M/S. Sathappa Textilers (P) Ltd., Coimbatore v. The Commissioner Of Income-Tax Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 04/12/2002 CORAM THE HON'BLE MR.JUSTICE N.V.BALASUBRAMANIANANDTHE HON'BLE MR.JUSTICE K.RAVIRAJA PANDIAN TAX CASE NO.307 OF 1998 AND TAX CASE NO. 308 OF 1998(Reference Nos.276 and 277 of 1998) M/s. Sathappa Textilers (P) Ltd.,Coimbatore. ... Applicant -Vs- The Commissioner of Income-taxCoimbatore. ... Respondent Prayer: Reference made to this Court in the statement of the casesubmitted by the Income Tax Appellate Tribunal, Madras 'B' Bench in R.A.Nos.474 and 475(MDS)/95 (I.T.A.Nos.469 and 470/Mds/87 for the assessmentyear 1982-83 and 1983-84. !For Applicant : Mr.J.Narayanaswamyfor M/s.Subbaraya Aiyar. For Respondent : Mrs.Pushya SitharamanSr.Standing counsel forIncome-tax. :JUDGMENT K.RAVIRAJA PANDIAN,J.Pursuant to the direction of this Court made in Tax Case PetitionNos.272 and 273 of 1996, the Income-tax Appellate Tribunal set out a case andreferred the following questions for the opinion of this Court:"1. Whether on the facts and in the circumstances of the case, theTribunal was right in holding that the lands held by the assessee had not beenconverted into stock in trade?2. Whether on the facts and in the circumstances of the case theTribunal was right in rejecting the alternate claim of the assessee regardingthe computation of capital gains on transfer of lands?" The assessment years are 1982-83 and 1983-84.2. The facts as stated in the statement of case are as follows:The assessee was a Private Limited Company engaged in textile business. From the assessment year 1982-83, it claimed that it had startedbusiness in real estate by converting part of its vacant land intostock-in-trade to carry on the business of real estate. In order to prove thesame, it was contended that a resolution to that effect was passed on 1.1.1981and entries have been made in the books of account. It was also claimed thatthe proceedings of the resolution was recorded in the minutes, duly signed bythe Chairman, that the minutes so recorded was filed with the Registrar ofCompanies on 11.1.1983, that as per the entries made in the books of account,the property alleged to have been converted into stock-in-trade was valued atthe market value of Rs.35,90,000/- and recorded in the books of account. Itwas also claimed that during the relevant previous year an extent of 3 .58acres of land was sold for the gross receipts of Rs.9,15,790/- and claimed asum of Rs.10,24,260/- as business loss. Pending the assessment proceedingsbefore the Assessing Officer, the assessee made an application to the Inspecting Assistant Commissioner under Section 14 4A for appropriatedirection. The Inspecting Assistant commissioner after hearing the assesseedeclined to give any direction as requested for. 3. The Assessing Officer after considering the material on record didnot accept the claim of the assessee of conversion of land intostock-in-trade. The Assessing Officer found that the property, which wasalleged to have been converted into stock-in-trade as per the resolution dated1.1.1981 was in fact sold during the relevant previous year as per theagreements of sales entered into by the assessee in the years 1969 and 1970.It was further concluded by the Assessing Officer that the higher valuation ofthe property in question was made by the assessee in order to avoid capitalgains tax. Thus, the Assessing Officer treated the transactions as sale ofimmovable property and computed long term capital gains. Likewise, for theassessment year, 1 983-84, the assessee claimed for allowances of Rs.56,960/-on the ground that the said amount was incurred by the assessee towardsimprovement of the land. That claim was also negatived by the AssessingOfficer on the ground that the assessee did not sell any land in respect ofwhich the said expenditure was incurred. 4. The assessee carried the matter in appeal to the Commissioner ofIncome-tax (Appeals), who accepted the claim of the assessee that the lands inquestion were converted into stock-in-trade by accepting the minutes dated1.1.1981 and held that the agreements of sales entered by the assessee werenot acted upon. By the said reasoning, the Commissioner of Income-tax(Appeals) set aside the assessment and remitted the matter back to theAssessing Officer to determine the business profit or loss of the transaction. 5. The revenue carried the matter on appeal to the Tribunal. TheTribunal concluded that the finding of the Commissioner of Income-tax (Appeals) are not based on facts; that the land in question which was allegedto have been converted into stock-in-trade were not at all in the assessee'spossession as on the date of resolution on 1.1.1981 to convert the same intostock-in-trade. The properties were sold under various agreements in theyears 1969 and 1970. Some of the agreement holders filed suits for specific performance of the agreements. The sale deeds were executed pursuant to theagreements already entered into and also in discharge of the decree passedagainst the assessee. The Tribunal found that when the asse ssee was not inpossession of the property in question, there is no question or possibilityfor the assessee converting the same into stock-in-trade. The Tribunalfurther found that the alleged conversion of the land into stock-intrade wasnot genuine. The Tribunal also rejected the minutes projected by the assesseein order to prove the conversion on the ground that the minutes so producedhas been entered into a loose sheet of paper and it is only an after thoughtto avoid the liability of capital gains. 6. The alternative claim of the assessee that part of the consideration had gone into discharging the mortgage debt and therefore tothat extent, the consideration paid by the purchaser, which went into indischarging mortgage debt has to be allowed as a deduction while computing thecapital gain, has also been rejected by the Tribunal on the ground that therewas absolutely no evidence to show that any consideration had gone intodischarging the mortgage debt and on the contrary found that the property soldunder various sale deeds were got released from the mortgage and then the saledeeds were executed. As against the order of Tribunal, the above referencewas made. 7. It is the contention of the learned counsel for the assessee that by resolution dated 1.1.1981, it was decided to convert the land belonging tothe Company at Tirupur and Kurichi as stock-in-trade of the business proposedto be carried on by them. In order to prove the same, the assessee filed copyof the minutes of the proceedings of the meeting of the Board of Directorsheld on 1.1.1981. That aspect of the matter has been totally brushed aside onthe grounds that since the minutes book in original has not been produced before the authority and the minutes were produced before the authorities inloose sheets. There is no legal necessity that the minutes must be recordedin the minutes book. 8. On the other hand, the learned counsel appearing for the revenue has submitted that there is absolutely no question of law involved in thepresent case. The only point to be decided in this case viz., whether therewas any conversion of the land in question as stock-intrade is a pure questionof fact. The fact finding authority has ultimately held that the so calledconversion as claimed by the assessee of the land into stock-in-trade to befalse. The Tribunal by cogent reason held that the assessee has not provedthe conversion of land in question as stock-in-trade in respect of therelevant assessment years and submitted that there is no materials tointerfere with the finding arrived at by the Tribunal. 9. We heard the arguments of the learned counsel on either side. 10. The only evidence that has been let in in order to prove the has submitted that there is absolutely no question of law involved in thepresent case. The only point to be decided in this case viz., whether therewas any conversion of the land in question as stock-intrade is a pure questionof fact. The fact finding authority has ultimately held that the so calledconversion as claimed by the assessee of the land into stock-in-trade to befalse. The Tribunal by cogent reason held that the assessee has not provedthe conversion of land in question as stock-in-trade in respect of therelevant assessment years and submitted that there is no materials tointerfere with the finding arrived at by the Tribunal. 9. We heard the arguments of the learned counsel on either side. 10. The only evidence that has been let in in order to prove the claim of the assessee that the land in question has been converted intostock-in-trade by the assessee is the resolution dated 1.1.1981. Section 193 of the Companies Act provides for "Minutes of proceedings of General meetingsand of Board and other meetings", which contemplates that every Company shallcause minutes of all proceedings of every general meeting and of allproceedings of every meeting of its Board of directors or of every Committeeof the Board, to be entered in books kept for that purpose within thirty daysof the conclusion of every such meeting with their pages consecutivelynumbered. Each page of every such book shall be initialed and signed andlast page of the records of proceedings of each meeting in such books shall bedated and signed in the case of minutes of proceedings of meeting of Board orof a Committee thereof by the Chairman of the said meeting or the Chairman ofthe next succeeding meeting. In the case of a minutes of the proceedings ofthe general meeting by the Chairman of the same meeting within the aforesaidperiod of thirty days or in the event of death or inability of that Chairmanwithin that period by a Director duly authorised by the Board for thatpurpose. In no case, the minutes of the proceedings of the meeting shall beattached to any such book as aforesaid by pasting or otherwise. The minutesof each meeting shall contain a fair and correct summary of the proceedings.Hence, the Tribunal has recorded a finding that in view of the expressprovision under Section 193 of the Companies Act, the minutes dated 1.1.1981produced in a loose sheet cannot be accepted. Even the Assessing Officer hasgiven a finding that in spite of the opportunity given to the assessee, theminutes book was not produced. When the Inspector visited the businesspremises of the assessee on 29.12.1984 on the basis of an authorisation underSection 133A, the Chairman informed the Inspector that the resolutions weretyped in loose sheets and kept with various other papers and it would taketime to trace and locate the same. Ultimately, the minutes book produced wasfound to be totally blank by the assessing authority. Further, in the minutesin original recorded in loose sheets on 1.1.1981, produced before theassessing officer, it was found that apart from the Chairman of the assesseeCompany, who has signed the minutes, two other Directors were also present atthe meeting, however they did not sign. 11. Further, the Tribunal also taken into consideration of the factthat as early as the year May, 1969 and December, 1970, the Company enteredinto several sale agreements in respect of the properties in question withseveral persons which are not consistent with minutes. Ultimately theTribunal found on fact with the available material that the assessee's claimof conversion was not genuine. The Tribunal has also recorded a clear findingthat the finding of the Commissioner of Income-tax (Appeals) that theagreements of sale entered into by the assessee with various persons have notbeen acted upon was not based on materials and in fact, against the contentionof the assessee who claimed to have sold the properties under agreements at alower price than the actual market value as on the date of sale. Further, theTribunal has also found that the advertisement given by the counsel for theassessee on 8.9.1982 inviting purchasers for the sale of land in an extent of357.74 cents with factory, shed, godown and other machines clearly showed thatthe assessee was intending to dispose of the entire business premises and wasnot doing any business in real estate. Taking into consideration of totalityof these factual position, the Tribunal has rejected the minutes. TheCertificate given by the Department under Section 230-A, which has also beenshown as a proof on behalf of the assessee, has been negatived on the ground that in the Certificate, it was only certified that there was no income-taxarrears on the part of the assessee and apart from that, the certificatecannot be used to prove that the land in question was converted intostock-in-trade of the business. 12. That apart, the Tribunal recorded a finding that there is nomaterial to come to the conclusion as done by the Commissioner of Income-tax(Appeals) that the lands were divided into plots and thereafter sold. Fromthe material records, the 31 sale deeds executed by assessee show that thelands were not sold in terms of plots, but in terms of extent over an extentof 357.74 cents. It is also found by the Tribunal that the assessee was notin possession of the land, which was sold during the relevant previous year.All those lands were sold under various agreements of sale and the purchaserswere given possession in the years 1969 and 1970 itself. This factualposition clinches the issue when the assessee was not in actual possession ofthe properties and the properties were given in possession of the agreementholders in the years 1969 and 1970 itself, there was no question of convertingthe land into stock-in-trade by passing a resolution in the year 1981. 13. Learned counsel for the assessee contended that even if theminutes produced by the assessee is ignored, the account books are sufficientto show that the land has been converted into stock-in-trade. In so far asthe accounts are concerned for the assessment year ended 31.03.1981 theChartered Accountant signed the balance sheet subsequently on 15.01.1982 andit was filed before the Income Tax Officer in May 1982 and the Tribunaltherefore recorded a finding that the action of the assessee is in conformitywith its action to cover up the liability of capital gain. We therefore holdthat the finding of the appellate Tribunal that the alleged conversion of thecapital into stock-in-trade by the resolution dated 1.1.1981 is not a genuineone is purely a finding of fact, especially when the said finding has beenarrived at on the basis of materials on record. The Tribunal afterconsidering of the relevant materials has recorded a finding that the allegedresolution dated 1.1.1981 was not a genuine one. 14. One other contention was also raised by the learned counsel forthe assessee that for the assessment years 1982-83 and 1983-84 respectivelyfor the previous year ended 31.03.1982 and 31.03.1983, the Tribunal not havegone into the question of the correctness of the resolution dated 1.1.1981,which fall in the previous year ended 31.03.19 81 i.e. for the earlierassessment year. We are also unable to accept the said submission as thelands were sold during the previous years and the assessee claimed on thebasis of the resolution dated 1.1.1 981 that the lands were converted intostock-in-trade and hence it is necessary for the Appellate Tribunal to go intothe question and determine same. Further, it is also relevant to mention herethat the assessee has not produced any material before the authorities to showduring the assessment proceedings for the assessment year 1981-82 that theassessee had produced the resolution dated 1.1.1981 and claimed the same asstock-in-trade. Hence, we are of the considered view that the allegedconversion of the land into stock-in-trade and the resolution dated 1.1.1981are not true and only make believe documents and thus we answer question No.1in the affirmative against the assessee and in favour of the revenue. 15. In respect of the alternative contention of the assessee that asmost part of the sale consideration was paid for discharging the mortgage tothe extent of payment made to South India Bank has to be treated as the costof the land or expenditure in executing the sale deeds so as to take the saidamount before computing the sale proceedings for capital gain. Here again, weare not able to accept the contention of the learned counsel for the reasonthat the Tribunal has recorded a categoric finding that the assessee did notproduce any evidence to show that the sale consideration was appropriated bythe mortgagee bank and further found that from the material filed by theassessee in the gift tax appeal that the mortgagee Bank has released 3.71acres of vacant property in T.S.No.328, Tirupur town from security and therebygiving a free hand to the assessee for the disposal of the same. When thefinal fact finding authority has recorded a finding that there is no materialto prove that the sale consideration has been paid for discharge of themortgage amount, we have no material to go against that finding. Hence, thesecond question also has to be answered in the affirmative against theassessee and in favour of the revenue and we are answering as such. However,there is no order as to costs. Index:YesWebsite: Yesusk To1. The Assistant Registrar,Income-tax Appellate Tribunal,Rajaji Bhavan, Besant Nagar,Chennai-600 090 (Five copies with records) 2.The Secretary,Central Board of Direct Taxes,New Delhi, 3.The Commissioner of Income Tax,Coimbatore, 4. The Commissioner of Income Tax(Appeals- V), Coimbatore, 5.The Income-tax Officer,City Circle, ICoimbatore. ((SCO LYRIX 6.1))�