Taxpublishers.in - InterestingDecision/IDDTF_244.htm - Tax Publishers Your Tax Solution Hub

Share via Whatsapp 85 Views


Tax Publishers Sale of Shares in the JV to JV partner based on future income prospects - whether business income/capital gain. Sale of shares to ESOP trust from purchased shares from market and long/short term capital losses sustained in the process whether a colourable device to offset capital gains *Facts :* Assessee was having a JV with Morgan Stanley called JM Morgan Stanley Security Pvt Ltd (JMMSSPL) in which assessee was holding 49% and Morgan Stanley (India) Securities Pvt Ltd (MSSPL) was holding 51%. As part of the JV covenants assessee was not supposed to be in competing business and also gave up his share broking business as well. During the AY 2008-09 the assessee sold 49% of this holdings in the JV to the other JV partner MSSPL offering a long term capital gain for tax @ Rs. 1730 crores. These shares were held since 1999 as investments in the books of the assessee and accordingly the same was treated as capital gains. Revenue's case was prima facie that the bereft the holding of the shares the compensation/consideration received for the divestment of the 49% share of the JV by the assessee since it was based on future revenue projections and was in lieu of an income earning avenues the same ought to be taxed as business profits under section 28(ii). The case travelled to the ITAT and was remanded back to the AO for fresh consideration. The AO sustained the business income reading in the denovo hearing and the CIT(A) reversed the same. Aggrieved revenue went in higher appeal - Separately the assessee had purchased the shares of another JV called JM Financial Products from the market and was transferred to the ESOP Trust for meeting Employee ESOP obligations. It so happened that the purchase price of these shares and the subsequent bonus shares issued against these etc. all resulting in a loss (both long and short term) while transferring these shares to the ESOP trust. Revenue's plea was that this short/long term capital loss itself was a colourable transaction to adjust the capital gain of the above JV shares sold. The AO also applied erroneously the provisions of Section 55(2)(aa) to compute the cost of acquisition and thereby denied the set off of both long/short term capital loss. The lower authorities sustained the disallowance of the set off losses. On higher appeal by the assessee - Held against the revenue that the JV 49% sale was indeed capital gains and cannot be taxed as business income. The provisions of Section 50CA do not exist for the said assessment year. So revenue without questioning the valuation cannot claim the same to be business income simply because the consideration flowed based on future income. *Applied :* Vodafone International Holdings B.V. v. UOI (2012) 341 ITR 1 (SC) : 2012 TaxPub(DT) 0370 (SC) Held in favour of the assessee that the CIT(A) himself has held that the application of Section 55(2)(aa) was wrong by the AO but denied the set off of losses. The losses were not colourable transaction and on facts they were found to be in order. *Applied :* CIT v. Sakarlal Balabhai (1968) 69 ITR 186 (Guj-HC) : 1968 TaxPub(DT) 0363 (Guj-HC) ACIT v. Biraj Investments P. Ltd. (2012) 210 Taxman 418 (Guj.-HC) : 2012 TaxPub(DT) 3041 (Guj-HC) UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) : 2003 TaxPub(DT) 1429 (SC) CIT Mumbai v. Walfort Share & Stock Brokers (P.) (2010) 326 ITR 1 (SC) : 2010 TaxPub(DT) 2087 (SC) *Ed. Note :* Following paras of the decision are relevant - "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. However the Assessing Officer has the right to question the correctness of the valuation and accordingly determine the treatment of the taxability of the amount which in his opinion is excess. 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. Further 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. "In the present case genuineness of the claim cannot be impeached. In his regard, 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 of Rs.4,95,00,000 on sale of 49.50 lakh shares of JMFPPL which supports the submission of assessee that the intention of the assessee was not purposely to reduce the payment of tax". *Case :* J.M. Financial Ltd. v. Dy. CIT 2023 TaxPub(DT) 4757 (Mum-Trib)

Tax Publishers

Sale of Shares in the JV to JV partner based on future income prospects - whether business income/capital gain.

Sale of shares to ESOP trust from purchased shares from market and long/short term capital losses sustained in the process whether a colourable device to offset capital gains

Facts :

Assessee was having a JV with Morgan Stanley called JM Morgan Stanley Security Pvt Ltd (JMMSSPL) in which assessee was holding 49% and Morgan Stanley (India) Securities Pvt Ltd (MSSPL) was holding 51%. As part of the JV covenants assessee was not supposed to be in competing business and also gave up his share broking business as well. During the AY 2008-09 the assessee sold 49% of this holdings in the JV to the other JV partner MSSPL offering a long term capital gain for tax @ Rs. 1730 crores. These shares were held since 1999 as investments in the books of the assessee and accordingly the same was treated as capital gains. Revenue's case was prima facie that the bereft the holding of the shares the compensation/consideration received for the divestment of the 49% share of the JV by the assessee since it was based on future revenue projections and was in lieu of an income earning avenues the same ought to be taxed as business profits under section 28(ii). The case travelled to the ITAT and was remanded back to the AO for fresh consideration. The AO sustained the business income reading in the denovo hearing and the CIT(A) reversed the same. Aggrieved revenue went in higher appeal -

Separately the assessee had purchased the shares of another JV called JM Financial Products from the market and was transferred to the ESOP Trust for meeting Employee ESOP obligations. It so happened that the purchase price of these shares and the subsequent bonus shares issued against these etc. all resulting in a loss (both long and short term) while transferring these shares to the ESOP trust. Revenue's plea was that this short/long term capital loss itself was a colourable transaction to adjust the capital gain of the above JV shares sold. The AO also applied erroneously the provisions of Section 55(2)(aa) to compute the cost of acquisition and thereby denied the set off of both long/short term capital loss. The lower authorities sustained the disallowance of the set off losses. On higher appeal by the assessee -

Held against the revenue that the JV 49% sale was indeed capital gains and cannot be taxed as business income. The provisions of Section 50CA do not exist for the said assessment year. So revenue without questioning the valuation cannot claim the same to be business income simply because the consideration flowed based on future income.

Applied :

Vodafone International Holdings B.V. v. UOI (2012) 341 ITR 1 (SC) : 2012 TaxPub(DT) 0370 (SC)

Held in favour of the assessee that the CIT(A) himself has held that the application of Section 55(2)(aa) was wrong by the AO but denied the set off of losses. The losses were not colourable transaction and on facts they were found to be in order.

Applied :

CIT v. Sakarlal Balabhai (1968) 69 ITR 186 (Guj-HC) : 1968 TaxPub(DT) 0363 (Guj-HC)

ACIT v. Biraj Investments P. Ltd. (2012) 210 Taxman 418 (Guj.-HC) : 2012 TaxPub(DT) 3041 (Guj-HC)

UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) : 2003 TaxPub(DT) 1429 (SC)

CIT Mumbai v. Walfort Share & Stock Brokers (P.) (2010) 326 ITR 1 (SC) : 2010 TaxPub(DT) 2087 (SC)

Ed. Note : Following paras of the decision are relevant -

"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. However the Assessing Officer has the right to question the correctness of the valuation and accordingly determine the treatment of the taxability of the amount which in his opinion is excess. 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. Further 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.

"In the present case genuineness of the claim cannot be impeached. In his regard, 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 of Rs.4,95,00,000 on sale of 49.50 lakh shares of JMFPPL which supports the submission of assessee that the intention of the assessee was not purposely to reduce the payment of tax".

Case : J.M. Financial Ltd. v. Dy. CIT 2023 TaxPub(DT) 4757 (Mum-Trib)