Between: M/S. Ana Labs, Hyderabad v. $ The Deputy Commissioner Of Income Tax

THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY and THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A. No.76 of 2004 % 09.12.2014 Between:# M/s. Ana Labs, Hyderabad. Versus ...APPELLANT $ The Deputy Commissioner of Income Tax. ...RESPONDENT < Gist: > Head Note: ! COUNSEL FOR THE APPELLANT :- Sri A.V.Krishna Kaundinya^COUNSEL FOR RESPONDENT :- Sri S.R.Ashok ? Cases Referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A. No. 76 of 2004 JUDGMENT:(per the Hon’ble Sri Justice L.Narasimha Reddy) This appeal is filed by the Assessee feeling aggrieved bythe order, dated 31.10.2003, passed by the Hyderabad Bench“A” of the Income Tax Appellate Tribunal in IT(SS)ANo.74/Hyd/2002. The appellant is a partnership firm. It was undertakingthe activity of analyzing chemical compounds and pollutants. The firm is part of group of establishments, by name BhagavatiAna Labs Limited. A search was conducted in the parentorganization on 30.07.1998. On the basis of that, a show causenotice was issued to the appellant on 25.11.1998 under Section158BD of the Income Tax Act (for short ‘the Act’). Theappellant was required to file the returns for the block period1988-89 to 1997-98. In compliance with the notice, the appellant submitted returns showing nil income. The AssessingOfficer processed the same and passed an order, dated26.12.2000, taking the view that the appellant sold its assets,worth Rs.33,02,349/-; the actual sale value thereof isRs.1,12,93,389/- and that it is liable to pay the capital gains taxon Rs.79,91,040/-. It was held that the transaction is coveredby Section 45 (4) of the Act. Aggrieved by that, the appellantfiled an appeal before the Commissioner of Income Tax(Appeals). The appeal was rejected through order, dated27.02.2002. Thereafter, the appellant filed IT(SS)A No.74/Hyd/2002 before the Tribunal.That was dismissed by the Tribunal on 31.10.2003 and it washeld that even if the transaction does not fall under Section 45(4) of the Act, it would get attracted by Section 45 (1) of theAct. Sri A.V.Krishna Kaundinya, learned Senior Counsel forthe appellant, submits that the view taken by the AssessingOfficer or the Tribunal cannot be sustained in law. He contendsthat though the assets were transferred by the firm, theconsideration in the form of transfer of shares was paid to thepartners and the net result was that the appellant did notreceive any consideration at all. He contends that it was noteven the case of the Assessing Officer that Section 45 (1) ofthe Act gets attracted and once the Tribunal found that therewas no distribution of assets contemplated under Section 45 (4)of the Act, the matter ought to have been left at that. It is alsopleaded that the makeover of assets from the firm to its own sister company cannot be treated as transfer, within themeaning of Section 48 of the Act. Sri S.R.Ashok, learned Senior Standing Counsel for therespondent, on the other hand, submits that this is not a casewhere the appellant firm stood merged with the transfereecompany and, on the other hand, it is a clear case where theassets of the firm were sold to a company, after dissolution. Hesubmits that the consideration for the assets, transferred by theappellant was payable to it; and only by way of an internalarrangement, the consideration, in the form of shares was paidto the respective partners, in accordance with their shares inthe firm. He submits that all the authorities have analyzed thefacts correctly on the basis of the record and applied therelevant principles of law. sister company cannot be treated as transfer, within themeaning of Section 48 of the Act. Sri S.R.Ashok, learned Senior Standing Counsel for therespondent, on the other hand, submits that this is not a casewhere the appellant firm stood merged with the transfereecompany and, on the other hand, it is a clear case where theassets of the firm were sold to a company, after dissolution. Hesubmits that the consideration for the assets, transferred by theappellant was payable to it; and only by way of an internalarrangement, the consideration, in the form of shares was paidto the respective partners, in accordance with their shares inthe firm. He submits that all the authorities have analyzed thefacts correctly on the basis of the record and applied therelevant principles of law. The basic facts are not in dispute. Notice under Section158BD of the Act was issued to the appellant on 25.11.1998 andin response to that, a return with nil income was filed. It is inthe course of processing of the return, that it was found that theappellant sold its assets on 05.05.1995 in favour of a company.Capital gains tax in relation to the said transaction was not paidon the ground that the trensfaree company has only allottedsome shares to the partners of the firm and no transfer assuch, has taken place. Section 45 of the Act reads asunder: “Section 45. Capital gains (1) Any profits or gains arising from the transfer of a capital asset effectedin the previous year shall, save as otherwise provided in sections54, 54B,54D,54E, 54F[,] 54G and 54H, be chargeable to income- tax underthe head" Capital gains", and shall be deemed to be the income of theprevious year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section (1), where anyperson receives at any time during any previous year any money or otherassets under an insurance from an insurer on account of damage to, ordestruction of, any capital asset, as a result of- (i)flood, typhoon, hurricane, cyclone, earthquake or otherconvulsion of nature; orconvulsion of nature; or (ii)roit or civil disturbance; or (iii)accidental fire or explosion; or (iv)action by an enemy or action taken in combating an enemy(whether with or without a declaration of war),(whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or otherassets shall be chargeable to income-tax under the head “Capital Gains”and shall be deemed to be the income of such person of the previousyear in which such money or other asset was received and for thepurposes of Section 48, value of any money or the fair market value ofother assets on the date of such receipt shall be deemed to be the fullvalue of the consideration received or accruing as a result of the transferof such capital asset. (2) Notwithstanding anything contained in sub- section (1), the profits orgains arising from the transfer by way of conversion by the owner of acapital asset into, or its treatment by him as, stock- in- trade of abusiness carried on by him shall be chargeable to income- tax as hisincome of the previous year in which such stock- in- trade is sold orotherwise transferred by him and, for the purposes of section 48, the fairmarket value of the asset on the date of such conversion or treatmentshall be deemed to be the full value of the consideration received oraccruing as a result of the transfer of the capital asset. (2A) Where any person has had at any time during the previous year anybeneficial interest in any securities, then, any profits or gains arising fromtransfer made by the depository or participant of such beneficial interestin respect of securities shall be chargeable to income-tax as the incomeof the beneficial owner of the previous year in which such transfer tookplace and shall not be regarded as income of the depository who isdeemed to be the registered owner of securities by virtue of sub-section(1) of Section 10 of the Depositories Act 1996, and for the purpose of- (i)Section 48; and (ii)Proviso to Clause (42A) of Section 2, (2A) Where any person has had at any time during the previous year anybeneficial interest in any securities, then, any profits or gains arising fromtransfer made by the depository or participant of such beneficial interestin respect of securities shall be chargeable to income-tax as the incomeof the beneficial owner of the previous year in which such transfer tookplace and shall not be regarded as income of the depository who isdeemed to be the registered owner of securities by virtue of sub-section(1) of Section 10 of the Depositories Act 1996, and for the purpose of- (i)Section 48; and (ii)Proviso to Clause (42A) of Section 2, the cost of acquisition and the period of holding of any securities shall bedetermined on the basis of the first-in-first-out method. (3) The profits or gains arising from the transfer of a capital asset by aperson to a firm or other association of persons or body of individuals (notbeing a company or a co- operative society) in which he is or becomes apartner or member, by way of capital contribution or otherwise, shall bechargeable to tax as his income of the previous year in which suchtransfer takes place and, for the purposes of section 48, the amountrecorded in the books of account of the firm, association or body as thevalue of the capital asset shall be deemed to be the full value of theconsideration received or accruing as a result of the transfer of the capitalasset. (4) The profits or gains arising from the transfer of a capital asset by wayof distribution of capital assets on the dissolution of a firm or otherassociation of persons or body of individuals (not being a company or aco- operative society) or otherwise, shall be chargeable to tax as theincome of the firm, association or body, of the previous year in which thesaid transfer takes place and, for the purposes of section 48, the fairmarket value of the asset on the date of such transfer shall be deemed tobe the full value of the consideration received or accruing as a result ofthe transfer. …..” From a perusal of this, it becomes clear that theobligation to pay capital gains tax arises once, a citizen orassessee transfers a capital asset, owned by him. Certainexceptions are provided for it and the appellant is not able tobring its case within the purview of those exceptions. As regards the plea of the appellant that theconsideration for the assets was paid in the form of shares tothe respective partners, the Assessing Officer took the viewthat the obligation to pay capital gains tax arose on account ofthe transfer of capital by way of distribution of capital assets,on the dissolution of the firm. That view was upheld by theCommissioner. The Tribunal, however, held that the sale tookplace, before the dissolution of the firm and it is not a case of distribution of assets, contemplated under Section 45 (4) of theAct. The argument on behalf of the appellant that once thecase does not fall under Section 45 (4) of the Act, the mattermust be left at that, cannot be accepted. The finding that therewas no distribution of assets does not lead to a conclusion thatthere is no transfer at all, particularly when it is not evendisputed that the sale as such has taken place, with theparticipation of the appellant. distribution of assets, contemplated under Section 45 (4) of theAct. The argument on behalf of the appellant that once thecase does not fall under Section 45 (4) of the Act, the mattermust be left at that, cannot be accepted. The finding that therewas no distribution of assets does not lead to a conclusion thatthere is no transfer at all, particularly when it is not evendisputed that the sale as such has taken place, with theparticipation of the appellant. The second ground urged by the appellant is withreference to the manner of payment of consideration. It doesnot make much of difference as to whether the considerationpaid in the form of money or otherwise or whether it was paid tosomeone other than the transferor; in the context of levy ofcapital gains tax. Either the transferor may receive the entireconsideration directly or may instruct the transferee to pay theconsideration to a third party. Either way, it would be paymentto the transferor, from the point of view of Section 45 of theAct. Added to that, the consideration may be in terms ofmoney, or in the form of an alternative property, or shares ofthe transferee company. What becomes the substratum, in thisregard, would be the consideration, in terms of money value. Once the money value of the asset is fixed, the tax is to be paidthereon notwithstanding the fact that the actual considerationwas paid in different form, albeit, to a third party. In the instant case, the consideration in the form ofallotment of shares was paid to the partners of the appellant on its instructions. There was no direct transaction between thepartners on the one hand and the transferee company, on theother. An attempt is made to apply the concept underlyingClause (xiii) of Section 47 of the Act. Firstly, the provision wasnot in vogue in the relevant assessment year. Secondly,assuming that the concept was in the offing and in a givencase, it may be applied if the facts support. The case of theappellant does not fall into that. It was not a case ofsuccession of the firm by the appellant firm by the transfereecompany, much less there was any exercise of corporatisationor demutualization, which are essential to attract Clause (xiii) ofSection 47 of the Act. The appellant is not able to demonstratethat the figures mentioned by the Assessing Officer areincorrect. We do not find any basis to interfere with the order underappeal. The appeal is accordingly dismissed. There shall be noorder as to costs. The miscellaneous petitions, if any, filed in this appealshall also stand disposed of. _____________________ L.NARASIMHA REDDY,J ________________________ CHALLA KODANDA RAM,J Dt:09.12.2014 Note: L.R. copy to be marked. kdl