Commissioner Of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj v. M/S Om Metals Infraprojects Ltd., Om Tower, M.i. Road, Church Road, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 183 / 2014 Commissioner of Income Tax-I, New Central Revenue Building, Statue Circle, Jaipur (Raj) ----Appellant Versus M/s Om Metals Infraprojects Ltd., Om Tower, M.I. Road, Church Road, Jaipur. PAN: ----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay, Mr. N.S. BhatiN.S. Bhati For Respondent(s) : Mr. Sanjay Jhanwar With Mr. Prakul Khurana, Ms. Archana, Mr. Mahendra GargeiyaMs. Archana, Mr. Mahendra Gargeiya _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 22/08/2017 1. By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby Tribunal has allowedthe appeal of the assessee and modified the order of the AO aswell as CIT(A). 2.This court while admitting the appeal on 5.1.2015 hasframed following substantial question of law:- “(i) Whether the Tribunal was justified inreversing the findings recorded by CIT(A) aswell as the Assessing Officer and holding thatthe amount of Rs.43,52,50,000/- is a capitalreceipt and not a revenue receipt, ignoring thatthe said amount was earned by the assesseefrom business by assigning its business rights? (ii) Whether the Tribunal has erred in holdingthat the amount of Rs.43,52,50,000/- is not tobe included for calculating book profit u/s115JB, ignoring that the said amount is arevenue receipt?” 3.Counsel for the appellant Mr. Singhi has taken us to theorder of the Tribunal and contended that tribunal has committedserious error in considering the capital receipt whereas it isrevenue receipt. He has also contended that the assessee is notentitled for the benefit u/s 115JB, therefore, he has contendedthat appeal deserves to be allowed. 4.However, counsel for the respondent Mr. Jhanwar has reliedupon the following decisions and contended that in view of theSupreme Court decision, the amount received by the assessee iscapital receipt. 4.1 In Oberoi Hotel (P) Ltd. vs. Commissioner of Income Taxreported in 1999 103 Taxmann 236 SC wherein it has been held asunder:- “11. The aforesaid principle is relied upon in thecase of Karam Chand Thapar and Bros's case(supra). Considering the aforesaid principles laiddown as per Article XVIII of the PrincipalAgreement, the amount received by the assesseeis for the consideration for giving up his right topurchase and or to operate the property or forgetting it on lease before it is transferred or letout to other persons. It is not for settlement ofrights under trading contract, but the injury isinflicted on the capital asset of the assessee andgiving up the contractual right on the basis ofPrincipal Agreement has resulted in loss of sourceof assessee's income.” 4.2 In Apollo Tyres Ltd. Vs. Commissioner of Income Tax (2002)122 Taxman 562 (SC) wherein it has been held as under:- “11. The aforesaid principle is relied upon in thecase of Karam Chand Thapar and Bros's case(supra). Considering the aforesaid principles laiddown as per Article XVIII of the PrincipalAgreement, the amount received by the assesseeis for the consideration for giving up his right topurchase and or to operate the property or forgetting it on lease before it is transferred or letout to other persons. It is not for settlement ofrights under trading contract, but the injury isinflicted on the capital asset of the assessee andgiving up the contractual right on the basis ofPrincipal Agreement has resulted in loss of sourceof assessee's income.” 4.2 In Apollo Tyres Ltd. Vs. Commissioner of Income Tax (2002)122 Taxman 562 (SC) wherein it has been held as under:- 7. The dispute in the present case is in regard tothe question whether the assessee's investment inthe UTI is business, and if so, is it a businesswhich qualifies to be an "eligible business" underSection 32AB ? In regard to the first aspect, wemust note that the tribunal as a question of factbased on material on record has come to theconclusion that the investment in the UTI by theassessee company is in the course of its businessand its business of manufacture and sale of tyresand sale and purchase of units of the UTI arecommon in nature and both the businesses areintertwined and interlaced. This finding isaccepted by the High Court also. We also find thatthis business of the assessee company of buyingand selling of units is a business as contemplatedunder Section 32AB of the Act. The question thenis: is it an eligible business under the saidsection ? The term "eligible business" is definedunder Sub-section (2) of Section 32AB. As perthat definition, all business of an assesseecompany will be an eligible business unless it fallsunder the type of business enumerated in Sub-clauses (a) and (b) of Section 32AB(2). It isnobody's case that this business of the assesseecompany is one of those businesses which fallunder business enumerated in Clauses (a) and (b)of Sub-section (2) of Section 32AB. Therefore,there is no doubt that the business of theassessee company is an eligible business. The factthat it is shown under a different head of incomewould not deprive the company of its benefitunder Section 32AB so long as it is held that theinvestment in the units of the UTI by the assesseecompany is in the course of its "eligible business".Therefore, in our opinion, the dividend incomeearned by the assessee company from itsinvestment in the UTI should be included incomputing the profits of eligible business underSection 32AB of the Act. 8. The last point for our consideration is: whetherbuying and selling of units by the assesseecompany can be treated as a speculativebusiness? For this purpose, the Revenue arguesthat the units purchased by the assesseecompany from the UTI are shares, therefore, as per Explanation to Section 73 of the Act, the saidbusiness of purchasing and selling of shares willhave to be treated as a business of speculation.The Revenue in support of this argument, relieson Section 32(3) of the UTI Act which reads asfollows : "(3) Subject to the foregoing sub-sections, for thepurposes of the Income-tax Act, 1961, --(a) any distribution of income received by a unitholder from the Trust shall be deemed to be hisincomebywayofdividends;and (b) the Trust shall be deemed to be a company." 8. The last point for our consideration is: whetherbuying and selling of units by the assesseecompany can be treated as a speculativebusiness? For this purpose, the Revenue arguesthat the units purchased by the assesseecompany from the UTI are shares, therefore, as per Explanation to Section 73 of the Act, the saidbusiness of purchasing and selling of shares willhave to be treated as a business of speculation.The Revenue in support of this argument, relieson Section 32(3) of the UTI Act which reads asfollows : "(3) Subject to the foregoing sub-sections, for thepurposes of the Income-tax Act, 1961, --(a) any distribution of income received by a unitholder from the Trust shall be deemed to be hisincomebywayofdividends;and (b) the Trust shall be deemed to be a company." 9. Relying on the above provision of the UTI Act,the Revenue contends that if the UTI is acompany and income from its units is dividendthen ipso facto the units will have to be shares,therefore, the business of purchase and sale ofunits conducted by the assessee company willhave to be deemed to be a business in shareswhich business, according to the Revenue,attracts Explanation to Section 73. On this basis,it is contended that the business of purchase andsale of units by the assessee company amounts toa business of speculation. Both the tribunal andthe High Court have considered this argument asalso the effect of Section 32(3) of the UTI Act andhave come to the conclusion that the provision ofthe said Act is limited for the purpose ofassessment of dividend income under the Act,and for deduction of tax at source. They have heldthat the legal fiction created by Section 32(3) ofthe UTI Act cannot be carried any further. Wehave examined the provisions of the UTI Act andwe are of the opinion that even though the saidSection creates a fiction to make the UTI as adeemed company and distribution of incomereceived by the unit holder as a deemed dividend,by virtue of these deemed provisions, it cannot besaid that it also makes the unit of the UTI adeemed share. In our opinion, a deemingprovision of this nature as found in Section (3)should be applied for the purpose for which thesaid deeming provision is specifically enacted,which in the present case is confined only todeeming the UTI as a company and deeming theincome from the units as a dividend. If as amatter of fact, the Legislature had contemplatedmaking the units as also a deemed share then itwould have stated so. In the absence of any such specific deeming in regard to the units as sharesit would be erroneous to extend the provisions ofSection (3) of the UTI Act to the units of UTI forthe purpose of holding that the unit is a share.For these reasons, we are in agreement with thefinding of the High Court on this point also.” 4.3 In Commissioner of Income Tax, Bangalore vs. B.C. SrinivasaSetty AIR 1981 SC 972 wherein it has been held as under:- specific deeming in regard to the units as sharesit would be erroneous to extend the provisions ofSection (3) of the UTI Act to the units of UTI forthe purpose of holding that the unit is a share.For these reasons, we are in agreement with thefinding of the High Court on this point also.” 4.3 In Commissioner of Income Tax, Bangalore vs. B.C. SrinivasaSetty AIR 1981 SC 972 wherein it has been held as under:- “17. The question which has been raised beforeus, has been considered by some High Courts, andit appears that there is a conflict of opinion. TheMadras High Court in Commissioner of Income-taxv. K. Rathnam Nadar MANU/TN/0559/1968 :[1969]71ITR433(Mad) , the Calcutta High Court inCommissioner of Income-tax v. Chunilal Prabhudas& Co., (supra) the Delhi High Court in JagdevSingh Mumick v. Commissioner of Income-taxMANU/DE/0150/1970 : [1971]81ITR500(Delhi) ,the Kerala High Court in Commissioner of Income-tax v. E.C. Jacob MANU/KE/0124/1972 :[1973]89ITR88(Ker) , the Bombay High Court inthe Commissioner of Income-tax v. HomeIndustries & Co. MANU/MH/0097/1977 :[1977]107ITR609(Bom) and Commissioner ofIncome-taxv.MichelPostalMANU/MH/0141/1977 : [1978]112ITR315(Bom)and the Madhya Pradesh High Court inCommissioner of Income-tax v. Jaswant LalDayabhaiMANU/MP/0099/1978:[1978]114ITR798(MP) have taken the view thatthe receipt on the transfer of goodwill generated ina business is not subject to income-tax as a capitalgain. On the other side lies the view taken by theGujarat High Court in Commissioner of Income-taxv. Mohanbhai Pamabhai [1978] 91 I.T.R. 393 andthe Calcutta High Court in K.N. Daftary v.CommissionerofIncome-taxMANU/WB/0174/1975 : [1977]106ITR998(Cal)that even if no cost is incurred in building up thegoodwill of the business, it is nevertheless acapital asset for the purpose of capital gains, andthe cost of acquisition being nil the entire amountof sale proceeds relating to the goodwill must bebrought to tax under the head "Capital gains". It isapparent that the preponderance of judicialopinion favours the view that the transfer ofgoodwill initially generated in a business does not give rise to a capital gain for the purposes ofincome-tax.” 4.4In Rajasthan Spinning & Weaving Mills vs. DeputyCommissioner of Income Tax (2006) 150 Taxman 205 (Raj.)wherein it has been held as under:- “The Court clearly stated that AO while computingthe income under Section 115J has only the powerof examining whether the books of account arecertified by the authorities under the CompaniesAct as having been properly maintained inaccordance with the Companies Act. The AO hasthe limited power of making increases andreductions as provided for in the Explanation tothe said section. To put it differently, the AO doesnot have the jurisdiction to go beyond the netprofit shown in the P&L a/c which have beenstatutorily audited, approved by AGM and filedwith the Registrar of Companies who has certifiedits correctness except to the extent adjustmentsprovided in the Explanation to Section 115J. This proposition of the Supreme court in ouropinion should put quietus to the controversy ofquestioning the book profit shown in the P&L a/cwhich have been duly audited, approved by AGMof the company and has been filed before Registrarof Companies who had no objection to thecorrectness to be beyond the scrutiny of the AO. This proposition of the Supreme court in ouropinion should put quietus to the controversy ofquestioning the book profit shown in the P&L a/cwhich have been duly audited, approved by AGMof the company and has been filed before Registrarof Companies who had no objection to thecorrectness to be beyond the scrutiny of the AO. If that is so, then the CIT was apparently in errorin going through the book profit shown by theassessee and taking upon himself to examinewhether any amount has been wrongly taken intoconsideration while preparing the P&L a/cdeclaring the book profits to be contrary to theprovisions of the Companies Act by resorting to itsown view of true and fair result of company'sworking, whereas the company's accounts havebeen certified by its auditors to be in accordancewith the provisions of the Act and approved inannual general meeting of the company andthereafter have also been certified by the Registrarof the Companies. This enquiry being beyond thejurisdiction of the AO under the IT Act, theassumption of jurisdiction by CIT on the ground that assessment order was erroneous andprejudicial to interest was not sustainable. It may further be noticed that the Supreme Courtdecision in Apollo Tyres case (supra) was renderedin relation to the asst. yr. 1990-91 when Section115J only was in force at relevant time.Sub-section (2) of Section 115JA has beeninserted w.e.f. 1st April, 1997 which provides aclear provision in this regard in Sub-section (2)which reads as under : "(2) Every assessee, being a company, shall, forthe purposes of this section prepare its P&L a/c forthe relevant previous year in accordance with theprovisions of Parts II and III of Schedule VI of theCompanies Act, 1956 : Provided that while preparing P&L a/c, thedepreciation shall be calculated on the samemethod and rates which have been adopted forcalculating the depreciation for the purpose ofpreparing the P&L a/c laid before the company atits annual general meeting in accordance with theprovisions of Section 210 of the Companies Act,1956." A perusal of the aforesaid provision goes to showbeyond any doubt that any such scrutiny intoclaim of depreciation while resorting to alternativetax is not permissible by the AO under proviso toSub-section (2) of Section 115JA, who has toaccept the claim of depreciation which has beenadopted for the purpose of preparing P&L a/c laidbefore AGM in accordance with the provisions ofSection 210 of Companies Act, 1956, andapproved by AGM. We may notice that w.e.f. 1st April, 1997 theassessments are governed by Section 115JA andnot by Section 115J. The applicability of Section115JA stopped after asst. yr. 1990-91. As a matter of fact, the order of CIT as affirmedby the Tribunal is founded on wholly erroneousview of object of Section 115J and scope ofenquiry by AO into finding book profit on the basisof "true and fair result" concept of company'sworking, divorced from the mandate that thealternate basis of finding a minimum base to levy tax is not to arrive at different computation ofprofits as per the own view of AO what ought to bebook profit, but is to be founded on admittedprofits shown in the books of account to itsshareholders for declaring dividends, subject toadditions or deductions envisaged underExplanation to Section 115J. As a matter of fact, the order of CIT as affirmedby the Tribunal is founded on wholly erroneousview of object of Section 115J and scope ofenquiry by AO into finding book profit on the basisof "true and fair result" concept of company'sworking, divorced from the mandate that thealternate basis of finding a minimum base to levy tax is not to arrive at different computation ofprofits as per the own view of AO what ought to bebook profit, but is to be founded on admittedprofits shown in the books of account to itsshareholders for declaring dividends, subject toadditions or deductions envisaged underExplanation to Section 115J. An alternative which is founded on admission ofassessee, cannot be considered to find outwhether such admission is acceptable or not. Theprovision does not give any authority to anyinstrumentality functioning under the Act to probeinto finding book profit de hors what has beenshown in the audited books of account which areplaced before AGM and approved by theshareholders and certified by the Registrar ofCompanies when the same is filed with him. Thatis the acceptance by the shareholders andstatutory authorities to be the result of company'saffairs. Such accepted book profit has to beaccepted by AO to find whether income computedby him in accordance with IT Act is more than orless than such admitted income. It is only if as aresult of company's total taxable income inaccordance with IT Act by the AO, it is found to beless than 30 per cent of admitted book profits asdiscussed above, that resort has to be had toSection 115J and not otherwise. If thecomputation in accordance with provisions of ITAct gives better tax results, it is not at all requiredto go to Section 115J. The CIT has obviously exceeded its jurisdiction tofind the order of AO to be erroneous, not on thebasis of declared book profit, but on the basis ofbook profit computed by him and the Tribunal toofell in like error in accepting the position. The view about scope and enquiry into bookprofits as per audited P&L a/c duly approved bythe AGM and certified by Registrar of Companies issettled by the decision of the Supreme Court inApollo Tyres case (supra). Hence, the orders of CITunder Section 263 as well as of Tribunal is contrary to it, must be held to be erroneous and notsustainable.” 5.In that view of the matter, both the issues are answered in favour of the assessee and against the department. The appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Brijesh 24.