J.M. Financial Ltd Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that shares held as investment is taxable under capital gain. The same cannot be treated as business income on the ground that the assessee was participating in the business of JMMSSPL and had had transferred the controlling/business interest.
Facts- 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% 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. AO 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. CIT(A) upheld the order of assessment. Aggrieved, the assessee preferred appeal before the Tribunal.
Conclusion- Held 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 participating in the business of JMMSSPL and had had transferred the controlling/business interest.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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.
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. 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.”
3. 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
“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 (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.
2. Ground II: 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)
(Page 104 of the Order)
On the facts and circumstances of the case, the Appellant prays that the conclusion reached by the learned C1T(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 short term short term capital loss of Rs.465,44, 19.508/- be accepted as a genuine short term capital loss.
Ground III; Applicability of Section 55(2)(aa) for calculating the amount of Long-term capital loss and Short-term capital loss on sale of shares of JM Financial Products Pvt. Ltd.
(Page 104 of the Order)
On the facts and circumstances of the case, the Appellant prays that the conclusion reached by the learned C1T (A) on the non-applicability of the provisions of Section 55(2)(aa) of the Income-tax Act, 1961 to the shares of a private limited company is not correct and that such loss is determined by spreading the original cost to the total number of shares including the bonus shares is erroneous and contrary to the law. On the facts and circumstances of the case, the Appellant prays that the calculation of the amount of longterm capital loss and the amount of short-term capital loss as derived by the Appellant by applying the provisions of section 55(2)(aa) of the Income-tax t. Act, 1961 be accepted and that the long-term capital loss be accepted at Rs.54,90,36,870/- and the short-term capital loss be accepted at Rs.465,44,19,508/-.
Ground IV: Set-off of Long-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 received for the premature termination of Joint venture, foregone future profit and goodwill of the business, not for the value of the share”.
3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) further erred in not appreciating the fact that the assessee failed to establish the valuation of shares done on the basis of the net worth of the joint venture and that the consideration was for the worth of the shares, not for the loss of further business.”
4. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary
I.T.A. No.3925/Mum/2015 – Revenue
Sale of Shares – Long Term Capital Gain or Business Income
4. The assessee has made an investment in joint venture in JMMSSPL on 01/04/1999. The assessee has sold these investments in shares to MSSPL on 18/05/2007. The Assessing Officer in the remanded proceedings held after considering the Vodafone International Holdings B.V. vs UOI [(2012) 341 ITR 1] that the consideration is to be taxed in terms of section 28(2) of the Income-tax Act, 1961 for the reason that –
