JAIDEV R. SHROFF,MUMBAI vs. DCIT CC- 6(3) EARSTWHILE ACIT - CC-38, MUMBAI

Briefly stated relevant facts are that the assessee is an individual and filed the return of income declaring the total income of Rs. 9.48 Crs (rounded off). Assessment was completed u/s 143(3) of the Act and the assessed income was determined at Rs. 96.91 Crs (rounded off). In the assessment, AO made additions on account of Long Term Capital Gains (LTCG) amounting to Rs. 87,44,79,700/- apart from other additions. This issue relating to the LTCG is the subject matter of the appeal before the Tribunal.

Relevant facts include that the assessee-individual owns 55,27,644 shares of United Phosphorous Ltd-UPL and 5,52,965 shares of United Enterprises Ltd -UEL. These shares were transferred voluntarily to M/s. Nerka Chemicals Private Limited (NCPL) without any consideration received by the assessee.The said transfer is executed under the “Transfer Agreement” dated 26.2.2010. The copy of the said

During the proceedings before the first appellate authority, assessee reiterated the above submissions and questioned the above additions. Vide para 4.3.14.1 of his order, CIT (A) held that considering the absence of consideration,

We shall now deal with the aforesaid other reasons. To start with, the CIT (A) invoked the provisions of section 2(22)(a) of the Act and came the conclusion that the transfer of shares is the case of “disguised distribution of accumulated profits” (para 4.3.14.3 of the CIT (A)‟s order is relevant). It is the case of the CIT(A) that the individual shareholders of the donor companies/members of the Shroff family have eventually received some benefit and the same should be considered as dividend under section 2(22)(a) of the Act. Thus, the CIT(A) directed the AO to obtain the shareholding of the donor companies and work out the FMV of shares of UPL and UEL transferred by the donor companies to NCPL and tax the same under section 2(22)(a) of the act in the hands of the members of Shroff family, the donors of the shares. Further, the CIT(A) held that the donors of shares shall be liable to pay dividend distribution tax u/s 115-0 of the Act.

During the proceedings before us, Shri Parcy Pardiwala, Ld Counsel for the assessee submitted that the CIT (A) disapproved the AO‟s decision of invoking the provisions of sectin 45(1) and deleted the addition on account of LTCG on that basis. He also appreciated the fact non payment of any consideration by the NCPL to the assessee and concluded that it is indeed the case of transfer of shares without any consideration in cash or kind. However, CIT(A) confirmed the addition by virtue of the provisions of section 2(22)(a), 115-0 and section 56(2)(vii) of the Act. In this regard, Ld counsel found fault with the impugned order of the CIT(A) in general and also with the direction to the AO in taxing in the hands of the assessee, in particular.

We shall now deal with the argument of the assessee‟s Counsel on the “transfer Agreement dated 26/2/10”. Ld Counsel argued vehemently stating that the said agreement constitutes a “gift agreement” in spirit. Referring to the recital B of hte said agreement, Ld Counsel brought our attention to the expressions „voluntary‟ and the „without consideration‟. He reasoned that the these expressions constitute important aspects of any gift transaction and therefore, the said transfer agreement constitutes „gift agreement‟ in substance.

Further, before us, Ld Counsel for the assessee stated that the gift can be made by all the persons specified in section 2(31) of the Act. For that proposition, he brought out attention to the proviso to section 47(iii) of the Act where the provisions refer to a company gifts. Further, he also relied heavily on the orders of the Tribunal in the case of DP World (P) Ltd vs. DCIT (2013) 140 ITD 694 (2014) and the decision in the case of DCIT vs. KDA Enterprises Pvt Ltd (2015) 39 ITR (Trib.) 657 (paras, 27, 31 and 39 of the said Tribunal‟s order are relevant) to support the view that the gifts are given by all the persons. Further, he submitted that in the present case, the donor is an individual and donee is the company and transfer of shares constitutes a valid gift and said transfer is an exempt transfer u/s 47(iii) of the Act. Further, referring to judgment of Honble High court of Bombay in the case of Nerka Chemicals P Ltd 371 ITR 280, Ld Counsel mentioned that it is the case of the donee and it is prima facie finding on the said transfer transactions that title of the transfer agreement is not determinative of its true character. The Honble High Court also appreciated the fact of absence of consideration in the said transaction of transfer of shares by the assessee to NCPL. He also referred to another judgment in the case of another donor of shares (out of 17 donors) ie Prakriya Pharmachem –Spl. Civil Application no 20492 of 2015 copy placed at page 12 and 21 of the paper book, and mentioned that the said transfer was considered „exempt transfer‟ u/s 47(iii) of the Act.

Further, referring to the provisions of section 2(22)(a) of the Act, Ld AR submitted that these provisions are required to be interpreted strictly. The provisions of said clause (a) visualizes a situation of (i) a company having accumulated profits; (ii) they are subject matter of distribution to the share holders of the said company; (iii) and such distribution involves release of all or any part of the assets of the company by the company. Explaining the facts of the present case, Ld AR submitted that the assessee is an individual and owns the shares of UPL and UEL. These shares are transferred to NCPL without consideration. With these facts, Ld AR submitted that there is no case for invoking the provisions of section 2(22)(a)

Further, referring the impugned order, Ld AR informed that CIT(A) directed the AO to tax these share transfer transactions and invoked provisions of section 56(2)(vii) of the Act. CIT(A) is of the view that the shroff family members, being the ultimate the share holders of the donee company, are the eventual beneficiaries of these transactions and therefore, that benefit accrued to the share holders needs to be taxed as taxable gift under the provisions of section 56(2)(c) of the Act in the hands of the assessee-donor. In this regard, Ld AR brought our attention to the AO‟s order dt 4.1.2016 giving effect to the order of the CIT(A) and submitted that the AO made addition of Rs 70,86,56,900/- as income other sources u/s 56(2)(vii)(c) of the Act. Bringing our attention to the said provisions, Ld Counsel submitted that the said provisions of clause (c) apply in case of receipt of property by an individual or an HUF without consideration. In the instant case, the facts are reverse and the assessee is the donor and the company is the donee, the recipient of the gift of shares of UPL and UEL. Further, AR submitted that the indirect benefits if any in any case are outside these provisions. Ld AR brought our attention to the said provisions and submitted that the said provisions are invoked on the presumption that it is a case of tax avoidance / colourable device. CIT (A) quoted wrongly that the substance of the whole scheme of transaction of transfer of shares attracts the provisions of section 56(2)(vii) of the Act. Otherwise, as per Ld AR, there is no case for attracting those provisions. There is no case of colourable device, as it is a case of straight transaction of transfer of share by the assessee to NCPL without consideration. He also submitted that the AO / CIT (A) randomly applied the ratio of the judgment in case of McDowells (supra) ignoring the facts of the case.

Per contra, Ld DR for the Revenue heavily relied on the orders of the AO / CIT (A). The DR is of the opinion that in substance, the family members of Shroff are / will be benefitted as and when the said shares of UPL / UEL are sold and in that sense of the matter, the benefit arose to the assessee. Ld DR argued for confirming the orders of the CIT (A). Decision of the Tribunal

We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. The assessee is aggrieved with the conclusions of the CIT (A) relating to the invalid invoking of various provisions of section 2(22)(a); section 115-O; section 56(2)(vii) and colourable device related issues. To list of the various aspects discussed by the CIT(A) in his order and according to him the share transfer transaction constitutes ,-

Applicability of the provisions of clause (a) of section 2(22)/sectin 115-0 of the Act: In this regard, Ld Counsel for the assessee brought our attention to the relevant provisions and submitted that the assessee is an individual and therefore, the question of distribution of dividend does not arise for invoking the provisions of clause (a) of section 2(22) of the Act.

After hearing both the parties, we have perused the relevant provisions of section 2(22)(a) of the Act and the same reads as under:-

Considering the above arguments of the Ld AR and the plain reading of the above extracted provisions, we find, the conclusion of the CIT (A) constitutes far stretched one and legally unsustainable. These deemed provisions are required to be interpreted strictly and for this proposition we rely on the SC judgment in the case of C P Sarathy Mudaliar (supra). As such, there is no dispute on the facts and the assessee-individual belonging to the shroff family are not the share holders in the NCPL during the year under consideration. Of course, he was never so. Even if he were a shareholder in NCPL, where is benefit to the assessee, when the donor and supposed ultimate beneficiary is one and the same. For example, Sri Jaidel R Shroff, Vikram R shroff or Sri Rajnikanth D Shroff are the donors of shares to NCPL. The alleged ultimate beneficiaries of the impugned transaactions are again the same individual of the shroff family. We don‟t find any benefit accrued to them in any manner. Therefore, the analysis of the provisions of clause (a) of section 2(22) of the Act reveals that the same are inapplicable to the share transaction under consideration. In our opinion, the CIT (A) has randomly applied these provisions invalidly and without having any strength of explicit legal provisions. There are no provisions for taxing the so called indirect benefit accrued to the shareholders of the company and provisions of section 2(22)(e) and the that of the section 64 helps the assessee. Therefore, we direct the AO to delete the addition on this account.

In our view, further, we find Ld CIT (A) exceeded his jurisdiction in directing the AO to tax the donor companies u/s 115-O of the Act, which may be consequent one, but they are not the subject matter of appeals before him. Therefore, we order for deletion of such direction. Therefore, further, we direct the AO to delete the addition on this account.

Applicability of the provisions of section 56(2)(vii)(a)/(c) of the Act: Regarding the invoking of the provisions of section 56(2)(vii)(a)/(c) of the Act, we find that the same become taxable in the hands of donee. Relevant provisions read as under: “56(2)

Issues relating to conclusions of Colourble Device: In the present case, the facts are that the assessee is an individual and owner of shares of the UPL/UEL. He gifted the shares without consideration to NCPL and the assessee constitutes a donor of shares. Revenue alleges that the assessee, being the shares of holding company of NCPL, received a benefit which should be taxed as per the SC judgment in the case of Mc Dowells (supra). In other words, the donor and donee of the benefit are the same. On this factual matrix, we do not find any indirect benefit

To sum up, the transfer agreement dated 26.2.2010 needs to be considered as the “gift agreement” as title is not determinative and for this, we rely on the Honble Bombay HC judgment in the case of NCPL (supra) and Gujarath High Court‟s judgment in the case of Prakriya Pharmachem (supra). So far as the assessee- individual is concerned, the impugned transactions are covered by the provision of section 47(iii) of the Act as prima facie held by the said judgments. There is no case of invoking the provisions of section 2(22)(a) of the Act on the assessee-individual. Similarly there is no case for direction to AO for invoking th provisions of section 115- 0 of the Act on the donor companies where the Shroff family members are the share holders. Finally we disapprove the CIT(A)‟s claim of colourable device in these cases of individuals. Considering the same, we are of the opinion that the grounds raised by the assessee are required to be allowed in favour of the assessee. We order accordingly.

In the result, appeal of the assessee is allowed.

Before us, Ld Counsel for the assessee brought our attention to the facts, ground of appeal and submitted that the issues raised in this appeal are exactly identical to that of the issues raised in the appeal ITA No.4660/M/2015. He also submitted that his arguments are equally relevant and apply to the grounds under consideration.

On hearing both the parties, we find that but for the facts and figures, the issues raised in this appeal are exactly identical to that of the ones decided by us in the said appeal ITA No.4660/M/2015. In the said appeal, we allowed the grounds in favour of the assessee. Considering the commonality of the issues involved in both the appeals, our conclusion drawn therein applies to the present appeal too. Accordingly, grounds no.1 to 4 raised by the assessee stand allowed in favour of the assessee.

In the result, appeal of the assessee is allowed.

Out of above five grounds raised by the assessee in this appeal, Grounds no.1 to 4 are identical to the ones raised by the assessee in ITA No. 4359/M/2015 (AY: 2010-2011), which is adjudicated by us in the above paragraphs of this order. Considering the commonality of the issues raised, arguments of the Ld Counsels and the facts, our decision given therein squarely applies to the present appeal too. Accordingly, grounds no.1 to 4 raised by the assessee are allowed.

Ground no.5 relates to the taxing of rental income on protective basis. In this regard, Ld Representatives of both the parties submitted that it is the case of protective addition. Further, they submitted that the substantive addition done by the AO in the AY 2009-2010 has become final in all respects. Considering the same, we are of the opinion, the assessee is entitled to relief since, the said rental income

In the result, appeal of the assessee is allowed. IV. ITA No.4584/M/2015 (AY 2010-2011) (In the case of Sandra R. Shroff) 30. This appeal filed by the assessee on 6.8.2015 is against the order of the CIT (A)-54, Mumbai dated 31.3.2015 for the assessment year 2010-2011. In this appeal, assessee raised five main grounds viz (i) Taxability u/s 2(22)(a) of the Act; (ii) taxability of donor companies u/s 115-O; (iii) taxability u/s 56(2)(vii) of the Act; and (iv) gift of UPL and UEL shares as a colourable device and (v) taxability of rental income as income from house property on protective basis.

All the issues raised in this appeal are identical to the ones raised by the assessee in ITA No. 4583/M/2015 (AY: 2010-2011), which is adjudicated by us in the above paragraphs of this order. Considering the commonality of the issues raised, our decision given therein squarely applies to the present appeal too. Accordingly, all the grounds raised by the assessee are allowed.

In the result, appeal of the assessee is allowed.

Conclusively, all the four appeals filed by the assessees are allowed.