ASSISTANT COMMISSIONER OF INCOME TAX Vs. NIRMALABEN CHUNILAL
INCOME TAX APPELLATE TRIBUNAL
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B.L. Chhibber, Accountant Member -
(1.) THE following two common grounds have been raised by the Revenue in these appeals :
1. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in holding that the claim of short-term capital loss was not based on sham transactions.
(2.) On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in holding that the claim of short-term capital loss should have been allowed in the hands of the assessee.
2. The facts of these cases are somewhat extraordinary. All seven assessees are partners of either of the two firms, viz., Meghna Enterprise and Amrut Trading Co. On 23-6-1985, the assessees purchased shares of Meghdeep Chemicals Pvt Ltd. at the rate of Rs. 100 per share and after a short lapse of time on 1-8-1985 sold the same at the rate of Re. 1 per share to :-
(1) Smt. Ranidevi Gautamchand Chowdhary
(2) Shri Gautamchand Sohanlal Chowdhary
(3) Shri Mahavirchand Sohanlal Chowdhary
(4) Shri Gautamchand Sohanlal Chowdhary
(5) Smt. Manjudevi Mahavirchand Chowdhary
In the process, the assessees suffered huge losses.
The assessees claimed the losses as short-term capital losses. It was submitted before the Assessing Officer that the assessees were partners of the two firms referred to supra which firms had deposits with the company, i.e., Meghdeep Chemicals Pvt. Ltd. The company was not doing very well and was accumulating huge losses. The company's Chartered Accountants, who were negotiating with the Bankers for further credit facilities, informed the company that the Bank could consider the matter if the company took steps, to broadbase its capital structure and reduced its interest burden. The bankers suggested that the depositors may be persuaded to transfer the deposits to capital account so as to improve the debt-equity ratio. It was further submitted before the Assessing Officer that the company accordingly negotiated with the partners of the depositor firms who, otherwise having no hopes of return of the deposits, agreed to subscribe for shares to be issued by the company. The company thereupon passed a resolution raising its paid-up capital from Rs. 15 lakhs to Rs. 1 crore and allotted new shares to the concerned partners at par at the rate of Rs. 100 per share. Subsequently, the assessees realised that the company was unlikely to get revived and accordingly they sold the shares at the rate of Re. 1 per share to the five persons referred to supra. The learned Assessing Officer was not satisfied with the arguments of the assessees and disallowed the losses as "dead" or "sham" losses on the following grounds : -
(a) That there was no commercial expediency to buy shares in exchange of deposit.
(b) No prudent businessman would buy shares for full consideration.
(c) That the decision in the case of South Asia Industries (P.) Ltd. v. CIT  155 ITR 392 (Delhi) was applicable.
(3.) THE assessees challenged the action of the Assessing Officer before the CIT (Appeals) and filed a "voluminous paper book" running into 107 pages. THE CIT (Appeals) forwarded this paper book to the learned Assessing Officer for remand report. THE Asstt. CIT submitted his remand report on 9-4-1990. THE learned CIT (Appeals) after reproducing the remand report in para 3 of his order held as under :
In view of all these and the assessments of the company, viz., Santosh Industrial Fate of the (P.) Ltd., Ahmedabad, the main purchaser of the shares for the asst. year 1986-87, I am of the opinion that there is no sham transaction involved in the sale of shares under consideration and so the claim should have been allowed as a short-term capital loss in the hands of the assessees.;
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