2012 (11) TMI 930 - AT - Income Tax

Capital gain - receipt of gain on sale of shares - business income or capital gains - held that - The modus-operandi adopted by the joint bidders was to float three SPVs in the form of companies and to obtain the allotment of land in the name of these companies. Shares were allotted to them in these companies and within five days of allotment, the assessee along with its joint bidders i.e., Naman group sold their shares in SPVs entity NCPL to K. Raheja Corp. Pvt. Ltd. From the above facts, it is clear that what was undertaken by the assessee was a business activity and not an investment in a capital asset. - Held as taxable as business income - Decided in favor of assessee. Taxability of notional income on sale of shares - The Assessing Officer has notionally calculated the profits which the assessee, according to the Assessing Officer, ought to have earned in the sale of these shares and brought the same to tax. - held that - When the assessee has not charged or earned any income during the impugned assessment year, in our considered opinion, it is not right on the part of the authorities to assume a particular income and then bring it to charge on the ground that certain income has accrued or arisen in the case of the assessee. Under sections 22 & 23 of the Income-tax Act when income is assessed under the head Income from house property , the Act specifically provides for deeming of income No such parallel provision is available when income is assessed under other heads. The addition made by the A.O on account of short term capital gain of Rs. 2,31,47,564, is purely notional neither accrued nor received by appellant and not in accordance with the judicial precedents and the same is deleted - Decided in favor of assessee.

Summary

Issues Involved:

1. Tax treatment of income from the sale of shares.
2. Taxability of notional income.

Issue-Wise Detailed Analysis:

1. Tax Treatment of Income from the Sale of Shares:

The Revenue contested the Commissioner (Appeals)'s decision to treat the income from the sale of shares as business income rather than capital gains. The assessee, a real estate developer, formed a joint venture with another developer, Naman, to bid for plots from MMRDA, resulting in the formation of three Special Purpose Vehicles (SPVs). The assessee held significant stakes in these SPVs and sold its shares in one SPV (NCPL) to K. Raheja Corp. Pvt. Ltd. shortly after the plots were allotted. The Assessing Officer initially treated the profit from this sale as capital gains, arguing that the assessee's activities did not constitute regular business. However, the Commissioner (Appeals) upheld the assessee's contention that the income should be treated as business income, given the nature of the assessee's business and the short duration between the allotment and sale of shares. The Tribunal agreed with the Commissioner (Appeals), noting that the assessee's activities were consistent with its business of real estate development and dismissed the Revenue's appeal on this ground.

2. Taxability of Notional Income:

The second issue concerned the taxability of notional income related to the sale of shares in the other two SPVs (NRPL and NPPL). The Assessing Officer argued that the shares were transferred at face value despite the plots' significant market value, suggesting that the assessee should have earned a higher profit. The Commissioner (Appeals) rejected this, stating that no notional income could be taxed unless it had accrued or been received. The Tribunal upheld this view, emphasizing that the transactions were governed by the joint venture agreements, which included specific clauses for share transfers in case of funding defaults. The Tribunal found no evidence of any additional unrecorded income and cited several case laws supporting the principle that only actual income received or accrued could be taxed. Consequently, the Tribunal dismissed the Revenue's appeal on this ground as well.

Conclusion:

The Tribunal upheld the Commissioner (Appeals)'s decisions on both issues, concluding that the income from the sale of shares should be treated as business income and that no notional income could be taxed in the absence of evidence of additional income. The Revenue's appeal was dismissed in its entirety.