Short-Term Capital Loss Disallowance Upheld; Sham Transaction for Tax Avoidance

Issue: Whether a short-term capital loss claimed by the assessee on the sale of shares can be disallowed when the Assessing Officer (AO) concludes that the purchase and sale of shares was a sham transaction designed for tax avoidance.

Facts:

The assessee made a short-term capital gain on the sale of shares of one company and claimed a short-term capital loss on the sale of shares of another company.
The AO noted that the shares of both companies were purchased at Rs. 100 per share and sold at Rs. 12.20 per share.
The AO held that the transaction of purchase and sale of shares was a tax avoidance measure and disallowed the short-term capital loss claimed by the assessee.
The Commissioner (Appeals) and the Tribunal confirmed the order of the AO.

Decision:

The court held that since the AO had concluded that the transaction of purchase and sale of shares was a sham transaction, the impugned order did not raise any substantial question of law.

Key Takeaways:

Sham Transactions: Transactions that are designed solely for tax avoidance purposes and lack genuine commercial substance can be treated as sham transactions.
Disallowance of Loss: Losses arising from sham transactions can be disallowed.
Evidence of Tax Avoidance: The AO can consider factors such as the purchase and sale price of shares to determine whether a transaction is a sham designed for tax avoidance.
Confirmation by Higher Authorities: If the Commissioner (Appeals) and the Tribunal confirm the AO’s order, it strengthens the case against the assessee.
Substantial Question of Law: The court will not interfere with the decisions of lower authorities unless there is a substantial question of law involved.

In essence:

This case highlights the scrutiny that tax authorities apply to share transactions, especially when there are indications of tax avoidance. The court upheld the disallowance of the loss, confirming the principle that sham transactions designed to manipulate capital gains or losses will not be recognized for tax purposes.

HIGH COURT OF BOMBAY
Trends Pharma
v.
Income-tax Officer-24(3)(4)C-11
M.S. Sonak and Jitendra Jain, JJ.
INCOME TAX APPEAL NO.1621 OF 2018
FEBRUARY 6, 2025

Nishant Thakkar and Bhavesh Bhatia for the Appellant. Ms. Sushma Nagaraj, Sr. Standing Counsel and Ms. Vibhuti Keny for the Respondent.
ORDER

1. This appeal is filed under Section 260-A of the Income-tax Act (hereinafter referred to as ‘the Act’) for the assessment year 2010-11, challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 10 August 2017.
2. The appeal proposes the following substantial questions of law:-
SUBSTANTIAL QUESTIONS OF LAW
(a)

Whether the Tribunal was right in passing an order after more than 10 months of concluding the hearing?
(b)

Whether the Tribunal was right in law in dismissing the appeal without considering /dealing with any of arguments urged by the Appellant?
(c)

Whether the Tribunal was right in law in holding that the purchase as well as the sale of shares of Trends Pharma Pvt. Ltd., was a colourable device adopted by the Assessee in order to avoid tax?
3. However, the learned counsel for the appellant did not advance arguments on question (a) at the time of the hearing; therefore, it is presumed that he is not pressing for the same. We now propose to deal with questions (b) and (c).
4. The appellant for AY 2010-11 during the assessment year 201011 made a short-term capital gain of Rs.69,59,165/- and adjusted short term capital loss of Rs.70,24,000/- on sale of the shares of Trends Pharma Pvt. Ltd. The assessing officer in the assessment order observed that the shares of Trends Pharma Pvt. Ltd. were purchased in February 2010 at Rs.100/- per share and sold in March 2010 for Rs.12.20/- per share. The assessing officer in the assessment order has concluded that the transaction of purchase and sale of the shares is a tax avoidance measure and, after giving detailed reasons, held the transaction to be a sham transaction. The assessing officer disallowed the short-term capital loss of Rs.70,24,000/-.
5. The first appellate authority, Commissioner (Appeals) examined the issue in-depth and after considering the submissions made by the appellant assessee and the reasoning given by the assessing officer in the assessment order, in paragraph 3.3 of his order confirmed the finding of the assessing officer that, the transaction of buying and selling of shares was a sham transaction to generate short term capital loss by using colourable device to evade payment of taxes. The Commissioner (Appeals) gave detailed reasoning for coming to the conclusion in paragraph 3.3.
6. The appellant-assessee carried the matter to the Tribunal who vide order dated 10 August 2017 after hearing and considering the submissions of the appellant-assessee and the revenue confirmed the findings of both the authorities i.e. the assessing officer and Commissioner (Appeals) and agreed with the findings of both the authorities that the transaction of sale and purchase of shares was a colourable device adopted by appellant-assessee to generate loss and to avoid tax. The Tribunal refused to interfere after giving the findings on the transaction being a sham transaction.
7. Mr. Thakkar, learned counsel for the appellant, vehemently objected to the findings of the three authorities and submitted that even if this transaction would not have been entered into but loan would have been given, still he would have been entitled to claim the deduction since in pricing same would have been factored. He submitted that the three authorities’ findings are perverse and prayed for admission of the present appeal. He also produced a compilation of documents during the hearing before us and brought to our attention page 75 of the said compilation which gives the details of the date of transfer and name of transferor and transferee of shares of Trends Pharma Pvt. Ltd.
8. Ms. Sushma, learned counsel for the respondent, submitted that the questions raised in the present appeal do not raise any substantial questions of law. She further submitted that all three authorities have examined the facts and, after considering the material on record, gave a factual finding that the transaction is bogus. She further submitted that the question of perversity is not raised but only argued in the oral arguments before this Court, and in any case, even that is not correct since all three authorities have considered the submissions made by the appellant assessee. Learned counsel opposed the admission of the appeal.
9. We have heard learned counsel for the appellant and the respondent.
10. Insofar as question (b) is concerned, we do not agree that both the appellant authorities have not considered the argument of the appellant-assessee. The assessing officer in the assessment order has reproduced the submissions in the assessment order and, after considering and evaluating the same and examining the transaction, has concluded that the transaction of purchase and sale of shares is a sham transaction. Furthermore, the Commissioner (Appeals) also has reproduced the submissions of the appellant assessee in paragraph 3.2 of his order and, after evaluating the same, has given a detailed reasoning in paragraph 3.3 for confirming the findings of the assessing officer that the transaction is a sham transaction. The Tribunal, in its order after hearing the parties, has confirmed the said findings of the Commissioner (Appeals) and by relying not only on the findings of the Commissioner (Appeals) but also by giving independent findings in paragraphs 8, 9 and 10 and has confirmed the transaction as sham transaction.
11. In light of the above, we do not agree that all three authorities have not considered the submissions made by the appellant assessee. In any case, question (b) deals with the non-consideration of the Tribunal of arguments urged by the appellant assessee. As to what has been urged and what is not urged before the Tribunal, this Court cannot comment on the same. It was for the appellant assessee to have moved the application under Section 254(2) of the Act if the appellant assessee had any grievance in this regard. From the record, we find that all aspects were considered by the three authorities and no case for interference is made out on the ground alleged. Therefore, in our view, no substantial question of law arises from question (b) raised in the appeal memo.
12. Insofar as question (c) is concerned, all three authorities and more particularly the Tribunal, being a final fact-finding authority, have given a finding that the transaction of buying and selling of shares is a colourable device adopted by the appellant assessee to avoid tax. There is no question raised that this finding is perverse. In any case, the three authorities have considered the submissions and have arrived at the conclusion of the transfer being colourable device to avoid tax. This Court cannot reconsider the said findings of facts, which are based upon the records filed before the authorities. In light of the concurrent findings of fact by all the three authorities, in our view, whether the transaction is a colourable device to avoid tax does not raise any substantial question of law but is purely a finding of fact which has been arrived at concurrently by the three authorities. The evidence on record backs this crucial finding. Adequacy of evidence is usually not examined in such appeals dealing with substantial questions of law. In any case, this is also not a matter where the evidence could be said to be inadequate.
13. The belated contention that even without the colourable device the assessee could have advanced a loan and claimed deductions is purely hypothetical. The effect of such a course cannot be envisioned. Such an issue does not arise. In any case, findings of fact that are backed by the material on record cannot be interfered based on such a contention.
14. In view of above, this appeal is dismissed since it does not raise any substantial question of law.