Capital gain treatment upheld for unquoted preference shares where CBDT guidance was considered and no sham transfer shown.

Gain on sale of unquoted non voting preference shares was held to be long term capital gain where the assessing officer had before him the CBDT instruction and had made enquiries and examined supporting records; absent specific evidence of sham transactions or transfer of control, revision of assessment on the basis that the instruction was not considered could not be sustained. Revision to restrict set off of brought forward long term capital losses was set aside because those losses arise from pending appellate proceedings and cannot be pre empted by revision jurisdiction. An adverse treatment of a recorded loss on disposal of plant and equipment was also set aside on proof it had been added back in computation.

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Issues: (i) Whether gain on sale of 34 unquoted preference shares of ICICI Bank Ltd is taxable as long-term capital gain or business income; (ii) Whether set off of brought forward long-term capital loss should be limited to the assessed figure or the figure claimed by the assessee; (iii) Whether loss on disposal of property, plant and equipment of Rs. 96.65 lakhs was already added back in computation and required adverse treatment.

Issue (i): Whether the gain on transfer of the unlisted preference shares is to be treated as long-term capital gain or as business income.

Analysis: Consideration was given to CBDT Circular No. 4/2007 dated 15.06.2007, CBDT Circular No. 6/2016 (F. No. 225/12/2016-ITA-II) dated 29.02.2016 and Letter F. No. 225/12/2016/ITAT II dated 02.05.2016 which direct that income from transfer of unlisted shares be treated as capital gain subject to specific exceptions (including questionable genuineness, lifting of corporate veil or transfer including control and management). The record shows the Assessing Officer issued specific queries under section 142(1) and the assessee furnished detailed responses and supporting documents, including board minutes and reliance on the CBDT instruction. The authority invoking revision under section 263 relied on part 3(iii) of the Instruction but there is no demonstration that enquiries required to establish the exceptional circumstances (transfer of control/management or sham transactions) would have altered the practical outcome in respect of widely held non-voting preference shares; further, the authority presuming non-consideration of the Instruction overlooked that the Instruction was before the Assessing Officer.

Conclusion: Issue decided in favour of the assessee; the gain is to be treated as capital gain and the exercise of jurisdiction under section 263 on this ground is set aside.

Issue (ii): Whether the set off of brought forward long-term capital loss should be limited to the assessed figure of Rs. 12,10,75,318/- or to the figure claimed by the assessee.

Analysis: The assessed amount for AY 2012-13 (Rs. 12,10,75,318/-) arises from ongoing proceedings and appeals which have not attained finality. The Tribunal noted that final adjustment of brought forward losses must await the conclusion of those appeal proceedings and that section 263 cannot be used to pre-empt the result of pending appellate adjudication.

Conclusion: Issue decided in favour of the assessee; the impugned revision under section 263 cannot substitute or supersede the outcome of pending appellate proceedings on carry forward loss and the action under section 263 is not sustainble on this ground.

Issue (iii): Whether the loss on disposal of property, plant and equipment of Rs. 96.65 lakhs was already added back in computation of income and therefore not liable to adverse action under section 263.

Analysis: The assessee produced workings and documentation demonstrating that the loss amount (together with related interest component) had been included and added back in the computation of income and these details were placed before the Assessing Officer during assessment proceedings.

Conclusion: Issue decided in favour of the assessee; the direction in the revision order to treat the amount adversely is set aside.

Final Conclusion: The Principal Commissioner of Income Tax's order under section 263 is set aside on all three contested grounds and the appeal is allowed, leaving issues that depend on pending appellate adjudication to be finally determined in their respective proceedings.

Ratio Decidendi: Where a CBDT instruction or circular guiding the tax-treatment of share transactions is before the Assessing Officer and the Assessing Officer has examined material and sought relevant information, a revision under section 263 cannot be sustained merely on the presumption that the instruction was not considered; exceptional circumstances specified in the instruction must be shown to exist before treating transfers of unlisted shares as business income rather than capital gains.

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