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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Ravish Sood(JM)
O R D E R Per B.R. Baskaran (AM) :-
The Revenue has filed this appeal challenging the order dated 8.1.2015 passed by the learned CIT(A)-20, Mumbai by deleting the addition of ` 40 lakhs relating to profit on sale of shares made by the AO.
The assessee-company is engaged in the business of trading in shares and securities. The Assessing Officer noticed that the assessee has shown four parties, viz., Fehmida S Mun, Nafisa A Mun, Sakina A Mun and Tasneem S Mun, as sundry creditors with the balance of ` 32,50,000/- each. When enquired, the assessee stated that he had received the above said sum of ` 32,50,000/- from each of the persons as advance against sale of unquoted shares of M/s. Midvalley Entertainment Ltd. The Assessing Officer issued summons u/s. 131 of the Act to all these four parties and recorded their submissions. The Assessing Officer noticed that all the four parties have shown the above said amount as payment made towards purchase of 50,000
2 M/s. Devkant Synthetics (India) Private Limited shares of M/s. Midvalley Entertainment Ltd., at a price of ` 65/- per share. The Assessing Officer noticed that the assessee has also issued broker’s instruction slip and the shares have also been transferred to demat account of respect four parties. Accordingly, the Assessing Officer took the view that the sale has been completed and the assessee has failed to disclose profit arising on sale of 2 lakhs shares (50000 shares x 4 parties) of M/s. Midvalley Entertainment Ltd. The Assessing Officer noticed that the assessee had purchased the above said shares at ` 45/- per share. Accordingly he worked out the profit at ` 20/- per share and accordingly, computed the profit on sale of shares ` 40 lakhs and added the same to the income of the assessee. The assessee challenged the addition by filing appeals and when the matter went to the Tribunal, the assessee pointed out that it has received back 2 lakhs shares given to the above said four persons and the same was subsequently sold in the subsequent years and the profit thereon was also offered. Accordingly, it was contended before the Tribunal that the addition of ` 40 lakhs made by the Assessing Officer would result in double assessment of the same income. In view of this submission, the Tribunal restored the matter to the file of the learned CIT(A) with the direction to adjudicate the issue afresh. Accordingly, the impugned order was passed by the learned CIT(A).
The learned CIT(A) noticed that the assessee had entered into a memorandum of agreement with four parties. On perusal of various clauses of memorandum of understanding, the learned CIT(A) came to the conclusion that the sale of 2.00 lakhs shares to the above said parties has not become final upon receipt of ` 32.50 lakhs from each of the parties. Accordingly, the learned CIT(A) concluded that the addition of ` 40 lakhs made by the Assessing Officer is not sustainable and accordingly deleted the same. The revenue is aggrieved by the decision of Ld CIT(A).
We have heard the parties and perused the record. We notice that the main issue to be considered is, in the facts and circumstances of the case,
3 M/s. Devkant Synthetics (India) Private Limited whether the sale of shares has been completed during the year or not? We noticed that the learned CIT(A) has deleted the addition of ` 40 lakhs with the following observations :-
3.3 Decision - I have carefully considered the AO's order, his remand repo, the earlier order of the CIT(A) and the submissions of the assessee, in light of the directions issued by the Hon’ble Tribunal, as extracted earlier in this order at paragraph No.
The decision is seen to primarily boil down to one single issue, viz. 'was there any conclusion of the transaction of sale of shares during the previous year relevant to the assessment year under consideration at the time the Shares were handed over to the members of the Mun family?'. Here, it would he material to examine the agreements on which these transactions are seen to have been based. It is noteworthy that there is no examination of the said agreements either in the AO's order or his remand report. Be that as it may, all the agreements entered into by the appellant with Sushri Femida Mun, Sushri Sakina Mun, Sushri Tasneem Mun and Sushri Nafisa Mun are seen to be identical in terms of both the quanta of shares and money, as also the conditions laid down therein. They are all seen to have been signed on 18th October 2007 on non-judicial stamp paper purchased by the assessee on 15th October 2007. All the agreements stipulate a base price of 65/- per share of MEL, stating that the expectation was of a public issue by 31St December 2007 of 90/- per share and actual listing of MFL on the stock exchange by 31st January 2008. In case of a public issue offer below 90/- per share, the appellant was to make good the shortfall by offering to the members of the Mun family additional shares owned by it. The Mun family members were free to sell the shares after 380 days after the date of listing of the shares. All the four agreements were for 50,000 shares each. From the documentation filed, it is clear that in pursuance of the agreements the said shares were transferred to the four members of the Mun family on 23rd October 2007, the appellant having been paid an advance of @ ` 65/- per share in lieu thereof. The appellant has also filed a copy of the prospectus of MEL which came out much later and which states the date of the commencement of the public issue as 10th January 2011. It has also filed a copy of the circular by the stock exchange announcing the commencement of trading on 27th January 2011. Clearly, there was no public issue by MEL by 31st December 2007 or for that matter no listing of MEL shares on the stock exchange by 31st January 2008, as envisaged by the agreements. To this extent, there is a clear vitiation of the terms of the agreements. The subsequent conduct of both the parties to each of the four agreements too bears out such an understanding on their part. Ali the 4 M/s. Devkant Synthetics (India) Private Limited
shares transferred to the four members of the Mun family have been retransferred back to the appellant on return of the advances (@ ` 65/- per share) by the appellant, the first such transfer and return having taken place en 28th April 2008 in the case of Sushri Sakina Mun. In fact the same shares returned by Sushri Mun have been sold and transferred to Dr. J. Muni Manohar on 28th April 2008 @ ` 76.25 per share, the resultant capital gain after deducting the cost of acquisition of 45/- per share having been offered to tax in AY 2009-10. All these transfers of shares and monies are seen to be supported by documentation in terms of demat statements, bank statements, etc.
3.3.1 The basic issue here is whether the conduct of the appellant and the members of the Mun family would lead to an actual sale of shares or whether the reversal of the advance as also the re-transfer of shares would lead to they not being treated as sale. In this context, while rendering its decision in the case of C1T v. Ashaland Corporation (133 ITR 55), the Hon'ble Gujarat High Court had observed as follows.
A transaction which may or may not ultimately result, in complete sale ..... is no transaction at all for the purpose of working out profit. Receipt of some amount would assume the character of income or profit only when the sale transaction is completed in accordance with law." From a plain reading of the above ratio, it would become clear that the ultimate result of a transaction on its completion would be important. In the case at hand, the appellant had returned the exact amounts received earlier as advances and received back the exact shares earlier transferred. This fact cannot be overlooked while deciding this matter. To my mind, this issue needs to be looked at holistically and not in piecemeal. To this extent, I am not in agreement with the AO when he states that the subsequent happenings in this case would be irrelevant. It is also noteworthy that the appellant has returned the capital gain computed at a higher sale consideration @ ` 76.25 per share as opposed to ` 65/- per share as computed by the AO in the subsequent assessment year, which the AO has accepted. In fact this double taxation of a component of the capital gain (i.e the difference between ` 65/- and the cost of acquisition of ` 45/-) has been clearly subjected to double taxation. Equally noteworthy would be the fact that the AO has not sought to bring to tax only the residuary capital gain (i.e. the difference between ` 76.25 and ` 65/-) in AY 2009-10, in line with the addition sought to be made by him in AY 2008-09. Rather, the entire capital gain (i.e. the difference
5 M/s. Devkant Synthetics (India) Private Limited between ` 76.25 and ` 45/-) has been brought to tax in AY 2009- 10. Coming to the accounting of all these transfers in the books of the appellant, it is seen to have consistently shown the monies advanced by the members of the Mun family as sundry credits, while continuing to show the shares as part of its assets in its balance sheet, even when they had been transferred to the members of the Mun family.
3.3.2 In view of the discussion in the preceding sub-paragraphs, after careful consideration, I am of the view that the capital gain in question did not arise during the previous year relevant to the assessment year under consideration.
The Ld D.R submitted that the sale has been completed during the year under consideration as the same is evidenced by the fact that the assessee has transferred the shares to the demat account of the buyers. He further submitted that the buyers have shown the same as purchase of shares and not as payment of advance. Accordingly he supported the order passed by Ld CIT(A).
On the contrary, the Ld A.R invited our attention to the Memorandum of Agreement entered between the parties. He submitted that, as per clause 2 of the agreement, the price of Rs.65/- per share received by the assessee cannot be considered to be final, i.e., the assessee is required to offer more shares if the price of public issue of shares is not Rs.90/- or more. Accordingly he submitted that the sale cannot be considered to be complete without determination of selling price. Further the agreement has some more clause offering compensation to the above said four parties, if the listed price goes below Rs.65/-. He submitted that the assessee has to obtain back the shares given to the above said parties, since the company did not go for public issue by the stipulated time. He submitted that the assessee has sold the shares subsequently to other parties at a higher price and the resultant capital gain was offered in those years.
6 M/s. Devkant Synthetics (India) Private Limited
Having heard rival submissions, we are of the view that the order passed by Ld CIT(A) does not require any interference. A perusal of memorandum of agreement entered between the assessee and each of the above said four parties would show that the amount of Rs.65/- received by the assessee cannot be considered to be the final selling price and the quantity of shares also cannot be considered to be final figure of 50,000/-. The clause no.2 provide for allotment of additional shares to the above said parties and the clause no.3 provides for refund of money to them, both on happening of certain events. Hence we agree with the contentions of the assessee that the sale has not been completed during the year under consideration, in the absence of finality of the selling price and selling quantity. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
In the result, the appeal filed by the assessee is allowed.
Order has been pronounced in the Court on 3.2.2017.