Sale of Shares in a Pvt Company by Assessee to Son in order to Book Losses so as to set-off Capital Gain from Sale of Property can’t be treated as Sham Transaction: ITAT [Read Order]

Recently, a two-member bench of Income Tax Appellate Tribunal ( ITAT ) at Mumbai in Madhu Sarda vs. Income Tax Officer held that merely because the assessee has claimed set off of loss on account of long-term capital loss suffered on sale of shares to his/her son, against the capital gain earned on sale of immovable asset cannot be treated as a sham transaction.

The Assesse sold 900 of his shares to his son at fair market value. On such sale, the assessee suffered considerable long-term capital loss. In the same year, he sold his property and earned a capital gain. The assessee filed the return of his income and claimed set off of the loss on account of long-term capital loss suffered by the assessee on sale of shares against the profit of long-term capital gain earned on the sale of the immovable asset. The Assessing Officer and on appeal the CIT (A) both disallowed such set-off and treated the sale of shares by the assessee to his son as a ‘sham transaction’.

Aggrieved by the order of CIT (A) the assessee filed an appeal before the Income Tax Appellate Tribunal. The Counsel for the assessee argued that merely because the assessee has claimed setoff of capital loss against the capital gain earned during the same period, could not be said to be a colourable device or method adopted by the assessee to avoid the tax. He further contended that transactions of sale of share were genuine and were transacted at a proper valuation. He pointed out that the transaction cannot be treated as non-est merely on the basis of some economic detriment.

The Counsel for the Revenue argued that the assessee developed a colourable device under the guise of share transaction to avoid the tax. He pointed out that the shares were sold to the son of the assessee and he alleged that the company which issued the shares to the assessee was owned and managed by his family members.

The bench comprising of Judicial Member Pawan Singh & Accountant Member B. R. Bhaskaran relied on the case of Union of India vs. Azadi Bachao Andolan in which the Supreme Court had held that an act which is otherwise valid in law cannot be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the notional interest as perceived by the revenue.

“In our view, the transactions being genuine, merely because the assessee has claimed set-off of capital loss against the capital gain earned during the same period, cannot be said to be a colourable device or method adopted by the assessee to avoid the tax…The transactions carried by the assessee are valid in law, cannot be treated as non-est merely on the basis of some economic detriment or it may be prejudicial to the interest of revenue. Further, if the period co-existed or permitted the assessee to set off her capital loss against the capital gain earned, would itself not give rise to the presumption that the transaction was in the nature of the colourable device.”  Said the Bench.