2019 (8) TMI 237 - AT - Income Tax

Gain earned on sale of investments - sale of shares - Capital gain or business income - assessee is not trading in shares and securities and shares in these companies were held as investment in the balance sheet - dept. alleged that that shares were purchased as part of business strategy with clear intention to sell them at profit - HELD THAT - Assessee invested in shares of specific healthcare provider companies, as mentioned hereinabove during years under consideration. From objectives of assessee in Memorandum of Association placed in paper books, it is observed that assessee was to purchase, lease or otherwise acquire, establish, maintain, operate, run, manage or administer hospitals, Medicare, health care, diagnostic, healthcare and research centres. Assessee thus invested in these companies with clear intention of furthering primary objective in expanding its business in healthcare sector. Further, it is also not denied that, these investments in specific companies are part of business agreement, as per its commitment to subscribe to shares, subject to fulfilment of certain conditions. Further, it is observed that assessee sold shares invested in these companies to India Advantage Fund-V, a trust holding majority of shares of assessee. To verify actual intention of assessee behind these investments, we called for agreements entered into by assessee with these companies. Ld.AR produced all agreements relevant for years under consideration, and also submitted that, these were not considered by Ld.AO/Ld.CIT (A). We are therefore inclined to set aside this issue back to Ld.AO. Ld.AO shall verify agreements and ascertained true intention of assessee behind such huge investments. Assessee shall by way of corroborative evidences establish its claim and if satisfied Ld.AO shall consider the issue on the tests laid down by various courts relied upon by assessee. Appeal filed by assessee allowed for statistical purposes.

Issues Involved:

1. Treatment of capital gains on the sale of investments as business income.
2. Eligibility to carry forward unabsorbed losses/depreciation.
3. Liability to pay interest under Section 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Capital Gains on the Sale of Investments as Business Income:

The core issue in the appeals was whether the gains from the sale of shares and mutual funds should be treated as capital gains or business income. The appellant argued that the shares were held as capital assets and not as stock in trade, and the gains should be taxed as capital gains. The appellant emphasized that it was a wholly-owned subsidiary of a venture capital fund formed to make investments in healthcare provider companies. The shares were shown as investments in the balance sheet and not as stock in trade. The appellant highlighted that the shares were held for a significant period, there were no borrowed funds, and the primary objective was capital appreciation, not trading.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the appellant was engaged in the business of rendering medical and healthcare services, and the investments in healthcare provider companies were a requirement of the appellant's business. The AO treated the entire profit on the sale of shares as business income, arguing that the shares were held with the motive of earning profit and not to earn dividend income.

The Tribunal observed that the appellant invested in shares of specific healthcare provider companies with the clear intention of furthering its primary objective of expanding its business in the healthcare sector. The Tribunal noted that the investments were part of a business agreement and were sold to India Advantage Fund-V, a trust holding the majority of the appellant's shares. The Tribunal called for the agreements entered into by the appellant with these companies to verify the actual intention behind the investments.

The Tribunal decided to set aside the issue back to the AO to verify the agreements and ascertain the true intention of the appellant behind the investments. The AO was directed to consider the issue based on the tests laid down by various courts relied upon by the appellant.

2. Eligibility to Carry Forward Unabsorbed Losses/Depreciation:

The appellant contended that the AO erred in holding that the appellant was not eligible to carry forward unabsorbed losses/depreciation by setting off the same against the alleged income assessed as business income. The CIT(A) had confirmed this view. The appellant argued that the action and conclusion of the authorities were not in accordance with the law and were erroneous on facts.

The Tribunal did not provide a separate detailed analysis for this issue but implied that the resolution of the primary issue regarding the treatment of capital gains would impact the determination of eligibility to carry forward unabsorbed losses/depreciation.

3. Liability to Pay Interest Under Section 234C of the Income Tax Act:

The appellant denied the liability to pay interest under Section 234C of the Income Tax Act, arguing that the interest was levied erroneously and should be deleted. The Tribunal noted that the grounds relating to interest under Section 234 were consequential in nature and would depend on the final determination of the primary issue regarding the treatment of capital gains.

Conclusion:

The Tribunal allowed the appeals for statistical purposes and set aside the issue of the treatment of capital gains back to the AO for re-examination. The AO was directed to verify the agreements and ascertain the true intention behind the investments. The Tribunal's decision on the primary issue would impact the determination of eligibility to carry forward unabsorbed losses/depreciation and the liability to pay interest under Section 234C. The appeals were allowed for statistical purposes, and the order was pronounced in open court on 31-07-2019.

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