2014 (3) TMI 22 - AT - Income Tax

Computation of long term capital gain on sale of shares Benefit u/s 28(iv) of the Act - Whether the CIT(A) was right in holding that the entire sale consideration received by assessee on sale of shares be treated as capital gains, as against part of the amount treated as benefit under section 28(iv) by A.O Held that - The appellant brought on record evidence to show that the foreign company intended to acquire the total share holdings and the appellant was in a position to quote the rate per share - the appellant could get a substantial rate - The appellant also brought on record evidence to show that one Government Wing accepted the rate and permitted the foreign investor to bring in the foreign currency for purchase of the shares - the entire sale consideration received by him is relatable to the transfer of shares and is assessable only as a long term capital gain. There was no reason to differ from the findings of the CIT(A) - Assessee justified the sale of shares at higher price and also explained the circumstances in which the foreign company negotiated and paid that amount - assessee is employed on salary basis and he has no business activity so as to invoke provisions of section 28(iv) - Unless there is a business activity, benefit in the business does not arise - As rightly noticed by the CIT(A), even the transfer of management rights is also transfer of capital asset which again results in capital gain - Looking at it in any way, the gain can only taxed under the head Capital Gain . Learned Counsel also placed on record the order of the other shareholder wherein A.O. did not disturb the capital gains offered on sale of shares in similar manner the order of the CIT(A) upheld Decided against Revenue.

Summary

Issues:
Revenue appeal against CIT(A) order on treatment of sale consideration from shares as capital gains or business income.

Analysis:
The Revenue appealed against the CIT(A) order regarding the treatment of the sale consideration from shares as capital gains or business income for the assessment year 2008-2009. The dispute arose when the Assessing Officer (A.O.) disagreed with the assessee's computation of long-term capital gains on the sale of shares of a company. The A.O. argued that part of the sale consideration was attributable to the surrender of management rights, not just the shares. The A.O. valued the shares at Rs.614/- per share and considered the balance as income from business or profession. The CIT(A) accepted the assessee's contentions, noting the increasing value of the shares and the negotiations with a foreign investor. The CIT(A) directed the A.O. to assess the entire sale consideration as long-term capital gains and allow exemption under section 54F.

The assessee, a founder Director of the company, sold shares to a foreign investor at Rs.960/- per share. The A.O. contended that the sale consideration included surrender of management rights, valuing the shares at Rs.614/- per share. The CIT(A) found the entire consideration attributable to the share transfer, considering the increasing share value and negotiations with the investor. The CIT(A) directed the A.O. to assess the sale consideration as long-term capital gains and allow exemption under section 54F.

The CIT(A) supported the assessee's arguments based on the increasing share value, negotiations with the foreign investor, and approval by a Government Wing for the share sale. The CIT(A) concluded that the entire sale consideration was related to the share transfer and should be treated as long-term capital gains. The A.O. was directed to assess the sale consideration under the head of capital gains and allow the exemption under section 54F.

The ITAT upheld the CIT(A) decision, emphasizing the lack of business activity by the assessee to invoke section 28(iv) for business income. The ITAT noted that the transfer of management rights also constituted a transfer of a capital asset, resulting in capital gains. The ITAT confirmed the CIT(A) order, dismissing the Revenue's appeal.

In conclusion, the ITAT upheld the CIT(A) order, ruling that the entire sale consideration from the shares should be treated as long-term capital gains, not business income. The decision was based on the increasing share value, negotiations with the foreign investor, and the absence of business activity by the assessee. The ITAT confirmed the exemption under section 54F and dismissed the Revenue's appeal.