Income Tax Officer vs Neo Trust

D.A. Mehta, J.—On 24/4/2000 the Court admitted the appeal by formulating following substantial question of law:

Whether the Appellate Tribunal is right in law and on facts in holding that when the assessee transferred its business assets to Nirma Chemical Works and S.K. Family Trust by three installments without any consideration, capital gain was not leviable as also balancing charge u/s 41(2) was not imposable?

The Assessment Year in question is 1984-1985, the relevant previous year being calendar year 1983. The Assessee trust became a partner in a partnership firm constituted on 16/1/1982, whereby the Assessee was having 60 % share and the remaining 40 % share was held equally at 20% each by two other persons, namely S.K. Patel Family Trust and Nirma Chemical Works Pvt. Ltd. With effect from 1/1/1983, by virtue of Retirement Deed dated 5/1/1983, Nirma Chemical Works Pvt. Ltd., retired and on settlement of accounts, as mutually agreed, land with superstructure valued at Rs. 11,06,555/- was given to the retiring parter. Thereafter, on 31/3/1983 the firm was dissolved and S.K. Patel Family Trust took over the business with all assets & liabilities and the Assessee trust got back the capital contribution made by it.

The Assessing Officer therefore took a stand that, as the incoming partners had not brought any capital, the partnership firm did not carry on any business, the partnership firm was not registered with Registrar of Firms and the distribution of assets on retirement and/or on dissolution was not in accordance with the profit sharing ratio; the entire transaction was a colourable device adopted with the object of avoiding liability to tax u/s 45 of the Income Tax Act 1961 (''the Act''). The Assessing Officer therefore invoked provisions of Section 52(1) of the Act, and also sought to tax profits u/s 41(2) of the Act. Accordingly the assessment was framed on 30/3/1987 after rejecting the explanation tendered by the Assessee.

When the matter was carried before Commissioner of Appeals, the contention raised by the Assessee came to be accepted by Commissioner (Appeals) by relying upon Apex Court decision in case of Commissioner of Income Tax, Madras Vs. Shivakami Co. Pvt. Ltd., As regards the balancing charge u/s 41(2) of the Act, it was found by Commissioner (Appeals) that as the transfer was at the book value, there would not be any balancing charge unless the book value was more than the written down value of the assets as per Income Tax records. That, this was not even the case of the Assessing Officer and hence the said addition was also deleted.

The Revenue challenged the order of Commissioner (Appeals) before Tribunal, who vide impugned order has confirmed the findings of Commissioner (Appeals) by referring to the Apex Court decision on which reliance has been placed by Commissioner (Appeals). The findings in relation to balancing charge have also been confirmed by the Tribunal.

Learned Counsel appearing for appellant Revenue has assailed the impugned order of Tribunal by submitting that, both, Commissioner (Appeals) and the Tribunal failed to appreciate that the entire act of formation of partnership firm, thereafter retirement of one partner and subsequent dissolution were all sham transactions, in as much as, in fact the properties of the proprietary concern, namely the Assessee trust stood transferred to Nirma Chemical Works Pvt. Ltd. and S.K. Patel Family Trust by acting in three stages. That such transfer was without any consideration. That, once it was held that the transaction was with a duty to avoid tax, provision of Section 52(1) of the Act permitted an Assessing Officer to replace the full value of consideration by the market value of the property transferred. That, in the circumstances, the impugned order of Tribunal was required to be reversed. In support of the submissions made, reliance was placed on Madras High Court decision in case of S.V. Kumaragurupasamy Vs. Commissioner of Income Tax,

Learned senior advocate appearing on behalf of respondent Assessee submitted that the ratio of the Apex Court decision fully governs the case of the Assessee and the said judgment in the case of Commissioner of Income Tax, Madras v. Shivakami Co. P. Ltd. (supra) has since been applied and followed by this High Court in case of Commissioner of Income Tax Vs. Nitiben Chamanlal Parekh, The learned advocate, therefore, submitted that there was no error in the impugned order of Tribunal so as to warrant interference.

There is no dispute on facts. It is an accepted position that the transactions took place at book value and there is no evidence that the assessee received anything more than the stated consideration. In case of CIT v. Shivkami Co. P. Ltd. (supra) the Apex Court was dealing with the first proviso to Section 12B(2) of the Indian Income Tax Act, 1922, corresponding to Section 52 of the Act. After referring to the earlier decision in case of K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, the Apex Court has stated that:

... Though the legislation in question is to remedy the social evil and should be read broadly and should be so read that the object is fulfilled, yet the onus of establishing a condition of taxability must be fulfilled by the Revenue. There is no evidence direct or inferential that the consideration actually received by the assessee was more than what was disclosed or declared by him. The relationship between the parties has been established. The desire to defeat the claims of the Revenue has also been established by the fact that, for this, the assessee had stated a false fact in the document is not established.

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... Therefore, unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for the computation of capital gains. The onus is on the Revenue- the inferences might be drawn in certain cases but to come to a conclusion that a particular higher amount was, in fact, received must be based on such material from which such an irresistible conclusion follows. In the instant case, no such attempt was made.

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... Capital gains tax was intended to tax the gains of an assessee, not what an assessee might have gained. What is not gained cannot be computed as gained. All laws, fiscal or otherwise, must be both reasonably and justly interpreted whenever possible. Capital gains tax is not a tax on what might have been received or could have been taxed. In this case, the Revenue has made no attempt to establish that there was any understatement though it might be that shares were sold at an undervalue.

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.... The proviso helps or enables the Department by providing a way to determine the market value. But the proviso is applicable only where the full value for the consideration has not been stated. There is no evidence, direct or inferential, in these cases that the full consideration had not been stated in the document.

Thus, on facts, as concurrently found by both the appellate authorities, namely Commissioner (Appeals) and the Tribunal, there is no evidence to show that the Assessee received anything more than what is stated in the document. Applying the aforesaid settled legal position to the facts of the case, it is not possible to state that the impugned order of Tribunal suffers from any legal infirmity, so as to warrant interference.

In so far as Madras High Court decision in case of S.V. Kumaragurupasamy Vs. Commissioner of Income Tax, cited on behalf of Revenue, suffice it to state that the said judgment has not considered the Apex Court decisions on which reliance has been placed by the Tribunal while deciding the present matter.

In relation to the addition u/s 41(2) of the Act, there is no material on record to dislodge the finding of fact recorded by Commissioner (Appeals) to the effect that the book value was more than written down value of the assets as per Income Tax Records. Hence, even on this count there is no error in law committed by the Tribunal. The Tribunal was therefore justified in holding that neither capital gains was chargeable u/s 45 of the Act nor balancing charge was taxable u/s 41(2) of the Act. Appeal is accordingly dismissed, with no order as to costs.