2020 (10) TMI 411 - AT - Income Tax

Long term capital gain - transfer u/s 2(47) - Year of assessment - AO on perusal of agreement was of the view that under the agreement,assessee as well as other co-owners of Unisol were to receive in aggregate a sum of ₹ 20 crores and proceeded to tax entire amount of ₹ 20 crores in the subject assessment year in the hands of all co-owners of shares - HELD THAT - Commissioner (Appeals) deleted the addition of ₹ 4.48 crores made by the Assessing Officer on the ground that it is notional. On further appeal, the Tribunal upheld the findings of the Commissioner (Appeals) inter alia holding that as there is no certainty of receiving any amount as deferred consideration, the bringing to tax the maximum amount of ₹ 20 crores provided as a cap on the consideration in the agreement dated 25-1- 2006 is not tenable. What amount has to be brought to tax is the amount which has been received and/or accrued to the respondent-assessee and not any notional or hypothetical income as the revenue is seeking to tax the respondent-assessee in the subject assessment year 2006-07. What has to be taxed is the amount received or accrued and not any notional or hypothetical income. As observed by the Apex Court in CIT v. Shoorji Vallabhdas Co 1962 (3) TMI 6 - SUPREME COURT Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., the accrual of its income or its receipt; but the substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize. In this case ₹ 20 crores cap in the agreement is not income in the subject assessment year. In this case the amount of ₹ 20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement dated 25th January, 2006 pertaining to the transfer of shares - Appeal filed by the Revenue is dismissed.

Issues Involved:
1. Reliance on predecessor’s findings regarding the transfer of 3,50,000 shares.
2. Definition of transfer under section 2(47) and AO’s opinion on the transfer of shares.
3. Granting relief to the assessee regarding the transfer of 1,50,000 shares and the related tax implications.
4. AO’s detailed inquiries and opinion on the transfer of shares.
5. Validity of CIT(A)’s decision and restoration of AO's order.

Issue-wise Detailed Analysis:

1. Reliance on Predecessor’s Findings Regarding Transfer of 3,50,000 Shares:
The Revenue contended that the CIT(A) erred in relying on the predecessor’s findings without appreciating the AO’s detailed discussion. The Tribunal noted that the CIT(A) accepted the assessee's contention and deleted the addition of ?35,23,75,000 in respect of 3,50,000 shares, which were not returned by Classic Credit Ltd. (CCL) despite several requests.

2. Definition of Transfer under Section 2(47) and AO’s Opinion on the Transfer of Shares:
The Revenue argued that the CIT(A) overlooked the inclusive definition of transfer in section 2(47) and the AO’s correct opinion formed after detailed inquiries. The Tribunal found that the AO treated the entire transaction of 5,00,000 shares as Long Term Capital Gains (LTCG), with specific capital gains computed for 1,50,000 shares and 3,50,000 shares. The CIT(A) had deleted the addition for 3,50,000 shares, considering it as notional income, which is not permissible under the law.

3. Granting Relief to the Assessee Regarding the Transfer of 1,50,000 Shares and the Related Tax Implications:
The Revenue claimed that the CIT(A) erred in granting relief to the assessee for 1,50,000 shares, arguing that the assessee company is liable for taxes on such transfers. The Tribunal observed that the assessee had advanced 5,00,000 shares of GTL as a loan, and 1,50,000 shares were adjusted against sales by two group companies, which had already been taxed in their hands. Hence, taxing the same in the assessee’s hands would lead to double addition, which is not permissible.

4. AO’s Detailed Inquiries and Opinion on the Transfer of Shares:
The Revenue emphasized that the AO had correctly formed an opinion on the transfer of shares after detailed inquiries. The Tribunal noted that the AO had computed capital gains on 1,50,000 shares and treated the remaining 3,50,000 shares as sale consideration. However, the CIT(A) found that the assessee had not received any consideration for the 3,50,000 shares, and thus, taxing it as capital gains was not valid.

5. Validity of CIT(A)’s Decision and Restoration of AO's Order:
The Revenue sought to set aside the CIT(A)’s decision and restore the AO’s order. The Tribunal reviewed the additional evidence, including confirmation letters and broker notes, and found that the assessee had provided sufficient documentation to support its claims. The Tribunal affirmed the CIT(A)’s order, noting that the assessee had not received any consideration for the 3,50,000 shares, and taxing it would amount to notional income, which is not permissible.

Conclusion:
The Tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s order that deleted the addition of ?35,23,75,000 for 3,50,000 shares and recognized that taxing the same shares in the hands of the assessee and the group companies would lead to double taxation. The Tribunal emphasized that only actual income received or accrued should be taxed, not notional or hypothetical income.

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