RUSSEL CREDIT LIMITED,KOLKATA vs. PCIT, KOL, KOLKATA

Present for: Appellant by : J.P. Khaitan, Sr. Counsel Bikash Chanda, CA Respondent by : Abhijit Kundu, CIT DR Date of Hearing : 21.08.2024 Date of Pronouncement : 23.10.2024 O R D E R

PER SANJAY AWASTHI, ACCOUNTANT MEMBER:

1. This appeal filed by the assessee is against the order of the Ld. Principal Commissioner of Income Tax, Kolkata-1 (hereinafter referred to as “the Ld. Pr. CIT”) passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2018-2019, dated 27.02.2023, which has been passed against the assessment order u/s 143(3) read with sections 143(3A) & 143(3B) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) passed by the Assessing Officer, National e- Assessment Centre, Delhi, dated 08.03.2021.

(a) Treatment of gain from transfer of 34 unquoted preference shares of ICICI Bank Ltd as long-term capital gain (hereafter ‘LTCG’) of Rs. 12,97,56,648/- instead of business profit of Rs. 18,48,26,280/-, ostensibly on the ground that in the audited accounts these investments were classified as “stock-in-trade”.

(b) Set off of the LTCG against the brought forward long-term capital loss of AY 2012-13, which could only be Rs. 12,10,75,318/-, being the figure of loss surviving after assessment u/s 143(3) of the Act for the AY 2012-13, and not Rs. 12,97,56,648/-, as claimed by the appellant.

(c) Allowing of Rs. 96,65,106/- towards loss on disposal of property, plant and equipment, even when, allegedly, this was not allowable, being capital in nature.

1.1 Aggrieved with this action of Ld. Pr. CIT, the appellant has filed the present appeal, challenging the impugned order through the following grounds of appeal:

Ground No. 1: Profit on sale of investment in 34 nos Unlisted Preference Shares of ICICI Bank Ltd considered as business income instead of Long-Term Capital Gain Rs. 12,97,56,648/-: (a) For that the Learned Principal Commissioner of Income Tax, erred in law in holding that the assessment order under section 143(3) of Income Tax Act, 1961 (the Act) is erroneous and prejudicial to the interest of the revenue in respect of profit on sale of Unlisted Preference Shares of ICICI Bank Ltd. (b) For that the learned Principal Commissioner of Income Tax was not justified in considering the assessment order under section 143(3) of the Act is erroneous, since Russel Credit Ltd. : AY: 2018-19 the Appellant Company has relied upon the CBDT instruction no. F.NO.225/12/2016/ITA.II dated 2nd May 2016 in its submission and the Assessing Officer (AO) had followed the said CBDT instruction while allowing the profit on sale of Unlisted Preference Shares of ICICI Bank Ltd to be treated as Long- Term Capital Gain instead of business income. Hence, the Assessment Order cannot be considered as erroneous, in view of the clear-cut instruction by CBDT that income arising from transfer of unlisted shares would be considered under the head 'Capital Gain' and not business income irrespective of period of holding (c) For that the learned Principal Commissioner of Income Tax was not justified in setting aside the order of the Assessing officer passed u/s 143(3) of the Act considering the profit on sale of Unlisted Preference Shares of ICICI Bank Ltd as business income, without appreciating the fact that the assessing officer had duly enquired and verified the documents and records of the Appellant Company relating to its sale of unlisted preference shares before passing the assessment order u/s 143(3) of the Act. (d) For that the order passed by the learned Principal Commissioner of Income Tax u/s 263 of the Act is against the settled principle of law that an order of Assessing officer should be both erroneous and prejudicial to the interest of the revenue, and such tests being not satisfied in the instant case, the order u/s 263 is in excess of jurisdiction and liable to be quashed. (e) Without prejudice, the learned PCIT erred in holding that the AO had not gone through the CBDT instruction no. F. NO 225/12/2016/ITA.II dated 2nd May 2016 for examining the situation in which the instruction is not applicable, even though the same was duly submitted by the Appellant Company during the course of original assessment proceedings u/s 143(3) of the Act. Relief Prayed: The proceedings u/s 263 of the Act in respect of sale of Unlisted Preference Shares should be quashed. Without prejudice the treatment adopted by the Appellant Company and confirmed by the AO during the scrutiny assessment proceedings should be accepted. Ground No. 2: Reduction in Set off of brought forward Long-Term Capital Loss with Long Term Capital Gain of Rs.86,81,330/-: (a) That on the facts and in the circumstances of the case, the Ld. PCIT erred in making the set off of Long-Term Capital Gain of Rs. 12,10,75,318/- with assessed brought forward Long- Term Capital Loss of Rs. 12,10,75,318/- of AY 2012-13 instead of returned brought forward Long-Term Capital Loss of Rs. 12,97,56,648/- Relief Prayed: Set off of brought forward Long-Term Capital Loss with Long Term Capital Gain of Rs. 12,97,56,648/-should be allowed. Ground No. 3: Loss on disposal of Property, Plant & Equipment already added back in the computation of income of Rs. 95,65,105/-: (a) For that the learned Principal Commissioner of Income Tax was not justified in directing AO to verify whether the loss on disposal of property, plant & equipment of Rs. 95,65,105/-has been added back by the Appellant Company, without appreciating the fact that the Appellant Company has submitted all the documents Russel Credit Ltd. : AY: 2018-19 and records substantiating the fact that the said loss has been added back in the computation of income Relief Prayed: The direction given by learned PCIT should be quashed. Ground No. 4: To crave leave to add, modify or abrogate any grounds as may be considered appropriate during the course of hearing.

2. The appellant has filed a paper book running into 185 pages, written submissions on each issue and copies of some cases purportedly on the ground that once an issue has been considered by the Ld. AO then the same cannot be revisited by the authority seized with performing an action u/s 263 of the Act. The Ld. DR has also filed written submissions in support of the impugned order.

2.1. Before us, the Ld. AR has vehemently argued for quashing of the impugned order. Also, heavy reliance has been placed on CBDT’s Instruction No. 225/12/2016/ITA.II dated 02.05.2016 and an earlier Circular No. 4/2007 dated 15.06.2007 which, as we shall see, have a critical bearing on this subject.

2.2. The crux of the Ld. AR’s contention on the claim of LTCG is that the issue of taxability of gain arising out of sale of preference shares in M/s ICICI Bank Ltd was dealt with by the Ld. AO in as much as there was a specific query u/s 142(1) of the Act (dated 25.01.2021, as placed before us on pages 145 onwards of paper book) as under:

“2. As per the computation under the head Business and Profession, you have reduced the amount of Rs 18.48,26,280/- from Profit on sale of long term investment to be considered separate income under the head capital gain. This amount was shown as LTCG in the Capital Gain schedule, wherein you have claimed amount of Rs 337797480/- as Full Value of consideration received from sale of asset. The capital gain of Rs 12,97,56,648/- arose which was set off against the Long term capital loss of AY 2012-13 In respect of the above transaction, kindly submit the following: i. The FMV of this asset has not been stated in the ITR. You are required to submit the FMV of the asset as per the provision of the Act along with supporting evidence.

Russel Credit Ltd. : AY: 2018-19 ii. Further from Balance sheet it is seen that the value of non-current investment has not reduced. You are required to justify the same with supporting documents in respect of the same and kindly reconcile the same with Balance Sheet iii. In this regard kindly justify your claim of LTCG along with documents of sale, purchase and relevant portions of Bank statement highlighting this transaction of sale and purchase of the said asset.” In response to this query by the Ld. AO, the Ld. AR relied on the detailed response submitted before the Ld. AO (as available in the paper book filed before us at pages 132-144 and again at pages 149-167). Through this response the appellant laid out the conspectus of facts surrounding this issue and also placed reliance on CBDT Instruction dated 02.05.2016 (supra) to canvass the point that this Instruction directs the Assessing Officer to treat gain arising from transfer of unlisted shares under the head “Capital Gain”. From the paper book, the Ld. AR read out the detailed explanation submitted before the Ld. AO in support of his claim. Incidentally, the extract of the minutes of the Board Meeting, dated 05.02.2021, were also pointed out on pages 171-173 of the paper book, to demonstrate that the treatment of the said gain as “Capital Gain” was placed before the Board for approval, along with the period of holding and other details of the investments in question. 2.3. The Ld. AR also emphasised the facts pertinent to the issue of setting off of LTCG against brought forward losses. Regarding this issue it has been pointed out that vide notice u/s 142(1) dated 28.12.2020 the Ld. AO had enquired into this matter and had been apparently satisfied about the veracity of claim tendered by the assessee. To summarise the facts in this regard, it is seen that the initial loss (long term capital loss) claimed in AY 2012-13, which was Rs. 23,35,75,318/-, was reduced to Rs. 12,10,75,318/- through an assessment order. Admittedly, this assessment order has been appealed against with the matter still pending for adjudication before the Ld. First Appellate Authority. As informed by the Ld. AR and pointed out in the paper book, this fact was duly mentioned in the audited accounts (Notes) and placed at page 24 of the paper book. It has been averred that this action of the Ld. AO was taken adverse note of Russel Credit Ltd. : AY: 2018-19 in the impugned order on the grounds that the assessed figure of Rs. 12,10,75,318/- should have been adopted instead of Rs. 12,97,56,648/-. 2.4. Regarding the remaining issue of claim of loss on disposal of assets, it has been averred that such loss on disposal of property, plant and equipment of Rs. 96.65 lacs was actually added back in the computation of income as a composite amount comprising of Rs. 96,65,106/- (impugned) and Rs. 6,84,478/- (being net interest paid on income tax), totalling to Rs. 1,03,49,584/-. The Ld. AR pointed out that this working was supplied to the Ld. AO in response to his notice u/s 142(1) of the Act dated 28.12.2020. Various relevant pages in the paper book were pointed out in this regard. 2.5. The Ld. AR concluded his arguments by stating that a full and correct disclosure of facts pertaining to all the three impugned issues was duly made before the Ld. AO and in light of this there was no reason to treat the Ld. AO’s order as being erroneous or prejudicial to the interest of Revenue.

3. The Ld. DR relied on the impugned order and pointed out that the appellant had all along treated the said investments as “stock-in-trade” and when it suited his convenience, he switched over to treating them as capital investments. The Ld. DR also relied on written arguments which were placed on record by him. The Ld. DR painstakingly took us through the audited accounts of the assessee wherein such investments in securities were listed as “stock-in-trade”. It was also pointed out that these audited accounts would necessarily have been approved by the Board of Directors before being adopted. The Ld. DR also averred that on the one hand the audited accounts show them as stock-in-trade but conveniently for tax purposes the gain has been booked under ‘Capital Gain’, to avail of the benefit of setting off the capital loss. The Ld. DR also pointed out that the Ld. AO’s order was not indicative of any conscious acceptance of the assessee’s arguments, in as much as there is no visible discussion in the assessment order regarding the applicability of Instruction dated Russel Credit Ltd. : AY: 2018-19 02.05.2016 (supra). The Ld. DR also pointed out that the Ld. AO had not conducted any enquiry regarding the part 3(iii) of the Instruction dated 02.05.2016 (supra) and thereby the matter was covered under explanation 2(a) to section 263(1) of the Act.

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.

5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.”

(iii) Letter F. No. 225/12/2016/ITAT II dated 02.05.2016 Russel Credit Ltd. : AY: 2018-19 “Regarding characterisation of income from transactions in listed shares and securities, Central Board of Direct Taxes ('CBDT) had issued a clarificatory Circular no. 6/2016 dated 29th February 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be tased under the head Capital Gain' unless the taxpayer itself treats these as its stock-in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject.

4. The above may be brought to the notice of all for necessary compliance.”

It is seen that at least two of the above-mentioned Circulars/Instructions have been considered by both the Ld. AO and Pr. CIT (especially Instruction dated 02.05.2016). In fact, the Ld. Pr. CIT has used a particular limb of Instruction dated 02.05.2016 (supra) being 3(iii), to hold that enquiries were not conducted by the Ld. AO to determine if the impugned transfer of shares did or did not result in transfer of control and management of, in this case M/s ICICI Bank Ltd., the company in question. In fact, the provision of section 263(1) clause (a) of second Explanation has been invoked to hold that on this point action u/s 263 is certainly due. On this issue it needs to be mentioned that it has been adequately demonstrated that the said Instruction (supra) was before both the Ld. AO and Ld. Pr. CIT even though the same has not been explicitly discussed by the Ld. AO. Even at the expense of over emphasis it needs to be presumed that the Ld. AO was aware of the same while deciding on the taxability of the impugned Russel Credit Ltd. : AY: 2018-19 amount. At this juncture, sustenance is drawn from the case of Pramod Kumar Tekriwal (ITAT/92/2021, of the Hon’ble Calcutta High Court, in which the following has been held: “The short question involved in these appeals is whether the Principal Commissioner of Income Tax 10, Kolkata [PCIT] could have exercised his powers under section 263 of the Act. In our considered view, the tribunal has elaborately examined this issue, taken note of the decision of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 [SC] and allowed the appeal. Further, the tribunal has noted that the assessing officer had made an addition of 2% to the gross profit over and above the rate of gross profit of 4.63% totalling to 7.63%. It appears that after completing the assessment the assessing officer addressed the PCIT stating that certain error has occurred in the assessment order and requested him to review the order under section 263 of the Act. Whether such a procedure adopted by the PCIT was legally sustainable was examined by the tribunal and in our considered view after taking note of the various decisions of the Hon'ble Supreme Court it was rightly pointed out that section 263 of the Act does not permit substituting one opinion for another (emphasis added). That apart, the tribunal has specifically recorded a factual finding that the assessee had produced all necessary details of the purchase, sales, audited books of accounts, quantity details, etc... Further, the tribunal found that the assessee's books of accounts were audited by the Chartered Accountant, the quantity details were given in respect of opening stock, purchase, sales, closing stock, etc. Furthermore, the tribunal pointed out that no discrepancy was found between the purchase shown by the assessee and the sales decline. Thus, on facts, the tribunal concluded that assumption of jurisdiction by the PCIT under section 263 of the Act was erroneous. In our considered view, there is no error in the order passed by the tribunal nor there is any perversity in its approach for us to interfere. We find that there is no question of law, much less substantial question of law arising in this appeal. Consequently, the appeals are dismissed.” The SLP against this case was dismissed on merits (and also on the grounds of limitation) by the Hon’ble Apex Court [295 Taxman 411 (SC)] vide order dated 18.08.2023. In light of the discussion on this issue and the facts mentioned, there is no hesitation in holding that the Ld. Pr. CIT fell in error in presuming that the Ld. AO had not considered the specific directive under Instruction dated 02.05.2016 (supra). Before putting this matter to rest, we have also considered whether, on practical considerations, there is any possibility of change in management in the case of a widely held large Company like M/s ICICI Bank Ltd, through transfer of preference shares (non-participating/non-voting) of the quantum under consideration. The answer appears to be in the negative, leading to a firming of belief that in this particular case an enquiry on part Russel Credit Ltd. : AY: 2018-19 3(iii) of Instruction dated 02.05.2016 (supra) would be a futile exercise, even if permitted. 4.2 Regarding the remaining two issues pertaining to carried forward loss adjustment and the issue of taxability, or otherwise, of Rs. 96.65 lacs, it is clear that the issue of adjustment of loss would be settled once the matter attains finality in appeal proceedings, leaving no scope for any action u/s 263 of the Act. Furthermore, regarding the issue of loss of Rs. 96.65 lacs, it is seen that the Appellant has adequately demonstrated before all the lower authorities that the said amount has duly been considered and added back in the computation of income. 4.3 In light of the discussion above, it is held that the Ld. Pr. CIT fell into an error in exercising his jurisdiction u/s 263 of the Act on all three counts of dispute. This order is accordingly set aside and the appeal of the assessee is allowed.