Can long term capital loss from sale of listed shares through off market be allowed to set off and carry forward?
The basic rule in the income tax is that if the income is exempt the loss relating to same income cannot be claimed. Therefore, if any long term capital asset on which Securities Transaction Tax (STT) is paid is sold at the loss the set off of the loss is not available because the corresponding income is exempt u/s 10(38).
Take a case, where the assessee has transferred shares held as Long term capital assets through off market transaction i.e. without payment of STT the exemption of 10(38) is not allowed. In case this transaction is resulting into genuine loss, it was held that the set off and carry forward is permitted.
The court held that this was a case of tax planning rather than tax avoidance and such genuine loss cannot be disallowed as it did not fall within the Ambit of section 10(38) because of non-payment of Securities Transaction Tax.
This was held in case of Asra Sales And Investments Pvt. … vs Income-Tax Officer
Refer the case below:
This appeal filed by the assessee is against the order of Commissioner of Income Tax (Appeals) -I, Pune dated 31.01.2014 relating to assessment year 2009- 10 against order passed under section143(3) of the Income Tax Act 1961 (in short ‘the Act’).
ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd
- The assessee has raised the following grounds of appeal:-
- The learned CIT(Appeals) erred on facts and in law in not allowing long term capital loss of Rs.8,39,57,040/- on sale of listed shares to be set off against the taxable long term capital gains from sale of unlisted shares on both of which STT was not paid and transactions were outside the purview of section 10(38). The learned CIT(A) grossly erred in treating the transaction as a colorable devise. He failed to appreciate past history of the assessee and the group companies as also the arguments and contentions advanced by the assessee. The learned CIT(A) further erred in holding that the relevant shares should have been sold at book value as against the market value adopted by the assessee for which necessary evidence and justification was furnished to the CIT(A) and on her record. The learned CIT(A) thus erred in observing that the resultant loss on difference between book value and market value amounting to Rs.2,75,83,524/- needs to be ignored for set off.
- The only issue raised in the appeal filed by the assessee is against non- adjustment of long term capital loss of Rs.8,39,57,040/- on sale of listed shares against taxable long term capital gains of sale of unlisted shares, on both the transactions where STT was not paid and the transactions were outside the purview of section 10(32)of the Act. The assessee is also aggrieved with the order of CIT(A) in holding that the relevant shares should have been sold at book value as against the market value adopted by the assessee and thus observing that the resultant loss on difference between book value and market value amounting to Rs.2.75 crores needs to be ignored for set off.
- Briefly, in the facts of the case, the assessee for the year under consideration had declared income from business loss at (-) Rs.13,54,362/- and long term capital gains of Rs.3,85,58,664/-. The assessee was engaged in the activity of making investment in shares, mostly of group companies and derived income from capital gains, dividend income and some nominal interest. On perusal of return of income and Profit & Loss Account, the Assessing Officer noted that the assessee had shown business loss and he was asked to justify the claim of expenses as no business activity was being carried out as against the assessee earning long term capital loss which had been carried forward separately and dividend income which was claimed as exempt under section 10(33)of the Act and share of profit from ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd partnership, which was also claimed as exempt under section 10(2A)of the Act. The Assessing Officer observed that there was no business activity of the assessee for the past three years as admitted by the assessee itself and there was no resumption of business till the date of assessment i.e. 30.11.2011. Hence, the business loss claimed by the assessee was ignored as no business was being carried on. The profit on sale of shares of Rs.1,83,537/- was charged to tax as short term capital gains without any set off against the business loss. Further, the Assessing Officer noted that the assessee has shown long term capital gains of Rs.4,53,98,376/- on sale of shares of unlisted group companies and long term capital loss of (-) Rs.8,39,57,040/- on sale of shares of listed companies i.e. G G Dandekar Machine Works Ltd. (in short GGDL). The assessee by set off this long term capital gains of Rs.4.53 crores on sale of unlisted companies with long term capital loss of Rs.8.39 crores on sale of shares of listed companies, thereby computing the net long term capital loss at Rs.3.85 crores. The said loss was carried forward to the succeeding years. The Assessing Officer observed that since GGDL was listed company at the stock exchange and its sale and purchase was to be governed by the Rules of Stock Exchange and liable for the Security Transaction Tax (in short STT), the assessee was asked to clarify how this loss on listed shares which fall under section 10(38) of the Act has been set off against the profit on sale of unlisted shares. In reply, the assessee furnished the details of sales of listed and unlisted securities and pointed out that the long term capital loss in respect of GGDL and ING Vysya Liquid fund, no STT was paid as sale of GGDL was off market sale and ING Vysya Liquid fund units were redeemed on maturity. As such, the said transactions were outside the purview of section 10(38) of the Act and therefore, form part of computation of total income. He pointed out that the transactions which were not entered into in any recognized Stock Exchange were not chargeable to STT and hence, were outside purview of section 10(38) of the Act, as such, the loss on sale of such listed shares was correctly claimed in the ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd computation of income. The Assessing Officer noted that the assessee had purchased the shares of GGDL in 2006 through broker M/s. Sajag Securities Pvt. Ltd. @ Rs.74.10 per share through Stock Exchange, after payment of STT of Rs.2,20,252/-. The Assessing Officer observed that the transaction in the said shares was thus, eligible for charging of STT. Once the shares were acquired through recognized Stock Exchange after paying STT, then once they are sold after holding for more than four months, then the long term capital gains or loss shall be exempt under section 10(38) of the Act. The Assessing Officer further observed that once the shares were otherwise eligible for exemption under section 10(38) of the Act, then mere fact that the said shares were subsequently sold in off market, that too to a 100% subsidiary BVHPL, without paying any STT, would not take away or change the nature of shares, because the shares were listed at Stock Exchange and were otherwise eligible for levy of STT. The Assessing Officer also noted that it was not the case that the shares could not have been sold through recognized Stock Exchange. On the other hand, the reason given by the assessee to sell the shares in off market was that these were sold in off market to reduce the liability of STT / brokerage. The Assessing Officer analyzed that where the shares of unlisted companies on which capital gain had been earned, would be governed by the Rules of Stock Exchange and shall not be liable for any STT, then under no circumstances, the gains on sale of such shares would not be exempt under section 10(38) of the Act also. Whereas, shares which are listed, then the same are sold through Stock Exchange and they would attract STT and gain / loss would have fallen under exempt category of section 10(38) of the Act. The Assessing Officer was of the view that the transaction of selling such shares of GGDL after 12 months on off market without STT to a 100% subsidiary at loss was only a colourable device to enable the assessee to claim the set off of loss on sale of listed shares against profits on sale of unlisted shares, hence, the claim of assessee that the provisions of section 10(38) of the Act do not apply to transactions of sale of shares ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd was held to be incorrect. The Assessing Officer also noted that the assessee had sold the shares on 18.03.2009 at loss of (-) Rs.48/- per share, whereas the book value was Rs.59.60 and on the same date, the unlisted shares of KSL have been sold @ Rs.225/- per share, whereas book value was only Rs.134/- per share, which had resulted in the capital gain. Both the sales were made on the same date and to the same entity i.e. BVHPL which is again the 100% subsidiary of assessee. The Assessing Officer in this regard held that it was well settled principle that it is the substance and actual circumstances of the transactions and not the form which would be relevant to decide the nature of particular transaction as held by the Hon’ble Supreme Court in Padamjee R. Kadambande reported in 195 ITR 877 (SC) and other decisions. Further, reliance was placed on series of decisions to look into surrounding circumstances to find out the reality of transaction at hand and it was held that the long term capital loss of Rs.8.39 crores on sale of shares of listed companies would not be set off in the current year against the long term capital gains of sale of listed shares nor it would be allowed to carry forward to be set off in future and the long term capital gains of Rs.4.53 crores on sale of shares of unlisted group company would be chargeable to tax in the year itself as long term capital gains @ 20%.
- Another aspect noted by the Assessing Officer was that the shares of GGDL shares were sold at less than book, whereas the sales of other unlisted companies were sold at higher than listed value. In this regard, the Assessing Officer computed the loss on sale of shares of GGDL was below the book value at Rs.2.75 crores and it was observed that the same would be ignored while setting it off other income, if any, in the current year or for carry forward and set off in subsequent years. However, since the whole loss on sale of listed shares / units was not eligible for set off against the profits from sale of unlisted shares, therefore, no separate disallowance of Rs.2.75 crores was made in the year.
ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd
- The CIT(A) has upheld the order of Assessing Officer and also treated the transaction to be a colourable device where the transaction was made on the same day in respect of listed shares and sale of shares of unlisted group companies. The CIT(A) also rejected the contention of assessee with regard to off market transaction between the group companies. The next plea of the assessee that similar transactions were carried out in off market mode in the earlier years, was also not accepted by the CIT(A) and in view thereof, long term capital loss of Rs.8.39 crores on sale of shares of listed companies of GGDL was held to be not available for set off in the current year against the long term capital gains nor it could be allowed to carry forward for set off in the subsequent year. The CIT(A) also upheld the order of Assessing Officer in holding that though no separate disallowance of Rs.2.75 crores was being made but the same was not available for set off.
- The assessee is in appeal against the order of CIT(A).
- The learned Authorized Representative for the assessee pointed out that the issue arising in the present appeal is can the loss arising on sale of shares on off market transaction be adjusted against long term capital gains. He referred to the Balance Sheet as on 31.03.2008 and 31.03.2009 and pointed out that the investment was to the tune of Rs.26.93 crores as on 31.03.2008 which was reduced to Rs.6.79 crores as on 31.03.2009. He referred to Schedule III of unsecured loans, wherein as on 31.03.2008, the loan was Rs.18.02 crores which was reduced to Nil as on 31.03.2009. The assessee pointed out that the interest paid on short term loans during the financial year 2007-08 was Rs.1.59 crores and for the financial year 2008-09 was Rs.1.26 crores. He stressed that the list of shares i.e. long term investment reflects that out of total investment of Rs.17.70 crores, the investment in GGDL was to the tune of Rs.17.65 crores as on 31.03.2008. However, this ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd investment was liquidated by the assessee and the total long term investment in equity shares was reduced to Rs.5 lakhs. Further, the assessee pointed out that it was utilizing its funds for investment in sister concern which are unquoted shares, whereas as on 31.03.2008, investment in Kirloskar group company was Rs.3.94 crores out of total investment of Rs.5.38 crores. The said investment was partly liquidated by the assessee during the financial year 2008-09 and the total investment in unquoted shares reduced to Rs.2.31 crores as against 5.38 crores as on 31.03.2008. The learned Authorized Representative for the assessee pointed out that it was business decision to sell those shares in order to repay the loan of Rs.18 crores. He further pointed out that all the ICD loan raised in the year 2007 was invested in shares of GGDL which were purchased @ Rs.74/- per share. In 2008, all the shares were sold for Rs.11.41 crores @ Rs.48/- per share. He stressed that the assessee has undertaken off market route which is recognized by NSDL and are routine transactions which happened between group companies. He concluded by stating that the transaction was not a colourable transaction as the desire of the assessee was to arrest his business loss. He further pointed out that there was no harm in parking funds with group concerns and also better value was of group companies, wherein the assessee was holding 24% shares as against allegation of Assessing Officer that BVHPL was 100% subsidiary of assessee company. Referring to the provisions of section 10(38)of the Act, he pointed out that the same is applicable when STT is chargeable, which in turn, is chargeable when the transaction is on Stock Exchange. He made reference to clause (b) of section 10(38)of the Act and also referred to section 88 of the Finance (No.2) Ac t, 2004, wherein it was provided that STT would be charged where the transaction in securities is entered into in recognized Stock Exchange. He says that while interpreting section, pick and choose policy cannot be adopted and rule of strict interpretation is to be applied, where intention has to be garnered from the words used in the statute.
ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd
- The learned Departmental Representative for the Revenue pointed out that when the assessee makes loss, which was not routed through Stock Exchange, section 10(38)of the Act not available but in case you see the transaction in a broader prospective, it can be part of section 10(38)of the Act, since the tax liability is reduced by it. He pointed out that since sale of listed shares is chargeable to STT, the question whether STT is paid or not would determine the nature of transaction. He placed reliance on the order of CIT(A).
- We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the orders of authorities below in not allowing set off of loss arising on sale of shares of GGDL in off market sale to be set off against income arising from long term capital gains on sale of unquoted shares. The case of Revenue authorities is that where GGDL was a listed company, the sale of said shares was liable to STT and hence, the transaction is governed by section 10(38)of the Act. However, the assessee by effecting off market sale of said shares to a group company has perpetuated the mischief and the transaction was colourable device. Another related issue raised was since the book value of GGDL was Rs.59.60 per share and the sales were made @ Rs.48/- per share, as against purchase of share @ Rs.74/- per share, further added credence to the case against the assessee that transaction was a colourable devise. On the other hand, the case of the assessee before us is that it was a investment company and was engaged in money lending business. The assessee was Kirloskar group holding company, which in turn, acquired shares of Kirloskar group companies as and when opportunity arose. The assessee had taken loan to the tune of Rs.18 crores from another group company namely BVHPL. The said loan was carrying an interest @ 8% per annum. However, since for the past three years, there was lull in the business activities and there was difficulty in servicing interest on the loan, it was decided that the loan be settled through sale of shares to BVHPL to prevent any ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd further loss or eroding of worth. The assessee claims that it had sold the shares of GGDL, another group concern, to BVHPL on purely business needs and without any ulterior motive. Since the shares were being sold to group concern, the assessee thought that there was no need to route through the Stock Exchange. Since GGDL was Kirloskar group company, the assessee hesitated to sell it on the Stock Exchange as the same could have been picked up by a stranger and the groups holding in GGDL would have diluted; in order to prevent the same, shares were sold to BVHPL in off market. The assessee claimed that in the past also, many transactions between the group concern were carried out in a off market mode and no questions have been raised against such transactions in the past by the Department. The assessee has sold the shares of GGDL which is listed company which was liable to STT and where such transaction of sale of GGDL shares which is off market, on which no STT was paid, can it be governed by section 10(38)of the Act?
- Section 10(38)of the Act reads as under:-
“10(38) Any income arising from the transfer of a long term capital asset, being an equity share in a company or a unit of an equity oriented fund where –
(a) the transaction of sale of such equity share of unit is entered into on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force; and
(b) such transaction is chargeable to securities transaction tax under that Chapter Provided that the income by way of long term capital gain of a company shall be taken into account in computing the book profit and income tax payable under section 115JB.”
- The perusal of said section reflects that if a transaction of sale of equity shares is chargeable to STT, then the provisions of section 10(38) of the Act are attracted. Section 88of the Finance (No.2) Act, 2004 had introduced imposition of STT and the said section reads as under:-
ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd “88. On and from the commencement of Chapter VII, there shall be charged a securities transaction tax at the rate of 0.15 per cent of the value of taxable securities transactions entered into in any recognized stock exchange and such tax shall be payable by the purchaser of the securities.”
- The bare reading of said section reflects that a transaction which is entered into in any recognized Stock Exchange, then STT becomes chargeable and payable on such transaction. However, the question before us is that where quoted shares of a company are sold in off market transaction, can the provisions of section 10(38)of the Act govern the said transaction? Admittedly, the transactions could be carried out through two different avenues i.e. by way of sale through the stock market or by way of sale through off market transactions. Both the transactions are recognized transactions and any person is at liberty to undertake any of the transactions. In case the quoted shares of any company are sold through Stock Exchange, then the next step is that STT would become liable to be paid on such transactions. However, in case the shares are sold between two parties in off market transaction, then there is no question of charging of STT. Once no STT is charged, the provisions of section 10(38)of the Act would not be attracted. In case the transaction is routed through Stock Exchange, then undoubtedly, the assessee would be liable to pay STT; but in the facts of the present case, the assessee has not sold listed shares through Stock Exchange and had not paid any STT and consequently, the provisions of section 10(38) of the Act are not applicable.
Reading the provisions of section 10(38) of the Act and section 88 of the Finance (No.2) Act, 2004, literal interpretation of the section needs to be made in order to adjudicate the present issue before us. On reading of section 10(38) of the Act, it is very clear that where any income arising on the transfer of any long term asset being an equity share or unit of equity funds and where the transaction is undertaken on Stock Exchange then, such transaction is chargeable to STT and where it is chargeable to STT, the provisions of section 10(38) of the Act are attracted and the gain arising therefrom can be set off only against the losses ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd arising from sale of listed equity shares which are transacted through Stock Exchange. But in the facts of the present case, situation is different. No doubt, the assessee was holding equity shares of GGDL which were quoted. The assessee had purchased the said shares through Stock Exchange and had paid STT. However, at the time of sale of said equity shares, the assessee took a decision not to trade it through Stock Exchange, in order to prevent any stranger from picking up the equity of Kirloskar group company. The decision was taken in order to safeguard the acquisition of said shares by any stranger to the group concern. As referred by us in the paras hereinabove, majorly most of the shares were held by the assessee company and those shares were sold to another group concern. The said concern i.e. BVHPL from whom the loan was raised, was not 100% subsidiary of the assessee company, but the assessee had holding to the extent of 24% shares in the said concern. The assessee pointed out before the authorities below that it was minority shareholder in BVHPL and even the Board of Directors of the assessee as well as of BVHPL were independent and managed by professionals and there was no control / influence or interference in each other’s activities. The decision was taken by the assessee to settle its dues i.e. repaying the loan raised from BVHPL by adjusting it against the value of quoted shares held by the assessee in GGDL, which was a subsidiary of the assessee and in this way retained the shareholding within family and not involved strangers by selling the said shares through Stock Exchange, was a business decision taken by the shareholders of the assessee company and no fault could be found with the said decision. There is no merit in the order of Assessing Officer in holding that the transaction was a colourable device.
- The assessee had claimed the set off of sale of said shares against long term capital gains arising on sale of shares of unlisted group companies declared at Rs.4,53,98,376/-. The loss arising on sale of shares of GGDL which was a listed ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd company was to the extent of Rs.8,39,57,040/- and the balance long term capital loss of (-) Rs.3,85,58,664/- has been carried forward. There is no dispute to the fact that the gain arising on sale of shares of unlisted group companies do not attract STT and the said gain can be adjusted against the loss arising on sale of such shares on which no STT is paid.
- Even the website of NSDL recognizes the market trades and off market trades and it is observed as under:-
“12.2 Market Trades
12.2.1 The participant shall effect a debit or credit to the accounts of its
Clients only on receipt of proper authorization from the Clients in the forms laid out in Annexures L and M. Alternatively, a Client may give standing instructions to its Participant to credit its account. 12.2.2 The aforementioned forms submitted by the Clients and Clearing Members shall be checked by the Participant to ensure the completeness of the form and validity of the signature of the Client and the Clearing Member before the requests on these forms are executed.
12.3 Off – Market Trades
12.3.1 Transfer of securities in respect of off market trades shall be effected
on receipt of a duly filled in securities transfer instruction form from the Clients for delivery as well as a securities transfer instruction form from the Clients for receipt. The specimen of these forms have been laid out in Annexure L and M respectively as specified in Rule 12.2.1 above. Alternatively, a Client may give standing instructions to its Participant to credit its account.
12.3.2 The Participant should check for the completeness of the form and validity of the signature of the Client before effecting such transfers.”
- So, the module is provided on the NSDL platform under which any person while disposing of its security is given the option of trading the same in on market transaction and off market transaction. So the existence and acceptance of off market trades cannot be doubted. The assessee while selling the shares of listed company GGDL opted to transact on off market trade, since the said shares were of Kirloskar group concern and the group did not want the shares to be picked up by any stranger, if traded on the Stock Exchange. Such business decision taken by ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd the assessee cannot be doubted and called as colourable device to set off profits arising on sale of unquoted shares.
- Hence, the exercise undertaken by the assessee in selling the listed shares of its group concern GGDL in off market transaction is acceptable mode of selling the shares. Once the transaction has been undertaken by the assessee as business decision, then simply because the said transaction could be routed through Stock Exchange does not justify the stand of authorities below in not allowing the set off of loss arising from off market transaction on which no STT was paid against the gain arising on sale of unlisted group companies, on which also no STT is to be paid. Applying the rule of literal interpretation to the provisions of the Act i.e. section 10(38)of the Act and section 88of the Finance (No.2) Act, 2004, it is clear that STT is to be paid on such transaction which are entered into through recognized Stock Exchange. The Section does not provide that each transaction of sale of listed transaction is to be routed through Stock Exchange. Applying the said principle to the facts of the case, where the shares of group entity which was a listed company i.e. GGDL were sold in off market transaction, then no STT is to be paid and the provisions of section 10(38) of the Act are not to be applied and consequently, set off of loss arising on sale of GGDL against the income from long term capital gains arising on sale of unquoted shares cannot be denied. Accordingly, we hold so.
- Now, coming to the second aspect of the issue wherein the Assessing Officer has held the transaction to be a colourable device adopted by the assessee in order to adjust the loss against the gain arising in its hands during the year, wherein the shares were sold to sister concern. We have already referred to the factual aspects of the issue where the shares of GGDL were sold to sister concern BVHPL in order to settle the loan raised from the said concern, the said concern was not 100% ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd subsidiary of the assessee but the assessee had only 24% shareholding in the said group company. In order to maintain the shares of listed group concern GGDL within group, the decision taken by the assessee to arrest the loss arising on account of liability to pay interest on the loan raised from BVHPL cannot be doubted. It is a business decision taken by the assessee to arrest the losses and the same cannot be called as colourable devise. Accordingly, we reverse the findings of Assessing Officer and CIT(A) in this regard.
- Another aspect of the issue is the allegation of Assessing Officer that as against book value of share as on 31.03.2008 at Rs.59.61 per share, the shares of GGDL were sold at Rs.48/- per share to another group concern BVHPL. These shares were acquired by the assessee @ Rs.74.25 in December, 2006. The said transaction as per the Assessing Officer suggested colourable device so that by selling the shares to its own subsidiary, at prices above or below the book value, the assessee was manipulating the income to reduce its tax liability. First of all, as decided in the paras hereinabove, the shares have not been sold to subsidiary of the assessee but to a concern from whom the assessee has raised loan to the extent of Rs.18 crores and the decision was taken to repay the loan and arrest the payment of interest on such loans, the shares of the group concern were sold in off market transaction to BVHPL. The said transaction is not a colourable device. Further, the assessee has sold the shares on the market price prevailing on the date of sale and no fault can be found with such transactions undertaken by the assessee. In case as against the market value, the other concern had purchased the shares at a higher value, then it would be questionable, but it is not so, in the present case and hence, we find no merit in the orders of authorities below in holding that the loss claimed by selling the shares of GGDL to its 100% subsidiary below the book value should be ignored while setting it off against the other income, if any, in current year or for carry forward and set off in subsequent years. The loss ITA No. 1345/PUN/2014 M/s.Asara Sales & Investment P.Ltd was worked out at (-) Rs.2,75,83,524/-. We reverse the orders of Assessing Officer and CIT(A) in this regard and hold that the total loss arising on the said transaction can be adjusted against the gain arising on sale of unquoted shares during the year and balance loss can be carried forward and set off against any other gain arising in the subsequent years. Accordingly, ground of appeal No.1 raised by the assessee is thus, allowed.
- In the result, the appeal of assessee is allowed.
Order pronounced on this 8th day of March, 2017.