Ita/1797/2009 Of The Commissioner Of Income Tax v. Shri.k.v.mohammed Zakir

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON &THE HONOURABLE MR. JUSTICE A.HARIPRASAD MONDAY, THE 10TH DAY OF APRIL 2017/20TH CHAITHRA, 1939 ITA.No. 1797 of 2009 ( ) ----------------------- AGAINST THE ORDER IN ITA 270/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED12-06-2009 APPELLANT(S)/APPELLANT/RESPONDENT:--------------------------------- THE COMMISSIONER OF INCOME TAX THRISSUR. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT:------------------------ SHRI.K.V.MOHAMMED ZAKIR PROP.KAP INDIA CONSTRUCTIONS, CITY CENTRE, ROUND WEST, THRISSUR. BY ADV. SRI.P.BENNY THOMAS ADV. SRI.P.GOPINATH ADV. SRI.K.JOHN MATHAI ADV. SRI.E.K.NANDAKUMAR ADV. SRI.RAJA KANNAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13-02-2017,THE COURT ON 10-04-2017 DELIVERED THE FOLLOWING: P.R. RAMACHANDRA MENON & A. HARIPRASAD, JJ~~~~~~~~~~~~~~~~~~~~~~I. T. Appeal No. 1797 of 2009~~~~~~~~~~~~~~~~~~~~~Dated, this the 10[th] day of April, 2017 JUDGMENT Ramachandra Menon J. Can, a person borrow from himself and whether the 'soleproprietor' and his 'business concern' can be treated as two separateentities in the realm of the assessment of long term Capital GainTax ?. Is it not necessary to satisfy all the requirements underSection 47 (xiv) [proviso a, b and c] of the Income Tax Act [hereinafter referred to as 'Act'] separately, to have exemption from thetransfer envisaged under Section 45 of the Act, involvingtaxability/exigency to tax ?. Is the Tribunal justified in passing theorder under challenge in this appeal, in favour of the assessee,treating the amount in the current account of the proprietorshipconcern, as a 'loan to the proprietor', which was stated as taken overby the Company, despite the absence of any such case before theCommissioner, whose order under Section 263 of the Act wassubjected to challenge before the Tribunal at the instance of theassessee ? These are the substantial questions of law, on which theparties were heard in this appeal. I. T. Appeal No. 1797 of 2009 : 2 : 2. The respondent assessee was running a proprietorship concern under the name and style as KAP (India) Constructions,Thrissur. The said establishment, which was pursuing business incivil construction on contract basis, was having the head office atBangalore and site offices at different places, including in Kerala.The proprietorship concern was run upto 30.09.2000 andthereafter, it was taken over by a limited Company by name KAP(India) Projects and Constructions (P) Limited, with all the assetsand liabilities of the former, as per the terms agreed and settled. 3. The respondent assesee filed return for the year 2001 -'02, declaring a total income of Rs. 47,83,440/-; of courserevealing the income received from the proprietorship concern upto 30.09.2000 and income from other sources as well. Pursuant toscrutiny under Section 143(3) of the Act, the assessment wasfinalized by the assessing officer as per Annexure A order dated30.10.2003, treating the assessed income as Rs.50,49,130/- andfixing tax liability accordingly. 4. On further scrutiny/perusal of the records, the appellant/Commissioner of Income Tax observed that, as per theterms and conditions of the agreement, all the assets of theproprietorship concern amounted to Rs.9,64,39,231.19 [including I. T. Appeal No. 1797 of 2009 : 3 : 3. The respondent assesee filed return for the year 2001 -'02, declaring a total income of Rs. 47,83,440/-; of courserevealing the income received from the proprietorship concern upto 30.09.2000 and income from other sources as well. Pursuant toscrutiny under Section 143(3) of the Act, the assessment wasfinalized by the assessing officer as per Annexure A order dated30.10.2003, treating the assessed income as Rs.50,49,130/- andfixing tax liability accordingly. 4. On further scrutiny/perusal of the records, the appellant/Commissioner of Income Tax observed that, as per theterms and conditions of the agreement, all the assets of theproprietorship concern amounted to Rs.9,64,39,231.19 [including I. T. Appeal No. 1797 of 2009 : 3 : the goodwill valued at Rs.2,45,00,000], which was taken over bythe Company, as per the values reflected in the Balance Sheet ofthe proprietary concern, as on 30.09.2000. It was also noted thatthe credit balance in the capital and current account of theassessee in the balance sheet of the proprietorship concern, as on30.09.2000, amounted to Rs.5,17,03,897.63. An amount ofRs.1,52,94,900/- represented the value of 1,52,949 shares of facevalue of Rs.100/- each and the balance amount was payable at theend of the year, which was shown as 'amount due to the assessee'under “unsecured loans” due to the assessee. As per the relevantrecords, the assesee had transferred to the Company his individualbusiness consisting of all the assets amounting toRs.9,64,39,231.19 [which includes the goodwill value ofRs.2,45,00,000/-]andtheliabilitiesamountingtoRs.4,47,35,333.56. As the transfer of goodwill would attract capitalgain tax under the Income Tax Act and since the goodwill valued atRs.2,45,00,0000/- remained untaxed under the Capital Gain Tax,Annexure A assessment finalized by the Assessing Officer wasnoted as erroneous and prejudicial to the interest of the revenue.It was accordingly, that a show-cause notice dated 14.10.2004 wasissued to the assessee to explain why the amount of goodwill : 4 : should not be brought to the tax net under the Capital Gain Tax. 5. On receipt of the said notice, a reply was submitted by theassessee, pointing out that he had satisfied the conditionsprescribed under Section 47 (xiv) of the Act, to have exemptionfrom the liability. It was pointed out, with reference to Section 47(xiv) (a), that all the assets and liabilities of the sole proprietorshipconcern stood transferred as the assets and liabilities of theCompany. In respect of Section 47 (xiv) (b), it was pointed outthat the assessee was holding shares worth 51% of the paid upcapital and that his share holding had never come down below 50%at any point of time. In respect of Section 47 (xiv) (c),it wasstated that the assessee had not received consideration/benefitdirectly or indirectly in any form or manner other than by way of'allotment of shares' in the Company and that he had not receivedany interest on the balance to his credit under the loan account aswell. After considering the explanation and also after perusing therecords, the Commissioner observed that all the conditionslaiddown under Section 47 (xiv) of the Act had not been fullfilled by theassessee. It was observed that the assessee had receivedconsideration in some form other than by way of allotment ofshares i.e. out of net asset of Rs.5,17,03,897.63 I. T. Appeal No. 1797 of 2009 I. T. Appeal No. 1797 of 2009 [Rs.9,64,39,231.19 - Rs.4,47,35,333.56]; as allotment of shareswas only to an extent of Rs.1,52,94,900/-, whereas a sum ofRs.2,73,07,905/- was treated as 'unsecured loan'. Based on thesaid finding, it was held as per Annexure B order dated24.11.2004 that, 'goodwill' to an extent of Rs.2,45,00,000/-omitted to be taxed under the Capital Gain Tax and henceAnnexure A order passed by the Assessing Officer was set aside,directing to recompute the assessee's total income, taking intoaccount the said figure as well and to fix the liability accordingly. 6. Pursuant to Annexure B order, a fresh assessment wasdone by the Assessing Officer, as borne by Annexure C orderdated 21.12.2005. But on being aggrieved of Annexure B orderpassed by the Commissioner, the assessee took up the matter inappeal before the Income Tax Appellate Tribunal. After hearingboth the sides, the Tribunal, as per Annexure D order dated12.06.2009, intercepted Annexure C order passed by theCommissioner; holding that invocation of the power by theCommissioner under Section 263 of the Act was wrong and furtherthat there was no violation of Section 47 (xiv) at the hands of theassesee, as the deficit figure was to be treated as genuine liabilityof the sole proprietorship concern, to the proprietor. It was also I. T. Appeal No. 1797 of 2009 : 6 : observed that, no consideration was received by the assessee inrespect of the transfer of assets and liabilities, except to the extentas mentioned by the assessee and further, even if the disputedamount shown in the 'current account' of the proprietorshipconcern as due to the proprietor [stated as taken over by theCompany as a loan, to be repaid on demand], no suchamount/consideration was received by the assessee in theparticular year, to be reckoned for the purpose of computation. Itwas accordingly, that Annexure B order passed by theCommissioner was interdicted and the appeal was allowed, whichforms the subject matter of challenge in this appeal preferred bythe Commissioner/Department. 7. Heard Mr. Jose Joseph, the learned standing counselappearing for the appellant and Mr. Gopinatha Menon, the learnedcounsel appearing for the respondent/assessee at length. 8. Any profits or gains arising from the transfer of capitalassets effected in the previous year shall, save as otherwiseprovided in the particular situations referred to under Section 45of the I.T. Act, are chargeable to income tax under the head“capital gains” and it shall be deemed to be the income of theprevious year in which the transfer took place. Certain transactions I. T. Appeal No. 1797 of 2009 have been taken outside the purview of Section 45, as dealt withunder Section 47 of the Income Tax Act. Since we are concernedonly with Section 47 (xiv), it is extracted below : “(xiv) where a sole proprietary concern is succeeded by acompany in the business carried on by it as a result of whichthe sole proprietary concern sells or otherwise transfersany capital asset or intangible asset to the company : Provided that - (a) all the assets and liabilities of the soleproprietary concern relating to the business immediatelybefore the succession become the assets and liabilities ofthe company ; (b) the shareholding of the sole proprietor in thecompany is not less than fifty per cent of the total votingpower in the company and his shareholding continues remainas such for a period of five years from the date of thesuccession; and (c) the sole proprietor does not receive anyconsideration or benefit, directly or indirectly, in any formor manner, other than by way of allotment of shares in thecompany;” 9. According to the learned standing counsel for the Provided that - (a) all the assets and liabilities of the soleproprietary concern relating to the business immediatelybefore the succession become the assets and liabilities ofthe company ; (b) the shareholding of the sole proprietor in thecompany is not less than fifty per cent of the total votingpower in the company and his shareholding continues remainas such for a period of five years from the date of thesuccession; and (c) the sole proprietor does not receive anyconsideration or benefit, directly or indirectly, in any formor manner, other than by way of allotment of shares in thecompany;” 9. According to the learned standing counsel for the appellant, the amount pumped in by the sole proprietor to his'proprietorship concern' and shown in the current account, can benothing other than investment, which, when taken over, will form I. T. Appeal No. 1797 of 2009 : 8 : the liability of the Company, to be discharged only by allottingsharesand in no other manner; to be in conformity with Section 47(xiv) (c) and to have the benefit of exemption accordingly. Sameis the position in the case of a partnership as well, as it is alwaysopen for the partners to effect capital contributions, shown as aliability, and it can be sought to be compensated only by allotmentof shares for availing the benefit of exemption in terms of Section47 (xiv) of the Income Tax Act. In other words, it is only anaccounting gimmick displayed by the assessee in the books ofaccounts, showing the disputed amount as part of the currentaccount and the liability. The statutory provision makes itobligatory to have it reckoned and compensated only by 'allotmentof shares' and no other manner, if exemption is claimed in respectof the Capital Gain Tax. 10. According to Mr. Gopinatha Menon, the learned counselappearing for the respondent, the disputed portion of the amountdoes not form part of the consideration at all and that, as pointedout by the Tribunal in paragraph 11 of Annexure D order, no suchconsideration was ever received by the assessee in the very samefinancial year '2001 - '02'. The learned counsel sought to defendthe order passed by the Tribunal, also placing reliance on the I. T. Appeal No. 1797 of 2009 decisions referred to and relied on by the Tribunal in the very sameorder, contending that invocation of power under Section 263 ofthe Act by the Commissioner was quite wrong. The learned counselalso pointed out that, even if two views are possible, it is not aground for interference, when the view already expressed is alsosustainable. 11. We have gone through the decisions cited across the Barand as referred to in Annexure D order passed by the Tribunal.With regard to the observation made by the Tribunal, finding faultwith the course pursued by the Commissioner for invoking thepower under Section 263 of the Act, it is to be noted that, Section263 confers adequate power upon the Commissioner to call for andexamine any proceedings under the Act, if he considers that theorder passed by the assessing officer is erroneous, in so far as it is'prejudicial to the interest of the revenue'. Under suchcircumstances, appropriate orders can be passed, after affordingan opportunity of hearing, as the circumstances of the case wouldjustify, which includes an order enhancing or modifying assessmentor cancelling or directing a fresh assessment. 12. There is no dispute as to the factual position that theworth of the assets of the proprietorship concern transferred to the 12. There is no dispute as to the factual position that theworth of the assets of the proprietorship concern transferred to the Company by the assessee amounted to Rs.9,64,39,231.19 andthe liabilities were to the tune of Rs.4,47,35,333.56. The valueof the assets transferred includes the 'goodwill' as well, which wasvalued at Rs.2,45,00,000/-. By virtue of the mandate underSection 55(1)(b) and 55(2)(a) of the Income Tax Act, it was notedthat the cost of acquisition and cost of improvement of the'goodwill' shall be taken as 'nil' and it was accordingly, that thedifferential portion was worked out and shown as the amountactually due to the assessee. Out of this amount, since the value ofthe total shares amounted to only Rs.1,52,94,9000/- [whileshowing Rs.2,73,07,905/- as unsecured loan], it was observed thatSection 47 (xiv) (c) was not satisfied completely and the 'good will'portion to an extent of Rs.2,45,00,000/- was also liable to betaxed. This is not an attempt on the part of the Commissioner 'togenerate some more revenue' by refixing the assessment, if twoviews were possible. It is not a question of two alternate views,but a case of only 'one view', which came to be wrongly decided bythe Tribunal. As it stands so, it is the correct view that can besustained and not the impaired one. Non-satisfaction of theingredient under Section 47 (xiv)(c) in toto is a major defect and assuch, value of the 'goodwill' i.e. Rs.2,45,00,000/- admittedly forming part of the assets transferred, required to be taxed undersuch circumstances. This being the position, the judicial precedentscited and sought to be relied on by the assesee [as relied on by theTribunal] actually do not come to the rescue of the assesee. ThisCourt is of the firm view that the power exercised by theCommissioner under Section 263 of the Act is correct and that thefinding rendered by the Tribunal, to the contrary, is not sustainable. 13. Coming to the reasoning given by the Tribunal, that'deficit' has to be treated as 'loan' given by the proprietorshipconcern, to the proprietor; [n turn taken over by the Company as'loan' to be cleared on demand], it is to be noted that, under nocircumstances can a person borrow from himself and transpose as'creditor' and 'borrower' at the same time. To this extent,'proprietor' and 'proprietorship concern' are not two differententities. Whatever is pumped in by the 'proprietor' to hisproprietorship, is nothing other than investment and it forms partof the asset, which, when taken over by the Company, will have tobe compensated [after deducting the liabilities]. If at all anyexemption is to be claimed to come outside the purview of'transfer' envisaged under Section 45 of the Act, variousrequirements mentioned under Section 47 (xiv) have to be I. T. Appeal No. 1797 of 2009 satisfied. There may not be any dispute to the fact that all theassets and liabilities of the proprietorship concern have been takenover, but if there is wrong description of part of the assetsconcerned as a 'liability', such wrong procedure/accounting cannotbe glibly swallowed, disregarding the mandate of the provisions oflaw in relation to the exigibility to tax. The proprietorship concerncould have borrowed any amount to have categorized as a 'loan',only if it was procured from some other source, than himself/theproprietor. The finding and reasoning given by the Tribunal arenot at all correct and it is liable to be intercepted. I. T. Appeal No. 1797 of 2009 satisfied. There may not be any dispute to the fact that all theassets and liabilities of the proprietorship concern have been takenover, but if there is wrong description of part of the assetsconcerned as a 'liability', such wrong procedure/accounting cannotbe glibly swallowed, disregarding the mandate of the provisions oflaw in relation to the exigibility to tax. The proprietorship concerncould have borrowed any amount to have categorized as a 'loan',only if it was procured from some other source, than himself/theproprietor. The finding and reasoning given by the Tribunal arenot at all correct and it is liable to be intercepted. 14. With regard to the further observation made by theTribunal in Annexure D order, that even if the amount in dispute istreated as part of consideration, no such consideration was everreceived by the assesee in the year '2001- 02' and hence Section47 (xiv)(c) was not attracted; it is to be noted that the 'transfer'was effected as on 01.10.2000, on which date, the disputedamount described as the liability of the 'proprietorship concern', tothe proprietor, was stated as taken over by the Company as'unsecured loan' to be discharged to the proprietor on demand.This by itself shows that the Company could not have borrowed anyamount from the proprietor/assessee, unless the amount was credited to the latter's account. Though the amount actually did notcome to the hands of the assessee/proprietor, the moment it isshown as 'loan' repayable to the proprietor, there results anindirect admission that the said amount had already come to thecredit of the proprietor/assessee; from whom the Company hadtaken over the 'loan'. By virtue of the legal fiction in this regard, itcan be easily said that, part of the consideration was paid by theCompany to the 'proprietor' pursuant to taking over theproprietorship concern with all the assets and liabilities; whichincluded the cost of the 'goodwill' as well, to an extent ofRs.2,45,00,000/-. In so far as there is no dispute that the totalnumber of shares transferred was only 1,52,949 [having face valueof Rs.100/- each], with a total worth of Rs.1,52,94,900/-, therewas clear deficit, which was never paid or satisfied in the form ofshares as envisaged under Section 47 (xiv) (c) of the Act. In otherwords, the terminology used under Section 47 (xiv) (c) is quitecategoric, that the proprietor shall not receive any consideration orbenefit directly or directly, in any form or manner, other than byway of allotment of shares in the Company. The very usage ofexpression, asserting the same to an appropriate extent, clearlyreveals the intent of law makers that, it shall only be by way of ''shares and in no other way at all. When the Statute sayssomething to be done in a particular manner, it shall be done onlyin that manner and not in other manner. We find support from theruling rendered by the Apex Court in Competent Authority Vs.Barangore Jute Factory and Ors.[(2005) 13 SCC 477] and bythis Court in Lakshmikutty Amma Vs. Vijayalakshmikutty[1992 (2) KLT 341] taking a cue from the celebrated Englishdecision 1875 (1) Ch.D 426 [Taylor Vs. Taylor]. The value of'goodwill' of the proprietorship firm passed on to theCompany, having a value of Rs.2,45,00,000/-as part ofconsideration/benefit which has been indirectly/wrongly shown as'loan' from the “proprietorship concern, to the proprietor”, takenover by the Company, to be satisfied as and when demanded.Viewed in the above circumstances, the said consideration hadlegally come to the credit of the proprietor/assessee on 01.10.2000itself, to have transposed the latter as a creditor of the Company,who sought to show the said amount as a 'loan' procured from theproprietor. 15. In this context, it is also relevant to note the stand ofthe assesee as per the 'case/explanation' projected by him, inresponse to the show-cause notice issued by the Commissioner 15. In this context, it is also relevant to note the stand ofthe assesee as per the 'case/explanation' projected by him, inresponse to the show-cause notice issued by the Commissioner proposing to exercise the power under Section 263 of the Act. Thesaid version is specifically taken note of by the Commissioner inAnnexure B order and it has been extracted by the Tribunal in'paragraph 4'of Annexure D as well, which is to the followingeffect: “In response to the said notice the assessee vide his letterdated 15-11-2004 has stated as under :- 1. All the conditions prescribed u/s 47(xiv) (c) havebeen complied with by assessee. The total issued and paid upcapital of the Company as on 31.03.2002 was Rs.3 Crores ofwhich, I subscribed Rs.153 lacs being 50% of the Paid-upcapital. The conditions of provisions (b) have been satisfied.So far, the percentage of my share holding has not come down.All the assets and liabilities of the Company. Nowhere in theSection, it is mentioned that shares should be issued for thewhole amount. As and when shares are issued, my shareholdingshould not be less than 50% of the total voting power. Thatcondition is fully satisfied. 2. Regarding provision (c), I may inform you that I havenot received any consideration or benefit directly or indirectlyin any form or manner other than by way of allotment ofshares in the Company. I have not received any interest onthe balance to my credit under loan account also. 3. Provision 'b' also does not stipulate that sharesshould be issued for the value of entire assets taken over by I. T. Appeal No. 1797 of 2009 the Company. 4. For the reasons mentioned above, I strongly objectto your proposal to set aside the assessment to bring to taxthe value of Good will of Rs.2,45,00,000/- under the head'Capital Gains'.” It was with reference to the said stand/case, that the matter wasconsidered and decided by the Commissioner. But on challengingthe said order before the Tribunal, the assessee/respondent soughtto improve his case by contending something more, as referred toin paragraph 7of Annexure D. 16. The Tribunal has said much in'paragraph 10'of its order,stretching the proceedings/provisions even beyond the logicallimits, when it says that parties [proprietor and the Company] atthe time of taking over, had agreed that the 'current accountbalance' of the proprietor in the books of the whole proprietaryconcern was to be taken over as a liability under the loan accountand was to be discharged as 'loan'. A reference is also made todefinition of the term 'consideration' as given in Indian Contract Act[Section 23 mentioned therein appears to be a mistake, whichmight be Section 2(d)]. It is quite fundamental, that there cannotbe any agreement contrary to the provisions of law. When theTribunal propounds that there was an agreement between the 'proprietor' and the 'proprietorship concern' [treated as twodifferent entities], the necessity to have two legal persons to arriveat a contract (lender and borrower), based on the considerationpaid or agreed to be paid, was quite conveniently ignored. The roleof two different persons/entities and their status unfortunately hasbeen conferred upon the same person, i.e. the 'proprietor'; thuspropounding a strange proposition that the 'proprietorship concern'had borrowed an amount from the 'proprietor', to be satisfied in thedue course on demand; which liability in turn was stated as takenover by the Company. 'proprietor' and the 'proprietorship concern' [treated as twodifferent entities], the necessity to have two legal persons to arriveat a contract (lender and borrower), based on the considerationpaid or agreed to be paid, was quite conveniently ignored. The roleof two different persons/entities and their status unfortunately hasbeen conferred upon the same person, i.e. the 'proprietor'; thuspropounding a strange proposition that the 'proprietorship concern'had borrowed an amount from the 'proprietor', to be satisfied in thedue course on demand; which liability in turn was stated as takenover by the Company. 17. The crux of the above discussion is that, the legalposition applied correctly by the Commissioner to the given set offacts and circumstances, as per Annexure B order, came to bedisturbed by the Tribunal, as per Annexure D order. It is true thatin tax parlance, 'partnership' is different from 'partners' and bothcan be taxed, though partnership firm is not a legal entity. Butcoming to proprietorship concern, there is no identity to'proprietorship concern', leaving the 'proprietor' and the assesseeis always the proprietor in such cases. In other words, there cannot be any assessment separately for the 'proprietor' and'proprietorship concern'. There is absolutely no rhyme or reason to I. T. Appeal No. 1797 of 2009 have interfered with Annexure B order. The finding and reasoninggiven by the Tribunal is per se wrong and unsustainable in allrespects. Annexure D order passed by the Tribunal stands setaside. Annexure B passed by the Commissioner is restored. Appeal stands allowed. No cost. sd/-P. R. RAMACHANDRA MENON, JUDGE kmd sd/-A. HARIPRASAD,JUDGE /True copy/ P.A. to Judge