TaxTMI 
TaxTMI 
2015 (1) TMI 1338
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.... follows. The assessee is an individual who filed a return of income for assessment year 2007-08 declaring total income of Rs. 5,51,54,026/- which, inter-alia, included a net long term capital gain of Rs. 2,24,68,231/- as detailed hereunder :- "Long Term Capital Gain 17,32,46,580 Short Term Capital Loss Set off of b/f (14,95,84,935) - Long Term Capital Loss (7,41,504) - Short Term Capital Loss (4,51,910) Net Long Term Capital Gains 2,24,68,231" 4. The Assessing Officer noted that the long term capital gain of Rs. 17,32,46,580/- was in respect of sale of shares of City Park Pvt. Ltd., to M/s Peninsula Land Ltd.. The short term capital loss of Rs. 14,95,84,935/- was mainly on account of sale of shares of one company, namely, HCL Technologies Ltd.. The dispute in the captioned appeals revolves around the aforesaid transactions. 5. In so far as the transaction of sale of shares of City Park Pvt. Ltd. is concerned, the Assessing Officer treated the same as income from business of trading in shares. The said business income was worked out by the Assessing Officer as under :- "B. Profit on sale of City Park Pvt. Ltd. shares Sale of 66,70....
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....inclusive of brokerage and other charges. ** Cost based on average price Rs. 311.37 per share inclusive of bonus shares." 8. As a consequence of the aforesaid action, Assessing Officer worked out the net income from business by way of trading in shares of Rs. 16,94,78,713/- [i.e. (-) Rs. 39,41,287/- + Rs. 17,34,20,000/-]. 9. Both the aforesaid stands of the Assessing Officer were carried in appeal before the CIT(A). Before the CIT(A), assessee challenged the action of the Assessing Officer in law and on facts. The CIT(A) accepted the plea of the assessee that so far as the gain arising on the transfer of shares in City Park Pvt. Ltd. is concerned, it was assessable as 'capital gains' and not business income, as done by the Assessing Officer. Thus, on this aspect, assessee succeeded before the CIT(A). 10. Further, with regard to the transaction in the shares of HCL Technologies Ltd., the CIT(A) treated the same as a trading activity; and, he also upheld the methodology adopted by the Assessing Officer in computing the profit/loss on sale of 4,71,500 shares. Consequently, the CIT(A) has upheld the action of the Assessing Officer in working out the loss on purchase a....
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....senting Poonawalla Group through Apoorva Realtors Pvt. Ltd., a closely held company with only Dr. Cyrus Poonawalla and Shri. Adar Poonawalla as the shareholders. b. The firm City Park was converted to a Private Limited Company on 17-1-2006 and Apoorva Realtors Pvt. Ltd. owned and held by Dr. Cyrus Poonawalla and Shri. Adar Poonawalla, held 50% of shares of City Park Pvt. Ltd. c. Apart from ownership of 50% interest in City Park Pvt. Ltd., through share holding of Apoorva Realtors Pvt. Ltd., Dr. Cyrus Poonawalla in his individual capacity, and Dr. Cyrus Poonawalla and Adar Poonawalla as beneficial owner of closely held Poonawalla group companies advanced interest free loans to M/s. City Park and later City Park Pvt. Ltd. to the tune of Rs. 25 crores, indicating their deep interest. A passive investor would not advance unsecured loans interest free unless he is a promoter of the business, a fact acknowledged by Shri. Deshpande. d. City Park Pvt. Ltd. purchased lands exceeding 100 acres and developed it thereby raising the value of the company. Yet additional shares were allotted to Dr. Cyrus Poonawalla in his individual capacity at face value. This is clear....
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....s business transactions. 15. On the aspect of assessability of the gain on the sale of shares in City Park Pvt. Ltd., the learned counsel for the assessee has defended the order of the CIT(A). It was pointed out by the learned counsel that so far as the shares of City Park Pvt. Ltd. are concerned, assessee received the same as a gift from his father, an aspect which has not been disputed by the Assessing Officer, and therefore any sale thereof cannot be viewed as a trading activity. In sum and substance, reliance has been placed on the findings of the CIT(A) in terms of which the gain on sale of shares of City Park Pvt. Ltd. has been accepted to be assessable as capital gains. 16. We have carefully considered the rival submissions. Factually speaking, shares of City Park Pvt. Ltd. sold by the assessee were neither purchased and nor acquired by the assessee on his own volition, but the same have been received as gift from his father. Notably, out of the total of 6,67,000 shares, the investee company allotted 6,66,333 shares to Cyrus S. Poonawalla (assessee's father) on 27.01.2006 on par (@ Rs. 10/- each) and the balance 667 shares were allotted to him on 09.06.2006 on par. The....
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....and assets of a corporate entity are not business and assets of its shareholders, as held by the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar vs. CIT, (1955) 27 ITR 01 (SC). The CIT(A), in our view, made no mistake in disregarding the aforesaid plea of the assessee by relying on the judgement of the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar (supra). The following observations of the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar (supra) is worthy of notice, and which clearly support the conclusion of CIT(A) :- "That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills case [1950] SCR 869 at 904. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the ....
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....ver, in this case, the issue involved is taxability of gains arising on sale of impugned shares under the head "capital gains" or as "profits of business". The conversion of erstwhile partnership firm into private limited company, holding of shares by appellant's father in City Park, receipt of shares by the appellant way of gift, subsequent sale of shares, genuineness of the transactions are not doubted by the Assessing Officer. It cannot also be glossed over that 50% of the shares in the company were held by other prompters, namely Mr. Anirudha Deshpande, Mr. Vithal Maniyar, Namrata Film Enterprises Ltd. In such circumstances, in so far as acquisition and sale of shares of City Pak are concerned, it is difficult to say that the appellant adopted colorable device to avoid tax. The manner in which the transaction in shares of City Park has been entered into by the appellant's father and appellant can at best be termed as tax planning, but it cannot be regarded as tax evasion. Tax planning is permissible as held by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan 263 ITR 706." 21. In our view, the aforesaid discussion by the CIT(A) is f....
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....n the shares of HCL Technologies Ltd. was to incur loss on account of bonus striping and then set-off such loss against the long term capital gain accruing to the assessee on sale of shares of City Park Pvt. Ltd.. As per the Assessing Officer, the motive of the assessee in dealing in the shares of HCL Technologies Ltd. was tax avoidance and a dubious tax planning. Ultimately, the Assessing Officer disagreed with the assessee with nature and the quantification of loss on the sale of 4,71,500 equity shares of HCL Technologies Ltd.. The Assessing Officer computed the loss at Rs. 39,41,287/- as per the Tabulation which we have reproduced earlier in this order. The point of difference on this aspect between the assessee and the Assessing Officer was with regard to the cost of the shares sold. The Assessing Officer followed the methodology of spreading the cost of original shares to total shares i.e. the original shares plus bonus shares. In other words, the total shares held by the assessee (i.e. original shares 4,71,517 + bonus shares 4,71,517) were considered to have been acquired for an amount of Rs. 29,36,28,768/-, i.e. the price originally incurred by the assessee. The Assessing Of....
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....d the entire cost is liable to be adjusted on the original shares. 27. At the time of hearing, it has also been pointed out that during the year under consideration, assessee had sold other shares and units of mutual funds, and profit arising from such transactions have been accepted by the Assessing Officer to be assessable as 'capital gains'. Furthermore, it was pointed out that in the preceding assessment years as well as in the subsequent assessment years, the Assessing Officer has assessed the gain on sale of shares as an income assessable under the head capital gains, even in the course of scrutiny assessment. For all the aforesaid reasons, it has been canvassed that there was no scope for treating the impugned transaction as business transactions. It was also vehemently argued that there was no material to impeach the genuineness of the transactions and that at best the transaction can be termed as a 'use of the provisions of law' and it cannot be said to be 'a abuse of law', as was observed by the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers (P.) Ltd., 326 ITR 1 (SC) in a somewhat similar situation. 28. On the other hand, the Ld. Departme....
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....share as against as the purchase price of cum-bonus shares of Rs. 622 per share. The resultant loss was canvassed to be a short capital loss. In the subsequent years, assessee sold the balance shares remaining with him i.e. bonus shares of 471517 and the 17 out of the original 471517 shares. As the period of holding that was in excess of 12 months, in subsequent years the gain on sale of such shares has been accepted by the Assessing Officer as long term capital gain, which was exempt u/s 10(38) of the Act. Notably, while computing such capital gain, the cost of acquisition of the bonus shares was taken as 'Nil' by application of the provisions of section 55(2)(aa)(iia) of the Act. The aforesaid position has been accepted by the Assessing Officer in scrutiny assessment, as asserted by the assessee in the course of the hearing before us, and this material has not been repudiated from the side of the Revenue. 30. In the current year, assessee computed the loss on sale of 4,71,500 original shares by considering the average acquisition cost of Rs. 622 per share. Ostensibly, it resulted in a loss because the sale price realized was only Rs. 303 per share. First of all, the Assessing ....
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.... stripping transaction as sham or bogus. 31. In our considered opinion, the parity of reasoning laid down by the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra) is definitely attracted in the present case too. In the present case, even if it is taken that the transaction in the shares of HCL Technologies Ltd. was pre-planned, but the inference drawn by the Assessing Officer that it was a dubious tax planning cannot be upheld because there is nothing to impeach the genuineness of the transaction carried out by the assessee. In the case before the Hon'ble Supreme Court also, similar situation prevailed and the Revenue had cast doubt on the transaction because of pre-planned nature of the transaction. The Hon'ble Supreme Court negated the stand of the Revenue, as noted by us earlier. Applying the similar parity of reasoning in the present case, the stand of the Assessing Officer that the transaction was pre-meditated with the intention of incurring loss and setting-off against capital gains income is an "abuse of law" cannot be affirmed. 32. We may also refer to section 94(8) of the Act, which has been inserted by the Finance (No.2) w.e.f. 01....
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....able under the head 'capital gains'. It has also been pointed out that in the scrutiny assessment for the preceding assessment years as well as for the subsequent assessment years the profit on sale of shares earned by the assessee has been accepted as assessable under the head 'capital gains'. Notably, even with regard to the gain on sale of bonus shares of HCL Technologies Ltd., it was stated at Bar that in subsequent assessment years it has been accepted by the Assessing Officer as an income assessable under the head 'capital gains'. On all these aspects, the Revenue has not controverted the factual matrix brought out by the assessee. In this background, in our considered opinion, the onus was on the Revenue to establish that the transaction in the shares of HCL Technologies Ltd. was not assessable under the head 'capital gains', as declared by the assessee in the return of income. The moot point is as to whether or not, having regard to the discussion in the orders of the authorities below, such an onus has been discharged by the Revenue. 35. The only point made by the Revenue is that magnitude and frequency of the transaction in HCL Technologies Ltd. is substantial. In our ....