ITAT should order deeper investigation if material is creating doubt about presence of artificial losses

Where there is sufficient material to show that the claim of the assessee is not genuine or could be a sham, the Tribunal should order a deeper investigation and if required, remit the matter to the income tax authorities

CIT 

v. 

J.B. ROY

During assessment the AO noted that assessee had declared a loss under head "income from other sources". The said loss represented the interest paid on loans borrowed from group companies for purchase of unquoted shares of the other group companies. It was further noticed that no income was shown under the aforesaid head. The AO opined that the above method adopted by assessee was a colorable device for transferring the funds of some group concerns to other group concerns. Consequently, AO disallowed the said loss on the ground that the transaction was entered into merely to reduce tax liability. On appeal, the CIT (A) held in favour of assessee. The order of CIT(A) was also upheld by Tribunal. On appeal, the High Court held in favour of revenue as under: The Tribunal, despite being told that there were several unusual features which raised considerable doubt on the assessee's claim for deduction of the interest, did not consider it proper to examine the matter further. It simply chose to take umbrage on the principle that the Tribunal couldn't be expected to act as an investigating agency; It was noted that the Tribunal had failed to assess following surrounding circumstances: a) Though the AO had stated that shares were of the value of "few paise or even zero", yet the assessee brought no material on record to dispute the statement or to show that it was factually wrong; b) That the assessee was neither an investor nor a trader in shares. It was, therefore, for him to show the reasons which impelled him to acquire the shares of the group concerns. Further, the Allahabad High Court in the case of CIT v. Smt. Swapna Roy (2011) 331 ITR 367, has observed that "a man of common prudence shall never like to make investment in a company whose financial status is fragile and not liable to make profit". Thus, the Tribunal ought to have paid due attention to the unusual or even suspicious features of the case. Therefore, the case was decided in favour of the Revenue and the matter was remanded to AO for de novo consideration. [2012] (Delhi)