K.T.A & G.R.S EDUCATIONAL TRUST, VELLORE v. ITO (EXEMPTIONS) WARD 1, CHENNAI

capital loss at ` 1,04,45,051/- instead of ` 23,45,051/- allowed by the Assessing Officer in the case of each assessee.

2. The brief facts of the case are that the respondents Shri Aditya Gupta and Shri Ashish Gupta are sons of Shri J.K. Gupta. They have filed their return of income on 31.10.2002. Their return was processed u/s 143 (1) of the Act. Both the assessees have purchased 15000 shares each of Mankind Pharma (P) Ltd. on 31^stMarch, 2000 @ ` 750 per share. Thus, the cost of acquisition to each assessee was ` 1,12,50,000/-. On the date of purchase of these shares the book value of the share was ` 533/- per share. However, the assessees have purchased the shares @ ` 750/- per share. The have paid a premium of ` 650/- per share. On 15<sup>th</sup>March, 2001 the shares were sold to the Managing Director of the Mankind Pharma (P) Ltd. itself @ ` 125/- per share. In this way, each assessee had disclosed a capital loss of ` 1,04,45,051/-. The Assessing Officer asked the assessees to disclose the basis for suffering such losses. They explained that since they could not receive the dividend, they sold the shares. The Assessing Officer has expressed his doubt about the transaction itself, but he allowed the loss after taking into consideration the sale price of the shares at the book value. The book value on the day of sale was ` 665/- per share. The Assessing Officer was of the opinion that Mankind Pharma (P) Ltd. was showing profit and its profit has shown an increasing trend, therefore, the sale price of its shares cannot be less than the book value. He allowed long-term capital loss at ` 23,45,051/- in the case of each assessee.

3. Dissatisfied with the action of the Assessing Officer, both the assessees went in appeal before the CIT (A). Though Ld. CIT (A) has passed separate orders, on all vital points the orders are verbatim same. The assessees have submitted written submissions before the

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learned first appellate authority. They apprised Ld. CIT (A) about the restrictions put under the Companies Act, 1956 for transfer of shares in respect of a private limited company. According to the assessees, it is in the discretion of the managing directors to decline any transfer for the registration of shares if the transfer involves a contravention of Clause (iii) of sub-section (1) of Section 3 of the Companies Act, 1956. The assessees on the strength of Section 48 have further apprised Ld. CIT (A) as to how long-term capital gain/loss is to be computed. They have explained the expression 'full value of the consideration' provided in Section 48 and how this expression has been construed or interpreted in various authoritative pronouncements by the Hon'ble Supreme Court as well as by the Hon'ble High Court. The assessees have mainly relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. George Henderson & Co. Ltd. 66 ITR 622. The assessees have also explained that there cannot be any notional capital gain considered in the hands of any assessee. With regard to the bona fide of their investment vis-a-vis sale of shares, they have contended that investment was made in order to have control over the developing company, but that was not materialized, therefore, they have sold the shares. The submissions made in paragraph (ix) of the written submissions read as under:-

(ix) That at the time of making investment in the shares of Mankind Pharma Pvt. Ltd. the intention of the appellant was to acquire the majority of shares; in time to come; and to control the affairs of a developing company. The appellant, however, failed to acquire the majority shares; in spite of all his efforts made by him; so the appellant sold the shares to any of the willing purchasers at that time. The shares in question were not sold to the Managing Director of Mankind Pharma Pvt. Ltd. alone. The appellant wants to add that a Private Ltd. Company; the seller of the shares can sell his shares only to an existing shareholder and/or to the person approved by the Board of Directors of the said Company."

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4. Learned First Appellate Authority has reproduced the written submissions filed by the assessee in abbreviated form at pages 2 to 4. In para 4.4, Ld. CIT (A) has adjudicated the issue. This paragraph is similarly worded in both the orders. For the facility of reference, we are reproducing the finding of Ld. CIT (A) from the order passed in the case of Shri Aditya Gupta which reads as under:-

"4.4 I have gone through the facts of the case and submissions of the appellant. The A.O. though has made a note that the transfer was incurred through collusive transaction, nothing has been brought on record at all to substantiate the same. It is an admitted fact that the appellant is no way related to the company M/s Mankind Pharma Pvt. Ltd and its directors. Considering the material on record and its legal aspect, I allow the benefit of Long-Term Capital Loss of Rs.10,445,051/- to the appellant disallowed instead of Rs.2,345,051 allowed by the A.O."

5. The Ld. DR relied upon the order of Assessing Officer. She contended that there cannot be any justification to purchase the shares at the end of the accounting year and then sell them within five months at a huge loss. The Assessing Officer has inquired from the assessee the basis of investment, but the explanation made by the assessee before the Assessing Officer was that they have not received the dividend, therefore, they sold the investment. It was not their case that investment was made for having control over the affairs of the company.

6. Ld. Counsel for the assessee, on the other hand, relied upon the orders of the CIT (A). He contended that the Assessing Officer himself not disputed the purchase of shares. He has allowed the short-term capital loss to the extent of ` 23,45,051/- meaning thereby the transaction of sale and purchase has not been belied or doubted by him. The respondents have demonstrated the purchase and sale of shares. The only dispute remained for adjudication is whether shares

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were sold at the price claimed by the assessee or not. Section 48 of the Income-tax Act provide mode of computation of the capital gain/loss. The expression 'full value of the consideration' received by an assessee employed in Section 48 has been explained by the Hon'ble Supreme Court as well as by various other High Courts. He made a reference to the decision of Hon'ble Supreme Court in the case of George Henderson & Co. Ltd. (supra) and submitted that the Assessing Officer has no jurisdiction to replace the full value of the consideration disclosed by an assessee with the fair value of the capital asset transferred. The Assessing Officer has adopted the fair value of the shares which is equivalent to the book value in the books of the Mankind Pharma (P) Ltd. The Assessing Officer has not referred any material exhibiting the fact that assessees have received something more than that disclosed by them. He also relied upon the decision of ITAT in the case of Reliance Communications Infrastructure Ltd. vs. CIT reported in 34 SOT 241 (Mum). He pointed out that in this case also the Tribunal has explained the concept of 'full value of consideration' employed in Section 48 of the Income-tax Act.

7. We have duly considered the rival contentions and gone through the record carefully. We do not find any dispute with regard to the propositions laid by the Tribunal in the case of Reliance Communications Infrastructure Ltd. (supra) as well as the authoritative proposition laid down by the Hon'ble Supreme Court in the case of George Henderson & Co. Ltd. (supra). The dispute basically does not relate to the replacement of full value of consideration with the fair value of the capital asset transferred by computing long-term capital gain/loss u/s 48 of the Income-tax Act. The Assessing Officer in the assessment proceedings had asked the assessee to disclose the very basis for making investment and disposing of these investment within a very short period. It was a very relevant query at the end of the

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Assessing Officer. Shri Aditya Gupta in his computation of income has shown share of profit from M/s Sarda Exports at ` 6,07,07,306/-. He has interest income of ` 22,50,000/- which has been earned on RBI Tax Free Bonds. He has a dividend income of ` 11,47,117/- which has been claimed exempted. Thus, in a way, the assessee has income of more than ` 6,30,00,000/- which is exempt from tax. It indicate that Shri Aditya Gupta is well versed with the investments and the business activities. He would not venture in a transaction for booking a loss of this magnitude. There must be something underlying. In response to the query of the Assessing Officer, they have not disclosed that something. However, when the Assessing Officer made a reference about the non-establishment of the reason for making such investment, then, they have disclosed their motive for making the investment. This disclosure was in the submissions filed before the CIT

(A) (extracted supra). The learned First Appellate Authority failed to take cognizance of this explanation or any other explanation in the impugned orders. The Ld. First Appellate Authority has reproduced the submissions made by the respondents and, thereafter, recorded his conclusion in five lines without assigning any reason. The order of Ld. CIT (A) is based on surmises and is a non-speaking one. The assessees have not disclosed their bona fide for making such investment. If it is a simple business transaction, then, there should not be any reason for the A.O to disallow the capital loss suffered by them, but the facts apparently do not exhibit the transaction as a simple business transaction keeping in view the background of both the assessees. The Ld. First Appellate Authority ought to have looked into the controversy from all possible angles instead of simply reproducing the written submissions and then accepting them. The explanation of the assessee extracted supra has not been considered. In our opinion, the issue require a re-look at the end of Ld. CIT (A). Therefore, we set aside both the orders and restore the issue in both the appeals to the

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file of Ld. CIT (A) for re-adjudication. It is needless to say that the observations made by us would not impair or injure the case of the Assessing Officer or would not cause any prejudice to the defence/explanation of the assessee.

8. In the result, both the appeals are allowed for statistical purposes only.

The order pronounced in the open court on 16.12.2010. Sd/- Sd/-

[G.E. VEERABHADRAPPA] [RAJPAL YADAV]

VICE PRESIDENT JUDICIAL MEMBER

Dated, 16.12.2010.

dk

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT

By Order, Deputy Registrar, ITAT, Delhi Benches

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