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2016 (9) TMI 158 - ITAT MUMBAI

2016 (9) TMI 158 - ITAT MUMBAI - TMI - Capital gain from transfer of shares - DTAA between India–Singapore - Held that:- No actual shares which has been transferred or alienated albeit a substantive and valuable right has been given in the shares, which has to reckoned as capital asset or property as per our discussion herein above. Hence, it is gains from the alienation of an asset or property and any gain from alienation of such kind of “property” will fall within the scope of Para 6 of Articl .....

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sessable under the head “capital gain”; and secondly¸ such a capital gain cannot be held to be taxable in India in terms of para 6 of para 13 of India-Singapore-DTAA. With these observation, the addition made by the AO and as confirmed by the CIT(A) is directed to be deleted. - ITA No. : 4313/Mum/2011, ITA No.: 4717/Mum/2013 - Dated:- 26-8-2016 - SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Appellant : Shri J P Shah For The Respondent : Shri Jasbir Chouhan PER .....

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ul Chandaria, which is against order dated 19.03.2010 passed by Ld. CIT (Appeals)-12, Mumbai for the quantum of assessment passed under section 143(3) r.w.s. 147 for the assessment year 2002-03, wherein following grounds have been raised:- 1. The CIT(Appeals) erred in upholding the validity of section 147 notice and section 147 assessment order. 2. The CIT(Appeals) erred in holding that income of ₹ 11,71,00,000/- has arisen to the assessee and is taxable in the hands of the assessee as inc .....

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ent of The Republic of Singapore. 4. The CIT(Appeals) failed to appreciate that the residential status of the assessee is non-resident and all the documents have been executed abroad, and therefore, even if income has arisen, it has not arisen in India nor through or from any property in India, any asset or source of income in India or transfer of capital asset situated in India. 5. The CIT(Appeals) failed to appreciate that call option agreement does not result into any income by itself; the in .....

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Equity Shares in an Indian based company, Purse Holding (India) Pvt. Ltd. (hereinafter referred to as PHIL) for sum of ₹ 5,66,00,260/-. PHIL was established as a Special Purpose Vehicle (SPV) along with ING Barring Mauritius, a company registered in Mauritius (hereinafter referred to as ING BM). Both PHIL and ING BM had invested in an Indian company named as ING Barring India Pvt. Ltd (hereinafter referred to as BI) having 2 directors, Mr. Ajay Sanghavi and Mr. Rajaraman. The BI was mainl .....

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M and first shareholders to sell their shares held in PHIL to BM. The call / strike price was agreed at US $ 1. As per Article 3.1, of the said agreement the entire consideration for grant of call option was at US $ 24,50,000 which was to be paid by BM to the first shareholders in their bank accounts. The right of call option was to be exercised within the period of 150 years and it was agreed that, upon the receipt of call notice and the payment of call value, the first shareholders shall be ob .....

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ursuance of aforesaid call option however, the said income was not offered to tax in India. Accordingly, a notice under section 148, dated 26.03.2009 was issued for reopening the case under section 147. The reasons recorded for reopening the case were as under:- Mr. Praful Chandaria is a non-resident and a tax resident of Singapore. It is seen that he has invested in the shares of the Indian company M/s Purse Holding India Pvt. Ltd (PHIL), a company registered in India and having its office at 4 .....

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option to purchase all the shares held by PHIL in ING Baring @ Re.1, with option period of 150 years. Simultaneously, Mr. Praful Chandaria and the other two nominee share holders of PHIL entered into another call option agreement with ING Baring Mauritius (BM) for call option of US$ 1. Mr. Praful Chandaria received US $ 24,50,000/- towards writing these options. It is seen that Mr. Praful Chandaria has given an undertaking dated 19.12.2001 stating that on account of valuable consideration alread .....

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eholding in PHIL in US $ 24,50,000. The gains arising to Mr. Praful Chandaria on account of these transfer of shares held in Indian company is taxable in India as per the provisions of section 5 & 9 of the I.T. Act. It is seen that income which has arisen in India in terms of section 5(2) r.w.s. 9(1) has not been offered to tax and no return of income was filed for the said assessment year 2002-03 by the Praful Chandaria. In the light of the above information and material on record, I have r .....

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him nor any money has been credited to his account. He has not transferred his shareholding in PHIL to BM till date and hence there is no question of receiving any amount of US $24,50,000. The AO however after taking note of the facts as narrated in foregoing paragraph and information received, further noted that, in pursuance of call option agreement as above, M/s DSK Legal Mumbai were appointed as Escrow Agent in respect of shares of PHIL under call option agreement between BI and PHIL. He ob .....

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ct mentioned in the said undertaking has been summarized in the assessment order in the following manner:- (i) Mr. Praful Chandaria holds 99.9% shares; Mr. Ajay Sanghavi holds one share and Mr. Jatin Pandya also holds only one share, who were the shareholders of PHIL. (ii) For valuable consideration already received, each of the PHIL shareholders have agreed with Barring Mauritius to execute and abide by the call option agreement dated 14.12.2001 entered into by the PHIL shareholders with BM in .....

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001 entered into by us with Barring Mauritius Ltd in respect of all the shares held by PHIL in ING Barring India Private Limited (c) Escrow agreement dated December 14, 2001 entered into by us with Barring Mauritius Ltd and DSK legal (Escrow Agent) in respect of the shares held by PHIL in ING Barring India Private Limited. (iv) For valuable consideration already received, the assessee has agreed with Barring Mauritius Ltd to execute the irrecoverable power of attorney dated 14.12.2001 in favour .....

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to any manner act otherwise than in accordance with the said undertaking and not told transfer the PHIL shares other than pursuant to the document set out above or to issue any further shares of PHIL. 6. After noting down the aforesaid facts, AO arrived to the conclusion that already consideration has been received by the assessee in pursuance of call option agreement. He further noted that, assessee had given irrevocable power of attorney dated 19.12.2001 to ING Bank NV to act as his lawful at .....

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f BM regarding remittance proceed of US $ 24,50,000 by which the assessee had authorized the Chairman of BM to remit the proceed on behalf of the Purse Finance Ltd with specific details of bank account in which the said amount was to be remitted. The relevant fact on this point as noted by the Ld. AO is as under:- A/C Baring India Investment Ltd (Fund I). US$ 1,000,000.00 A/C Baring India Investment Ltd (Fund II). US$ 1,232,173.61 A/C The Baring Asia Private Equity Fund. - Amount due on 18/06/20 .....

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9(1). In response to the show cause notice, the assessee had first objected to the validity of reopening under section 147, which as per the noting in the assessment order, AO has disposed off the said objection vide his order dated 16.12.2009. On merits, the assessee vide letter dated 18.12.2009, submitted that he is not tax resident of India and, therefore, he is not assessable in India. Assessee again reiterated that, he has not actually transferred any of his shares in PHIL to BM and, there .....

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as discussed earlier, it was evident that the assessee had received income through or from property in India / through or form an asset/source of income in India, through or from an asset/ source of income in India, through or from transfer of capital asset situated in India, therefore the consideration of USD 24,50,000/- equivalent to Indian ₹ 11,71,00,000/- (47.80 x 24,50,000) received by the assessee is taxable in India as per sec.5(2) r.w.s 9(1) of the I T Act. The amount received by t .....

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icle 13 of India- Singapore-DTAA. Even under the Domestic Law such capital gain cannot be taxed because, there is no cost while giving the rights on the shares by virtue of call option agreement. However the assessee reiterated its stand that, no money on account of call option agreement was received. It was contended that the said shares of PHIL could not have been sold for ₹ 11,17,00,000/- because, perusal of Balance sheet of PHIL and BI will reveal that they were incurring huge losses a .....

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ials as discussed by the AO, confirmed the order of the AO that the amount in question is to be taxed as income from other sources in terms of section 9(1)(i). As regards the assessee s contention with regard to taxing of the income as capital gain and then giving benefit of Article 13 of India-Singapore DTAA his relevant observation are as under:- The contention of the Ld. AR, that if all anything is taxable than it is capital gain only which is not taxable because of Article 13 of DTAA is not .....

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ire facts, gave his detailed submissions not only with regard to validity of notice under section 148 but also on merits. His main contention on validity of notice under section 148 is that, the notice has been issued after obtaining the necessary approval of Additional Director of Income-tax, Mumbai who is not the competent authority for granting approval on the satisfaction of the AO before issuing notice under section 148 in terms of section 151, because the competent authority in the case of .....

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rth of the company. The entire substance of the transaction has to be looked into and not merely picking up the facts from here and there. He pointed out that from the perusal of the terms of call option agreement it is clear that shares have not been transferred albeit mere right has been given on such shares. It is also an admitted fact that till date shares had not been transferred to BM and, therefore, why a company would will pay such a huge amount on the basis of call option agreement. Dur .....

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stated that, it cannot be the case here because no alienation of shares has been done. He further drew our attention that in the call option agreement between BM and PHIL and then between PHIL and BI, there is no mention about consideration of US $ 2.45 million has been received. He thus submitted that, here in this case, one should not go by the terms of agreement but in terms of actual state of affairs as well as Balance sheet, that is, the substance of the entire transaction. Regarding the r .....

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n two different years. 9. Without prejudice, Mr. Shah submitted that, if at all the alleged consideration of ₹ 11,17,00,000/- is held to be taxable in the hands of the assessee, then same has to be treated as capital gain because valuable right has been assigned by the assessee in favour of BM to transfer the shares which is nothing but a transfer of property within the ambit of section 2(14) r.w.s. 2(47). He pointed out that, this fact is clearly borne out from the following clauses / art .....

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ccordance with this Agreement; (iii) By Article 3.2 states: Within a period of 150 years Barings shall have the right to exercise the Call Option and acquire the Shares at the Call Value, subject to any regulatory approval , (iv) By Article 3.3 states: (i) To exercise the right set forth in Article 3.1, Barings shall send a written notice to the Purse Shareholders ( Call Notice ), with a copy to the Board, stating that Barings requires the Purse Shareholders to transfer the Shares to Barings. , .....

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es: An amount equivalent to the Call Value has been deposited by Barings with the Purse Shareholders as and by way of a deposit and/ or advance payment towards the Call Value, which shall stand appreciated as Call Value upon delivery to Barings of duly executed transfer forms of the Shares to be sold, accompanied by the relevant share-certificate(s) Hence, he submitted that, if it is a transfer of the property then in terms of Article 13(6), the same cannot be held to be taxable in India but onl .....

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d if such money has been received by the assessee, then it has to brought to tax under section 9(1)(1), because the same is arising out of transfer of property situated in India or from an asset and source of income in India. Hence it has been rightly taxed as income from other sources and not as capital gain . In a nutshell, he strongly relied upon the order of the CIT(A). As regards, the approval of notice under section 148 by Addl. CIT/DIT, he submitted that under the Income Tax Act, Jt. Comm .....

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from the material on record. The subject matter of dispute before us on merits is, whether the sum of US $2,450,000 which in terms of INR is 11,71,00,000/- can be held to be taxable in hands of the assessee in India. Admittedly, the assessee is tax resident of Singapore and is non-resident Indian. In case of non-resident, while taxing any income accrued or arising in India has to be seen from the perspective of the Treaty, which here in this case India-Singapore DTAA and if any benefit is provi .....

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the PHIL shareholders to sell their entire shareholding in PHIL. The strike price or the call option was agreed for US $ 1 and the consideration mentioned was US $ 2,450,000 and such a call option spread into period of 150 years. In common parlance, a call option is reckoned as a contract in which the holder (buyer) has the right (but not an obligation) to buy a specified quantity of a security/shares at a specified price (strike price) within a fixed period of time. For the writer (seller) of .....

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een given for perpetuity. Not only that, an irrevocable power of attorney has also been executed in favour of the ING Bank in respect of all the shares in PHIL confirming that, assessee will not at any time purport to revoke the same, which inter-alia shows that assessee has alienated a substantive and valuable rights as an owner of the shares in perpetuity, albeit without dejure alienating the shares itself. This aspect of the matter has also been highlighted by the Ld. AO in his order. From th .....

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, namely giving of right to sell shares at a determined price, has been alienated by the assessee and hence it cannot be held merely as a call option agreement simplicitor. 12. Now, the core issue/ question left to be decided is, as to how the amount is to be taxed and whether such an amount would be taxable in the hands of the assessee in India or not and under which head. The revenue s case is that, it is taxable as income from other sources and has been brought to tax in India by invoking the .....

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enation of shares in terms of the call option agreement which is evident from the various recitals and articles which have been incorporated and discussed above, but clearly a valuable and substantive right in the shares of an Indian company have been given to a non-resident company, that is Barring Mauritius. Under normal circumstances, no right in the shares is given away by way of call option , albeit only right to buy the shares at a strike price within a stipulated time period is given whic .....

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see shall not at any time purport to revoke the same. Such a bundle of substantive rights are generally not given under normal call-option agreements . In the peculiar facts of the present case, such an option right in the shares has to be reckoned as transfer/alienation of a valuable and substantive right, which would be a class of asset in itself, separate from shares which though continue to stand in the name of the assessee. Such a valuable rights/ interest in shares would certainly be a cap .....

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icle 13, which reads as under:- 1. Gains derived by a resident of Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a contracting State has in the other Contracting State has in the other Contracting State or of movable property pertaining to a f .....

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e only in the Contracting State of which the alienator is a resident. 4. Gains from the alienation of shares of the capital stock of a company the property of which consists principally, directly or indirectly, of immovable property situated in a Contracting State may be taxed in that state. 5. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in the State. 6. Gains from the alienation of any propert .....

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or alienated albeit a substantive and valuable right has been given in the shares, which has to reckoned as capital asset or property as per our discussion herein above. Hence, it is gains from the alienation of an asset or property and any gain from alienation of such kind of property will fall within the scope of Para 6 of Article 13, whereby, the taxing right has been given to the resident state, that is, the state of the alienator, which here in this case is Singapore. The allocation of tax .....

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DTAA. With these observation, the addition made by the AO and as confirmed by the CIT(A) is directed to be deleted. 14. In view of our finding given hereinabove, we do not feel it necessary to go into the other aspects of the arguments placed before us by the parties and also the arguments on the validity of the notice under section 148; as same are treated as academic. 15. In the result, appeal of the assessee is treated as allowed. 16. Now we shall take-up appeal filed by the assessee being IT .....

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es not result into any income by itself; the income or loss if at all will arise only when the option given under the agreement is exercised and the fact is that the option has not been exercised in Asst. year 2002-03. 4. The CIT(Appeals) erred in holding that income of ₹ 11,75,26,500/- has arisen to the assessee and is taxable in the hands of the assessee as income from capital gain. 5. The CIT(Appeals) erred in holding that the investment by the assessee-company in ING Bearings India Ltd .....

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ny amount, the alleged receipt of sales proceeds by a majority shareholder on relinquishment of the rights over the shares is taxable in the hands of the Company as the issue of taxability in the hands of the majority shareholder is challenged before higher tax authorities and has yet not reached finality 7. The CIT(Appeals) ought to have allowed the appeal in toto. 8. The assessee reserves its right to add, amend, alter, delete, change or modify any or all grounds of appeal before or at the tim .....

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Purse Holding (India) Pvt Ltd (PHIL) is assessed to be in this charge vide PAN AACCP 2854 N. In the AY 2002-03 the return was processed u/s 143(1) of the Act on 10.02.2003. No. scrutiny assessment has been completed in this case. In this case an information of tax evasion has been received from the Addl. DIT(IT), Range 1, Mumbai vide letter dated 30.03.2009. The context of the information is as under: I. The assessee company (PHIL) had invested in the shares of ING Baring India Ltd (B1), a NBFC .....

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tered in to a call option agreement with Barings Mauritius giving them an option to purchase all the shares held by PHIL in ING-Barings India Ltd. The consideration for this option was Re.1, the period of option was 150 years. However, on verification of returns filed by the assessee, it is noticed that the consideration accrued by the call option exercised by Investigation has further informed that the assessee has sold the shares @ 0.49/- as against to the striking rate of Re.1/- per share. Ap .....

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faction of Commissioner of Income-tax , who cannot be reckoned as competent authority, authorized to give approval for such satisfaction on the reasons recorded under section 151. Under the provisions of section 151, the necessary satisfaction on the notice has to be obtained from the Joint Commissioner of Income-tax. 19. On this issue, the revenue was asked by the bench to produce the necessary records so as to verify, whether the impugned proceedings u/s 148 have been initiated after obtaining .....

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y satisfaction of Additional CIT. The column has been left blank. Thus, nothing turns out from the document furnished by the Ld. DR as there is no satisfaction of Addl. CIT at all. On the contrary, the notice under section 148 dated 31.03.2009 mentions that this notice is being issued after obtaining the necessary satisfaction of Commissioner of Income-tax . The revenue could not produce any other document to show that the necessary approval of Joint Commissioner or Additional Commissioner has b .....

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oned in sub-section (2) of section 151. For the sake of reference section 151 is reproduced hereunder:- (1) No notice shall be issued under section 148 by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer, that it is a fit case for the issue of such notice. (2) In a case .....

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ioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under section 148, need not issue such notice himself . 20. Admittedly, in this case, sub-section (1) and sub-section (3) are not applicable, albeit sub-section (2) applies which provides that, no notice shall be issued under section 148 by the AO who is below the rank of Joint Commissioner unless Joint Commissioner is satisfied on the reasons recorded by th .....

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(Bom), that the powers which are conferred upon a particular authority have to be exercised by that authority alone and the satisfaction which the statute mandates of a distinct authority cannot be substituted by the satisfaction of another. Here, in this case also the satisfaction was given by the Commissioner of Income-tax instead of Joint Commissioner. The Hon ble High Court has cancelled the reassessment proceedings and the notice u/s 148 after observing and holding as under:- 6 The second g .....

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er after the expiry of 4 years from the end of the relevant Assessment Year unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice. The expression "Joint Commissioner" is defined in Section 2(28C) to mean a person appointed to be a Joint Commissioner of Income Tax or an Additional Commissioner of Income Tax under Section 117(1). In the present case, the record before the Court indicate that the A .....

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f the CIT (1) conveying approval to the proposal submitted by the Assessing officer. There is merit in the contention raised on behalf of the Assessee that the requirement of Section 151(2) could have only been fulfilled by the satisfaction of the Joint Commissioner that this is a fit case for the issuance of a notice under Section 148. Section 151(2) mandates that the satisfaction has to be of the Joint Commissioner. That expression has a distinct meaning by virtue of the definition in Section .....

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erior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority. Where a statute requires something to be done in a particular manner, it has to be done in that manner. In a similar situation the Delhi High Court in Commissioner of Income Tax Vs. SPL'S Siddhartha Ltd. (ITA No.836 of 2011 decided on 14 September 2011) held that powers which are conferred upon a particular authority have to be exercis .....

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