Ita/663/2008 Of The Commissioner Of Income Tax v. Shri Mohan Virwani

1 IN THR HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 18[‘T]DAY OF AUGUST 2014 PRESENT THR HON'BLE MR. JUSTICE N. KUMAR. ANT) THR HON'BLE MRS. JUSTICKH RATHNAKALA LT.A. NO.663 /2008 A/W I.T.A.NOs.646,692, 696, 609 AND 666 OF 2008 IN ITA NO 663 /2008 BRTWHREN 1.THE COMMISSIONBR OF INCOME TAX.C.R. BUILDINGQUEENS ROAD,BANGALORE 2. THERE ASST. COMMISSIONER OF INCOME TACENTRAL CIRCLE-2(3),C.R.BUILDING,QUEENS ROAD|BANGALORE. ... APPELLANTS (BY SRI.K V ARAVIND, ADV.) AN DSHRI MOHAN VIRWANLNO.101/102, EMBASSY CHAMERS,NO.o, VITHAL MALYA ROADBANGALORE -560 OO1. .. RESPONDENT (BY SRIYUTHS A SHANKAR & M LAVA, ADVS.) THIS ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISINGOUT OF ORDER DATED 17-12-2007 PASSED IN [TA NO.|914/BNG/2006, FOR THE ASSESSMENT YEAR 2002-2003,| PRAYING THAT THIS HON'BLBE COURT MAY BRK PLEASETO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.SIATED THEREIN, Il. ALLOW THR APPEAL AND SEI ASIDE THR ORDER.PASSED>BY|THERITATBANGALOREINITANO.914/BNG/2006,DATED|1/-12-2007CONFIRMTHERORDERS OF THR’ APPELLATK COMMISSIONER ANDASSISTANT COMMISSIONER OF INCOME TAX, CENTRALCIRCLE - 2(3), BANGALORE. IN ITA.NO.646/2008: 1.THE COMMISSIONBR OF INCOME TAX.C.R. BUILDING|QUEENS ROAD,BANGALORE 2. THRE ASST. COMMISSIONER OF INCOME TAXCENTRAL CIRCLE-2(3)C.R.BUILDING,QUEENS ROAD|BANGALORE._.. APPBLLANTS (BY SRI.K V ARAVIND, ADV.) ANT)MRS. RAJ M VIRMANINO.101/102, EMBASSY CHAMBERS, NO.5, VITTAL MALYA ROAD,BANGALORE-560 OO1.—. RESPONDENT (BY SRIYUTHS A SHANKAR & M LAVA, ADVS.) THIS ITA IS FILED U/S.260-A OF L.T.ACT, 1961|ARISING OUT OF ORDER DATED 1/7-12-200/7 PASSED IITA NO. 909/BNG/2006, FOR THE ASSESSMENT YEAR)2000-2001, PRAYING THAT THIS HON'BLE COURT MAY BE.PLEASED TO: I FORMULATE THE SUBSTANTIAL QUESTIONS OF|LAW STATED THEREIN, Il ALLOW THER APPEAL AND SET ASIDE THE ORDER|PASSED.BY|THRITATBANGALORE|INITANO.909/BNG/2006,DATED|17-12-2007CONFIRM,THERORDERS OF THRE APPELLATK COMMISSIONER ANDASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -.2(3), BANGALORE.| IN ITA NO 6952/2008 BE ITWEH 1.THE COMMISSIONER OF INCOME TAX.CHENTRAL CIRCLEC.R. BUILDINGQUEENS ROAD,BANGALORE 2. THERE ASST. COMMISSIONER OF INCOME TACENTRAL CIRCLE-2(3)C.R.BUILDING,QUEENS ROAD|BANGALORE.... APPELLANTS (BY SRI. K V ARAVIND, ADV.) AND:MRS RAJ M VIRMANIL NO.101/102, EMBASY CHAMBERS,|NO.5,VITHAL MALYA ROAD,BANGALORE-560 OO1—. RESPONDENT (BY SRIYUTHS A SHANKAR & M LAVA, ADVS.) THIS ITA IS FILED U/S.2600-A OF I.T.ACT, 1961ARISING OUT OF ORDER DATED 17-12-2007 PASSED IN|ITA NO. 910/BNG/2006, FOR THE ASSESSMENT YEAR.2002-2003, PRAYING THAT THIS HON'BLE COURT MAY BE.PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.SIATED THEREIN, Il. ALLOW THR APPEAL AND SEI ASIDE THR ORDER.PASSED>BY|THERITATBANGALOREINITANO.910/BNG/2006,DATED>1/-12-2007CONFIRMTHEORDERS OF THR APPBELLATKH COMMISSIONER AND ASSCOMMISSIONER OF INCOME TAX, CENTRAL CIRCLE - 2(3),.BANGALORE. IN ITA NO 6596/2008 BE ITWEH 1.THE COMMISSIONBR OF INCOME TAX.CRENTRAL CIRCLEC.R. BUILDING|QUEENS ROAD,BANGALORE 2. THE ASST. COMMISSIONER OF INCOME TAX.CENTRAL CIRCLE-2(3)C.R.BUILDING,QUEENS ROAD|BANGALORE._. APPELLANTS _ (BY SRI. K V ARAVIND, ADV.) ANT) SHRI JAIKISHAN VIRWANLNO.101/102, EMBASSY CHAMERS,NO.5, VITHAL MALYA ROAD,BANGALORE-560 OO1.—. RESPONDENT (BY SRIYUTHS A SHANKAR & M LAVA, ADVS.) THIS ITA IS FILED U/S.2600-A OF I.T.ACT, 1961ARISING OUT OF ORDER DATED 17-12-2007 PASSED IN|ITA NO. 911/BNG/2006, FOR THE ASSESSMENT YEAR-2000-2001, PRAYING THAT THIS HON'BLE COURT MAY BE.PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|SIATED THEREIN, Il ALLOW THR APPKAL AND SHBT ASIDB THR ORDER.PASSED.BY|THRITATBANGALORE|INITANO.911/BNG/2006,DATED|1/-12-2007CONFIRMTHEORDERS OF THR’ APPELLATK COMMISSIONER ANDASSISTANT COMMISISONER OF INCOME TAX, CENTRAL|CIRCLE 2(3), BANGALORE. IN ITA NO 659 /2008 BRTWHREN 1.THE COMMISSIONER OF INCOME TAX.CHENTRAL CIRCLEC.R. BUILDING|QUEENS ROAD,BANGALORE 2 THE ASST. COMMISSIONER OF [INCOME TAXCENTRAL CIRCLE-2(3) 6 (BY SRIYUTHS A SHANKAR & M LAVA, ADVS.) THIS ITA IS FILED U/S.2600-A OF I.T.ACT, 1961ARISING OUT OF ORDER DATED 17-12-2007 PASSED IN|ITA NO. 911/BNG/2006, FOR THE ASSESSMENT YEAR-2000-2001, PRAYING THAT THIS HON'BLE COURT MAY BE.PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|SIATED THEREIN, Il ALLOW THR APPKAL AND SHBT ASIDB THR ORDER.PASSED.BY|THRITATBANGALORE|INITANO.911/BNG/2006,DATED|1/-12-2007CONFIRMTHEORDERS OF THR’ APPELLATK COMMISSIONER ANDASSISTANT COMMISISONER OF INCOME TAX, CENTRAL|CIRCLE 2(3), BANGALORE. IN ITA NO 659 /2008 BRTWHREN 1.THE COMMISSIONER OF INCOME TAX.CHENTRAL CIRCLEC.R. BUILDING|QUEENS ROAD,BANGALORE 2 THE ASST. COMMISSIONER OF [INCOME TAXCENTRAL CIRCLE-2(3) 6 C.R.BUILDING,QUEENS ROAD|BANGALORE. _.. APPBLLANTS (BY SRI. K V ARAVIND, ADV.) AND: SHRI JAIKISHAN VIRWANL|NO.101/102,EMBASSY CHAMERS,NO.5,VITHAL MALYA ROAD,BANGALORE -560 OO1.—. RESPONDENT (BY SRI. A SHANKAR & M LAVA, ADV.) THIS ITA IS FILED U/S.2600-A OF I.T.ACT, 1961ARISING OUT OF ORDER DATEBD 17-12-2007 PASSED INITA NO. 912/BNG/2006, FOR THE ASSESSMENT YEAR-2002-2003, PRAYING THAT THIS HON BLE COURT MAY BEPLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.SIATED THEREIN, Il. ALLOW THR APPEAL AND SEI ASIDE THR ORDER.PASSED.BY|THRITATBANGALORE|INITANO.912/BNG/2006,DATED|17-12-2007CONFIRM,THERORDERS OF THR APPBELLATKH COMMISSIONER AND ASSCOMMISISONER OF INCOME TAX, CENTRAL CIRCLE - 2(3),.BANGALORE. IN ITA NO 6606/2008 BRTWHREN 1.THE COMMISSIONBR OF INCOME TAX.CENTRAL CIRCLE,C.R. BUILDING J QUEENS ROAD,BANGALORE 2 THER ASST. COMMISSIONER OF INCOME TAXCENTRAL CIRCLE 2(3)C.R.BUILDING,QUEENS ROAD|BANGALORE._.. APPELLANT (BY SRI. K V ARAVIND, ADV.) AN D SHRI MOHAN VIRWANLNO 101/102, EMBASSY CHAMBERS|NO os, VITHAL MALLYA ROADBANGALORE-560 OO1.—. RESPONDENT (BY SRIYUTHS A SHANKAR & M LAVA, ADVS.) THIS ITA IS FILED U/S.2600-A OF I.T.ACT, 1961ARISING OUT OF ORDER DATED 17-12-2007 PASSED IN|ITA NO. 913/BNG/2006, FOR THE ASSESSMENT YEAR.2000-2001, PRAYING THAT THIS HON BLE COURT MAY BEPLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|SIATED THEREIN, Il ALLOW THR APPKAL AND SHBT ASIDB THR ORDER.PASSED.BY|THRITATBANGALORE|INITANO.913/BNG/2006,DATED|17-12-2007CONFIRM,THERORDERS OF THR APPELLATE COMMISSIONER AND ASST.COMMISISONER OF INCOME TAX, CENTRAL CIRCLE - 2(3),.BANGALORE. THESE APPEALS COMING ON FOR HEARING, THIS|DAY,N.AUMAR, J.,DELIVERED THERE FOLLOWING: JU DGMENT These.appealsare|filed bytheTEVEeETLchallenging the common order passed by the.Tribunal which upheld the conclusion of theAppellateCommissioner|thatthenatureoT transaction would not strictly fall within the case offamily partition but falls in the case of a familyarrangement requiring reacquisition, revaluation and|settlement of interest and properties and therebyprovisions of Section 49(1) of the Income Tax Act (“theAct” for brevity) are not attracted. ”.. The assessee are all members of undividedViirwani Family/Group. This undivided Group hadinterests in various businesses carried on by themembers, who were either partners/shareholders invarious firms/companies being run by the Group. |Certain differences of opinion cropped up between thevarious members of the Virwani Family/Group inconnection with various businesses of the Group, which slowly escalated into a full-fledged familydispute covering all its activities and properties of thefirm and companies belonging to the Group. Thesedisputes between the members of the Family/Groupcame to be resolved after lot of efforts to bring areconcilement by several well wishers under an oral)family settlement reached amongst the members ofthe family on 9.1.1999. © ”.. The assessee are all members of undividedViirwani Family/Group. This undivided Group hadinterests in various businesses carried on by themembers, who were either partners/shareholders invarious firms/companies being run by the Group. |Certain differences of opinion cropped up between thevarious members of the Virwani Family/Group inconnection with various businesses of the Group, which slowly escalated into a full-fledged familydispute covering all its activities and properties of thefirm and companies belonging to the Group. Thesedisputes between the members of the Family/Groupcame to be resolved after lot of efforts to bring areconcilement by several well wishers under an oral)family settlement reached amongst the members ofthe family on 9.1.1999. © 3. The subject matter of these appeals relate to valuation of shares which was far in excess of thevalue of actual acquisition. After the family settlementconsequent accounting entries were passed by the)assessees in their books of accounts. The cost ofacquisition of shares taken by them was portrayedand set out in the statement of affairs as on31.3.1999. The returns filed on the said basis for the.assessment year 1999-2000 was completed under)section 143(3) of the Act accepting the income returnsas well as the various explanations furnished in respect of family settlement. It is in the subsequent|year, the Assessing Authority refused to act on the)said explanations on the ground that adopting ahigher cost is that consequent to family settlement)there was depletion in net worth position of theassessee and that depletion should be treated as)additional cost towards the shares retained by them|so that net worth of the assessee prior to familysettlement and consequent to family settlementremained the same. The Assessing Authority was ofthe view that such a stand is not supported by theprovisions of the Act. The depletion in the net worth|can no way be termed as increase in the cost of any)asset since improvement of cost is with reference to a)specific asset and loss of other assets would not be)cost of improvement to the existing assets. Theconcept of computation of capital gains is with regardto the sale of proceeds and cost of this computation isnothing to do with the valuation in the net worthposition of the assessee owing to the happenings like| family settlement. The amount actually paid by the)assessee for acquisition of the shares are only to be)considered for the purpose of computation of capitalgains apart from the cost paid for acquiring shares.No other cost had been incurred by the assessee)against these shares. As the assessee was theabsolute owner of the shares and there was no costincurred towards improvement since the right wasabsolute from the very first day and was so till the)date of transfer. Therefore, the Assessing Authority|was of the view that what assessee lost was an asset.which was individually belonged to him and therefore,no variation in the cost is called for. Therefore, takinginto consideration the actual cost of acquisition of theshares, the capital gains was worked out. Aggrieved|by the said order, the assessee preferred an appeal tothe Commissioner of Income Tax (Appeals). 4. The Appellate Commissioner recorded a/finding that the Assessing Authority has also 4. The Appellate Commissioner recorded a/finding that the Assessing Authority has also rendered a finding that there was no basis foradopting the cost of acquisition of shares atRs.1,30,000/- as a result of family settlement andthat the entire family settlement was merely a devise|to claim higher deduction on account of the cost of)acquisition of the shares. The assessee contends that|the fact that there is depletion of the assets of the)appellant to the tune of Rs.3,44,51,783/- as a resultof the family settlement is not only borne on record,|as the Assessing Authority has worked out in theassessment order, but also the adoption of cost ofacquisition of shares at Rs.1,30,00,000/- under the)family arrangement in regard to depletion of theassets, iS corroborated by the fact that when theassessee has subsequently sold the shares after)family settlement, the assessee was able to realize asum of Rs.92,87,843/- which compares favourably|with the cost of the shares under the familyarrangement at Rs.1,30,00,000/-. He has recorded a)categorical finding that there is no force in the finding| of the Assessing Authority that the basis for adoption|of cost of shares at Rs.13,30,000/- is not known or)that the family settlement was merely a device and a)make believe arrangement between the members ofthe family. Theses findings being contrary to thematerials available on record, which clearly showsthat there were prevailing disputes and that pursuant|to the family settlement, the parties had acted upon|and divided the various business between them, areunjustified and cannot be the basis for holding thatthe assessees are not entitled to claim deduction in.the actual cost of the shares at Rs.1,30,00,000/-. Hefurther held that the provisions of Section 49(1) of theAct are applicable only in the case of assets acquired|from a previous owner in the modes specified in the)section and no _ other. Partition or a familyarrangement of the assets of the Hindu undividedfamily is specified under Section 49(1) of the Act andthe Assessing Authority has sought to invoke the saidprovision in the case of the assessee to take the cost) to the previous owner as the cost in the hands of the)assessee. The said provision would not be applicable|to the case of the assessee as the family settlement|reached between the members of the family/groupwas neither a partition nor a family arrangement withregard to the joint family property of the parties and|therefore, the shares in GS Homes cannot be regardedas property received by the assessee in one of thespecified modes under Section 49(1) of the Act.Thereafter he proceeded to refer to the judgment ofthe Apex Court in the case ofKalooram Govindram|Vs. Commissioner of Income Taxreported in)57 ITR.335,where it was held that, “in case of allotment ofproperty under a partition, the value at which thesame was allotted would be cost of acquisition of the|said asset, as the said value could be regarded as a)consideration paid by the assessee for the acquisition|of the property under the partition. The ratio of the)said judgment squarely applies to the facts of theassessee’s case and therefore, he set aside the order) of the Assessing Authority and granted relief to the)assessee. Aggrieved by the said order, the revenue)preferred an appeal to the Tribunal. of the Assessing Authority and granted relief to the)assessee. Aggrieved by the said order, the revenue)preferred an appeal to the Tribunal. 5. The Tribunal on re-examination of the entire|facts after taking note of the judgments on whichreliance was placed, held that the department is not)doubtingthefamilyarrangement,andtheDepartment.iknot.claiming|thatthefamilyarrangement is a make shift arrangement and notareal arrangement or a dubious action where the factsof family dispute for over 3 years being settled with|sive and take of family interest, business etc. with thecompensation being made to the family members insuch a way that all received equal shares in thefamily, the element of payment or waiving of liabilitieswere taken into account, it would show that thesewere relevant only if considered with the valueadopted for the purpose of family arrangement. |Therefore, relying on aforesaid judgment of the Apex 16 Court, held that the Tribunal was justified in coming|to the conclusion of the that this was not strictly a)case of family partition, but itis a family arrangementrequiring reclassification, revaluation and settlement|of interest in the property and thereby Section 49(1) of the Act were not attracted was justified andtherefore, he dismissed the appeal. Aggrieved by the)said order, the revenue is in appeal. 6. The appeal was admitted to consider the|following substantial questions of law: 1. Whether the Appellate Authorities|were correct in holding that there was no.Capital Gains arising on transfer of 6,500shares held by the assessee in M/s.AceProperties Developers Put. Ltd., for alconsideration of Rs.4,50,00,000/- to M/s.HortuneHoldings:duringthecurrentassessment year in view of the family|arrangement which took place in the year1999 without properly appreciating thefacts of the case?| 2. whether the Appellate Authorities were|correct in placing reliance on the family|arrangement dated 9.1.1999 which had notaken place during the current assessmentyear and the provision of section 49(1) areattracted and consequently no capital gainstax can be levied? v7. From the aforesaid facts, it is clear)that the properties which are distributed in thefamily arrangement were not ancestral propertiesbelonging to the family and not even joint familyproperties. But all the persons who are parties tothe family arrangement belonged to the same family.In the name of each oneof them properties|had been acquired. It is in that context, dispute|arose between the parties. After three years, thefamily members with the assistance of elders)in the family, resolved the dispute’ andsentered into a family settlement on 9.1.1999. In the)said family settlement, as rightly held by the two AppellateAuthorities,thereWaS|reacquisition, revaluation andsettlement.oT interest.intheproperties and thereafter the properties were notdisturbed. The value of the shares in the case of GS.Homes was arrived at Rs.1,30,00,000/- for theassessee Mohan Virwani and when he sold the saidshares he was able to realize only Rs.92,87,843/-Though initiallyheacquired|6000sharesforRs.60,000/- subsequently, another 6000 shares of)Rs.13,61,000/- at the time of family settlement of the|properties were revalued. In the family settlement he|save up interest in other properties and he exclusively|sot those 12000 shares to his share which was valuedat Rs.1,30,00,000/-. The contention of the revenue|that it is the cost of acquisition initially incurred|alone should be taken into consideration and.Rs.1,30,00,000/- which is taken as the cost of sharesis only notional and for the purpose of avoidingcapital gain tax has been rightly rejected by both theAppellate Authorities. In coming to that conclusion| the Assessing Authorities have not taken intoconsideration the interest, the assessee gave up in)other properties. In fact, the material on recordshows that the assessee has given up interest to the)extent of about Rs.3,44,51,783/- and what he got in|settlement is his share worth Rs.1,30,00,000/-.|Therefore, rightly the authorities have held thatsection 49(1) of the Act is not attracted. This is notacase where any transfer of interest in the property isinvolved under Section 49(1)(i) of the Act whichsection deals with partition of the Hindu undivided|family. In the present case, the members of thefamily had various interests in various properties in|their individual capacities. When the dispute arose,|they amicably settled the same by entering into the)family arrangement and at that time, they valuedtheir assets and the share of the assessee was valued.at Rs.1,30,00,000/- and when he sold the shares for|Rs.92,87,843/-,.heearnedT1Ocapitalgains.Therefore, levy of capital gain by taking into consideration the initial acquisition of the shares is illegal and therefore, we do not find merits in these) appeals. Accordingly, we answer the substantialquestions of law framed in these appeals in favour ofthe assessee and against the revenue. Ordered|accordingly. 8. Though different amounts are involved in| respect of other assesses, the issue involved being thesame, the impugned orders passed in respect of other|assessees are also legally valid and do not call for)interference for the very same reasons assignedabove. Hence, there is no merit in all these appeals. —Dismissed. No costs. RS/* od/- | JUDGE. Sd/- JUDGE