2018 (9) TMI 68 - AT - Income Tax

CIT-A justification in striking down the order passed by the AO u/s 253/143(3) wherein the short term capital gains was brought to tax - whether the CIT-A was justified in passing certain comments about the taxability of short term capital gains after having struck down the addition made by the ld AO in the facts and circumstances of the case? - Held that - AO did compute the capital gains on conversion of private limited company into LLP at Rs Nil by fixing the consideration at book values as directed by the tribunal. Admittedly, this was computed in the hands of Aravali Polymers LLP (i.e the assessee herein) by treating the assessee LLP in the capacity of successor to private limited company. AO ought to have stopped the proceedings with this action which would be in strict consonance with the directions of the tribunal supra. We are in complete agreement with the arguments of the ld AR that the issue as to whether the sale of 3000000 lakh equity shares of EIH Ltd post conversion into LLP, would result in long term or short term capital gains, was never in dispute in the first round of proceedings. Since this was accepted by the ld AO in the assessment itself, there was no occasion to carry the said issue to the appellate forums such as CITA or the tribunal. Hence the ld AO ought not to have taken a different stand in the proceedings giving effect to the directions of the tribunal by treating the resultant gains on sale of 3000000 equity shares of EIH Ltd as short term capital gains. We find that this action of the ld AO had been rightly struck down by the ld CITA in his order. Accordingly, grounds raised by the revenue are dismissed. But we find that the CIT-A having struck down the action of the AO in taxing short term capital gains, had proceeded to make some observations, to somehow bring to tax the short term capital gains, which in our considered opinion, cannot be done as per law at all. These observations of the CIT-A are totally unwarranted and only reflects the contradictory stand of the CIT-A in as much as, the CIT-A, on the one hand, clearly gives a finding, that the AO cannot travel beyond his jurisdiction and has to strictly abide by the directions of the tribunal, but, on the other hand, the CIT-A decides to travel beyond his jurisdiction to look into issues which were not the subject matter of directions of the tribunal. We hold that the observations of the CIT-A in respect of Ground Nos. 5 & 6 raised before him deserves to be expunged and are hereby directed to be expunged. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in striking down the order passed by the Assessing Officer (AO) treating the transfer of EIH shares as short-term capital gains.
2. Whether the CIT(A) was justified in making certain comments about the taxability of short-term capital gains after having struck down the addition made by the AO.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Striking Down AO’s Order:

The core issue in the revenue's appeal was whether the CIT(A) was justified in striking down the AO’s order which treated the transfer of EIH shares as short-term capital gains. The brief facts are that the assessee LLP was formed by converting a private limited company (APPL) into an LLP. Upon conversion, all assets, including 3,184,807 shares of EIH Ltd, were transferred to the LLP at their book value. The assessee sold 3,000,000 of these shares and declared the resultant gains as long-term capital gains in its return, which was initially accepted by the AO.

In the original assessment proceedings under section 143(3) of the Income Tax Act, the AO accepted the claim of long-term capital gains. However, in subsequent proceedings, the AO shifted his stance and treated the gains as short-term capital gains, arguing that the period of holding by the LLP was less than one year and that the benefit of exemption under section 47(xiiib) was not available.

The CIT(A) observed that the AO's order under section 254/143(3) was supposed to be limited to the directions of the Tribunal, which had directed the AO to compute capital gains based on book values. The CIT(A) held that the AO had no jurisdiction to travel beyond these directions and accordingly struck down the AO’s action of treating the gains as short-term capital gains.

2. Comments on Taxability of Short-Term Capital Gains:

The assessee’s appeal focused on the CIT(A)'s comments regarding the taxability of short-term capital gains. The CIT(A) had made observations suggesting that the AO could take recourse to other proceedings to tax the gains as short-term capital gains if deemed legally proper. The CIT(A) also hinted at potential tax liabilities on the conversion of shares in the hands of the shareholders of the erstwhile company.

The Tribunal found these observations to be unwarranted and contradictory. On one hand, the CIT(A) acknowledged that the AO should not exceed his jurisdiction, but on the other hand, the CIT(A) himself ventured beyond his jurisdiction with these comments. The Tribunal held that these observations were not in accordance with the law and directed that they be expunged.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to strike down the AO's order treating the gains as short-term capital gains. The Tribunal allowed the assessee's appeal, expunging the unwarranted comments made by the CIT(A) regarding the taxability of short-term capital gains.

Final Judgment:
The appeal of the assessee was allowed, and the appeal of the revenue was dismissed. The order was pronounced in the Court on 29.08.2018.