Lakshminarayan Ganesh, CHENNAI V. ACIT, CHENNAI

ITA 333/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4204 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 15-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 06-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR
• Keywords: Reopening of assessment; Share purchase agreement; Cost of acquisition; Tangible material; Difference of opinion; Scheme of amalgamation; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , , % BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ I.T.A. NO. 333/MDS/2017 / ASSESSMENT YEAR : 2007-08 MR. LAKSHMINARAYANAN GANESH, NO. 132, CATHEDRAL ROAD, CHENNAI 600 086. [PAN: AADPG 6123F] VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(3), CHENNAI. ( / APPELLANT) ( / RESPONDENT) & ' / APPELLANT BY : SHRI SRIRAM SESHADRI, ADVOCATE *+& ' / RESPONDENT BY : SHRI NARENDRA KUMAR, JCIT ' /DATE OF HEARING : 20.06.2017 ' /DATE OF PRONOUNCEMENT : 20.06.2017 /O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-3, CHENNAI, I N ITA NO. 04/CIT(A)- 3/2013-14 DATED 30.09.2016. :-2-: ITA NO. 333/MDS/2017 2. SHRI LAKSHMINARAYANAN GANESH, THE ASSESSEE, AN I NDIVIDUAL, FILED HIS RETURN FOR ASSESSMENT YEAR 2007-08 ON 26.07.2007 , INTER ALIA, ADMITTING LONG TERM CAPITAL GAIN ARISING FROM TRANSFER OF SALE OF SHARES OF RANE MADRAS LIMITED. THE REGULAR ASSESSMENT WAS COMPLETED U/S. 143(3) ON 21.12.2009 ACCEPTING THE RETURNED INCOME WHICH INCLUDED THE IN COME FROM THE ABOVE LONG TERM CAPITAL GAINS AT RS. 1,05,14,444/-. THIS ASSE SSMENT WAS REOPENED U/S. 147 AND WAS COMPLETED ON 27.03.2013. WHILE DOING SO , THE AO HELD THAT IF THE ENTIRE TRANSACTION OF 'SALE, MERGER, DEMERGER' IS ' LOOKED THROUGH', IT WOULD BE CLEAR THAT 1,96,165 SHARES OF RANE MADRAS LTD (RML) SOLD DURING THIS ASSESSMENT YEAR ARE NOTHING BUT THE ORIGINAL SHARES OF RANE ENGINE VALVE LIMITED (REVL) . THE COST OF ACQUISITION ADOPTED BY THE ASSESSEE AT RS 146 PER SHARE TOWARDS THEM ARE THE EXCHANGE VALUE OF THE SH ARES OF RML . THE AO HELD THAT SINCE THE COST OF ACQUISITION OF REVL SHARES HAS BEEN REDUCED FROM THE SALE PRICE IN THE ASSESSMENT MADE IN AY 20 05-06, THERE IS NO COST FOR THE ACQUISITION OF REVL SHARES AND HENCE THE AO ADO PTED THE COST OF ACQUISITION OF SHARES AT NIL AND DETERMINED THE L ONG TERM CAPITAL GAIN AT RS. 2,35,39,800/-. AGGRIEVED, THE ASSESSEE FILED AN APP EAL BEFORE THE CIT (A)-3, CHENNAI, CHALLENGING THE REOPENING OF ASSESSMENT U/ S. 147 AND THE DISALLOWANCE OF COST OF ACQUISITION ETC. THE CIT ( A) UPHELD THE VALIDITY OF RE- OPENING AND THE ACTION OF THE AO DENYING THE COST OF ACQUISITION. THE CIT (A) FURTHER HELD , INTER ALIA, THAT RANE (MADRAS) MANUFACTURING LTD (CURRENTLY KNOWN AS RANE (MADRAS) LTD.) IS A PRIVATE LIMITED C OMPANY, THE PROMOTERS ARE :-3-: ITA NO. 333/MDS/2017 SIPHONING OFF FUNDS FROM PUBLIC LIMITED COMPANIES B ELONGING TO THE GROUP BY SALE OF SHARES OF THE PROMOTERS AMONG THE GROUP CON CERNS , THE SALE OF ONE GROUP COMPANY'S SHARE BELONGING TO THE PROMOTER TO ANOTHER GROUP COMPANY IS AN INSIDER TRADING AND RS. 2,35,39,800 RECEIVED BY THE ASSESSEE SHOULD BE TAXED UNDER SECTION 56(2)(VII)(C) UNDER 'INCOME FRO M OTHER SOURCES'. AGGRIEVED, THE ASSESSEE FILED THIS APPEAL CHALLENGI NG THE REOPENING OF THE ASSESSMENT, DISALLOWANCE OF COST OF ACQUISITION AND THE ENHANCEMENT MADE BY THE CIT(A). 3. THE AR SUBMITTED THAT THE ASSESSEE HELD 95,4 09 SHARES OF RANE ENGINE VALVES LTD. (REVL). IN THE MONTH OF MAY, 200 4, THEY WERE SOLD TO RANE (MADRAS) LTD. (CURRENTLY KNOWN AS RANE HOLDINGS LTD ). TOWARDS THE SALE CONSIDERATION, THE ASSESSEE WAS ALLOTTED 190,818 EQ UITY SHARES OF RANE (MADRAS) LTD., (I.E TWO SHARES OF RANE (MADRAS) LTD VALUED AT INR 146 PER SHARE) AND ADDITIONALLY, CASH CONSIDERATION OF INR 118 PER SHARE WAS ALSO PAID. THEREFORE, THE TOTAL CONSIDERATION PER SHARE FOR THE SALE OF SHARES OF REVL WAS INR 410. BASED ON THIS, THE ASSESSEE HAD PAID TAX ON THE CAPITAL GAINS ARISING ON THE SALE OF SHARES OF REVL IN A Y 2005-06. THUS, THE ASSESSEE HAD CEASED TO BE THE OWNER OF 95,409 SHARES OF REVL AND IN TURN, OBTAINED 190,818 SHARES OF RANE (MADRAS) LTD. IN NOVEMBER 20 04, IT PURCHASED 5,347 EQUITY SHARES OF RANE (MADRAS) LTD AT THE RATE OF I NR 147 PER SHARE FROM THE :-4-: ITA NO. 333/MDS/2017 PUBLIC. AFTER THIS PURCHASE, IT HELD 1,96,165 EQUIT Y SHARES OF RANE (MADRAS) LTD. 3.1 FURTHER, THE A R SUBMITTED THAT PURSUANT TO A SCHEME ARRANGEMENT UNDER SECTION 391 READ WITH SECTION 394 OF THE COMP ANIES ACT, 1956, ACCEPTED BY THE HON'BLE MADRAS HIGH COURT WITH EFFECT FROM A PRIL 25, 2005, RANE (MADRAS) LTD. WAS DEMERGED. THE MANUFACTURING DIVIS ION WAS TRANSFERRED UNDER THE SCHEME OF AMALGAMATION INTO RANE (MADRAS) MANUFACTURING LTD. (CURRENTLY KNOWN AS RANE (MADRAS) LIMITED OR, FOR C ONVENIENCE SAKE, 'RML- RESULTING CO.'. THE ORIGINAL RANE (MADRAS) LTD., W HICH IS CURRENTLY KNOWN AS RANE (HOLDINGS) LTD OR THE DEMERGED COMPANY, AS 'RH L- DEMERGED CO.' AS A CONSEQUENCE OF THIS DEMERGER, THE ASSESSEE WAS ALLO TTED 1,96,165 EQUITY SHARES IN RML- RESULTING CO. 3.2 ON SALE OF RML- RESULTING COS SHARES (IE TH E ISSUE IN DISPUTE) , THE AR SUBMITTED THAT DURING AY 2007-08 (THIS A YEAR), TH E ASSESSEE SOLD THE SHARES IT HELD IN RML- RESULTING CO. TO RHL-DEMERGED CO. F OR A CASH CONSIDERATION OF INR 120 PER SHARE. WHILE COMPUTING THE COST OF ACQU ISITION OF THE SHARES OF RML-RESULTING CO., THE COST OF ACQUISITION OF THE S HARES OF RHL-THE DEMERGED CO. WAS APPORTIONED BETWEEN THE SHARES OF THE TWO C OMPANIES INVOLVED IN DEMERGER IN ACCORDANCE WITH SECTIONS 49(2C) AND 49( 2D) OF THE ACT. THE COST OF ACQUISITION OF THE SHARES OF RML- RESULTING CO . WERE DETERMINED AS UNDER: :-5-: ITA NO. 333/MDS/2017 THE SHARES ALLOTTED AS A CONSIDERATION OF SALE OF SHARES OF REVL OF 1,90,818 SHARES (ORIGINAL VALUE DETERMINED WAS INR 146 PER SHARES) WERE DETERMINED AT INR 66.78 PER SHARE UNDER SECTION 49(2C) OF THE ACT. THE 5,347 SHARES WHICH WERE PURCHASED FROM THE PU BLIC AT INR 147 PER SHARE WERE VALUED AT INR 67.24 PER SHAR E UNDER SECTION 49(2C) OF THE ACT. THE DIFFERENCE BETWEEN THE SALE PRICE OF INR 120 P ER SHARE AND THE COST AS DETERMINED ABOVE WAS REPORTED AS CAPITAL GAINS AND TAXES WERE PAID AT THE RATE OF 10 PERCENT WITHOUT THE BENEFIT OF INDEXATIO N, AS THE SHARES ARE LISTED ON THE STOCK EXCHANGE. THE REPORTED CAPITAL GAIN WAS SCRUTINIZED BY THE AO IN DETAIL, IT WAS ACCEPTED AND ASSESSED AS SUCH UN DER THE REGULAR ASSESSMENT. 3.3 THEREAFTER, THE AR SUBMITTED THAT THE LEARNED A SSESSING OFFICER REOPENED THE ASSESSMENT ON THE BASIS THAT THE IMPUG NED TRANSACTION OF SALE OF SHARES OF RML-RESULTING CO. WAS NOTHING BUT BUYB ACK OF SHARES UNDER SECTION 46A OF THE ACT. THIS IS THE APPARENT FROM T HE REASONS FOR REOPENING OF ASSESSMENT. THE LD. AO HAS NOT EXPLAINED HOW THE SA LE OF SHARES OF ONE COMPANY TO ANOTHER COMPANY COULD EVER RESULT IN A B UYBACK OF SHARES. HAVING CLAIMED SO, HE HAD DROPPED THIS LINE OF CONTENTION ON THE FINAL ASSESSMENT. FURTHER, THE LD. AO HAS ALSO CONTENDED IN HIS NOTE EXPLAINING THE REASONS TO REOPEN THE ASSESSMENT THAT THE COST OF ACQUISITION OF SHARES OF RML-RESULTING CO. MUST BE COMPUTED IN RELATION TO THE PROPORTION OF SHARES ORIGINALLY HELD BY :-6-: ITA NO. 333/MDS/2017 THE APPELLANT IN REVL. HAVING CLAIMED SO, HE HAS DR OPPED THIS LINE OF CONTENTION ON THE FINAL ASSESSMENT. DROPPING BOTH THE REASONS ORIGINALLY STATED BY HIM, THE LD. AO HAD, IN THE ASSESSMENT OR DER DATED MARCH 27, 2013, HELD THAT IF THE ENTIRE TRANSACTION OF 'SALE, MERGE R, DEMERGER' IS 'LOOKED THROUGH', IT WOULD BE CLEAR THAT THE 1,96,165 SHARE S WHICH WERE SOLD ARE NOTHING BUT THE ORIGINAL SHARES REVL. BASED ON THI S ASSUMPTION, THE LD. AO HELD THAT SINCE THE COST OF ACQUISITION FOR PURCHAS E OF SHARES OF REVL WAS CLAIMED IN THE AY 2005-06 AGAINST THE CAPITAL GAINS ON THE SALE OF SHARES OF REVL, NO COST WOULD NOW BE AVAILABLE TO THE APPELLA NT FOR BEING CLAIMED AS A DEDUCTION WHILE COMPUTING CAPITAL GAINS ARISING FR OM THE SALE OF RML- RESULTING CO. SHARES AND ACCORDINGLY DISALLOWED TH E COST OF ACQUISITION CLAIMED BY THE APPELLANT OF INR 1,30,35,356 . 3.4 ON THE ABOVE FACTS AND CIRCUMSTANCES, THE AR C HALLENGED THE VALIDITY OF THE REOPENING. HE TOOK US THROUGH THE PAGES 89 TO 108 OF THE PAPER BOOK AND SUBMITTED THE AO AT THE TIME OF ORIGINAL ASSESS MENT OBTAINED VARIOUS DETAILS ABOUT THE ACQUISITION, EXCHANGE AND SALES OF THESE SHARES AS ON 31.3.2005, 06 & 07 TOGETHER WITH ACTUAL MARKET PRIC E ON THE DATE OF PURCHASE, SALE AND THE SALE AND PURCHASE PRICE , CONSIDERED T HE AVERAGE 10 WEEK PRICE OF THE SHARES ON THE DATE OF TRANSACTION , WHETHER THESE TRANSACTIONS WERE PERMITTED BY SEBI, DETERMINATION OF COA U/S 49 ETC AND THEN PASSED THE ORIGINAL ASSESSMENT ORDER. THEN, THE AR SUBMITTED T HAT THE REASSESSMENT :-7-: ITA NO. 333/MDS/2017 PROCEEDINGS HAVE BEEN INITIATED WITHOUT ANY NEW MAT ERIAL BEING AVAILABLE ON RECORD TO FORM A BASIS FOR 'REASON TO BELIEVE' THAT INCOME HAS ESCAPED ASSESSMENT, THE PROCEEDINGS INITIATED BY THE LD. AO UNDER SECTION 147 AMOUNTS TO CHANGE OF OPINION AND IS LIABLE TO BE QU ASHED AS THE COMPUTATION OF CAPITAL GAINS HAD BEEN CONSIDERED DURING THE COU RSE OF THE REGULAR ASSESSMENT UNDER SECTION 143(3) AND WHEN THE REASON S FOR REOPENING THE ASSESSMENT WERE DROPPED OR NOT PURSUED WITH, THE LD . AO LOSES HIS JURISDICTION TO CONTINUE WITH THE REASSESSMENT PROC EEDINGS AND SHOULD HAVE DROPPED THE PROCEEDINGS FORTHWITH. THE LD. CIT(A) E RRED IN STATING THAT THE LD. AO HAS FOLLOWED DUE PROCEDURE AND REOPENED ASSE SSMENT ON TANGIBLE MATERIAL WHICH HAS LIVE-LINK WITH THE FORMATION OF BELIEF THAT INCOME HAS ESCAPED ASSESSMENT WHEN NO NEW TANGIBLE MATERIAL WA S BROUGHT ON RECORD FOR CARRYING OUT THE ASSESSMENT UNDER SECTION 147 OF TH E ACT. PER CONTRA, THE DR RELIED ON THE ORDERS OF THE AO & THE CIT (A). 4. WE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH RELEVANT MATERIAL. THE AO RECORDED THE FOLLOWING REASONS, AS EXTRACTED FRO M THE ORDER OF THE CIT(A): IT IS NOTICED THAT DURING THE PREVIOUS YEAR RELEVA NT TO A. Y 2007-08, THE ASSESSEE HAS SOLD 196165 SHARES OF M/S. RENE (MADRA S) LTD AND ADMITTED RS.10514444/- AS LTCG DURING THE YEAR. HOW EVER, IT IS NOTICED WHILE ADOPTING THE COST OF ACQUISITION IN WORKING O UT THE CAPITAL GAINS IN RESPECT OF THE ABOVE SALE OF SHARES, THE ASSESSEE H AS ADOPTED HIGHER FIGURE BASES ON THE SHARE PURCHASE AGREEMENT CONSEQ UENT TO THE DEMERGER OF THE ABOVE COMPANY. SINCE THE SALE OF 19 6165 SHARES :-8-: ITA NO. 333/MDS/2017 INCLUDED 95409 SHARES ACQUIRED BEFORE THE DEMERGER, THE COST OF ACQUISITION SHOULD BE ARRIVED AT BASED ON THE PROPO RTION OF SHARES HELD ORIGINALLY ALLOTTED THEREAFTER AS PER THE SHARE PUR CHASE AGREEMENT. IN OTHER WORDS, THE COST TO BE ADOPTED WILL BE PROPORT IONATE COST OF THE SHARES HAD IN REVL ORIGINALLY AND AS PER THE SPA AN D ALSO THE ACTUAL COST SHARES ACQUIRED THROUGH PREFERENTIAL ALLOTMENT CORR ESPONDING TO THE SHARES ALLOTTED BYWAY OF SHARE PURCHASE AGREEMENT A ND NOW SOLD. IT IS ALSO NOTICED THAT THE ABOVE ACQUISITION / SALE IS O NLY A BUY BACK OF THE SHARES AND THEREFORE FALLS UNDER SECTION 46A OF THE I.T. ACT CONSEQUENTLY THE REDUCED RATE OF 10% CAN BE APPLIED ONLY TO CAPI TAL GAINS COMPUTED U/S 48 AND NOT U/S 46A. IN VIEW OF THE ABOVE, I HAV E REASONS TO BELIEVE INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. FROM THE ABOVE, IT IS CLEAR THAT THE AO DID NOT HAV E ANY NEW MATERIAL FOR INITIATING THE IMPUGNED REASSESSMENT PROCEEDIN GS AND WHAT HE HAS DONE IN THIS CASE AMOUNTS TO A CHANGE OF OPINION WHICH WAS FORMED EARLIER. THE ASSESSEE HAS DISCLOSED FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR ITS ASSESSMENT AT THE TIME OF ORIGINAL ASSESSMENT ITSEL F .THE AO HAS NOT ESTABLISHED THE REASON FOR THE FAILURE ON THE PART OF THE ASSESSEE. HENCE, THE REASSESSMENT PROCEEDINGS IS LIABLE TO BE QUASHED F OR THE ELABORATE REASONS CANVASSED BY THE ASSESSEE, SUPRA, AND HENCE WE QUA SH THE REASSESSMENT PROCEEDINGS. 4.1. THE AR ALSO INVITED OUR ATTENTION TO TH E PAGES 89 TO 108 OF THE PAPER BOOK AND MADE THE SAME SUBMISSIONS WHICH WERE EXTRACTED ABOVE. HE FURTHER SUBMITTED THE FACT THE AO HAD PASSED A REC TIFICATION ORDER ON THE :-9-: ITA NO. 333/MDS/2017 BASIS THAT THE SHARES OF RANE (MADRAS) LIMITED WERE LISTED AND HENCE, THE CONCLUSION OF THE LD. CIT (A) THAT RANE (MADRAS) LI MITED IS PRIVATE COMPANY IS BASELESS, THE LD. CIT(A) ERRED IN CONCLUDING THAT, RANE (MADRAS) MANUFACTURING LTD (CURRENTLY KNOWN AS RANE (MADRAS) LTD.) IS A PRIVATE LIMITED COMPANY, WHEN THE SAME IS PUBLIC LIMITED COMPANY AN D THE INFORMATION ABOUT THE COMPANY IS AVAILABLE ON PUBLIC DOMAIN , THE PRO MOTERS ARE SIPHONING OFF FUNDS FROM PUBLIC LIMITED COMPANIES BELONGING TO TH E GROUP BY SALE OF SHARES OF THE PROMOTERS AMONG THE GROUP CONCERNS WHEN SUCH SALE OF SHARES WERE DONE BY OFFERING THE CAPITAL GAINS ARISING FROM THE SALE TO TAX, THE SALE OF ONE GROUP COMPANY'S SHARE BELONGING TO THE PROMOTER TO ANOTHER GROUP COMPANY IS INSIDER TRADING WITHOUT APPRECIATING THE FACT TH AT THE CAPITAL GAINS ARISING ON SALE OF SHARES BY THE PROMOTER WAS DULY OFFERED TO TAX AND IN ARRIVING TO A CONCLUSION THAT THE ASSESSEE SHOULD BE TAXED UNDER SECTION 56(2)( VII) ( C) OF THE ACT WITHOUT APPRECIATING THE FACT THAT THE AMOU NT WAS RECEIVED IN EXCHANGE OF SALE OF SHARES HELD BY THE ASSESSEE IN RANE (MADRAS) LTD. (EARLIER KNOWN AS RANE MADRAS MANUFACTURING LTD.) A ND THAT SUCH SHARES WERE HELD POST A COURT APPROVED SCHEME OF DEMERGER ETC. AFTER HEARING THE RIVAL SUBMISSIONS, WE DO NOT FIND ANY MERIT IN THE ORDER OF THE CIT (A) AND HENCE ALLOW THE ASSESSEES APPEAL ON MERIT ALSO. 5. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. :-10-: ITA NO. 333/MDS/2017 ORDER PRONOUNCED ON MONDAY, THE 20 TH DAY OF JUNE, 2017 AT CHENNAI. SD/- ( ) (GEORGE MATHAN) ' # /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) # /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 20 TH JUNE, 2017 JPV ' *34 54 /COPY TO: 1. &/ APPELLANT 2. *+& /RESPONDENT 3. 6 ( )/CIT(A) 4. 6 /CIT 5. 4 * /DR 6. /GF