ASST CIT 19(3), MUMBAI V. VERNAN P. TRUST, MUMBAI

ITA 5397/MUM/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0883 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 06-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S E DASTUR
• Keywords: Gift; Business income

Judgement Text

F IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, M UMBAI BEFORE SHRI A.D. JAIN, JM AND SHRI N.K. BILLAIYA, A M .. , . . , ./ I.T.A. NO.5397/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 A.C.I.T. 19(3), ROOM NO. 305, 3 RD FLOOR, PIRAMAL CHAMBERS, PAREL, MUMBAI 400 012. / VS. VERNA N PRIVATE TRUST, C/O IL & FS TRUST COMPANY LTD., PLOT NO. C-22, G BLOCK, BANDRA KURLA COMPLEX, BANDRA (EAST, MUMBAI 400 051. ./ PAN : AABTV2381C ( ! / APPELLANT ) .. ( '# ! / RESPONDENT ) ./ I.T.A. NO. 5709/MUM/2013 ( / ASSESSMENT YEAR : 2010-11 VERNA N PRIVATE TRUST, C/O IL & FS TRUST COMPANY LTD., PLOT NO. C-22, G BLOCK, BANDRA KURLA COMPLEX, BANDRA (EAST, MUMBAI 400 051. / VS. A.C.I.T. 19(3), ROOM NO. 305, 3 RD FLOOR, PIRAMAL CHAMBERS, PAREL, MUMBAI 400 012. ./ PAN : AABTV2381C ( ! / APPELLANT ) .. ( '# ! / RESPONDENT ) A SSESSEE BY SHRI S.E. DASTUR & SHRI NIRAJ SHETH REVENUE BY : SHRI G.M. DOSS $ % & ' ( ) / DATE OF HEARING : 02-07-2015 *+,- ' ( ) / DATE OF PRONOUNCEMENT : 31-7-2015 [ ITA 5397/M/13 & ITA 5709/M/12 2 . / O R D E R PER A.D. JAIN, J.M . : .. , THESE ARE CROSS APPEALS FOR A.Y. 2010-11. ITA NO. 5397/MUM/2013 HAS BEEN FILED BY THE DEPARTMENT, WHEREAS ITA NO. 5 709/MUM/2013 HAS BEEN PREFERRED BY THE ASSESSEE. BOTH THE PARTIES A RE AGGRIEVED OF THE LD. CIT(A)S DIRECTION TO THE A.O. TO TAX THE GAIN ARIS EN TO THE ASSESSEE FROM THE SALE OF SHARES AS CAPITAL GAIN. THE DEPARTMENT SAY S THAT THE A.O. HAD CORRECTLY HELD THIS GAIN TO BE THE ASSESSEES BUSIN ESS INCOME. THE ASSESSEE, ON THE OTHER HAND, CONTENDS THAT THE GAIN WAS CAPIT AL GAIN EXEMPT FROM TAX U/S 10(38) OF THE I.T. ACT. 2. THERE IS A DELAY OF 18 DAYS IN THE FILING OF THE ASSESSEES APPEAL. AS PER THE APPLICATION SEEKING CONDONATION OF THE DELAY, T HE ASSESSEE HAS CONTENDED IN THE ACCOMPANYING AFFIDAVIT (ASSESSEES PAPER BOO K PAGES 75-77), THAT SINCE THE MAIN GROUND OF APPEAL RAISED BEFORE THE LD. CIT (A), CHALLENGING THE ASSESSMENT OF THE LONG TERM CAPITAL GAIN ARISING OU T OF THE SALE OF SHARES AS BUSINESS INCOME AND THEREBY DENYING THE EXEMPTION O N SUCH INCOME U/S 10(38) OF THE ACT, WAS ALLOWED BY THE LD. CIT(A) AN D THE ALTERNATIVE GROUNDS WERE NOT ADJUDICATED, BONAFIDE BELIEVING THAT THE E XEMPTION HAD BEEN GRANTED TO THE ASSESSEE, THE ASSESSEE DID NOT FILE ANY APPE AL AGAINST THE ORDER PASSED BY THE LD. CIT(A); THAT IT WAS ON 20-8-2013, THAT T HE ASSESSEE RECEIVED ORDER DATED 1-8-2013, PASSED BY THE A.O., GIVING EFFECT T O THE LD. CIT(A)S ORDER; THAT IT WAS SEEN THAT THEREIN, THE A.O. HAD RELIED ON TH E DIRECTIONS OF THE LD. CIT(A) AND, CONSEQUENTLY HAD SOUGHT TO TAX THE LONG TERM C APITAL GAIN; THAT A NOTICE OF DEMAND U/S 156 OF THE ACT WAS THUS ISSUED, DEMAN DING RS. 2,12,75,180/- FROM THE ASSESSEE; THAT IT IS PURSUANT TO THE AFORE SAID ORDER PASSED BY THE A.O., GIVING EFFECT TO THE LD. CIT(A)S ORDER, THAT THE ASSESSEE HAS BECOME AGGRIEVED AND HAS HAD TO PREFER THIS APPEAL; AND TH AT IT IS DUE TO THIS REASON, ITA 5397/M/13 & ITA 5709/M/12 3 THAT AN INADVERTENT DELAY OF 18 DAYS HAS OCCURRED I N FILING THE APPEAL, WHICH BE ORDERED TO BE CONDONED. 3. HAVING CONSIDERED THE ABOVE CONTENTS OF THE AFFI DAVIT ACCOMPANYING THE APPLICATION FOR CONDONATION OF DELAY, WE FIND THE D ELAY OF 18 DAYS IN THE FILING OF THE ASSESSEES APPEAL TO BE A BONAFIDE DELAY. TH E LD. CIT(A) HAD GRANTED THE EXEMPTION CLAIMED BY THE ASSESSEE U/S 10(38) OF THE ACT AND, THEREFORE, THERE WAS NO REASON FOR THE ASSESSEE TO PREFER ANY APPEAL THEREAGAINST BEFORE US. HOWEVER, IT WAS IN PURSUANCE TO THE A.OS ORDER GIV ING EFFECT TO THE ORDER OF THE LD. CIT(A), THAT THE NOTICE U/S 156 OF THE ACT AS ABOVE, WAS ISSUED TO THE ASSESSEE. IT IS THIS , WHICH HAS GRIEVANCED THE ASSESSEE, NECESSITATING THE FILING OF THE PRESENT APPEAL. THE DELAY IN QUESTION , I.E., THE DELAY OF 18 DAYS IN FILING THE APPEAL HAS OCCURRED IN THE PROCESS. THE LD. CIT(A) DECIDED THE ASSESSEES APPEAL VIDE ORDER DATED 5-6-2013. THE CE RTIFIED COPY OF THIS ORDER WAS RECEIVED BY THE ASSESSEE ON 27-6-2013. THE DUE DATE FOR FILING THE APPEAL WAS 26-8-2013. THE A.O.S ORDER, GIVING EFFECT TO T HE ORDER OF THE LD. CIT(A)S ORDER WAS PASSED ON 1-8-2013. THE COPY THEREOF WAS RECEIVED BY THE ASSESSEE ON 20-8-2013. THE PRESENT APPEAL ULTIMATELY GOT TO BE FILED ONLY ON 13-9- 2013. NOW, EVIDENTLY, THE FACTUAL MATRIX, AS DELINE ATED IN THE AFFIDAVIT, EXPLAINS THE BONAFIDES OF THE ASSESSEE. THE ASSESSE E ITSELF HAVING BECOME THE AGGRIEVED PARTY, AS ABOVE, AGAINST THE ORDER OF THE LD. CIT(A), OBVIOUSLY, IT CANNOT STAND TO GAIN BY INTENTIONALLY DELAYING THE FILING OF ITS APPEAL THEREAGAINST. MOREOVER, NO MALAFIDE INTENTION CAN B E ASCRIBED TO THE ASSESSEE, IN VIEW OF THE ABOVE FACTS, FOR DELAYING THE FILING OF THE APPEAL. 4. FOR THE ABOVE REASONS, FINDING THAT SUFFICIENT C AUSE PREVENTED THE ASSESSEE FROM FILING THE APPEAL WITHIN TIME, THE DE LAY OF 18 DAYS, OCCURRED IN THE FILING OF THE ASSESSEES APPEAL, IS HEREBY COND ONED. 2. COMING TO THE MERITS OF THE CASE, THE FACTS ARE THAT THE ASSESSE IS A PRIVATE TRUST, HAVING AS ITS OBJECTIVE, TO ENSURE A N EFFECTIVE SUCCESSION ITA 5397/M/13 & ITA 5709/M/12 4 PLANNING MECHANISM AND INTERGENERATIONAL TRANSFER O F THE TRUST CORPUS AND INCOME. THIS TRUST WAS CREATED BY THE SETTLORS, SHR I VINEET NAYYAR AND HIS WIFE, MRS. REVA NAYYAR, BY VIRTUE OF A TRUST DEED D ATED 24-3-2010. DURING THE YEAR, THE TRUST CARRIED OUT SHARE TRANSACTIONS. IN THE RETURN OF INCOME FILED, A PROFIT OF RS. 14.69 CRORES WAS SHOWN ON TH E SALE OF SHARES. THIS WAS OFFERED AS LONG TERM CAPITAL GAIN. HOWEVER, NO TAX WAS PAID ON SUCH GAIN AND EXEMPTION WAS CLAIMED U/S 10(38) OF THE ACT. THE A .O. PROPOSED TO TREAT THE GAINS AS THE BUSINESS INCOME OF THE ASSESSEE AND TH E ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THIS SHOULD NOT BE DONE, THE ASSE SSEE TRUST HAVING BEEN CREATED ON 24.3.2010 AND THE SHARES, TRANSFERRED TO THE D-MAT ACCOUNT ON 26-3-2010, HAVING BEEN SOLD ON 30-3-2010, I.E., WIT HIN SEVEN DAYS OF THE FORMATION OF THE TRUST. THE ASSESSEE SUBMITTED A W RITTEN EXPLANATION DATED 11-2-2013. THIS COMPREHENSIVE LETTER STANDS REPRODU CED IN THE IMPUGNED ORDER, AT PAGES 2 TO 7 THEREOF, COMPRISING PARA 4.1 OF THE ORDER. 3. THE A.O. OBSERVED, INTER ALIA, THAT THE SETTLORS OF THE TRUST HAD CONTRIBUTED SIX LACS EQUITY SHARES OF M/S TECH MAHI NDRA. IT WAS OBSERVED THAT THE MAIN OBJECTIVE OF THE TRUST WAS TO ENSURE AN EFFECTIVE SUCCESSION PLANNING MECHANISM AND INTERGENERATIONAL TRANSFER O F THE TRUST CORPUS AND INCOME. IT WAS OBSERVED THAT THE SHARES WERE SOLD J UST ABOUT SEVEN DAYS AFTER ACQUISITION THEREOF, WHICH WAS TOO SHORT A PERIOD F OR TREATING THE ACTIVITY AS AN INVESTMENT, RATHER THAN A BUSINESS. IT WAS OBSERVED THAT SINCE THE OBJECTIVE BEHIND CREATING THE TRUST WAS NOT TO HOLD THE SHARE S AS INVESTMENT, BUT TO SELL THEM, THE SALE OF THE SHARES WAS CLEARLY A BUS INESS ACTIVITY AND THE PROFIT ARISEN OUT OF THE SALE WAS UNDOUBTEDLY A BUSINESS I NCOME OF THE ASSESSEE. 4. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) DIRECTED THE A.O. TO TREAT THE GAIN ARISEN OUT OF THE PURCHASE AND SALE OF SHARES AS A CAPITAL GAIN, RATHER THAN BUSINESS INCOME, AS HELD BY THE A.O. A GGRIEVED, THE PARTIES HAVE FILED THEIR RESPECTIVE APPEALS BEFORE US. ITA 5397/M/13 & ITA 5709/M/12 5 5. THE LD. D.R. HAS CONTENDED THAT THE LD. CIT(A) H AS ERRED IN ISSUING THE AFORESAID DIRECTION TO THE A.O., FOR THE TRANSACTIO NS ENTERED INTO BY THE ASSESSEE WERE CLEARLY BUSINESS TRANSACTIONS, INASMU CH AS 1,83,114 SHARES, WHICH WERE HELD BY THE TRUST IN ITS CORPUS, WERE SO LD FOR A SUM OF RS. 16,14,74,624/-, WITHIN A PERIOD OF SEVEN DAYS FROM THE DATE OF ACQUISITION THEREOF, THAT OBVIOUSLY, AS CORRECTLY TAKEN NOTE OF BY THE A.O., THE CONDUCT OF THE ASSESSEE CLEARLY SHOWS THAT THE INTENTION FOR T HE CREATION OF THE TRUST WAS NOT TO HOLD THE SHARES AS INVESTMENT, BUT TO SELL T HE SAME FOR EARNING PROFIT; THAT THE VOLUME, FREQUENCY, CONTINUITY AND REGULARI TY OF TRANSACTIONS IN A SYSTEMATIC MANNER FOR EARNING INCOME THROUGH A PORT FOLIO MANAGER, AS CORRECTLY OBSERVED BY THE A.O., CONFIRMED THE ACTIV ITY AS A BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE WITH THE PRIMARY OBJECTI VE OF MAXIMIZING THE PROFIT. 6. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, HAS REITERATED THE STAND OF THE ASSESSEE BEFORE THE TAXING AUTHORITIES . IT HAS BEEN CONTENDED THAT THE TRUST WAS BROUGHT INTO EXISTENCE FOR THE B ENEFIT OF THE THREE CHILDREN OF THE SETTLORS OF THE TRUST. ATTENTION HAS BEEN DR AWN TO THE COPY OF THE TRUST DEED DATED 24.3.2010, WHICH HAS BEEN PLACED IN THE ASSESSEES PAPER BOOK, AT PAGES 48 TO 71 THEREOF. IT HAS BEEN POINTED OUT THAT THE TRUST DEED CLEARLY MENTIONS THE OBJECTIVE OF THE TRUST TO BE THE UTILI ZATION OF THE TRUST CORPUS, AND THE INCOME GENERATED THEREFROM, FOR THE BENEFIT AND MAINTENANCE OF THE BENEFICIARIES OF THE TRUST AND THE ENSURING OF AN E FFECTIVE INTERGENERATIONAL TRANSFER OF WEALTH, AND SUCH OTHER OBJECTIVES, AS A RE SPECIFICALLY DETAILED IN SCHEDULE I OF THE TRUST DEED. IT HAS BEEN CONTENDE D THAT THE SHARES IN QUESTION WERE NOT PURCHASED, AS WRONGLY OBSERVED BY THE A.O., BUT WERE GIFTED AND THAT IT IS A CASE OF SALE SIMPLICITOR OF THE CORPUS OF THE TRUST; THAT THE TRUST WAS SET UP ON 24-3-2010 AND THE SALE TOOK PLACE ON 29-3-2010; THAT IN THE NEXT YEAR, ALL THE SHARES WERE SOLD; AN D THAT THE PROFIT FROM THE SALE OF THE M/S TECH MAHINDRA SHARES WAS TEMPORARIL Y INVESTED IN LIQUID FUND ITA 5397/M/13 & ITA 5709/M/12 6 AND POST THAT, IT WAS INVESTED, AS PER THE TRUST DE ED, TO BROADEN THE BASE OF THE INVESTMENT, INTO MORE SECURED INVESTMENTS. RELI ANCE HAS BEEN PLACED ON SAROJ KUMAR MAZUMDAR VS. CIT, 37 ITR 242 (SC) AND ASHOK KUMAR JALAN VS. CIT, 187 ITR 316 (BOM). 7. WE HAVE HEARD THE PARTIES AND HAVE ALSO PERUSED THE RECORD. THE ISSUE IS AS TO WHETHER THE LD. CIT(A) HAS CORRECTLY DIREC TED THE A.O. TO TREAT THE GAIN IN QUESTION AS CAPITAL GAIN AND NOT BUSINESS INCOME , AS HAD BEEN DONE BY THE A.O. THE OBJECTS OF THE TRUST, AS VISUALIZED IN ITS TRUST DEED, ARE AS FOLLOWS (ASSESSEES PAPER BOOK, PAGE 51):- THE OBJECTS OF THE TRUST PRIMARILY WOULD BE UTILIZA TION OF THE TRUST CORPUS AND THE INCOME GENERATED THEREON FOR THE BEN EFIT AND MAINTENANCE OF THE BENEFICIARIES TO THE TRUST, ENSU RING EFFECTIVE INTERGENERATIONAL TRANSFER OF WEALTH AND SUCH OTHER OBJECTS AS ARE SPECIFICALLY DETAILED IN SCHEDULE 1 HEREIN. 8. SCHEDULE I TO THE TRUST DEED (ASSESSEES PAPER B OOK, PAGE 63) RUNS AS FOLLOWS:- A. TO ENSURE EFFECTIVE SUCCESSION PLANNING MECHANIS M AND INTERGENERATIONAL TRANSFER OF TRUST CORPUS AND INCO ME. B. TO PROVIDE FOR ANY FINANCIAL OR NON-FINANCIAL NE EDS OF EXISTING AND FUTURE BENEFICIARIES OF THE TRUST INCLUDING TRA VEL, MEDICAL, EDUCATION. MARRIAGE, MAINTENANCE, INSURANCE, PAYMEN T OF INSURANCE PREMIUM OR ANY OTHER REQUIREMENT WHICH ACCORDING TO THE TRUSTEE IS ESSENTIAL TO ENSURE WELFARE AND BENEFIT OF THE BENE FICIARIES, ETC. C. TO PROVIDE FOR CONSOLIDATION AND RING FENCING OF ASSETS. D. TO UNDERTAKE INVESTMENT ACTIVITIES IN IMMOVABLE ASSETS. E. TO CONTRIBUTE TO CHARITABLE INITIATIVES, WHICH A RE UNANIMOUSLY RECOMMENDED BY THE BENEFICIARIES. IT IS EVIDENT FROM THE ABOVE, THAT IT IS THE UTILIZ ATION OF THE TRUST CORPUS AND THE INCOME ARISING THEREFROM, FOR THE BENEFIT OF TH E CHILDREN OF THE SETTLORS, I.E., THE BENEFICIARIES OF THE TRUST, WHICH IS THE PRIME OBJECTIVE OF THE ASSESSEE TRUST. BY SUCH UTILIZATION OF THE TRUST CORPUS, INT ERGENERATIONAL TRANSFER OF WEALTH IS SOUGHT TO BE ENSURED BY AN EFFECTIVE SUCC ESSION PLANNING ITA 5397/M/13 & ITA 5709/M/12 7 MECHANISM. A READING OF CLAUSE (B) OF SCHEDULE I OF THE TRUST DEED EVINCES THE PROVISION FOR NEEDS OF THE BENEFICIARIES OF THE TRUST, EXISTING AS WELL AS FUTURE, SO AS TO ENSURE THEIR WELFARE AND BENEFIT. CLAUSE (B) OF SCHEDULE 1 PROVIDES AS AN OBJECT, TO UNDERTAKE INVESTMENT ACTI VITIES, IMMOVABLE ASSETS. CLAUSE (B) MAKES PROVISION FOR CONSOLIDATION AND RI NG FENCING OF THE ASSETS. 9. SCHEDULE II TO THE TRUST DEED (ASSESSEES PAPER BOOK, PAGES 64-67), CONTAIN THE LIST OF THE BENEFICIARIES. BENEFICIAL I NTEREST AND DISTRIBUTION HAS BEEN PROVIDED FOR DURING THE LIFE OF THE SETTLORS A ND POST THEIR DEMISE, UPON TERMINATION OF THE TRUST. IN SCHEDULE III TO THE TR UST DEED, (ASSESSEES PAPER BOOK, PAGES 68-71), THE POWERS AND DUTIES OF THE TR UST DEED ARE GIVEN. A CURSORY GLANCE AT THESE POWERS AND DUTIES MAKES IT ATONCE CLEAR THAT THESE ARE TOWARDS THE UTILIZATION OF THE CORPUS OF THE TR UST AND THE INCOME GENERATED THEREFROM FOR THE BENEFIT OF THE BENEFICI ARIES OF THE TRUST. 10. THE ASSESSEE FILED WRITTEN SUBMISSIONS DATED 27 -8-2012 BEFORE THE A.O. A COPY THEREOF IS TO BE FOUND AT THE ASSESSES PAPE R BOOK, PAGES 98-103. THEREIN, THE ASSESSEE SUBMITTED THAT THE PURPOSE OF THE TRUST WAS NOT TO CARRY OUT ANY BUSINESS, BUT TO MAKE INVESTMENT; AND THAT THE OBJECT OF THE TRUST WAS TO ENSURE AN EFFECTIVE SUCCESSION PLANNIN G MECHANISM AND INTERGENERATIONAL TRANSFER OF TRUST CORPUS AND INCO ME. IT WAS STATED THAT THE LONG TERM CAPITAL GAIN OF RS. 14,69,09,814/-, EARNE D ON THE SALE OF SHARES, WAS EXEMPT FROM TAX U/S 10(38) OF THE ACT. IT WAS STATED THAT THE TRUST HAD RECEIVED SIX LACS SHARES OF M/S TECH MAHINDRA FROM THE SETTLOR OF THE TRUST, AS THE CORPUS OF THE TRUST. THIS LETTER/CERTIFICAT E IS PLACED AT THE ASSESSEES PAPER BOOK, PAGE 101. IT READS THUS: ITA 5397/M/13 & ITA 5709/M/12 8 26 TH MARCH 2010 TO WHOMSOEVER IT MAY CONCERN THIS IS TO CONFIRM THAT IN MY CAPACITY AS A SETTLOR OF VERNAN PRIVATE TRUST, I HAVE CONTRIBUTED THE FOLLOWING SHARES TOWARDS THE C ORPUS OF THE AFOREMENTIONED TRUST ON 26 TH MARCH, 2010. SCRIP NO. 1: TECH MAHINDRA LIMITED. DEMAT ACCOUNT NO. DATE OF PURCHASE QTY AMOUNT (RS) 1204470004464687 24 OCT. 08 26600 9,968,582.32 :IN 300214 :10768294 26 MARCH 07 573400 38,417,800.00 SINCERELY, SD/- VINEET NAYYAR (SETTLOR VERNAN PRIVATE TRUST) THUS, IT IS EVIDENT THAT THE SHARES WERE CONTRIBUTE D BY THE SETTLOR OF THE TRUST, TOWARDS THE CORPUS OF THE TRUST. 11. IT IS IN THE ABOVE FACTUAL BACKGROUND THAT IT I S TO BE SEEN WHETHER THE TRANSFER OR SALE OF SHARES BY THE ASSESSEE WAS IN T HE NATURE OF BUSINESS/ADVENTURE IN THE NATURE OF TRADE. AS SEEN HEREINABOVE, THE SIX LACS SHARES OF M/S TECH MAHINDRA LTD. WERE CONTRIBUTED T OWARDS THE CORPUS OF THE TRUST. THESE SHARES WERE SOLD AND EXEMPTION U/S 10( 38) OF THE ACT WAS CLAIMED ON THE SALE PROCEEDS. NOW, THE VERY OBJECT OF THE TRUST WAS THE UTILIZATION OF THE TRUST CORPUS AND THE INCOME GENE RATED THEREFROM IN INVESTMENT, SO AS TO ENSURE THE BENEFIT OF THE TRUS TEES. IT NEEDS TO BE SEEN AS TO WHETHER THE TRANSFER IS TOWARDS THIS AVOWED INTE NTION, OR NOT. IT HAS COME ON RECORD BY WAY OF THE ASSESSEES WRITTEN SUBMISSI ON DATED 31-3-2010 (ASSESSEES PAPER BOOK, PAGES 32-47), FILED BEFORE THE LD. CIT(A), THAT OUT OF THE SIX LACS SHARES, CONTRIBUTED TOWARDS THE CORPUS OF THE TRUST, 96% WERE ITA 5397/M/13 & ITA 5709/M/12 9 ALLOTTED TO SHRI VINEET NAYYAR, SETTLOR OF THE TRUS T UNDER THE EMPLOYEE STOCK OPTION PLAN (ESOP FOR SHORT). THE REMAINING 26,000 SHARES WERE PURCHASED BY THE SAID SETTLOR, THAT IS TO SAY, THAT I.E., ONL Y ABOUT 4% SHARES WERE BOUGHT BY THE SETTLOR. THEN, WHEREAS UNDER THE ESOP, THE S HARES WERE ALLOTTED ON 26-3-2007, THEY WERE SETTLED ON THE TRUST ONLY ON 2 4-3-2010, WHICH SHOWS THAT IT WAS NOT THE INTENTION OF THE SETTLOR TO RES ELL THE SHARES IMMEDIATELY AND THEREBY TO MAKE QUICK PROFIT. LIKEWISE, THE BAL ANCE 26,600 SHARES, ACQUIRED ON 24-10-2008, WERE HELD TILL 24-3-2010, W HEN THE SAME WERE SETTLED. THE SHARES WERE NOT ACQUIRED/PURCHASED BY THE ASSESSEE TRUST ITSELF. THEY WERE SOLD GRADUALLY AND THE PROCEEDS ARISING F ROM THE SALE THEREOF WERE INVESTED IN MUTUAL FUNDS/DEBT INSTRUMENTS OR GOVERN MENT SECURITIES, WHICH ARE, UNDOUBTEDLY, LESS RISKY INVESTMENT MODES. 12. FURTHER, IT IS SEEN THAT, IT IS NOWHERE THE CAS E OF THE DEPARTMENT THAT THE TRUST IS A SHAM OR BOGUS TRUST. THE VALIDITY OF THE CORPUS OF THE TRUST, CORRECTLY NOTED BY THE LD. CIT(A), HAS NEVER BEEN D OUBTED. APROPOS THE ACTIVITY OF SALE OF SHARES, IN THE FACTS, AS DISCUS SED, WE DO NOT FIND IT TO BE A BUSINESS ACTIVITY. THE SHARES WERE TREATED AS AN I NVESTMENT ALL THROUGH AND NOT AS STOCK-IN-TRADE. THE BALANCE SHEET SAYS SO. NO FUNDS WERE BORROWED FOR THE ACTIVITY. ONLY ONE SALE/TRANSFER TOOK PLACE DURING THE YEAR UNDER CONSIDERATION. THE SALES WERE AFFECTED FOR DIVERSI FICATION OF PORTFOLIO, SO AS TO SECURE THE INVESTMENT AND TO TAKE ADVANTAGE OF THE BULLISH TREND OF THE TECH MAHINDRA SHARES, PREVAILING AT THE RELEVANT TIME. THE PRICE MOVEMENT OF THE SHARES, AS BROUGHT ON RECORD BEFORE THE TAXING AUTH ORITIES BUTTRESSES THE DECISION OF SALE OF THE SHARES IMMEDIATELY ON CONST ITUTION OF THE TRUST, TO BE A PRUDENT DECISION. TOO, IT IS ALSO ON RECORD THAT S OON AFTER THE SALE OF THE TECH MAHINDRA SHARES, THE PRICE THEREOF DIPPED SUBSTANTI ALLY. ALL THIS IS AN INDICATION TO THE FACT THAT THE ACTIVITY WAS NOT A BUSINESS ACTIVITY, NOR AN ADVENTURE IN THE NATURE OF TRADE. IT HAS ALSO BEEN TAKEN NOTE OF, CORRECTLY, BY THE LD. CIT(A) AND NOT REFUTED BY THE DEPARTMENT, T HAT THE TRUST IS EXPRESSLY ITA 5397/M/13 & ITA 5709/M/12 10 PROHIBITED FROM UNDERTAKING ANY BUSINESS ACTIVITY. MOREOVER, THE AVOWED INTENTION OF THE TRUST AS DISCUSSED HEREINABOVE, HA S NEVER BEEN DISPROVED AND IT IS ONLY THAT THE ALLEGED INTENTION OF CARRYI NG ON BUSINESS HAS BEEN SUPERIMPOSED THEREON. THIS HAS RIGHTLY BEEN RECTIF IED BY THE LD. CIT(A) BY MAKING DETAILED OBSERVATIONS REGARDING THE OBSERVAT ION OF THE A.O., THAT THE INTENTION OF THE SETTLORS THEMSELVES WAS TO CARRY O N BUSINESS ACTIVITY, BEING EXTRANEOUS, A VALID TRUST HAVING COME INTO EXISTENC E AND SUCH TRUST HAVING NOT BEEN FOUND TO BE INGENUINE; THAT THE ACQUISITIO N OF SHARES WAS NOT A VOLUNTARY PURCHASE MADE BY THE ASSESSEE TRUST, BUT THEY WERE CONTRIBUTED TO ITS CORPUS AT THE TIME OF THE VERY INCEPTION OF THE TRUST; THAT THE ASSESSEES CLAIM HOLDING PATTERN BY WAY OF DIVERSIFICATION OF ASSET WAS ALSO NOT REPELLED BY THE A.O.; THAT THE FACT THAT A PORTFOLIO MANAGER WAS APPOINTED IS SYNCHRONOUS WITH THE INTENT AND OBJECTIVE OF THE CR EATION OF THE TRUST; AND THAT HOLDING THE SHARES OF JUST ONE CORPORATE ENTIT Y NOT BEING DESIRABLE WAS A DECISION AS PER THE PRUDENCE OF THE TRUST. 13. WE, FOR THE ABOVE DISCUSSION, ARE AD IDEM WITH THE LD. CIT(A), IN ARRIVING AT THE CONCLUSION THAT FROM THE SALE OF SHARES UNDE RTAKEN BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION, NO BUSINESS AC TIVITY STANDS MADE OUT. 14. THEREFORE, WE UPHOLD THE ACTION OF THE LD. CIT( A) IN DIRECTING THE A.O. TO TREAT THE GAIN IN QUESTION AS A CAPITAL GAIN. HOWE VER, THIS GAIN WAS CLAIMED BY THE ASSESSEE AS EXEMPT U/S 10(38) OF THE ACT. A S PER THIS PROVISION, ANY INCOME ARISING FROM THE TRANSFER OF A LONG TERM CAP ITAL ASSET, BEING AN EQUITY SHARE IN A COMPANY, SHALL NOT BE INCLUDED WHILE COM PUTING THE TOTAL INCOME. THIS HAS NOT BEEN TAKEN INTO CONSIDERATION BY THE L D. CIT(A), THOUGH THIS PROVISION IS CLEARLY APPLICABLE TO THE FACTS OF THE CASE. ACCORDINGLY, THE GRIEVANCE OF THE ASSESSEE IS FOUND TO BE JUSTIFIED AND IS ACCEPTED AS SUCH. WE HOLD THAT THE PROFIT ON THE TRANSFER OF SHARES IS A SSESSABLE AS CAPITAL GAIN EXEMPT U/S 10(38) OF THE ACT. ITA 5397/M/13 & ITA 5709/M/12 11 15. FOR THE DELIBERATION MADE IN THE PRECEDING PARA GRAPHS, THE GRIEVANCE OF THE DEPARTMENT IS FOUND TO BE SHORN OF MERIT AND IT IS REJECTED AS SUCH, WHEREAS THE GRIEVANCE OF THE ASSESSEE IS FOUND TO B E JUSTIFIED. THE SAME IS ACCEPTED. 16. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED AND ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JULY, 2015 . ' *+,- $ /0 1 2 31-7-15 + ' 3& SD/- SD- (N.K. BILLAIYA) (A.D. JAIN ) ACCOUNTANT MEMBER /J UDICIAL MEMBER / $ & MUMBAI ; 1 DATED [ %.../ R.K. R.K. R.K. R.K. , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '# ! / THE RESPONDENT. 3. $ ?( () / THE CIT(A)- 32, MUMBAI 4. $ ?( / CIT- CITY-= 21, MUMBAI 5. B%C 3 '(DE , ) DE- , / $ & / DR, ITAT, MUMBAI G BENCH 6. 3 F G & / GUARD FILE. ! ( / BY ORDER, # B( '( //TRUE COPY// )/(* + ( DY./ASSTT. REGISTRAR) , / $ & / ITAT, MUMBAI