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TMI Blog2023 (8) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... is not tenable since the treatment of shares in the books of accounts whether as stock-in-trade or investment is also one of the determining factor for taxation under capital gain or business income and it cannot be said that the method adopted for arriving at the sale consideration determines the nature of transaction. There is merit in the submission of the ld AR that since section 50CA of the Act is inserted by the Finance Act, 2017 with effect from 02/04/2018 and therefore, the said insertion for valuation of capital asset transferred being shares of a company other than equity shares or the purpose of section 48 being fair market value determined as prescribed, is not applicable to the assessee for the year under consideration. The intention of the assessee is to hold to the shares of JMMSSPL as investment is demonstrated by the reflection of the shares under investments in the financial statements and from the factual finding given by the CIT(A) that the Board Resolution dated 18.04.1998 passed while making the investment clearly mentions that the assessee has made a capital investment. Accordingly in our view treatment of the gain as business income on this ground is not sus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the order of the Commissioner of Income-tax (Appeals)-9, Mumbai (in short, "the CIT(A)") dated 30/04/2015 for assessment year 2008-09. 2. The assessee is a holding company and has made investment in the joint venture in JM Morgan Stanley Security Pvt Ltd (JMMSSPL) in which the assessee is holding 49% (49 lakhs equity shares) along with Morgan Stanley (India) Securities Pvt Ltd (MSSPL) which holds 51% share. The assessee filed return of income for A.Y. 2008-09 declaring total income at Rs. 1191,60,94,839/-. The case was selected for scrutiny and the assessment order under section 143(3) was passed on 06/12/2010 assessing the total income at Rs. 1761,62,51,490/-. During the year under consideration, the assessee has shown long term capital gain of Rs. 1730,58,51,513/- on sale of shares in JMMSSPL to MSSPL. The Assessing Officer proceeded to treat this gain as the business income of the assessee for the reason that the assessee was in the business of shares and securities as a broker and was also involved in share trading business. The Ld.CIT(A) upheld the order of assessment by holding that the termination of the joint venture was to avoid commercial inconvenience accruing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 1 (SC). The Ld.CIT(A) in the second round allowed the appeal in favour of the assessee by holding that the income arising out of the sale of shares is to be taxed under the head, "capital gains". The assessing Officer in addition to the above did not allow the loss arising out of sale of shares of JM Financial Products Pvt Ltd and did not allow the same to be set off against the long term capital gain declared by the assessee. This issue was also remitted back by the Tribunal in the first round of appeal to the Assessing Officer. The Assessing Officer in the second round retained the disallowance of set off of short term capital loss against the long term capital gain by holding the same to be non genuine. The CIT(A) upheld the order of the Assessing Officer in the second round of appellate proceedings also. Therefore, both the assessee and the revenue are in appeal before the Tribunal raising the following grounds of appeal - Assessee "1. Ground I: Treatment of the transaction of Sale of shares of JM Financial Products Pvt. Ltd, as a colourable device and non-genuine and consequently Disallowance of Claim for Set-off of Long-Term Capital Loss on the same: Rs. 54,90,36,870 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng-Term Capital Loss on sale of shares of JM Financial Products Pvt. Ltd.: Rs. 54,90,36,870 (Rs. 54.90 crores) (Page 104 of the Order) On the facts and circumstances of the case, the Appellant prays that the long term capital loss of Rs. 54,90,36.870/- be set off against the other long term capital gain ^ earned by the Appellant during the assessment year 2008-09. Ground V: Set-off of Short-Term Capital Loss on sale of shares of JM Financial Products Pvt. Ltd.: Rs. 465,44,19,508 (Rs. 465.44 crores) (Page 104 of the Order) On the facts and circumstances of the case, the Appellant prays that the short term capital loss of Rs. 465, 44, 19,5087- be set off against the other long term capital gain earned by the Appellant during the assessment year 2008-09." Revenue 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to Charge gain of Rs. 1771,36,61,381/-on transfer of 49,00,000 equity shares as Long Term Capital Gain instead of Business Income". 2. "On the facts and in the circumstances of the case in law, the Ld. CIT(A) also erred in not appreciating the fact that the consideration was actually receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). There would be a separate executive committee for the management of the Company in accordance with the business plan (Pg. 38 - 39 PB1). The principal officers of the Company would be designated by MS while the Assessee would only be consulted for the same (Pg. 39 PB1). This clearly shows that the Assessee was not managing the Company but was merely given rights to be consulted in the appointments of the principal officers; 4. The Company had purchased for a consideration the existing business of the Assessee's Institutional Equity Sales and Trading Business Assets and customer accounts. (Pg. 44 - 45 PB1). The Assessee therefore was not carrying out the business of broking of shares and securities from the inception of the Company until the sale of the shares in the Company. There was a specific non-compete clause in the agreement on both the parties. (Pg. 58 PB1). In fact, even as of date the Assessee is not carrying the business of broking of shares and securities; 5. The Assessee has obtained substantial dividend income from the JV company (Pg. 694 PB2), the shares were held as Investments (Pg. 347 PB1) and there were no shares held as stock in trade. 14A disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereas in reality, the shares held were sold to the partner in the joint venture and as a result of the sale, the stock of the partner goes up from 51% to 100%. Therefore, the consideration received by the assessee is very much in the nature of capital gains from sale of shares. It is further submitted that the Assessing Officer treated the gain as a business income for the reason that the basis or arriving at the consideration is not on net worth of the joint venture. In this regard, the Ld.AR submitted that the valuation of consideration for sale of shares was not challenged by the department but the revenue has merely ascribed motive for the same saying that it was a transaction in the nature of ordinary business of the assessee incurred to avoid commercial inconvenience with no foundation and facts and with disregard for evidence on record. Another argument presented by the Ld.AR is that section 50CA of the Act has been inserted by the Finance Act, 2017 with effect from 02/04/2018 and therefore, the said insertion for valuation of capital asset transferred being shares of a company other than equity shares or the purpose of section 48 being "fair market value" determined as pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that date i.e. till 26.10.2006, Morgan Stanley was willing to sell its shares in STJV & IBJV to J.M. Financial Ltd., (assessee) for US $ 75 million whereas it offered to buy all the shares in STJV 85 IBJV from J.M. Financial Ltd. i.e. from the assessee for US $ 125 million. It may be mentioned here that the shareholding of the assessee in J.M. Morgan Stanley Pvt. Ltd. was 49% while that of Morgan Stanley was 51%. This obviously shows substantially different rates for the same shares held by different price at the same time. Thus Morgan Stanley offered to sell its shareholding in the JV Company at a much lesser price and at the same time it offered to buy the assessee's shareholding in the JV company at a much higher price. It is, therefore, clear that had the negotiations been merely for determination of price of shares only, it would not have resulted in different rates for the same shares as the price of shares of a company at a particular time has necessarily to be the same in different hands. * Thus this offer by Morgan Stanley clearly establishes the fact that the amount of compensation negotiated was lumpsum since the very beginning of the negotiations and there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was only a modality adopted for such restructuring. In view of these facts, it will be a grossly erroneous interpretation that the sum of Rs. 1771.36 Cr. as sale consideration only for the sale of 49,00,000 shares of JM Morgan Stanley Securities Pvt. Ltd. * 3.10 Hence it is obvious from the above facts that the amount of Rs. 1771.36 Cr. was assessee's claim of loss of resulting from split consolidated business and pre-mature end of JV business which makes it obvious that this amount was expected future profits which was loss to the assessee as a result of split of consolidated businesses and accordingly the same is revenue receipt and is accordingly to be treated as income from business as per the provisions of section 28 of I.T. Act, 1961. 9. We heard the parties and perused the material on record. The coordinate bench in the first round of appeal has remitted the issue back to the assessing officer to consider the issue of treatment of gain on sale of shares in joint venture as capital gain or business income in the light of the decision of Hon'ble Supreme Court in the case of Vodafone (supra). The Assessing Officer in the remanded proceedings once again treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isting of independent capital assets within the meaning of section 2(14), the aspect of control vis-à-vis the ownership of shares, control premium, legal relationship between a holding company and a subsidiary company, acquiring control on purchase of shares, transfer of controlling interest is incidental to the transfer of shares and that the two cannot be broken up etc. (ii) The AO has misconceived the applicability of Section 28(ii)(a) because it requires payment of compensation to a person who was managing the whole or substantially the whole of affairs of an Indian company in connection with the termination of his management. (iii) In Vodafone case the Hon'ble Supreme Court has held that to ascertain the legal nature of the transaction one has to look at the entire transaction as whole and not adopt dissecting approach by applying "look at" test. 12. Besides the CIT(A) also relied on various judicial pronouncements to hold that gain earned by the assessee on sale of shares is to taxed under the head Capital Gains. The main contention of the revenue for treating the gain on sale of shares as business income is that the assessee has a controlling intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a dissecting approach. One more aspect needs to be reiterated. There is a conceptual difference between preordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense indicated above or investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc. Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid income tax ranging from Rs. 3 crore to Rs. 250 crore per annum during the period 2002-03 to 2006- 07. Even after 11.02.2007, taxes are being paid by VIH ranging from 394 crore to Rs. 962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the contract and the surrounding circumstances. Controlling interest is inherently contractual right and not property right and cannot be considered as transfer of property and hence a capital asset unless the Statute stipulates otherwise. Acquisition of shares may carry the acquisition of controlling interest, which is purely a commercial concept and tax is levied on the transaction, not on its effect. 13. When we look at the case in hand, it is noticed that the assessee had sold the investment which the assessee has been holding for long period of time from which the assessee has been earning dividend income. The impugned transaction, in assessee's case is sale of shares. Therefore applying the above ratio of the Hon'ble Supreme Court irrespective of whether the assessee was having a controlling interest (which according to the submissions, the assessee does not have) it is the transaction that needs to be looked into for the purpose of determining the taxability. Accordingly in our view the shares are held by the assessee as investment and the gain arising out of sale of such investment cannot be treated as a business income on the ground that the assessee was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he intention of the assessee is to hold to the shares of JMMSSPL as investment is demonstrated by the reflection of the shares under investments in the financial statements and from the factual finding given by the CIT(A) that the Board Resolution dated 18.04.1998 passed while making the investment clearly mentions that the assessee has made a capital investment. Accordingly in our view treatment of the gain as business income on this ground is not sustainable. In view of these discussions we hold that that the gain arising on transfer of 49,00,000 equity shares of JMMSSPL by the assessee is chargeable to tax under the head capital gains and the assessee be allowed to claim the indexed cost of acquisition considering the period of holding of the shares. In result the appeal of the revenue is dismissed. I.T.A. No.3987/Mum/2015 - Assessee's appeal 15. The issue in assessee's appeal is disallowance of set off of short term capital gain / loss. During the year under consideration, the assessee had shown both, short term and long term capital loss on sale of shares of assessee's group company, JM Financial Product Pvt Ltd (JMFPPL) which was a private limited company. Brief facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and is merely a device to create a loss to cancel the part of profit earned on sale of the joint venture and evade the tax. The Assessing Officer relied upon the judgement of the Hon'ble Supreme Court in the case of Mcdowell & Co. Ltd 151 ITR 148 (SC) and rejected the assessee's claim of set off of short, term capital loss of Rs. 465,44,19.508/- and long term capital loss of Rs. 54,90,36,870/- as non-genuine camouflaged loss. The CIT(A) in the first round of appeal upheld the order of the Assessing Officer. The Tribunal remitted the issue back to the Assessing Officer to decide the issue in accordance with the decision in the issue pertaining to treatment of sale of shares in JM Morgan Stanley Securities Pvt Ltd to be assessable as capital gain or business income. 17. In the second round of proceedings, the Assessing Officer held that the assessee could not establish the genuineness of the transaction against the findings given by the CIT(A) in the first round and that the onus was on the assessee to prove that the transaction was not a colourable transaction. The Ld.CIT(A) in the second time held that the entire transaction had taken place not for any commercial purposes bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,90,36,870/- on the ground that the assessee with the help of its own group companies made a colourable device to artificially create loss to cancel profit earned on sale of 49% shares to the J.V. and thereby evade the tax. For this proposition, he relied on the decision of Hon'ble Apex Court in the case of Mcdowell & Co. (supra). In the first round of appeal, the CIT(A) while upholding the action of the AO in rejecting the claim- of set off of such long term capital loss and short term capital loss relied on the decision in the case of Jannhavi Investment Pvt, Ltd. (304 ITR 276 Bom.) and Dahiben Umedbhai Patel vs. Normal-Jeans Hamilton & Others reported in 57 Comp. Case 700 Bom. and held that the computation of such loss by applying the provisions of section 55(2)(aa) is not correct. Accordingly the CIT(A) held that such loss shall not be allowed to be deducted or set off from income. In the second round of proceedings the lower authorities sustained the disallowance on the same grounds as stated by their predecessors in the first round of appeal. 20. The main contention of the revenue for disallowing the set off of loss is that the loss is artificially created to reduce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also brought to our notice that JMFPPL had applied for banking license in 2013 which resulted in phenomenal growth of the company which resulted in wealth creation for employees. We also notice that these facts have not been considered by the lower authorities before concluding that the entire transaction to be non-genuine It is relevant to consider the decision of the Hon'ble Supreme Court in the case of CIT Mumbai vs Walfort Share & Stock Brokers (P.) Ltd where it is held that - 20. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of section 94(7) vide Finance Act, 2001 with ef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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