BHAGIRATH CHANDULAL ARYA,MUMBAI vs. PR CIT 18, MUMBAI

The details of the facts of this particular transaction of earning of income of Rs. 55.01 Crs include that the assessee acquired the shares in JBF to the extent of 102.82 lakhs of shares during the period from FY 2004-05 to 2010-11. Out of that, during the year, assessee transferred 40 lakhs shares to his unmarried daughter and earned the gains of Rs. 55.02 Crs. With 102.82 lakh shares, assessee‟s-family members‟ shareholding in the company constitutes 47.29% of the total equity in JBF. Individually, assessee‟s share in the JBF works out to 16.52%. The said 40 lakh shares were transferred to his daughter ie Ms. Chinar B. Arya in the month of February, 2011. As per the books these shares are said to have been acquired on 1.4.2007. It is also noticed that the assessee gave loan amounting to Rs. 70.16 Crs to his daughter useful for purchase of the said 40 lakhs shares. She also received other loans from other family members and the same is evidenced by the entries in the financial statements. Eventually, CIT issued show cause notice holding that the said amount of Rs. 55.02 Crs (rounded off) constitutes „business income‟ and the Assessing Officer lost sight of making proper enquiries in respect of the said ten transactions of transfer of shares to his unwed daughter as shown in AIR. Relevant lines from the order of the CIT (page 3) read as under:- “......Thus, the offloading shares out of share held meant for keeping controlling interest in the company has given rise to gain to the assessee shown as long term capital gain amounting to Rs. 55,01,91,539/- is nothing but business income only in substance. Here, is worth noting that the assessee has in fact earned the profit of Rs. 55,01,91,539/- for this out of opportunity cost available to the assessee in form of investment made in M/s. JBF Industries Ltd to keep controlling interest in the said company. Therefore, claim of the assessee of Rs. 55,01,91,539/- as LTCG is not correct but should have been treated as business income. This shows the AO has lost sight of making proper enquiries in respect of ten transactions giving rise to Long Term Capital Gain (LTCG), which the AO is under legal obligation to do so. In this way, since, the AO has failed to do the proper enquiry in respect of all the transactions showing in the AIR this amounts, rendering the assessment order erroneous and prejudicial to the revenue as well.” Thus, the two reasons for the CIT to invoke the provisions of section 263 are: (i) treating the assessee as trader in shares of JBF and (ii) the AO‟s failure to make proper enquiries in the said transactions of purchase and sale of 40 lakh JBF shares.

In response to the show cause notice dated 7.5.2014, assessee submitted by way of written submissions and the same are reproduced in para 2 of the revision order passed by the CIT u/s 263 of the Act. Briefly, the contents of the reply includes that (i) the transfer of 40 lakh shares to Ms. Chinar B. Arya, constitutes an „internal restructuring‟ of JBF shareholding; (ii) assessee is not a trader and engaged in share business activity for the income to constitute business income; (iii) assessee sold in the AY 2004-05 one lakh JBF shares and earned “long term capital loss”. The said loss was claimed in the return of income and the same was accepted by the Revenue without any disturbance. Assessee relied on the set „principle of consistency‟ and submitted that the facts are identical and pleaded for accepting the claim in this year also. 4.1. In this regard, assessee submitted the supporting documents / bills / financial statements etc; (iv) Without prejudice, it is the claim of the assessee that when a controlling interest is transferred, the same falls in the capital field and the income earned on sale of such interest constitutes „capital asset‟ and never should it be treated as business activity. Assessee relied on various decisions in this regard; (v) assessee also submitted that AO accepted the claim of the assessee after detailed proper enquiries into transactions of purchase / sale of shares and therefore, the attempt of the CIT in cancelling the assessment order passed u/s 143(3) of the Act should constitute a case of revisions based on „change of opinion‟. The same is not permitted under the Statute. Further, it is the case of the assessee that AO has also taken a possible view in the matter and the CIT cannot substitute the same with his view. For this proposition, he relied on the judgment of the Hon‟ble Supreme Court in the case of CIT vs. Max India [2007] 295 ITR 282 (SC) and another judgment of the Apex Court in the case of Malabar Industries Co. Ltd vs. CIT [2000] 243 ITR 83 (SC). Further, assessee also submitted that 40 lakh shares were transferred to his daughter in normal cause of sale of shares – Long Term Capital Assets - involving a registered Broker M/s. Sunidhi Securities & Finance Ltd.

However, CIT is of the view that the transfer of said 40 lakh of shares of JBF to the assessee‟s daughter is part of his vocation of managing of the company in the capacity of Chairman and Managing Director of M/s. JBF and such activity constitutes „vocation‟, which falls in the meaning of „business activity‟. For this proposition, he relied on the judgment of the Hon‟ble Calcutta High Court in the case of CIT vs. Rajeeva Lochana Kanoria (208 ITR 616) (Cal.) and judgment of the Hon‟ble Guwahati High Court in the case of Nabadwip Chandra Roy vs. CIT [1962] 44 ITR 591. Since, the management and control of interest in the company is a „vocation‟ / business activity, the sale transactions involving 40 lakh shares to the assessee‟s daughter constitutes a „business transaction‟. 5.1. Therefore, as per the CIT, the earning of Rs. 55.02 Crs (rounded off) constitutes „business income‟ in substance. On the issue of application of mind by the AO during the regular assessment proceedings, CIT opined that AO failed to make proper inquiries into the transactions with his daughter (Ms Chinar Arya) and also M/s. Sunidhi Securities & Finance Ltd etc. CIT also analysed the brief transactions of shares as per the discussion given in para 8 of his order and discussed why the assessee failed to transfer the shares to his daughter by way of gift. In para 10 of his order, CIT held that the Assessing Officer has neither called for any details of purchase and sale of 40 lakh shares nor the source of the amount lent by the assessee to his daughter for purchase of the shares etc. Relevant lines from the said paras 10 and 11 of the CIT‟s order read as under:- “10.........The facts discussed above show that the AO has neither called for any details relating to the purchase and sale of 40 lac shares nor, the source of the amount lent by the assessee to his daughter for purchase of the shares not, he has examined the details filed by the assessee during the course of assessment proceedings to know the real intention behind the sale of 40 lac shares by the assesse to his daughter by raising loans from his family members and then advancing that amount to his daughter for purchase of above shares and also the fact that the assessee is a promoter, director and chairman of the company of M/s. JBF Industries Ltd and sale of shares of the company has taken place when he is controlling and running the company, which transaction tantamount to „adventure in the nature of trade. In regard to the above contention of the assessee, I also rely on the following decisions wherein proceedings u/s 263 of the Act, have been upheld because of lack of enquiry and investigation into a material transaction during the course of assessment proceedings: (i) CIT vs. Jawahar Bhattacharjee (2012) 342 ITR 0074 (ii) P.V. Sreenijin vs. CIT (Central) 2014) 106 DTR 087 (iii) CIT vs. Parasmal Jain (2012) 249 CTR 0534 (iv) CIT vs. Anand Kumar Jain (2015) 370 ITR 140 (v) CIT vs. Ashok Logani (2012) 347 ITR 22 (vi) Tata B.P. Solar India Ltd vs. Addl. CIT (2011) 139 TTJ 0289”

Eventually, CIT is of the opinion that these transactions constitute “an adventure in the nature of trade”. He relied on various decisions to substantiate that when there is no proper enquiries by the AO in the regular assessment, CIT can assume jurisdiction u/s 263 of the Act. At the end, CIT concluded by commenting that the order of the AO is erroneous and prejudicial to the interest of Revenue. Accordingly, CIT directed the Assessing Officer to reframe the assessment order after examining the following issues:-

Further, eventually, CIT set aside the order of the AO and directed for redoing the same as per the law and assess the income under the head „business income‟ instead of „long term capital gains‟. Aggrieved with the above revisions order of the CIT, assessee filed an appeal before the Tribunal.

To start with, the case of the assessee against the order of the CIT is that the issue raised by the CIT in the show cause notice was deeply examined by the Assessing Officer during the scrutiny proceedings u/s 143(3) of the Act while completing the assessment dated 28.2.2014. In support of the same, Ld Counsel for the assessee brought our attention to various documents of the paper book. Referring to page 13 of the paper book (a letter of the AO dated 21.2.2014 during the scrutiny proceedings issued to the assessee), Ld Counsel for the assessee read out the following lines:- “1)............you are requested to show cause why the long term capital gain of Rs. 58,64,75,978/- should not be treated as business income this year too.”

In response to the above query, assessee gave a detailed written reply, a copy of which is placed at pages 14 to 30 of the paper book. Explaining the above correspondence, Ld Counsel for the assessee submitted that the facts relating to the purchase of the said 40 lakh shares of JBF by the assessee and sale of the same to the unwed daughter Ms. Chinar B. Arya, relevant amounts, the particulars of the broker who is engaged in the transactions, bank particulars etc were already furnished and explained to the satisfaction of the AO at the time of the assessment proceedings. Further, bringing our attention to page 17 of the paper book, Ld Counsel for the assessee submitted that the assessee was never a trader in shares and he was always an investor and therefore, the question of treating the amount gained as „business income‟ should not arise. Referring to the holding period of the said 40 lakh shares sold by the assessee, Ld Counsel for the assessee demonstrated that the shares in question were held more than one years and the same constitutes „long term capital asset‟ as per the definition given to the “shares”. Ld AR further submitted that at the time of sale of the shares to his daughter, assessee paid Securities Transactions Tax (STT) as per the relevant provisions of the Act. Further also, drawing our attention to pages 18 and 19 of the paper book, Ld Counsel for the assessee mentioned that the Assessing Officer consistently accepting the claim of the assessee with regard to the long term capital gains or loss. Bringing our attention to the long term capital loss of Rs. 39,45,156/- earned by the assessee in the AY 2009- 2010, Ld Counsel for the assessee mentioned that the Department accepted the same without any disturbance. Considering the above, it is the argument of the Ld Counsel for the assessee that there is a need for maintaining the rule of consistency, the CIT erred in disturbing the assessee‟s claim in this regard. Further, brining our attention to the Board Circular No.4/2007, dated 15.6.2007, Ld Counsel for the assessee submitted that there is a clear cut definition to the shares held as „stock-in- trade‟ and held as „investment‟ and the CIT failed to respect the contents of the said Circular in thrusting on the assessee the stock-in-trade status to the said 40 lakh shares ignoring the book entries as well as the definition of the long term capital asset given by the statute. Ld AR further relied on various decisions to demonstrate that the CIT erred in invoking the provisions of section 263 of the Act. Eventually, Ld Counsel for the assessee submitted that the long term capital gains of Rs. 58.56 Crs (rounded off) constitutes long term capital gains and not the business income of the assessee. Further, Ld Counsel for the assessee submitted that the assessee is full time Managing Director of the assessee and he does not deal with the buying and selling of the shares. The fact of giving detailed discussions to the CIT during the show cause notice issued u/s 263 of the Act, CIT‟s decision in ignoring the contents of the same was also pointed out by the Ld AR. Further, Ld Counsel for the assessee brought our attention to the financial statements of various years evidencing the fact of reflecting the said 40 lakh shares as „investment‟ was also demonstrated. Bringing our attention to the loans received by the assessee and giving of the same to his daughter for empowering the daughter to purchase 40 lakh shares, Ld Counsel for the assessee submitted that this aspect was also examined at the relevant point of time and therefore, the present exercise by the CIT u/s 263 of the Act constitutes a case of thrusting his view in place of the existing view taken by the Assessing Officer during the regular assessment proceedings. Referring to the decisions of the Hon‟ble Gauhati High Court in the case of Nabadwip Chandra Roy vs. CIT (44 ITR 591) and the judgment of the Hon‟ble Calcutta High Court in the case of Commissioner Of Income-Tax vs Rajeeva Lochan Kanoria [1994] 208 ITR 616 (Cal), Ld Counsel for the assessee submitted that the cases wrongly referred by the CIT. Further, without prejudice, Ld Counsel for the assessee submitted that what is sold is the 40 lakh shares to his daughter, which constitutes part of the stock in the company held by the assessee ie 16.52% individually and 47.29% as a family, and the same should constitute internal restructuring of JBF shareholding. Bringing our attention to the similar transactions reported in the Assessment Year 2004-05, Ld Counsel for the assessee demonstrated that the said transactions were never considered as business transactions and the claim of the assessee was accepted without disturbance. In the AY 2004-05, assessee sold 1 lakh shares which earned long term capital loss of Rs. 32.28 lakhs. Referring to various decisions ie CIT vs. Naishadh Vaccharajani (ITA No.1042/2011) (Bom. HC), dated 22.9.2011; Nagindas P Sheth HUF vs. ACIT (ITA No.961/M/2010, dated 5.4.2011); CIT vs. Gopal Purohit [2011] 336 ITR 287 (Bom.) - SLP rejected – 334 ITR (St.) 308, Ld Counsel for the assessee demonstrated that the present claim of the assessee constitutes long term capital gains and the same should be accepted without any disturbance. Referring to the order of the CIT in principle and para 11 of his order in particular, which constitutes a reason for treating the order of the AO as erroneous and prejudicial to the interest of Revenue on the ground of failure of the AO to examine various issues, Ld Counsel for the assessee submitted that the seven reasons given by the CIT in the said para 11 of his order constitutes only surmises and suspicion etc and there is no error specifically pointed out by the CIT for calling the order of the AO as erroneous. The observations relating to the variation of price on the stock exchange, allegation of insider trading etc are unspecific and unsubstantiated by the CIT. Some other observations made in the said para 11 are unrelated to the AY under consideration and the they constitutes roving enquiries unspecific to the issue as well as the AY under consideration. Referring to the CIT‟s allegation, Ld Counsel for the assessee mentioned that the assessee was never a businessman and there is no profit motive in selling the shares to his unwed daughter. It is a case of internal restructuring of the shareholding pattern of the JBF Group and it is not a case of trading to gain profits. The sale of the shares to his daughter should be read as empowering family member without losing 47.29% of the total equity in JBF by the family members. On this issue, Ld Counsel for the assessee submitted various decisions to demonstrate as to how the sale of shares would not constitute adventure in the nature of trade.

On the other hand, Ld DR for the Revenue relied heavily on the order of the CIT. Referring to the order of the AO, Ld DR submitted that the same is cryptic and it does not speak much about the transactions in question. Relying on the judgment in the case of CIT vs. Amitab Bachchan vide Civil Appeal No. 5009 of 2016 [Arising out of S.L.P.(C) No.11621 of 2009] dated 11th May, 2016, Ld DR submitted that like in the present case, AO failed to make proper enquiries and failed to apply his mind on the provisions of the Act which should lead to the conclusions that the AO‟s order is erroneous and prejudicial to the interest of Revenue. Summing up the entire transactions leading to earning of the profit of Rs. 55.02 Crs, Ld DR submitted that the said unwed daughter does not have sufficient funds to buy the said 40 lakh shares of JBF and in fact she was made investment worthy by giving loans out of his unsecured loans. The entire transaction is a collusive arrangement with his daughter and it leads to claim of exemption of capital gains earned by the assessee u/s 10(38) of the Act. Assessee has not paid any income tax on the said gains of Rs. 55.02 Crs (rounded off). Thus, Ld DR submitted that this is a case of assessee doing business with his shares and earning business income and not the long term capital gains for becoming eligible for not paying any tax in view of the provisions of section 10(38) of the Act.

We have heard both the parties and gone through the paper book as well as the written submissions filed before us. There is no dispute about the facts and figures that appeared in the orders. CIT has listed out various allegations for denying of exemption on the gains earned by the assessee in selling of 40 lakh of JBF shares to his unwed daughter. Some of the allegations include (i) the failure of the AO in conducting proper enquiries into the purchase and sale of the transaction of shares / role of share broker / the payment details etc., (ii) the assessee, since traded in shares was held as a trader of shares and he is not an investor; (iii) the assessee‟s purchase and sale transactions constitute „an adventure in the nature of trade‟; (iv) the sale transactions executed by the assessee, being a C & MD of JBF constitutes his vacation / business activity which falls in the scope of section 28 of the Act; (v) the list of 7 areas that required proper investigation by the AO constitutes errors in the order of the AO. Eventually, CIT proposed a change of head of income ie from the “capital gains” to “profit and gains from business or profession”. We shall take up each of these allegations if they are validly raised by the CIT within the scope of the provisions of section 263 of the Act. 11.1. Regarding the allegation of lack of proper enquiries by the AO in the regular assessment dated 28.2.2014 made u/s 143(3) of the Act, we find, the AO issued a letter dated 21.2.2014 and called for details on the purchase and sale transaction of 40 lakh shares of JBF. In fact, AO‟s letter dated 21.2.2014 which was mentioned in the preceding paras of this order, expressly clear in mentioning AO‟s proposal to tax the said gains as „business income‟. Against the said proposal, we find the assessee filed a detailed reply running into 30 pages, which is referred in page 9 of this order, suggests that AO completed regular assessment after examining the purchase transactions of the shares, sale transaction of the shares, the participation of M/s. Sunidhi Securities & Finance Ltd as a broker, the financials required for the daughter to buy the shares, financial statements of the assessee and concerned parties etc. 11.2. It is appropriate to extract relevant portions from the said letter dated 21.2.2014 (page 13 of the paper book) and the same is scanned and placed as under:-

From the above, we find the said reply deals with assessee‟s holding of shares in JBF since FY 2005-06 onwards, made of acquisition of shares, decision to tax them under the head “capital gains”, how the assessee is an investor only over the years, sources of the funds, details on payment of STT on the sale transactions as and when they were sold, holding period particulars, applicability of Circular 4/2007, dated 15.6.2007 of the CBDT details of purchase / sale transactions, large number of case laws relied by the assessee, rule of consistency and finally the reasons for not disturbing the claim of the assessee as exempt capital gains. The penultimate para from page 17 of the reply letter dated 25.2.2014 (page 30 of the paper book) reads as under:- “In view of the above, we request you not to treat the Long Term Capital Gain of Rs. 58,64,75,978/- as business income and oblige”.

We have perused the copies of the return of income for various AYs ie AY 2003-04 onwards and the copies of the bills, which are kept in the paper book. Considering the same, it can be comfortably infer that the AO made assessment after raising reasonable queries on the correctness of the claim of exemption u/s 10 of the Act in respect of the gains in question. Merely by seeing the assessment order, the CIT was led into an error to conclude that the assessment order was completed without conducting the proper enquiries. CIT is aware of this part of the enquiry and also the reply of the assessee. Therefore, this part of the argument of the CIT is dismissed. We cannot appreciate the finding of the CIT that the AO has not applied his mind and not conducted proper enquiries.

So far as the line of investigations recommended by the CIT, as suggested in para 6 of this order, in our opinion, the same constitutes thrusting of his line of conducting enquiries – his views on that of the Assessing Officer without crystallising clearly the error in the order and loss of revenue. Such views substituting the views of the AO are not sustainable in law so far as the scope of the provisions of section 263 of the Act is concerned. CIT failed to found errors in the AO‟s order made /s 143(3) of the Act. Therefore, this part of the conclusion of the CIT is unsustainable and accordingly dismissed.

Regarding the allegation of the CIT relating to vocation, we find the CIT treated the purchase and sale transaction entered into by the assessee in the capacity of CMD of the company constitutes vocational / business activities relying on certain decisions viz., Hon‟ble Calcutta High Court in the case of Rajeeva Lochana Kanoria (supra) and judgment of the Hon‟ble Guwahati High Court in the case of Nabadwip Chandra Roy (supra). On perusal, we find that facts of these cases are entirely different on facts. In view, these decisions will not help the CIT considering the peculiar facts of this case. Therefore, we dismiss the relevant inferences of the CIT in this regard.

Regarding the allegation relating to the “adventure in the nature of trade”, we find, the fact of assessee transferring 40 lakh shares of JBF to his unwed daughter is a matter relating to the assessee‟s decision to not to sell shares to the outsiders. It is certain that by selling the shares to the outsiders, the shareholding of the family in the company (JBF) is likely to be diluted losing the control in the company. Therefore, it is understandable that the transfer of 40 lakh shares of JBF, in our opinion, cannot constitute a „transfer with profit motive‟, which is an essential ingredient to an „adventure in the nature of trade‟. Further, it is not a case of trading activity of stock-in-trade as the assets involved are „long term capital assets‟ held by the assessee undisputedly beyond the period of three years. It is a statutorily defined any share held by the assessee for a period of more than 36 months is a long term capital asset (section 2(42A) of the Act). When assessee falls in the said definition of „long term capital asset‟, there is no reason why the same should be disturbed by the CIT on the ground of suspicion and surmises. Therefore, this part of the conclusion of the CIT is unsustainable in law and the same is dismissed.

Further, we observed that the contents of the CBDT‟s Circular 6/2016 and 4/2014 dated 29.2.2016 and 7.4.2014 respectively do not permit the alteration of the head of income for taxing the gains earned on sale of the shares normally. Exceptions are also provided these Circulars. The Department has not made out any case that the fact of the present case falls in the said exceptions. The relevant paras 3(a) and 4 of the said Circular 6/2016 (supra) are extracted and placed here as under:- “3..... (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b)...... (c)....... 4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions.” In our opinion, the CIT prematurely held that the order of the AO is erroneous. We do not approve the finding of the CIT. 18. From the above analysis of the CIT‟s allegations, we find, CIT did not pin pointedly crystallise the errors in the order of the AO dated 28.2.2014 and failed to quantify the loss of revenue by giving valid / sustainable reasons. In our opinion, this is the case of where the CIT tries to substitute his line of investigation with that of the AO and the same is not permissible under the provisions of section 263 of the Act.

The scope of section 263 is repeatedly explained by various judicial pronouncements such as Instant Holdings Ltd vs. Principal CIT in (AY 2011-12), dated 07.12.2015 wherein one of us (AM) is a party to the said order. For the sake completeness of this order, relevant paras from the said Tribunal‟s order (supra) are extracted as under:- I. Scope of the provisions of section 263 of the Act 24. We have examined the scope of the provisions of section 263 of the Act and the settled legal propositions pro-founded by the Hon‟ble Apex Court as well as other courts on the subject ie jurisdiction of the Pri. CIT u/s 263 of the Act are as follows. Accordingly, for the revenue, an incorrect assumption of fact, incorrect assumption of law, failure of the AO to or routinely to conduct investigation in to an issue and when such assumptions or failures led to „the interest of revenue‟, are the approved grounds for the CIT to assume the jurisdiction u/s 263 of the Act. Limiting the aspects of „incorrect assumption of law‟, which is the issue in the instant case, as well as „prejudicial to the interest of revenue‟, the view of the supreme court and the High court of Bombay in the cases of Malabar Industrial Co Ltd (243 ITR83) and Gabriel India Ltd (203 ITR108)(Bom) respectively are relevant. It is a settled matter that the judicial discipline demands that the Income tax Authorities are bound to give effect to the judicial interpretation of the Honble High courts on the subject concerned. It is binding on the IT Authorities when such interpretations are affirmed by the Apex court. In the back ground of the same, an „incorrect assumption of the law‟ constitutes an acceptable ground for the CIT to assume jurisdiction. Further, when the AO adopts one of the courses permissible in law and it has resulted in the loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as and erroneous order prejudicial to the interests of the revenue, unless the view taken by the ITO is unsustainable in law.

Further, on the issue of application of the mind of the AO, in the case of Gabriel India Ltd (supra), the Jurisdiction High Court has also held that where the AO has made enquiries with regard to nature of the claim as evidenced by the detailed explanations furnished by the assessee in the assessment proceedings, the order of the AO cannot be called to be erroneous and prejudicial to the interest of revenue. Recording the loss of revenue by the CIT is the requirement of the revisionary order of the CIT. Such loss of revenue should be obviously assessee- specific ie with reference to the assessee in question and not with reference to the other party of the transaction or third party. Regarding application of mind of the AO, it is a decided issue that the assessment proceedings must reflect that there are enquiries undertaken by the AO. It is not the requirement that the order must speak on such enquiries.”

Considering the above, in our opinion, it is not the case of “erroneous order” / „prejudicial to the interest of revenue‟. Hence, it is a case of invalid