Satyanaryana Vivek Kumar(HUF), Bangalore V. Income tax Officer, Ward-1(1), Bangalore

CO 101/BANG/2014

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 0959 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 30-07-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-07-2015
• Assessment Year: misc
• Appeal Filed On: 15-12-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Reassessment proceedings
• Section: 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER ITA NO.1074/BANG/2014 ASSESSMENT YEAR : 2006-07 THE INCOME TAX OFFICER, WARD 1(1), BANGALORE. VS. SHRI SATYANARAYANA VIVEK KUMAR (HUF), 11/3, NANDIDURGA ROAD, BANGALORE 560 046. PAN: AAJHS 0663J APPELLANT RESPONDENT CO NO.101/BANG/2014 [IN ITA NO.1074/BANG/2014] ASSESSMENT YEAR : 2006-07 BY ASSESSEE SHRI SATYANARAYANA VIVEK KUMAR (HUF), BANGALORE. PAN: AAJHS 0663J APPELLANT BY : SHRI G.R. REDDY, CIT-I (DR) RESPONDENT BY : SHRI P. DINESH, ADVOCATE DATE OF HEARING : 10.07.2015 DATE OF PRONOUNCEMENT : 30.07.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORD ER DATED 27.05.2014 OF THE CIT(APPEALS)-I, BANGALORE RELATIN G TO ASSESSMENT YEAR 2006-07. 2. IN THIS APPEAL, THE GRIEVANCE OF THE REVENUE IS THAT THE CIT(A) WRONGLY ALLOWED THE CLAIM OF EXEMPTION U/S. 10(38) OF THE ACT IN RESPECT OF ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 2 OF 10 INCOME ARISING FROM TRANSFER OF CAPITAL ASSET VIZ., EQUITY SHARES OF A LISTED COMPANY BY NAME BHORUKA FINANCIAL SERVICES LTD. (BF SL) ON SALE OF WHICH SECURITIES TRANSACTION TAX HAD BEEN PAID. THE FURT HER GRIEVANCE OF THE REVENUE IS THAT THE CIT(A) TREATED THE CAPITAL GAIN IN QUESTION AS LONG TERM CAPITAL GAIN ON SALE OF SHARES AS AGAINST THE STAND OF THE AO THAT THE CAPITAL GAIN IN QUESTION WAS SHORT TERM CAPITAL GAI N WITHOUT ANY BASIS. ACCORDING TO THE REVENUE, THE CIT(A) IN COMING TO T HE ABOVE CONCLUSIONS HAD FOLLOWED THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF BHORUKA ENGINEERING INDUSTRIES LTD. VS. DCIT ITA NO.120/201 1 DATED 9.4.2013 WHICH WAS A DECISION RENDERED IN THE CASE OF ANOTH ER SHAREHOLDER OF BFSL WHO HAD SOLD SHARES UNDER FACTS AND CIRCUMSTANCES SIMILAR TO THAT OF THE ASSESSEE IN THE PRESENT APPE AL AND IN WHOSE ASSESSMENT ALSO THE REVENUE REFUSED TO ACCEPT THE C LAIM OF EXEMPTION OF CAPITAL GAIN U/S.10(38) OF THE ACT AND HAD PROCEEDE D TO TREATED THE CAPITAL GAIN IN QUESTION AS SHORT TERM CAPITAL GAIN ON IDEN TICAL REASONS AS ARE GIVEN IN THE CASE OF THE ASSESSEE IN THE PRESENT AP PEAL. ACCORDING TO THE REVENUE THE DECISION OF THE HONBLE KARNATAKA HIGH COURT HAS NOT BEEN ACCEPTED BY THE REVENUE AND AN SLP HAS BEEN PREFERR ED BEFORE THE HONBLE SUPREME COURT AGAINST THE SAID DECISION. I NCIDENTALLY, THE ASSESSEE HAS ALSO FILED CROSS OBJECTION IN WHICH HE HAS CHALLENGED THE VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT IN WHICH THE AFORESAID ADDITIONS WERE MADE BY THE ASSE SSING OFFICER. ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 3 OF 10 3. THE FACTS GIVING RISE TO THE PRESENT APPEAL ARE AS FOLLOWS. THE ASSESSEE IS A HUF AND ONE OF THE PROMOTERS AND SHAR EHOLDER OF BFSL. THE ASSESSEE DERIVES INCOME FROM HOUSE PROPERTY AND ALSO DEALING IN SHARES AND SECURITIES. THE ASSESSEE FILED RETURN O F INCOME FOR AY 2006-07 DECLARING A SHORT TERM CAPITAL LOSS OF RS.6,21,935 AND AN INCOME OF RS.6,187 AS INCOME FROM OTHER SOURCES. IN THE SAID RETURN THE ASSESSEE HAD CLAIMED EXEMPTION U/S.10(38) OF SHORT TERM CAPI TAL GAIN OF RS.9,90,07,395 ON SALE OF SHARES OF BFSL. IN THE A SSESSMENT PROCEEDINGS CONCLUDED UNDER SEC.143(3) OF THE ACT BY ORDER DATE D 24.10.2008, THE CLAIM OF THE ASSESSEE FOR EXEMPTION WAS ACCEPTED BY THE AO. 4. THEREAFTER, THE CASE WAS REOPENED AND NOTICE U/S . 148 OF THE ACT WAS SERVED ON THE ASSESSEE ON 30.11.2011. THE REASS ESSMENT PROCEEDINGS WERE INITIATED FOR DISALLOWING THE CLAI M FOR EXEMPTION U/S.10(38) OF THE ACT VIZ., ON THE LONG TERM CAPIT AL GAIN ON SALE OF SHARES OF BFSL. 5. THE FACTS WITH REGARD TO CAPITAL GAIN ON SALE OF SHARES OF BSFL ARE AS FOLLOWS: THE ASSESSEE DURING THE YEAR HAD SOLD 22,100 SHARES OF M/S. BFSL TO M/S. DLF COMMERCIAL DEVELOPERS LTD., [DLFC DL FOR SHORT] AND TOTAL CONSIDERATION OF RS. 9,92,29,000 AT THE RATE OF RS.4,490 PER SHARE. THE CAPITAL GAINS OUT OF ABOVE SALE CORRESPONDING T O THE 22,100 SHARES OF ASSESSEE WAS RS.9,90,07,395. THE ASSESSEE CLAIMED THE ENTIRE AMOUNT AS EXEMPT ON THE GROUND THAT THE SHARE IN BFSL WERE HELD FOR A PERIOD OF ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 4 OF 10 MORE THAN ONE YEAR AND THAT SECURITY TRANSACTION TA X, (FOR SHORT STT), WAS PAID AS PROVIDED U/S. 10(38) OF THE ACT DURING THE SALE THROUGH MAGADH STOCK EXCHANGE, PATNA (MSE). THE ASSESSEE CLAIMED THAT THE LONG TERM CAPITAL GAINS EARNED ON SALE OF BFSL SHARES AS EXEM PT FROM TAXATION UNDER SECTION 10(38) OF THE ACT SINCE THE SHARES TRANSFER RED WERE QUOTED SHARES HAVING SUFFERED SECURITIES TRANSACTION TAX AND FURT HER THE SHARES HAVING BEEN HELD FOR MORE THAN 12 MONTHS. 6. IN THE REASSESSMENT PROCEEDINGS, THE AO FOUND TH AT BFSL BELONGS TO BHORUKA GROUP OF COMPANIES AND MOST OF THE SHARE S IN THIS COMPANY ARE HELD BY SHRI. S.N. AGARWAL AND HIS FAMILY MEMBE RS, EITHER IN THEIR INDIVIDUAL CAPACITY OR AS PARTNERS OF THE CONCERNS. FROM THE RECORDS OF BFSL, THE AO NOTICED THAT BFSL HAD, FOR A LARGE PER IOD OF ITS EXISTENCE AS ONE OF BHORUKA GROUP COMPANY CARRIED ON THE BUSINES S OF FINANCIAL INVESTMENT OF THE GROUP. EXCEPT THIS, NO OTHER BUSI NESS WAS CARRIED ON BY BFSL. ON 16.06.2004 AND ON 30.06.2004, THE COMPANY BFSL ACQUIRED LAND OF 15 ACRES FOR RS.3.75 CRORES FROM M/S. BHORU KA STEEL LTD. THIS LAND APPEARED AT RS. 4.21 CRORES IN THE BALANCE SHEET AS AT 31.03.2005, WHICH IS INCLUSIVE OF DEVELOPMENT EXPENSES ON THE LAND. 7. THE PROMOTERS OF BFSL SOUGHT PERMISSION FROM SE BI TO EXEMPT THEM FROM MAKING PUBLIC ANNOUNCEMENT IN RESPECT TO SALE OF 1,98,850 EQUITY SHARES TO M/S DLFCDL, NEW DELHI. THE PROMOTE RS OF BFSL ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 5 OF 10 DISCLOSED THE RATE OF RS.2,400/- PER SHARE FOR THE PURPOSE OF SELLING THE SHARES TO DLFCDL. THE LAST QUOTED VALUE OF THIS SH ARE WAS RS.5/- IN 1985. 8. THE ASSESSING OFFICER FURTHER NOTICED THAT DURIN G THE FY 2004-05 BFSL SOLD ALL THE LISTED EQUITY SHARES. ACCORDINGLY , THE INVESTMENTS WHICH WERE WORTH RS.4.61 CRORES AS ON 31.03.2004 GOT REDU CED TO RS.3.85 CRORES AS ON 31.3.2005. THESE INVESTMENTS AS ON 31.3.2005 WERE EQUITY SHARES OF M/S BHORUKA POWER CORPORATION LTD. DURING THE FY 20 05-06, BFSL SOLD EVEN THE INVESTMENTS OF RS.3.85 CRORES. AS AFORESAI D, BFSL HAD ACQUIRED 15 ACRES OF LAND SITUATED AT WHITEFIELD, BANGALORE, DURING THE FY 2004-05. BFSL PURCHASED THIS LAND AT A NOMINAL PRICE OF RS. 3.75 CRORES FROM BHORUKA STEEL LTD. DURING AUGUST 2005, M/S DLFCDL P URCHASED THE SHARES OF BFSL AT A NEGOTIATED RATE OF RS. 4,490/- PER SHARE FOR A TOTAL CONSIDERATION OF RS. 89.08 CRORES. BY VIRTUE OF THI S DEAL THE PROMOTERS OF BFSL HAVE SOLD THEIR STAKES TO DLFCDL. 9. ACCORDING TO THE AO, THE DIRECTORS AND PROMOTERS OF BFSL DISPOSED OFF ALL THE OTHER ASSETS HELD BY BFSL EXCEPT LAND B EFORE THE SHARES WERE SOLD TO DLFCDL. THE INTENTION OF THE DIRECTORS AND PROMOTERS OF BFSL IS TO TRANSFER THE UNDERLYING ASSET, BEING LAND TO THE BU YER COMPANY DLFCDL. IF THE INTENTION OF THE DIRECTORS AND PROMOTERS OF BFS L WAS TO TRANSFER BFSL ALONG WITH ALL ITS ASSETS AND LIABILITIES, THEN ALL ASSETS AND LIABILITIES BELONGING TO BFSL WOULD HAVE REMAINED AS SUCH AND N O CHANGE WOULD HAVE TAKEN PLACE IN THE BALANCE SHEET OF BFSL. THE SALE OF ALL OTHER ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 6 OF 10 INVESTMENTS AND REDUCTION OF LOANS AND ADVANCES WAS POSSIBLE TO BFSL SINCE THESE TRANSACTIONS WERE DONE WITH THE GROUP C OMPANIES. DLFCDL COULD NOT HAVE BOUGHT THE SHARES OF BFSL AT A SUBST ANTIAL RATE OF RS.4,490/- PER SHARE IF BFSL WAS NOT HAVING THE LAN D OF 15 ACRES AS THE ASSET. THE AREA WHERE THE LAND IS SITUATED HAS HUGE COMMERCIAL VALUE. THIS PROVES BEYOND DOUBT THAT DLFCDL HAS IN FACT PU RCHASED THE SHARES OF BFSL KEEPING IN VIEW THE VALUE OF THE UNDERLYING ASSET BEING LAND AT WHITEFIELD. THIS TRANSACTION IS STRUCTURED IN SUC H A WAY THAT THE PROMOTERS AND DIRECTORS HOLDING THE SHARES OF THE COMPANY, BF SL, SELL THEIR SHAREHOLDINGS TO DLFCDL AND RECEIVE THE CONSIDERATI ON. 10. THE AO OBSERVED THAT THERE IS A NECESSITY TO LI FT THE CORPORATE VEIL AND UNDERSTAND THE TRUE NATURE OF THE TRANSACTION I N COMMERCIAL SENSE. THE AO CONCLUDED THAT DLFCDL HAS MADE THE PAYMENT NOT T O JUST BUY THE SHARES OF BFSL BUT TO ACQUIRE THE UNDERLYING ASSET. THE SHARES OF THE COMPANY WERE LISTED IN THE BANGALORE STOCK EXCHANGE . WITHOUT MAKING FULL AND COMPLETE EFFORTS TO TRANSACT THROUGH BANGALORE STOCK EXCHANGE, IT HAS CHOSEN TO CARRY OUT THE TRANSACTION FROM MAGADH STO CK EXCHANGE. WHEN THE ASSESSEE COMPANY COULD HAVE TRANSACTED THROUGH ANY OTHER RECOGNIZED STOCK EXCHANGE SINCE MAGADH STOCK EXCHAN GE WAS NOT PERMITTED TO CARRY OUT THE SHARE TRANSACTIONS FOR A LONG TIME. THE COMPANY, BFSL AND ITS PROMOTERS HAD ALSO APPLIED TO SEBI SEE KING EXEMPTION FROM MAKING PUBLIC OFFER FOR SALE OF THESE TRANSACTIONS. THESE UNUSUAL ATTEMPTS OF THE ASSESSEE COMPANY FINALLY CULMINATED IN SELLI NG A NON-COMPETITIVE ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 7 OF 10 STOCK FOR RS.4,490/- PER SHARE BY STRIPPING OUT ALL THE ASSETS AND INVESTMENTS OF BFSL, EXCEPT THE LAND IT WAS REDUCED TO A SHELL COMPANY. THIS SHELL COMPANY WAS USED TO TRANSFER A RED ASSET AND PROMOTERS TOOK THE FRUITS OF THE TRANSACTION. BFSL AND ITS PROMOTE RS MADE DELIBERATE ATTEMPT TO STRUCTURE DEAL TO AVOID TAX IMPLICATION. 11. FOR ALL THE ABOVE REASONS, THE AO HELD THAT THE ASSESSEE WAS NOT ELIGIBLE FOR CLAIM OF EXEMPTION U/S. 10(38) OF THE ACT AND THAT THE TRANSACTION IN QUESTION IN SUBSTANCE ATTRACTS TAX I NVOKING THE RULING OF THE HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO., 154 ITR 148 (SC) . THE AO HELD THAT GAIN ON SALE OF SHARES OF BFSL B Y THE ASSESSEE TO DLFCDL WAS CHARGEABLE TO TAX AS SHORT TERM CAPITAL GAIN AND ACCORDINGLY BROUGHT THE SAME TO TAX AS SHORT TERM CAPITAL GAIN. IN COMING TO THE AFORESAID CONCLUSION, THE AO ALSO PLACED RELIANCE O N THE DECISION OF THE ITAT IN THE CASE OF M/S. BHORUKA ENGINEERING INDUSTRIES LTD., WHICH WAS ALSO PART OF AGARWAL GROUP WHICH HELD SHARES IN BFS L. IN THE CASE OF BHORUKA ENGINEERING INDUSTRIES LTD. V. DCIT, ITA NO .1139/BANG/2010, ORDER DATED 22.02.2010 , THE TRIBUNAL TOOK THE VIEW THAT THE TRANSACTION W AS A TAX PLANNING DEVICE TO AVOID PAYMENT OF LEGITIMAT E TAX ON CAPITAL GAIN AND THEREFORE HAD TO BE IGNORED. THE GAIN ON SALE OF S HARES WAS TREATED AS SHORT TERM CAPITAL GAIN AND BROUGHT TO TAX. THE AO MADE A REFERENCE TO THE AFORESAID DECISION OF THE TRIBUNAL TO FORTIFY HIS C ONCLUSIONS THAT THE TRANSACTION OF SALE OF SHARES BY THE ASSESSEE WHICH WAS IDENTICAL IN ALL ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 8 OF 10 ASPECTS TO THE SALE OF SHARES BY BHORUKA ENGINEERING INDUSTRIES LTD., WAS TO BE IGNORED AND ONLY SUBSTANCE OF THE TRANSACTION TAKEN NOTE OF. 12. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) FOL LOWING THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF BHORUKA ENGINEERING INDUSTRIES LTD., (SUPRA) , UPHELD THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S.10(38) OF THE ACT AND REVERSED THE ORDER OF THE AO. 13. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 14. WE HAVE CONSIDERED THE GROUNDS OF APPEAL OF THE REVENUE AND FIND THAT THE ISSUE RAISED BY THE AO IN THE ORDER OF ASS ESSMENT HAS ALREADY BEEN DECIDED BY THE HONBLE KARNATAKA HIGH COURT BY JUDGMENT DATED 09.04.2013 IN ITA NO.120/2011, IN THE CASE OF BHORU KA ENGINEERING INDUSTRIES LTD. (SUPRA). THE HONBLE ITAT IN THE C ASE OF BHORUKA ENGINEERING INDUSTRIES LTD. IN ITA NO.1139/BANG/201 0 , HAD UPHELD THE ORDER OF THE AO HOLDING THAT THE SALE OF SHARES BY THE VARIOUS ENTITIES OF BHORUKA GROUP WAS A COLORABLE DEVICE TO EVADE TAX A ND THE CAPITAL GAIN ON SALE OF SHARES WAS TO BE REGARDED AS SHORT TERM CAP ITAL GAIN AND EXEMPTION U/S.10(38) OF THE ACT WAS NOT TO BE ALLOWED. THE A SSESSEE HAD CARRIED THE MATTER TO THE HONBLE HIGH COURT OF KARNATAKA. THE HONBLE HIGH COURT OF KARNATAKA WAS PLEASED TO SET ASIDE THE ORDER OF THE TRIBUNAL AND HELD THAT THE TRANSACTION OF SALE OF SHARES WERE REAL, GENUIN E AND FOR VALUABLE ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 9 OF 10 CONSIDERATION AND WERE WITHIN THE FRAMEWORK OF LAW. CONSEQUENTLY, EXEMPTION U/S. 10(38) OF THE ACT HAD TO BE ALLOWED. 15. IT IS NOT IN DISPUTE THAT THE FACTS IN THE CASE OF ASSESSEE ARE IDENTICAL WITH THAT OF THE CASE OF BHORUKA ENGINEERING INDUSTRIES LTD ., (SUPRA) AND THEREFORE THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA WILL SQUARELY APPLY TO THE FACTS OF THE PRESENT CASE. WE ARE THE REFORE OF THE VIEW THAT THE ORDER OF THE CIT(APPEALS) HAS TO BE UPHELD AND THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S. 10(38) OF THE ACT HAS TO BE ALLO WED. WE HOLD ACCORDINGLY AND DISMISS THE APPEAL OF THE REVENUE. SINCE THE A PPEAL IS BEING DISMISSED ON MERITS, WE DO NOT DEEM IT NECESSARY TO ADJUDICATE ON THE VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT AS RAISED BY THE ASSESSEE IN ITS CROSS OBJECTIONS AND THE SAID ISSUE IS LEFT OPEN WITHOUT ADJUDICATION. 16. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALSO DISMISSED AS NOT REQUIRING ADJUDICATION. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF JULY , 2015 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 30 TH JULY , 2015 . /D S/ ITA NO. 1024/BANG/2014 & CO 101/BANG/2014 PAGE 10 OF 10 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR/ SENIOR PRIVATE SECRETARY ITAT, BANGALORE.