TaxTMI 
TaxTMI 
2023 (8) TMI 379
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....During the year under consideration, the assessee has shown long term capital gain of Rs. 1730,58,51,513/- on sale of shares in JMMSSPL to MSSPL. The Assessing Officer proceeded to treat this gain as the business income of the assessee for the reason that the assessee was in the business of shares and securities as a broker and was also involved in share trading business. The Ld.CIT(A) upheld the order of assessment by holding that the termination of the joint venture was to avoid commercial inconvenience accruing in the future as a joint venture and that termination was a result of split of business arrangement between the assessee and its partners. Aggrieved, the assessee preferred appeal before the Tribunal. The Tribunal remitted the issue back to the Assessing Officer by holding that - "We have considered the rival arguments made by both the sides, perused the orders of the AO and the ld.CIT(A) and the paper book filed on behalf of the appellant. We have also considered the various decisions cited before us. The question to be decided in the impugned ground is regarding the treatment of consideration received on sale of 49 lakh equity shares of JMMS Securities to Morgan Stanl....
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....y holding the same to be non genuine. The CIT(A) upheld the order of the Assessing Officer in the second round of appellate proceedings also. Therefore, both the assessee and the revenue are in appeal before the Tribunal raising the following grounds of appeal - Assessee "1. Ground I: Treatment of the transaction of Sale of shares of JM Financial Products Pvt. Ltd, as a colourable device and non-genuine and consequently Disallowance of Claim for Set-off of Long-Term Capital Loss on the same: Rs. 54,90,36,870 (Rs. 54.90 crores) (Page 104 of the Order) On the facts and circumstances of the case, the Appellant prays that the conclusion reached by the learned Commissioner of Income-tax (Appeals) - 9, ("CIT(A)':) that the Appellant has entered into a transaction for sale of shares of JM Financial Products Pvt. Ltd. with the object of tax avoidance and it is a colorable device is erroneous and contrary to the facts. The Appellant prays that the claim of long term capital loss of Rs. 54,90,36,870/- be accepted as a genuine long term capital loss. 2. Ground II: Treatment of the transaction of Sale of shares of JM Financial Products Pvt. Ltd, as a colourable device and non-gen....
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....er long term capital gain earned by the Appellant during the assessment year 2008-09." Revenue 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to Charge gain of Rs. 1771,36,61,381/-on transfer of 49,00,000 equity shares as Long Term Capital Gain instead of Business Income". 2. "On the facts and in the circumstances of the case in law, the Ld. CIT(A) also erred in not appreciating the fact that the consideration was actually received for the premature termination of Joint venture, foregone future profit and goodwill of the business, not for the value of the share". 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) further erred in not appreciating the fact that the assessee failed to establish the valuation of shares done on the basis of the net worth of the joint venture and that the consideration was for the worth of the shares, not for the loss of further business." 4. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary I.T.A. No.3925/Mum/2015 - Revenue Sale of Shares - Long Term Capital Gain or Business Income 4. The assessee has ....
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....rom the inception of the Company until the sale of the shares in the Company. There was a specific non-compete clause in the agreement on both the parties. (Pg. 58 PB1). In fact, even as of date the Assessee is not carrying the business of broking of shares and securities; 5. The Assessee has obtained substantial dividend income from the JV company (Pg. 694 PB2), the shares were held as Investments (Pg. 347 PB1) and there were no shares held as stock in trade. 14A disallowance was made in AY 2007-08 on dividend received from the Company (Pg. 845 PB2); 6. The Joint venture was not envisaged for any particular term but was in effect brought about to lay down the rights and duties of the Assessee and MS in the newly formed company. (Pg. 106 PB1); 7. The Assessee had exited the broking business is clearly brought out in the terms of the non-compete clause and the fact that during the year, Income was earned mainly on sale of long term investments, short term investments, Interest, lease rent and dividend received (Pg. 352 PB1). The name of the Assessee was also changed from J.M. Share and Stock Brokers Limited to JM Financial Ltd. to better reflect the change; and 8. The Agreem....
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....business of the assessee incurred to avoid commercial inconvenience with no foundation and facts and with disregard for evidence on record. Another argument presented by the Ld.AR is that section 50CA of the Act has been 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 Ld.AR also relied on the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. vs UOI (supra) to submit that sale of shares of joint venture company is a transfer of capital asset and liable to capital gain tax. The Ld.AR without prejudice submitted that the amount received towards future profits or deprivation of future profit for the assessee is received not in the ordinary course of business and, therefore, is a capital receipt. 8. The Ld.DR, on the other hand, submitted that - * Ld. CIT(A) has not appreciated the fact that at the very outset when the assessee entered in the Joint Ventur....
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....her price. It is, therefore, clear that had the negotiations been merely for determination of price of shares only, it would not have resulted in different rates for the same shares as the price of shares of a company at a particular time has necessarily to be the same in different hands. * Thus this offer by Morgan Stanley clearly establishes the fact that the amount of compensation negotiated was lumpsum since the very beginning of the negotiations and there was no indication that the payment was simply for the purchase of shares sold by the assessee. * It may also to be mentioned here that, the assessee itself had demanded from Morgan Stanley a sum of US $ 540 million for the transfer of its stake in STJV being the "loss resulting from split of consolidated businesses and pre-mature end' of the JV. This fact is clearly mentioned in Point No.3 in this letter (Pg.No. 228 & 229 of the paper book). Thus, later on also, the amount of US $ 540 million asked by the assessee, the amount offered by Morgan Stanley and ultimately the amount paid by Morgan Stanley was for the value of the assessee's stake in the JV business and it was not the consideration received merelyfer the....
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....28 of I.T. Act, 1961. 9. We heard the parties and perused the material on record. The coordinate bench in the first round of appeal has remitted the issue back to the assessing officer to consider the issue of treatment of gain on sale of shares in joint venture as capital gain or business income in the light of the decision of Hon'ble Supreme Court in the case of Vodafone (supra). The Assessing Officer in the remanded proceedings once again treated the income to be taxed as business income u/s. 28 for the reason that the entire consideration received is not the value of the shares but for the value of business interest for which sale of shares is used as a medium. With regard to the applicability of the decision of the Apex Court in Vodafone (supra) to assessee, the Assessing Officer has held that - (i) In Vodafone case the parties involved were non-residents whereas in assessee's case the impugned transaction is between two entities (ii) In Vodafone case the issue of taxability u/s. 28(ii) was not adjudicated (iii) In Vodafone case, the issue was with regard to the taxability of the profit whereas in assessee's case the taxability is not in dispute since the as....
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....ature of the transaction one has to look at the entire transaction as whole and not adopt dissecting approach by applying "look at" test. 12. Besides the CIT(A) also relied on various judicial pronouncements to hold that gain earned by the assessee on sale of shares is to taxed under the head Capital Gains. The main contention of the revenue for treating the gain on sale of shares as business income is that the assessee has a controlling interest in the business of JMMSSPL and consideration received is towards premature termination of joint venture where the assessee has transferred the said interest. JMMSSPL was formed as a JV to carry on the Institutional Equity and Trading business in which the assessee owns 49% of the shares of the company and the rest is owned by MSPPL. The assessee as per the non-compete clause in the agreement entered with MSPPL was not carrying on the business of broking of shares and securities post entering into the JV. From the perusal of the records we notice that the assessee has been holding the shares of JMMSS from 01.04.1999 to 18.05.2007 i.e. more than 8 years and the same are reflected under the head Investments and not as stock-in-trade in the f....
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....these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid income tax ranging from Rs. 3 crore to Rs. 250 crore per annum during the period 2002-03 to 2006- 07. Even after 11.02.2007, taxes are being paid by VIH ranging from 394 crore to Rs. 962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indirect taxes which also run in crores). Moreover, the SPA indicates "continuity" of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a "fly by night" operator/ short time investor. If one applies the look at test discussed hereinabove, without invoking the dissecting approach, then, in our view, extinguishment took place because of the transfer of the CGP share and not by virtue of various clauses of SPA. In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the court is satisfied that the transaction s....
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....upreme Court irrespective of whether the assessee was having a controlling interest (which according to the submissions, the assessee does not have) it is the transaction that needs to be looked into for the purpose of determining the taxability. Accordingly in our view the shares are held by the assessee as investment and the gain arising out of sale of such investment cannot be treated as a business income on the ground that the assessee was participating in the business of JMMSSPL and had had transferred the controlling/business interest. 14. The consideration for sale of shares is agreed between the assessee and MSPL as per the agreement of sale of shares in JMMSSPL. It is noticed that the assessee had negotiated the agreed price by producing before MSSSPL various prices which are paid in a similar transactions and final price was thus arrived at. The contention of the revenue is that the valuation is not done on the basis of net worth of JMMSSPL but based on the future business and therefore the consideration is for loss of business that cannot be treated as capital gains. From perusal of the method adopted for valuation of shares by the assessee, it is noticed that the asses....
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.... the shares. In result the appeal of the revenue is dismissed. I.T.A. No.3987/Mum/2015 - Assessee's appeal 15. The issue in assessee's appeal is disallowance of set off of short term capital gain / loss. During the year under consideration, the assessee had shown both, short term and long term capital loss on sale of shares of assessee's group company, JM Financial Product Pvt Ltd (JMFPPL) which was a private limited company. Brief facts of the issue is that the assessee had claimed set off of long term capital loss of Rs. 54,90,36,870/- and short term capital loss of Rs. 4,65,44,19,508/- claimed to have been incurred on account of shares of assessee's group company namely, JMFPPL. The assessee sold 54445 crore equity shares of JMFPPL representing 10% of the equity share capital to JM Financial Group Employees Welfare Trust being a trust created for the benefit of employees of JM Financial Group. The assessee sold the said shares to JM Financial Group Welfare Trust in order to institute employee stock option plan for the benefit of the employees of entire JM Financials group. The assessee submitted that the shares sold included original shares as well as bonus shares. And....
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....ital gain or business income. 17. In the second round of proceedings, the Assessing Officer held that the assessee could not establish the genuineness of the transaction against the findings given by the CIT(A) in the first round and that the onus was on the assessee to prove that the transaction was not a colourable transaction. The Ld.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. Therefore, he relied on the order of CIT(A) in the earlier round of appellate proceedings and accordingly, disallowed the set off of losses. 18. The Ld.AR submitted that - 1. The assessee issued bonus shares of JMFPPL for the reason that the assessee decided to include a large number of employees under the ESOP scheme and therefore large numbers of shares were issued at a lower price to make the ESOP scheme attractive. 2. Where shares have been actually sold, transferred and consideration has been received and details of sale of shares along with payment dates and other relevant details are already provided before the lower authorities. 3. The options have actually been granted and i....
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.... provisions of section 55(2)(aa) is not correct. Accordingly the CIT(A) held that such loss shall not be allowed to be deducted or set off from income. In the second round of proceedings the lower authorities sustained the disallowance on the same grounds as stated by their predecessors in the first round of appeal. 20. The main contention of the revenue for disallowing the set off of loss is that the loss is artificially created to reduce the tax payment on gain on sale of shares in JMSSPL. The revenue came to the said conclusion based on the finding that huge bonus shares were issued by JMFPPL which reduced the value of the shares from Rs. 114 to Rs. 10.40. During the course of hearing the bench directed the ld AR to submit the financials of JMFPPL for three years i.e. 31.03.2006, 31.03.2007 and 31.03.2008 in order to examine the basis of issue of bonus shares. The various key parameters perused from the financials are as tabulated below - (Amount Rs. in Crore) Financial year Net worth as at end of the Year Profit Before Tax Tax Profit After Tax 2005-06 99.09 (Pg.1677 PB7) 5.95 (Pg.1678 PB7) 1.50 (Pge.1678 PB7) 4.45 (Pg.1678 PB7) 2006-07 190.88 (Pg.1691 PB7) 34.50 (....
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....ansaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of section 94(7) vide Finance Act, 2001 with effect from 1-4-2002. With regard to such cases we may state that on facts it is established that there was a "sale". The sale price was received, by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called "abuse of law". Even assuming that the transaction was pre-planned there is nothing to" impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held....