ITO, CHENNAI vs. K.PRIYA, COIMBATORE

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

These two appeals filed by the Revenue are directed against

different orders of the Commissioner of Income-tax (Appeals)-

1,Coimbatore, dated 10.04.2015 for the above assessment year.

Since the issues in these two appeals are common in nature, these

appeals are clubbed, heard together, and disposed of by this common

order for the sake of convenience.

There was a delay of 07 days in filing these two appeals before 2.

the Tribunal. The department has filed affidavits praying for

condonation of delay. After going through the reason given in

condonation petitions, we are satisfied that there is a reasonable cause

for this short delay of 07 days in filing these two appeals and the same

are condoned and the appeals are admitted for adjudication.

First we take up ITA No.1600/Mds/2015 for adjudication. None 3.

appeared on behalf of the assessee. Therefore, we proceed to decide

the case on merits after hearing the ld. Departmental Representative.

The grievance of the Revenue in this appeal is regarding 4.

treating the sale of shares as long term capital gains instead of short

term capital gains.

ITA Nos.1600 & 1601/Mds/2015. :- 3 -:

The facts of the case are that the assessee filed her return of 5.

income had offered Long Term Capital Gains of �2,27,52,531/- earned

by her from the sale of shares of M/s. Ganesar Ginning Company (Pvt)

Ltd. The assessee, her husband Shri T.S.R.Khannaiyan and their

daughter Smt K. Priya, are the directors of the above company. They

entered into a Memorandum of Understanding dated 28-11-2006 with

M/s. DLF Retail Developers Ltd., as per which the entire share capital

of the company M/s. Ganesar Ginning Company Pvt. Ltd was

transferred to M/s. DLF Retail Developers Ltd. On this transaction, the

assessee has offered her share of Long Term Capital Gains in the

return of income filed. M/s. Ganesar Ginning Mills Pvt. Ltd., was having

only the land of 2 acres and 23 cents and a building on it, in

Coimbatore, as its assets. The entire share of the above company was

acquired, through resolution of transfer of shares, by the assessee, her

father and mother during September 2005. The Company was sold

during November 2006 as the entire share capital of the company was

sold by the assessee and her family. As per the Balance Sheet filed by

The Ganesar Ginning Company Private Limited for the year ending

313.2006, the authorized share capital was �1,50,OOO/- consisting of

1,500 shares ( each having a face value of Rs.100/-). The total of the

balance sheet is only �20,29,147/-, which consists of accumulated

losses of �30,14,192/-. As per the Profit and Loss account filed by the

ITA Nos.1600 & 1601/Mds/2015. :- 4 -:

above Company for the said period, there was a net loss of

�3,19,905/-. Further, no income was reflected in this account, which

showed that no business was conducted for 31.3.2005 and 31.3.2006.

In such a situation, no prudent business man would acquire 1500

shares of a company, which was incurring continuous losses, with a

face value of �1,50,OOO/- for �5,31,97,500/-. Hence it was apparent

that when the assessee and her parents acquired the shares of The

Ganesar Ginning Company Private Limited, their only objective /

interest was in the prime land owned by the company and not in the

business of the company. Hence the amount of �.5,31,97,500/- that

they paid was for the land and not for the business of the company.

Further the MOU entered into between the directors of The Ganesar

Ginning Company Private Limited ( ie assessee and her parents) and

M/s. DLF Retail Developers Limited talked mainly about the transfer or

the said land ( 2.23 acres at Ganapathy East Village, Coimbatore) i.e ,

about its mode of acquisition by the company, ceiling limits under the

ULCR Act, approval obtained by the directors on 5.7.2006 from

Coimbatore Local Planning Authority stated that it was industrial land

and could be used for general commercial purposes. etc. Hence, a

perusal of the above events revealed that the said land was acquired

by assessee and her husband and daughter on 23.9.2005 and

subsequently sold on 28.11.2006. It was apparent that since the

ITA Nos.1600 & 1601/Mds/2015. :- 5 -:

holding period of the asset ( land) was less than 3 years, the resultant

Capital Gain in the hands of the assessee needed to be assessed as

Short Term Capital Gains. Hence, in this case, there was tangible

material and there was reason to believe that Income chargeable has

escaped assessment Hence notice u/s.148 was issued to the assessee.

While computing assessment, the Assessing Officer treated capital gain

on transfer of shares as short term capital gains. Aggrieved, the

assessee preferred an appeal before the Commissioner of Income Tax

(Appeals).

the judgment of Karnataka High Court in the case of Bhoruka

Engineering Industries Ltd vs. DCIT 36 taxmann.com 82 decided the

issue in favour of the assessee. Against this, the Revenue is in appeal

before us.

The ld. Departmental Representative submitted that the 7.

Commissioner of Income Tax (Appeals) erred in relying on the decision of the

Karnataka High Court in the case of Bhoruka Engineering Industries Ltd. (cited

supra). The balance sheet of the acquired company showed only a loss of

�3,19,905/- the assessee's purpose of purchase of shares of the loss making

company was to acquire the land which was later sold to m/s. DLF Retail

Developers Ltd. for a high price of �14,58,40,140/- which shows this is

ITA Nos.1600 & 1601/Mds/2015. :- 6 -:

definitely a colourable device. Hence the assessing officer's action of assessing

the capital gain as a short term capital gain has to be upheld and the order of

the CIT(A) be quashed. Moreover, the modus operandi adopted by this

assessee in transferring the above

mentioned shares was entirely different from that of the case relied upon by

the Commissioner of Income Tax (Appeals). In this case, the entire share

capital of Ganesar Ginning Company Pvt. Ltd. was acquired through

resolution of transfer of shares by the assessee and her family whereas in the

case of Bhoruka Engineering Industries Ltd, the transfer of shares was done

through a registered stock exchange and the applicable securities transaction

tax was paid by them. The objective of the transfer as per the MOU ibid, was

to construct a shopping mall and complex on the land. Hence, assessing

officer's action of assessing the capital gain as a short term

capital gain, in this case, has to be upheld since this case is entirely different

in nature from the one cited by the Commissioner of Income Tax (Appeals).

perused the material available on record. It is evident that the

assessee has sold the shares of M/s. Ganesar Ginning Company (Pvt)

Ltd. to M/s. DLF Retail Developers Ltd. The Authorized Representative

submitted before the Commissioner of Income Tax (Appeals) that the

assessee has purchased only the shares of the company earlier and

ITA Nos.1600 & 1601/Mds/2015. :- 7 -:

not the lands or other assets of the company. The said land has been

held by the company M/s. Ganesar Ginning Company (Pvt) Ltd. from

the beginning. The assessee has offered to tax the gains from the sale

of shares as Long Term Capital Asset and paid the tax at applicable

rates. The company being a artificial person / different taxable entity,

the assessee cannot be taxed for the assets held by the company. It

was plea of the assessee before the Commissioner of Income Tax

(Appeals)that the sale of shares is not done through any Sub

Registrars Office or Registration Authorities. As seen from the facts of

this case, M/s. BSFL, one of the Group companies of M/s. Bhoruka

Engineering Industries Ltd, purchased 15 acres of land from M/s BSL.

The assessee company M/s. B S L and other Promoter shareholders

held 98.73 per cent shares in M/s. B S F L. Assessee along with other

promoters sold their shareholdings in BSFL to DLF-CDL through

Magadh Stock Exchange and claimed exemption from LTCG arising

from sale of shares. Before sale of shares, BSFL systematically reduced

all its assets except land. The Revenue contended that transaction of

sale of shares was a colourable device and virtually immovable

property had been transferred. The High Court held that "where

arrangement of assessee to avoid payment of tax did not

contravene any statutory provision and was achieved within

four corner of law, it cannot be found fault with'. The High Court

ITA Nos.1600 & 1601/Mds/2015. :- 8 -:

also held that" whether merely because if registered sale deed

had been excecuted by BSFL selling land in favour of DLF-CDL,

capital gain tax should be paid on sale consideration, was of no

reason to held that when a shareholder of BSFL transferred

their shares for a consideration after complying with legal

requirement, he was not entitled to benefit of tax exemption'.

The High Court held that it was a valid legal transaction in law and

merely because they were able to avoid payment of tax, it cannot be

said to be a colourable device or sham

transaction or a unreal transaction. In the case of the appellant the

transaction is real, all legal formalities have been complied with and

what is transferred is the shares and not immovable property. The

findings of the Assessing Authority that it is a transaction of

immovable property is contrary to law and contrary to the material on

record. The Karnataka High Court held that if the veil of the company

is lifted, what appeared to them is transaction of immovable property.

Such a finding is impermissible in law. In the case of M/s. Bhoruka

Engineering Industries Ltd (cited supra), the assessee traded the

shares in Magadh Stock Exchange and paid the transaction fee and

claimed the Long Term Capital Gains as exempt. In the case of the

assessee, she paid the Long Term Capital Gain on the sale of shares as

per the requirement of law. In view of the above, the issue in appeal

ITA Nos.1600 & 1601/Mds/2015. :- 9 -:

is squarely covered by the above judgment. Hence, the appeal of the

Revenue is dismissed.

ITA No.1601/Mds/2015, assessment year 2007-08; K. Priya. 9.

The first ground raised by the Revenue is with regard to reopening of

assessment.

assessee had offered Long Term Capital Gains of � 2,23,91,380/-

earned by her from the sale of shares of M/s. Ganesar

Ginning Company (Pvt) Ltd. The assessee and her parents Shri

T.S.R.Khannaiyan and Smt. T.R.K.Saraswathy, are the directors of

M/s. Ganesar Ginning Company (Pvt) Ltd. They entered into a

Memorandum of Understanding dated 28-11-2006 with M/s. DLF

Retail Developers Ltd., as per which the entire share capital of the

company M/s. Ganesar Ginning Company Pvt Ltd, was transferred to

M/s. DLF Retail Developers Ltd. On this transaction, the assessee has

offered her share of Long Term Capital Gains in the Return of income

filed. M/s. Ganesar Ginning Mills Pvt. Ltd., was having only the land

of 2 acres and 23 cents and a building on it, in Coimbatore, as its

assets. The entire share of the above company was acquired, through

resolution of transfer of shares, by the assessee, her father and

ITA Nos.1600 & 1601/Mds/2015. :- 10 -:

mother during September 2005. The Company was sold during

November 2006 as the entire share capital of the company was sold

by the assessee and her family. As per the Balance Sheet filed by the

Ganesar Ginning Company Private Limited for the year ending

31.3.2006, the authorized share capital was �1,50,000/- consisting of

1,500 shares ( each having a face value of Rs.100/-). The total of the

balance sheet is only �20,29,147/-, which consists of accumulated

losses of �20,14,192/-. As per the Profit and Loss account filed by the

Company for the said period, there was a net loss of �3,19,905/-.

Further, no income was reflected in this account, which showed that

no business was conducted for 31.3.2005 and 31.3.2006. In such a

situation, no prudent business man would acquire 1500 shares of a

company, which was incurring continuous losses, with a face value of

�1,50,000/- for �5,31,97,500/-. Hence it was apparent that when the

assessoe and her parents acquired the shares of The Ganesar Ginning

Company Private Limited, their only objective / interest was in the

prime land owned by the company and not in the business of the

company. Hence the amount of �5,31 ,97,500/- that they paid was

for the land and not for the business of the company. Further the

MOU entered into between the directors of the Ganesar Ginning

Company Private Limited ( ie assessee and her parents) and M/s. DLF

Retail Developers Limited talked mainly about the transfer of the said

ITA Nos.1600 & 1601/Mds/2015. :- 11 -:

land ( 2.23 acres at Ganapathy East Village, Coimbatore) i.e. about its

mode of acquisition by the company, ceiling limits under the ULCR

Act, approval obtained by the directors on 5.7.2006 from Coimbatore

Local Planning Authority stated that it was industrial land and could

be used for general commercial purposes, etc. Hence, a perusal of

the above events revealed that the said land was acquired by

assessee and her parents on 23.9.2005 and subsequently sold on

28.11.2006. It was apparent that since the holding period of the

asset ( land) was less than 3 years, the resultant Capital Gain in the

hands of the assessee needed to be assessed as Short Term Capital

Gains. Hence, in this case, there was tangible material and there was

reason to believe that Income chargeable has escaped assessment

Hence notice u/s.148 was issued to the assessee. Aggrieved, the

assessee preferred an appeal before the Commissioner of Income

Tax (Appeals).

On appeal, the Commissioner of Income Tax (Appeals) gave a 11.

finding in favour of the assessee holding that reopening is bad in law.

Against this, the Revenue is in appeal before us.

record. In this case the original assessment for the assessment year

ITA Nos.1600 & 1601/Mds/2015. :- 12 -:

2007-2008 was completed u/s.143(3) of the Act after examining the

books of accounts. It was noted that the calculation of capital gains on

sale of equity shares of Ganesar Ginning Mills Ltd has been verified by

the then Assessing Officer based on the relevant facts and materials

submitted by the assessee and the Assessing Officer has accepted the

stand of the assessee in respect of calculation of capital gains on sale

of shares. In such an eventuality in an assessment u/s.143(3) where

there has been no failure on the part of the assessee in disclosing truly

and materially all facts relating to the case, the assessment cannot be

reopened after 4 years time limit which was completed on 31.03.2012

as per the proviso to section 147 of the Act. Further, there was no

allegation by the Assessing Officer that there was failure on the part

of the assessee to disclose the materials, facts truly and correctly for

the period of assessment. Being so, since the assessment was re-

opened after four years from the end of the relevant assessment year

when the original assessment was completed u/s.143(3), this issue is

squarely covered by the judgment of Supreme Court in the case of

CIT vs. Kelvinator of India Ltd 320 ITR 561. The Assessing Officer

precluded from reopening the assessment. Accordingly, reopening of

assessment is invalid, the order of the Commissioner of Income Tax

(Appeals) is confirmed.

ITA Nos.1600 & 1601/Mds/2015. :- 13 -:

Coming to the second issue in this appeal, which is identical to 13. the one considered in ITA No.1600/Mds/2015. Applying the above ratio, this appeal of the Revenue is also dismissed.

In the result, the appeals of the Revenue in ITA Nos.1600 & 14. 1601/Mds/2015 are dismissed.

Order pronounced on Friday, the 16th day of October, 2015, at Chennai.

Sd/- Sd/- (चं� पूजार�) (एन.आर.एस. गणेशन)) (CHANDRA POOJARI) (N.R.S. GANESAN) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated: 16.10.2015 KV

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF