2014 (2) TMI 833 - AT - Income Tax

Disallowance u/s 10(23G) of the Act Long Term Capital Gain on sale of shares Held that - The approval given u/s 10(23G) has not been withdrawn as provided in rule 2E of the Income Tax Rules - the benefit which has accrued to the investor/assessee cannot be taken away just because of the reason that the investee company which has originally been approved u/s 10(23G) by the government has amalgamated into another company - by providing the approval for an investee company, the investor is entitled to the benefit which cannot be denied to the assessee/investor merely on the ground that the investee company has amalgamated/merged with another company, the process in which the assessee/investor has no role to play thus, the authorities are not justified in holding that the assessee is not eligible for exemption under the provisions of section 10 clause 23G of the Act - the exemption claimed by the assessee u/s 10(23G) of the Income Tax Act in respect of long term capital gain of on sale of shares of M/s RSPCL to M/s BSES/REL is allowed Decided in favour of Assessee.

Issues:
Disallowance of exemption claimed under section 10(23G) for long term capital gain on sale of shares of M/s RSPCL.

Analysis:
The appeal pertains to the disallowance made by the Assessing Officer (AO) against the exemption claimed by the assessee under section 10(23G) of the Income Tax Act for long term capital gain on the sale of shares of M/s RSPCL. The assessee had acquired 1,26,90,000 equity shares of M/s RSPCL and claimed exemption under section 10(23G) for the long term capital gain resulting from the sale of these shares. However, the AO disallowed the claim stating that RSPCL ceased to exist from 01.04.2003 due to amalgamation with another company, and hence, the exemption was not available unless the new company was an eligible enterprise approved by the competent authority.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that RSPCL ceased to exist as a separate legal entity from 01.04.2003, which was the eligible undertaking for exemption under section 10(23G). The capital gain arose post-amalgamation, and the sale of shares of RSPCL was deemed ineligible for exemption under section 10(23G) of the Act. The assessee challenged this decision before the Appellate Tribunal.

During the proceedings, the assessee argued that the shares were acquired and sold during the period when the enterprise was approved under section 10(23G). The assessee relied on the High Court's amalgamation order, which transferred all liabilities and assets of RSPCL to the transferee company, including the benefits enjoyed by the petitioner company. The assessee also cited Rule 2(E) of the Income Tax Rules to support the argument that as long as the Central Government had not withdrawn the approval granted, the assessee was entitled to the benefit under section 10(23G).

The Revenue contended that since the sale of RSPCL shares occurred after 01.04.2003 when RSPCL ceased to exist, the exemption under section 10(23G) was not applicable unless the new entity also received approval from the Central Government. The Revenue argued that the amalgamation order did not make the new company automatically eligible for approval under section 10(23G).

After considering both sides, the Tribunal analyzed the events leading to the dispute, highlighting the dates of share purchase, amalgamation proposal, amalgamation order, appointed date for amalgamation, and the date of share sale. The Tribunal noted that RSPCL was an approved undertaking under section 10(23G) at the time of share acquisition and sale, and the approval had not been withdrawn as per Rule 2E of the Income Tax Rules.

The Tribunal emphasized that the benefits accrued to the investor could not be denied due to the amalgamation, as the investor had a legitimate expectation of receiving the approved benefits. The Tribunal pointed out that the legislative intent did not include provisions to deny benefits to investors in cases of amalgamation unless specifically provided, unlike in other sections. Therefore, the Tribunal held that the assessee was eligible for exemption under section 10(23G) for the long term capital gain on the sale of RSPCL shares, overturning the lower authorities' decisions.

In conclusion, the Tribunal allowed the appeal filed by the assessee, deleting the disallowance of the exemption claimed under section 10(23G) for the long term capital gain on the sale of shares of M/s RSPCL to M/s BSES/REL.

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