Zambad Infrastructure Limited v. ACIT (HQ) Admn. Aurangabad
[Citation -2016-LL-0928-133]

Citation 2016-LL-0928-133
Appellant Name Zambad Infrastructure Limited
Respondent Name ACIT (HQ) Admn. Aurangabad
Court ITAT-Pune
Relevant Act Income-tax
Date of Order 28/09/2016
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags transaction of purchase and sale • adventure in nature of trade • cancellation of registration • securities transaction tax • memorandum of association • share application money • long term capital loss • commercial expediency • computation of income • business transaction • revenue authorities • additional evidence • business connection • sale consideration • single transaction • assessment record • colourable device • preference shares • prospective buyer • purchase of share • share transaction • avoidance of tax • work-in-progress
Bot Summary: Referring to pages 43 and 44 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the copies of the memorandum of association of the assessee company and submitted that the same clearly mentions the main objectives of the assessee company as development and construction of land. 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 primary evidence relating to sale of shares, loss suffered by assessee in such transaction has to be allowed. As regards the argument of the AO without prejudice that even if loss of Rs.3,28,00,000/- is to be allowed to the assessee it should be treated as long term capital loss since buying and selling of shares is not the business of 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 the contention of the AO on this issue is wrong. 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 association of the assessee company 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. Accordingly, the assessee holds lands at various places which were purchased from time to time for the purpose of development, the assessee had purchased plots of land from 8 parties in total. 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 assessee company by contending that the tiles for land produced by 27 ITA No.2031/PN/2014 the sellers were defective and there were problems with the ownership of land. 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 by the AO in the assessment order.


IN INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM ITA No.2031/PN/2014 Assessment Year : 2010-11 Zambad Infrastructure Appellant Limited, MZSK & Associates, Level 3, Business Bay, Plot No.84, Wellesley Road, Pune 411001 PAN : AAACZ0651M v/s ACIT (HQ) Admn. Aurangabad Respondent Assessee by : Shri J.P. Bairagra Respondent by : Shri P.L. Kureel Date of Hearing :29.08.2016 Date of Pronouncement:28.09.2016 ORDER PER R.K.PANDA, AM : This appeal filed by Assessee is directed against order dated 31-10-2014 of CIT(A), Aurangabad relating to Assessment Year 2010-11. 2. Ground of appeal No.1 by assessee reads as under : 1. Learned taxing authorities below had erred in disallowing loss on share transaction of Rs.3,28,00,000/-. Just and proper relief may be granted to appellant. 2 ITA No.2031/PN/2014 3. Facts of case, in brief, are that assessee is company engaged in business of Civil Construction. It filed its return of income on 15-10-2010 declaring income of Rs.7,19,07,807/-. said return was revised on 25-04-2011 declaring income of Rs.7,19,49,505/- due to change in claim of depreciation. During course of assessment proceedings AO noted that sales of Rs.16,11,75,432/- has been credited to profit and loss account. From details furnished by assessee AO noted that same includes sum of Rs.82,00,000/- received on sale of shares of Western Medical Solutions Pvt. Ltd. Further, AO noted that sum of Rs.4,10,00,000/- has been debited to profit and loss account with narration purchase of shares . He, therefore, asked assessee to furnish details of said purchase and sale of shares during year relevant to assessment year 2010-11. In response to said query it was replied by assessee as under which has been reproduced by AO in body of assessment order : 6.1 During F.Y. 2008-09 relevant to A.Y. 2009-10 assessee company had invested Rs.4.10 crores in equity shares of Western Medical Solutions Pvt. Ltd., Mumbai with objective to realize better price in due course and gain reasonable amount as profit on funds invested. 6.2 After making investment, assessee company found that company where money was invested, i.e. Western Medical Solutions Pvt. Ltd., Mumbai is not performing well and projections and proposal given in 2007 could not be achieved to large extent. assessee company found that investment has become dead. Considering these negative developments Board of Directors of assessee company has decided to sale these shares and accordingly passed resolution on 05-01-2010. Copy enclosed. 6.3 During F.Y.2009-10 relevant to A.Y. 2010-11, assessee company had sold these shared to Dev Construction Pvt. Ltd. at negotiated price of Rs.82,00,000/-, i.e. Rs.2/- per share. amount credited to Sale of Shares A/c. 3 ITA No.2031/PN/2014 4. assessee also enclosed copy of resolution passed by Board of Directors of assessee company for buyback of shares allotted to company. 5. However, AO was not satisfied with above explanation given by assessee. In order to verify genuineness of loss claimed by assessee at Rs.3,28,00,000/- on account of sale of shares AO obtained search report from Ministry of Corporate Affairs in respect of Western Medical Solutions Pvt. Ltd. From said search report he noted that assessee had purchased 41,00,000 equity shares of Rs.10/- each of Western Medical Solutions Pvt. Ltd. on 20-11-2008 for consideration of Rs.4,10,00,000/-. These shares have been sold by assessee to M/s. Dev Construction Pvt. Ltd. on 06-01-2010 during previous year relevant to assessment year 2010-2011 for consideration of Rs.82,00,000/-, thereby, incurring loss of Rs.3,28,00,000/-. assessee is in business of buying and selling of Land & development of land and purchase of shares of Western Medical Solutions Pvt. Ltd. is in no way connected with its business activities. 6. AO noted that assessee has not given any justification for investment of Rs.4,10,00,000/- made in unlisted company in F.Y. 2008-09 and has also not furnished any evidence to show how it expected to realize better price in due course of time and gain reasonable amounts of profit on funds invested in shares of unlisted company. From copy of balance sheet filed of Western Medical Solutions Pvt. Ltd. for A.Y. 2009-10 and 2010-11 he observed that company does not have any assets other than capital. Further, in short span of 14 months assessee has realized 4 ITA No.2031/PN/2014 that company it had invested was not performing well and therefore it decided to sell its shares at negotiated price of Rs.2/- per share as against its purchase price of Rs.10/- per share. He observed from records that purchase price of 41,00,000 share for Rs.4,10,00,000/- has been debited to profit and loss account of previous year 2009-10 whereas shares had been acquired on 20-11-2008 which falls in previous year 2008-09. According to AO purchase price of shares should have been debited to profit and loss account of earlier year whereas purchase price of Rs.4,10,00,000/- has been shown in balance sheet of earlier assessment year, i.e. 2009-10 as advance towards purchase of shares. 7. Referring to decision of Mumbai Bench of Tribunal in case of Bombay Oil Industries Ltd. Vs. DCIT reported in 82 ITD 626 where it has been held that tax planning can be tolerated, however, tax evasion by dubious modes cannot be countenanced, AO disallowed amount of Rs.3,28,00,000/- claimed by assessee on account of sale of shares of Western Medical Solutions Ltd. during year by holding that same is not genuine business loss. He held that both purchase and sale of transaction of shares of Western Medical Solutions Ltd. have been given in profit and loss account for A.Y. 2010-11 to reduce taxable income of assessee company and to evade payment of tax. Without prejudice to above, AO further noted that if loss of Rs.3,28,00,000/- on purchase and sale of shares of Western Medical Solutions Ltd. is to be allowed it will have to be treated as capital loss since buying and selling of shares is not business of assessee company. He noted that assessee has also stated that investment was made 5 ITA No.2031/PN/2014 with objective to realize better price in course of time and gain reasonable amount as profit on funds invested. He, therefore, held without prejudice that loss of Rs.3,28,00,000/- will have to be assessed as long term capital loss as shares of Western Medical Solutions Ltd. have been held for period of more than 12 months and long term capital loss can only be carried forward and set off against long term capital gains in following assessment years as per provisions of section 74 of I.T. Act. 8. Before CIT(A) assessee more or less reiterated same submissions. It was submitted that conclusion arrived at by AO is not correct. First of all, these shares were held as stock in trade and not as investment. Secondly, these shares were allotted by Western Medical Solutions Pvt, Ltd, Mumbai to assessee company on 20-11-2008. These shares were sold to M/s. Dev Construction Pvt. Ltd on 6-01-2010. Holding period is 412 days. To qualify to become long term asset as per definition u/s 2(42A) holding period should be more than 36 months. As stated by AO holding period of 12 months is applicable to listed shares dealt 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 sale of transaction of these shares. 9. It was submitted that during F.Y. 2009-10 relevant to A.Y. 2010-11, assessee company had sold land at Gut No. 78, Katvi and Land at Gut No. 138 Pisadevi and above referred equity 6 ITA No.2031/PN/2014 shares. All these assets were sold and accordingly these have been considered in Sales account. AO had given different treatment to these sales. Nature of both these assets is capital assets. assessee company has treated both shares and lands as stock in trade and profit/loss from sale has been treated as business income/loss. AO had applied different principles to two transactions having same nature. sale of shares of Western 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 treatment of stock in trade is not possible then same treatment be given to both assets. Considering facts of case and provisions of law, it was requested to allow business loss of Rs. 3,38,00,000/- on sale of shares. 10. However, CIT(A) was also not satisfied with arguments advanced by assessee and upheld action of AO by observing as under : 6.3 I have carefully considered facts of case and rival contentions. On perusal of same, it has been noticed that appellant company has purchased 41 Lakh shares of M/s. Western Medical Solutions Pvt. Ltd., on 20/11/2008 for consideration of Rs.4,10,00,000/- out of total shares issued and subscribed Rs.4,12,00,000/-. Therefore, about all shares i.e. 99.51% shares were held by appellant company. Therefore, appellant company has got full control over company M/s. Western Medical Solutions Pvt. Ltd. From audited balance sheet of company as at 31/03/2009, 31/03/2010 & 31/03/2011 available in assessment record, it has been noticed that amount of share capital of Rs.4,12,00,000/- and share application money of Rs.1,00,00,000/- totaling to Rs.5,12,00,000/- have been mainly invested in following assets 7 ITA No.2031/PN/2014 Particulars of main assets As on As on As on 31/03/2009 31/03/2010 31/03/2011 Investment in Jupiter Lifeline Hospitals 3,67,00,000 3,60,00,000 4,34,10,575 Loans and advances 1,42,42,840 1,42,00,000 60,00,000 Total 5,09,42.840 5,02,00,000 4,94,10,575 From audit reports and Director's reports, it has been noticed that Directors and Chartered Accountant of M/s. Western Medical Solutions Pvt. Ltd., have certified that loans and advances and current assets have realizable value as appearing in balance sheet. Auditors of company have also certified that balance sheet of company reflects true and fair view of its financial position. Auditors/Directors have not pointed out that either loans and advances or investment in jupiter Lifeline Hospitals have meager realizable value. Further, from balance sheet as at 31/03/2011 i.e. after sale of shares of above mentioned company by appellant, said company has recovered substantial loans and advances and has invested same in jupiter Lifeline Hospitals. Therefore, it is evident that said loans and advances and investment in jupiter Lifeline Hospitals has not become value less. As mentioned above, appellant company having share holding of 99.51% in M/s. Western Medical Solutions Pvt. Ltd. has full control over company including assets of company. Therefore, there is no justification for appellant company to sell 41 Lakh shares of M/s. Western Medical Solutions Pvt. Ltd. for Rs.82,00,000/- i.e. @Rs.2/- per share on 06/01/2010 to M/s Dev Construction Pvt. Ltd. In view of above facts and discussion, I am of considered view that loss of Rs.3,28,00,000/- claimed by appellant on sale of shares is non-genuine loss and transaction is sham transaction. A.O. is justified in disallowing said loss of Rs.3,28,00,000/- as business loss. addition of Rs.3,28,00,000/- made by AD. is confirmed. Ground No.2 is dismissed. 11. Aggrieved with such order of CIT(A) assessee is in appeal before us. 12. Ld. Counsel for assessee strongly opposed order of CIT(A). He submitted that whenever profit is shown on purchase and sale of shares department normally treats same as business income while assessees contend that it is capital gain. Referring to decision of Hon ble Bombay High Court in case of CIT Vs. Gopal Purohit reported in 336 ITR 287 he 8 ITA No.2031/PN/2014 submitted that Hon ble High Court in said decision has held that assessee can do both trading in shares as well as investment in shares. difference between both is depending on intention of assessee at time of purchase of shares and entries passed in books of account. He submitted that SLP filed by department has been rejected by Hon ble Supreme Court as reported in 333 ITR (statute) 308. Referring to Circular No.4/2007 dated 15-06-2007 issued by CBDT he submitted that CBDT in said circular has given or issued guidelines to Assessing Officers that there is distinction between shares held as investment and shares held as stock in trade. Whether particular holding of shares is by way of investment or forms part of stock in trade is matter which is within knowledge of assessee who holds shares and it should, in normal circumstances, be in position to produce evidence from 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 decision of Hon ble Supreme Court in case of CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. reported in 100 ITR 706 he submitted that Hon ble Supreme Court in said decision has held that single transaction can constitute adventure in nature of trade. Referring to decision of Hon ble Supreme Court in case of G. Venkataswami Naidu & Co. Vs. CIT reported in 35 ITR 594 he submitted that Hon ble Supreme Court in said decision has held that even isolated single transaction may be adventure in nature of trade if some of essential features of trade are present in such transaction. He submitted that in instant case assessee is engaged in business of infrastructure, i.e 9 ITA No.2031/PN/2014 construction of buildings etc. and decided to invest in business of hospital and hotel. Since for running of these businesses big chunk of funds are required, therefore, assessee decided to purchase shares of Western Medical Solutions Pvt. Ltd., who inturn holds shares of Jupiter Lifeline Hospital which is engaged in business of running of hospitals and hotels. 14. Referring to pages 45 to 50 of paper book he submitted that company had received proposal vide letter dated 10-07-2007 from Western Medical Solutions Pvt. Ltd for investment of funds. As per said proposal Western Medical Solutions Pvt. Ltd had identified Jupiter group as leading group in Healthcare and Hotel industry and which had proposal for constructing 200 bedded tertiary care hospital along with 55 studio apartment hotel at Thane. He submitted that as per said letter Jupiter Lifeline Hospital proposed to extend its activities by building more and more hospitals together with hotels and therefore assessee saw good opportunity of buying shares of Western Medical Solutions Pvt. Ltd which inturn was holding shares of Jupiter Lifeline Hospitals which could be disposed off in short span and earn profit. He submitted that assessee company found proposal to be worthwhile and therefore it passed resolution during board meeting held on 26-07-2007, copy of which is placed at page 51 of paper book. In said resolution it was resolved to invest in upcoming hospital project of Jupiter group through purchase of shares of Western Medical Solutions Pvt. Ltd. He submitted that proposal of assessee company was accepted and Western Medical Solutions Pvt. Ltd. passed resolution in board meeting held on 20-11-2008 for issue of 41,00,000 shares of Rs.10/- each at par to 10 ITA No.2031/PN/2014 assessee. He submitted that in impugned assessment year assessee was in need of funds for its own construction projects and also received information that Jupiter Hospital is not able to build more hospitals and hotels as planned due to non-availability of funds and hence assessee decided to dispose off these shares at loss. He submitted that shareholders and directors of assessee company are not relatives of either Western Medical Solutions Pvt. Ltd or Jupiter Lifeline Hospitals and therefore these 2 companies are not associate concerns of assessee. Referring to pages 342 to 344 of paper book he drew attention of Bench to details of shareholding and list of directors of 3 companies namely assessee, Western Medical Solutions Pvt. Ltd and Dev Constructions Pvt. Ltd. 15. Referring to pages 63, and 66 to 74 of paper book he submitted that when assessee purchased shares of Western Medical Solutions Pvt. Ltd same has been shown in books under head loans and advances which is clear from schedule No.7(e) of balance sheet for year ending 31-03-2009. He submitted that during impugned assessment year assessee has shown purchase of shares and sale of shares in its profit and loss account. purchase of shares were not shown under head Investment as it was intention of assessee to re-sell shares within short span of period. Further, no dividend or income was received by assessee from Western Medical Solutions Pvt. Ltd. In view of these facts AO as well as CIT(A) are wrong in not allowing business loss and in treating same as loss under head capital gain. 11 ITA No.2031/PN/2014 16. Referring to pages 43 and 44 of paper book Ld. Counsel for assessee drew attention of Bench to copies of memorandum of association of assessee company and submitted that same clearly mentions main objectives of assessee company as development and construction of land. As per clause 19 page 44 of paper book company is also authorized to acquire/take up and hold shares/debentures, stock bonds, securities etc. Therefore, it cannot be said that assessee was not in business of purchase and sale of shares. Moreover assessee had purchased and sold futures and options of shares in previous year and loss incurred of Rs.7,79,122/- in that year was disclosed as business loss which was accepted in order passed u/s.143(3) of I.T. Act. For above proposition he referred to profit and loss account enclosed as page 63, computation of income at pages 60 to 62 and assessment order for A.Y. 2009-10 at pages 77 and 78. He submitted that during A.Y. 2010-11 assessee was in need of funds for its own construction projects. Since Jupiter Lifeline Hospital was not able to build more hospitals and hotels as planned due to non-availability of funds assessee decided to dispose of shares. Therefore, company first requested Western Medical Solutions Pvt. Ltd. for buyback of shares allotted. Since Western Medical Solutions Pvt. Ltd. expressed its inability to buyback of shares assessee resolved to sell share capital of Western Medical Solutions Pvt. Ltd. to prospective buyer. In board meeting held on 05-01-2010 it was decided to sell shares at value of Rs.82,00,000/- to willing buyer being Dev Construction Pvt. Ltd. minutes of meeting is placed at page 53 of paper book. He submitted that projects proposed in 2007 by Western 12 ITA No.2031/PN/2014 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 profits. Only assets held by Western Medical Solutions Pvt. Ltd. were shares in Jupiter Lifeline Hospitals and advances given. Profits of company were negligible. Moreover hotel project of investee, i.e., Jupiter Lifeline Hospital did not take off. In such circumstances it was difficult for company to find suitable buyer as it was unknown whether company would make profits and duration of gestation period involved. 17. Referring to following decisions he submitted that AO cannot enter into shoes of assessee and it is businessman, who knows better about 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 AO in instant case has failed to appreciate real business facts that nobody can predict that every business decision will invariably result into profitable success. 18. So far as observation of AO and CIT(A) that loss incurred by assessee on sale of shares as non-genuine loss he submitted that assessee has fully submitted all details regarding purchase and sale of shares of Western Medical Solutions Pvt. Ltd, being copy of Board resolutions passed for purchase, allotment and for subsequent sale of shares. assessee has also submitted details of payments made for shares allotted by Western Medical Solutions Pvt. Ltd., accounting treatment in audited books and payments received from Dev Construction on sale of shares. Further, 13 ITA No.2031/PN/2014 assessee and party to whom shares were sold are unrelated parties. 19. Referring to decision of Hon ble Madras High Court in case of CIT Vs. Spencers and Co. Ltd. reported in 359 ITR 644 he submitted that Hon ble High Court in said decision has held where assessee has produced all required primary evidence relating to sale of shares, loss suffered by assessee in such transaction has to be allowed. He submitted that in that case AO had disallowed assessee s claim as capital loss on sale of shares of group companies treating it as manipulated or bogus loss. Tribunal found that assessee had produced all required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share particulars etc. appellate authority also found that AO did not prove these documents or evidences to be false or bogus. Accordingly, claim of loss made by assessee was allowed. He submitted that principles laid down in above decision are squarely applicable to facts of present case since in instant case also AO has not proved that details submitted by assessee are false or bogus. 20. So far as decision relied on by AO and CIT(A) in case of Bombay Oil Industries (Supra) is concerned he submitted that said decision is not applicable to facts of present case and is distinguishable. In that case assessee had resorted to device of manipulated transaction by preparing certain documents and agreement so that it can book substantial capital loss in order to set off capital gains that arose from liquidation of one of its fully owned subsidiary company. Further, sale was made to related party, 14 ITA No.2031/PN/2014 who was under control and influence of assessee company because of business connection and was main distributor of products of M company in which directors of assessee had majority stake. Further, AO had also pointed out irregularities in documentation and flow of funds between parties. However, in instant case, no such facts were noted. assessee, investee and purchase company are unrelated and hence, there was no motive behind transaction of sale of shares at lower price. 21. Even search report of Western Medical Solutions Pvt. Ltd. obtained by AO from Ministry of Corporate Affairs also confirmed that shareholders and directors of company are not related to shareholders and directors of M/s. Western Medical Solutions Pvt. Ltd. and Dev Construction. 22. As regards argument of AO without prejudice that even if loss of Rs.3,28,00,000/- is to be allowed to assessee it should be treated as long term capital loss since buying and selling of shares is not business of assessee company, Ld. Counsel for assessee referring to Clause No.19 at page 44 of paper book drew attention of Bench to memorandum of association of assessee company which authorises purchase, holding and sale of shares and securities, therefore, contention of AO on this issue is wrong. Further, whether loss is business loss or capital gain depends on intention of assessee when acquired and its treatment in books of account. He submitted that in instant case intention of assessee company was always to resell. For above proposition he relied on following decisions and 15 ITA No.2031/PN/2014 submitted that business loss of Rs.3,28,00,000/- arising on account of sale of shares should be allowed. 1. New Prahlad Mills Pvt. Ltd. Vs. CIT reported in 85 ITD 480 2. ITO Vs. Bunty Holdings Pvt. Ltd. reported in 60 SOT 70 23. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). He submitted that Ld.CIT(A) has given justifiable reasons for rejecting claim of business loss at Rs.3,28,00,000/- as non genuine loss and transaction as sham transaction. Therefore, order of CIT(A) on this issue be upheld and ground raised by assessee should be dismissed. 24. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find assessee in instant case has shown loss of Rs.3,28,00,000/- on account of sale of shares of Western Medical Solutions Pvt. Ltd. which were purchased for Rs.4,10,00,000/- on 20-11-2008 and sold on 06-01-2010 at Rs.82,00,000/-. AO disallowed claim of assessee on ground that same is not genuine business loss and both purchase and sale transactions of shares of Western Medical Solutions Pvt. Ltd. have been given in profit and loss account to reduce taxable income of assessee company and to evade payment of tax. For above proposition, AO relied on decision of Mumbai Bench of Tribunal in case of Bombay Oil Industries Ltd. (Supra). Further, without prejudice to above AO held that loss of Rs.3,28,00,000/- will have to be assessed as long term capital loss as shares of Western Medical Solutions 16 ITA No.2031/PN/2014 Pvt. Ltd. have been held for period of more than 12 months and long term capital loss can only be carried forward and set off against long term capital gain in subsequent assessment years as per provisions of section 74. We find Ld.CIT(A) upheld action of AO by holding that claim of loss of Rs.3,28,00,000/- made by assessee on sale of shares is non-genuine loss and transaction is sham transaction. relevant observation of CIT(A) has already been reproduced in preceding paragraphs. 25. It is submission of Ld. Counsel for assessee that share transaction effected by assessee is genuine transaction. According to him, assessee can hold shares either as investment or as stock in trade. Further, in view of decision of Hon ble Supreme Court in case of Sutlej Cotton Mills Supply Agency Ltd. (Supra) single transaction can constitute adventure in nature of trade. It is also contention of Ld. Counsel for assessee that full details were given before AO as well as CIT(A) substantiating purchase and sale of shares and justification for sale of shares at loss. It is also submission of Ld. Counsel for assessee that AO cannot enter into shoes of assessee and it is businessman who knows better how to conduct business. It is also submission of Ld. Counsel for assessee that every business decision may not invariably result into profit. 26. We find some force in above arguments of Ld. Counsel for assessee. We find assessee before AO had submitted that company had received proposal vide letter dated 10-07-2007 from Western Medical Solutions Pvt. Ltd. for investment 17 ITA No.2031/PN/2014 of funds. As per said proposal Western Medical Solutions Pvt. Ltd. had identified Jupiter group as leading group in healthcare and hotel industry which had proposal for constructing 200 bedded tertiary care hospital along with 55 studio apartment hotel at Thane. assessee saw good opportunity to buy shares of Western Medical Solutions Pvt. Ltd. which inturn was holding shares of Jupiter Lifeline Hospitals. Necessary resolution was passed by board meeting held on 26-07-2007, copy of which is placed at page 51 of paper book. Board of Directors of Western Medical Solutions Pvt. Ltd. had passed resolution in board meeting held on 20-11-2008 for issue of 41,00,000 shares of Rs.10/- each at par to assessee. Since subsequently assessee had information that Jupiter Lifeline Hospitals is not able to build more hospitals and hotels as planned and since assessee was in need of funds it decided to dispose of shares at loss. Since Western Medical Solutions Pvt. Ltd. expressed its inability to buyback shares assessee sold shares to prospective buyer M/s. Dev Constructions Pvt. Ltd. Under these circumstances, we have to see as to whether claim of loss by assessee has to be allowed as genuine business loss or loss to be disallowed as none-genuine and sham transaction. 27. From details furnished by assessee in paper book we find shares of Western Medical Solutions Pvt. Ltd. were shown in books under head loans and advances as on 31-03-2009 which is evident from pages 63 and 66 to 74 of paper book. On being questioned by Bench as to why shares are shown under head current assets loans and advances Ld. Counsel for assessee submitted that shares were allotted to assessee on 18 ITA No.2031/PN/2014 12-12-2009 with distinct numbers 2000 to 41,20,000 vide Registered Folio No.5 Certificate No.22. We find clause 19 of Memorandum of Association of company authorizes 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 impugned assessment year assessee has shown purchase of share and sale of shares in profit and loss account. As mentioned earlier, in preceding year shares were shown under head loans and advances and not under head investment . No dividend or other income was received by assessee from Western Medical Solutions Pvt. Ltd. It is also admitted fact that none of Directors of assessee company are in no way related to Directors of Western Medical Solutions Pvt. Ltd. or M/s. Dev Constructions Pvt. Ltd. It is also noticed from submissions made by assessee that during A.Y. 2009-10 assessee had claimed loss in futures and options share trading at Rs.7,79,122/- as per page 64 of paper book which is profit and loss account for year ended 31-03-2009. We find AO in 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 argument of Ld. Counsel for assessee that loss incurred by assessee on sale of shares cannot be treated as non-genuine loss. 28. It has been held in various decisions that AO cannot enter into shoes of assessee and it is businessman who knows better how to conduct its business. Hon ble Bombay High Court in case of CIT Vs. Salitho Ores Ltd. (Supra) has held that 19 ITA No.2031/PN/2014 expenditure incurred for purpose of business cannot be refused on ground that expenditure was imprudent. Hon ble High Court held that when it was not case of revenue that expenditure was not bonafide or that it was incurred by way of diversion of profits to related person or sister concern of assessee revenue could not have gone into question of expediency of expenditure incurred and/or expediency of hiring of 4 dozers that was matter of commercial expediency and assessee was best judge of it. It was accordingly held that expenditure was allowable expenditure. 29. We find in case of CIT Vs. Spencers and Co. Ltd. (No.3) (Supra) AO had disallowed assessee s claim as capital loss on sale of shares of group companies treating it as manipulated or bogus loss. Tribunal found that assessee had produced all required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share price etc. relating to sale of shares. appellate authorities also found that AO did not prove these documents or evidence to be false or bogus. Accordingly, claim of loss made by assessee was allowed. On further appeal by Revenue Hon ble High Court has held as under : 21. We have given our anxious consideration to reasons given and findings arrived at by appellate authority and Tribunal. We find from order of appellate authority that with material available on record he had proceeded to adjudicate claim of assessee. appellate authority on scrutiny of material available on record found that assessee had produced all required primary evidence such as copies of bills, contract notes, receipts for sale consideration, share particulars, etc., relating to sale of shares. appellate authority also found that assessing authority did not prove these documents or evidence to be false or bogus. On appreciation of factual aspects of matter, appellate authority held that assessing authority was not justified in holding sale of shares as bogus and claim was made with motive to avoid payment of tax. appellate authority was found to be satisfied with materials available on record that loss 20 ITA No.2031/PN/2014 suffered by assessee in sale of shares was genuine loss and, therefore, entitled to claim loss under "Capital gains". finding of appellate authority was based on materials available on record and, therefore, is finding of fact. Tribunal, concurring with said finding, held that there was no convincing material put forth by Revenue to establish that assessee was claiming loss on ostensible sale of shares belonging to group companies with motive of tax avoidance. Tribunal also confirmed finding of appellate authority that all required primary evidence relating to sale of shares were produced before assessing authority and that assessing authority did not point out any infirmity in those evidence. Tribunal also found that assessing authority could not accept transaction in part and reject or disbelieve rest only for purpose of assessment of loss. On careful analysis of orders of appellate authority and Tribunal in light of material available on record and arguments made, we see no reason to interfere with concurrent findings of fact recorded by authorities below. -There is no infirmity in order passed by Tribunal confirming order of appellate authority directing assessing authority to assess loss on sale of shares under head "Long-term capital gains". We are also not convinced that decision cited by Revenue in case of McDowell Co., cited supra, in any way support case of Revenue and claim of loss on account of sale of shares, in our view, does not appear to be any "colourable device" as instrument for avoidance of tax as wrongly argued on part of Revenue. On contrary, decision relied upon by assessee in Azadi Bachao Andolan s case, cited supra, would show that test to determine whether claim is colourable device or not is to determine whether transaction is device to avoid tax and whether transaction is such that judicial process may accord its approval to it. Tribunal has analysed materials on record to come to conclusion that loss on account of sale of shares was genuine and that said loss has occurred in course of business and cannot be added to income of assessee in any manner. Furthermore, Revenue has failed to demonstrate as to how loss on account of sale of shares is not genuine but colourable device. We, therefore, answer substantial question of law No.4 raised by Revenue against them and in favour of assessee. 30. Since in instant case assessee has submitted all details and revenue authorities have not proved these documents as false or untrue, therefore, we do not find any reason as to why loss of shares should not be allowed as business loss. 31. We find Hon ble Supreme Court in case of Sutlej Cotton Mills Supply Agency Ltd. (Supra) has held that single transaction of purchase and sale outside assessee s line of business may constitute adventure in nature of trade. It is not necessary to 21 ITA No.2031/PN/2014 constitute trade that there should be series of transactions of purchase and sale. Similar view has been taken by Hon ble Supreme Court in case of G. Venkataswami Naidu and Company (Supra). It has further been held that question as to whether transaction is adventure in nature of trade is question of mixed law and fact. Even isolated single transaction may be adventure in nature of trade if some of essential future or trade are present in such transaction. It has been held that decision about character of transaction as to whether it is in nature of trade cannot be based solely on application of any abstract rule, principle or test and must in every case depend upon all relevant facts and circumstances. 32. We find Hon ble Bombay High Court in case of New Prahlad Mills Pvt. Ltd. Vs. CIT reported in 85 ITR 480 has held as under (short notes) : Held, that loss of Rs.5,44,580/- suffered by assessee on sale of shares was trading or revenue loss which was allowable in computing its business income. three relevant annual general meetings of Jupiter were on July 17, 1947, June 7, 1948, and September 15, 1949. On none of those dates did assessee have control over more than 50 per cent of voting rights in Jupiter, even if holding of East and west in Jupiter was taken into account, Tribunal having found that assessee had complete control over East and West. What was even more significant was that though assessee, through its own holding and holding of East and West in Jupiter, had to control more than 50 per cent voting rights 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 theory that assessee had purchased shares for acquiring control over affairs of Jupiter purchased shares with view to boosting up their prices and selling them at inflated price. assessee succeeded in selling shares at inflated price but it had made its own purchases at such high price that adventure landed it in loss of Rs.5,44,580/-. Whether assessee s transaction amount to dealing in shares or to investment is mixed question of fact and law and legal effect of facts found by Tribunal, on which assessee could be treated as dealer or investor, is question of law.. 22 ITA No.2031/PN/2014 It was accordingly held that loss of Rs.5,44,580/- suffered by assessee on sale of Jupiter shares and East and West shares is 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 assessee may not result into profit. Sometimes assessee may have to incur loss also. Therefore, merely because assessee has incurred loss on account of purchase and sale of shares same cannot be treated as non-genuine and sham especially when various other documents furnished by assessee have not been proved to be false of bogus. 34. So far as decision of Mumbai Bench of Tribunal in case of Bombay Oil Industries Ltd. (Supra) which has been relied on by AO and CIT(A) is concerned we find said decision is not applicable to facts of present case and is distinguishable. Tribunal has given finding that in that case assessee had resorted to device of manipulated transaction by preparing certain documents and agreement so that it can book substantial capital loss in order to set off capital gain that arose from liquidation of one of its own company. Further, sale was made to related party who was under control and influence of assessee company because of business connection and was main distributor of products of company in which Directors of assessee had majority stake. irregularities in documentation and flow of funds between parties was also pointed out by AO. However, in instant case neither transactions are between related parties nor revenue has pointed out that assessee has 23 ITA No.2031/PN/2014 resorted to device of manipulated transaction by preparing manipulated documents. As mentioned earlier, neither assessee nor investee nor purchaser company are related to each other. Therefore, decision relied on by AO and CIT(A) in our opinion are not applicable to facts of present case. 35. So far as argument of AO without prejudice that loss can be allowed as long term capital loss since buying and selling of shares is not business of assessee company is concerned, we have already noted from clause 19 of memorandum of association of assessee company (copy of which is placed at page 44 of paper book) that 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 shares are of unlisted company and have been held for less than 36 months, therefore, it is not capital asset. In view of above discussion, we are of considered opinion that CIT(A) was not justified in disallowing claim of business loss of Rs.3,28,00,000/-. We, therefore, set aside order of CIT(A) and direct AO to allow claim of business loss. ground raised by assessee is accordingly allowed. 36. Ground of appeal No.2 by assessee reads as under : 1. Learned taxing authorities below had erred in rejecting revaluation of stock of land at Hyderabad at net realizable value and making addition of Rs.90,62,325/-. Just and proper relief may be granted to appellant. 24 ITA No.2031/PN/2014 37. Facts of case, in brief, are that during course of assessment proceedings, AO noticed that assessee has claimed opening stock of land at Hyderabad as on 01-04-2009 at Rs.90,63,325/- whereas closing stock of said land as on 31-03-2010 has been shown at Rs.1,000/- only. AO, therefore, asked assessee to justify above claim which has resulted into claim of business loss of Rs.90,62,325/-. assessee contended that it has purchased land from various agriculturists at Hyderabad after obtaining opinion from retired High Court Judge with object to develop said lands by way of future projects. However, on later date it was found that title of said land is not clear and various litigations were pending in respect of said lands. Considering these facts, land has been valued at token amount of Rs.1,000/-. 38. However, AO was not satisfied with explanation given by assessee and disallowed claim of loss of Rs.90,62,325/- by observing as under : "I am unable to accept fact that assessee who has been in Reality business would have made investment of Rs. 90,63,325/- in land at Hyderabad without ascertaining whether it was getting clear title. No documentary evidence has been filed by assessee to establish that it does not have clear title to land purchased in Hyderabad and recourse it had taken to recover its money or obtain clear title to land. As in case of purchase and sale of share of Western Medical Solutions Pvt. Ltd, downward revision of value of land at Hyderabad to token value of Rs. 1,000/- appears to have been done primarily to reduce taxable income of assessee and evade payment of tax." In support of above decision, of holding claim of loss of Rs.90,62,325/- as non-genuine, A.O. has relied on ratio laid down in case of Hela Holdings Pvt. Ltd, Vs. CIT [2003] 263 ITR 129 (Calcutta) and also on ratio laid down by Hon'ble Supreme Court in case of UOI Vs. Azadi Bachav Andolan [2003] 263 ITR 706 (SC). 25 ITA No.2031/PN/2014 39. Before CIT(A) it was submitted that assessee company had valued stock-in-trade i.e. work-in-progress on account of Hyderabad land project shown in statement of WIP as per consistent method of stock valuation i.e. at cost or market price whichever is lower, as stated in Form No. 3CD Sr. No. 12(a). Before purchase of these lands assessee company had obtained opinion from Retired High Court Justice. As per this opinion assessee company had invested funds in these lands with objective to develop these lands for future projects. After purchase of these lands and filing of application for mutation entry in land records with local land revenue authorities, it has been revealed that titles for land produced by sellers were defective and there were problems of ownership. assessee company had filed petition with High Court, Aurangabad. 40. After going through back history of land it has been revealed that there is no possibility of getting titles rectified and there is remote possibility of getting lands registered in name of assessee company in records of land revenue authorities. Considering legal and factual position assessee company had taken decision to value land as stock in trade at nominal value of Rs. 1000/-. Accordingly value has been reflected in Work-in- Progress. It was accordingly requested to allow reduced value of stock of Hyderabad land project at Rs. 1000/- and delete addition of Rs. 90,62,325/- made by AO. 41. However, CIT(A) also was not satisfied with arguments advanced by assessee and upheld order of AO by observing as under : 26 ITA No.2031/PN/2014 7.3 I have carefully considered facts of case and rival contentions. On perusal of same, it has been noticed that appellant has claimed to have purchased land at Hyderabad for consideration of Rs.90,63,325/-. appellant has claimed that said land which is under litigation and title of which is not clear has been purchased on basis of opinion of retired High Court Judge. appellant has further claimed that in year under appeal, it has been noticed that said land is not having clear title and is under litigation and hence value of said land has been claimed by appellant as closing stock at Rs.1,000/- as token amount. above contentions of appellant are not supported by any evidence as no evidence in support of above claims has been filed either before A.O. or before undersigned. It is settled position of law that claims of expenditure, business loss, deductions are to be supported by evidence and assessee is duty bound to prove said claims with evidence. Therefore, in absence of any evidence in support of above mentioned revaluation of closing stock of land which has resulted into business loss of Rs.90,62,325/-, claim of appellant is rejected. addition of Rs.90,62,325/- is accordingly confirmed. Ground No.3 is dismissed. 42. Ld. Counsel for assessee submitted that assessee is in business of construction and development of lands. Accordingly, assessee holds lands at various places which were purchased from time to time for purpose of development, assessee had purchased plots of land from 8 parties in total. details of which are enclosed at pages 80 to 233 of paper book. He submitted that these lands were purchased on various dates in year 2007 and were held as stock in trade in books of assessee which is clear from Schedule 10 and 11, copy of which is placed at page 21 of paper book and details of closing stock are as per page 34 of paper book. He submitted that after purchase of lands these lands were registered in land records in name of assessee. Thereafter assessee received notices of caveat application filed by Smt. K. Rajitha, wife of K. Ventaiah Reddy and others against assessee and various other persons for cancellation of sale deeds under which land was purchased by assessee company by contending that tiles for land produced by 27 ITA No.2031/PN/2014 sellers were defective and there were problems with ownership of land. 43. Referring to pages 321 to 341 of paper book, Ld. Counsel for assessee submitted that Govt. of Andhra Pradesh, Registration and Stamp Department passed its order dated 12-08-2008 wherein registration of land in name of assessee and various other persons were cancelled. He submitted that cancellation of land in name of assessee company are mentioned on page no 329 and 330 of paper book. In said order Ld Authority has observed on page 2 (Page 322 of paper book) that alleged land grabbers (being parties who have sold plots of land to assessee) without any interest, right, title and in collusion with concerned registration authority and in conspiracy for extraneous consideration to grab properties have brought into existence registered sale deeds in respect of properties mentioned in Annexure II (which is inclusive of assessee's property) and that concerned registering authority without strictly following mandatory provisions of Registration Act 1908 and instruction of governments from time to time to be followed for registration of documents and much less without following mandatory provisions under section 6D of A.P. Rights in Pattedari Pass Books Act 1971 proceeded with registration of such documents even without verifying title documents and link documents of executants in document in Annexure II in question. 28 ITA No.2031/PN/2014 44. Authority further observed in page 7 of order (Page 327 of paper book) that it is alleged in all 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. parties therefore requested authorities to cancel all documents registered without titles illegally. Thereafter Authority has examined case in detail including documents obtained from Sub registrar. 45. From records it was noticed that 38E certificate holder ownership has not been updated in Revenue Records in MRO Shamirpet (Page 334 of Paper book). Further Authority has also observed that certain parties were misled by Broker Guru Swami who took them to registration office and obtained their signatures and told them that they have title and that they have received consideration. (Page 336 of 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 strength and reputation of individual. (Page 337 of Paper book). Authority has concluded that above parties have cashed on lacunas in pahani updating and lack of proper scrutiny before registration by Sub- Registrar and registering authority which precipitated issue.(page 338 of Paper book). Thus from above order it is evident that assessee and many other purchasers were fooled into purchasing land from certain imposters who had claimed to have complete ownership/ title to property. Further since there was lack of updating of records of registration by Sub-Registrar, assessee, 29 ITA No.2031/PN/2014 even though tried his best, could not have foreseen level of scheming involved. 47. On receipt of above order, assessee realised that there was no possibility of getting titles rectified and there was remote possibility of getting land registered in its name. Hence assessee decided to revalue land at token value of Rs 1000/- after taking facts and legal issues into consideration. 48. Ld. Counsel for assessee submitted that assessee is developer cum builder and plots of land are stock-in-trade for assessee which has also been noted by AO in assessment order. Thus loss incurred on account of defect in title of ownership of land and subsequent cancellation of ownership of land in assessee s name by registering authority is clearly business loss which is correctly reflected in opening and closing stock of land. decision relied by AO has no applicability to facts in assessee's case. To substantiate his case Ld. Counsel for assessee filed certain additional evidences and requested Bench to admit same as they go to root of matter and clarify all doubts raised by AO and CIT(A). 49. Aggrieved with such order of CIT(A) assessee is in appeal before us. 50. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find assessee in instant case has shown opening stock of land at Hyderabad as on 01-04-2009 30 ITA No.2031/PN/2014 at Rs.90,63,325/- whereas closing stock of said land as on 31-03-2010 was shown at Rs.1000/-thereby claiming business loss of Rs.90,63,325/-. We find AO disallowed claim of assessee treating loss as non-genuine on ground that assessee could not produce any documentary evidence to establish that it does not have clear title of land purchased in Hyderabad and recourse which it had taken to recover its money or obtain clear title of land. We find Ld.CIT(A) upheld action of AO on ground that assessee could not substantiate with any documentary evidence to support its claim that said land is not having clear title and is in litigation for which value of said land was shown at Rs.1000/- as against Rs.90,63,325/- shown as opening value. It is submission of Ld. Counsel for assessee that Government of Andhra Pradesh, Registration and Stamp department has passed order dated 12-08-2008 wherein registration of land in name of assessee and various other persons were cancelled. We find assessee during course of hearing before Tribunal has also filed following documents as additional evidence : 1. Copy of caveat filed by Smt. K. Rajitha & Others for cancellation of sale deeds under which land was purchased by assessee company (Page 234 to 313 of paper book). 2. Copy of notices and order passed by Commissioner and Inspector General of Registration and Stamps Department, Hyderabad for cancellation of registration of land in favour of assessee company as vendor had no title for land sole to assessee company (Page 314 to 341 of paper book). 51. Since these additional documents were not produced before AO and CIT(A) and since these documents go to root of matter, we admit same. Considering totality of facts of 31 ITA No.2031/PN/2014 case, we are of considered opinion that matter requires re- visit to file of AO in view of above additional evidences. AO shall decide issue afresh and in accordance with law after giving due opportunity of bearing heard to assessee. We hold and direct accordingly. Ground of appeal No.2 by assessee is accordingly allowed for statistical purposes. 52. In result, appeal filed by assessee is partly allowed for statistical purposes. Order pronounced in open court on 28-09-2016. Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Pune; " Dated : 28th September, 2016. Copy of Order forwarded to : 1. Appellant 2. Respondent 3. CIT(A), Aurangabad 4. CIT, Aurangabad 5. DR, ITAT, B Pune; 5. Guard file. BY ORDER, // True Copy // //True ( Sr. Private Secretary ( ITAT, Pune Zambad Infrastructure Limited v. ACIT (HQ) Admn. Aurangabad
Report Error