2024 (6) TMI 421 - AT - Income Tax

Tax rate applicable on LTCG from the sale of unlisted shares - Applicability of section 112(1)(c) of the Act - action of AO in computing the tax on the long term capital gain on sale of unlisted shares at the rate of 21.63% (including surcharge and cess) under section 112(1)(c) (i) as against the tax computed by the assessee in the return of income at the rate of 10.815%. (including surcharge and cess) under the provisions of section 112(1)(c) (i) - HELD THAT - Share Purchase Agreement in no way depict the transfer of assets individually or collectively. As we go across this agreement, it is more in the nature of dilution of share holding of the assessee company in the joint venture by way of exit from the joint venture and the consequences of the same is that the Firestone TVS Pvt. Ltd. was to stop using Firestone Mark and to use the name of Firestone from the name of the Company. The tax authority below have not made any effort to examine the Share Purchase Agreement and for that reasons a very general conclusion of consequences of transfer of shares considered it to be sale of capital assets of company, while it is a simple case of transfer of shares and there can be no attribution of any Long Term Capital Gain on account of transfer of shares for the purpose of Section 112(1)(c)(ii) taxing the income at 20% plus surcharge and cess. Assessee had reasonably explained the reasons for deduction of 20% of the TDS by Sundaram Industries Pvt. Ltd. and, even otherwise on the basis of deduction of excess TDS there cannot be any estoppel to change the nature of income with consequential effects, as to, at what rate the income is taxable. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the CIT(A) order.
2. Tax rate applicable on long-term capital gain from the sale of unlisted shares.
3. Applicability of section 112(1)(c) of the Act.
4. Nature of the transaction: transfer of shares vs. transfer of entire business.
5. Consideration of judicial pronouncements.
6. Reliance on information collected u/s 133(6) without providing an opportunity for cross-examination.
7. Basis of the CIT(A) decision.
8. Application of the proviso to section 48.
9. Initiation of penalty proceedings u/s 270A.

Summary:

1. Validity of the CIT(A) Order:
The assessee challenged the order of the CIT(A), arguing it was flawed both legally and factually.

2. Tax Rate on Long-Term Capital Gain:
The CIT(A) confirmed the AO's computation of tax on the long-term capital gain at 21.63% (including surcharge and cess) u/s 112(1)(c)(i) of the Act, against the assessee's computation at 10.815% u/s 112(1)(c)(iii).

3. Applicability of Section 112(1)(c):
The CIT(A) erred in applying section 112(1)(c)(i) to the transfer of unlisted shares, which should be taxed under section 112(1)(c)(iii).

4. Nature of the Transaction:
The CIT(A) incorrectly held that the assessee transferred the entire business, including rights, goodwill, and business, rather than just unlisted shares. The transaction was a share sale, not an asset sale, as supported by the Share Purchase Agreement and judicial precedents, including the Supreme Court's decision in Vodafone International Holdings BV. vs. UOI & Anr.

5. Judicial Pronouncements:
The CIT(A) ignored judicial pronouncements that distinguish the sale of shares from the sale of other capital assets.

6. Information Collected u/s 133(6):
The CIT(A) relied on information from Sundaram Industries Pvt. Ltd. collected u/s 133(6) without providing the assessee an opportunity to cross-examine, violating natural justice principles.

7. Basis of CIT(A) Decision:
The CIT(A)'s decision was based on assumptions and lacked contrary material evidence.

8. Proviso to Section 48:
The AO failed to grant the benefit of the first/second proviso to section 48 while calculating long-term capital gain.

9. Penalty Proceedings u/s 270A:
The CIT(A) erred in confirming the initiation of penalty proceedings u/s 270A.

Conclusion:
The appeal was allowed, and the impugned addition was deleted. The transaction was a simple transfer of shares, not a transfer of business assets, and should be taxed at the rate applicable to long-term capital gains from unlisted shares. The order was pronounced in the open court on 05.06.2024.