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TMI Blog2016 (9) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... a in terms of para 6 of para 13 of India-Singapore-DTAA. With these observation, the addition made by the AO and as confirmed by the CIT(A) is directed to be deleted. - ITA No. : 4313/Mum/2011, ITA No.: 4717/Mum/2013 - - - Dated:- 26-8-2016 - SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Appellant : Shri J P Shah For The Respondent : Shri Jasbir Chouhan PER AMIT SHUKLA, JM: The aforesaid appeals have been filed by the aforementioned assessees against separate impugned orders dated 31.03.2011 and 19.03.2010 passed by different CIT (Appeals) Mumbai for the quantum of assessment passed under section 143(3) r.w.s. 147 for the assessment year 2002-03. Since similar facts are permeating through in both the appeals, therefore same were heard together and are being disposed off by way of this consolidated order. 2. We will first take up appeal of Shri Praful Chandaria, which is against order dated 19.03.2010 passed by Ld. CIT (Appeals)-12, Mumbai for the quantum of assessment passed under section 143(3) r.w.s. 147 for the assessment year 2002-03, wherein following grounds have been raised:- 1. The CIT(Appeals) erred in uphold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,680 shares), whereas PHIL held 25% of the shareholding (85,74,560 shares) in BI. The assessee s share in PHIL was more than 99% and it had two other directors also, one Mr. Ajay Sanghavi and other Mr. Jatin Pandya who were having one equity share each in PHIL. On 19.11.2009, the assessee along with other two directors entered into Call Option Agreement between BM and first shareholders to sell their shares held in PHIL to BM. The call / strike price was agreed at US $ 1. As per Article 3.1, of the said agreement the entire consideration for grant of call option was at US $ 24,50,000 which was to be paid by BM to the first shareholders in their bank accounts. The right of call option was to be exercised within the period of 150 years and it was agreed that, upon the receipt of call notice and the payment of call value, the first shareholders shall be obliged to transfer the shares to BM within one month of the payment of call value. There was another Call Option Agreement dated 14.12.2001, between PHIL and BM, whereby PHIL agreed for giving BM an option to purchase the entire shares held by PHIL in BI and the consideration for this option was agreed at strike value/ call p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the I.T. Act. It is seen that income which has arisen in India in terms of section 5(2) r.w.s. 9(1) has not been offered to tax and no return of income was filed for the said assessment year 2002-03 by the Praful Chandaria. In the light of the above information and material on record, I have reason to believe that income chargeable to tax has escaped assessment for the AY 2002-03. Apparently, the gains arising on transfer of such shares is more than one lakh of rupees. I have reason to believe that such income in the form of capital gain has escaped assessment and that is a fit case for issue of notice u/s 148 . 5. The assessee s case before the Assessing Officer was that the said transaction was never actually entered by him and neither any money on that account was ever received by him nor any money has been credited to his account. He has not transferred his shareholding in PHIL to BM till date and hence there is no question of receiving any amount of US $24,50,000. The AO however after taking note of the facts as narrated in foregoing paragraph and information received, further noted that, in pursuance of call option agreement as above, M/s DSK Legal Mumbai were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able power of attorney dated 14.12.2001 in favour of ING bank NV in respect of all your shares held by PHIL in ING barring and you shall not at any time permit PHIL to revoke shares of PHIL. (vi) The assessee has agreed and undertaken not to any manner act otherwise than in accordance with the said undertaking and not told transfer the PHIL shares other than pursuant to the document set out above or to issue any further shares of PHIL. 6. After noting down the aforesaid facts, AO arrived to the conclusion that already consideration has been received by the assessee in pursuance of call option agreement. He further noted that, assessee had given irrevocable power of attorney dated 19.12.2001 to ING Bank NV to act as his lawful attorney. In the said POA, it was mentioned that, assessee has irrecoverably nominated ING Bank for value received and assessee has given powers to attend otherwise take part in all the meetings held in connection with PHIL in relation to all the shares in the company held by him from time to time. Thus, the bank had all the powers qua the shares of PHIL held by the assessee. The AO further brought on record that, assessee had issued a letter of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India / through or form an asset/source of income in India, through or from an asset/ source of income in India, through or from transfer of capital asset situated in India, therefore the consideration of USD 24,50,000/- equivalent to Indian ₹ 11,71,00,000/- (47.80 x 24,50,000) received by the assessee is taxable in India as per sec.5(2) r.w.s 9(1) of the I T Act. The amount received by the assessee is treated as income from other sources and included in the total income of the assessee . 7. In the first appeal, the Ld. CIT(A) too has confirmed the said addition on the same reasoning and on the basis of facts and material as discussed by the AO. Before the ld. CIT(A), another important submission which was made by the assessee was that, if at all the said amount is held to be taxable then it can be taxed as capital gain and same cannot be brought to tax in India by virtue of Article 13 of India- Singapore-DTAA. Even under the Domestic Law such capital gain cannot be taxed because, there is no cost while giving the rights on the shares by virtue of call option agreement. However the assessee reiterated its stand that, no money on account of call option agreement was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement and that to be a huge sum of ₹ 11,17,00,000/- when 85% of the paid-up capital of BI has been wiped out on account of accumulated losses and there is no worth an asset in the Balance sheet of PHIL and why would a company will give such a huge amount to the assessee on mere call option which far exceeds net worth of the company. The entire substance of the transaction has to be looked into and not merely picking up the facts from here and there. He pointed out that from the perusal of the terms of call option agreement it is clear that shares have not been transferred albeit mere right has been given on such shares. It is also an admitted fact that till date shares had not been transferred to BM and, therefore, why a company would will pay such a huge amount on the basis of call option agreement. During the course of the proceedings before the authorities below, the assessee has filed an affidavit that, he has not received any amount from BM and such an affidavit has not been controverted or rebutted by the Department. A call option is kind of advance and is not an incidence of taxation. It cannot be taxed at the point of call option but only when shares are actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) By Article 3.3 states: (i) To exercise the right set forth in Article 3.1, Barings shall send a written notice to the Purse Shareholders ( Call Notice ), with a copy to the Board, stating that Barings requires the Purse Shareholders to transfer the Shares to Barings. , (v) By Article 3.4 states: Upon receipt of the Call Notice and payment of the Call Value, the Purse Shareholders shall be obligated to transfer the Shares to Barings within one month of the payment of the Call Value. (vi) By Article 3, 5(i) states: The completion of the purchase and sale of the Shares shall take place at such time and at such place, as shall be designated by Barings, which date must not be later than one month from the receipt of the Call Value. And (vii) By Article 3.5(ii) states: An amount equivalent to the Call Value has been deposited by Barings with the Purse Shareholders as and by way of a deposit and/ or advance payment towards the Call Value, which shall stand appreciated as Call Value upon delivery to Barings of duly executed transfer forms of the Shares to be sold, accompanied by the relevant share-certificate(s) Hence, he submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI). One Mauritius based company namely; ING Barring Mauritius (BM) holds 75% of shares in ING Barring India. Both assessee as well as PHIL vide separate call option agreement entered with Barring Mauritius granted an option to BM to call upon the PHIL shareholders to sell their entire shareholding in PHIL. The strike price or the call option was agreed for US $ 1 and the consideration mentioned was US $ 2,450,000 and such a call option spread into period of 150 years. In common parlance, a call option is reckoned as a contract in which the holder (buyer) has the right (but not an obligation) to buy a specified quantity of a security/shares at a specified price (strike price) within a fixed period of time. For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised. The call option writer is paid a premium for taking on the risk associated with the obligation. Here in the present case, there is very peculiar agreement/ arrangement, where the strike price has been mentioned as US $ 1 and the fixed period of time for exercising the call option has been fixed for 150 years. This factum itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, no right in the shares is given away by way of call option , albeit only right to buy the shares at a strike price within a stipulated time period is given which may not be termed as capital asset under section 2(14), because, without exercising the option no actual asset is created. Here in the present case as discussed in our earlier part of our finding, the right in the shares has been given for an incredibly large period of 150 years. Not only that, the rights which are enjoyed by the assessee as shareholder have been exercised by the power of attorney holders to participate in the affairs of the company and it has been further provided that, assessee shall not at any time purport to revoke the same. Such a bundle of substantive rights are generally not given under normal call-option agreements . In the peculiar facts of the present case, such an option right in the shares has to be reckoned as transfer/alienation of a valuable and substantive right, which would be a class of asset in itself, separate from shares which though continue to stand in the name of the assessee. Such a valuable rights/ interest in shares would certainly be a capital asset . Parting with any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in para 4 and 5, the same again will not be applicable because here no actual shares which has been transferred or alienated albeit a substantive and valuable right has been given in the shares, which has to reckoned as capital asset or property as per our discussion herein above. Hence, it is gains from the alienation of an asset or property and any gain from alienation of such kind of property will fall within the scope of Para 6 of Article 13, whereby, the taxing right has been given to the resident state, that is, the state of the alienator, which here in this case is Singapore. The allocation of taxing right under Article 13(6) cannot be attributed to India but to the resident state. Thus, on the facts and circumstances of the case as discussed above, we hold that, firstly , the consideration received by the assessee is arising from the assignment of substantive and valuable rights in the shares of an Indian company which is assessable under the head capital gain ; and secondly such a capital gain cannot be held to be taxable in India in terms of para 6 of para 13 of India-Singapore-DTAA. With these observation, the addition made by the AO and as confirmed by the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete, change or modify any or all grounds of appeal before or at the time of the hearing . 17. The facts of the present appeal is quite similar to the appeal as discussed and decided above, as here in this case also, however here in this case the revenue has sought to tax the entire amount of ₹ 11.75 crores as Long-term-capitalgain in the hands of the assessee company. The assessee s case was also reopened by issuance of notice under section 148 dated 31.03.2009 on the following reasons recorded :- Reasons for the belief that income has escaped assessment: M/s Purse Holding (India) Pvt Ltd (PHIL) is assessed to be in this charge vide PAN AACCP 2854 N. In the AY 2002-03 the return was processed u/s 143(1) of the Act on 10.02.2003. No. scrutiny assessment has been completed in this case. In this case an information of tax evasion has been received from the Addl. DIT(IT), Range 1, Mumbai vide letter dated 30.03.2009. The context of the information is as under: I. The assessee company (PHIL) had invested in the shares of ING Baring India Ltd (B1), a NBFC dealing in investment banking/brokerage business in India. The company (B1) had 2 share holders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice u/s 148 . There is no comment or any satisfaction of Additional CIT. The column has been left blank. Thus, nothing turns out from the document furnished by the Ld. DR as there is no satisfaction of Addl. CIT at all. On the contrary, the notice under section 148 dated 31.03.2009 mentions that this notice is being issued after obtaining the necessary satisfaction of Commissioner of Income-tax . The revenue could not produce any other document to show that the necessary approval of Joint Commissioner or Additional Commissioner has been taken, rather as found from the record submitted, the Form for obtaining the approval of Joint Commissioner, in terms of section 151 does not mentions anything whether the Additional CIT has actually given his satisfaction on the reasons recorded or not. The column has been left blank. Hence from the records, it is ostensibly clear that the satisfaction in terms of section 151(1)(2) for the issuance of notice have been given by the Commissioner of Income Tax, who is not an authority as mentioned in sub-section (2) of section 151. For the sake of reference section 151 is reproduced hereunder:- (1) No notice shall be issued under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the reopening is sought to be challenged is that the mandatory requirement of Section 151(2) has not been fulfilled. Section 151 requires a sanction to be taken for the issuance of a notice under Section 148 in certain cases. In the present case, an assessment had not been made under Section 143(3) or Section 147 for A.Y. 2004-05. Hence, under sub section 2 of Section 151, no notice can be issued under Section 148 by an Assessing officer who is below the rank of Joint Commissioner after the expiry of 4 years from the end of the relevant Assessment Year unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice. The expression Joint Commissioner is defined in Section 2(28C) to mean a person appointed to be a Joint Commissioner of Income Tax or an Additional Commissioner of Income Tax under Section 117(1). In the present case, the record before the Court indicate that the Assessing Officer submitted a proposal on 28 March 2011 to the CIT(1) Thane through the Additional Commissioner of Income Tax Range (I) Thane. On 28 March 2011, the Additional CIT forwarded the proposal to the CIT and after ..... X X X X Extracts X X X X X X X X Extracts X X X X
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