2017 (3) TMI 195 - AT - Income Tax

Profit on sale of shares - whether assessed as long term capital gains exempt u/s. 10(38)? - CIT(A) has given a finding that the assessee firm has been formed as a Partnership firm - Held that - We notice that the AO has not examined the provisions of Partnership Deed before coming to the conclusion that the status of the assessee cannot be taken as partnership firm in AY 2007-08. Hence the view taken by the AO is against the Partnership Deed as well as the assessment record relating to AY 2007- 08. In any case, the AO has not disturbed the assessment relating to AY 2007-08, i.e., the status of the assessee has been accepted as Partnership firm in AY 2007-08. In that case, it would not be proper for the AO to take the view that the holding period of the shares of M/s Assam Company Ltd can be recognized from 1.4.2007 only. AO has taken the view that M/s Reliance Capital Ltd has formed this assessee firm only to generate long term capital gains and he has further observed that the same income would have been assessed as business profits, had it purchased the shares of M/s Assam Company Ltd on its account. The Ld A.R furnished copies of Profit and Loss account as well as the assessment order of M/s Reliance capital Ltd to show that M/s Reliance capital Ltd has declared Short term capital gains and also Long term capital gains in purchase and sale of shares, meaning thereby, the presumption entertained by the AO has been proved to be wrong. Accordingly the Ld A.R submitted that there was no restriction for M/s Reliance Capital Ltd to hold the shares as its Investment. Regarding the observation made by the AO that the assessee was the major share holder in Public shareholding category and further the assessee has invested in shares of M/s Assam company Ltd, the assessee has submitted that it did not get any controlling interest in the above said company and further the shares have actually been sold within 15 months. Hence, in our view, the above said factual position cannot change the character of the shares. On the contrary, in our view, it may support the case of the assessee that it had actually made investment in the shares of M/s Assam Company Ltd. CIT(A) was correct in holding that the gain arising on sale of shares of M/s Assam Company Ltd should be assessed as Long term capital gain. - Decided against revenue

Summary

Issues Involved:
1. Validity of reopening of assessment.
2. Classification of profit on sale of shares as long-term capital gains or business income.

Detailed Analysis:

1. Validity of Reopening of Assessment:

The assessee contested the validity of the reopening of the assessment. The Assessing Officer (AO) had issued a notice under section 148 within four years from the end of the assessment year, arguing that the profit-sharing ratio indicated that M/s. Reliance Capital Ltd. should be considered the sole proprietor of the business for the previous year, thereby affecting the classification of the shares' holding period. However, the learned CIT(A) upheld the validity of the reopening, stating that the partnership firm was valid and the shares were held for more than one year, thus qualifying for long-term capital gains.

2. Classification of Profit on Sale of Shares:

The primary issue was whether the profit on the sale of shares amounting to ?26.87 crores should be assessed as long-term capital gains exempt under section 10(38) of the Act or as business income. The AO argued that the partnership firm was formed to generate long-term capital gains and that the shares were held for less than one year, thus classifying the profit as business income. The AO also suggested that the firm’s major partner, M/s. Reliance Capital Ltd., formed the partnership to avoid business income taxation.

However, the learned CIT(A) and the Tribunal found that the partnership firm was validly constituted and recognized in the assessment year 2007-08. The shares were purchased as investments and held for more than 12 months. The CIT(A) noted that the assessee firm was formed by fulfilling the requirements of the Act, and the partnership deed provided that profits and losses would be divided based on the weighted average capital of the partners. The major partner, M/s. Reliance Capital Ltd., brought in the entire funds, and the profit-sharing ratio was accepted in the assessment year 2007-08. The Tribunal upheld this view, noting that the AO did not examine the partnership deed provisions before concluding that the firm could not be recognized as a partnership in the previous year.

Further, the Tribunal observed that M/s. Reliance Capital Ltd. had declared both short-term and long-term capital gains in its accounts, disproving the AO's presumption that the firm was formed solely to generate long-term capital gains. The Tribunal also noted that the assessee did not gain any controlling interest in M/s. Assam Company Ltd. and sold the shares within 15 months, supporting the claim that the shares were held as investments.

Conclusion:

The Tribunal upheld the CIT(A)'s decision that the profit on the sale of shares should be classified as long-term capital gains, exempt under section 10(38) of the Act. Consequently, the appeal of the revenue was dismissed, and the issue of reopening the assessment became moot, as it would result in an academic exercise. The Tribunal confirmed that the assessee's status as a partnership firm and the classification of the shares as long-term investments were valid and justified.