Income Tax Appellate Tribunal - Mumbai
Vernan P. Trust, Mumbai vs Department Of Income Tax on 31 July, 2015
आयकर अपील
य अ धकरण "F " यायपीठ मब
ंु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE SHRI A.D. JAIN, JM AND SHRI N.K. BILLAIYA, AM
ी ए.डी. जैन, या यक सद य एवं ी एन. के. बलै या, लेखा सद य ।
आयकर अपील सं./I.T.A. No.5397/Mum/2013
( नधा रण वष / Assessment Year : 2010-11
A.C.I.T. 19(3), बनाम/ Vernan Private Trust,
Room No. 305, 3 r d floor, Vs. C/o IL & FS Trust
Piramal Chambers, Parel, Company Ltd.,
Mumbai - 400 012. Plot No. C-22, G Block,
Bandra Kurla Complex,
Bandra (East,
Mumbai - 400 051.
थायी ले खा सं . /PAN : AABTV2381C
(अपीलाथ! /Appellant) .. ("#यथ! / Respondent)
आयकर अपील सं./I.T.A. No. 5709/Mum/2013
( नधा रण वष / Assessment Year : 2010-11
Vernan Private Trust, बनाम/ A.C.I.T. 19(3),
C/o IL & FS Trust Room No. 305, 3 r d floor,
Vs.
Company Ltd., Piramal Chambers,
Plot No. C-22, G Block, Parel,
Bandra Kurla Complex, Mumbai - 400 012.
Bandra (East,
Mumbai - 400 051.
थायी ले खा सं . /PAN : AABTV2381C
(अपीलाथ! /Appellant) .. ("#यथ! / Respondent)
Assessee by Shri S.E. Dastur &
Shri Niraj Sheth
Revenue by : Shri G.M. Doss
ु वाई क' तार)ख / Date of Hearing
सन : 02-07-2015
घोषणा क' तार)ख /Date of Pronouncement : 31-7-2015
[
2 ITA 5397/M/13 & ITA 5709/M/12
आदे श / O R D E R
PER A.D. JAIN, J.M. :
ए.डी. जैन, या यक सद य These are cross appeals for A.Y. 2010-11. ITA No. 5397/Mum/2013 has been filed by the Department, whereas ITA No. 5709/Mum/2013 has been preferred by the assessee. Both the parties are aggrieved of the ld. CIT(A)'s direction to the A.O. to tax the gain arisen to the assessee from the sale of shares as capital gain. The Department says that the A.O. had correctly held this gain to be the assessee's business income. The assessee, on the other hand, contends that the gain was capital 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 assessee's appeal. As per the application seeking condonation of the delay, the assessee has contended in the accompanying affidavit (assessee's paper book 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 out of the sale of shares as business income and thereby denying the exemption on such income u/s 10(38) of the Act, was allowed by the ld. CIT(A) and the alternative grounds were not adjudicated, bonafide believing that the exemption had been granted to the assessee, the assessee did not file any appeal against the order passed by the ld. CIT(A); that it was on 20-8-2013, that the assessee received order dated 1-8-2013, passed by the A.O., giving effect to the ld. CIT(A)'s order; that it was seen that therein, the A.O. had relied on the directions of the ld. CIT(A) and, consequently had sought to tax the long term capital gain; that a notice of demand u/s 156 of the Act was thus issued, demanding Rs. 2,12,75,180/- from the assessee; that it is pursuant to the aforesaid 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 that it is due to this reason, 3 ITA 5397/M/13 & ITA 5709/M/12 that an inadvertent delay of 18 days has occurred in filing the appeal, which be ordered to be condoned.
3. Having considered the above contents of the affidavit accompanying the application for condonation of delay, we find the delay of 18 days in the filing of the assessee's appeal to be a bonafide delay. The 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.O's order giving 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 assessee's appeal vide order dated 5-6-2013. The certified 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 the 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 delineated in the affidavit, explains the bonafides of the assessee. The assessee 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 be 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 cause prevented the assessee from filing the appeal within time, the delay of 18 days, occurred in the filing of the assessee's appeal, is hereby condoned.
2. Coming to the merits of the case, the facts are that the assesse is a private Trust, having as its objective, to ensure an effective succession 4 ITA 5397/M/13 & ITA 5709/M/12 planning mechanism and intergenerational transfer of the Trust corpus and income. This Trust was created by the settlors, Shri Vineet Nayyar and his wife, Mrs. Reva Nayyar, by virtue of a Trust Deed dated 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 the 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 the assessee was asked to explain as to why this should not be done, the assessee 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., within seven days of the formation of the Trust. The assessee submitted a written explanation dated 11-2-2013. This comprehensive letter stands reproduced 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 Mahindra. It was observed that the main objective of the Trust was to ensure an effective succession planning mechanism and intergenerational transfer of the Trust corpus and income. It was observed that the shares were sold just about seven days after acquisition thereof, which was too short a period for 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 shares as investment, but to sell them, the sale of the shares was clearly a business activity and the profit arisen out of the sale was undoubtedly a business income 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. Aggrieved, the parties have filed their respective appeals before us.
5 ITA 5397/M/13 & ITA 5709/M/12
5. The ld. D.R. has contended that the ld. CIT(A) has erred in issuing the aforesaid direction to the A.O., for the transactions entered into by the assessee were clearly business transactions, inasmuch as 1,83,114 shares, which were held by the Trust in its corpus, were sold 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 the creation of the trust was not to hold the shares as investment, but to sell the same for earning profit; that the volume, frequency, continuity and regularity of transactions in a systematic manner for earning income through a Portfolio Manager, as correctly observed by the A.O., confirmed the activity as a business activity carried on by the assessee with the primary objective of maximizing the profit.
6. The ld. Counsel for the assessee, on the other hand, has reiterated the stand of the assessee before the taxing authorities. It has been contended that the Trust was brought into existence for the benefit of the three children of the settlors of the Trust. Attention has been drawn to the copy of the Trust Deed dated 24.3.2010, which has been placed in the assessee's 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 utilization 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 effective intergenerational transfer of wealth, and such other objectives, as are specifically detailed in Schedule I of the Trust Deed. It has been contended 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; and that the profit from the sale of the M/s Tech Mahindra shares was temporarily invested in liquid fund 6 ITA 5397/M/13 & ITA 5709/M/12 and post that, it was invested, as per the Trust Deed, to broaden the base of the investment, into more secured investments. Reliance 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 directed 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 (assessee's paper book, page 51):-
"The objects of the Trust primarily would be utilization of the Trust Corpus and the income generated thereon for the benefit and maintenance of the Beneficiaries to the Trust, ensuring effective intergenerational transfer of wealth and such other objects as are specifically detailed in Schedule 1 herein."
8. Schedule I to the Trust Deed (assessee's paper book, page 63) runs as follows:-
a. To ensure effective succession planning mechanism and intergenerational transfer of Trust Corpus and Income.
b. To provide for any financial or non-financial needs of existing and future Beneficiaries of the Trust including travel, medical, education. marriage, maintenance, insurance, payment of insurance premium or any other requirement which according to the Trustee is essential to ensure welfare and benefit of the Beneficiaries, 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 are unanimously recommended by the Beneficiaries.
It is evident from the above, that it is the utilization of the Trust corpus and the income arising therefrom, for the benefit of the 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, intergenerational transfer of wealth is sought to be ensured by an effective succession planning 7 ITA 5397/M/13 & ITA 5709/M/12 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 activities, immovable assets.
Clause (b) makes provision for consolidation and ring fencing of the assets.
9. Schedule II to the Trust Deed (assessee's paper book, pages 64-67), contain the list of the beneficiaries. Beneficial interest and distribution has been provided for during the life of the Settlors and post their demise, upon termination of the Trust. In Schedule III to the Trust Deed, (assessee's paper book, pages 68-71), the powers and duties of the Trust 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 Trust and the income generated therefrom for the benefit of the beneficiaries 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 assesse's paper 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 planning mechanism and intergenerational transfer of Trust corpus and income. It was stated that the long term capital gain of Rs. 14,69,09,814/-, earned 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/certificate is placed at the assessee's paper book, page 101. It reads thus:
8 ITA 5397/M/13 & ITA 5709/M/12 "26th 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 corpus of the aforementioned Trust on 26th March, 2010.
Scrip No. 1: Tech Mahindra Limited.
Demat Account No. Date of Qty Amount (Rs)
Purchase
1204470004464687 24 Oct. 08 26600 9,968,582.32
:IN 300214 26 March 07 573400 38,417,800.00
:10768294
Sincerely,
Sd/-
Vineet Nayyar
(Settlor Vernan Private Trust)"
Thus, it is evident that the shares were contributed by the Settlor of the Trust, towards the corpus of the Trust.
11. It is in the above factual background that it is to be seen whether the transfer or sale of shares by the assessee was in the nature of business/adventure in the nature of trade. As seen hereinabove, the six lacs shares of M/s Tech Mahindra Ltd. were contributed towards 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 generated therefrom in investment, so as to ensure the benefit of the Trustees. It needs to be seen as to whether the transfer is towards this avowed intention, or not. It has come on record by way of the assessee's written submission dated 31-3-2010 (assessee's 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 9 ITA 5397/M/13 & ITA 5709/M/12 allotted to Shri Vineet Nayyar, Settlor of the Trust 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., only about 4% shares were bought by the Settlor. Then, whereas under the ESOP, the shares were allotted on 26-3-2007, they were settled on the Trust only on 24-3-2010, which shows that it was not the intention of the Settlor to resell the shares immediately and thereby to make quick profit. Likewise, the balance 26,600 shares, acquired on 24-10-2008, were held till 24-3-2010, when the same were settled. The shares were not acquired/purchased by the assessee Trust itself. They were sold gradually and the proceeds arising from the sale thereof were invested in Mutual Funds/Debt Instruments or Government Securities, which are, undoubtedly, less risky investment modes.
12. Further, it is seen that, it is nowhere the case 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 doubted. Apropos the activity of sale of shares, in the facts, as discussed, we do not find it to be a business activity. The shares were treated as an investment 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 diversification 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 authorities buttresses the decision of sale of the shares immediately on constitution of the Trust, to be a prudent decision. Too, it is also on record that soon after the sale of the Tech Mahindra shares, the price thereof dipped substantially. 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, that the Trust is expressly 10 ITA 5397/M/13 & ITA 5709/M/12 prohibited from undertaking any business activity. Moreover, the avowed intention of the Trust as discussed hereinabove, has never been disproved and it is only that the alleged intention of carrying on business has been superimposed thereon. This has rightly been rectified by the ld. CIT(A) by making detailed observations regarding the observation of the A.O., that the intention of the Settlors themselves was to carry on business activity, being extraneous, a valid Trust having come into existence and such Trust having not been found to be ingenuine; that the acquisition 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 assessee's 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 creation of the Trust; and that holding the shares of just one corporate entity 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 undertaken by the assessee during the year under consideration, no business activity 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. However, this gain was claimed by the assessee as exempt u/s 10(38) of the Act. As per this provision, any income arising from the transfer of a long term capital asset, being an equity share in a company, shall not be included while computing the total income. This has not been taken into consideration by the ld. 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 assessable as capital gain exempt u/s 10(38) of the Act.
11 ITA 5397/M/13 & ITA 5709/M/12
15. For the deliberation made in the preceding paragraphs, 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 be justified. The same is accepted.
16. In the result, the appeal filed by the Department is dismissed and assessee's appeal is allowed.
Order pronounced in the open court on 31st July, 2015 ु े यायालय म0 1दनांकः 31-7-15 को क' गई ।
आदे श क' घोषणा खल
Sd/- sd-
(N.K. BILLAIYA) (A.D. JAIN)
लेखा सद य ACCOUNTANT MEMBER या यक सद य/JUDICIAL MEMBER
मुंबई Mumbai; 1दनांक Dated
[
व. न.स./ R.K., Sr. PS
आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :
1. अपीलाथ! / The Appellant
2. "#यथ! / The Respondent.
3. आयकर आयु?त(अपील) / The CIT(A)- 32, Mumbai
4. आयकर आय?
ु त / CIT- City-= 21, Mumbai
5. Bवभागीय " त नDध, आयकर अपील)य अDधकरण, मुंबई / DR, ITAT, Mumbai G Bench
6. गाडF फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स#याBपत " त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai