Ita/90/2009 Of Anto Thomas @ A.t.anto, Chalakudy v. Deputy Commissioner Of Income Tax,Centra

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN THURSDAY, THE 21ST JANUARY 2010 / 1ST MAGHA 1931 ITA.No. 90 of 2009() -------------------- IT.103/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ------------------------------ SHRI ANTO THOMAS ALIAS K.T.ANTO, CHALAKUDY. BY ADV. SRI.V.RAMACHANDRAN, SENIOR ADVOCATE SRI.V.P.K.PANICKER SRI.JACOB THOMAS VELLIKKUNNEL RESPONDENTS/APPELLANTS: --------------- 1. COMMISSIONER OF INCOME TAX, ERNAKULAM. 2. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-II, ERNAKULAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/01/2010, ALONG WITH ITA NO.91 OF 2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. ....................................................................I.T. Appeal Nos.90 & 91 of 2009 ....................................................................Dated this the 21st day of January, 2010. JUDGMENT Ramachandran Nair, J. The connected appeals are filed by an individual assesseee andand AOP constituted by the very same assessee with his wife againstorders issued by the Tribunal in departmental appeals sustaining blockassessment made under Section 158BC of the Income Tax Act(hereinafter called "the Act") on the individual assessee and theassessment made under Section 158BC read with Section 158BD onthe AOP. We have heard Senior counsel Sri.V.Ramachandranappearing for the appellants and Senior Standing Counsel Sri.P.K.R.Menon appearing for the respondent-department. 2. The brief facts that led to the controversy are the following. A partnership firm by name Kanichai Movie Enterprises owned 39.195cents of land and a building thereon, where the firm had a theatrebuilding to carry on business of exhibition of movies. However, inthe course of time, the building was converted into a hotel and the same was leased to a partnership firm by name M/s.Hotel Lucia Drive-inRestaurant. As on 1.4.1989 the lessor-firm namely Kanichai MovieEnterprises consisted of only two partners who are husband and wifeby name Anto Thomas and Mariamma Anto who are members of theAOP. Similarly as on 1.4.1989, the lessee-firm namely, M/s.HotelLucia Drive-in Restaurant, which was carrying on bar hotel business inthe building leased out from the same firm, also had the same partnersnamely, Sri.Anto Thomas and Mariamma Anto, which constituted theAOP, the appellant in I.T.A. 91/2009. In the course of searchconducted on 28.7.1998 by the Income Tax Department in the premisesof another firm by name M/s.Puther Drugs and it's partners and in thepremises of common partner of these two firms namely, Anto Thomas,the Department recovered several documents which prove thetransaction of sale of land and building with bar hotel by the firmM/s.Hotel Lucia Drive-in Restaurant to M/s.Puther Drugs consisting ofseven partners namely, Sri.Stephen Thomas, Sri.Joy Thomas,Sri.T.M.Thomas, Sri.Sebastian Thomas, Sri.Benny Joseph,Sri.E.O.Lawerance and Sri.K.F.Russel. The sale consideration as disclosed by the seized document was Rs.83.5 lakhs and the documentshowed that the amount payable to the two partners of M/s.Hotel LuciaDrive-in Restaurant will be reduced by 1% commission to those whoarranged the sale. The seized document contained an indemnity bondsigned by Sri.Anto Thomas and his wife Smt.Mariamma Anto, whichclearly establish that the transaction was sale of the land with building,goodwill, bar licence, furniture and all fittings. Based on the evidencecollected by the Department, the Assessing Officer concluded that thesale deed between the two firms Kanichai Movie Enterprises andM/s.Hotel Lucia Drive-in Restaurant, both the firms consisting of thesame partners namely, Sri.Anto Thomas and Smt.Mariamma Anto whoare husband and wife, the subsequent partnership deed executed on28.4.1995 inducting 18 partners most of whom are partners ofM/s.Puther Drugs and the subsequent deed of retirement on 12.4.1996are part of a scheme contrived to camouflage actual sale of the hoteland bar business as a going concern with land and building, furnitures,fittings and bar licence. It is also found from the terms of thepartnership deed executed on 28.4.1995 by which the appellants inducted the partners of M/s.Puther Drugs, that they have not evenretained adequate capital contribution and the transfer of business isestablished beyond doubt because existing employees of the appellantswere retrenched and new employees were inducted by the incomingpartners who have really started business, and to camouflage the actualsale, the appellants, husband and wife were retained as partners. In theblock assessments made, the disputed income assessed is the capitalgains on sale of the land and building wherein bar hotel business iscarried on, one at the hands of Anto Thomas and the other at the handsof Sri.Anto Thomas and his wife Mariam Anto as AOP. Even thoughassessments were vacated by the first appellate authority holding thatthere was no transfer of assets assessable either under Section 45(3) or45(4) of the Income Tax Act, the Tribunal reversed the findings andheld that the scheme of transaction amounts to transfer of the land withhotel building thereon as a going concern. Even though the Tribunalhas sustained the block assessment in principle in both the assessees,the Tribunal has not gone into the appellants' dispute on quantumassessed. 3. In appeal, the appellants have raised questions challenging thevalidity of assessment, status in which assessment is made and also themanner and method of determination of capital gain in blockassessment. The contention raised by Senior counsel appearing for theappellants is that block assessment in the hands of AOP under Section158BC read with Section 158BD is untenable because according tohim, AOP does not exist at all. Similarly, so far as I.T.A. No.90/2009is concerned, counsel contended that there is no scope for assessmentof the individual assessee-appellant under Section 158BC becauseSection 45(4) provides for only assessment of capital gains at the handsof the partnership firm, that too, only when there is dissolution of thefirm and distribution of the assets. The further contention raised by thecounsel is that Section 45(3) has no application because the saidSection provides for assessment in the hands of the partners joining afirm when the sale consideration to be treated as transfer value is theamount credited in the capital account of the partner joining the firm.Senior Standing counsel appearing for the respondents on the otherhand heavily relied on the evidence and materials gathered during inspection, based on which block assessment under Section 158BCread with Section 158BD was made and contended that even thoughthe Tribunal has not relied on detailed facts, their findings go to showthat they have taken into account evidence and materials gathered oninspection to substantiate their finding that the assessment for capitalgain in block assessment is tenable. Even though both sides have reliedon some decisions and the Tribunal has also relied on several decisionsof the High Courts and the Supreme Court, we do not think there is anyneed to go into the legal question because in this case the clear findingbased on seized documents including indemnity bond executed byappellants is that appellants have sold the bar hotel with land, building,furniture, fixtures and with bar licence as a going concern for aconsideration of Rs.83.5 lakhs. When transaction is proved to be a salebased on seized documents and the statements recorded frompurchasers, the applicability of sub-section (3) or sub-section (4) ofSection 45 does not arise at all. Section 45(3) specifically covers thesituation of a person joining a firm by bringing capital asset other thancash as his contribution. Similarly Section 45(4) provides for assessment of capital gain on the distribution of assets of a firm orother association of persons or body of individuals among the memberson dissolution or otherwise. In this case the clear finding based onevidence collected on inspection is that the purpose of transfer of theland and building by one firm to the other, the partners of both firmsbeing the same persons who are none other than husband and wife, themembers of the AOP-appellant in one of the appeals herein, was onlyto facilitate the firm engaged in hotel and bar business which had onlyleasehold rights in respect of the land and building to confer title on thevery same firm for the purpose of sale through induction of newpartners who are none other than the actual purchasers and thenretirement of the original partners namely, the appellants. It ispertinent to note that the Kanichai Movie Enterprises which originallyowned the land and building, executed sale deed in favour of thepartnership firm M/s.Hotel Lucia Drive-in Restaurant on 24.4.1995.Admittedly both the firms have the very same two partners namely,Sri.Anto Thomas and Smt.Mariamma Anto. Shortly after execution ofthis transfer deed of the land and hotel building, the two partners namely, Sri.Anto Thomas and Smt.Mariamma Anto, inducted 18 otherpersons by reconstitution of the partnership on 28.4.1995. The findingof the departmental authorities based on seized documents is that eversince execution of this deed, the appellants have retained only anominal capital in their account and they have actually withdrawn frombusiness, though on paper they continued as partners. In other words,the execution of the transfer deed of the property on 24.4.1995, thereconstitution of the partnership with purchasers on 28.4.1995 andsubsequent retirement by the two partners namely, Sri.Anto Thomasand his wife along with few others on 12.4.1996 is a clear scheme oftransfer of land and building and bar hotel with licence as a goingconcern on the specific consideration of Rs.83.5 lakhs. So much so, inour view, assessment was rightly made for capital gains as thetransaction is a clear transfer of property within the meaning of Section2(47) of the Act without reference to Section 45(3) or Section 45(4) ofthe Act. We, therefore, uphold in principle the orders of the Tribunalholding that the transaction by the appellants amounts to transfer ofcapital asset which attracts liability for tax for capital gains. 4. Another question raised by counsel for the appellants is thatthere is no justification for assessment of Sri.Anto Thomas and his wife 4. Another question raised by counsel for the appellants is thatthere is no justification for assessment of Sri.Anto Thomas and his wife Smt.Mariamma Thomas as constituting an AOP. However, Seniorcounsel appearing for the Revenue contended that seized documentsprove beyond doubt that Sri.Anto Thomas and his wife havediscontinued from business and their whole effort was to transfer theland and building and hotel as a going concern with bar licence and toget the sale consideration of Rs.83.5 lakhs. Since there is nopartnership between these two persons after the reconstitution of thefirm on 28.4.1995 and the purpose was found to be only sale of theproperty and to earn profit therefrom, we do not think there is anythingwrong in treating both of them being admittedly beneficiaries, as anAOP. We, therefore, hold that block assessment under Section 158BCread with Section 158BD in the hands of Sri.Anto Thomas and his wifeSmt.Mariamma Thomas as AOP is tenable. We, therefore, reject thiscontention as well. 5. Counsel for the appellants also objected against assessment ofthe same income in the hands of the AOP as well as one individual partner namely, Sri.Anto Thomas who is the appellant in I.T.A.No.90/2009. However, Standing Counsel for the Revenue contendedthat since assessment is under Section 158BC, rate of tax is the sameand so much so, tax effect is same irrespective of in whose handsassessment is sustained. He has further submitted that even thoughtwo separate assessments are sustained by the Tribunal, recovery willbe limited from one of them. We do not think appellants can have anygrievance against double assessment, if recovery is limited only underone. Since we have upheld the assessment in the hands of AOP, wedirect recovery of arrears of tax with interest from Sri.Anto Thomasand his wife Smt.Mariamma Anto. 6. Counsel for the appellants challenged the method ofcomputation of capital gains which was not considered in detail by the Tribunal. We feel this requires consideration because once theassessment is sustained by us as a sale disguised under cover ofreconstitution and retirement from partnership firm, necessarily theappellants are entitled to examine the true nature and character of thetransaction. Admittedly the two partners namely, Sri.Anto Thomas and his wife Smt.Mariamma Anto, became absolute owners of the propertywhen they became the sole partners in the firm M/s.Kanichai MovieEnterprises which happened on 1.4.1989. We have already found thatthe transfer of land by one firm consisting of two partners to anotherfirm consisting of the very same partners on 24.4.1995 was only partand parcel of a scheme for sale of property to strangers, whichhappened when the partnership firm M/s.Hotel Lucia Drive-inRestaurant after purchase of the land inducted 18 partners bypartnership deed dated 28.4.1995. So much so, for the purpose ofdetermination of long term capital gains, the date of acquisition of theproperty by the two sellers namely Sri.Anto Thomas andSmt.Mariamma Anto should be taken as 1.4.1989. Section 158BBprovides for assessment of undisclosed income also in the same mannerin which tax is computed under the provisions of the Act. Long termcapital gain entitles for deduction of cost of acquisition with indexationthereon. Since the two persons namely, Sri.Anto Thomas andSmt.Mariamma Anto got absolute right over the land as sole partners ofthe partnership firm Kanichai Movie Enterprises as on 1.4.1989, we feel acquisition of the land and building should be estimated on thatdate and they are entitled to claim deduction towards furtherimprovements and indexation cost of acquisition. Therefore,computation of net capital gain requires recomputation by the officer inthe light of what we have stated above. Further, substantial amount ofsale consideration is attributable to the consideration paid for theacquisition of bar licence, which the hoteliers find difficult to get inKerala. Therefore, in the first place, sale consideration has to beapportioned towards consideration for goodwill, charges for transfer ofbar licence, though in an indirect manner, and cost of furnitures,fixtures etc. It is for the Assessing Officer to estimate the cost of theland and building after making exclusion of these items. However,sale consideration for the purchase of goodwill and for the licence feeare also assessable as undisclosed income under Section 158BB. 7. We, therefore, dispose of the appeals by upholding theassessments confirmed by the Tribunal in principle, but by remandingthe matter to the Assessing Officer for recomputation of capital gainsafter granting eligible deduction to the assessee and after giving an opportunity of hearing to them. Even though counsel for the appellantscontended that assessment should be made as a regular assessment andnot as a block assessment under Section 158BC read with Section158BD, we are unable to accept this contention because assessment inthe case of AOP is permissible under Section 158BD because in thecourse of search in the premises of M/s.Puther Drugs and Sri.AntoThomas, the department got enough materials based on whichassessment was made at the hands of the AOP. Consequently rate oftax applied namely, 60%, is the appropriate one. C.N.RAMACHANDRAN NAIRJudge pms V.K.MOHANANJudge