Income Tax Appellate Tribunal - Hyderabad
Dcit, Circle-14(1), Hyd, Hyderabad vs Sri Krishna Trust, Hyd, Hyderabad on 21 December, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA No. Asst. Year Appellant Respondent
642/Hyd/15 2011-12 M/s. Sri Krishna Trust,
The Deputy HYDERABAD
Commissioner of [PAN: AAKTS3353A]
643/Hyd/15 2011-12 Income Tax, M/s. Rukmini Devi
Trust,
Circle-14(1) HYDERABAD
[PAN: AABTR7819K]
644/Hyd/15 2011-12 HYDERABAD M/s. Padmavathi Trust,
HYDERABAD
[PAN: AABTP9199E]
933/Hyd/16 2012-13 M/s. Sri Krishna Deva
Raya Trust,
HYDERABAD
[PAN: AAKTS3354H]
934/Hyd/16 2012-13 M/s. Padmavathi Trust,
The Asst. HYDERABAD
Commissioner of [PAN: AABTP9199E]
935/Hyd/16 2012-13 Income Tax, M/s. Pinocchio Trust,
HYDERABAD
Circle-14(1), [PAN: AABTP9200A]
936/Hyd/16 2012-13 M/s. Annapurna Devi
HYDERABAD Trust,
HYDERABAD
[PAN: AADTA1306Q]
937/Hyd/16 2012-13 M/s. Rukmini Devi
Trust,
HYDERABAD
[PAN: AABTR7819K]
938/Hyd/16 2012-13 M/s. Cindrella Trust,
HYDERABAD
[PAN: AABTC2743H]
1026/Hyd/16 2012-13 M/s. Sri Venkateswara
The Income Tax Trust,
Officer, HYDERABAD
Ward-14(1), [PAN: AAKTS3355G]
1027/Hyd/16 2012-13 HYDERABAD M/s. Sri Krishna Trust,
HYDERABAD
[PAN: AAKTS3353A]
For Revenue : Shri A. Sitarama Rao, DR
For Assessee : Shri S. Rama Rao, AR
Date of Hearing : 24-11-2016
Date of Pronouncement : 21-12-2016
:- 2 -: ITA Nos. 642, 643, 644/Hyd/15
933 to 938, 1026 & 1027/Hyd/16
ORDER
PER BENCH :
These batch of appeals are by Revenue against the separate but common orders of the Ld. Commissioner of Income Tax (Appeals)-VI, Hyderabad. The issue being similar and has a common set of facts, these appeals are heard together and decided by this common order. The issue in the present appeals by the Revenue is whether the gain from sale of shares by the trust(s) has to be treated as 'income from business' or 'income from capital gains'?
2. Briefly stated, Shri Boppana Satyanarayana Rao and his family members are involved in the activity of education and are founder trustees of Chaitanya Group of Educational Institutions. Smt. Boppana Seema and Smt. Boppana Sushmasri and other family members are trustees of these eleven trusts. They were the owners of 10,000 shares (of Rs. 10/- each) of a private limited company, M/s. K-12 Education Management Pvt. Ltd (M/s. K-12) This company does not run any educational institution but manages some of the services to be rendered to the group educational institutions. Some of the shares were settled with the trusts as corpus for the benefit of family members. The shares in M/S K-12 were ultimately transferred to M/s. Varsity Education Management Pvt. Ltd. The share value fixed was at Rs. 2 Lakhs per share. By way of this transfer of shares, about Rs. 200 Crores was received by these trusts and other members. This money in turn was a remittance from M/s. NSR PE Mauritius LLC, the transactions of which were approved by the RBI. The trusts were formed in March, 2011 and the trustees have settled some of the shares as capital in the trust(s), which in turn was sold either :- 3 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 during the financial years relevant for AY. 2011-12 or for AY. 2012-
13. The details of the shares received, shares sold, consideration and the capital gain offered are as under:
Name of the Date of No. of Asst. No. of Amount of Capital gain Trust & PAN No. Institution shares Year shares sale admitted (Rs) settled sold consideration (Rs)
1.Padmavathi 11.03.2011 625 2011- 187 3,74,00,000 3,73,98,130 Trust - 12 AABTP9199E 11.03.2011 2012- 438 8,75,00,000 8,74,95,164 13
2. Sri Krishna 11.03.2011 625 2011- 188 3,76,00,000 3,75,98,120 Trust - 12 AAKTS3353A 11.03.2011 2012- 437 8,75,00,000 8,74,95,175 13
3. Rukmini Devi 11.03.2011 625 2011- 188 3,76,00,000 3,75,98,120 Trust - 12 AABTR7819K 11.03.2011 2012- 437 8,75,00,000 8,74,95,175 13
4. Sri 11.03.2011 625 2012- 438 8,75,00,000 8,74,95,164 Venkateshwara 13 Trust -
AAKTS3355G
5. Sri Krishna 11.03.2011 1250 2012- 1250 25,00,00,000 24,99,86,200 Devaraya Trust - 13 AAKTS3354H
6. Pinocchio 11.03.2011 1250 2012- 1250 25,00,00,000 24,99,86,200 Trust - 13 AABTP200A
7. Annapurna 11.03.2011 2500 2012- 2500 50,00,00,000 49,99,72,400 Devi Trust - 13 AADTA1306Q 2.1. For the sake of analyzing the issue, the appeal in the case of M/s. Sri Krishna Trust is considered in detail.
ITA Nos. 642/Hyd/2015 & 1027/Hyd/2016:3. The assessee is a private family trust with Smt. Boppana Sushmasri and Smt. Boppana Seema as trustees. The trust was formed on 11-03-2011. The trust got 625 shares of M/s.
:- 4 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 K-12 towards corpus fund and out of the same, the trust sold 187 shares on 23-11-2011 for Rs. 3,74,00,000/- and balance 438 later for a consideration of Rs. 8,75,00,000/-. After reducing the cost of acquisition incurred in the hands of the donors, the trust admitted the balance as Long Term Capital Gain at Rs. 3,75,98,120/- for AY. 2011-12 and Rs. 8,74,95,175/- for AY. 2012-13.
4. After going through the above transactions, the AO was of the opinion that the Long Term Capital Gain admitted by assessee has to be treated as its 'business income'. While doing so, the AO primarily referred to the premium paid at Rs. 1,99,990/- for each share of Rs. 10/- of M/s. K-12 by the purchasing company M/s. Varsity Education Management Pvt. Ltd., relations between the shareholders of companies, interest of the trustees in the two companies vis-a-vis the other seven trusts. The AO was of the opinion that most of the trustees have taken benefit of the brand name 'Chaitanya Group of Educational Institutions' and so- much of the premium earned was nothing but an orchestrated transaction of business nature. The AO did not believe the basis for paying share premium by M/s. Varsity Education Management Pvt. Ltd., at a ratio of 1:20,000 for the shares of M/s. K-12. He also noted that there is no revenue activity for the year ending 31- 03-2011 and the funds were flown into company by M/s. NSR PE Mauritius LLC, and finally doubted the veracity of the transactions by paying the huge premium. Since the trustees of the appellant- trust were also directors of both M/s. K-12 and M/s. Varsity Education Management Pvt. Ltd., the AO was of the opinion that the transaction is not in the nature of normal sale and transfer of shares is nothing but an orchestrated transaction. He also held that the acquisition of shares of M/s. K-12 by M/s. Varsity :- 5 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 Education Management Pvt. Ltd., was with a sole motive of diverting investments to personal hands of 'beneficial owners' of the assessee- trust, who are also happened to be founder members of the Chaitanya Group. Holding so, the AO treated the capital gain offered as business receipts and taxed at higher rate of 30% than what was offered by assessee at 20%. Thus, there is no change in amount of income, but the rate of tax only.
5. Before the Ld.CIT(A), assessee objected to the treatment given by the AO in assessing the sale of shares as 'business transaction'. It was submitted that the trust has not acquired shares with any loan funds and the shares were not its stock-in- trade. It was further submitted that the shares were held as 'investment' and there was only one transaction of sale in the year. Since the companies are not at all connected with the brand name of 'Chaitanya', it was submitted that AO's action, while making various surmises and assumptions is not correct. In support of the contentions, apart from giving various details of the trusts, assessee relied on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Nadatur Holding & Investments Pvt. Ltd [210 Taxman 597], wherein it was held that solitary sale of shares by assessee cannot be treated as 'trade' or 'business' in the shares.
6. Ld.CIT(A) after going through the facts of the case and submissions of assessee held that the gain is to be assessed as 'capital gain' and not as a 'business income'. Ld.CIT(A) also noted that there is no relationship between the brand of 'Chaitanya Group' to that of transactions of M/s. K-12 / M/s. Varsity Education Management Pvt. Ltd., / M/s. NSR PE Mauritius LLC.
:- 6 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 Ld.CIT(A) was also of the opinion that trust transactions cannot be doubted just because the parties have not produced the investment agreement between M/s. NSR PE Mauritius LLC and M/s. Varsity Education Management Pvt. Ltd. Ld.CIT(A) also was of the opinion that except drawing some inferences, the AO has not brought any concrete material to substantiate that the share transfer of M/s. K- 12 to M/s. Varsity Education Management Pvt. Ltd., was an arranged one for the benefit of founder Members of the Chaitanya Group/beneficiary of the appellant trust. Ld.CIT(A) did not agree with the opinion of the AO about the absence of due diligence certificate in respect of M/s. K-12, stating that this aspect is the look out of the investing company and AO has no role to play when the gain and sale of shares was offered to tax. Ld.CIT(A) also noted that 'accepting without conceding that the shares of M/s. K-12 do not yield so much of premium going by its financials alone, the gains admitted by the appellant-trust could not be of this quantum'. It appears that for the margin of 10% of tax, the AO drew some un- verifiable inferences and went on to treat the transactions as 'business transactions'. The Ld.CIT(A) also noted that the assessee- trust has not purchased any shares in the open market or for that matter, has not done any other sale or purchase of shares other than the sale of its corpus fund shares assigned by the trustees. It was further held that going by this lone transaction, AO can not come to conclusion that this is a business transaction. Ld. CIT(A) followed the Hon'ble Karnataka High Court in the case of CIT Vs. Nadatur Holding & Investments Pvt. Ltd [210 Taxman 597] (supra). Finally, Ld.CIT(A) concluded as under:
"4.8 All through the assessment the Assessing Officer put his focus to prove that the transaction is an orchestrated transaction with a motive of diverting foreign investment to personal hands of the founder members of Chaitanya Group without appreciating the fact that the appellant-trust :- 7 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 has admitted huge capital gains from this very sale transaction. It is also pertinent to mention that the Assessing Officer has conducted a survey in this case along with other Trusts under his jurisdiction and connected with the transaction. Intriguingly, no findings of this survey were referred to in the assessment and there is no iota of any impounded material found contrary to the claims made by the appellant in its return of income. If the AO could not found anything contrary to the claims made in the return even after conducting a survey, summoning and recording statements from all the parties connected to the transaction, it is not understood, how the Assessing Officer went on to refer to the transactions not directly connected with the appellant-trust or its Trustees vis-a-vis the transactions of the two companies, the brand name of Sri Chaitanya and concluded that the transaction is a business transaction. The reference to the brand name Sri Chaitanya appears to have been stretched out of proportion by the Assessing Officer, where the Trustees of the appellantTrust are not in control/management of the Sri Chaitanya group of institutions. It is only referring to the relation of the trustees of the appellant-trust with the founders of the Sri Chaitanya Group of Educational Institutions, who are also not in control of the institutions at present, the Assessing Officer linked the transaction as orchestrated one for the benefit of the beneficiary of the trust.
4.9. Therefore, going by the above discussion, the sole transaction of transfer of shares carried by the appellant-trust cannot be termed as business transaction and the gain admitted thereon cannot be treated as income from business. The Assessing Officer is directed to treat the gain arising from the sale of shares of M/s K-12 to M/s. Varsity as long term capital gains in the hand appellant-trust".
Aggrieved by the order of the Ld.CIT(A), Revenue is in appeal.
7. Ld. DR referring to the formation of the trusts, the beneficiaries of each trust and the transactions undertaken by the trusts submitted that without there being any basis, the group has got more than 200 Crores and this orchestrated transaction in the form of sale by the trust has to be considered as 'business transaction'. He mainly reiterated the stand of the AO that sale of shares by the trust to M/s. Varsity Education Management Pvt. Ltd., amounts to business and not sale of investments, as a single isolated transaction can also be considered as a 'business'. It was further submitted that the group sold the shares for encashing the :- 8 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 goodwill of the name of Chaitanya and the sale of shares by M/s. K-12 to M/s. Varsity Education Management Pvt. Ltd., was for transfer funds to personal hands of Trustees. Ld. DR also submitted that this is a tax planning device to avoid taxation on sale of shares. As it is in the nature of business, AO was correct in treating the same as 'business income'.
8. Ld. Counsel however, referred to the transactions and submitted that these shares which were sold to M/s. Varsity Education Management Pvt. Ltd., are nothing but corpus fund shares, which were held as 'investments'. The fact that AO has not disputed the quantum of income declared itself indicate that there is no tax planning in this matter. In fact, it was submitted that Chaitanya Group of Institutions are 'tax exempt trusts' and assessee trust are 'tax paying trusts' being private discretionary trusts. It was submitted that if the group were to encash the goodwill of Chaitanya Group, the funds would have been directly received by the educational trusts which are exempt from tax. Instead, assessee group members chose to pay the taxes. Since assessee sold the corpus fund shares and has no other sale of share transactions, the transaction is rightly offered as capital gains. Ld. Counsel relied on the decision of the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT [116 ITR 1] and also the decision of the Hon'ble Karnataka High Court in the case of Karnataka High Court in the case of CIT Vs. Nadatur Holding & Investments Pvt. Ltd [210 Taxman 597] (supra).
9. We have considered the rival submissions and perused the details on record. First of all, some of the observations of the CIT(A) are not appropriate. CIT(A) has considered some extraneous :- 9 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 aspects in arriving at the decision. While coming to a decision as extracted in para 4.5, the Ld.CIT(A) opines that assessee-trust has admitted 'huge' capital gains. Whether capital gains are huge or not, it should be immaterial so long as the computation is correct. 'Huge' capital gains should not lead to a conclusion whether the transaction is genuine or not. Further, Ld.CIT(A) opines that there is no iota of any impounded material found contrary to the claims made by the appellant in its return of income. If AO has not brought any evidence on record, it is for the Ld.CIT(A) to call for the information and examine the issue rather than putting the blame on AO. CIT(A) is a quasi-judicial authority and has co-terminus powers with that of AO for enquiry and even enhancement of assessment so made. Another observation was that 'reference to the brand name 'Sri Chaitanya' appears to have been stretched out of proportion by the AO, where the trustees of the appellant-trust are not in control/management of Sri Chaitanya Group Institutions'. This observation of the CIT(A) is not correct and Sri Chaitanya Group of Educational Institutions are being run by Shri B. Srinivasa Rao and his family members, even as of now. These sort of illogical findings may affect the conclusions of the CIT(A). The Hon'ble Supreme Court in the case of CIT Vs. Daulat Ram Rawatmull [87 ITR 349] (SC) has observed as under:
"...............When a Court of fact acts on material partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the Court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. Likewise, if the Court of fact bases its decision partly on conjectures, surmises and suspicions and partly on evidence, in such a situation an issue of law arises [See Dhirajlal Girdharilal vs. CIT (1954) 26 ITR 736 (SC)].
14. In the case of Edwards (Inspector of Taxes) vs. Bairstow (1955) 28 ITR 579 (HL), the House of Lords dealt with this aspect of the matter. Viscount Simonds in that case observed :
:- 10 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 "For it is universally conceded that, though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think, fairly summarised by saying that the Court should take that course if it appears that the CITs have acted without any evidence or upon a view of the facts which could not reasonably be entertained."
Lord Radcliffe expressed himself in the following words :
"If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the Court must intervene."
15. The above observations were relied upon by Bhagwati, J. (speaking for the majority) in the case of Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181 (SC). The following proposition was laid down in that case :
"It follows, therefore, that facts proved or admitted may provide evidence to support further conclusions to be deduced from them, which conclusions may themselves be conclusions of fact and such inferences from facts proved or admitted could be matters of law. The Court would be entitled to intervene if it appears that the fact-finding authority has acted without any evidence or upon a view of the facts, which could not reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question."
Keeping the above principles in mind, we are of the opinion that CIT(A)'s order is vitiated by certain observations made which have no relevance for the decision. Consequently, we have examined independently the issues raised by the authorities.
10. Even though there is no dispute with the fact that these trusts are incorporated with a nominal corpus fund, the corpus was substantially enhanced by way of settling the shares of M/s. K-12 by the trustees for the benefit of one of the family members. The shares were held by assessee-trust as 'corpus fund' and shown as 'investments' in the asset and liability statement. After the sale :- 11 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 of shares, assessee-trust has offered the gain after reducing the cost of acquisition in the previous owner's hand.
11. The question that arose for consideration is whether the shares held by the trust and gain earned by the trust on sale of shares should be assessed as 'income from capital gain' or 'income from business'? As can be seen from the transaction, there is a solitary sale of shares received as corpus fund to M/s. Varsity Education Management Pvt. Ltd., at a premium. Receipt of very high premium may raise suspicion but that alone cannot be a basis for treating the transaction as 'business in nature'. In case of any suspicious nature, these can be examined in the hands of those companies, but as contended by Ld. Counsel there is no such doubt raised in these company cases, as the record indicate the investments as well as sale of shares were accepted by the respective AOs. The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT [116 ITR 1] (supra) has held that 'in the absence of any evidence of trading activity in case of purchase and re-sale of shares, it has to be held that profit arising from the re-sale is accretion to the capital'. The principles underlying the difference between the capital gain and business income were examined by the Hon'ble Supreme Court in the case of G. Venkataswami Naidu & Co., Vs. CIT [35 ITR 594]. The Hon'ble Supreme Court has clearly held that accretion to the capital does not become income merely because the original capital was invested in the hope and belief that it could raise value. Similar view is also held by the Hon'ble Karnataka High Court in the case of CIT Vs. Nadatur Holding & Investments Pvt. Ltd [210 Taxman 597] (supra).
:- 12 -: ITA Nos. 642, 643, 644/Hyd/15 933 to 938, 1026 & 1027/Hyd/16 11.1. In view of the judgements of Hon'ble Supreme Court and the facts and circumstances of the case, we agree with the final order of the CIT(A) that the solitary sale of shares by assessee- trust cannot be treated as trade or business in the shares. Moreover, as rightly pointed out by the Ld. Counsel in the case, even if the beneficiaries are taking advantage of the goodwill of M/s. Chaitanya Group of companies, the gain therein would be a capital gain only. Further, had these trusts are not created, the gain in the hands of individual share holders would still be assessed as 'Long Term Capital Gain' only. By forming these trusts and settling the amounts as corpus of the trusts, there is no benefit accrued to any party in these transactions, as the capital gain is taxable either in the hands of assessee or in the hands of the original shareholder of M/s. K-12. Looking at either way, there is no merit in the Revenue's contentions. In view of that we dismiss the Revenue's grounds.
12. Since the facts in other cases are also similar, for the reasons stated above, we reject the Revenue's contentions in all the other appeals.
13. In the result, all the Revenue appeals are dismissed.
Order pronounced in the open court on 21st December, 2016 Sd/- Sd/-
(D. MANMOHAN) (B. RAMAKOTAIAH)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated 21st December, 2016
TNMM
:- 13 -: ITA Nos. 642, 643, 644/Hyd/15
933 to 938, 1026 & 1027/Hyd/16
Copy to :
1. The Deputy Commissioner of Income Tax, Circle-14(1), Hyderabad.
2. The Asst. Commissioner of Income Tax, Circle-14(1), Hyderabad.
3. The Income Tax Officer, Ward-14(1), Hyderabad.
4. M/s. Sri Krishna Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
5. M/s. Rukmini Devi Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
6. M/s. Padmavathi Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
7. M/s. Sri Krishna Deva Raya Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
8. M/s. Pinocchio Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
9. M/s. Annapurna Devi Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
10. M/s. Cindrella Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
11. M/s. Sri Venkateswara Trust, 8-2-293/82/A/549/B, Road No. 27, Jubilee Hills, Hyderabad.
12. The Commissioner of Income Tax (Appeals)-VI, Hyderabad.
13. The Pr.Commissioner of Income Tax-VI, Hyderabad.
14. D.R. ITAT, Hyderabad.
15. Guard File.