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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-34, Mumbai [in short CIT(A)], in appeal No. CIT(A)-34/DCIT 23(3) dated 24.11.2016. The Assessment was framed by the DCIT, Circle-23(3), Mumbai (in short ‘DCIT’/ AO) for the A.Y. 2011-12 vide order dated 02.01.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of Revenue is against the order of CIT(A) in treating the surplus arising out of sale and purchase of shares as capital gains instead of business income assessed by the Assessing Officer. For this Revenue has raised the following 2 grounds: - “1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A), Mumbai was right in treating the addition made of Rs. 7,46,99,433/- as capital Gains exempt by the Assessing officer?.
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A), Mumbai should not have considered the income of Rs. 7,46,99,433/- as Business Income in the light of the facts brought on record by the Assessing Officer examining the transaction in light of various parameters laid out by CBDT instruction and judicial pronouncement?”
Briefly stated facts are that the assessee is a Private Trust and it is crated to ensure effective succession planning mechanism and intergenerational transfer of trust corpus and income. Verna Private Trust is created by settlers Shri Vineet Nayyar and his wife Ms. Reva Nayyar by a Trust deed dated 24.03.2010. The said Trust is declared as an irrevocable trust and discretionary in nature as per sub-clause (k) of clause 5 of the trust deed. The settlers had appointed IL&Fs Trust Company Ltd (ITCL) as the trustee of the trust fund who in turn is empowered to carry out the business of the trust. During the previous year relating to this assessment year, the trust has carried out following share transactions.
Name of the Purchased on Sold on Period of holding shares/ NCD India Infoline NCD 04.08.2011 02.02.2012 178 days Solaris Holding 25.06.2010 12.05.2011 306 days NCD Solaris Holdings 06.07.2010 12.05.2011 306 days NCD 4. The assessee sold 1 lakh shares of Tech Mahindra limited for a total consideration of ₹ 7,48,57,899/- and declared the surplus arising out of the sale and purchase of transactions amounting to ₹ 6,81,58,100/- as long term capital gain and claimed exemption under section 10(38) of the Act. The AO noted from the details of share transactions of Tech Mahindra Limited that the meager gain of assessee is from trading in non-convertible debentures (NCD) of India Infoline and Solaris Holding to the extent of ₹ 1,09,08,818/- and the holding period of NCDs’ is 1 year and assessee claimed capital gain on sale of shares of Tech Mahindra Ltd. According to AO, the shares of Tech Mahindra were held by assessee not from 26-03-2007 but from 04-03-2010 i.e. on the date which trust was created. According to AO, the assessee has created illusion by showing the date as on 26-03-2007 in the return of income but the shares are sold by assessee within 475 days of the date of transfer. Further, the AO noted that 5,73,400 shares were received by assessee as employees stock option i.e. ESOP of Tech Mahindra Ltd. on 26.03.2007, as he was owner of shares of Tech Mahindra Ltd. and further purchase of shares of 26,600 on 24.10.2008 from the open market. Subsequently, 5,73,400 shares were transferred to irrevocable Trust on 26.03.2010 as settler of Verna Private Trust out of which shares are sold by assessee during the year. The AO also noted that in AY 2010-11 also profit on sale of shares of Tech Mahindra Limited amounting to Rs. 14,69,09,844/- was treated as business income but in appeal the issue decided against Revenue and in favour of assessee and income was treated as capital gain. The AO treated the profit derived from sale of shares of Tech Mahindra Limited and trading in NCDs’ as business income amounting to Rs. 7,46,99,433/-. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after considering the tribunal order for AY 2010-11 in treated the profit arising out of sale and purchase of shares and NCDs as capital gains by observing as Para 4.3 as under:-
“4.3 I have considered the facts of the case and the appellant’s submissions. I find that the Hon’ble ITAT in its order dated 31.07.2015 in the case of the appellant of AY 2010-11 in had held as under:
13. We, for the above discussion, are ad idem with the ld. CIT(A) in arriving at the conclusion that from the sale of shares undertaken by the assessee during the year under consideration, no business activity stands made out.
14. Therefore, we uphold the action of the ld. CIT(A) in directing the AO to treat the gain in question as a capital gain. However, this gain was claimed by the assessee as exempt under section 10(38) of the Act. As per this provision, any income arising from the transfer of a long term capital asset, being an equity share in a company, shall not be included while computing the total income. This has not been taken into consideration by the ld. CIT(A), though this provision is clearly applicable to the facts of the case. Accordingly, the grievance of the assessee is found to be justified and is acceptable as such. We hold that profit on the transfer of shares is assessable as capital gain exempt under section 10(38) of the Act.
For the deliberation made in the preceding paragraphs, the grievance of the Department is found to be shorn of merit and is rejected as such, whereas the grievance of the assessee is found to be justified. The same is accepted Respectfully following the above decision of the Hon’ble ITAT, the appellant’s ground of appeal is allowed."
Aggrieved, now Revenue is in appeal before Tribunal.
At the outset, the learned Counsel for the assessee stated that this issue is squarely covered by Tribunal’s decision for AY 2010-11 in assessee’s own case in order dated 31-07- 2015, wherein Tribunal considering the entire factum of the case treated the gain arising out of transfer of shares as capital gains exempt under section 10(38) of the Act by observing in Para 7 to 14 as under:-
“7. We have heard the parties and have also perused the record. The issue is as to whether the ld. CIT(A) has correctly directed the A.O. to treat the gain in question as capital gain and not business income, as had been done by the A.O. The objects of the Trust, as visualized in its Trust Deed, are as follows (assessee’s paper book, page 51):-
“The objects of the Trust primarily would be utilization of the Trust Corpus and the income generated thereon for the benefit and maintenance of the Beneficiaries to the Trust, ensuring effective intergenerational transfer of wealth and such other objects as are specifically detailed in Schedule 1 herein.”
Schedule I to the Trust Deed (assessee’s paper book, page 63) runs as follows:-
a. To ensure effective succession planning mechanism and intergenerational transfer of Trust Corpus and Income. b. To provide for any financial or non-financial needs of existing and future Beneficiaries of the Trust including travel, medical, education. marriage, maintenance, insurance, payment of insurance premium or any other requirement which according to the Trustee is essential to ensure welfare and benefit of the Beneficiaries, etc. c. To provide for consolidation and ring fencing of assets. d. To undertake investment activities in immovable assets. e. To contribute to charitable initiatives, which are unanimously recommended by the Beneficiaries.
It is evident from the above, that it is the utilization of the Trust corpus and the income arising therefrom, for the benefit of the children of the Settlors, i.e., the beneficiaries of the Trust, which is the prime objective of the assessee Trust. By such utilization of the Trust corpus, intergenerational transfer of wealth is sought to be ensured by an effective succession planning mechanism. A reading of clause (b) of Schedule I of the Trust Deed evinces the provision for needs of the beneficiaries of the Trust, existing as well as future, so as to ensure their welfare and benefit. Clause (b) of Schedule 1 provides as an object, to undertake investment activities, immovable assets. Clause (b) makes provision for consolidation and ring fencing of the assets.
Schedule II to the Trust Deed (assessee’s paper book, pages 64-67), contain the list of the beneficiaries. Beneficial interest and distribution has been provided for during the life of the Settlors and post their demise, upon termination of the Trust. In Schedule III to the Trust Deed, (assessee’s paper book, pages 68-71), the powers and duties of the Trust Deed are given. A cursory glance at these powers and duties makes it atonce clear that these are towards the utilization of the corpus of the Trust and the income generated therefrom for the benefit of the beneficiaries of the Trust.
The assessee filed written submissions dated 27-8-2012 before the A.O. A copy thereof is to be found at the assesse’s paper book, pages 98-103. Therein, the assessee submitted that the purpose of the Trust was not to carry out any business, but to make investment; and that the object of the Trust was to ensure an effective succession planning mechanism and intergenerational transfer of Trust corpus and income. It was stated that the long term capital gain of Rs. 14,69,09,814/-, earned on the sale of shares, was exempt from tax u/s 10(38) of the Act. It was stated that the Trust had received six lacs shares of M/s Tech Mahindra from the Settlor of the Trust, as the corpus of the Trust. This letter/certificate is placed at the assessee’s paper book, page 101. It reads thus:
“26th March 2010
To whomsoever it may concern This is to confirm that in my capacity as a Settlor of Vernan Private Trust, I have contributed the following shares towards the corpus of the aforementioned Trust on 26th March, 2010.
Scrip No. 1: Tech Mahindra Limited.
Sincerely, Sd/- Vineet Nayyar (Settlor Vernan Private Trust)”
Thus, it is evident that the shares were contributed by the Settlor of the Trust, towards the corpus of the Trust.
It is in the above factual background that it is to be seen whether the transfer or sale of shares by the assessee was in the nature of business/adventure in the nature of trade. As seen hereinabove, the six lacs shares of M/s Tech Mahindra Ltd. were contributed towards the corpus of the Trust. These shares were sold and exemption u/s 10(38) of the Act was claimed on the sale proceeds. Now, the very object of the Trust was the utilization of the Trust corpus and the income generated therefrom in investment, so as to ensure the benefit of the Trustees. It needs to be seen as to whether the transfer is towards this avowed intention, or not. It has come on record by way of the assessee’s written submission dated 31-3-2010 (assessee’s paper book, pages 32-47), filed before the ld. CIT(A), that out of the six lacs shares, contributed towards the corpus of the Trust, 96% were allotted to Shri Vineet Nayyar, Settlor of the Trust under the Employee Stock Option Plan (ESOP for short). The remaining 26,000 shares were purchased by the said Settlor, That is to say, that i.e., only about 4% shares were bought by the Settlor. Then, whereas under the ESOP, the shares were allotted on 26-3-2007, they were settled on the Trust only on 24-3-2010, which shows that it was not the intention of the Settlor to resell the shares immediately and thereby to make quick profit. Likewise, the balance 26,600 shares, acquired on 24-10-2008, were held till 24-3-2010, when the same were settled. The shares were not acquired/purchased by the assessee Trust itself. They were sold gradually and the proceeds arising from the sale thereof were invested in Mutual Funds/Debt Instruments or Government Securities, which are, undoubtedly, less risky investment modes.
Further, it is seen that, it is nowhere the case of the Department that the Trust is a sham or bogus Trust. The validity of the corpus of the Trust, correctly noted by the ld. CIT(A), has never been doubted. Apropos the activity of sale of shares, in the facts, as discussed, we do not find it to be a business activity. The shares were treated as an investment all through and not as stock-in-trade. The balance sheet says so. No funds were borrowed for the activity. Only one sale/transfer took place during the year under consideration. The sales were affected for diversification of portfolio, so as to secure the investment and to take advantage of the bullish trend of the Tech Mahindra shares, prevailing at the relevant time. The price movement of the shares, as brought on record before the taxing authorities buttresses the decision of sale of the shares immediately on constitution of the Trust, to be a prudent decision. Too, it is also on record that soon after the sale of the Tech Mahindra shares, the price thereof dipped substantially. All this is an indication to the fact that the activity was not a business activity, nor an adventure in the nature of trade. It has also been taken note of, correctly, by the ld. CIT(A) and not refuted by the Department, that the Trust is expressly prohibited from undertaking any business activity. Moreover, the avowed intention of the Trust as discussed hereinabove, has never been disproved and it is only that the alleged intention of carrying on business has been superimposed thereon. This has rightly been rectified by the ld. CIT(A) by making detailed observations regarding the observation of the A.O., that the intention of the Settlors themselves was to carry on business activity, being extraneous, a valid Trust having come into existence and such Trust having not been found to be ingenuine; that the acquisition of shares was not a voluntary purchase made by the assessee Trust, but they were contributed to its corpus at the time of the very inception of the Trust; that the assessee’s claim holding pattern by way of diversification of asset was also not repelled by the A.O.; that the fact that a Portfolio Manager was appointed is synchronous with the intent and objective of the creation of the Trust; and that holding the shares of just one corporate entity not being desirable was a decision as per the prudence of the Trust.
13. We, for the above discussion, are ad idem with the ld. CIT(A), in arriving at the conclusion that from the sale of shares undertaken by the assessee during the year under consideration, no business activity stands made out.
14. Therefore, we uphold the action of the ld. CIT(A) in directing the A.O. to treat the gain in question as a capital gain. However, this gain was claimed by the assessee as exempt u/s 10(38) of the Act. As per this provision, any income arising from the transfer of a long term capital asset, being an equity share in a company, shall not be included while computing the total income. This has not been taken into consideration by the ld. CIT(A), though this provision is clearly applicable to the facts of the case. Accordingly, the grievance of the assessee is found to be justified and is accepted as such. We hold that the profit on the transfer of shares is assessable as capital gain exempt u/s 10(38) of the Act. "
When this was confronted to the learned DR, he relied on the order of the AO. We find from the above that the issue is fully covered in favour of assessee and respectfully following the Tribunals for AY 2010-11 and taking a consistent view, we uphold the order of CIT(A) treating the profit from sale and purchase of shares as capital gains. We dismiss this issue of Revenue’s appeal.
The next issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses relatable to exempt income under section 14A read with Rule 8D of the Income Tax Rules 1962 (hereinafter ‘the Rules’). For this Revenue has raised the following ground No.3:-
3. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) was right in directing to delete the disallowance additions of Rs. 44,40,474/- made by the Assessing Officer under section 14A 4.2.4 8D of the Income Tax Act by treating the sale of securities as ‘Capital gain’ and not ‘Business Income’ as assessed by the AO?.
8. Briefly stated facts are that the assessee has earned dividend income from Mutual Fund of ₹ 6,47,239 and tax free interest on bonds at ₹ 29,85,818/-. The assessee has also paid investment advisory fee of ₹ 38,76,398/-. The AO noticed from the balance sheet of the assessee that assessee has made new investment in Mutual Funds amounting to ₹ 14,66,52,359/- and in tax free bonds amounting to ₹ 7,39,78,206/-. According to AO, the assessee has not offered any disallowance and hence, applying Rule 8D of the Rules made disallowance under Rule 8D 2(i) at ₹ 38,76,398/- being investment advisory fee and a further disallowance being 0.5% of average value of investment under Rule 8D(2)(iii) at ₹ 5,64,076/-. Thereby the AO made total disallowance of ₹ 44,40,474/-. Aggrieved, assessee preferred the appeal before CIT(A).
9. The CIT(A) deleted the disallowance by noting that the assessee himself has disallowed investment advisory fee of ₹ 38,76,398/-, which is included in whole of expenses suo moto disallowed and added back by the assessee amounting to ₹ 72,31,136. Before us also the assessee filed complete accounts from where it is clearly noted that the assessee has debited expenses of ₹ 72,31,136/-, including investment and advisory fee of ₹ 38,76,398/-. The whole amount has been added back by the assessee in its computation of business income. Once, the assessee has added the entire expenses to the computation of business income there is no scope for any disallowance under Rule 8D(2)(i) or under Rule 8D(2)(iii). Accordingly, the CIT(A) also deleted the disallowance made under Rule 8D(2)(iii) i.e. o.5% of average value of investment amounting to ₹ 5,64,076/-. For this CIT(A) observed in Para 6.3 as under:-
“6.3 I have considered the facts of the case and the appellant’s submissions. It is seen that the appellant h ad debited expenses of Rs. 72,31,136/- in the Statement of Profit & Loss during the current assessment year. This whole amount of Rs. 72,31,136/- which also includes investment advisory fees of Rs. 38,76,398/- has been added back by the appellant in its computation of business income. Though the AO had treated the gains from sale of securities as business income and allowed business expenses debited in P & L account, such treatment by the AO has been reversed by the decision given in Ground No.
Consequently, no expenses stand allowed to the appellant. In view of these facts, the disallowance of Rs. 44,40,474/- under section 14Ar.w.r 8D is debited. The appellant’s ground of appeal is allowed."
10. We find no infirmity in the order of CIT(A) and hence, this issue of Revenue’s appeal is dismissed.
11. The next issue in this appeal of Revenue is against the order of CIT(A) and directing the AO to treat the income from pre payment charges amounting to Rs. 4,32,376/- under the head income from other sources as against assessed by AO as business income. For this Revenue has raised the following ground No.4:-
4. Whether on the facts and in the circumstances of the case and in law, the ld CIT(A) was right in directing to treat the income from prepayment charges amounting to Rs. 4,32,376/-. Under the head ‘income from other sources’ instead of ‘business income’ as assessed by the Assessing Officer?.
12. Briefly stated facts are that the assessee received prepayment charges amounting to Rs. 4,32,376/- on early redemption of NCDs’ and offered the same as income from other sources. However, the AO brought the prepayment charges under the head business income. The CIT(A) directed the AO to treat the same as income from other sources in Para 8.1 as under:-
8.1 The matter has been considered. It is seen that the Assessing Officer has not made any discussion on this issue in the assessment order. This item of income was simply included as part of business income in respect of gains from sale of securities. In ground No.1, the gains from sale of securities has been held to be capital gains and not income from business. There is also no difference in tax incidence whether the same is treated as income from other sources or income from business. Considering all these, the appellant’s ground of appeal is allowed.
Aggrieved, now Revenue is in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that this is tax neutral exercise because the assessee has offered this as income from other sources. The gain arising out of sale of securities has been held to be capital gain and there is prepayment charges received is to be assessed as income from other sources. We find no infirmity in the order of CIT(A) and hence, the same is affirmed. This issue of Revenue’s appeal is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 04-07-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 04-07-2018 kao kI ga[- .