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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Judicial Member This is an appeal by the Revenue against the order dated 27.05.2014 of the CIT(Appeals)-I, Bangalore relating to assessment year 2006-07. 2. In this appeal, the grievance of the revenue is that the CIT(A) wrongly allowed the claim of exemption u/s. 10(38) of the Act in respect of
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income arising from transfer of capital asset viz., equity shares of a listed company by name Bhoruka Financial Services Ltd. (BFSL) on sale of which securities transaction tax had been paid. The further grievance of the revenue is that the CIT(A) treated the capital gain in question as long term capital gain on sale of shares as against the stand of the AO that the capital gain in question was short term capital gain without any basis. According to the Revenue, the CIT(A) in coming to the above conclusions had followed the decision of the Hon’ble Karnataka High Court in the case
of Bhoruka Engineering Industries Ltd. Vs. DCIT ITA No.120/2011
dated 9.4.2013 which was a decision rendered in the case of another
shareholder of BFSL who had sold shares under facts and circumstances similar to that of the Assessee in the present appeal and in whose assessment also the revenue refused to accept the claim of exemption of capital gain u/s.10(38) of the Act and had proceeded to treated the capital gain in question as Short term capital gain on identical reasons as are given in the case of the Assessee in the present appeal. According to the Revenue the decision of the Hon’ble Karnataka High Court has not been accepted by the Revenue and an SLP has been preferred before the Hon’ble Supreme Court against the said decision. Incidentally, the assessee has also filed Cross Objection in which he has challenged the validity of initiation of reassessment proceedings u/s. 147 of the Act in which the aforesaid additions were made by the Assessing Officer.
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The facts giving rise to the present appeal are as follows. The
assessee is a HUF and one of the promoters and shareholder of BFSL. The assessee derives income from house property and also dealing in
shares and securities. The Assessee filed return of income for AY 2006-07
declaring a short term capital loss of Rs.6,21,935 and an income of Rs.6,187 as income from other sources. In the said return the Assessee
had claimed exemption u/s.10(38) of short term capital gain of Rs.9,90,07,395 on sale of shares of BFSL. In the assessment proceedings
concluded under Sec.143(3) of the Act by order dated 24.10.2008, the
claim of the Assessee for exemption was accepted by the AO.
Thereafter, the case was reopened and notice u/s. 148 of the Act
was served on the assessee on 30.11.2011. The reassessment proceedings were initiated for disallowing the claim for exemption
u/s.10(38) of the Act viz., on the long term capital gain on sale of shares of
BFSL.
The facts with regard to capital gain on sale of shares of BSFL are
as follows: The assessee during the year had sold 22,100 shares of M/s.
BFSL to M/s. DLF Commercial Developers Ltd., [“DLFCDL” for short] and total consideration of Rs. 9,92,29,000 at the rate of Rs.4,490 per share.
The capital gains out of above sale corresponding to the 22,100 shares of assessee was Rs.9,90,07,395. The assessee claimed the entire amount
as exempt on the ground that the share in BFSL were held for a period of
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more than one year and that Security Transaction Tax, (for short ‘STT’),
was paid as provided u/s. 10(38) of the Act during the sale through Magadh Stock Exchange, Patna (MSE). The assessee claimed that the long term
capital gains earned on sale of BFSL shares as exempt from taxation under
section 10(38) of the Act since the shares transferred were quoted shares having suffered Securities Transaction Tax and further the shares having
been held for more than 12 months.
In the reassessment proceedings, the AO found that BFSL belongs to Bhoruka Group of Companies and most of the shares in this company
are held by Shri. S.N. Agarwal and his family members, either in their individual capacity or as partners of the concerns. From the records of
BFSL, the AO noticed that BFSL had, for a large period of its existence as one of Bhoruka Group Company carried on the business of financial
investment of the group. Except this, no other business was carried on by
BFSL. On 16.06.2004 and on 30.06.2004, the company BFSL acquired land of 15 acres for Rs.3.75 crores from M/s. Bhoruka Steel Ltd. This land
appeared at Rs. 4.21 crores in the Balance Sheet as at 31.03.2005, which is inclusive of development expenses on the land.
The promoters of BFSL sought permission from SEBI to exempt
them from making public announcement in respect to sale of 1,98,850 equity shares to M/s DLFCDL, New Delhi. The promoters of BFSL
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disclosed the rate of Rs.2,400/- per share for the purpose of selling the
shares to DLFCDL. The last quoted value of this share was Rs.5/- in 1985.
The Assessing Officer further noticed that during the FY 2004-05 BFSL sold all the listed equity shares. Accordingly, the investments which
were worth Rs.4.61 crores as on 31.03.2004 got reduced to Rs.3.85 crores as on 31.3.2005. These investments as on 31.3.2005 were equity shares of
M/s Bhoruka Power Corporation Ltd. During the FY 2005-06, BFSL sold
even the investments of Rs.3.85 crores. As aforesaid, BFSL had acquired 15 acres of land situated at Whitefield, Bangalore, during the FY 2004-05.
BFSL purchased this land at a nominal price of Rs. 3.75 crores from Bhoruka Steel Ltd. During August 2005, M/s DLFCDL purchased the
shares of BFSL at a negotiated rate of Rs. 4,490/- per share for a total consideration of Rs. 89.08 crores. By virtue of this deal the promoters of
BFSL have sold their stakes to DLFCDL.
According to the AO, the directors and promoters of BFSL disposed off all the other assets held by BFSL except land before the shares were
sold to DLFCDL. The intention of the directors and promoters of BFSL is to
transfer the underlying asset, being land to the buyer company DLFCDL. If the intention of the directors and promoters of BFSL was to transfer BFSL
along with all its assets and liabilities, then all assets and liabilities belonging to BFSL would have remained as such and no change would
have taken place in the Balance Sheet of BFSL. The sale of all other
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investments and reduction of loans and advances was possible to BFSL
since these transactions were done with the group companies. DLFCDL could not have bought the shares of BFSL at a substantial rate of
Rs.4,490/- per share if BFSL was not having the land of 15 acres as the
asset. The area where the land is situated has huge commercial value. This proves beyond doubt that DLFCDL has in fact purchased the shares
of BFSL keeping in view the value of the underlying asset being land at Whitefield. This transaction is structured in such a way that the promoters
and directors holding the shares of the company, BFSL, sell their
shareholdings to DLFCDL and receive the consideration.
The AO observed that there is a necessity to lift the corporate veil
and understand the true nature of the transaction in commercial sense. The AO concluded that DLFCDL has made the payment not to just buy the
shares of BFSL but to acquire the underlying asset. The shares of the
company were listed in the Bangalore Stock Exchange. Without making full and complete efforts to transact through Bangalore Stock Exchange, it has
chosen to carry out the transaction from Magadh Stock Exchange. When the assessee company could have transacted through any other
recognized stock exchange since Magadh Stock Exchange was not
permitted to carry out the share transactions for a long time. The company, BFSL and its promoters had also applied to SEBI seeking exemption from
making public offer for sale of these transactions. These unusual attempts of the assessee company finally culminated in selling a non-competitive
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stock for Rs.4,490/- per share by stripping out all the assets and investments of BFSL, except the land it was reduced to a shell company. This shell company was used to transfer a red asset and promoters took the fruits of the transaction. BFSL and its promoters made deliberate attempt to structure deal to avoid tax implication.
For all the above reasons, the AO held that the assessee was not eligible for claim of exemption u/s. 10(38) of the Act and that the transaction in question in substance attracts tax invoking the ruling of the Hon’ble Supreme Court in the case of McDowell & Co., 154 ITR 148
(SC). The AO held that gain on sale of shares of BFSL by the assessee to
DLFCDL was chargeable to tax as short term capital gain and accordingly brought the same to tax as short term capital gain. In coming to the aforesaid conclusion, the AO also placed reliance on the decision of the ITAT in the case of M/s. Bhoruka Engineering Industries Ltd., which was also part of Agarwal group which held shares in BFSL. In the case of Bhoruka Engineering Industries Ltd. v. DCIT, ITA No.1139/Bang/2010, order dated 22.02.2010, the Tribunal took the view that the transaction was a tax planning device to avoid payment of legitimate tax on capital gain and therefore had to be ignored. The gain on sale of shares was treated as short term capital gain and brought to tax. The AO made a reference to the aforesaid decision of the Tribunal to fortify his conclusions that the transaction of sale of shares by the assessee which was identical in all
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aspects to the sale of shares by Bhoruka Engineering Industries Ltd., was
to be ignored and only substance of the transaction taken note of.
On appeal by the assessee, the CIT(Appeals) following the decision of the Hon’ble Karnataka High Court in the case of Bhoruka Engineering
Industries Ltd., (supra), upheld the claim of the Assessee for exemption u/s.10(38) of the Act and reversed the order of the AO.
Aggrieved by the order of the CIT(Appeals), the revenue has
preferred the present appeal before the Tribunal.
We have considered the grounds of appeal of the revenue and find
that the issue raised by the AO in the order of assessment has already
been decided by the Hon’ble Karnataka High Court by judgment dated 09.04.2013 in ITA No.120/2011, in the case of Bhoruka Engineering
Industries Ltd. (supra). The Hon’ble ITAT in the case of Bhoruka Engineering Industries Ltd. in ITA No.1139/Bang/2010, had upheld the
order of the AO holding that the sale of shares by the various entities of
Bhoruka group was a colorable device to evade tax and the capital gain on sale of shares was to be regarded as short term capital gain and exemption
u/s.10(38) of the Act was not to be allowed. The assessee had carried the matter to the Hon’ble High Court of Karnataka. The Hon’ble High Court of
Karnataka was pleased to set aside the order of the Tribunal and held that the transaction of sale of shares were real, genuine and for valuable
ITA No. 1074/Bang/2014 & CO 101/Bang/2014 Page 9 of 10 consideration and were within the framework of law. Consequently, exemption u/s. 10(38) of the Act had to be allowed.
It is not in dispute that the facts in the case of assessee are identical with that of the case of Bhoruka Engineering Industries Ltd., (supra) and
therefore the decision of the Hon’ble High Court of Karnataka will squarely apply to the facts of the present case. We are therefore of the view that the order of the CIT(Appeals) has to be upheld and the claim of the assessee for exemption u/s. 10(38) of the Act has to be allowed. We hold accordingly and dismiss the appeal of the Revenue. Since the appeal is being dismissed on merits, we do not deem it necessary to adjudicate on the validity of initiation of reassessment proceedings u/s. 147 of the Act as raised by the assessee in its cross objections and the said issue is left open without adjudication.
In the result, the appeal by the Revenue is dismissed and the cross objection of the Assessee is also dismissed as not requiring adjudication.
Pronounced in the open court on this 30th day of July, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 30th July, 2015. /D S/
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.