2013 (7) TMI 646 - AT - Income Tax

Colourable transaction - Exemption u/s 10(38) - long term capital gain - the assessee-company sold the holding of manority shares to M/s. DLF Commercial Developers Ltd. (DLF-CDL), which is a subsidiary of M/s. DLF Universal Ltd - The assessee-company claimed exemption from taxation for the above sum of long-term capital gains on the ground that the sales were made through a stock exchange and securities transaction tax (STT) was paid as provided under section 10(38) of the Income-tax Act, 1961. - In the previous year relevant to the assessment year under appeal, BFSL acquired land for ₹ 3.75 crores from M/s. Bhoruka Steels Ltd., which is another company of Bhoruka group Held that - Though BEIL, BFSL and Bhoruka Steels Ltd. are different corporate entities for the purpose of the Companies Act, they are all controlled by the same interest group of Agarwal family as common shareholders which is very prominent in the entire course of transaction involved in the present appeal - The assessee and its group associates along with the concerned individuals of the same group held 98.73 per cent. of the shares in BFSL, it means without any contradiction that the assessee along with its group owned all the assets and properties of BFSL even though those assets and properties are technically held in the name of BFSL as an independent corporate entity. Once this corporate veil is pierced, which is within the powers of the Revenue authorities, we find that the properties and assets of BFSL were held and de facto owned by the assessee-company and its group Landed property purchased for ₹ 3.75 crores has become substantially the property of DLF-CDL when 98.73 percent in BFSL were transferred to DLF-CDL on sale - If the formalities of the transactions and the legal nature of the corporate bodies are ignored for a moment, the stark fact coming to surface is that the assessee s group has sold the property belonging to one of its concerns to DLF-CDL for a consideration of more than ₹ 89 crores through the medium of sale and transfer of shares which property was purchased for ₹ 3.75 crores and thereby made attempt to avoid payment of short-term capital gains tax Decided against the Assessee.

Issues Involved:
1. Determination of short-term capital gains.
2. Legitimacy of the transaction and applicability of section 10(38) of the Income-tax Act, 1961.
3. Alleged use of a colourable device to avoid tax.
4. Application of the Supreme Court's ruling in McDowell and Co. Ltd. v. CTO.
5. Jurisdiction of the transaction through Magadh Stock Exchange instead of Bangalore Stock Exchange.
6. Assessment of capital gains tax liability.
7. Imposition of interest under sections 234B and 234D of the Income-tax Act.

Detailed Analysis:

1. Determination of Short-term Capital Gains:
The Assessing Officer (AO) determined that the capital gains of Rs. 20,25,49,549 arising from the sale of shares by the assessee-company, BEIL, were short-term capital gains. This was based on the finding that the transaction was essentially a transfer of land owned by BFSL, which had been held for less than a year, thus making it a short-term capital asset.

2. Legitimacy of the Transaction and Applicability of Section 10(38):
The assessee claimed exemption under section 10(38) of the Income-tax Act, arguing that the sale of shares was genuine and securities transaction tax (STT) was paid. The AO, however, rejected this claim, asserting that the transaction was structured to avoid tax on short-term capital gains.

3. Alleged Use of a Colourable Device to Avoid Tax:
The AO concluded that the transaction was a colourable device to evade tax. The sale of shares in BFSL, which owned land acquired for Rs. 3.75 crores, to DLF-CDL for Rs. 89,28,36,500 was seen as a means to transfer the land without incurring short-term capital gains tax. This conclusion was drawn by applying the Supreme Court's ratio in McDowell and Co. Ltd. v. CTO.

4. Application of the Supreme Court's Ruling in McDowell and Co. Ltd. v. CTO:
The AO and Commissioner of Income-tax (Appeals) (CIT(A)) applied the Supreme Court's ruling in McDowell and Co. Ltd. to determine that the transaction was a colourable device. The assessee argued that subsequent Supreme Court rulings in Union of India v. Azadi Bachao Andolan and CIT v. Walfort Share and Stock Brokers P. Ltd. clarified that genuine transactions should not be treated as colourable devices. However, the authorities found that the transaction in question was not genuine.

5. Jurisdiction of the Transaction through Magadh Stock Exchange Instead of Bangalore Stock Exchange:
The AO noted that the shares were sold through the Magadh Stock Exchange, which was not permitted by SEBI to trade in shares at the time. The Bangalore Stock Exchange had declined to deal with the shares. This switch was seen as an attempt to pay STT and claim exemption under section 10(38).

6. Assessment of Capital Gains Tax Liability:
The AO and CIT(A) assessed the capital gains as short-term, taxable in the hands of the assessee. The sale of shares was viewed as a means to transfer the underlying land, thereby attracting short-term capital gains tax. The CIT(A) upheld the AO's assessment, rejecting the assessee's appeal.

7. Imposition of Interest under Sections 234B and 234D:
The CIT(A) also upheld the imposition of interest under sections 234B and 234D of the Income-tax Act, which was contested by the assessee.

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, agreeing with the findings of the AO and CIT(A) that the transaction was a colourable device to evade short-term capital gains tax. The Tribunal held that the surplus arising from the sale of shares should be treated as short-term capital gains and taxed accordingly. The imposition of interest under sections 234B and 234D was also upheld. The order was pronounced on February 10, 2011, at Bangalore.

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