Renu Gupta vs DCIT

Per Kavitha Rajagopal, J M:

This appeal is filed by the assessee challenging the order passed by the Ld. Commissioner of Income Tax (Appeals) [‘the Ld. CIT(A)’, for short] passed under Section 250 of the Income Tax Act, 1961 ('the Act' for short) for Assessment Year (‘AY’, for short) 2022-23.

The assessee has raised the following grounds of appeal:-

Brief Facts of the Case are that the assessee, an individual and resident, filed her return of income for Assessment Year 2022-23 dated 29.07.2022 declaring total income of ₹84,96,597. The return was selected for scrutiny under CASS, inter alia, on account of the substantial difference noticed between the sale consideration of securities/mutual funds as reflected in the departmental database and the amount appearing in the return of income, as well as the claim of substantial capital loss against capital gains.

During the course of assessment proceedings, the Ld. AO noticed from the departmental database that the assessee had received sale consideration of ₹38.82 crore, whereas the mutual fund transactions initially examined by the Ld. AO reflected a lower figure. The assessee explained that the alleged difference of ₹10.57 crore represented the sale consideration of units of Edelweiss Arbitrage Fund and had already been duly disclosed in the return of income, including in Schedule 112A. The aggregate sale consideration disclosed in the return amounted to ₹38,82,20,822, which was found to be identical to the figure appearing in the departmental database. Accordingly, no adverse inference was drawn on this issue.

The principal issue in assessment was related to the short-term capital loss claimed by the assessee on the sale of shares of Cafenoir Estates Private Limited, which was an unlisted company. The assessee had purchased the shares on 05.03.2022 and subsequently sold them to her husband at ₹6,505 per share, resulting in a short-term capital loss of ₹1,57,82,685/-. The Ld. AO considered the transaction unusual, particularly in view of the short interval of approximately 17 days between the purchase and sale and the alleged substantial decline in the value of the shares during this period.

The Ld. AO also observed that Cafenoir Estates Private Limited had advanced a sum of ₹1.20 crore to the assessee which according to the Ld. AO implied that the assessee did not possess sufficient funds for acquiring the shares and the funds advanced by the company had facilitated the purchase of its own shares. The Ld. AO regarded this as an unusual feature of the transaction.

In response, the assessee submitted that she had adequate financial resources to make the investment. It was stated that she had investments of approximately ₹10.40 crore in mutual funds, having a market value of about ₹13.25 crore as on 31.03.2022, besides substantial amounts advanced to family-group companies and recoverable on demand. The assessee further explained that the amount of ₹1.20 crore received from Cafenoir Estates Private Limited was intended towards a proposed acquisition of shares of BDR Finvest Private Limited, which was subsequently not proceeded with, resulting in repayment of the amount.

The assessee also pointed out that her son had independently acquired 7,174 shares of Cafenoir Estates Private Limited at ₹6,270 per share. It was contended that the assessee’s subsequent sale of the shares to her husband at ₹6,505 per share could not be regarded as evidence of an artificial reduction in value. The assessee explained that the family was in the process of acquiring the company and that the circumstances surrounding the acquisition justified the price paid for the shares.

It was further submitted that the purchase and sale transactions were duly supported by banking records, executed transfer documents and corresponding disclosures in the books and income-tax returns of the parties concerned. The assessee therefore contended that the transaction could not be disregarded merely because it resulted in a capital loss or had the effect of reducing the overall tax liability.

The Ld. AO, however, was not satisfied with the explanation. Although the actual occurrence of the transaction was not disputed, the Ld. AO questioned the manner in which the transaction had been structured which according to the Ld. AO, the purchase of unquoted shares at a high price followed by their sale to the assessee’s husband within a short period indicated that the transaction was undertaken with the objective of generating a capital loss for adjustment against the capital gains earned during the year. Having regard to the surrounding circumstances, the Ld. AO concluded that the transaction was a pre-arranged and closed-circuit arrangement lacking genuine commercial purpose and was primarily intended to create an artificial short-term capital loss. Accordingly, the entire loss of ₹1,57,82,685/- was disallowed. Penalty proceedings under section 270A(8) were also initiated. Consequently, the total income of the assessee was assessed at ₹2,42,79,282/- as against the returned income of ₹84,96,597/-.

Aggrieved, the assessee was in appeal before the First Appellate Authority, who, vide order dated 31.12.2025, upheld the order of the Ld. AO on the ground that the impugned transaction constituted a structured arrangement lacking commercial substance, thereby dismissing the appeal filed by the assessee.

The assessee is in appeal before us challenging the order of the Ld.CIT(A). It is observed that the assessee had purchased 3074 equity shares of Cafenoir Estates Private Limited (CEPL) from Columbia Holdings Pvt. Ltd., for a total sale consideration of Rs.3,57,79,065/- dated 05.03.2022 which was paid through account payee cheque from the assessee’s HDFC Bank account and the shares were duly transferred and registered in her name in the record of CEPL. Subsequently, on 21.03.2022, i.e., within a short period of acquisition, the assessee sold the said shares to her husband Shri Rajesh Gupta at Rs.6,505/- per share for an aggregate amount of Rs.1,99,96,200/- which was duly transferred and registered in the name of Shri Rajesh Gupta in the books of CEPL. As a result of the purchase and sale, the assessee had incurred a short-term capital loss of Rs.1,57,82,685/-which was claimed as short-term capital loss in her return. During the assessment proceedings, the Ld. AO did not dispute the genuineness or the actual execution of the share transaction and had also accepted the assessee’s contention that the shares had been acquired from an unrelated party where the consideration has been paid through banking channel and the seller had also accounted for the sale consideration in its books of account. The only dispute with regard to the said transaction is that the Ld. AO was of the considered view that notwithstanding the formal validity of the transaction, the manner and circumstances in which the shares were purchased and sold indicated that the arrangement was devised to generate artificial short-term capital loss for the purpose of reducing the assessee’s taxable income. The Ld. AO consequently disallowed the claimed loss and added the same to the returned income of the assessee, thereby determining the total income at Rs.2,42,79,282/-. Though the assessee has challenged the said addition before the Ld.CIT(A) contending, inter alia, that the transactions were genuine, supported by documentary evidence, undertaken through normal banking channel and could not be disregarded merely because they resulted in tax loss, the Ld.CIT(A) rejected the assessee’s contention. The assessee further pointed out that her son had also acquired shares of CEPL from the major shareholder at Rs.6,270/-per share whereas the assessee had subsequently transferred her share to her husband at Rs.6,505/- per share, which, according to the assessee demonstrated that the value of shares had not been artificially rigged. The Ld. CIT(A) rejected this contention of the assessee as well.

Before us, the Ld. AR for the assessee argued that the transaction of purchase and sale of share was a legally permissible transaction and was not a colourable device for the reason that the Ld. AO has not found any discrepancy in the purchase price of the shares or the sale price of the shares and has also not disputed the fact that the shares were owned by the assessee which has been subsequently transferred by way of sale for which the sale consideration has also been received by her against such sale of share. The Ld. AR brought our attention to all the documentary evidences filed before us as well as the lower authorities. The Ld. AR contended that the assessee’s son has also purchased the shares of the same company @ Rs.6,270/- each on 21.02.2022 from Mrs. Taranjeet Khanna, who was a major shareholder of the company Cafenoir Estates Private Limited and was one of the directors also. The ld. AR reiterated that the shares were sold at above fair market value as the same can be verified from the fact that the son of the assessee acquired 50% stake in the company at Rs.6,270/- per share while the assessee transferred the share at Rs.6,505/- each substantiating that the sale price is above the fair market valuation calculated as per Section 11UA of the Act.

The Ld. AR relied on a catena of decisions in support of the assessee’s contention that merely the assessee has incurred a loss does not entitle the Revenue to hold the same to be a non-genuine transaction without any adverse material brought on record to substantiate that these are pre-conceived scheme for the purpose of creating a short-term capital loss.

The Ld. DR, on the other hand, controverted the said fact and contended that these are transactions done for the purpose of evading tax. The ld. DR further contended that the assessee has created artificial loss for the purpose of setting off large capital gain with such capital loss. The ld. DR argued that the assessee has failed to discharge the onus cast upon her to prove the genuineness of transaction and purchase and sale of shares by establishing the commercial purpose of the impugned transaction. The Ld. DR relied on the orders of the lower authorities.

We have heard the rival submissions and perused the material available on record. The only moot issue that requires adjudication is whether the lower authorities were justified in disallowing the short-term capital loss claimed by the assessee on the ground that the same is not genuine, but, rather, a pre-conceived transaction for the purpose of creating short-term capital loss. The ld. AO has made the impugned addition by rejecting the assessee’s contention and held that the assessee’s son being one of the shareholders of Cafenoir Estates Private Limited and the assessee being in a compulsion to buy the shares of the said company for the purpose of acquiring the company, the assessee had purchased the shares at a high price and, subsequently, when the shares of Cafenoir Estates Private Limited came into the hands of the assessee, the price of the said shares were regulated by the assessee and her son where there was a sudden fall in the price to accommodate the assessee’s husband to buy the shares at Rs.6,505/- per share. The ld. AO also observed that the assessee had no funds to buy the shares except for the fund of Rs.1,20,00,000/- received from Cafenoir Estates Private Limited. The Ld. AO treated the impugned transaction to be a colourable device for the purpose of setting off the capital gain with the artificially created capital loss. The ld. AO relied on the decision of the Hon’ble Apex Court in the case of CIT vs. T.N. Aravinda Reddy (1979) 120 ITR 46; the decision of the Hon’ble Punjab & Haryana High Court in the case Porrits & Spencer (Asia) Ltd. Vs. Commissioner of Income-tax, Faridabad [2010] 190 TAXMAN 174 (P & H); the Apex Court decisions in the case Mc Dowell & Co. Ltd. Vs. Commercial tax Officer [1985] 154 ITR 148 (SC) and in the case CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) in support of the Ld. AO’s contention. The Ld.CIT(A) upheld the finding of the Ld. AO stating that there was no commercial purpose for the said transaction and held it to be a colourable device.

The Ld. AR brought our attention to the assessment order at para 4.5 and the second para at page 15 that the Ld. AO himself has recorded that it is an undisputed fact that the impugned transaction was genuine, but, disallowed the short-term capital loss only on mere suspicion that it was for creating capital loss. The ld. AR for the assessee also brought our attention to the decision relied upon by the Ld. AO in the case of Porrits and Spencer (Asia) Ltd. (supra) which, according to the Ld. AR, was very much in favour of the assessee wherein it was held that when the transactions are held to be genuine, there was no justification in holding the same to be not bona fide, since the transaction was done with a motive to avoid tax liability. The Ld. AR further relied on the decision of the Apex Court in the case of Union of India vs. Azadi Bachao Andolan, 263 ITR 706, and also the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Pivete Finance Ltd., 192 Taxman 21, which has duly considered the decision of the Apex Court in the case of McDowell & Company Ltd. v. CTO (1985) 154 ITR 148 and Azadi Bachao Andolan (supra) and has held that evasion of tax is different from tax planning and held that when the assessee enters into a transaction which is otherwise valid in law and also part of tax planning, then, the same cannot be held to be not genuine, stating that the motive of entering into the transaction was merely to reduce its tax liability. The relevant extract of the said decision is cited hereinunder for ease of reference:-

From the above observation, it can be safely concluded that the impugned transaction entered into by the assessee cannot be held to be a colourable device where the said transaction is executed independently by the assessee, though has resulted in loss. Further, we find force in the argument of the Ld. AR stating that there was no adverse material on record brought by the Revenue to substantiate that the transaction is merely a colourable device and, hence, there can be no adverse inference drawn against the assessee when the Revenue itself has held the transaction to be genuine. We also draw support from the fact that the assessee has sold the shares to her husband Shri Rajesh Gupta at Rs.6,505/- each which is a higher price than the price paid by her son to acquire 50% stake in the company at Rs.6,270/- each which was not disputed by the Revenue during the assessment proceedings in the case of the assessee’s son. On the above observation, we do not find any justification in upholding the order of the Ld.CIT(A) and, therefore, direct the Ld. AO to delete the impugned addition made in the hands of the assessee. Therefore, the grounds of appeal raised by the assessee are hereby allowed.

In the result, the appeal filed by the assessee is hereby allowed.