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TMI Blog2010 (12) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee deleted. - Appeal is allowed - I. T. A. No. 284/Mds/2010, - - - Dated:- 24-12-2010 - O. K. Narayanan, Hari Om Maratha, JJ. V. Ramachandran for the Appellant Shaji P. Jacob for the Respondent ORDER O. K. Narayanan, Vice-President:- This is an appeal filed by the assessee for the assessment year 2004-05. The appeal is directed against the order of the Commissioner of Income-tax (Appeals)-IV at Chennai dated January 22, 2010 and arises out of the assessment completed under section 143(3) read with section 147 of the Income-tax Act, 1961. The assessee is a non-resident individual. He filed his return of income for the impugned assessment year 2004-05 for Rs. 86,440. The income was returned under two heads "Income from house property" and "Income from other sources". Initially, the return was processed under section 143(1). Thereafter the Assessing Officer issued notice under section 148 and completed the assessment under section 143(3) read with section 147. In the previous year relevant to the assessment year under appeal, the assessee had made investments in shares of certain companies in India. The assessee had acquired 15,03,100 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plan made by the signatories to the joint venture agreement including the assessee. The Assessing Officer observed that all these successive transactions were the reflections of a master plan scheme blue printed by the assessee and his associates. He came to a conclusion that all the transactions involving acquisition, sale and transfer of shares are part and parcel of a financing scheme made out for the new company CEPL to undertake its business activities. When the Assessing Officer examined the nature of transactions carried out by the assessee in acquiring the shares, he found that the assessee had acquired 2,75,871 shares of Rs. 100 each at par in CEPL in exchange of the shares he had already acquired in VML and CPL. He proceeded on that proposition and found a great difference in the purchase price of shares of CEPL suffered by the assessee and later suffered by ORE. The Assessing Officer pointed out that the assessee got a share in CEPL at par at Rs. 100 per share. He noticed on the other hand, that ORE got the share at a premium of Rs. 504.15 per share. Accordingly, ORE paid Rs. 604.15 per share including the face value of Rs. 100 and a premium of Rs. 504.15 per sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and any transfer or sale of shares made by the assessee was again subject matter of verification by the Reserve Bank of India, based on which alone the assessee would be permitted to repatriate the funds to foreign countries. (iv) That the entire scheme of purchase and transfer of shares made by the assessee was closely monitored by the Reserve Bank of India, and there is nothing to read beyond the apparent nature of the transactions. (v) That the assessee had acquired shares in CEPL by transferring the shares purchased in VML and CPL. The purchase price as well as the transfer price were the same, at par, and therefore, there is no question of the assessee earning any capital gains in making investments and arrangements in Indian companies. (vi) That the assessee purchased the shares in VML and CPL at face value of shares of Rs. 10 each and those shares were sold at the same rate and therefore, there is no question of computing any capital gains in the hands of the assessee. (vii) That as laid down by the hon'ble Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597 (SC), capital gains have to be computed on the actual consideration received b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax arises on that quantum worked out on the basis of the market value. The Commissioner of Income-tax (Appeals) also relied on the judgment of the hon'ble Madras High Court which was already relied on by the Assessing Officer in the case of A.R. Alagappa Chettiar v. ITO [2004] 267 ITR 749 (Mad). Thus, after discussing the case in a detailed manner and relying on the judicial pronouncements, the Commissioner of Income-tax (Appeals) agreed with the view of the Assessing Officer and upheld the action of the Assessing Officer in taxing the assessee for short-term capital gains. The first appeal was accordingly dismissed. The assessee is aggrieved and therefore, in second appeal before us. The detailed grounds raised by the assessee are reproduced below:- (1) The order of the Commissioner of Income-tax (Appeals) dated January 22, 2010 confirming the assessment of a sum of Rs. 13,90,80,365 as short-term capital gains is erroneous on facts and in law. (2) The Commissioner of Income-tax (Appeals) erred in holding that the reopening of the assessment is valid in law. The assessment under section 147 ought to have been cancelled as being without jurisdiction. (3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Reserve Bank of India has recognised and approved the two transactions independently. The sale consideration has been dealt with separately and independent approval has been obtained to the two transactions. The approval by the Reserve Bank of India itself would clearly establish that the two transactions are not interlinked but are totally independent. (11) The Commissioner of Income-tax (Appeals) ought to have seen that in respect of the remittance of US$ 6,10,700 for the purchase of the shares in CEPL approval has been received from the Reserve Bank of India. The Commissioner of Income-tax (Appeals) is wrong in proceeding on the assumption that the transfer of funds is not pursuant to the Reserve Bank of India's approval. The Commissioner of Income-tax (Appeals) ought to have seen that both the transactions have been fully scrutinised by the Reserve Bank of India and have been approved as genuine independent transactions. In fact even the correspondence which was received by the Commissioner of Income-tax (Appeals) behind the appellant's back but was subsequently put to the appellant for his observation clearly establishes that the transactions have been approved by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on sale of those shares. While granting approval for the above transaction as well as for the transaction of acquiring shares in CEPL, the Reserve Bank of India, has examined the acceptability of the purchase and sale price. Therefore, it is seen that the assessee had acquired the shares in different companies not at an arbitrary or whimsical rate but at rates approved by the Reserve Bank of India. Therefore, there is nothing on record to show that the assessee had either paid or received any amount other than the amounts reflected on records in the matter of acquiring shares as well as disposing of shares. (v) Until this point has been proved, the Revenue has no reason to allege any case of generating capital gains in the hands of the assessee. In order to hold the assessee's responsible for capital gains, the assessing authority has adopted a strange ground of comparing the transaction price of the assessee with the transaction price of M/s. ORE in the context of that company acquiring shares in CEPL. (vi) M/s. ORE, Mauritius company had brought in funds of Rs. 75 crores in convertible foreign exchange with the approval of the Reserve Bank of India, for acquiring shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, 2007 clearly show the total investment made by the assessee. The investment made in CPL was approved by the Reserve Bank of India. The entire funds were brought into the country through inward remittance which was again approved by the Reserve Bank of India. The total amount remitted is within the purview of the Reserve Bank of India. It is in this context, the assessee has referred to section 45(5) particularly in the light of the two letters of the Reserve Bank of India, to highlight the point that the consideration has been accepted by the Reserve Bank of India. The total investment as set out in the letters are identical. Therefore, the assessing authority had no case to allege generating any capital gains in the hands of the assessee. Learned counsel relied on the judgment of the hon'ble Supreme Court in the case of K P. Varghese v. ITO [1981] 131 ITR 597 (SC) to highlight the basic principles of determining consideration for the purpose of computing the capital gains under the provisions of the Income-tax Act, 1961. The court held that sub-section (2) of section 52 of the Act can be invoked only where the consideration for the transfer of a capital asset has been under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f running the business of CEPL right from appointment of the chief executive to the selection of customers, passing of resolution, promoting new ventures, etc. etc. Shareholding-wise and control-wise ORE is a dominant shareholder in CEPL. This dominant position of ORE is something beyond comparison when the shareholding position of the assessee in CEPL is considered. Learned senior counsel argued that in the above facts and circumstances of the case, the finding given by the assessing authority regarding generation of short-term capital gains in the hands of the assessee is only a hypothetical assessment. There is no case of any transfer giving rising to capital gains. He, therefore, submitted that the addition of Rs. 13,90,80,365 made by the assessing authority and confirmed by the Commissioner of Income-tax (Appeals) may be deleted. Shri Shaji P. Jacob, the learned Commissioner appearing for the Revenue contended that the successive transactions carried out by the assessee established beyond doubt that the assessee had acquired shares in CEPL at the rate of Rs. 100 per share with full knowledge that the shares would be allotted to ORE at market value of Rs. 604.15 per sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... senior counsel appearing for the assessee that capital gains arise only when a transfer is made. In the present case, the assessee was allotted shares in CEPL against relinquish-ment of shares which he has already acquired in VML and CPL. This substitution is a clear case of transfer. The assessee was allotted shares in CEPL in lieu of shares already he had in VML and CPL. This is not a case of purchase of shares. This is a case of transfer of shares by which he could acquire shares of high worth in another company by paying less. "Paying less" is only an expression for convenience. The assessee has not paid anything. He has exchanged the shares. To put it more aptly, he has transferred his shares. The learned Commissioner contended that all these facts and propositions are well explained by the Commissioner of Income-tax (Appeals) in his speaking order and the lower authorities have rightfully come to the conclusion that the assessee has earned capital gains to the extent computed by the assessing authority. The learned Commissioner, therefore submitted that the appeal filed by the assessee is liable to be dismissed. We heard both sides in detail and considered the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above short cut computation is the basis of the addition made by the Assessing Officer in this case. When we find as stated in paragraph earlier that these transactions are not different segments of the same transaction but are independent transactions, the above proposition of the assessing authority loses ground. The soul of the case made out by the assessing authority is that the shares in VML and CPL were in effect transferred in lieu of shares in CEPL whereas the share value of the CEPL was much higher in the light of the price paid by ORE. Once it is seen that these transactions cannot be linked together, the primary reasoning relied on by the assessing authority is no more valid. An apprehension has been felt only for the reason that all these transactions were carried out within a short span of time. But for the above proximity of time, there is nothing on record to show that the assessee had transferred his shares in VML and CPL with shares in CEPL, for a hidden price value of Rs. 604.15 per share. When the transactions of the assessee were completed, ORE had not entered the picture and there was no question of the value of shares of CEPL being held at Rs. 604.15. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion remains then : what for ORE might have paid a higher amount at Rs. 604.15 per share in CEPL. This aspect has been elaborated by learned counsel appearing for the assessee. ORE had acquired 45 per cent. of shares in CEPL. That is a dominant shareholding. De facto speaking, that much shareholding just near to the controlling interest. As per the purchase agreement, ORE has further acquired more rights and privileges in determining the corporate and operational activities of CEPL. On every aspect of the functioning of the CEPL, it is necessary to get the consent of ORE. This dominant position in running the affairs of CEPL would be naturally available only at a cost. ORE cannot be compared with ordinary shareholders of CEPL and, therefore, there might be justification in such circumstances for ORE paying a higher amount for acquiring shares in CEPL. The allegation of the Assessing Officer that CEPL shares were allotted to the assessee at Rs. 100 per share which is at par and allotted to ORE at Rs. 604.15 per share, with premium has no legal basis. This is because a private company may allot its shares to different shareholders at different rates with or without premium. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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