ITAT Delhi Upholds Capital Loss Set-Off on CCD Sale; Rejects ‘Colourable Device’ Allegation in Family Business Distress Case

Key Facts and Tribunal Findings

The Income Tax Appellate Tribunal (ITAT), Delhi Bench “A”, has dismissed Revenue appeals in the cases of Subhash Chander Agarwal and Shanti Devi for Assessment Year 2020–21, upholding the allowability of short-term capital loss (STCL) arising from sale of compulsorily convertible debentures (CCDs) and its set-off against long-term capital gains (LTCG).

The dispute centered on the assessee’s claim of STCL of ₹12.48 crore on sale of CCDs of M/s MKY Constructions Pvt. Ltd., which was set off against LTCG of ₹10.38 crore arising from sale of a jointly owned residential property. The Assessing Officer treated the transaction as a colourable device designed to avoid tax, alleging lack of commercial substance and disallowed the set-off along with carry forward of loss.

The Commissioner (Appeals), however, allowed the claim, holding that the transactions were genuine, supported by documentary evidence, banking channels, and independent valuation. The Revenue challenged this finding before the Tribunal.

The Tribunal noted that the investment in CCDs was made in the backdrop of financial distress faced by the assessee’s family-owned company, which had defaulted on bank loans due to project-related disputes. The assessee, being a guarantor, had raised funds by mortgaging personal property and infused capital into the company to settle bank liabilities. The subsequent sale of CCDs at a nominal value was supported by an independent valuation indicating negative net worth.

Importantly, the Tribunal found no evidence to dispute the genuineness of the transactions, including subscription, funding, or sale. It held that the Assessing Officer’s conclusions were based on questioning commercial prudence rather than identifying any sham or fictitious arrangement.

Rejecting the Revenue’s reliance on the doctrine of “substance over form,” the Tribunal held that mere coincidence of capital gain and loss in the same year does not establish a tax avoidance scheme in the absence of incriminating material. It further observed that business decisions taken under financial distress cannot be evaluated solely on profitability considerations.

Accordingly, the Tribunal upheld the order of the Commissioner (Appeals) and dismissed both Revenue appeals.