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Judgment
PER ANUBHAV SHARMA, JM:
These appeals preferred by the Revenue against the order of the Ld. NFAC, Delhi, (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) arising out of the assessment orders u/s 143(3) r.w.s 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Further details of the appeal is as under:
| ITA No. & AY | Ld. FAA who passed the appellate order | Appeal No. & Date of order of the Ld. FAA | AO who passed the assessment order & Date of order |
| 4604/D/25 2020-21 | NFAC, Delhi | DIN & Order No. ITBA/NFAC/S/250/2025-26/1076310851(1) Dated 20.05.2025 | Assessment Unit, Income Tax Department Dated 30.09.2022 |
| 182/D/25 2020-21 | NFAC, Delhi | DIN & Order No. ITBN/NFAC/S/250/2024-25/1069962367(1) Dated 25.10.2024 | Assessment Unit, Income Tax Department Dated 27.09.2022 |
These are the two appeals filed by the Revenue for AY. 2020-21 against the respective orders passed by the Ld. CIT(A) in the case of Shri Subhash Chander Aggarwal (ITA No. 4604/Del/2025) and Smt. Shanti Devi (ITA No. 182/Del/2025).
The appeals were heard together and are being disposed of together as they arise out of common set of facts and involve common issues. In both cases, the Ld. CIT(A) has deleted the disallowance of Short-term Capital Loss arising on sale of 1,25,000 Compulsory Convertible Debentures (CCDs) of M/s MKY Constructions Pvt. Ltd. (formerly known as M/s Action Bridgegap Constructions Pvt. Ltd.), which loss had been set off against Long-Term Capital Gain arising from sale of residential property bearing no. 48/78, West Punjabi Bagh, New Delhi. Since the facts, transactions and issues involved in both appeals are identical and interconnected, taking the case of Shri Subhash Chander Aggarwal as the lead case the issues shall be discussed.
On hearing both the sides we find that the whole case of department tis that the subscription to Convertible Debenture and generating loss was a colourble arrangement to reduce the tax liability arising out of capital gains earned on sell of property held jointly by the two assesse.
It is countered by assessee by asserting certain facts giving rise to investment in CD and sale of same leading to loss and subsequent sale of the house generating capital gains but which was adjusted against the loss suffered in CD transaction. As per ld. Counsel, the assessee Subahsh Chand Aggarwal, and his son Tarun Agarwal were promoters and directors of M/s Action Bridgegap Constructions Pvt. Ltd., presently known as M/s MKY Constructions Pvt. Ltd.The said company was engaged in the business of road construction as contractor/sub-contractor. That the company has undertaken a road contract of Haryana State Roads and Bridges Development Corporation Ltd. at Hodel district for four kilo meters stretch at a total value of Rs. 135.20 crores. In order to execute this project, the said company had availed credit facilities from Axis Bank Ltd. and State Bank of India. The company executed the said project and its turnover in that respect is duly recorded in its financials for the year ended 31.03.2015, where Revenue operation was Rs. 96.72 crores. However, the payment against the work executed ran into litigation as Haryana State Roads and Bridges Development Corporation Ltd. did not release the payment.Consequent to the dispute, the liability of interest went on, with the result that the company was unable to serve the interest on the loan raised from Axis Bank and State Bank of India. Consequently, Axis Bank and State Bank of India recalled their credit facilities. The bank also issued notices under Securities and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI). The assessee, being a guarantor and its liability to pay the whole liability towards the bank borrowings in order to protect himself and his family from coercive recovery proceedings and to enable the company to settle bank dues, the assessee and his wife decided to infuse funds in the company. As for this purpose, they raised loan from Indiabulls Commercial Credit Ltd. by mortgaging their jointly owned residential property bearing No. 48/78, West Punjabi Bagh, New Delhi. Thereafter, the assessee subscribed to 2,50,000 Compulsorily Convertible Debentures (CCDs) of face value Rs. 1,000/- each aggregating to Rs. 25 crores vide the debenture subscription agreement dated 06.09.2018.The funds infused through CDs were utilized by the company towards repayment of loans of Axis Bank and State Bank of India. However, despite infusion of funds, the financial position of the company did not improve due to continued adverse circumstances.Accordingly in order to reduce the further stress, the assessee along with his wife sold their jointly owned residential property at 48/78, West Punjabi Bagh, New Delhi. The assessee and her wife paid the loan from Indiabulls out of the proceeds from sale of residential property. The assessee's 50% share in sale consideration was Rs. 17 crores. After reducing indexed cost of acquisition, the assessee declared Long Term Capital Gain of Rs. 10,38,72,609/-.That the assessee sold CCDs on 21.03.2020 for Rs. 1,25,000/-, resulting in Short Term Capital Loss of Rs. 12,48,75,000/-. As per valuation report, the fair market value of CCD was negative. The CCDs were sold above the fair market value determined by the valuer. Against the Long-Term Capital Gain of Rs. 10,38,72,609/-, the assessee set-off the genuine Short-Term Capital Loss of Rs. 12,48,75,000/- and carried forward the balance loss of Rs. 2,10,02, 391/-in accordance with law.
It appears these fact did not impress the ld. AO and during the course of scrutiny assessment proceedings, the Ld. AO issued mandatory notice calling necessary information and document and the assessee filed replies dated 25.08.2022 (copy shared in PB Pages 59-70) along with all supporting documents including audited financials, loan sanction letter, bank statements, subscription agreement, valuation report and utilization details. However, the Ld. AO, without disputing the genuineness of subscription, sale transaction, banking channels, loan documents or valuation report, concluded that the transaction lacked commercial substance and treated the Short-term Capital Loss of Rs. 12,48,75,000/- as a colourable device adopted to avoid tax on Long Term Capital Gain. Accordingly, the set-off of Rs. 10,38,72,609/- was disallowed and carry forward of balance loss was denied.
Aggrieved by the assessment order, the assessee filed an appeal before CIT(A) where the contentions of assesse were accepted. 11. After considering the entire factual matrix and submissions, the Ld. CIT(A) examined the issue in detail. The Ld. CIT(A) recorded that the genuineness of subscription and sale of CDs is not doubted.The transactions are supported by documentary evidence and banking channels.The valuation was carried out by independent SEBI registered Merchant Banker.The AO has not brought any adverse material to prove collusion or sham.Commercial prudence of an assessee cannot be questioned by AO.Loss arising from genuine transfer of capital asset cannot be disallowed merely on suspicion.The Ld. CIT(A) held that the AO's conclusion that the transaction is a colourable device is based on assumptions and conjectures and not supported by evidence. Accordingly, the Ld. CIT(A) deleted the disallowance of Short-Term Capital Loss of Rs. 12,48,75,000/- and allowed the set-off and carry forward as claimed. The department is in appeal and raised following grounds;
“1.Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 12,48,75,000/- claimed as Short-Term Capital Loss (STCL) on sale of Compulsorily Convertible Debentures (CCDs), which were used to set off Long-Term Capital Gains (LTCG) on sale of residential property?
2.Whether on the facts and circumstances of the case and in law, the Ld. C(A) has failed to appreciate that the entire transaction of investment in CCDs, their transfer, and sale lacked commercial substance and was orchestrated solely to evade tax by creating artificial capital losses.?
3.Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in accepting the genuineness of the CCD investment and sale transaction without verifying OR requiring the assessee to produce a valuation report prepared at the time of subscription, justifying the subscription at Rs.1,000 per CCD, despite the company's negative net worth and acknowledged financial distress.?
4.Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in relying merely on the assessee's narrative and principle of preponderance of human probability while ignoring glaring circumstantial evidence indicating that the transaction was a pre-planned colorable device designed for tax avoidance.?
5.Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has failed to consider that the assessee, a seasoned businessman associated with over 65 companies and 15 firms, would not have made a Rs.25 crore investment in a financially distressed family concern without any return OR business rationale, thus defying the test of commercial prudence?
6.Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in overlooking the fact that the assessee resigned as Managing Director shortly before the CCD allotment, and later transferred 50% of the CCDs to his wife, followed by a joint sale to a common buyer at Rs.1 per CCD, which clearly indicates a structured arrangement to generate matching capital losses.
7.Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in placing reliance on judicial decisions that are factually distinguishable and has failed to apply binding decisions of the Hon'ble Supreme Court in McDowell & Co. Ltd. and Sumati Dayal, which require substance-over-form analysis and rejection of sham arrangements.
8.That the order passed by the Ld. CIT(A) is contrary to the facts of the case, evidence on record, and settled judicial precedents, and therefore deserves to be set aside.
9.That the appellant craves leave to add, alter, amend OR withdraw any ground of appeal at the time of hearing.”
Ld. DR has filed written submissions and for completeness same are reproduced here below;
“14.At the outset, it is respectfully submitted that the present submissions are "being made in respect of both connected appeals, namely ITA No. 4604/Del/2025 in the case of Shri Subhash Chander Aggarwal and ITA No. 182/Del/2025 in the case of Smt. Shanti Devi. Submission in the present matter is primarily being made in the case of Shri Subhash Chander Aggarwal (ITA No. 4604/Del/2025).
•It is respectfully submitted that the Ld. CIT(A) has erred in deleting the disallowance of Short-Term Capital Loss of Rs. 12,48,75,000/- claimed on transfer of 1,25,000 CDs of M/s MKY Constructions Pvt. Ltd., which was set off against Long Term Capital Gain of Rs. 10,38,72,609l-arising from sale of immovable property.
•The Ld. AO, after detailed inquiry under limited scrutiny on the issue of capital. gain/loss, had categorically brought on record that the entire arrangement lacked commercial substance and was a pre-ordained colourable device for tax avoidance
•The facts, as noted in the assessment order, clearly highlight that the assessee made investment on 06.09.2018 in CCDs at a face value of Rs. 1,000/ each and within a short span transferred the same on 21.03.2020 for a meagre consideration, thereby claiming a Short-Term Capital Loss of Rs. 12,48,75,000/-.
•This loss was immediately utilized to wipe off the Long-Term Capital Gain arising on 08.05.2019 from sale of residential property at West Punjabi Bagh, Delhi.
•The Ld. AO, after issuing notices under sections 142(1) and after examining all the documents on record recorded a categorical finding that at the time of investment the company had already lost its status as a 'going concern as per the Auditor's Report for F.Y. 2018-19 and the same adverse remarks continued in F.Y. 2019-20. No prudent investor would invest Rs. 25 crores in unsecured CDs of a company whose net worth stood eroded and which was facing severe financial distress, unless the investment was backed by collateral benefit or ulterior objective.
•The Ld. CIT(A) was further not justified in accepting the genuineness of the investment in CDs and the subsequent sale thereof without calling for and examining the valuation report prepared at the time of subscription, justifying subscription at Rs. 1,000/- per CCD, particularly when the company had negative net worth and acknowledged financial distress. Acceptance of such explanation without independent verification vitiates the finding of genuineness.
•The valuation report relied upon by the assessee does not validate the commerciality of the transaction. The Merchant Banker merely applied NAV method as per Rule 11UA; valuation at negative value does not justify original subscription at Rs. 1,000/- per CCD.
•The Ld. CIT(A) has erred in relying solely upon the explanation furnished by the assessee while ignoring the principle of preponderance of human probabilities and surrounding circumstances, which clearly indicate that the transaction was a pre-planned colourable device designed for tax avoidance.
•It was further brought on record that the assessee was associated with multiple companies and firms (over 65 companies and 15 firms), and yet chose to invest a huge sum of Rs. 25 crores in a financially distressed family concern without any reasonable expectation of return and without any demonstrable business rationale. Such conduct defies the test of commercial prudence, particularly for a seasoned businessman.
•The Ld. CIT(A) has also overlooked the material fact that the assessee resigned as Managing Director shortly before the allotment of CCDs and thereafter transferred 50% of the CCDs to his wife, and subsequently both jointly transferred the CDs, resulting in generation of matching capital loss in both hands. This sequence of events clearly suggests a structured and pre-designed arrangement to engineer capital loss.
•The source of investment was stated to be loan from an NBFC, thereby implying high interest burden, whereas no interest income was received on the CDs due to losses of the company. Such conduct is inherently contrary to commercial prudence.
•The transaction resulted in complete neutralization of taxable LTCG of Rs. 10.38 crores and further carry forward of loss of Rs. 2.10 crores. The Ld. AO specifically recorded that the transaction was devoid of commercial substance and constituted a colourable device adopted to avoid tax on LTCG.
•The Ld. CIT(A) has ignored the binding principles laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. and Sumati Dayal, wherein it has been held that the authorities are entitled to look at the substance of the transaction and apply the test of human probabilities to determine the real nature of the arrangement. The Ld. CIT(A), however, wrongly relied upon judgments cited by the assessee without appreciating the applicability of the above Supreme Court decisions to the present facts.
•The assessee has contended that at the time of investment in 2018 there was no occasion to foresee capital gain in 2020 and therefore no motive of tax avoidance can be attributed. This argument overlooks the fact that the relevant assessment is for A.Y. 2020-21 when both LTCG and STCL were claimed and the tax effect crystallized in the same year.
•In view of the above factual matrix and the categorical findings recorded in the assessment order that the arrangement lacked commercial substance and was a preordained device for tax avoidance, it is respectfully submitted that the Ld. CIT(A) erred in deleting the disallowance. The order of the Ld. AO disallowing the set off of STCL of Rs. 10,38,72,609/- against LTCG and denying carry forward of balance loss deserves to be restored.
15.It is, therefore, humbly prayed that the order of the Ld. CIT(A) be set aside and the assessment order passed under section 143(3) be upheld in toto.”
Ld. Counsel for assesse has reasserted the facts and pleaded that there was genuine hardship in the family business and in order come out of same desperate measures were taken but same did not work out. The allegation of colourable arrangement is thus not befitting the facts. He relied the findings of ld. CIT(A).
We have considered the rival submission and gone through the material on record. The department has not doubted the fact that the company had executed the road project awarded by Haryana State Roads and Bridges Development Corporation Ltd. The company had availed loans from Axis Bank and State Bank of India for execution of this project. The said loans were utilized for execution of the project and subsequently became irregular due to litigation and mounting interest burden. That the funds for subscribing CDs were raised by mortgaging the jointly owned residential property with Indiabulls Commercial Credit Ltd. The loan sanction letter, loan schedule and bank statements showing disbursal of loan and subsequent investment in CCDs were placed on record. That the CCDs were sold on 21.03.2020 based on independent valuation by SEBI registered Category-l Merchant Banker. The valuation report dated 15.03.2020 was placed on PB pg. 234-246. As per valuation, the fair market value was negative. The CCDs were sold at Re. 1 per CD, which was above the fair market value.
There was no case of any of these transaction being manipulated or not occurring in ordinary course of business expediency. It is further important to note that the CDs were subscribed at PAR without any premium. The ld. AO is merely questioning the wisdom of subscribing CCDs at PAR, when the company was red flagged by auditors. It is quite appreciable that in order to avoid coercive action by the banks and possible declaration as wilful defaulter, the assessee mortgaged his personal residential property with Indiabulls and raised loan. The loan so raised was utilized towards repayment of Axis Bank and State Bank of India dues. The observation of the Id. AO that no action was taken by the banks to declare the assessee as wilful defaulter is too short sight as being declared defaulter assesse would only have lost credibility and future prospects even so this assertion is misconceived, as such action was avoided precisely because the assessee mortgaged his property and settled the dues.
Thus it needs to be appreciate that the investment in CCDs was not a case of parking surplus funds for earning return but was a case of financial compulsion arising out of guarantee obligations as the family enterprise M/s Action Bridgegap Constructions Pvt. Ltd. had availed credit facilities from Axis Bank and SBI and due to heavy losses the banks had recalled the loans and initiated coercive proceedings. The assessee Subhash Chandra was a guarantor of such loans and his liability was co-extensive. Therefore, in order to protect himself and his family from recovery proceedings and to settle the bank liabilities, if funds vide CD, were infused in the company it cannot be compared with a situation where an individual having surplus fund makes investments for making an earning on the surplus funds. The Id. AO has observed has gone on the basis that the percentage shareholding of the assessee was low but ignored the fact that the assessee and his family were promoters of the company and that the assessee was guarantor of the bank loan. So here was personal interest and not just financial stake.
Then we need to appreciate that CCDs were subscribed in September 2018, the residential property was sold in May 2019 giving rise to LTCG, and the CDs were sold in March 2020 resulting in STCL.The whole period was distress period for the family business. The desperation to sustain the business or respectable exit, is quite natural instinct for a business man and certainly in quick succession of event such desperate attempts would have happened, in ether way succeeding or failing. Thus in the given facts and circumstances the allegation that the transaction was orchestrated for tax avoidance is thus unjustified. Lack of commercial prudence, in such like transaction cannot be made basis to allege a malice. Every pursuit of business decision making must be examined objectively from perspective of business man not only if it way always a profitable. The exit from the situation by selling family dwelling jointly held by couple only adds credence to the claim that it is a case of financial distress arising from litigation faced by the company with Haryana State Roads and Bridges DevelopmentCorporation Ltd. leading to raising of loans. Merely because LTCG and STCL occurred in the same year, the transaction cannot be termed as colourable device when the law allows such set-off of capital loss against capital gain then to allege that there is some colourable device to claim same should be on basis of set of evidences not just gross apprehension of ld. Tax authorities. The relianceby ld. DR on principles laid down in McDowell & Co. Ltd. (1986 AIR 649) and Sumati Dayal (1995) 214 ITR 801 is misplaced. If the issue was of human probability in contrast to concrete evidence then the explanation given by appellants seems more probable on the scales of preponderance.This does not appear to be a case of make-believe transaction. All transactions arise out a sequence of event with one arising from other and duly documented and supported by evidence. There is no allegation that the company artificially created loss or that money flowed back to the assessee. We find substance in the contention of ld. Counsel that the doctrine of human probabilities has little application to genuine commercial distress transactions.
In view of the detailed findings recorded by the Ld. CIT(A), which are based on proper appreciation of facts and circumstance, the grounds raised to challenge the impugned order deserve to be rejected. The appeals filed by the Revenue are thus, dismissed.