JM Financial Ltd. v. Dy. CIT

Case snapshot

Sections / provisions: 45; Capital gains; Business income; Set-off of capital loss

Questions before the Court / Tribunal

• Capital loss/share transactions: investment character, bonus shares and whether transaction can be labelled a colourable device.
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

I.T.A. No.3987/Mum/2015 (Assessment year : 2008-09) M/s J.M. Financial Ltd vs Deputy Commissioner of Income-tax- 141, Maker Chambers, 11, Nariman 4(3)(1), Mumbai Point, Mumbai-400 021 6th Floor, Room No.649, Aayakar PAN : AAACJ2590B Bhavan, Mumbai-400 APPELLANT RESPONDENT

I.T.A. No.3925/Mum/2015 (Assessment year : 2008-09) Deputy Commissioner of Income-tax- vs M/s J.M. Financial Ltd 4(3)(1), Mumbai 141, Maker Chambers, 11, Nariman th 6 Floor, Room No.649, Aayakar Point, Mumbai-400 021 Bhavan, Mumbai-400 020 PAN : AAACJ2590B APPELLANT RESPONDENT

Assessee represented by Dr K Shivram Department represented by Shri Ankush Kapoor CIT DR

2. The assessee is a holding company and has made investment in the joint venture in JM Morgan Stanley Security Pvt Ltd (JMMSSPL) in which the assessee is holding 49% (49 lakhs equity shares) along with Morgan Stanley (India) Securities Pvt Ltd (MSSPL) which holds 51% share. The assessee filed return of income for A.Y. 2008- 09 declaring total income at Rs.1191,60,94,839/-. The case was selected for scrutiny and the assessment order under section 143(3) was passed on 06/12/2010 assessing the total income at Rs.1761,62,51,490/-. During the year under consideration, the assessee has shown long term capital gain of Rs.1730,58,51,513/- on sale of shares in JMMSSPL to MSSPL. The Assessing Officer proceeded to treat this gain as the business income of the assessee for the reason that the assessee was in the business of shares and securities as a broker and was also involved in share trading business. The Ld.CIT(A) upheld the order of assessment by holding that the termination of the joint venture was to avoid commercial inconvenience accruing in the future as a joint venture and that termination was a result of split of business arrangement between the assessee and its partners.…

crores. According to the appellant since these shares were held as capital asset for more than 8 years therefore, the gain on sale has to be treated as LTCG. According to the revenue the same has to be treated as LTCG of business or profession. Both the parties filed elaborate written submissions and relied on various case laws to support their stand. The ld.Counsel for the assessee while concluding his arguments filed a copy of the decision of Hon‟ble Supreme Court in the case of Vodafone International Holding B.V. and submitted that all points have been answered in the elaborate decision of the Hon‟ble Apex Court running in to more than 250 pages. Since admittedly this decision was not available either before the AO or before the ld.CIT(A), therefore, considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issues afresh in the light of the decision o the Hon‟ble Apex Court cites supra and in accordance with law after giving due opportunity of being heard to the appellant. The AO shall also give opportunity to the appellant to furnish the details of the nature…

Appellant / assessee submissions

crores. According to the appellant since these shares were held as capital asset for more than 8 years therefore, the gain on sale has to be treated as LTCG. According to the revenue the same has to be treated as LTCG of business or profession. Both the parties filed elaborate written submissions and relied on various case laws to support their stand. The ld.Counsel for the assessee while concluding his arguments filed a copy of the decision of Hon‟ble Supreme Court in the case of Vodafone International Holding B.V. and submitted that all points have been answered in the elaborate decision of the Hon‟ble Apex Court running in to more than 250 pages. Since admittedly this decision was not available either before the AO or before the ld.CIT(A), therefore, considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to adjudicate the issues afresh in the light of the decision o the Hon‟ble Apex Court cites supra and in accordance with law after giving due opportunity of being heard to the appellant. The AO shall also give opportunity to the appellant to furnish the details of the nature…

7. The Ld.AR submitted that the shares are held as investments and reflected under the head “investments” in the financials of the assessee from year to year and that the assessee has earned substantial dividend on the said investments. Accordingly, the assessee is an investor and not a trader in respect of shares shown under the head „investments‟ and, therefore, the gain arising out of the sale of the said investments should be taxed under the head „capital gains‟. The Ld.AR also submitted that the assessee was not a trader in shares of JMMSSPL nor were the shares held as stock in

trade. The assessee was also not involved in the captive management of the company and, therefore, the consideration from sale of shares should be taxed under the head „capital gain‟. The Ld.AR argued that the Assessing Officer has erroneously treated amount received as a compensation for loss resulting from split of joint venture whereas in reality, the shares held were sold to the partner in the joint venture and as a result of the sale, the stock of the partner goes up from 51% to 100%. Therefore, the consideration received by the assessee is very much in the nature of capital gains from sale of shares. It is further submitted that the Assessing Officer treated the gain as a business income for the reason that the basis or arriving at the consideration is not on net worth of the joint venture. In this regard, the Ld.AR submitted that the valuation of consideration for sale of shares was not challenged by the department but the revenue has merely ascribed motive for the same saying that it was a transaction in the nature of ordinary business of the assessee incurred to avoid commercial inconvenience with no foundation and facts and with disregard for evidence on record. Another…

8. The Ld.DR, on the other hand, submitted that –  Ld. CIT(A) has not appreciated the fact that at the very outset when the assessee entered in the Joint Venture with the Morgan Stanley Group in the year 1999, it was its "institutional equity business" (including the existing institutional equity sales and trading business assets of the assessee) which had been transferred by it to the Joint Venture Company, namely, J.M. Morgan Stanley Securities Pvt. Ltd. This fact is duly mentioned in Article 4 Section 4.01 (a) of the JV Agreement dated 21.01.1999 (Pg. Nos. 44 & 45 of the Paper book) It is therefore, logical to infer that finally, on 18.05.2007, when the assessee has exited this Joint Venture, the consideration received by the assessee is in fact the value of the assessee's stake in the Joint Venture business which had increased substantially in the 8 years during which the assessee was in this JV.  From the correspondence of the J.V. Company, namely, J.M. Morgan Stanley Securities Pvt. Ltd. (JMMSSPL) with Morgan Stanley placed by the assessee at Pg. Nos. 223 to 242 of this paper book, it is seen that the assessee had engaged in protracted negotiations to determine the amount…

Revenue / respondent submissions

trade. The assessee was also not involved in the captive management of the company and, therefore, the consideration from sale of shares should be taxed under the head „capital gain‟. The Ld.AR argued that the Assessing Officer has erroneously treated amount received as a compensation for loss resulting from split of joint venture whereas in reality, the shares held were sold to the partner in the joint venture and as a result of the sale, the stock of the partner goes up from 51% to 100%. Therefore, the consideration received by the assessee is very much in the nature of capital gains from sale of shares. It is further submitted that the Assessing Officer treated the gain as a business income for the reason that the basis or arriving at the consideration is not on net worth of the joint venture. In this regard, the Ld.AR submitted that the valuation of consideration for sale of shares was not challenged by the department but the revenue has merely ascribed motive for the same saying that it was a transaction in the nature of ordinary business of the assessee incurred to avoid commercial inconvenience with no foundation and facts and with disregard for evidence on record. Another…

Court / Tribunal analysis and reasoning

2. The assessee is a holding company and has made investment in the joint venture in JM Morgan Stanley Security Pvt Ltd (JMMSSPL) in which the assessee is holding 49% (49 lakhs equity shares) along with Morgan Stanley (India) Securities Pvt Ltd (MSSPL) which holds 51% share. The assessee filed return of income for A.Y. 2008- 09 declaring total income at Rs.1191,60,94,839/-. The case was selected for scrutiny and the assessment order under section 143(3) was passed on 06/12/2010 assessing the total income at Rs.1761,62,51,490/-. During the year under consideration, the assessee has shown long term capital gain of Rs.1730,58,51,513/- on sale of shares in JMMSSPL to MSSPL. The Assessing Officer proceeded to treat this gain as the business income of the assessee for the reason that the assessee was in the business of shares and securities as a broker and was also involved in share trading business. The Ld.CIT(A) upheld the order of assessment by holding that the termination of the joint venture was to avoid commercial inconvenience accruing in the future as a joint venture and that termination was a result of split of business arrangement between the assessee and its partners.…

business operations in India, the timing of the exit, the continuity of business on such exit, etc. Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid income tax ranging from Rs. 3 crore to Rs. 250 crore per annum during the period 2002-03 to 2006- 07. Even after 11.02.2007, taxes are being paid by VIH ranging from 394 crore to Rs. 962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indirect taxes which also run in crores). Moreover, the SPA indicates “continuity” of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a “fly by night” operator/ short time investor. If one applies the look at test discussed hereinabove, without invoking the dissecting approach, then, in our view, extinguishment took place because of the transfer of the CGP share and not by virtue of various clauses of SPA. In a case like the present one, where the structure has existed for a considerable…

Operative decision and relief

considering the period of holding of the shares. In result the appeal of the revenue is dismissed.

19. We heard the parties and perused the material on record. We notice that the AO rejected the claim of set off of short term capital loss of Rs. 4,65,44,19,508/- and long term capital loss of Rs. 54,90,36,870/- on the ground that the assessee with the help of its own group companies made a colourable device to artificially create loss to cancel profit earned on sale of 49% shares to the J.V. and thereby evade the tax. For this proposition, he relied on the decision of Hon'ble Apex Court in the case of Mcdowell & Co. (supra). In the first round of appeal, the CIT(A) while upholding the action of the AO in rejecting the claim- of set off of such long term capital loss and short term capital loss relied on the decision in the case of Jannhavi Investment Pvt, Ltd. (304 ITR 276 Bom.) and Dahiben Umedbhai Patel vs. Normal-Jeans Hamilton & Others reported in 57 Comp. Case 700 Bom. and held that the computation of such loss by applying the provisions of section 55(2)(aa) is not correct. Accordingly the CIT(A) held that such loss shall not be allowed to be deducted or set off from income. In the second round of proceedings the lower authorities sustained the disallowance on the same…

23. It is observed by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) that an act which is otherwise valid in law cannot be treated as to evade tax merely on the basis of some suspicious underlying motive supposedly resulting in some economic detriment or prejudice to the Revenue. In the present case genuineness of the claim cannot be impeached. In his regard, we notice that the shares were sold by the assessee from the Demat account for which the consideration is received by the assessee and that shares sold had been issued under the ESOP scheme of the Trust where the options are being exercised by the assessee. We further notice that the assessee has also shown short term capital gain of Rs.4,95,00,000 on sale of 49.50 lakh shares of JMFPPL which supports the submission of assessee that the intention of the assessee was not purposely to reduce the payment of tax. On the other hand the revenue has not brought any material to controvert the contention of assessee. So we cannot countenance the action of Ld.CIT(A)/AO on this issue and uphold the claim of assessee. In view of these discussion and considering the decisions of the Hon'ble Supreme Court, we see no…

25. In result the appeal of the assessee is allowed and the appeal of the revenue is dismissed. Order pronounced in the open court on 04/08/2023.

Ratio and legal principle

• Whether shares generate business income or capital gains is determined by the factual/investment character of the holding and transaction evidence; a tax result alone cannot convert a genuine investment transaction into a colourable device.
• Where actual transfers, demat records, consideration and consistent investment treatment are established and Revenue shows no material proving sham, capital-loss consequences cannot be denied merely because they are tax advantageous.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with capital loss/share transactions: investment character, bonus shares and whether transaction can be labelled a colourable device. Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 45 - apply the exact version considered in the judgment.
• Capital gains - apply the exact version considered in the judgment.
• Business income - apply the exact version considered in the judgment.
• Set-off of capital loss - apply the exact version considered in the judgment.

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Different outcome / possible distinction

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