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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI ARUN KUMAR GARODIA
M/s. Vectra Consulting The Deputy Commissioner Services Pvt. Ltd., of Income Tax, Vs. No. 54, Richmond Road, Circle – 11 (5), Bangalore – 560 025. Bangalore. PAN: AAACV6135C APPELLANT RESPONDENT Assessee by : Shri S. Parthasarathi, Advocate Revenue by : Mrs. Priscilla Singsit, CIT (DR) Date of hearing : 05.09.2018 Date of Pronouncement : 29.11.2018 O R D E R
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the revenue and the same is directed against the order of ld. CIT (A)-I, Bangalore dated 20.11.2013 for Assessment Year 2009-10.
The grounds raised
by the revenue are as under. “1. The order of the Learned CIT (Appeals) is opposed to law and the facts and circumstances of the case.
2. The CIT(A) erred in holding that the assessee had held the shares as investment only and that the entire transaction was in the nature of investment only without appreciating the fact that the shares were transferred to the assessee as stock in trade to its director Sri M.K Chandrasekhar who did not have substantial credit worthiness and who in turn sold the shares the very next day to Asia Net Holdings Pvt. Ltd.
3. The CIT(A) erred in not appreciating that the shares were converted into stock in trade without appreciating the fact that shares of the company worth Rs. 276,25,71,059/- as recorded in the financial statements of the assessee were transferred for a sum of Rs. 36,04,69,928/- only.
4. The CIT(A) failed to appreciate that the entire transaction was among the group companies namely M/s Epsilon Advisors Pvt. Ltd., M/s Coimbatore Cable Net Pvt. Ltd., M/s Tayana Consultancy Pvt. Ltd. and the CIT(A) having power co-terminous with the AO, should have held the entire transaction as a collusive transaction by lifting Page 2 of 8 the corporate veil and the substantial profit earned through transfer of shares of Jupiter Capital Pvt. Ltd. by various entities of the group at different times should have been brought to tax in the hands of one of the group companies.
For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.
The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”
The ld. DR of revenue supported the assessment order whereas the ld. AR of assessee supported the order of CIT (A).
We have considered the rival submissions. We find that in the assessment order, the AO has noted in Para no. 3 that the assessee had offered long term capital loss on sale of shares, amounting to Rs. 4,38,86,718/- and he has further noted that from the details submitted, it is seen that the assessee was holding shares in a company called M/s. Jupiter Capital Pvt. Ltd. (JCPL) and such share holding constituted 99.9% in that company. He further noted that M/s. JCPL was a subsidiary of the assessee company and in the assessee’s books, the investment in the subsidiary was shown at Rs. 36,04,69,928/-. The AO has further noted that in this year, the entire share holding was transferred to Shri M K Chandrashekar, who was incidentally the Director of the assessee company and also in the subsidiary company M/s. JCPL. These shares are shown as transferred to Shri M K Chandrashekar at the same value being Rs. 36,04,69,928/- as reflected in the assessee’s books and the assessee indexed the cost and thereby arrived at the above loss. After discussing the full details in this regard in paras 9 and 10 of the assessment order, the AO has held that this is related party transaction and it is certainly not done at arm’s length. Finally he came to the conclusion that the transaction cannot be held genuine, which is further proved from the subsequent events after sale. For the sake of ready reference, we reproduce Para nos. 9 to 15 of the assessment order. These paras are as under. “9. The net worth of JCPL is not fictitious. On perusal of the Balance Sheet of M/s JPCL, t s noticed that this Company was a profit making one and had substantial profit reserves of Rs.16.76 crores, as on Page 3 of 8 31/03/2009. Further, JCPL had invested the funds collected as share premium in several other infrastructure and other companies which were engaged in different businesses. It is also seen that those companies are also profit making entities. In this background, the book value of the shares of JCPL works out to Rs.5,061/- per share. The fair value can be even more if shares of those companies in which JCPL invested, are valued at market price. Thus the sale of shares held by the assessee company to its Director, Shri M K Chandrasekar, resulted in a loss to the assessee Company to the extent of Rs.240.21 crores. This is a related party transaction and it is certainly not done at arm's length.
Regarding the reason for transfer of shares to the Director, the assessee states that it was done to enable JPCL to obtain a status of NBFC without itself getting that status as a holding Company. So the shares of the subsidiary company were transferred as per the directions stipulated by the Reserve Bank of India, for granting CoR (Certificate of Registration) to Jupiter Capital Pvt. Ltd., as a non- banking financial institution (NBFI). However, the RBI never directed that the shares should be sold at a price much lower than the book value of the shares nor had it directed that the shares should be sold to Shri Chandrasekar only. In fact, from the income-tax returns of Shri Chandrasekar, it is seen that he is an individual earning total income of Rs.4,80,00/- which includes pension of Rs.57,432/- and interest income. On the other hand, the assessee had not proved the credit worthiness or capacity of this individual to buy the shares of such a huge company. From all these circumstances, the transaction cannot be held as genuine, which is further proved from the subsequent events after sale.
Shri.M.K.Chandrasekhar bought the shares on 30/03/2009 for Rs.36,04,69,928/-. He held the shares for only one day and sold the same on the very next day to M/s. Asia Net Holdings Pvt. Ltd. This shows that M/s Asia Net Holdings Pvt. Ltd., was waiting to purchase the shares of M/s JCPL even before it was transferred to Shri M K Chandrasekar. Hence, Sri M.K. Chandrasekhar acted as a conduit to pass on the benefits to M/s Asia Net Holdings Pvt. Ltd. He does not hold any shares in the assessee company but could be a nominated Director. In fact the major share holder of the assessee company is Shri Rajiv Chandrasekar who is the son of Shri M K Chandrasekar. But for this reason there was no necessity to transfer the shares or sell its subsidiary to him at a much lower price than its real worth. Since the assessee has no explanation as to why the share were sold at a value lower than the real worth, I have not alternative, but to adopt the net worth value as sale consideration.
Notwithstanding the above observations and conclusions, the computation of capital gains was itself found to be erroneous inasmuch as the sale consideration on transfer of shares to Shri M K Chandrasekar ought to have been taken at fair market value in Page 4 of 8 accordance with section 45(2) of the I T Act, 1961. That is because the shares of JCPL have all along been held by the assessee as stock in trade although they were being shown under investments in its books. The representation in the books is not a deciding factor to understand any entry, rather the underlying intention should be looked into to decide the nature of entries in the books, as has been held by a number of Courts. The assessee is an investment company whose main objective is trading of shares which has also been accepted by the assessee in its reply dtd.26/12/2011.
When the assessee originally invested in the shares of JCPL, the financial year 2005-2006, then the intention could be to hold these shares as investments. However, later after acquiring the remaining shares from those five companies, the intention had obviously changed to trade in those shares, and at this point of time the shares had been treated as stock-in-trade, although it continued to show them in the books under investment. This intention is abundantly clear when it decided to purchase further shares in M/s JCPL from those five companies mentioned above, by paying 25% share premium of Rs.35,49,94,8381-. This was viewed as a business opportunity by the assessee to take over JCPL which had a high net worth at that point of time so that it can sell them and reap huge profits in future.
Hence, the assessee made JCPL its fully owned subsidiary with an intention to gain advantage when the subsidiary was sold. This amounts to conversion of a capital asset into stock-in-trade within the meaning of Section 45(2) of the I T Act, 1961. Since the assessee has sold the shares of its subsidiary company during the previous year 2008-2009, the provisions of Section 45(2) is attracted and the assessee is supposed to offer capital gains in the year of sale.
As per Section 45(2), the fair market value of the asset, as on the date of such conversion, shall be deemed to be the full value of the sale consideration received. In the case of the assessee, the fair market value of the shares now transferred was Rs.276.25 crores, in the financial year 2006;2007 itself, as that sum represents the net worth of the subsidiary. Hence keeping in view of the discussions in Para 11 above, the net worth value should be considered for computing the long term capital gains, and accordingly the computation is made as under: Sale consideration : Rs 276,25,71,059 Less: Indexed cost of Acquisition : Rs.40,43,56,646/- = Rs.235,82,14,413/-“ Long Term Capital Gains 5. Being aggrieved the assessee carried the matter in appeal and ld. CIT(A) has decided the issue in favour of the assessee on this basis that there was no conversion from investment to stock in trade as alleged by the AO and Page 5 of 8 therefore, section 45(2) of the IT Act is not applicable in the facts of present case. Relevant paras of the order of CIT (A) are Para 3.10 to 3.18. The same are reproduced here in below for ready reference:- “3.10 In the present case, the appellant invested in shares of M/s JCPL. Therefore, the shares of a private limited company are not tradable in the market like other assets and consequently such shares cannot be considered to be stock-in-trade. The fact was also brought to the notice of the AO that there were no takers of the shares and, as a result, the appellant company sold its holdings of shares in M/s JCPL to one of its Directors. It is also noted that the AO has not brought on record that the appellant received sale consideration over and above what has been declared in the return of income. 3.11 In view of the foregoing facts and circumstances of the issue, I am of the considered view that the appellant had held the shares as investment only and that the entire transaction was in the nature of investment only. In support of this view, reliance is placed on the decision of the Hon'ble High Court of Rajasthan in CIT v. Sohan Khan & Mohan Khan (2008) 304 ITR 194. The relevant portion of the decision is reproduced: 13. In our view, one of the most significant considerations would be, the regularity of transaction of purchase and sale. Mere fact that there was a series of transactions of sale only, by selling the part of the whole land, purchased in one go, or purchased once upon a time, in piecemeal, would not render the activity of sale to be an "adventure in the nature of trade". In the present case, there is nothing to show that the land was purchased with intention to sell it at a-profit, or with requisite intention to bring it within the parameters of “stock-in-trade”. It is not shown that the assessee is a regular dealer in real estate. It appears, that the land was purchased in 1970, which was under cloud of Land ceiling Laws, and after that cloud was cleared, and other adjoining lands had been developed, and since the land was not yielding any return, it was decided to be sold in piecemeal, by earmarking plots, but then nonetheless it would remain a disposal of the capital asset only, and not a transaction of any "stock-in-trade" so as to be described as "adventure in the nature of trade". obviously therefore, it is liable to be taxed only as the capital gain. 3.12 As regards the additional ground, the appellant made further submissions, which are reproduced at paras 2 to 8 supra. Similar submissions were also made while filing rectification application dated 16/7/2012, requesting for rectification of the assessment order dated 29/12/2011. In the rectification application, it is submitted that, as per section 45(2) of the Act, when the shares of JCPL held as capital asset are treated as stock-in-trade and are sold, not only capital gains is required to be taxed but also the business profit/loss consequent to sale of stock-in-trade has to be computed as per the Page 6 of 8 provisions of section 28 of the Act. Accordingly, the business loss is computed by the appellant as under: sale proceeds received Rs.36,04,69,928 Less: Cost adopted for purposes of provisions of s.45(2) Rs.276,25,71,059 Business loss consequent to sale of shares Rs. 240,21,01,131 3.13 The appellant further requested set-off of loss of Rs.240,21,01,131/- under the head 'Profit from business' against the income from capital gains in terms of section 71(2) of the Act as follows: Business income declared Rs. 82,89,119 Add: Long term capital gains as computed in the assessment Rs. 235,82,14,413 Balance Rs. 236,65,03,532 Less: Loss under the head 'Business' on sale of shares Rs.240,21,01,131 Total loss Rs. 3,55,97,599 3.14 In view of the above submission, the appellant contended that the total loss of Rs.3,55,97,599/- is required to be assessed as against the total income of Rs.236,65,03,528/- computed by the AO in the assessment order under consideration. 3.15 Further, the appellant reiterated that it is entitled to claim the business loss in view of the Board's Circular No.397 dated 16/10/1984. The illustration given in the circular is as follows: • Suppose the cost of the asset is Rs.20,000. The asset is converted by the owner as stock-in-trade on 1.6.1984 and taken to his stock at the market value of Rs.70,00,000. The stock is sold on 1.8.1985 for Rs.80,000/-. • Capital gain of Rs.50,000 (subject to admissible deductions) will be liable to tax in the assessment year 1986-87. The business profit of Rs.10,000/- arising on the sale of the asset will be liable to tax as part of the business income for the assessment year 1986-87 (the accounting year of the assessee has been taken to be the financial year). 3.16 According to the working given above, the appellant stated that the additional ground does not seek reduction of income as arithmetically proved; hence, prayed for allowance of benefit of carry forward of business loss of Rs.3,55,97,599/- with nil income for this assessment year on a totality of computation of income returned at Rs.81,89,110/- and carry forward the long term capital loss of Rs.4,38,86,718/- though it may result in a refund of the prepaid taxes on the income of Rs.82,89,120/- coupled with the claim of carry forward of long term capital loss.
3.17 In this context, I would like to mention that I have decided the issue in favour of the appellant on the grounds of appeal originally raised. Therefore, further adjudication on additional grounds of appeal is merely academic in nature and, hence, the same does not survive for consideration. Accordingly, the additional grounds are rejected. 3.18 In a nutshell, the original ground of appeal is allowed and the additional grounds of appeal are dismissed for statistical purposes.”
6. We find that a categorical finding is given by CIT (A) in Para 3.10 of his order reproduced above that the investment by the assessee company in the shares of JCPL is an investment in the shares of a private limited company and the shares of a private limited company are not tradable in the market like other assets and consequently, such shares cannot be considered to be stock in trade. This finding of CIT (A) could not be controverted by the learned DR of the revenue. We also find that in the assessment order, no valid basis is indicated by the AO to hold that there is conversion of investment into stock in trade. We find that up to Para 11 of the assessment order, the AO has discussed the facts and has doubted about sale of shares to the director of the assessee company at a low price but there is no discussion in these paras on this aspect that there is conversion from investment to stock in trade. But suddenly, in Para 12 of the assessment order, the AO says that computation of capital gain is erroneous because it should have been computed as per section 45 (2) of the I T Act, 1961. But nowhere in the assessment order, the AO has stated about the date on which the alleged conversion took place and what is the basis of this allegation about conversion from investment to stock in trade. In Para 13 of the assessment order, the AO has stated that when the assessee originally invested in the shares of JCPL, in the financial year 2005 – 06, then the intention could be to hold these shares as investment but later after acquiring the remaining shares from five companies, the intention has obviously changed. We fail to understand as to how acquisition of some more shares on any terms or at any price alone will change the intention of holding the shares from investment to stock in trade. Under these facts, we find no infirmity in this decision of CIT (A) that section Page 8 of 8 45 (2) is not applicable in the present case. No other aspect is decided by CIT (A). Hence, we hold that there is no infirmity in the order of CIT (A) as per which he held that section 45 (2) is not applicable. We decline to interfere in the order of CIT (A).
In the result, the appeal filed by the revenue stands dismissed. Order pronounced in the open court on the date mentioned on the caption page.