Transaction of “sale” of “pledged” shares at loss to a group company with object to set-off loss against gains is not a “colourable transaction”

ACIT vs. Biraj Investment Pvt. Ltd (Gujarat High Court)

The assessee earned capital gains on sale of certain shares. To offset the gains, the assessee sold shares of another company, which were pledged to IDBI, to a group company, at a loss. The AO & CIT(A) treated the transaction of sale to the group company as a “colourable device” & rejected the loss on the ground that as the shares were pledged, they could not have been sold. However, the Tribunal allowed the assessee’s claim. On appeal by the department to the High Court, HELD dismissing the appeal:
Though the shares were pledged with IDBI and the assessee did not have physical possession of the share certificates and had also undertaken to IDBI that the shares would not be transferred, there was still a “transfer” u/s 2(47). While there would be a serious question of validity of such transaction in so far as the assessee’s relationship with IDBI is concerned, and the purchaser would not be entitled to transfer the shares in its’ name, these issues were not relevant because the assessee did transfer whatever rights it had in the shares to the purchaser. The Revenue’s argument that the transaction was a “colourable device” and a “paper arrangement” is not acceptable because (i) there is no provision which prevents an assessee from selling loss making shares with a view to offset the loss against other gains and (ii) the transaction with the group company was at the fair value. The fact that the shares were pledged and could not be registered in the purchaser’s name did not establish that transaction was a contrived one (Sakarlal Balabhai 69 ITR 186 (Guj), Azadi Bachao Andolan 263 ITR 706 (SC) & Vodafone 341 ITR 1 (SC) followed).