2016 (4) TMI 127 - AT - Income Tax

Addition u/s 56(2)(vi) - status of AOP OR individual or HUF - Held that - Section 2(31) defines person as including (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not,(vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. It is palpable from the definition of person as given in section 2(31) of the Act that AOP is a person different from an individual or a HUF. Even if an AOP consists of some individuals, the status of such a group of individuals remains as that of AOP , in the same way in which when some individuals enter into partnership, the body which comes into existence is called a Firm . The AO has rightly admitted the status of the assessee as an AOP and not an individual or HUF. It is axiomatic from a plain reading of the provision that any sum exceeding ₹ 50,000/- can fall within the ambit of section 56(2)(vi) of the Act only if it is received by an individual or HUF. Since the assessee in question is an AOP and not any individual or HUF, who received a sum of ₹ 1.60 crore without consideration, such a receipt in our considered opinion cannot be included in its total income within the framework of section 56(2)(vi). We, therefore, set aside the impugned order on this score and order for the deletion of this addition. - Decided in favour of assessee Disallowance of loss - AO has disallowed the loss by treating the transactions of sale of shares by the assessee to its trustees as sham and tax avoidance device - Held that - loss arising from transfer of shares etc., held as long term capital assets, on which no STT is paid because of off-market sale transaction, does not fall within purview of section 10(38) and consequently becomes eligible for set off and carry forward as per the other relevant provisions. This is a lacuna in the provision which has been lawfully exploited by the assessee by transferring shares held as long-term capital assets through off market transactions resulting into genuine loss and thus escaping the rigor of the exemption provision contained in section 10(38), which would have otherwise disentitled it to claim set off and carry forward of such a loss. The AO has held these off-market sale transactions as a colorable device and tax avoidance scheme adopted by the assessee to evade payment of legitimate tax due to the exchequer. In our considered opinion, this is a glaring example of tax planning rather than the tax avoidance as has been held by the AO. In view of the fact that the assessee entered into valid transactions of transfer of shares of Bajaj Hindustan Ltd., Tata Consultancy Ltd. and Reliance Communications Ltd. to Shri M.H. Dalmia and Smt. Abha Dalmia, we hold that the loss suffered on such transactions is a genuine loss which cannot be disallowed as it does not fall within the ambit of section 10(38) because of non-payment of STT. Overturning the impugned order on this issue, we direct the allowing of carry forward of loss - Decided in favour of assessee

Summary

Issues Involved:

1. Confirmation of addition of ?1,60,00,000 made by the Assessing Officer (AO) under section 56(2)(vi) of the Income-tax Act, 1961.
2. Confirmation of disallowance of long-term capital loss of ?1,86,86,461.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of ?1,60,00,000 under Section 56(2)(vi):

The primary issue is whether the amount of ?1.60 crore received as a gift by the assessee trust from Mrs. Abha Dalmia is chargeable to tax under section 56(2)(vi). The assessee, a beneficiary trust, received this amount, which was not included in the total income. The AO invoked section 56(2)(vi), arguing that the trust, assessed as an Association of Persons (AOP), does not qualify for the exemption since it is neither an individual nor a Hindu Undivided Family (HUF). The AO noted that the gift was received without consideration and from a close relative but emphasized that the recipient was an AOP, not an individual or HUF, thereby disqualifying it from exemption under section 56(2)(vi).

The Tribunal analyzed section 56(2)(vi), noting it as a charging provision, not an exemption one. The conditions for applicability include receipt exceeding ?50,000, without consideration, by an individual or HUF, from any person within a designated period. The Tribunal found that while the first, second, and fourth conditions were met, the third condition was not, as the recipient was an AOP. Consequently, the Tribunal held that the amount of ?1.60 crore received by the trust could not be included in its total income under section 56(2)(vi), leading to the deletion of the addition.

2. Confirmation of Disallowance of Long-term Capital Loss of ?1,86,86,461:

The second issue concerns the disallowance of a long-term capital loss of ?1.86 crore on share transactions. The AO noted that the assessee sold shares through off-market transactions to trustees/beneficiaries, without paying Securities Transaction Tax (STT), and disallowed the loss, terming the transactions as sham and tax avoidance devices. The assessee contended that the shares were sold at prevailing market rates and the transactions were genuine, supported by quotations and payment records.

The Tribunal examined whether the off-market transactions were genuine. It found that the shares were sold at closing market rates, transferred through demat accounts, and payments were made through banking channels, indicating genuineness. The Tribunal noted that section 10(38) exempts income from long-term capital assets on which STT is paid, but since no STT was paid on off-market transactions, the loss did not fall under this exemption. Consequently, the loss was eligible for set off and carry forward. The Tribunal held that the transactions were valid and the loss genuine, thus allowing the carry forward of the loss amounting to ?1.86 crore.

Conclusion:

The appeal was allowed, with the Tribunal setting aside the additions and disallowances made by the AO and CIT(A), and ordering the deletion of the ?1.60 crore addition and allowing the carry forward of the ?1.86 crore loss.