Regardless of a controlling interest, shares held as investments are subject to the capital gains tax

Fact and issue of the case

These cross appeals by the assesse and the Revenue are against the order of the Commisioner of Income-tax (Appeals)-9, Mumbai (in short, „the CIT(A)‟) dated 30/04/2015 for assessment year 2008-09.

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. 200809 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 the future as a joint venture and that termination was a result of split of business arrangement between the assessee and its partners. Aggrieved, the assessee preferred appeal before the Tribunal. The Tribunal remitted the issue back to the Assessing Officer by holding that –

“We have considered the rival arguments made by both the sides, perused the orders of the AO and the ld.CIT(A) and the paper book filed on behalf of the appellant. We have also considered the various decisions cited before us. The question to be decided in the impugned ground is regarding the treatment of consideration received on sale of 49 lakh equity shares of JMMS Securities to Morgan Stanly or a gross consideration of ₹ 1771.32 crores. According to the appellant since these shares were held as capital asset for more than 8 years therefore, the gain on sale has to be treated as LTCG. According to the revenue the same has to be treated as LTCG of business or profession. Both the parties filed elaborate written submissions and relied on various case laws to support their stand. The ld.Counsel for the assessee while concluding his arguments filed a copy of the decision of Hon’ble Supreme Court in the case of Vodafone International Holding B.V. and submitted that all points have been answered in the elaborate decision of the Hon’ble Apex Court running in to more than 250 pages. Since admittedly this decision was not available either before the AO or before the ld.CIT(A), therefore, considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issues afresh in the light of the decision o the Hon’ble Apex Court cites supra and in accordance with law after giving due opportunity of being heard to the appellant. The AO shall also give opportunity to the appellant to furnish the details of the nature of services rendered by JMFCPL to it and show the nexus of expenses incurred in connection with the transfer of the shares. We hold and direct accordingly. The ground of appeal No.1 by the appellant is accordingly allowed for statistical purpose.”

In the second round of proceedings, the Assessing Officer held the gain on sale of shares be business income by stating that assessee’s case is distinguishable from the case of Vodafone International Holdings B.V. vs UOI 341 ITR 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

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 (Rs.54.90 crores) (Page 104 of the Order) On the facts and circumstances of the case, the Appellant prays that the conclusion reached by the learned Commissioner of Income-tax (Appeals) – 9, (“CIT(A)’:) that the Appellant has entered into a transaction for sale of shares of JM Financial Products Pvt. Ltd. with the object of tax avoidance and it is a colorable device is erroneous and contrary to the facts. The Appellant prays that the claim of long term capital loss of Rs.54,90,36,870/- be accepted as a genuine long term capital loss.

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 Short-Term Capital Loss on the same: Rs.465,44,19,508 (Rs.465.44 crores)

Observation of the court

During the year under consideration the assessee has transferred 5.445 crores shares of JMFPPL to the Trust formed for the purpose of issuing ESOPs to the employees. It is noticed from the perusal of records that out the above 3.439 crore shares have already been issued to employees under the ESOP scheme by the Trust. It is noticed that the employees have exercised options to the extent of 14.82% of the shares. The ld AR during the course of hearing submitted that JMFPPL was the main profit making subsidiary company in the group having high credit rating and that is the reason the company was chosen for implementing ESOPs. The ld AR further submitted that the issue of shares under ESOP scheme is a common business practice in order to retain talent and to provide opportunity to employees to grow with the company. It is 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 –

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 effect from 1-4-2002. With regard to such cases we may state that on facts it is established that there was a “sale”. The sale price was received, by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called “abuse of law”. Even assuming that the transaction was pre-planned there is nothing to” impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.’s case (supra). Hence, in the cases arising before 1-4-2002, losses pertaining to exempted income cannot be disallowed.

It is observed by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra) that an act which is otherwise valid in law cannot be treated as to evade tax merely on the basis of some suspicious underlying motive supposedly resulting in some economic detriment or prejudice to the Revenue. In the present case genuineness of the claim cannot be impeached. In his regard, we notice that the shares were sold by the assessee from the Demat account for which the consideration is received by the assessee and that shares sold had been issued under the ESOP scheme of the Trust where the options are being exercised by the assessee. We further notice that the assessee has also shown short term capital gain of Rs.4,95,00,000 on sale of 49.50 lakh shares of JMFPPL which supports the submission of assessee that the intention of the assessee was not purposely to reduce the payment of tax. On the other hand the revenue has not brought any material to controvert the contention of assessee. So we cannot countenance the action of Ld.CIT(A)/AO on this issue and uphold the claim of assessee. In view of these discussion and considering the decisions of the Hon’ble Supreme Court, we see no infirmity. We therefore set aside the order of the CIT(A) disallowing the setoff of long term capital loss of Rs.54,90,36,870/- and short term capital loss of Rs.4,65,44,19,508/-.

The CIT(A) while upholding the disallowance of set off of losses has also held that the loss as computed by the assessee is not correct for the reason that the provisions of section 55(2)(aa)(ii) of the Act is not applicable in assessee’s case. During the course of hearing the ld AR presented various arguments in this regard contending that the provisions of section 55(2)(aa)(ii) is applicable to the impugned transaction. Since we have already held that the set off of loss should allowed in the case of the assessee in the foregoing paras., the submissions of the ld AR and ld DR in this regard is left open.

In result the appeal of the assessee is allowed and the appeal of the revenue is dismissed.

Order pronounced in the open court on 04/08/2023.