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Income Tax Appellate Tribunal, DELHI BENCHES : E : NEW DELHI
Before: SHRI R.S. SYAL, AM & MS BEENA A. PILLAI, JM
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order passed by the CIT(A) on 15.01.2014 in relation to the assessment year 2010-11.
First issue raised in this appeal is against the confirmation of addition of Rs.1,60,00,000 made by the Assessing Officer (AO) u/s 56(2)(vi) of the Income-tax Act, 1961 (hereinafter also called `the Act’).
Briefly stated, the facts of the case are that the assessee is a beneficiary trust which was constituted on 28.5.1999 by Shri Mridu Hari Dalmia as settlor with other trustees including himself, Shri Yadu Hari Dalmia and Shri Parag Dalmia. As per the Trust Deed, the beneficiaries of the Trust are Shri M.H. Dalmia, Smt. Abha Dalmia, Shri Gaurav Dalmia, Smt.
Sharmila Dalmia, Smt. Kanupriya Somani, Km. Devanshi Dalmia, Master Aryman Hari Dalmia and Km. Ananya Priya Dalmia with their respective spouses and children. The assessee filed its return showing income from house property, short-term capital gain and long-term capital gain. The assessee declared to have received a gift of Rs.1.60 crore from Smt. Abha Dalmia during the year towards trust fund account, which was not included in total income. The AO noted relationship between the donor and beneficiaries, being wife of Shri Mridul Hari Dalmia; mother of Shri Gaurav Dalmia and Smt. Kanupriya Somani; and grandmother of Km. Devanshi Dalmia, Master Aryman Hari Dalmia and Km. Ananya Priya Dalmia. He noticed the beneficiaries of the trust to be the relatives of the donor. Provisions of 2 section 56(2)(vi) of the Act were invoked. In this regard, the assessee was found to be admittedly a beneficiary trust assessed in the status of AOP and, hence, neither a firm nor a company. The AO further noticed that the assessee received a gift of Rs.1.60 crore through cheque from Mrs. Abha Dalmia, which was not a property. As the transaction of gift was executed on 18.9.2009, i.e., prior to the date of 1st June, 2010, the AO held that the claim of exemption by the assessee u/s 56(2)(vi) was not acceptable. After analyzing the provisions of section 56(2)(vi), the AO held that exemption of a gift depended upon fulfillment of certain conditions, viz., firstly the recipient of the gift should be an individual or HUF, secondly, the donor should be covered in the list of persons mentioned in the proviso and covered by the Explanation thereof and, thirdly, the gift should be made on the occasion of marriage or received under will etc. Thereafter, the AO proceeded to test the applicability or otherwise of these three conditions on the facts of the instant case. In this regard, he found that the assessee was neither an individual nor HUF, which was the first condition for making gift exempt in the hands of the recipient. As regards the second condition, he noticed that the 3 donor was a close relative, being wife of Shri Mridu Hari Dalmia and mother/granddaughter of other beneficiaries. He accentuated that none of the persons mentioned actually received the said gift and it was the AOP alone who was recipient of the amount. Then, he went on to examine relationship between the beneficiaries and donor. On this count, he held that the assessee, not being an individual, could not be connected with the donor by blood or marriage. He emphasized on the assessee’s status of AOP given as per PAN data which was other than individual or HUF. In the light of the above facts, he held that the amount of Rs.1.60 crore received by the assessee trust from Mrs. Abha Dalmia was not entitled to any exemption. That is how, he made an addition for the sum of Rs.1.60 crore. The ld. CIT(A) echoed the action of the AO in this regard. The assessee is aggrieved against confirmation of the addition.
We have heard the rival submissions and perused the relevant material on record. The AO invoked the provisions of section 56(2)(vi) for coming to the conclusion that the amount of gift received by the assessee from Mrs. Abha Dalmia was not exempt under this provision and hence chargeable to tax. He satisfied himself as regards the fulfillment of three conditions as noted by him. At the outset, we find that the view point of the AO in construing section 56(2) as an exemption provision is not correct as it will be seen infra that it is rather a charging provision. Reverting to the point in dispute, the primary question which falls for our consideration is whether or not the amount of Rs.1.60 crore is chargeable to tax as per the provisions of section 56(2)(vi).
Section 56 falls under Chapter IV-F of the Act with the caption ‘Income from other sources.’ Sub-section (1) of this section provides that income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ‘Income from other sources’, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Then comes sub- section (2) of section 56 which provides in particular and without prejudice to the generality of the provisions of sub-section (1) that the incomes discussed under various clauses of this sub-section shall be chargeable to income-tax under the head ‘Income from other sources.’ Clause (vi), which is relevant for our purpose, reads as under : -
“(vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 but before the 1st day of October, 2009, the whole of the aggregate value of such sum: Provided that this clause shall not apply to any sum of money received— (a) from any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the payer; or (e) from any local authority as defined in the Explanation to clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (g) from any trust or institution registered under section 12AA. Explanation.—For the purposes of this clause, "relative" means— (i) spouse of the individual; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual; (iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual; (vi) any lineal ascendant or descendant of the spouse of the individual; (vii) spouse of the person referred to in clauses (ii) to (vi);”
A bare perusal of the above provision indicates that where any sum of money exceeding Rs.50,000/- is received without consideration by any individual or HUF, in any previous year from any person or persons, the whole of the aggregate value of such sum shall be chargeable to income-tax under the head ‘Income from other sources’. A cursory glance at the opening line of sub-section (2) of section 56 divulges that it is a charging provision, which charges the receipt of an otherwise genuine amount of gift etc. to tax, subject to the fulfillment of certain stipulated conditions. It follows that in order to attract the applicability of clause (vi) of section 56(2), the following conditions should be fulfilled:-
(i) An amount exceeding Rs.50,000/- in aggregate should be received in a year;
(ii) Such receipt should be without consideration;
(iii) Such receipt should be by an individual or HUF; and (iv) Such receipt by individual or HUF should be from any person or persons within the designated period.
It is on the cumulative satisfaction of the above conditions that the amount received becomes chargeable to tax u/s 56(2)(vi). Then, there is a proviso to this provision which forbids the applicability of the charging provision under certain circumstances enshrined in clauses (a) to (g).
Explanation to this proviso gives meaning to the term ‘relative’, which has been used in clause (a) of the proviso to section 56(2)(vi). Effect of the proviso along with Explanation to section 56(2)(vi), to the extent of the issue under consideration, is that where any sum of money exceeding the specified limit is received as gift from any relative as defined in the Explanation, that shall not be chargeable to tax u/s 56(2)(vi). Coming back to the aforenoted four conditions bringing receipt within the charging provision, we find that the first condition, namely, receipt of money in excess of Rs.50,000/- is satisfied. The second condition is that such amount should be received without consideration. This condition is also satisfied because the assessee trust received a sum of Rs.1.60 crore from Smt. Abha Dalmia as gift, which is obviously without any consideration. The fourth condition about the receipt of such amount from any person or persons before the designated date is also satisfied.
Now we espouse the third condition as per which the receipt of such sum should be by an individual or HUF. This condition is obviously wanting because as per the AO’s own version the status of the assessee is association of persons, which is other than an individual or HUF.
Section 2(31) defines "person" as including (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not,(vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. It is palpable from the definition of `person’ as given in section 2(31) of the Act that AOP is a person different from an individual or a HUF. Even if an AOP consists of some individuals, the status of such a group of individuals remains as that of `AOP’, in the same way in which when some individuals enter into partnership, the body which comes into existence is called a `Firm’. 9 The AO has rightly admitted the status of the assessee as an AOP and not an individual or HUF. It is axiomatic from a plain reading of the provision that any sum exceeding Rs.50,000/- can fall within the ambit of section 56(2)(vi) of the Act only if it is received by an individual or HUF. Since the assessee in question is an AOP and not any individual or HUF, who received a sum of Rs.1.60 crore without consideration, such a receipt in our considered opinion cannot be included in its total income within the framework of section 56(2)(vi). We, therefore, set aside the impugned order on this score and order for the deletion of this addition.
The only other issue which survives in this appeal is against the confirmation of disallowance of loss of Rs.1,86,86,461/-. The facts apropos this issue are that the assessee suffered a long-term capital loss of Rs.1.86 crore on share transactions, which amount was carried forward for future set off. Apart from that, the assessee also earned short-term capital gain, the taxability of which is not in dispute. The AO has drawn a chart on pages 2 and 3 of the assessment order calculating the amount of long-term capital loss along with short-term capital gain with STT and short-term capital gain without STT. The AO observed from this chart that the assessee entered into all the share transactions through NDA Securities Ltd., a registered share broker of National Stock Exchange, other than the shares of Bajaj Hindustan Ltd., Tata Consultancy Ltd. and Reliance Communications Ltd., which resulted in long-term loss of Rs.1.86 crore. It was noted that the assessee did not pay any Securities Transaction Tax (STT) on these transactions of sale of shares to Shri M.H. Dalmia and Smt. Abha Dalmia. He found that the assessee claimed to have transferred these shares through off-market sale on loss. Since the persons to whom such shares were sold happened to be the trustees and also the beneficiaries of the assessee trust, the AO came to hold that such off-market sale transactions were done intentionally to claim benefit of long-term capital loss. On being called upon to justify the claim, the assessee submitted that these shares were purchased and held for a period of more than one year and, hence, were long-term capital assets, which the AO did not dispute. The assessee then argued that such shares, held as investment, were sold at prevailing 11 market rates. In support of this contention, the assessee furnished copies of Quotations of these shares for the dates on which such transfers were made. These quotations have been reproduced on page 5 of the assessment order. The AO observed that the shares were sold at the `Closing price’ rather than the ‘Highest price of the day’. The assessee’s contention that the shares were transferred on the respective dates from the demat account of the assessee trust to the demat accounts of the buyers, who made payment of the requisite sale consideration through banking channel, did not convince the AO to accept the genuineness of the transactions. He felt that if these transactions had been made through recognized Stock Exchange with STT payment, then the loss would not have been carried forward within the meaning of section 10(38) of the Act. After considering certain decisions, the AO held that the assessee used a colorable device to avoid tax in connivance with the trustees/beneficiaries by simply placing the shares in the hands of the trustees and showing such placement as off-market sale. He, therefore, disallowed such loss by holding it as bogus. The ld. CIT(A) approved the view taken by the AO on this issue. 12
We have heard the rival submissions and perused the relevant material. The AO has disallowed the loss amounting to Rs.1.86 crore by treating the transactions of sale of shares by the assessee to its trustees as sham and tax avoidance device. The question which looms large for our consideration is to decide whether or not the transactions of sale of shares by the assessee to Shri M.H. Dalmia and Smt. Abha Dalmia through off market trade, were genuine. Firstly, we want to make it clear that it is not the case of the Revenue that all the transactions of off- market sale are non-genuine. Apart from making a bald submission, the ld. DR could not point out any provision debarring off-market trading of listed shares. On the contrary, the ld. AR has invited our attention towards certain decisions in which off-market sale transactions have been recognized as valid. Therefore, it follows that an off-market transaction of transfer of shares is not per se illegal or void.
Genuineness or otherwise of any transaction can be tested on the touchstone of a host of factors, which are not exhaustive. Coming to the facts of the extant case, we find that albeit these were off-market transactions to beneficiaries/trustees of the assessee trust, but, the sale 13 consideration is equivalent to the closing sale rate of these shares on the respective dates. The AO has opined that the transactions ought to have been entered into at the highest rate rather than the closing rate of the day. In this regard, we find that in so far as the shares of Bajaj Hindustan Ltd. are concerned, the highest quotation on 1.4.2009 was Rs.51.25 against the closing rate of Rs.50.50. Similarly, as regards the share of Tata Consultancy Services Ltd., the highest quotation as on 18.11.2009, being the date of sale, was Rs.693.00 as against the closing rate of Rs.690.45. Similarly, for shares of Reliance Communications Ltd., quotation as on 7.12.2009, being the date of sale, had the highest price of Rs.182/- as against the closing price of Rs.178.95. It is further noticeable that the lowest quotation of Bajaj Hindustan Ltd. on that day was Rs.47.50; that of Tata Consultancy Ltd. at Rs.660/-; and that of Reliance Communications Ltd. at Rs.175.85. We fail to understand any logic behind the AO considering the highest rates as relevant and ignoring the lowest or the opening or closing rates. As the assessee sold the shares at the closing rates of the respective sale dates, which lie somewhere between the highest and lowest rates of the day, the same 14 cannot be considered as unreasonable by any standard. This demonstrates that the shares were sold by the assessee at the prevailing market rates. It is further evident that even though these were off- market sale transactions, but, the actual transfer of shares took place on respective dates from the demat account of the assessee trust to the demat accounts of the transferees. It is further undisputed that payment of sale price was made by transferees which was credited to the bank account of the assessee trust. All these facts amply indicate the genuineness of the off-market sale transactions entered into by the assessee with its beneficiaries.
The AO has harped on the fact that if the transactions had been made through recognized Stock Exchange, then the STT would have been payable and resultantly the loss would have become ineligible for set off or carry forward in terms of section 10(38) of the Act. Section 10 provides that : `In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included…’. This manifests that section 10 is an exemption provision.
Relevant part of sub-section (38) of section 10 reads as under : -
` (38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust where— (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter :’
A perusal of sub-section (38) reveals that any income arising from the transfer of long-term capital asset, being an equity share etc., is exempt from tax if the transaction of sale of such equity share etc. is chargeable to Securities Transaction Tax under Chapter VII of the Finance (No.2) Act, 2004. It is trite that `Income’ covers both positive and negative incomes, that is, gains and losses. The Hon’ble Summit Court in a celebrated decision in CIT vs. Hariprasad & Co. P. Ltd (1975) 99 ITR 118 (SC) has held that the words "income" or "profits and gains" should be understood as including losses also, so that, in one sense "profits and gains" represent "plus income", whereas losses represent "minus income". In simple words, both the positive (gains) and negative (losses) are species of the genus of `income’.
We have noticed that section 10(38) is an exemption provision and not a deduction provision. Income from an exemption provision does not at all enter into computation of total income. If there is a positive income, such income is ignored and thus excluded from taxation and if there is a negative income, namely, loss, then such loss is also ignored and thus neither qualifies for set off against other chargeable incomes nor can be carried forward for a future set off against any other income chargeable to tax. This is on the principle of equality that if positive income from a source is not to be taxed, then on parity, the negative income from the same source should also not get an advantage of set off or carry forward. On the other hand, in the case of a deduction provision, the positive income from the designated source first enters into computation of income, but is then deducted in terms of the eligibility of deduction. In the like manner, if there is a negative income from that designated source, then such loss after entering into computation of income becomes eligible for set off against the other positive incomes subject to other relevant provisions. Here again the principle of equality applies. The essential difference between an exemption and a deduction provision thus lies in the fact that whereas income (both positive and negative) from an exemption provision does not enter into computation of income at all and is totally ignored, income (both positive and negative) from a deduction provision enters into computation of income and is first chargeable to tax and then deductible to the extent provided. The Hon’ble Bombay High Court in Hindustan Unilever Ltd. Dy. CIT (2010) 325 ITR 102 (Bom) quashed the reopening of an assessment on the ground that the loss of eligible unit was wrongly set off against the normal business income of the assessee by noticing that section 10B, as it now stands, is not a provision in the nature of an exemption but provides for a deduction and the loss sustained by the unit eligible for deduction under section 10B could be set off against the normal business income.
Coming back to our context, we find that section 10(38) is an exemption provision. This exemption provision states that any income arising from transfer of equity shares etc., held as long-term capital asset on which STT is paid, will be exempt from taxation. As income includes losses also, this provision applies to both positive and negative income. In other words, if the conditions stipulated under this provision are fulfilled, namely, there is a transfer equity shares etc., held as long term capital asset on which STT is paid, then the resultant gain will not be chargeable to tax and the resultant loss, if any, will equally not qualify for set off and carry forward. In order to fall within the purview of section 10(38), it is sine qua non that STT must have been paid on the transaction of sale of such equity share held as long-term capital asset.
It is undisputed that STT is payable in respect of transactions carried through a Stock Exchange, which are called on-market transactions. If there is some off-market transaction, namely, which is undertaken without involvement of a Stock Exchange and is directly between the buyer and seller, then no STT is payable thereon. This implies that if the transaction is off-market, then, no STT would be payable and, ex 19 consequenti, the provisions of section 10(38) would not be magnetized.
Once this section is not applicable, there can neither be any exemption of income nor there can be any question of denial of benefit of set off and carry forward of loss. In other words, loss arising from transfer of shares etc., held as long term capital assets, on which no STT is paid because of off-market sale transaction, does not fall within purview of section 10(38) and consequently becomes eligible for set off and carry forward as per the other relevant provisions. This is a lacuna in the provision which has been lawfully exploited by the assessee by transferring shares held as long-term capital assets through off market transactions resulting into genuine loss and thus escaping the rigor of the exemption provision contained in section 10(38), which would have otherwise disentitled it to claim set off and carry forward of such a loss.
The AO has held these off-market sale transactions as a colorable device and tax avoidance scheme adopted by the assessee to evade payment of legitimate tax due to the exchequer. In our considered opinion, this is a glaring example of tax planning rather than the tax avoidance as has been held by the AO. In view of the fact that the assessee entered into 20 valid transactions of transfer of shares of Bajaj Hindustan Ltd., Tata Consultancy Ltd. and Reliance Communications Ltd. to Shri M.H.
Dalmia and Smt. Abha Dalmia, we hold that the loss suffered on such transactions is a genuine loss which cannot be disallowed as it does not fall within the ambit of section 10(38) because of non-payment of STT.
Overturning the impugned order on this issue, we direct the allowing of carry forward of loss amounting to Rs.1.86 crore.
In the result, the appeal is allowed.
The order pronounced in the open court on 01.04.2016.