Pune Tribunal allows carry forward of capital loss arising from transfer of shares claimed in revised return

In the case of Bilcare Ltd.[1] (Taxpayer), one of the issues before the Pune Tribunal pertained to allowability of long-term capital loss (LTCL) arising on transfer of shares of overseas wholly owned subsidiary (WOS) to another overseas WOS where the claim for such loss was made for the first time through a revised return of income (ROI).

In the facts of the case, the Taxpayer, an Indian Company - ICo, sold shares of its Singapore WOS (SingCo) on 22 October 2015, subsequent to a Singapore High Court (HC) direction to liquidate the SingCo due to creditors’ action. Such transfer of shares was to ICo’s Mauritian WOS (MauCo) for a nominal consideration of SGD1 and the transfer was carried out after seeking approval from Singapore HC and also reported to Reserve Bank of India (RBI) under exchange control regulations– resulting in an LTCL of around INR9.22 crores. However, despite the transfer, ICo continued to reflect the investment in SingCo in its Balance Sheet as a non-current investment. Thereafter, facts indicated that value of assets of SingCo after deducting amounts owed to secured creditors and debenture holders was NIL.

The Taxpayer did not claim the LTCL in its original ROI (which disclosed a loss arising from business operations). The Taxpayer claimed LTCL on sale of SingCo shares for the first time in the revised ROI. Subsequently, such a claim was reiterated in the course of regular scrutiny proceedings. However, the tax authority denied the LTCL on multiple grounds viz. (a) for a valid revised ROI, the necessity of revision must be on account of any omission or wrong statement in the original ROI, which was not the case here when the LTCL was not disclosed in the original ITR consciously; (b) the sale of shares is not operational in law as the HC of Singapore did not mention the consideration on sale of shares; and (c) the sale of shares was to own WOS, hence, not at arm’s length and the Taxpayer failed to show that the sale was at price above de minimis threshold under specific anti-avoidance rule (SAAR) for transfer of shares of unlisted company.

On appeal, the first appellate authority (FAA) held that even if the LTCL could not have been claimed through revised ROI, since ICo had actually suffered a real loss, the claim made during the course of assessment proceedings can be considered. Even on merits, the FAA held that the LTCL claim was genuine and bona fide, and thus allowed the loss claim. 

Aggrieved by such an order of FAA, the tax authority appealed further to the Pune Tribunal. The Tribunal upheld FAA’s order and ruled in Taxpayer’s favor, both on jurisdictional issue as well as on merits.

The Tribunal held that the omission of the LTCL claim in the original ROI constituted an “omission” or “wrong statement” permitting the Taxpayer to file revised ROI within specified due date to claim such LTCL.

Furthermore, the Tribunal also noted that the transfer of shares was not only approved by the Singapore HC but was also reported to RBI under exchange control regulations. This shows that the transaction is a real one and not a dubious one. Additionally, the Tribunal also noted that ICo has the right to arrange its affairs in a manner to minimize its tax liability and the book treatment is not determinative for tax purposes. The Tribunal also held that the transaction value (SGD1) was at arm’s length since the value of assets of SingCo after deducting the amounts owed to secured creditors and debenture holders was NIL.

Lastly, the Tribunal held that the SAAR for transfer of shares of unlisted company was only introduced vide Finance Act 2017 w.e.f. tax year 2017-18 and was, hence, not applicable to the instant transaction undertaken in tax year 2015-16.

[1]  [TS-344-ITAT-2023(Pune)]; Judgement dated 31 May 2023