2012 (7) TMI 209 - AT - Income Tax

Treating the income from transfer of the rights enjoyed by the assessee as capital receipt - AO stated that the income should be taxed under the head capital gain - Execution of will - dispute over property - assessee in the capacity of Administrator - Held that - sale proceeds and advances were accumulated over the years and during the relevant year assessee received certain sums out of distribution of such sale proceeds as well as advances. The assessee had not sold any particular piece of land during the year and, therefore, Ld. CIT(A) has correctly held that the receipts would not be chargeable to income tax. In the absence of sale of a particular asset, revenue cannot assume that the sums are taxable on transfer of land. Liability of beneficiary to tax where administrator has paid tax - Held that - once the taxes are paid by the estate, naturally, the beneficiary receiving any distribution of such sale receipts could not have been taxed again by the revenue, thus, it is clear that sale receipt against which conveyance deed was already executed and which were assessed in the hands of estate of EFD, were not subjected to tax again. constituting the transaction as adventure in the nature of trade there has to be some business relationship or some commercial features in the transactions. Since assessee was not owner of the properties, there is no question of transferring any rights in such properties. Further, the administrator could not distribute the proceeds from sale of the properties unless the administration was complete i.e. expenses and taxes of the estate were paid - mere receipt of sale proceeds by the assessee from the estate of EFD would not amount to any extinguishment of his rights and, accordingly, the receipt of the sum cannot be taxed under the head capital gains - the assessee had invested in 55 companies during the year and these figures, by no stretch of imagination, would lead us to a conclusion that the assessee is not the investor but a trader in shares - decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the bequest made by EFD to American charitable organizations.
2. Taxability of the amounts received by the administrator and distributed to the beneficiaries.
3. Classification of the receipts as capital gains or business income.
4. Applicability of Section 45 and Section 2(47) of the Income Tax Act.
5. Allowability of Portfolio Management Services (PMS) fees as a deduction.

Detailed Analysis:

1. Validity of the Bequest:
The bequest made by EFD to the American charitable organizations was challenged under Section 118 of the Indian Succession Act, 1925. The Bombay High Court held that the bequest was invalid, affirming Mrs. Woronzow as the residuary legatee entitled to the proceeds from the estate.

2. Taxability of Amounts Received by the Administrator:
The amounts received by the administrator from the sale or advance of the estate's immovable properties were distributed among Mr. Wadia and four companies. The primary issue was whether these receipts should be taxed as capital gains or business income.

The ITAT Mumbai Bench in the case of Mr. Nusli Neville Wadia (ITA No.4573/M/2008) had dealt with a similar issue and held that such receipts are not taxable as capital gains or business income. This decision was followed for all the appeals under consideration.

3. Classification of Receipts:
The Assessing Officer had classified the amounts received by the administrator as capital gains or business income. However, the ITAT held that the amounts distributed were out of advances received from purchasers and developers, and not from the sale of properties. Therefore, these receipts were not taxable as capital gains or business income.

4. Applicability of Section 45 and Section 2(47) of the Income Tax Act:
For any capital receipt to be taxed under Section 45, there must be a transfer of a capital asset as defined under Section 2(47). The ITAT concluded that the right to receive sale proceeds constituted a capital asset, but there was no transfer of the asset during the relevant year. Therefore, no capital gains tax was applicable.

5. Allowability of Portfolio Management Services (PMS) Fees:
The ITAT Mumbai Bench, in the case of Pradeep Kumar Harlalka (ITA No.4501/M/2010), held that PMS fees are not deductible under Section 48 of the Income Tax Act as they do not have a direct nexus with the transfer of shares. This decision was followed, and the deduction for PMS fees was disallowed.

Conclusion:
The ITAT dismissed the department's appeals, holding that the receipts in question were not taxable as capital gains or business income. The cross objections and cross appeals filed by the assessee were also dismissed as they were rendered academic. The ITAT's decision was based on the precedent set in the case of Mr. Nusli Neville Wadia and the interpretation of relevant sections of the Income Tax Act.