THE issues before the Bench are - Whether the benefit of exemption from capital gain tax u/s 47(xiv) is available, when the assessee has corporatized his business of holding investments (shares) in the proprietary concern by transferring the same to an incorporated company in which he held virtually all the shares; Whether under the scheme of succession of section 47(xiv), there is any requirement that the capital or other intangible asset transferred to the company should be used by the sole proprietor for the purpose of his business; Whether when the only asset held in the proprietary concern was equity shares which got transferred into the succeeding company, the exemption of benefit from capital gain u/s 47(xiv) is not available; Whether the definition of "business" in Income Tax Act is an inclusive definition and includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture and Whether there is any decisive test of the intention to carry on the business. And the verdict goes in favour of the assessee.
Facts of the case
Assessee is an individual. He studied business management in USA and started managing the affairs of business which was run by his family viz., logistic services. There was a company by name Vikram Associates (P) Ltd', incorporated on 16.12.1992. The name of the company was later changed as Vikram Integrated Logistics Private limited. Thereafter, the name was again changed to M/s. Vikram Logistic & Maritime Services Pvt. Ltd. (VLMS) w.e.f. 26.6.2006. VLMS was incorporated in the year 1992 by the assessee's father Mr. C. Viswanatha Iyer. The main object of the company was transportation and logistics services. The company was handling agent for Container Corporation of India, a public sector undertaking. The shares of VLMS were held amongst the 4 members of the family.
There was a division of business between the members of the family, and all the shares holding in VLMS were transferred to the assessee, except 10 shares held by Rajalakshmi Viswanath. The assessee in turn transferred all his holding in other companies that belonged to the family in favour of C.Viswanatha Iyer and Chandrasekar Viswanath. The assessee thereafter infused funds into the business and in turn VLMS issued additional shares to the assessee. Funds were also infused into the business of VLMS by a Foreign Investor and in turn 2,46,300 shares were issued at a premium and allotted by VLMS to the foreign investor. Thereafter, shares of Rs.100/- each were sub-divided into shares of Rs.10/- each, and bonus shares were issued.
In the year 2007, a company by name Anuradha Holdings Private Limited (AHPL) was incorporated. The assessee and his mother Mrs. Rajalakshmi Viswanatha Iyer were the subscribers to the Memorandum of Association and Articles of Association. The main object of AHPL was to acquire, establish or promote companies, render advice and services for project development. Apart from the above main objects, one of the main objects of AHPL was to takeover proprietary business investment and assets of Mr. Vikram Viswanath, the assessee. In 2009, an agreement for takeover of the proprietary business of the assessee by AHPL was entered into. It may be pointed out that the assessee in his return of income filed before the Revenue authorities never declared income under the head "Income from Business". In the return of income filed for AY 2009-10, the source of income declared by the assessee's income was under the head "Salaries", "Income from House Property", "Capital Gain" and "Income from other sources".
It has been explained in the agreement that the assessee wanted to enhance the value of his business units/companies so that there would be increase in the value of his holdings. With that view he had acquired 100% control of one of the family business viz., VLMS. The agreement also narrates as to how the Assessee improved the business of VLMS by his efforts and how he had infused funds into the said business by diluting 1/3rd of his holdings in VLMS. The agreement also narrates as to how the Assessee has acquired certain commercial assets with an intention of achieving his business objective all to be owned in his proprietary capacity. The agreement further refers to the fact that AHPL was formed only for the purpose of corporatizing the business activities of the Assessee. The agreement concluded that with a view to give effect to the above intention, the assessee had transferred all the business and business assets and liabilities of the assessee.
A perusal of the Balance Sheet of the assessee showed that all the assets referred to in the schedule assets and liabilities were taken over except the other advances and liabilities. The assessee had filed the return of income for AY 2009-10 in which the assessee claimed that there was capital gain on transfer of 9,99,98,000 shares held by him in VLMS to AHPL under the takeover agreement and the same was not chargeable to tax in view of the provisions of Sec.47(xiv) of the Income Tax Act.
Contentions before the AO
There were multiple hearings before the AO and a detailed questionnaire was answered by the assessee on the applicability of the provisions of Sec.47(xiv) of the Act in respect of the transaction in question. However, the AO did not discuss the replies given by the assessee and completed the assessment rejecting the contentions of the assessee. The AO observed that there were certain conditions laid down in section 47(xiv) which were not fulfilled by the assessee, and therefore the benefit cannot be granted to the assessee. The AO held that the assessee had never properly disclosed in its return of income regarding the nature of the proprietary business and had also not disclosed any income under the head of "business income".
Secondly, the AO observed that only shares of VLMS and two other companies can be said to be assets and advance paid for purchase of land or buildings cannot be said to be assets in the real sense. The AO had also referred to Form No.2 filed with the Registrar of Companies ("ROC") in which AHPL had not referred to any assets as having been transferred. The AO therefore concluded that since there were no assets and there transfer, the other conditions of section 47(xiv) were also not satisfied. The AO concluded that the agreement was made only to make claim for relief u/s. 47(xiv) of the Act and was not reliable and had no evidentiary value. He also held that a return in Form No.3 had to be filed with the ROC and this form would reveal if any consideration was received in kind. Since such form was not filed, the AO concluded that no transfer of tangible assets had also taken place.
Appeal before the CIT(A)
On appeal before the CIT(A) it was submitted that the business of the assessee was holding shares of VMLS, and the assessee contributed all his efforts to the growth of logistic business of VMLS as major shareholder thereof. All efforts of the Assessee was aimed at increasing his worth by contributing to the growth of business of VMLS. It was also submitted that though section 47(xiv) refers to "a sole proprietary concern succeeded by a company in the business carried on by if as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company, there was no qualification as to the capital asset should be one required for the business sole proprietary business. It was also pointed out that even in the proviso one of the conditions was that all the assets and liabilities of the proprietary concern relating to the business requires to be transferred, and there is no specific exclusion of other assets.
Secondly, it was argued that the term "business" needs to be understood from the perspective of the assessee in the broadest possible manner. It was submitted that in the larger sense of the word, business means that which engages the time, talents and interest of a man; it is what a man proposes to himself; what belongs to a person to do or see and a person is bound either by the nature of his engagement or by private and personal motives, to perform a service for another.
The assessee further submitted that the main occupation of the assessee was to manage the logistic business and also to expand the business in venture capital and to create Corporate Module with a motive of earning income therefrom. On the efforts of the assessee, there was accrual of income which had been impliedly ploughed into the company which was completely controlled by him with 99.9% shareholding. The assessee strongly argued that all the activities done by the assessee with reference to VLMS were akin to that of venture capitalists and were done to ensure that the value of his holdings in VLMS increases. The assessee also pointed out that salary of Rs.1,49,75,400/- was paid by VLMS for the previous year relevant to AY 09-10. That salary was for regular services rendered as a full time employee and not for the extra efforts put in by the assessee in the way a venture capitalist would do.
It was submitted that though under the Act, the income was assessed under the head 'salary and income from other sources', the benefit, accrued to the assessee was on account of his business activity. The mere fact that the income had been assessed under the Act under different head by virtue of Section 14 of the Act, the existence of the business cannot be ruled out.
It was also submitted that the nature of business carried on by the assessee did not require did not require business licences or statutory approvals like registration under VAT, Service Tax, Import Export, reporting to SEBI, RBI etc. The assessee submitted that the factum of business was not dependant on assessment of the income under the head 'income from business' under the Act. Thus, it was concluded that the assessee was very much in business under proprietorship and all the assets transferred to the company from his proprietary business were required to be considered u/s. 47(xiv) of the Act and the exemption as claimed by the assessee from capital gains tax was required to be given.
However, the CIT(A) was not convinced with the submissions and the contentions and upheld the assessment order.
Aggrieved with this order, the assessee has filed this appeal before the Tribunal.
Appeal before the Tribunal
The counsel for the assessee raised similar contentions and submissions as done before the CIT(A). The counsel also placed reliance on several decisions in support of its contentions. The counsel also relied on a Supreme Court judgment in the case of New Horizons Ltd., and another Vs. Union of India and others, wherein it was held that the doctrine of lifting the veil, piercing the veil or peeping or seeing through the veil is invoked when the corporate personality is found to be opposed to justice, convenience or interest of revenue. The counsel for the assessee advocated the approach of peeping behind the corporate veil of VLMS and if done so, it would be clear that the assessee and VLMS were not different and were one and the same.
On the other hand, the DR contended that there was a distinction between cases of companies and individual and the ratio laid down in the context of a company cannot be extended to an individual. He emphasized the fact that neither in the return of income filed by the assesses nor in his Balance Sheet was there anything to show existence of any business. His further submission was that the question whether shares were held in the business of holding investments cannot be decided in vacuum. According to him an individual cannot be said to be engaged in the business of holding investments. It was emphasized that for all the activities that the assessee undertook to improve the business of VLMS, he had duly remunerated by way of salary. He also laid emphasis on the fact that Sec.47(xiv) of the Act specifically refers to a "sole proprietary concern" and the assessee had not answered as to how the above condition was satisfied. It was also submitted that the concept of lifting of corporate veil can be applied only a real business exists.
Having heard the parties, the Tribunal held that,
Transferred assets used by sole proprietor
++ there is no dispute that the conditions laid down in the proviso to Sec.47(xiv) of the Act are satisfied. The AO proceeded on the basis that there were three conditions required to be satisfied for applicability of the main provisions of Sec.47(xiv) of the Act viz., (i) The Assessee should have a business which is run in his individual capacity as a Sole Proprietary concern; (ii) The business should have assets and liabilities; (iii) There should be transfer of these assets and liabilities or sale of any capital asset. He proceeded to hold that the Assessee did not carry on any business and that there were no assets and liabilities of business and transfer of those assets and liabilities. We have in the earlier paragraph already referred to the provisions of Sec.47(xiv) of the Act and pointed out that under the scheme of the succession there should be sale or transfer of capital asset or intangible asset by the sole proprietor to the company and that there is no requirement that the capital or other intangible asset transferred should be used by the sole proprietor for the purpose of his business. This is clear from the expression "Any capital asset or intangible asset to the Company" used in Sec.47(xiv) of the Act. Therefore the (ii) and (iii) reason given by the AO in the order of assessment cannot be a valid basis to deny the claim of the Assessee for applicability of Sec.47(xiv) of the Act. Even CIT(A) did not sustain the order of the AO on this basis but proceeded to reject the plea of the Assessee only on the applicability of condition (i) as set out by the AO in the order of assessment viz., that there was no business carried on by the Assessee as sole proprietor. The issue that needs to be decided in this appeal is as to whether the Assessee was carrying on any business;
Inclusive definition of "business"
++ is any such physical manifestation of business contemplated by the Definition of business u/s. 2(13) of the Act? The definition of business as we have already seen is an inclusive definition and includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. When activities involve time, attention and labour of a person and when such activities are carried out with profit motive, it can be said that the person carries on business. No test is decisive of the intention to carry on the business. Facts and circumstances of a given case have to be seen before coming to a conclusion whether a person carries on business or not. The requirements for existence of business as set out by the CIT(A) in his order may be relevant but not mandatory and absence of those requirements cannot lead to an inference that a person has not carried on any business. As rightly submitted by the learned counsel for the Assessee, if there is income earned by carrying on business and where there is absence of the conditions as set out by the CIT(A), the revenue will not be able to bring to tax such income. We agree with the counsel for the Assessee that physical manifestation of business is not the requirement to come to a conclusion that a person carried on business or not;
++ we are of the view that the plea of the Assessee deserves acceptance. The Assessee has in respect of all the queries raised by the Revenue given convincing answers. As rightly submitted by the Counsel for the Assessee, the nature of business carried on by the Assessee as explained by the Assessee, has not been appreciated. As explained in the various definitions of "Business", even "a concern in the nature of commerce", would be sufficient. The various circumstances pointed out by the Assessee have been brushed aside by the Revenue as irrelevant circumstance. The facts brought out as above clearly show that the activities performed by the Assessee in relation to VLMS are in excess of what a mere dormant shareholder may indulge in. The Assessee had no other preoccupation, vocation, profession or activity-other than whole heartedly promotion of his investments besides discharging his duties as an employee and director;
Holding of investments is "business"
++ as laid down in the decision of the Madras High Court in the case of Amalgamations (P) Ltd. to conclude that a person is in the business of holding of investments, there is no particular form in which such business needs to be carried on. The only requirement is that there must be a real substantial and systematic or organized course of activity or conduct with the set purpose of earning profit which is the test for a business. In the present case as we have already explained in the earlier paragraphs, the assessee is not a mere investor. He had taken active interest in the business of VLMS and the same would be clear from the services that had been rendered. We are convinced that on the facts of the present case as brought out in the earlier paragraphs, we have to necessarily come to a conclusion that the Assessee was in the business of holding of investments. This is not a case where the assessee contented itself with merely making an investment and looking for the dividend. We would, therefore, hold that there was a business activity in the matter of holding of investments carried on by the Assessee. it is also of significance to take note of the fact that one of the objects for which AHPL was incorporated was to takeover proprietary business investment and assets of Mr. Vikram Viswanath, the Assessee. The purpose behind the provisions of Sec.47(xiv) (also of Sec.47(xii) of the Act) of the Act is to encourage running business in an organized form viz., as limited liability company rather than in the form of partnership or sole proprietary concern. Such conversion either of a firm into a company or proprietary concern into a company are encouraged and assets transferred pursuant to such conversion are not regarded as transfer giving raise to tax on capital gain. The approach that needs to be adopted is to assess the business realities and appreciate the inputs of the man behind the veil;
Principles of determining "business" different for individuals and companies
++ one of the arguments on behalf of the revenue by the OIT (DR) was that the principles laid down by the Supreme Court in the case of Amalgamations are not applicable to individuals and can be applied only in the case of entities which are "companies". In this regard the counsel for the Assessee brought to our notice the decision of the House of Lords in the case of Fry (Inspector of Taxes) Vs. Salisbury House Estate Ltd. In the aforesaid decision, the question before the Court was as to whether income from letting of properties in the case of a company which was incorporated with the objects of purchasing properties and letting them out for rent, was to be assessed as "Income from House Property" or "Business Income". One of the argument of the Revenue was that the principle that there cannot be a Business of holding properties and deriving rent therefrom, would not be applicable to entities which are limited liability companies. The Court dealt with the above argument in the following words:
["......But the Crown contends that the fact that the tax payer is a limited company may distinguish its operations from those of an individual. Assuming the Memorandum of Association allows it, and in this case it unquestionably does, a Company is just as capable as an individual of being a landowner and as such deriving rents and profits from its land, without thereby becoming a trader and in my opinion it is the nature of its operations, and not its own capacity, which must determine whether it is carrying on a trade or not. Nor do I see any reason why, as in the present case, some of its operations under the wise powers conferred by the Memorandum should not be operations of trade, whereas others are not"]
++ the above observations of the Court would show that the principles applicable in deciding whether a person carries on business or not cannot be different in the case of individual's and companies. We therefore do not find any force in the argument advanced by the DR before us;
Succession of proprietary concern
++ as we have already seen one of the main objects for which AHPL was incorporated was to take over the proprietary business of the Assessee. As early as June, 2007 when AHPL was incorporated, the Assessee believed that he was in the business of holding of investments and that this business had to be corporatized. The Assessee, had conceived a business model of converting his business of holding investments in shares of VLMS to AHPL as early as 2007, when AHPL was incorporated. Transfer of shares of VLMS by the Assessee took place in June, 2009. It cannot be said that the plea of the Assessee is an afterthought. Contemporaneous documents clearly indicate the intention of the Assessee of having indulged in the business of holding shares of VLMS as proprietor. The stand of the AO to the contrary is without any basis. The Assesses corporatized his business of holding investments (shares) in VLMS by transferring the same to AHPL in which he held virtually all the shares. We are of the view that on the facts and circumstances of the present case, the claim of the Assessee regarding applicability of the provisions of Sec.47(xiv) of the Act, should be accepted as it would advance the purpose behind those provisions;
Piercing the corporate veil
++ there is yet another way of looking at this case i.e., by peeping behind the veil of VLMS. The charging section viz., Section 4 of the Act which refers to the charge of income tax being on the total income of the previous year of every person. Section 5 defines scope of total income and it talks of income from whatever source derived which is received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India;
++ can it be said that the Assessee in the present case had gained a sum of Rs.329 crores by virtue of transferring his shares in VLMS to a company in which he himself holds the entire shareholding. The shares of VLMS that were owned by the Assessee became shares owned by AHPL and the entire shareholding in AHPL belonged to the Assessee. The facts and circumstances of the present case would justify peeping behind the veil of VLMS and to conclude that the business of VLMS was also the business of the Assessee and to say that VLMS and the Assessee are not different. The Assessee had no other preoccupation, vocation, profession or activity- other than whole heartedly promotion of his investments besides discharging his duties as an employee and director. The law laid down by the Supreme Court in the case of New Horizons Ltd. in our view should be applied in the present case as would advance the cause of justice. The doctrine of lifting the veil, piercing the veil or peeping or seeing through the veil, in the present case needs to be invoked because the corporate personality is found to be opposed to justice or convenience;
++ for the reasons given above, we are of the view that the claim of the Assessee that there was a succession to the sole proprietary concern of the Assessee by a company as a result of which the sole proprietary concern sold capital asset or intangible asset to a company and therefore the transfer by way of succession was not a transfer in view of the provisions of Section 47(xiv) of the Income Tax Act, 1961 ("the Act") and therefore capital gain arising from such transfer could not be brought to tax, reserves to be accepted. Consequently, the orders of the revenue authorities, bringing to tax capital gain on transfer of shares by the Assessee to AHPL is held to be unsustainable. The appeal of the Assessee is allowed.
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