Shri v. Dwarakanathan

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 10.06.2019 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Shri. V. Dwarakanathan,No.256, Green Lands,Nagaramalai Road, Salem-636 016.PAN : -Vs- The Assistant Commissioner of Income Tax,Central Circle 2(1),Room No.122, First Floor,Investigation Wing, 46, Nungambakkam High Road, Chennai...Respondent Appeal under Section 260A of the Income-tax Act, 1961againsttheorderdated12.02.2019madeinI.T.A.No.3100/Chny/2017 on the file of the Income-tax AppellateTribunal 'C' Bench, Chennai for the assessment year 2009-10against the order of the Commissioner of Income tax (Appeals),chennai - 600 0034 dated 21.09.2017 and made in ITA No.367/16-17and against the order of the Assistant Commissioner of IncomeTax, Central circle - 2(1) dated 30.12.2016 and made inGI.No./PANo.ACAPD5443J. This appeal, by the appellant/assessee filed under Section260A of the Income-tax Act, 1961 (hereinafter referred to as“the Act”), is directed against the order dated 12.02.2019,passed by the Income Tax Appellate Tribunal “C” Bench, Chennai(for brevity “the Tribunal”), in I.T.A.No.3100/Chny/2017, forthe assessment year 2009-10. https://hcservices.ecourts.gov.in/hcservices/ 2.The assessee has raised the following substantialquestions of law for consideration:-“Section 49:-(i) Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal is right in law in holding thatin the case of gift, Section 49 of the Income TaxAct, 1961 will not apply to give benefit to theAppellant while computing the capital gains inrespect of cost of acquisition of the previousowners? Alternative:-(ii) Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal is right in law in notconsidering that once the transaction of gift isnot valid and the Appellant had not become ownerof the Shares and the same is held to be bogus,the capital gains cannot be assessed in the handsof the Appellant?”3.HeardMr.G.Baskar,learnedcounselfortheappellant/assessee. 4.Before we consider as to whether any substantial questionof law arises for consideration or not in this appeal, we needto take note of the factual position. 5.The assessee is an individual filed his return of incomeon 09.11.2009 under Section 139 of the Act admitting a totalincome of Rs.3,88,430/-. A search was conducted in the group ofDr.A.M.Arun and others, who were the sons-in-law of the assesseeon 01.12.2015. During the course of search, it was found thatthe assessee sold shares for a consideration of Rs.1.5 Croresduring the financial year 2008-09. These shares were acquiredby the assessee through gift from the wife of Dr.A.M.Arun,daughter of the assessee. It was found that no resultant capitalgain was offered in return of income for the assessment year2009-10. Thus, the assessment was reopened by the Income TaxOfficer, Ward II(1), Salem. In the reasons for reopening, itwas stated that during the course of search, the assessee hasdeposed in his sworn statement recorded under Section 132(4) ofthe Act that he sold his shares for Rs.1,50,00,000/- in the year2008-09. These shares were stated to have acquired by theassessee through gift from his daughter Mrs.Meera Arun for Nilconsideration and the profit was not disclosed to theDepartment. 6.Further, it was stated that the assessee offered 6.Further, it was stated that the assessee offered additional income of Rs.1,50,00,000/- for the assessment year2009-10 and agreed to pay the due tax. It was pointed out thatduring the course of search, gold jewellery being worthRs.28,99,522/- was found and the assessee did not properlyexplain the source for the investment made. In the light of thedeposition made by the assessee before the investing team whilerecording statement under Section 132(4) of the At, theAssessing Officer stated that he has reason to believe that theassessee's taxable income for the assessment year 2009-10 hasescaped assessment. Therefore, notice under Section 148 of theAct was issued. The assessee did not respond to the notice.Subsequently, the jurisdiction of the case was transferred tothe Principal Commissioner of Income Tax, Salem, videnotification dated 21.06.2016. Pursuant to which, notice underSection 142(1) of the Act was issued on 20.09.2016 calling forcertain details along with return of income. Subsequently, aletter dated 20.09.2016 was sent to the assessee requesting himto file the return of income as well as the details called forin the notice dated 20.09.2016 issued under Section 142(1) ofthe Act. Once again, the assessee did not respond. A finalopportunity was given by the Department to the assessee, videletter dated 19.10.2016 calling upon him to file his return ofincome. Even for this notification, there was no response bythe assessee. Subsequently, by letter dated 04.11.2016, penaltynotices under Section 271(1)(b) of the Act were issued to theassessee calling upon him to explain why prosecution underSection 276CC of the Act should not be initiated for non filingof return of income in response to notice under Section 148 ofthe Act; and for levy of penalty for non compliance of noticeunder Section 142(1) of the Act should not be launched or leviedor should not levied against the assessee. The assessee did notrespond to any of these notices. 7.Thus, the Assessing Officer having left with no otheroption, completed the assessment proceedings ex-parte underSection 144 of the Act. After taking note of the materialsavailable on record, the Assessing Officer rejected thecontention of the assessee as not acceptable and that the saleof shares was not disclosed in original return of income and itcame to light only during the course of search of theresidential premises of the assessee and that the assesseeadmitted during the course of search to offer this amount as histaxable income. Accordingly, addition was made and theassessment was completed, vide order dated 30.12.2016. 8.Aggrieved by such order, the assessee preferred appealbefore the Commissioner of Income-Tax (Appeals) 18, Chennai (forbrevity, “the CIT(A)”) in I.T.A.No.367/16-17. The CIT(A) byorder dated 21.09.2017 allowed the appeal. The reason assignedby the CIT(A) was that Section 49 of the Act clearly specifies that the cost of the acquisition of the asset will have to bereckoned on the basis of cost of acquisition to the previousowner, the action of the Assessing Officer in assuming the costto be Rs.Nil is not correct. Accordingly the appeal stoodallowed. 9.With regard to the assessment under the other heads also,which was put to challenge, the CIT(A) allowed the appeal. TheRevenue filed appeal before the Tribunal. The Tribunal afterconsidering the entire facts and circumstances of the case,allowed the appeal filed by the Revenue and this is how theassessee is before us by way of this appeal. that the cost of the acquisition of the asset will have to bereckoned on the basis of cost of acquisition to the previousowner, the action of the Assessing Officer in assuming the costto be Rs.Nil is not correct. Accordingly the appeal stoodallowed. 9.With regard to the assessment under the other heads also,which was put to challenge, the CIT(A) allowed the appeal. TheRevenue filed appeal before the Tribunal. The Tribunal afterconsidering the entire facts and circumstances of the case,allowed the appeal filed by the Revenue and this is how theassessee is before us by way of this appeal. 10.Mr.G.Baskar, learned counsel for the appellant/assesseesubmitted that the Tribunal erroneously reversed the wellconsidered order passed by the CIT(A) and the observations ofthe Tribunal that the transaction was bogus is not sustainable.Further, it is submitted that the Tribunal ought to have seenthat gift of movable is by way of delivery and the gift ofshares by the assessee's daughter, Mrs.Meera Arun, to theassessee is a valid gift, as it is not mandatory that gift ofmovable assets, such as, shares needs to be by way of documentmuch less a registered document. Further, it is submitted thatthere is no requirement of the donor's consent for selling theshares to third parties, since the assessee had already becomeowner by the positive action of original shareholder, hisdaughter, Mrs.Meera Arun by executing Gift Deed in respect ofthe shares in favour of the assessee. Further, the learnedcounsel referred to the Business Transfer Agreement, dated31.12.2007; Return of Allotment of Vasan Health Care PrivateLimited, dated 28.10.2008; Share Transfer Form whereunder shareswere transferred from Mrs.Meera Arun to the assessee, dated29.10.2008; Share Transfer Form where the assessee transferredshares to M/s.Advantage Strategic Consulting Private Limited,dated 30.10.2008; Annual Return of Income of Mrs.Meera Arun forthe assessment year 2009-10, dated 21.10.2009; Register ofAllotment of Shares by Vasan Health Care Private Limited, underSection 143(3) of the Act of M/s.Vasan Health Care PrivateLimited for the assessment year 2009-10, dated 29.12.2011;Certificate issued by Advantage Strategic Consulting PrivateLimited for purchasing shares from the assessee, dated23.11.2016; and the assessment order of Mrs.Meera Arun for theassessment year 2009-10, dated 30.12.2016. 11.It is submitted that these documents will clear show thatthe gift made by the assessee's daughter is a valid gift and theshare transfer forms clearly show the transfer of 1,50,000shares to Advantage Strategic Consulting Private Limited, whichwas filed before the Registrar of Companies. It is furthersubmitted that the Tribunal grossly erred in holding that Section 49 of the Act will not apply to the case of the assesseeby observing that the assessee had not become the owner of thecapital assets. When the assessee had become the owner of theshares by way of gift executed by his daughter and therefore,Section 49(1)(ii) of the Act would apply. Alternatively, it issubmitted that the Tribunal having held that the transaction ofgift is not valid, ought to have held that there was no capitalgains that could arise out of a bogus transaction in the handsof the assessee. Thus, it is contended that the finding of theTribunal is absolutely perverse and the substantial questions oflaw framed for consideration required to be decided by thisCourt. 12.After elaborately hearing Mr.G.Baskar, learned counselfor the appellant/assessee, we do not agree with the submissionsmade and the grounds canvassed before us. We substantiate thisconclusion with the following reasons. 12.After elaborately hearing Mr.G.Baskar, learned counselfor the appellant/assessee, we do not agree with the submissionsmade and the grounds canvassed before us. We substantiate thisconclusion with the following reasons. 13.The Assessing Officer, in our considered view, has takennote of the entire factual thicket and has rejected the stand ofthe assessee. To be noted, the assessee did not cooperate in theassessment proceedings. This is clear from the factualposition, which we have narrated above that to the repeatedopportunities granted by the Assessing Officer to the assessee,none of which were availed by the assessee. 14.The Assessing Officer noting that the assessee did notsubmit any registered document commensurating the gift of theshares in favour of the assessee, had rejected on the groundthat mere production of Form 7B and copy of share premiumregister cannot be treated as valid documents for proof, asM/s.Vasan Health Care Private Limited is a limited company. TheAssessing Officer also noted that the assessee was called uponto furnish the Board's resolution of the companies, viz.,M/s.Vasan Health Care Private Limited and M/s.AdvantageStrategic Consulting Private Limited both of which were notsubmitted. Further, the assessee did not submit their sharepurchase agreement entered into between the assessee andM/s.Advantage Strategic Consulting Private Limited in spite ofnotice being issued. 15.Further, the Assessing Officer noted that shares wereallotted to Mrs.Meera Arun on 28.10.2008 and these shares aresaid to have been gifted to the assessee on 29.10.2008 and outof 3,00,000 equity shares, which are alleged to have beengifted, 1,50,000 equity shares were transferred by the assesseeto M/s.Advantage Strategic Consulting Private Limited on30.10.2008 for a nominal value of Rs.100/- per share. TheAssessing Officer further noted that the Board of Directors hadgiven approval only for allotment of shares to Mrs.Meera Arun https://hcservices.ecourts.gov.in/hcservices/ and no such approval was granted for transfer by way of gift toher father, viz., the assessee, who is also one of theDirectors, which should have been approved by the Board ofDirectors. Further, the Assessing Officer stated that all theshares at nominal rate and share premium was allotted for cashand to this cash generation, the assessee did not furnishsupportive document for source in the hands of his daughterMrs.Meera Arun. Further, from the records, the AssessingOfficer noted that Mrs.Meera Arun does not have sufficientsource for cash during the assessment year 2009-10 to investsuch huge cash in equity shares. 16.Further, the Assessing Officer observed that from theshare application return of allotment in Form 2, M/s.VasanHealth Care Private Limited indulged in allotment of shares incash for which without any basis inflated the share value by wayof premium. Therefore, the Assessing officer rejected the sameas unreliable in the absence of any business transaction withM/s.Advantage Strategic Consulting Private Limited that theassessee transferred the share to the said company on creditbasis. Further, it was observed from the assessment records ofM/s.Advantage Strategic Consulting Private Limited for theassessment year 2011-12 that, it had classified in computationof long term capital gains in respect of M/s.Vasan Health CarePrivate Limited, as number of shares sold, 30,000 equity sharesof Rs.10/- each, which indicated that the purchase value of suchshares by M/s.Advantage Strategic Consulting Private Limited wasstill at a premium value Rs.90/- per share. 17.With the above discussion, the Assessing Officer rejectedthe contention of the assessee as not acceptable. 17.With the above discussion, the Assessing Officer rejectedthe contention of the assessee as not acceptable. 18.The CIT(A), in our considered view, did not deal with allthe issues and to say the least, the order is abridged. Thediscussion in the order is only in paragraph 6.1 which onlydeals as to the effect of Section 49 of the Act withoutreferring to or dealing with the various contentions raised bythe assessee or the Revenue. The matter was carried to theTribunal by the Revenue and the following grounds raised by theRevenue before the Tribunal are very germane:- “2.2. The ld. CIT(A) had erred in not takingnote of the analysis of the transfer of shares inquick succession on 28.10.2008, 29.10.2008 and30.10.2008 which proves the above gift as bogus.The donor Smt. Meera Arun got allotted 3,00,000shares of M/s.Vasan Health Care Pvt. Ltd., on28.10.2008 and on the very next day, shetransferred the entire shares to her father i.e.,on 29.10.2008. In turn, Shri. Dwarakanathan,father of Smt. Meera Arun transferred 1,50,000 shares to M/s.Advantage Strategic ConsultingServices P Ltd., on 30.10.2008. Smt. Meera Arunpays a sum of Rs.200/- per share comprising ofRs.100/- nominal value and premium of Rs.100/-,while Shri. Dwarakanathan had sold part of theshares to M/s.Advantage Strategic Consulting Pvt.Ltd., only at face value i.e., at Rs.100/- withoutcharging any premium. 2.3 The ld. CIT(A) ought to have consideredthe fact that has come to light that the entiresale made by Shri Dwarakanathan was on creditbasis and the actual consideration was received inthe month of December, 2009 and October, 2010. Infact, M/s.Advantage Strategic Consulting PrivateLimited in turn has sold part of the shares toM/s.Sequola Capital India Growth Investment-I,Mauritius at Rs.7,500/- per share with a premiumof Rs.7400/- on 30.10.2008. .............................. 2.6. The ld. CIT(A) failed to note that theBoard of Directors had given approval only forallotment of shares to Mrs. Meera Arun.Therefore, any gift to father who is also aDirector should have been approved by the Board ofDirectors. In the absence of the same, theconcept of gift/transfer to have taken place isfalse and is nothing but an afterthought only.2.7. The ld. CIT(A) is not justified inomitting to have noted the fact that the analysisof the entire transaction in toto definitely showsthat huge funds were mobilized to M/s.AdvantageStrategic Consulting Private Ltd and therebyfacilitating its subsididary at Singapore toacquire huge assets in Singapore. The ld. C(T)Ashould have seen the entire transactionwholistically and should have come to the finalconclusion. Instead, he has viewed the issue ofgift in isolation, thereby came to a wrongconclusion. 2.8. The ld. CIT(A) ought to have consideredthe fact that, within one day from the allotmentof shares, there cannot be a change in the valueof shares, therefore, there is no justificationfor not charging premium by Shri. Dwarakanathan.Further, once the gift is proved to be bogus andan arrangement, the ld. CIT(A) should have takenthe Net Asset Value (NAV) and accordingly computedthe cost per share as on 30.10.2008. by not doingso, the ld. CIT(A) had totally erred in coming to a wrong conclusion.” 2.8. The ld. CIT(A) ought to have consideredthe fact that, within one day from the allotmentof shares, there cannot be a change in the valueof shares, therefore, there is no justificationfor not charging premium by Shri. Dwarakanathan.Further, once the gift is proved to be bogus andan arrangement, the ld. CIT(A) should have takenthe Net Asset Value (NAV) and accordingly computedthe cost per share as on 30.10.2008. by not doingso, the ld. CIT(A) had totally erred in coming to a wrong conclusion.” 19.The Tribunal heard the parties and hold that the assesseehas not disclosed the receipt of gift in the original return ofincome filed and later on claimed loss of Rs.1,50,00,000/- onsale of shares in the return of income filed in response to thenotice under Section 148 of the Act. The Tribunal noted thatthe assessee had not filed any registered document of gifteither before the Assessing Officer, or before the CIT(A) whichshows that the assessee had not owned the said shares which wasalleged to be gifted to him by his daughter Mrs.Meera Arun.Therefore, the Tribunal, on facts, concluded that the provisionsof Section 49 of the Act did not apply to the facts of the case,since the said provisions envisages only where the capital assetbecomes the property of the assessee, then the cost ofacquisition of the asset will have to be reckoned on the basisof cost of acquisition to the previous owner and otherwise, no. 20.Thus, the Tribunal faulted the assessee in not furnishingany evidence either before the Assessing Officer, or before theCIT(A), or before the Tribunal that he held the gift by way ofregistered document and that the donor, his daughter, Mrs.MeeraArun had sufficient source for cash during the assessment year2009-10 to invest such huge cash in 3,00,000 equity shares andtherefore, on facts, the Tribunal approved the finding of theAssessing officer that the transaction was entirely bogus. 21.In our considered view, the assessee has not been able todislodge any of the factual findings which have been re-appreciated by the Assessing Officer. Furthermore, as observedby us earlier, the assessee did not cooperate in the assessmentproceedings for the reasons best known. 22.Thus, in our considered view, there is no question oflaw, much less substantial question of law arising forconsideration. 23.In the result, the appeal fails and the same isdismissed. No costs. Sd/- Assistant Registrar(CS VI) //True Copy// To 1.The Income-tax Appellate Tribunal 'C' Bench, Chennai. Chennai. 2.The Commissioner of Income-Tax (Appeals)-18, 46, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. 46, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034. 3.The Assistant Commissioner of Income Tax, Central Circle 2(1), Room No.122, First Floor,Investigation Wing, 46, Nungambakkam High Road, Chennai. Central Circle 2(1), Room No.122, First Floor,Investigation Wing, 46, Nungambakkam High Road, Chennai. +1cc to Mr.G.Baskar, Advocate, SR.No.46594+1cc to Mr.T.R.Senthil Kumar, Advocate, SR.No.46842 T.C.A.No.308 of 2019Kak(03/09/2019)