Ita/274/2004 Of The Commissioner Of Income Tax v. M/S.gayathri Enterprises

IN THE HIGH COURT OF KARNATAKA AT BANGALOREDATED THIS THE 4 DAY OF JULY, 2012) PRESENT THE HON’BLE MR.JUSTICE D V SHYLENDRA KUMAR AND THE HON’BLE MR.JUSTICE B MANOHAR Income Tax Appeal No.274 of 2004 C/ Income Tax Appeal No.68 of 2010 and ITA CROB No. 1 of 2005 in Income Tax Appeal No.274 of 2004 In ITA No. 274 of 2004: BETWEEN: 1.THR COMMISSIONER OF INCOME TAXCHNITRAL CIRCLC.R. BUILDING,QUEENS ROAD,BANGALORECHNITRAL CIRCLC.R. BUILDING,QUEENS ROAD,BANGALORE 2.THR DEPULY COMMISSIONER CENTRE CIRCLE-2(1) C.R. BUILDING,QUEENS ROAD,QUEENS ROAD, BANGALOREAPPBRLLANT IBY SRI M V SESHACHALA @SRI K V ARAVIND, ADVS.}SRI K V ARAVIND, ADVS.} AND: M/S. GAYATHRI ENTERPRISESNO.160, (OLD NO.104), R.V.LAYOUT,KUMARA PARK WEST,BANGALORERBSPONDENT IBY SRI A SHANKAR &SRI M LAVA, ADVS.| THIS APPEAL IS FILED UNDER SECTION 260A OF THEINCOME TAX ACT, 1961, PRAYING TO SET ASIDE ORDER DATED18.12.2003 PASSED IN IT(SS)JA NO. 33/BANG/2003 FOR THASSESSMENT YEAR 1989-90 UPTO 22.07.1998 AND ETC., In ITA No. 68 of 2010: BETWEEN: M/S GAYATHRI ENTERPRISES(SINCE DISSOLVED)REP. [TS ERSTWHILE PARTNERSRI. A.S.>CHINNASWAMY RAJNO.160, (OLD NO. 104)R.V. LAYOUT, KUMARA PARK WESTBANGALORE —- 560 O2APPBRLLAN IBY SRI A SHANKAR &SRI M LAVA, ADVS.| AND: THE DY. COMMISSIONEBR OF INCOME-TACENTRAL CIRCLE 2(1)C.R.BUILDING, QUEENS ROAD,BANGALORE — 560 OO1RBSPONDENT IBY SRI K V ARAVIND, ADV.] THIS APPEAL IS FILED UNDER SECTION 260A OF THEINCOME TAX ACT, 1961, PRAYING TO SET ASIDE ORDER DATED18.12.2003 PASSED IN IT(SS)A NO. 593/BNG/2003 FOR THE BLOCASSESSMENI PERIOD 1989-90 TO 22.77.1998 AND EIT In ITA CROB No. 1 of 2005: BETWEEN: GAYATHRI ENTRBRPRISENO.160, (OLD NO. 104)R.V. LAYOUT, KUMARA PARK WESTBANGALORE CROSSOBJECTOR IBY SRI A SHANKAR @ORI M LAVA, ADVS.| AND: 1.THR COMMISSIONBR OF INCOME TAXCENTRAL CIRCLE,CENTRAL CIRCLE, C.R.BUILDINGQUEENS ROAD,QUEENS ROAD, BANGALORE — 560 OO] 2.THR DBEPUTY COMMISSIONBCENTRAL CIRCLE 2(1)CENTRAL CIRCLE 2(1) C.R.BUILDINGS, QUEENS ROAD BANGALORE — 560 OO]RBSPONDENTS |BY SRI M V SESHACHALA, ADV.| THIS ITA CROB IS FILED UNDER SBCTION JO0OA OF THINCOME TAX ACT, 1961 R/W ORDER XLI RULE 22 OF THE CPC,1908, PRAYING TO SET ASIDE ORDER DATED 18.12.2003 PASSED INITA NO. 53/BANG/2003 FOR THE BLOCK ASSESSMENT PERIOD1989-90 UPTO 22.07.1998 AND ETC., THESE APPEALS A/W ITA CROB COMING ON FOR HEARINGTHIS DAY, D V SHYLENDRA KUMAR. J., DELIVERED THEKOLLOWING: JU DBiGMENT RE: ITA No.274/2004: This appeal by the revenue under section 260-A of theIncome Tax Act, 1961 |for short ‘the Act’] is against the orderoT theTribunaldated18.12.20031n AppealNo. IT|SS|A.53 /Bang/200 2.The Tribunal having reversed the orders passed by theassessing authority and affirming order of the first appellateauthority holding that the respondent — assessee was liableto pay certain tax in respect of its undisclosed income for theblock period 1.4.1988 up to 22.7.1998 in view of certaintransfer of the assets of the respondent — assessee that suchtransfer had taken place as on 1.6.1992 and therefore therespondent — assessee which is otherwise liable to pay tax onthe income by way of capital gain earned by the firm inrespect of assets that had been transferred and as pervaluation as indicated in an agreement amongst therespondent — assessee and its erstwhile partners, had been suppressed or not disclosed by the firm and therefore the taxhiability under Chapter-XIV-B of the Act, but this orderhaving been reversed by the Tribunal on an erroneousassumption of facts and law, the order is vitiated and isliable to be set aside etc. 3.At the time of admitting this appeal, this court hadframed the following questions as arising out of the order ofthe Tribunal and meriting our examination in this appeal. suppressed or not disclosed by the firm and therefore the taxhiability under Chapter-XIV-B of the Act, but this orderhaving been reversed by the Tribunal on an erroneousassumption of facts and law, the order is vitiated and isliable to be set aside etc. 3.At the time of admitting this appeal, this court hadframed the following questions as arising out of the order ofthe Tribunal and meriting our examination in this appeal. “1.Whether the Tribunal was correct in holdingthat capital gains should be brought to tax inthe year in which the dissolution of the firmtakes place and not the year in whichconsequentfo suchdissolutionthedistribution of assets takes place as persection 45/4/ of the Act?that capital gains should be brought to tax inthe year in which the dissolution of the firmtakes place and not the year in whichconsequentfo suchdissolutionthedistribution of assets takes place as persection 45/4/ of the Act? 2.Whether the Tribunal was correct in arrivingat a conclusion that the assets held by theassessee was treated as its stock in tradeand therefore could not be brought to taxunder the head capital gains despite therebeing no evidence to arrive at such aconclusion or a categorical assertion from theassessee that these assets had been treatedas its stock in trade except the strayobservation of the Appellate Commissionerwhich could not be treated as qa conclusionat a conclusion that the assets held by theassessee was treated as its stock in tradeand therefore could not be brought to taxunder the head capital gains despite therebeing no evidence to arrive at such aconclusion or a categorical assertion from theassessee that these assets had been treatedas its stock in trade except the strayobservation of the Appellate Commissionerwhich could not be treated as qa conclusion 3.WhethertheTribunal has|ignoredthematerial seized during search as inventorisedas A/HC/23, A/HC/12, etc, property taxpayment made by the assessee on 4.11.1988statement of one of the partners admittingthat the firm was not dissolved on 25.3.1987but continued to exists upto 1988-89 and thecategoricalfindingof|the|AppellateCommissioner that the firm continued upto1992 and consequently, recorded a perversefinding that the income derived from the saleof the assets of the firm was not liable to taxunder the head ‘Capital Gains’, for the Blockperiod?’material seized during search as inventorisedas A/HC/23, A/HC/12, etc, property taxpayment made by the assessee on 4.11.1988statement of one of the partners admittingthat the firm was not dissolved on 25.3.1987but continued to exists upto 1988-89 and thecategoricalfindingof|the|AppellateCommissioner that the firm continued upto1992 and consequently, recorded a perversefinding that the income derived from the saleof the assets of the firm was not liable to taxunder the head ‘Capital Gains’, for the Blockperiod?’ 4Any income earned during the block period had notbeen disclosed by the assessee, it can be made subjectmatter of assessment under the Act, if such informationrelatingCO undisclosedincome.hadbeen>=64;:16?pursuant to a search of the premises of the assessee who isliable to pay tax or pursuant to search of the premises of anyother person, but the material there leading to the revelationof undisclosed income of the assessee, which can be broughtto tax as the income of the block period. 5.A tew undisputed facts as can be inferred from therecords are that partnership firm by name GayathriEnterprises came to be formed by the joining together of asmany as seven partners as on 19.5.1980. It appears whilethree minors were admitted to the benefit of the partnershipfirm and later the company by name M/s. ASK BrothersPrivate Limited was also admitted as a partner as on1.3.1986 and thereby the number of partners swell toeleven. 5.A tew undisputed facts as can be inferred from therecords are that partnership firm by name GayathriEnterprises came to be formed by the joining together of asmany as seven partners as on 19.5.1980. It appears whilethree minors were admitted to the benefit of the partnershipfirm and later the company by name M/s. ASK BrothersPrivate Limited was also admitted as a partner as on1.3.1986 and thereby the number of partners swell toeleven. 6.It is the version of the assessee that the partnershipcame to be dissolved as on 25.3.198/7; that it is confirmed bthe subsequent agreement dated 25.5.1987 and the mannerof distribution of the shares of the partners of the dissolvedform which had been indicated in the agreement dated29.9.1987 came to be realigned and so also the valuation ofthe assets of the firm as per the further agreement dated1.6.1992.. While such is the version insotar as these threeevents are concerned as asserted by the assessee, the view of the revenue is that the events said to have taken place, suchas dissolution of the firm on 25.3.1987 and the sharing ratioof the assets, claimed on the basis of the agreement dated95.5.1987 are all documents which are either antedated orfabricated for the purpose of avoiding legal consequence oftransfer of the assets of the firm taking place as on 1.6.1992under the agreement of the even date and this developmenthad been deliberately withheld from the revenue for evadingpayment of tax on the possible capital gains that arises inthe hands of the firm for transferring the assets of the firmwhich were two parcels of immovable properties in favour ofsome of the partners alone and in consideration of the otherpartners relinquishing their entitlement to the shares in thecompany which was a partner to which the assets came tobe transferred and such value of shares which wererelinquished by some of the partners in favour of thecompany itself or other partners was indicated to be Rs.4crores and based on this value of two parcels of land whichwere assets of the firm, the assessing authority computed the capital gains worked out at a sum of Rs.3,43,49,943/-and brought this amount to tax as the income of the firmduring the block period. It is this liability which became thebone of contention between the assessee and the revenue. T The assessee carried the matter by way of appeal to theCommissioner of Income Tax [Appeals], but without muchsuccess as the Commissioner dismissed the appeal and theassessee having pursued the matter by way of second appealto the Tribunal, found success before the Tribunal as theTribunal allowed the appeal for more than one reason and asa result of these orders, the assessee was relieved of the taxliability as determined by the assessing authority andtherefore the revenue is in appeal and as noticed aboveraising the questions referred to above. 8.We have heard Sri. M V Seshachala, learned seniorstanding counsel appearing for the appellant — revenue andsri. Shankar, learned counsel for the respondent — assesseeat some length. Q What is essentially urged before us by the learnedsenior standing counsel appearing for the appellant -revenue is that the Tribunal has totally ignored the materialwhich was available; that it has recorded findings contraryto the findings recorded by the authorities even without anybasis or without any rationale; that the Tribunal failed to seeor has ignored specific material which is virtually in thenature of admission made by the very partners of the firm toindicate that the firm, in fact, had not been dissolved as on29.3.1987; that it has continued to exist even during theyear 1988 and onwards and the Tribunal has alsooverlooked the documentary evidence in the form of certainentries in the revenue records showing the names oferstwhile owners and then firm even much later to the year1987 and such material could not have been ignored by theTribunal for reversing the order passed by the authoritiesbelow. 10,However, Sri. Seshachala, learned counsel appearingfor the appellant — assessee has also taken us through theprovisions of section 45/4] of the Act, its legislative history,definition of ‘transfer’ as it occurs in section 2/47] of the Act,history of clause |6| of sub-section |11] to Section 47 of theAct coming on to the statute book on 1.4.1987 changesbrought about by the Finance Act, 1987 and also the changeof legal position on and after 1.4.1992 in the provisions ofsections 182, 183 and 184 of the Act which has come intoeffect from 1.4.1992 and therefore has urged that thecombined effect of these amendments operating is capitalgains arising due to the transfer of a capital asset by way oftransfer of an asset due to the distribution of the assets ondissolution of the firm has to be necessarily brought to taxas the capital gains of the firm in the year in which thetransfer has taken place in terms of the provisions of section45/4] of the Act. 11.In support of such submission, Sri. M V Seshachala,learned counsel has placed reliance on the Judgment of theBombay High Court in the case of‘THE COMMISSIONER OFINCOME TAX v. A N NAIK & ASSOCIATES’reported in[2004] 265 ITR 346 [Bom|1 which has been followed anapplied by this court in the case of.‘COMMISSIONER OFINCOME TAX v. GURUNATH TALKIES’reported in.SIS ITR59.The two cases wherein the legislative history of section45/4] read with section 2/47] had been elaborately discussedand therefore urges that the Tribunal is definitely in error innot following the ratio of these cases for disposing the appealbefore the Tribunal and concluding to the contrary. 12,Mr. Seshachala has urged with some vehemence thatthe Tribunal overlooking the legal position and particularlyby opining that the subject assets had been held as stock intrade is a finding which is not based on any material onrecord and is more an assumption and allowing the appealon such premise is also an error committed in law etc, 13.orl. Shankar, learned counsel appearing for therespondent — assessee, on the other hand, has sought toraise three issues and the first and foremost submission isthat the revenue had never made good the factual position ofthe firm not having been dissolved as on 25.3.1987 even asindicated in the document which was sought to be reliedupon, but which has been conveniently avoided by theauthorities though had been called for production by theassessee by indicating that it is antedated or otherwise is notacceptable etc. 14,It is secondly urged that the provisions of section 45/4]have no application as the firm having been dissolved andtherefore the assets to be shared as on the date ofdissolution of the firm in terms of the provisions of section47\11] of the Act as it stood at the relevant point of time, anydistribution of the capital assets on the dissolution of a firm,body of individuals or other association of persons is not tobe regarded as transfer and as this legal position held the field on the day of dissolution, all other questions do notarise for examination and therefore irrespective of thefindings recorded by the Tribunal, if the subject transactionis not to be regarded as transfer and therefore there is noneed for disturbing the order of the Tribunal. 15)By way of abundant caution, Mr. Shankar, learnedcounsel for the assessee has also urged that the provisionsof Chapter-XIV-B of the Act will be attracted only in respectof the undisclosed income of the assessee relating to theblock period has come to the knowledge of the assessingauthority and such information is attributable to materialunearthed during a search pursuant to an authorizationunder section 132 ot the Act. 16.It is also asserted that even on a combined reading ofthe instruments reflecting the three events, the transfer hastaken place much prior to 1.6.1992; that the instrumentdated 1.6.1992 is only an instrument tor revaluing the assets of the firm and not for transfer, but settling theaccounts on revaluation as on that day etc. 15)By way of abundant caution, Mr. Shankar, learnedcounsel for the assessee has also urged that the provisionsof Chapter-XIV-B of the Act will be attracted only in respectof the undisclosed income of the assessee relating to theblock period has come to the knowledge of the assessingauthority and such information is attributable to materialunearthed during a search pursuant to an authorizationunder section 132 ot the Act. 16.It is also asserted that even on a combined reading ofthe instruments reflecting the three events, the transfer hastaken place much prior to 1.6.1992; that the instrumentdated 1.6.1992 is only an instrument tor revaluing the assets of the firm and not for transfer, but settling theaccounts on revaluation as on that day etc. 17.Sri A Shankar, has also asserted that the search wasof the business premises of Hotel Chalukya at No 44,Racecourse Road, Bangalore belonging to M/s Atria group,but no document or material revealing non-disclosure of anyincome on the part of the assessee was found as such and itis only based on some account books relating to M/sRamaleela Enterprises, which were available at the place ofsearch and claimed to be seized documents and it is furtherclaimed that the source of information is certain entries inthe books of account of M/s Ramaleela Enterprises, whereinthe assessee’s name figured as a debtor and a statementsaid to be given by a partner, and the three documentsreferred to and relied upon by the authorities were not partof the material unearthed during the search and thereforehas submitted that the other materials could not have beenused for the purpose of bringing to tax the undisclosedincome of the block period. 18,It is also submitted by Sri Shankar that even thefactum of dissolution, distribution of shares and revaluationwere all part of the revelation made by each of the partnersof the firm and not as though there was a. totanondisclosure of the development to the revenue. 19,In support of these contentions, Sri Shankar hasplaced reliance on a good number of authorities. ACOWe have bestowed our attention to the submissionsmade at the Bar and perused the order of the tribunal, asalso the grounds urged in support of the memorandum ofappeal, 21.We find that the tribunal has basically proceeded onthe premises that the seized material|Per se-did not indicateany undisclosed income of the assessee 1.e. the firm and it isalso opined that this is so because the information which issought to be used was not directly one relating to theassessee, but an indirect one, such as in the account books of some other person the name the firm figures in somecapacity. The tribunal also did not agree with the findingthat the firm had continued on and after 1-4-1987, based onthe statement of Sri Ramachandra Raje Urs was not acorrect approach etc. DD?Though it is brought to our notice by Sri M Vseshachala, learned senior standing counsel for theappellant-revenue that the finding to the effect that the firmwas dissolved with eftect from 25-3-1987 was not warrantedin the facts and circumstances of the case and particularlyin the wake of the entries in the books of accounts of M/sRamaleela Enterprises indicates the existence of the firmand the statement of the partner etc., we are of the opinionthat in matters where a plausible view can be taken andmore so in a matter where a finding is based on a reading ofthe contents of a couple of documents and its inference,which becomes a finding and if more plausible views orinferences can be drawn, such matters are not matters which are required to be examined as a pure question of lawwithin the scope of Section 260A of the Act. 23|We find in the facts and circumstances of the case, thematerial on record was definitely not of clinching nature andthat the only conclusion could be that the firm was notdissolved on 25-3-1987, but only later. It may be or may not86N which are required to be examined as a pure question of lawwithin the scope of Section 260A of the Act. 23|We find in the facts and circumstances of the case, thematerial on record was definitely not of clinching nature andthat the only conclusion could be that the firm was notdissolved on 25-3-1987, but only later. It may be or may not86N DE|The entire proceedings being on the premise that thefirm continued to exist even during 1988 and because oiwhich position, the provisions of the Finance Act, 1987 areTO bemade.applicableandthereforetheB>;:16;consequences, we are of the view that it is not possible,unless there is a positive finding that the firm did exist after29.03.1987 or after 01.04.1987. This factual position is notdefinite or clear, deserving a conclusion in law. In suchcircumstance, in our considered opinion, an inference on thelegal position is not warranted. 25,Though Sri Seshachala has very vehemently urged thatthe consequences that follow in law by operation of theprovisions of sub-section (4) of Section 45 of the Act evenassuming that the firm was dissolved after 25-3-1987, in thesense that the firm was dissolved on or before 1-4-1987 also,the provisions of sub-section (4) of Section 45 of the Act isgood enough and this coupled with the provisions of Section189 of the Act, has a legal effect of bringing to tax the gain ofthe firm in view of transfer being on 1-6-1992, as on thisdate, this argument is again on an assumption of facts andtherefore not warranting an examination in law. We say sofor the reason that even the fact that the transfer took placeonly on 1-6-1992 is a fact which is not definite as a findingon tact and on the other hand it is one to be interred on areading of all three documents, referred to above, 26.If the revenue is to rely upon these three documentsfor some part of them to claim that the documents revealsome undisclosed income of the assessee which has escaped tax and earned during the block period, we find at the sametime not giving same importance to the other parts of thedocuments, but understanding the other clauses by way ofinference or on a logic attributing certain motives to theassessee iS not a proper way olf reading the documentassuming that it is relatable to the search and has a link tothe search. OT”In the scheme of Section 158B in Chapter XIV-B of theAct, revelation of any undisclosed income should be clearand direct. As we find that it is not so in the present facts|and circumstances of the case, we hold that the scope forinterference with the order of the tribunal under Section260A of the Act is very less and therefore we do not proposeto examine the questions as had been formulated at the timeof admission of this appeal and do not answer the questionsas|OnenotwarrantingansSWeCin.thefacts4=?circumstances of the case and accordingly dismiss theappeal without disturbing the order passed by the tribunal. RE: ITA)CROB 1 OF 2005 OS|Thiscross-objection1S|dismissedfollowing:16judgment delivered by this court in ITA No 274 of 2004,holding that a cross objection is not tenable in an appealunder section 260A of the Act. Even otherwise, theassessee having come up with a separate appeal in respectof the very questions by filing ITA No 68 of 2010, this cross-objection does not survive and it is accordingly dismissed. RE: ITA No 68 OF 2010: 2QYori A Shankar, learned counsel for the appellant-assessee submits that in the wake of dismissal of the appealof the revenue in ITA No 274 of 2004, as per the judgmentabove, the question has become academic and the appealdoes not survive for examination. It is accordinglydismissed| Sd/-JUDGE Sd/-JU DG