2013 (10) TMI 544 - AT - Income Tax

Gain on sale of shares - who is liable to be taxed - Joint ownership of shares - taxability - Held that - There is no doubt that occupancy rights were attached to the shares of the company, the share holders have transferred their shares, the assessee has only received the cost of construction whereas the entire gain from such transfer arose to the share holder who have rightly declared the income of their respective hands and has been rightly taxed by the department in the hands of the share holders. The dual ownership of the property i.e. legally owned by the company and defacto by the members is an accepted position in the Income tax law - A perusal of the assessment order shows that the shareholder has shown long term capital loss on sale of shares at Rs. 1,08,64,687/-. The AO has observed in his assessment order that the asset under transfer is the shares of M/s. Calico Dyeing & Printing Mills Ltd. (present assessee) alongwith the right to occupy and use the immoveable property which are accrue to the buyer on payment of the construction cost to M/s. Calico Printing and Dyeing (present assessee), since the construction was carried out by the said company as stipulated in the agreement. After making minor adjustments to the proportionate value of market shares, the AO has accepted the entire sale transaction in the hands of the shareholder i.e. M/s. Calico Associates. This also proves that the Revenue has collected tax from the hands of the shareholders - Following decision of Westwind Realtors (P) Ltd. Vs DCIT 2006 (3) TMI 559 - ITAT MUMBAI - Decided against Revenue.

Summary

Issues Involved:
1. Taxability of income from the sale of shares and occupancy rights.
2. Application of the principle of mutuality.
3. Allegation of tax avoidance through a colorable device.
4. Validity of tripartite sale agreements.
5. Double taxation concerns.

Issue-wise Detailed Analysis:

1. Taxability of Income from Sale of Shares and Occupancy Rights:
The Revenue contended that the income from the sale of shares and occupancy rights should be assessed in the hands of the appellant company. The Assessing Officer (AO) argued that the company was engaged in a business venture and the profits arising from the sale of flats should be taxed as business income. The AO computed the net taxable profit at Rs. 10,72,02,035/- after considering the market value and deducting construction and land costs.

The assessee, however, claimed that it was a mutual benefit company and only collected construction costs from flat owners without any profit motive. The Ld. CIT(A) concluded that the income from the sale of shares and occupancy rights could not be assessed in the hands of the appellant company, as the rights were attached to the shares and were transferred by the shareholders, who had already offered the income to tax.

2. Application of the Principle of Mutuality:
The AO rejected the assessee's contention that it operated on the principle of mutuality, arguing that there was no reciprocity or mutual dependence among the members. The Ld. CIT(A) found that the company was working solely for the benefit of its members/shareholders and the transactions were supported by agreements and registered with authorities, thus upholding the principle of mutuality.

3. Allegation of Tax Avoidance through a Colorable Device:
The AO believed that the assessee used a colorable device to avoid tax by splitting the cost of the flat between itself and its sister concern, M/s. Calico Associates. The Ld. CIT(A) dismissed this allegation, stating that no evidence was provided to prove that the transaction was a sham or a device to avoid tax. The transactions were duly verified and supported by agreements, and the income was already taxed in the hands of the shareholders.

4. Validity of Tripartite Sale Agreements:
The Ld. DR contended that the tripartite sale agreements were void ab initio. However, the Tribunal found that the agreements were in line with the Articles of Association of the company, which were accepted by the Registrar of Companies. Therefore, the agreements were valid and enforceable.

5. Double Taxation Concerns:
The assessee argued that taxing the income in its hands would result in double taxation, as the shareholders had already offered the income to tax. The Ld. CIT(A) and the Tribunal agreed, noting that the shareholders had declared the income and it was duly taxed by the department. Therefore, taxing the same income in the hands of the appellant company would lead to double taxation.

Conclusion:
The Tribunal upheld the findings of the Ld. CIT(A) that the income from the sale of shares and occupancy rights could not be assessed in the hands of the appellant company. The appeal filed by the Revenue was dismissed, and the cross objection filed by the assessee was also dismissed. The judgment emphasized the principle of mutuality, the validity of the tripartite agreements, and the avoidance of double taxation.