Bomi S. Billimoria v. ACIT ITAT ‘F’ Bench, Mumbai Before D. Manmohan (VP) and J. Sudhakar Reddy (AM)
ITA No. 2120/Mum./1998 A.Y. : 1993-94. Decided on: 30-6-2009
Counsel for assessee/revenue: Prakash Jotwani/ J. V. D. Langstieh
S. 48 – Amount received on transfer of shares under cashless option not liable to tax under the head ‘Income from Capital Gains’ since such option does not have cost of acquisition.
Per D. Manmohan :
Facts:
The assessee was an employee of Johnson & Johnson, Bombay which was a subsidiary of Johnson & Johnson, USA. Under stock option plan, the USA company granted to the assessee, on 7-12-1989, a cashless option to purchase 2500 shares of Johnson & Johnson, USA at a price of USD 57.88 per share which price was the fair market value of the stock on the day of granting the option. The Reserve Bank of India had approved the stock option scheme on the condition that there should not be any payment, either in India or abroad, for acquiring the shares.
During the previous year relevant to A.Y. 1993-94, on 13-8-1992, the assessee exercised his option to realise the value of the options under the scheme and accordingly sold 1000 shares in USA and received a sum of Rs.4,59,405 in Indian currency. After considering the amount retained in USD in EEFC Account and also the bank charges the net gain was computed at Rs.5,44,925. The assessee regarded this amount as a capital receipt not chargeable to tax.
The Assessing Officer (AO) held the profit on sale of option to be chargeable either as salary or short term capital gains or as speculation profit.
The CIT(A) held that the shares obtained under the ESOP were a capital asset and as they were held for less than 3 years, the gain was assessable as short term capital gain. He rejected the argument that as there was no ‘cost of acquisition’, ‘the capital gains were not assessable.
Aggrieved, the assessee preferred an appeal to the Tribunal. The issue before the Tribunal was whether the amount received by the assessee was liable to tax under the head’ capital gains’ and if so whether there was any cost of acquisition so as to bring to tax the net receipts.
Held:
1) As the CIT(A) had held that the shares acquired under ESOP amounted to acquisition of a capital asset one had to proceed on that premise;
2) Since on the date of exercising the option there was no cost of acquisition of shares, in accordance with the ratio of the decision of the Apex Court in the case of B. C. Srinivasa Shetty (128 ITR 294) the gains could not be taxed;
3) Even if it is assumed that the market value of the shares is the benefit given to the assessee, such benefit can be said to accrue to the assessee only on the date of exercise of the option. As the date of exercise of option as well as the date of sale is the same, there was no difference between the ‘deemed cost of acquisition’ and the actual price realised by assessee and thus there is no capital gain chargeable to tax.
The Tribunal allowed the appeal filed by the assessee.
2. Shree Capital Services Ltd. v. ACIT ITAT Special Bench Kolkata Before G. D. Agrawal (VP) and B. R. Mittal (JM) and C. D. Rao (AM) ITA No. 1294 (Kol.) of 2008
AY. : 2004-05. Decided on: 31-7-2009
Counsel for assessee/revenue: Manish Sheth/ Sushil Kumar s. 43(5) – For a period prior to A. Y. 2006-07 transactions in futures and options are speculative transactions u/s.43(5) – S. 43 (5) (d) is not retrospective.
Per G. D. Agrawal :
Facts:
During the previous year relevant to A.Y. 2004-05 the assessee company, which was engaged in the business of financing and investment in shares and securities, suffered a loss of Rs.9,25,065 on account of futures and options. The Assessing Officer (Aa) treated the same as speculation loss as per S. 43(5) of the Act.
The CIT(A) confirmed the order of the Aa. Aggrieved, the assessee preferred an appeal to the Tribunal. The Special Bench (SB) of the Tribunal adjudicated two questions viz. (i) whether a transaction in derivatives falls within the meaning of ‘speculative transaction’ as provided u/s.43(5); and if the answer to the first question is in the affirmative, whether clause (d) of S. 43(5), introduced by the Finance Act, 2005 w.e.f. 1-4-2006, is clarificatory in nature and therefore retrospective in operation.
Held:
1. Derivative is a security which derives its value from the underlying assets. When the underlying asset of any derivative is share and stock, for all practical purposes, the treatment given to such derivative should be similar to stock and securities.
2. S. 43(5) uses the term ‘commodity’ in a very wide sense and covers ‘derivatives’.
3. The fact that S. 43(5)(d) exempts certain derivatives from the ambit of the definition of ‘speculative transaction’ itself shows that they would otherwise have come within the term. If ‘derivatives’ are held to be not covered by the definition of ‘speculative transaction’ the amendment would be redundant.
4. Since clause (d) of S. 43(5) does not exempt all transactions in derivatives but only the ‘eligible transactions’ on ‘recognised stock exchanges’ this clause cannot be held to be clarificatory. Further, Rules 6DDA and 6DDB which deal with ‘recognised stock exchanges’ were inserted w.e.f. 1-7-2005. Consequently, clause (d) of S. 43(5) applies to AY. 2006-07 and onwards.
The Tribunal dismissed the appeal filed by the assessee.
3. Western Coalfields Ltd. v. ACIT ITAT Nagpur Bench
Before N. L. Dash (JM) and V. K. Gupta (AM)
IT A No. 289 and 290/N ag.l2006
AYs. : 2002-03 and 2003-04. Decided on: 30-6-2009 Counsel for assessee/revenue: Nani Daruwala/ A K. Singh
Explanation to S. 37(1) – Penalty which is not of the nature of illegal! unlawful expenditure is not covered by the Explanation to S. 37(1).
Per V. K. Gupta :
Facts:
The assessee company was a colliery which trans-ported coal to Electricity Boards in railway wagons. Freight paid to the railways depended upon the carrying capacity of the wagons. In case the wagons were overloaded as compared to their carrying capacity, the railways charged ‘overloading charges’ at a rate which was generally six times the normal freight. The assessee’ claimed these overloading charges as a deduction on the ground that they have been incurred for a commercial purpose and were not for infraction of any law. The Assessing Officer (Aa), however, held these to be penal in nature and did not allow the same.
The CIT(A) confirmed the action of the AO.
Aggrieved, the assessee preferred-an appeal to the Tribunal.
Held:
The Tribunal observed that had the amounts been paid to a private carrier the same would have been allowable. The fact that the same are paid to Railways which is an institution owned by the Government, working under an Act of Parliament, the nature of overloading charges which are essentially of commercial nature cannot be characterised as of penal nature irrespective of the nomenclature given to such charges by the Railways. It held that:
i. the substance of the matter has to be looked into and given preference over the form;
ii. the amount was essentially of a commercial nature and incurred in the normal course of the business and was consequently allowable;
iii. the object of Explanation 1 also supports the claim of the assessee as these expenses are not of the nature of any illegal/unlawful expenditure;
iv. the decision of Punjab & Haryana High Court in the case of Hero Cycles Ltd. is squarely applicable.
This ground was decided in favor of the assessee.
4. ACIT v. RPG Life Sciences Ltd. ITAT ‘C’ Bench, Mumbai Before P. M. Jagtap (AM) and V. D. Rao OM) ITA No. 1579/Mum.l2006
A.Y. : 2002-2003. Decided on: 31-8-2009
Counsel for revenue/assessee:
Yashwant V. Chavan/B. V. Jhaveri
S. SOB read with S. 2 (42 C) – Slump sale – Sale of one of the manufacturing divisions of the assessee
– Whether the transaction could be considered as slump sale – On the facts, Held: No.
Per P. M. Jagtap :
Facts:
The assessee was engaged in the business of manufacturing pharmaceutical and agrochemical prod-ucts. During the year under consideration, its agro-chemical division was sold for an agreed consider-ation of Rs.72.70 crares. During the course of assessment proceedings, the assessee was asked to explain as to why the said sale be not treated as a slump sale and capital gain arising therefrom be not computed u/ s.50B. In reply, the assessee explained that it had sold the assets and liabilities of its agrochemical division by identifying the value of each and every item. In support, the break up of the agreed consideration of Rs.72.7 crore was given. The attention of the AO was drawn to the various schedules of the agreement where the fixed assets were valued item-wise by ascertaining the value of land, building, plant and machinery, furniture and fixtures and capital work-in-progress separately.
However, the assessee’s submissions were not found acceptable by the AO for reasons, amongst others, as under:
Assessee had transferred the entire undertaking as a going concern along with all existing employees.
The intention of the contracting parties was to sell the agrochemical undertaking and not the land, building, plant and machinery and furniture and fixtures and other intangible and current assets, all of which comprised the agro-chemical division separately.
The individual assets of agrochemical division I.were not separately valued but only group of assets were valued.
The valuation report valuing individual assets and/or schedules to the agreement listing out individual assets and value thereof have no relevance unless the consideration is determined on the basis of itemised value.
All the licences, old records of account books, vouchers pertaining to agrochemical business were also transferred by the assesses.
Accordingly, it was held that that the sale of the agrochemical division by the assessee was slump sale and the capital gain arising there from was chargeable to tax in its hand as per the provisions of S. SOB.
On appeal the CIT(A) accepted the stand of the assessee that sale of its agrochemical division was not a slump sale.
Held:
The Tribunal noted that as confirmed by the CIT(A) in his order – all the fixed assets as well as the current assets of agrochemical division were valued. The fixed assets were valued itemised by ascertaining the value of each and every asset separately and after adding non-compete fee of Rs.4 crores to the said value, the value of the fixed assets was worked out at Rs.54.33 crores. In a similar manner, net current assets were valued at Rs.58.38 crores and after deducting the value of net current liabilities therefrom, the total value was arrived at Rs.88.68 crores. As against the said value, the consideration finally agreed was Rs.72.70 crores and the reconciliation to explain the difference between the same was also furnished. The Revenue was not able to controvert or rebut the findings recorded by the CIT(A). Therefore, the Tribunal upheld the order of the CIT(A).
