2023 (8) TMI 379 - AT - Income Tax

Tribunal rules gain on shares as Long Term Capital Gain, allows set off of losses

The Tribunal ruled in favor of the assessee, determining that the gain on the sale of shares should be taxed as Long Term Capital Gain (LTCG) and allowing ... Correct head of income - treatment of gain on sale of shares in joint venture as capital gain or business income - HELD THAT:- From perusal of the method adopted for valuation of shares by the assessee, it is noticed that the assessee has agreed for a lump sum consideration without any breakup of what is attributable to assets, liabilities and future business. It is to be noticed that the Act does not contain provisions to state that determination of the head of income under which the gain on sale of shares is to be taxed is based on the valuation used for arriving at sale consideration for transfer of shares. In assessee's case the assessing officer did not question the method or basis of the valuation of shares and has not disputed the consideration received towards sale of shares but held the gain to be a business income on the ground that the valuation is arrived at based on future business. This in our opinion is not tenable since the treatment of shares in the books of accounts whether as stock-in-trade or investment is also one of the determining factor for taxation under capital gain or business income and it cannot be said that the method adopted for arriving at the sale consideration determines the nature of transaction. There is merit in the submission of the ld AR that since section 50CA of the Act is inserted by the Finance Act, 2017 with effect from 02/04/2018 and therefore, the said insertion for valuation of capital asset transferred being shares of a company other than equity shares or the purpose of section 48 being “fair market value” determined as prescribed, is not applicable to the assessee for the year under consideration. The intention of the assessee is to hold to the shares of JMMSSPL as investment is demonstrated by the reflection of the shares under investments in the financial statements and from the factual finding given by the CIT(A) that the Board Resolution dated 18.04.1998 passed while making the investment clearly mentions that the assessee has made a capital investment. Accordingly in our view treatment of the gain as business income on this ground is not sustainable. In view of these discussions we hold that that the gain arising on transfer of 49,00,000 equity shares of JMMSSPL by the assessee is chargeable to tax under the head capital gains and the assessee be allowed to claim the indexed cost of acquisition considering the period of holding of the shares.Decided in favour of assessee. Disallowance of set off of short term capital gain / loss - loss is artificially created to reduce the tax payment on gain on sale of shares in JMSSPL - CIT(A) in the second time held that the entire transaction had taken place not for any commercial purposes but with a motive to create loss in books of account - HELD THAT:- In the present case genuineness of the claim cannot be impeached - we notice that the shares were sold by the assessee from the Demat account for which the consideration is received by the assessee and that shares sold had been issued under the ESOP scheme of the Trust where the options are being exercised by the assessee. We further notice that the assessee has also shown short term capital gain on sale of JMFPPL which supports the submission of assessee that the intention of the assessee was not purposely to reduce the payment of tax. On the other hand the revenue has not brought any material to controvert the contention of assessee. So we cannot countenance the action of Ld.CIT(A)/AO on this issue and uphold the claim of assessee. We therefore set aside the order of the CIT(A) disallowing the setoff of long term capital loss and short term capital loss CIT(A) while upholding the disallowance of set off of losses has also held that the loss as computed by the assessee is not correct for the reason that the provisions of section 55(2)(aa)(ii) of the Act is not applicable in assessee's case. During the course of hearing the ld AR presented various arguments in this regard contending that the provisions of section 55(2)(aa)(ii) is applicable to the impugned transaction. Since we have already held that the set off of loss should allowed in the case of the assessee in the foregoing paras., the submissions of the ld AR and ld DR in this regard is left open. Issues Involved:1. Treatment of gain on sale of shares as Long Term Capital Gain (LTCG) or Business Income.2. Disallowance of set off of Long Term Capital Loss (LTCL) and Short Term Capital Loss (STCL) on sale of shares.3. Applicability of Section 55(2)(aa) for calculating LTCL and STCL.Issue-wise Summary:1. Treatment of Gain on Sale of Shares as LTCG or Business Income:The assessee, a holding company, sold its shares in JM Morgan Stanley Security Pvt Ltd (JMMSSPL) and declared the gain as Long Term Capital Gain (LTCG). The Assessing Officer (AO) treated this gain as business income, citing the assessee's involvement in the business of shares and securities. The CIT(A) upheld this view, stating that the termination of the joint venture was to avoid future commercial inconvenience and was a result of a split business arrangement. However, the Tribunal remitted the issue back to the AO for reconsideration in light of the Supreme Court's decision in Vodafone International Holdings B.V. vs UOI. In the second round, the AO again treated the gain as business income, but the CIT(A) ruled in favor of the assessee, holding that the income should be taxed under 'capital gains.' The Tribunal agreed, emphasizing that the shares were held as investments and not as stock-in-trade, and the gain should be taxed as LTCG.2. Disallowance of Set Off of LTCL and STCL on Sale of Shares:The assessee claimed set off for LTCL and STCL incurred on the sale of shares of JM Financial Products Pvt Ltd (JMFPPL). The AO disallowed the set off, labeling the transaction a 'colorable device' for tax avoidance. The CIT(A) upheld this disallowance. In the second round, the AO and CIT(A) maintained their stance. However, the Tribunal found that the financial position of JMFPPL justified the issuance of bonus shares and that the shares were genuinely sold to a trust for an Employee Stock Option Plan (ESOP). The Tribunal ruled that the losses were genuine and allowed the set off of LTCL and STCL.3. Applicability of Section 55(2)(aa) for Calculating LTCL and STCL:The CIT(A) held that the provisions of Section 55(2)(aa) were not applicable to the assessee's case. However, since the Tribunal allowed the set off of losses, the arguments regarding the applicability of Section 55(2)(aa) were left open.Conclusion:The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, holding that the gain on the sale of shares should be taxed as LTCG and permitting the set off of LTCL and STCL. The order was pronounced in the open court on 04/08/2023.