LAKSHMINARAYAN GANESH,CHENNAI vs. ACIT, CHENNAI

आदेश /O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

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Aggrieved, the assessee filed this appeal challenging the reopening of the assessment, disallowance of cost of acquisition and the enhancement made by the CIT(A).

Ltd. 3.1 Further, the A R submitted that pursuant to a scheme arrangement under section 391 read with section 394 of the Companies Act, 1956, accepted by the Hon'ble Madras High Court with effect from April 25, 2005, Rane (Madras) Ltd. was demerged. The manufacturing division was transferred under the scheme of amalgamation into Rane (Madras) Manufacturing Ltd. (currently known as Rane (Madras) Limited or, for convenience sake, "RML- Resulting co.". The original Rane (Madras) Ltd., which is currently known as Rane (Holdings) Ltd or the demerged company, as "RHL- Demerged co." As a consequence of this demerger, the assessee was allotted 1,96,165 equity shares in RML- Resulting co.

3.2 On sale of RML- Resulting co’s shares (ie the issue in dispute) , the AR submitted that during ay 2007-08 (this a year), the assessee sold the shares it held in RML- Resulting co. to RHL-Demerged co. for a cash consideration of INR 120 per share. While computing the cost of acquisition of the shares of RML-Resulting co., the cost of acquisition of the shares of RHL-the Demerged co. was apportioned between the shares of the two companies involved in demerger in accordance with sections 49(2C) and 49(2D) of the Act. The cost of acquisition of the shares of RML- Resulting co . were determined as under:

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• The shares allotted as a consideration of sale of shares of REVL of 1,90,818 shares (original value determined was INR 146 per shares) were determined at INR 66.78 per share under section 49(2C) of the Act. • The 5,347 shares which were purchased from the public at INR 147 per share were valued at INR 67.24 per share under section 49(2C) of the Act.

The difference between the sale price of INR 120 per share and the cost as determined above was reported as capital gains and taxes were paid at the rate of 10 percent without the benefit of indexation, as the shares are listed on the stock exchange. The reported capital gain was scrutinized by the AO in detail, it was accepted and assessed as such under the regular assessment.

3.3 Thereafter, the AR submitted that the Learned Assessing officer reopened the assessment on the basis that the impugned transaction of sale of shares of RML-Resulting co. was nothing but buyback of shares under section 46A of the Act. This is the apparent from the reasons for reopening of assessment. The Ld. AO has not explained how the sale of shares of one company to another company could ever result in a buyback of shares. Having claimed so, he had dropped this line of contention on the final assessment.

Further, the Ld. AO has also contended in his note explaining the reasons to reopen the assessment that the cost of acquisition of shares of RML-Resulting co. must be computed in relation to the proportion of shares originally held by :-6-: ITA No. 333/Mds/2017 the appellant in REVL. Having claimed so, he has dropped this line of contention on the final assessment. Dropping both the reasons originally stated by him, the Ld. AO had, in the assessment order dated March 27, 2013, held that if the entire transaction of "sale, merger, demerger" is "looked through", it would be clear that the 1,96,165 shares which were sold are nothing but the original shares REVL. Based on this assumption, the Ld. AO held that since the cost of acquisition for purchase of shares of REVL was claimed in the ay 2005-06 against the capital gains on the sale of shares of REVL, no cost would now be available to the appellant for being claimed as a deduction while computing capital gains arising from the sale of RML- Resulting co. shares and accordingly disallowed the cost of acquisition claimed by the appellant of INR 1,30,35,356 .

3.4 On the above facts and circumstances, the AR challenged the validity of the reopening. He took us through the pages 89 to 108 of the paper book and submitted the AO at the time of original assessment obtained various details about the acquisition, exchange and sales of these shares as on 31.3.2005, 06 & 07 together with actual market price on the date of purchase, sale and the sale and purchase price , considered the average 10 week price of the shares on the date of transaction , whether these transactions were permitted by SEBI, determination of COA u/s 49 etc and then passed the original assessment order. Then, the AR submitted that the reassessment

:-7-: ITA No. 333/Mds/2017 proceedings have been initiated without any new material being available on record to form a basis for 'reason to believe' that income has escaped assessment, the proceedings initiated by the Ld. AO under section 147 amounts to change of opinion and is liable to be quashed as the computation of capital gains had been considered during the course of the regular assessment under section 143(3) and when the reasons for reopening the assessment were dropped or not pursued with, the Ld. AO loses his jurisdiction to continue with the reassessment proceedings and should have dropped the proceedings forthwith. The Ld. CIT(A) erred in stating that the Ld. AO has followed due procedure and reopened assessment on tangible material which has live-link with the formation of belief that income has escaped assessment when no new tangible material was brought on record for carrying out the assessment under section 147 of the Act. Per contra, the DR relied on the orders of the AO & the CIT (A).

“It is noticed that during the previous year relevant to A. Y 2007-08, the assessee has sold 196165 shares of M/s. Rene (Madras) Ltd and admitted Rs.10514444/- as LTCG during the year. However, it is noticed while adopting the cost of acquisition in working out the capital gains in respect of the above sale of shares, the assessee has adopted higher figure bases on the share purchase agreement consequent to the demerger of the above company. Since the sale of 196165 shares

:-8-: ITA No. 333/Mds/2017 included 95409 shares acquired before the demerger, the cost of acquisition should be arrived at based on the proportion of shares held originally allotted thereafter as per the share purchase agreement. In other words, the cost to be adopted will be proportionate cost of the shares had in REVL originally and as per the SPA and also the actual cost shares acquired through preferential allotment corresponding to the shares allotted byway of share purchase agreement and now sold. It is also noticed that the above acquisition / sale is only a buy back of the shares and therefore falls under section 46A of the I.T. Act Consequently the reduced rate of 10% can be applied only to capital gains computed u/s 48 and not u/s 46A. In view of the above, I have reasons to believe income chargeable to tax has escaped assessment.”

From the above, it is clear that the AO did not have any new material for initiating the impugned reassessment proceedings and what he has done in this case amounts to a change of opinion which was formed earlier. The assessee has disclosed fully and truly all material facts necessary for its assessment at the time of original assessment itself .The AO has not established the reason for the failure on the part of the assessee. Hence, the reassessment proceedings is liable to be quashed for the elaborate reasons canvassed by the assessee, supra, and hence we quash the reassessment proceedings.

4.1. The AR also invited our attention to the pages 89 to 108 of the paper book and made the same submissions which were extracted above. He further submitted the fact the AO had passed a rectification order on the :-9-: ITA No. 333/Mds/2017 basis that the shares of Rane (Madras) Limited were listed and hence, the conclusion of the Ld. CIT (A) that Rane (Madras) Limited is private company is baseless, the Ld. CIT(A) erred in concluding that, Rane (Madras)

Manufacturing Ltd (currently known as Rane (Madras) Ltd.) is a private limited company, when the same is public limited company and the information about the company is available on public domain , the promoters are siphoning off funds from public limited companies belonging to the group by sale of shares of the promoters among the group concerns when such sale of shares were done by offering the capital gains arising from the sale to tax, the sale of one group company's share belonging to the promoter to another group company is insider trading without appreciating the fact that the capital gains arising on sale of shares by the promoter was duly offered to tax and in arriving to a conclusion that the assessee should be taxed under section 56(2)( vii) ( c) of the Act without appreciating the fact that the amount was received in exchange of sale of shares held by the assessee in Rane (Madras) Ltd. (earlier known as Rane Madras Manufacturing Ltd.) and that such shares were held post a Court approved scheme of demerger etc. After hearing the rival submissions, we do not find any merit in the order of the CIT (A) and hence allow the assessee’s appeal on merit also.

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Order pronounced on Monday, the 20th day of June, 2017 at Chennai.