 0.000, Nitkin Properties & Estates (P) Ltd. at Rs. 20.00.000 & Ceenik Holdings Pvt. at Rs. 3,90,0001-. The assessee had realized Rs. 2,25,00,0001- oil of house properties/unlisted shares, of which only lts.3 1,90,000 were applied towards said companies, and balance were paid to other family members, or used for other purposes. These figures do not give confidence on the appellant’s main reliance oil of funds in bailing out the four private limited companies. The appellant has further stated that she had sold shares listed at stock exchanges also at a loss, however, the statement of quoted shares sold at loss shows loss of meager Rs. (573). These observations are without prejudice to the fact that the letter dated 29-1-2013 submitted by appellant does not bear acknowledgment stamp as a proof of the same having submitted during assessment proceedings.

On the contrary, I find that the appellant has first invested the shares of two unlisted companies @Rs. 100 & Rs. 250 respectively making total investment of Rs. 1,55,00,000, which is sold at meager Rs. 10 per share for total consideration of Rs. 9.50,000 only. The appellant has not submitted the balance sheet of said companies as oil which may also be relevant since the sale is made as on 10-9-2009 & 15-12-2009 respectively. The appellant has failed to prove what has changed between the purchase date and sale date so that the valuation of said companies tumbled drastically. No prudent investor would sell its investment of as high as Rs. 1,55.00,000 for just Rs. 9.50,000 even in case of utter distress, which gives just above … % of total investment without any fundamental change in valuation of said companies. Moreover. in present case, the appellant is not even able to substantiate that she was in dire need of funds, and that she had actually applied such funds to meet any urgent obligations. The booking of huge losses oil of unlisted shares without substantiating the sharp fall in their valuation. coupled with almost equivalent gain on sale of three residential properties only point to a situation where the appellant has engineered the transactions with a view to manage its legitimate tax liability, which cannot he allowed under any circumstances.

In view of the above. I confirm the addition made of Its. 1,22,88,426 to taxable Long Term Capital Gain of the assessee. and also confirm the disallowance of deduction claimed on account of loss on sale of unquoted shares. Therefore, the grounds of appeal are dismissed.”

Aggrieved, now assessee is in second appeal before Tribunal.

5. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessment has been completed at an income of Rs. 1,30,06,155 rejecting the claim of long term capital loss on the sale of unquoted equity shares amounting to Rs. 1,45,50,000. The claim of the of the assessee for set off long term capital gain on the sale of property against the long term capital loss on sale of unquoted equity shares has been rejected on the ground that the same is not genuine. The reasons for rejection as per the assessing officer and confirmed by the Commissioner (Appeals) are as follows :–

(i) There was no basis for the assessee who have incurred such huge loss.

(ii) The transaction is arranged to defraud revenue.

(iii) There was no justification for selling the shares at face value since the companies are doing well.

(iv) The claim of the assessee that she was in need of money has not been established.

(v) The application of the sale proceeds by the assessee does not justify the distress sale as claimed.

(vi) No prudent investor would sell his investment at such a huge loss even in case of distress. The claim of the assessee is as follows.”

6. From the above, we find that the assessee is an investor in many new companies not only in the past but also the future. Some of these companies are start-up companies wherein investment are made at high rates and at premium. At times these companies do not succeed as expected. The assessee had explained the reason for liquidating immovable properties and investments in some companies on account of financial requirement. The assessee is a co-borrower and guarantor for some companies and hence distress sale was made to fund the requirement either directly or through family members. The assessee also withdrew from the PPF account. The investment in the two companies sold was made with a long-term view. These companies were venturing into mining in Goa and had plans to be listed in next 3 to 4 years. As the assessee wanted to exit earlier some differences arose with the majority shareholders who refused to give more than the face value Rs. 10. Assessee was therefore at the mercy of the Purchaser as the assessee was a minority shareholder. Hence assessee had no option but to exit at face value. assessing officer has not accepted the transaction as genuine since these companies were having decent profit. However assessing officer has not alleged that the assessee has received back cash on account of the sale. The Purchasers of the shares from the assessee are not related in any way to the assessee. The Purchaser have not been examined by the assessing officer to verify the genuineness of sale. The assessing officer has failed to appreciate that shares of private limited companies cannot be sold in the open market and hence the seller is at the mercy of the Purchaser. Merely because the assessee had sold the shares at face value in a distressed situation it cannot be presumed that the assessee had engineered the transaction is to manage its tax liability. The assessee states that the sale is genuine out of urgent financial needs and also on account of the fact that differences had arisen between the assessee and the majority shareholders.

7. As far as the facts are concerned, now the assessee before us also produced even the date of payment for purchase of shares, which was made only at the time of purchase of shares and which is reflected in the following chart :–

Name of the Co.	Date of purchase/ payment	No. of shares	Amount	Date of sale	Sale amt	Gain / loss
VRKP Steel Industries P. Ltd.	18.09,2007	25,000	2500000	15-9-2009	2,50,000	22,50,000
	17-10-2007	1500	15,00000	10-9-2009	1,50,000	13,50,000
	18-3-2008	1500	1500000	10-9-2009	1,50,000	1350000
(A)		55000	5500000		5,50000	49,50000
Ankola paper mills Ltd.	20-7-2007	10,000	25,00,000	16,12.2009	4,00,000	96,00,000
	03-8-2007	10,000	25,00,000
	05-9-2007	10,000	25,00,000
	14-9-2007	6,000	15,00,000
	21-9-2007	4000	10,00000
(B)		4,00,000	1,00,00,000
(A=B)		95,000	15,50,000		95,00,000	1,45,50,000

8. Apart from the above payments, the assessee has transferred the shares back to the Ankola Paper Mills (P) Ltd. and VRKP Steel Industries (P) Ltd. and received the payment of Rs. 10,00,000. This Rs. 10,00,000 was invested by the assessee in international export corporation of Rs. 32,00,000. It means that the assessee was in need of money and hence, for this purpose he sold the investments. As the transaction is genuine, we find that the lower authorities erred in disallowing the long term capital loss incurred by the assessee in the sale of unquoted equity shares. We allow the claim of the assessee and direct the assessing officer to recompute the income accordingly. This appeal of assessee is allowed.

9. In the result, the appeal of assessee is allowed.