Mumbai ITAT: Purchase and sale of shares of other companies does not include purchase and sale of mutual funds

Equest India Pvt. Ltd. v. ITO, decided on 18^th February, 2011

ITA NO.3921/MUM/05

Assessment Year: 2001-02

Question/s before the Hon’ble Tribunal: Whether loss in purchase and sale of mutual funds is loss speculative business as it appears in the explanation to section 73 of the Income tax Act, 1961?

Relevant facts: A loss of Rs. 1,02,07,278/- which was treated as loss in speculative business also included loss of Rs.46,68,912/- relating transactions pertaining to units of mutual funds.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 4: “It was the contention of the ld. Counsel for the assessee that units of mutual funds cannot be treated as “purchase and sale of shares” so as to attract the provisions of Explanation to section 73 of the Act. We find force in the contention raised by the ld. Counsel for the assessee. We direct the Assessing Officer to verify the claim of the assessee with regard to the loss on sale of units of mutual funds and if the claim of the assessee is found to be correct to treat such loss as ordinary loss and not speculative loss.”

Mumbai ITAT: Prior to 2003, if Assessee has filed earlier returns, no penalty for non-filing of return in case returns filed in earlier years

M/s Noble Electric Co. v. Income Tax Officer, on 11^th February, 2011

ITA No. 1655/Mum/2007

Assessment Year: 2001-02

Question/s before the Hon’ble Tribunal: whether as per the explanation (3) to section 271(1)(c) as exists prior to 1.4.2003, the assessee’s non filing of the return of income for the assessment year under consideration would be deemed as concealment of particulars of income.

Relevant facts: The assessee is a partnership firm and did not file return of income u/s 139(1) within a period as prescribed under the Act. The notice under sect ion 142(1) was issued on 26.12.2001 requesting the assessee to file its return of income for the assessment year under consideration. The AO passed the assessment u/s 144(3) of the Act estimating the total income of the assessee at Rs.2,45,63,230/ - being the short term capital gain on sale of immovable property consisting of land and building vide agreement dated 28.9.2000 for a total consideration of Rs.2,60,00,000/ - . The penalty proceedings were initiated under the provisions of sect ion 271(1)(c) of the Act and a penalty of Rs.1,81,55,071/ - was imposed vide order dated 30.3.2006.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 7: “In view of the above decision of the Hon. Jurisdictional High Court , we are of the view that the assessee had already filed the returns of income and some of them are definitely within the time prescribed u/s 139(4) then non filing of the return for the assessment year under consideration would not be deemed as concealment of the particulars of the income on the part of the assessee as per explanation (3) as stood prior to 1.4.2003. Accordingly, in the facts and circumstances of the case, and in view of the decision of the hon. Jurisdictional High Court in the case of CIT V/s Lata Shantilal Shah the penalty is liable to be deleted.”

The decision is available here.

Kolkata ITAT: No segregation of amount paid for a share attributable to transfer and ‘controlling interest’ – The whole amount is to be taxed

ACIT, Kolkata v. R.K.B.K. Fiscal Services, decided on 3^rd February, 2011

I.T.A.No. 770/KOL/2010, inter-alia

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal:

(1) Whether the transaction in question involved in addition to and apart from the transfer of shares a transaction of transfer of controlling interest by the assessee namely the promoter group to Holcim and there was transfer of control of the company.

(2) If the answer to the first is in the affirmative, on the principles of apportionment what value out of the composite consideration received to be apportioned as value received for the transfer of controlling interest?

(3) Whether the value of controll ing interest is liable to capital gains tax?

Relevant facts: The assessee, in his return of income, disclosed short term capital gain of Rs.3,77,02,504/- and long term capital gain of Rs.7,27,34,858/- from off market transactions of sale of shares of M/s. Gujarat Ambuja Cements Ltd. to Holderind Investment Limited through their Authorized Representative, Mr. Paul Hungentobler (hereinafter referred to as Holcim Mauritius). Though pursuant to agreement with Holcim and the assessee [ assessee being one of the various parties, who entered into a joint agreement with Holcim ] the full value of consideration was Rs.105/- per share, it was contended by the assessee before the AO that the value of share was only Rs.74.20 per share and the balance of Rs.30.80 was paid for parting with the managerial control. In support of the above contention the valuation report prepared by Deloitte Haskins & Sells was also submitted. It was contended by the assessee that only Rs.74.20 could be taken as sale consideration received for transfer of shares and the balance amount of Rs.30.80 could not be taxed as the same was on account of transfer of capital asset which had no cost of acquisition.

Upholding the appeal of the department, the Hon’ble Tribunal held that:

Para 22.12: “In the facts and circumstances of the case, we are of the considered opinion that the amount received by the assessee for the said non-compete undertaking is squarely covered by section 28(va) of the Act.. It has nothing to do with transfer of controlling interest. We, therefore, hold that in terms of said agreement Rs.15/- per share is assessable as income under the head ‘business’ as per provision of section 28(va) of the Act.”

Para 22.16: “As regards the full value of consideration of transfer of shares of M/s.GACL as per agreement dated 28-01-06, the agreement itself states the same to be Rs.90/- per share. It has not been disputed by the ld. AR for the assessee that full value of sale consideration has no relationship with ‘market value’ of the capital asset. Thus, there is no question of determination of market value of impugned capital asset being share. In this view of the matter, the valuer’s report as submitted by the assessee has no relevance for adjudication of the issue at hand.”

Para 22.18: “We, therefore, hold that :-

a. The full value of consideration for transfer of impugned shares is Rs.90/- per share for the purpose of calculation of capital gains;

b. Rs.15/- per share is to be assessed as income under the head’ business’ as per section 28(va)”

The decision is available here.

Mumbai ITAT: No advance tax be deducted and no interest u/s 234B payable when TDS equals amount of tax payable

ADIT (International Taxation) v. Universal International Music BV, on 31^st January, 2011

ITA No.6063/M/2004; ITA No.9034/M/2004; ITA No.2304/M/2006; ITA No.5064/M/2006

Assessment Year: 2000-01, 2001-02, 2002-03, 2003-04

Question/s before the Hon’ble Tribunal: Whether the benefit of Article 12 of the Indo-Netherlands DTAA is applicable to the assessee?

Whether interest u/s 234B is liable to be charged as no advance tax was paid by the assessee?

Relevant facts: The assessee who was the tax resident of Netherlands within the meaning of Article 4 of Double Taxation Avoidance Agreement (DTAA) signed between India and Netherlands was engaged in Manufacturing of audio and visual recordings, the development, manufacture and exploitation of audio and visual carriers or combinations thereof and earning royalty on exploitation of music rights. The assessee sought benefit of article 12 of the India-Netherlands DTAA and offered to tax the royalty income @10%, while the AO sought to tax the income at 30% being that the assessee was not the beneficial owner of the intellectual property.

Dismissing the appeal of the department, the Hon’ble Tribunal held that:

Para 10.3: “In view of the foregoing decision we see no infirmity in the order of CIT(A) in coming to the conclusion that the assessee was the beneficial owner of the royalty and the same has to be taxed @ 10% for all the years.

Para 11.1: “The dispute is regarding levy of interest under section 234B. There is no dispute that entire income of the assessee was tax deductible at source under the provisions of section 195 and therefore in view of the provisions of section 209(1)(d), the advance tax payable by the assessee will be nil. This view is supported by several judgments including the judgment of Hon’ble jurisdictional High Court (313 ITR 187). We therefore see no infirmity in the order of CIT(A) deleting the interest and the same is therefore upheld.”

The decision is available here.

Mumbai ITAT: The liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s.271C

ACIT (TDS) v. American School of Bombay Education Trust, on 31^st January, 2011

I.T.A.Nos.6349 to 6351/Mum/2009

Assessment Year: 1997-98 to 1999-2000)

Question/s before the Hon’ble Tribunal: Whether action u/s 201(1) deeming an assessee in default is a necessary precondition to the levy of penalty u/s 271C?

Relevant facts: Briefly stated facts of the case are that a survey action u/s.133A was taken upon the assessee on 24-01-2006. Orders u/s. 201(1) and 201(1A) were passed by the DCIT (TDS). Thereafter, penalty was levied u/s.271C, inter alia, in respect of the years under consideration. When the matter came up before the ld. CIT(A), the assessee contended that the Tribunal vide order dated 01-07- 2009 in ITA Nos.3622 to 3624/M/07 has observed that the initiation of proceedings in the instant years was beyond the period of 6 years and hence barred by limitation. Considering the fact that the Tribunal has quashed the orders u/s.201(1) and 201(1A) in respect of these years, the ld. CIT(A) ordered for the deletion of penalty u/s.271C in these years, against which the Revenue has come up in appeals before us.

Upholding the appeal of the assessee, the Hon’ble Tribunal held that:

Para 3: “A bare perusal of this provision indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s.271C… Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.”

The decision is available here.