2019 (8) TMI 237 - AT - Income Tax

Tribunal re-examines capital gains treatment, directs AO to verify agreements for true intention.

M/s i-VEN Medicare India Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Circle-11 (3), Bangalore

M/s i-VEN Medicare India Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Circle-11 (3), Bangalore - TMI Issues Involved:1. Treatment of capital gains on the sale of investments as business income.2. Eligibility to carry forward unabsorbed losses/depreciation.3. Liability to pay interest under Section 234C of the Income Tax Act.Issue-wise Detailed Analysis:1. Treatment of Capital Gains on the Sale of Investments as Business Income:The core issue in the appeals was whether the gains from the sale of shares and mutual funds should be treated as capital gains or business income. The appellant argued that the shares were held as capital assets and not as stock in trade, and the gains should be taxed as capital gains. The appellant emphasized that it was a wholly-owned subsidiary of a venture capital fund formed to make investments in healthcare provider companies. The shares were shown as investments in the balance sheet and not as stock in trade. The appellant highlighted that the shares were held for a significant period, there were no borrowed funds, and the primary objective was capital appreciation, not trading.The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the appellant was engaged in the business of rendering medical and healthcare services, and the investments in healthcare provider companies were a requirement of the appellant's business. The AO treated the entire profit on the sale of shares as business income, arguing that the shares were held with the motive of earning profit and not to earn dividend income.The Tribunal observed that the appellant invested in shares of specific healthcare provider companies with the clear intention of furthering its primary objective of expanding its business in the healthcare sector. The Tribunal noted that the investments were part of a business agreement and were sold to India Advantage Fund-V, a trust holding the majority of the appellant's shares. The Tribunal called for the agreements entered into by the appellant with these companies to verify the actual intention behind the investments.The Tribunal decided to set aside the issue back to the AO to verify the agreements and ascertain the true intention of the appellant behind the investments. The AO was directed to consider the issue based on the tests laid down by various courts relied upon by the appellant.2. Eligibility to Carry Forward Unabsorbed Losses/Depreciation:The appellant contended that the AO erred in holding that the appellant was not eligible to carry forward unabsorbed losses/depreciation by setting off the same against the alleged income assessed as business income. The CIT(A) had confirmed this view. The appellant argued that the action and conclusion of the authorities were not in accordance with the law and were erroneous on facts.The Tribunal did not provide a separate detailed analysis for this issue but implied that the resolution of the primary issue regarding the treatment of capital gains would impact the determination of eligibility to carry forward unabsorbed losses/depreciation.3. Liability to Pay Interest Under Section 234C of the Income Tax Act:The appellant denied the liability to pay interest under Section 234C of the Income Tax Act, arguing that the interest was levied erroneously and should be deleted. The Tribunal noted that the grounds relating to interest under Section 234 were consequential in nature and would depend on the final determination of the primary issue regarding the treatment of capital gains.Conclusion:The Tribunal allowed the appeals for statistical purposes and set aside the issue of the treatment of capital gains back to the AO for re-examination. The AO was directed to verify the agreements and ascertain the true intention behind the investments. The Tribunal's decision on the primary issue would impact the determination of eligibility to carry forward unabsorbed losses/depreciation and the liability to pay interest under Section 234C. The appeals were allowed for statistical purposes, and the order was pronounced in open court on 31-07-2019.