The Commissioner Of Income Tax (Central), Ludhiana v. M/S Oswal Spinniing & Weaving Mills Ltd., Ludhiana

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.R. No.111 of 1995 Date of decision: 12.7.2010 The Commissioner of Income Tax (Central), Ludhiana. -----Applicant. Vs. M/s Oswal Spinniing & Weaving Mills Ltd., Ludhiana -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. K.K. Mehta, Sr. Standing Counselfor the revenue.for the revenue. Mr. S.K. Mukhi, AdvocateMr. Rajiv Sharma and Ms. Jyoti, Advocatesfor the assessee. --- ADARSH KUMAR GOEL, J. 1. The Income Tax Appellate Tribunal, Chandigarh hasreferred following question of law for opinion of this Court, arisingout of its orders dated 22.9.1992 in I.T.A. No.1227/Chandi/1987for the assessment year 1983-84:- “Whether on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holdingthat transfer of assets at W.D.V. level valued atRs.3,01,700/- in exchange of shares valued atRs.15,74,874/- did not constitute “transfer” within the meaning of section 2(47) and also was right in law indeleting the addition of Rs.12,73,174/- made by theAssessing Officer by invoking proviso to section 41(2)of the Income Tax Act, 1961?” 2. The assessee is a limited company and engaged inmanufacture of yarn and vanaspati ghee and sale thereof. Forthe year in question, the assessee filed return declaring loss ofRs.25,50,380/- which was subsequently revised on 31.3.1986declaring loss of Rs.23,41,950/-. During the course ofassessment proceedings, the Assessing Officer found that certainassets pertaining to textile unit of the assessee were transferredto the shareholders at written down value of Rs.3,01,700/- inexchange of 3017 shares held by the shareholders which weresurrendered by the company. The value of 3017 shares @Rs.522/- per share was 15,74,874/-. This transaction was shownby one of the shareholders to fall under the capital gains tax.However, the Assessing Officer sought explanation from theassessee as to why the transaction be not charged under capitalgain tax in its case as well, whereupon it was pointed out that asthe assets were transferred by the company to its shareholdersand, therefore, no liability to capital gain tax would arise. TheAssessing Officer invoked Section 41(2) of the Income Tax Act,1961 (for short, “the Act”) in respect of transferred assets in lieuof excess value of the shares over the written down value of theassets and made an addition of Rs.12,73,174/-. On appeal, it was contended by the assessee that the reduction of sharecapital of the company did not amount to sale or transfer andvaluation of the shares was against the principles laid down bythe Hon’ble Supreme Court in C.W.T.v. Mahadeo Jalan andothers[1972] 86 ITR 621 and thus, no profit may be involved ifvalue of shares was taken to be equal to the value of assetstransferred. The CIT(A) set aside the said addition by holding thatno transfer of assets was involved and it was only reduction of theshare capital. Reliance was placed on judgment of the Hon’bleSupreme Court inCITv. R.M. Amin[1977] 106 ITR 368 to holdthat reduction in subscribed capital of the company did notamount to sale or transfer. In that process, no profit was made toattract Section 41(2) of the Act. However, no finding on the issueregarding valuation of shares was recorded, as it was held to benot taxable. The Tribunal upheld the view of CIT(A). 3. We have heard learned counsel for the parties andperused the record. 4. Learned counsel for the revenue submitted that fromthe facts it is clear that the assessee had availed the benefit ofdepreciation under Section 32 in respect of land, building andmachinery which was transferred for consideration higher thanthe written down value and therefore, the assessee had madeprofit which was covered under Section 41(2) of the Act.Reliance has been placed on judgment of the Hon’ble SupremeCourt in Kartikeya V. Sarabhai vs. CIT [1997] 228 ITR 163, 3. We have heard learned counsel for the parties andperused the record. 4. Learned counsel for the revenue submitted that fromthe facts it is clear that the assessee had availed the benefit ofdepreciation under Section 32 in respect of land, building andmachinery which was transferred for consideration higher thanthe written down value and therefore, the assessee had madeprofit which was covered under Section 41(2) of the Act.Reliance has been placed on judgment of the Hon’ble SupremeCourt in Kartikeya V. Sarabhai vs. CIT [1997] 228 ITR 163, distinguishing earlier judgment in R.M. Amin’s case (supra),holding that payment of lesser value for shares of more valueinvolves profit. Reliance has also been placed on judgment of theAllahabad High Court in Chandra Katha Industriesv. CIT[1982]138 ITR 168, to canvass that the expression “sold” in Section 41(2) of the Act includes an exchange and therefore, the excessover the written down value of the asset would be taxed under thesaid provision. 5. Learned counsel for the assessee on the other handsupported the view taken by the CIT(A) and the Tribunal, to theeffect that transfer of assets at written down value for highervalue of shares should be treated to be reduction in the value ofthe share capital, which could not be equated to transfer andsince no transfer was involved therein, so as to attract Section 41(2) of the Act. 6. The findings of CIT(A) recorded in para 3.9 which hadbeen affirmed by the Tribunal while adjudicating the issue are tothe following effect:- “3.9As regards the observation of the ITO in hisorder, the ITO mentioned in his order that the word‘transferred back to the company has been mentionedand the basis of that word transferred be held thatthere is a transfer. Hence the transfer is involved inthese transactions. As the transfer of the asset to thecompany i.e. there is a transfer of the shares of thecompany and back to the company. It means to theextent of 3017 shares the corresponding assets have been distributed to the outgoing share holders and thecapital stand reduced to that extent. Had it been thetransfer to third party then the appellant itself, theinterpretation of the ITO about the word ‘transfer’ wasjustified. In the instant case, the word transfer cannotbe used and section 41(2) cannot be applied in thecase because there is no transfer of the assets ratherit was reduction of the share capital.” 7. The points that arise for consideration in thisreference can be categorized into two sub headings:-reference can be categorized into two sub headings:- (a) Whether in the facts and circumstances of the case,the transfer of assets at written down value inexchange of shares would constitute ‘transfer’ withinthe meaning of Section 2(47) of the Act?the transfer of assets at written down value inexchange of shares would constitute ‘transfer’ withinthe meaning of Section 2(47) of the Act? (b)If answer to the first question is in the affirmative,whether the allotment/exchange of shares for higherconsideration than the written down value of theassets would attract provisions of Section 41(2) of theAct?whether the allotment/exchange of shares for higherconsideration than the written down value of theassets would attract provisions of Section 41(2) of theAct? 8.Adverting to the first question, it would beadvantageous to refer to Section 2(47) of the Act, which defines‘transfer’ at the relevant time. The same reads as under:-advantageous to refer to Section 2(47) of the Act, which defines‘transfer’ at the relevant time. The same reads as under:- “2(47)“transfer”, in relation to a capital asset,includes the sale, exchange or relinquishment ofthe asset or the extinguishment of any rightsincludes the sale, exchange or relinquishment ofthe asset or the extinguishment of any rights therein or the compulsory acquisition thereofunder any law” 8.Adverting to the first question, it would beadvantageous to refer to Section 2(47) of the Act, which defines‘transfer’ at the relevant time. The same reads as under:-advantageous to refer to Section 2(47) of the Act, which defines‘transfer’ at the relevant time. The same reads as under:- “2(47)“transfer”, in relation to a capital asset,includes the sale, exchange or relinquishment ofthe asset or the extinguishment of any rightsincludes the sale, exchange or relinquishment ofthe asset or the extinguishment of any rights therein or the compulsory acquisition thereofunder any law” 9. According to the aforesaid provision, this Clauseintroduces an artificial extended meaning to the expression‘transfer’. The said term includes transaction of ‘sale’ and‘exchange’, which even in ordinary parlance, would be transfers,but it also takes within its ambit ‘relinquishment’ or‘extinguishment of rights’, which may otherwise be not included inthe said term. 10. The Hon’ble Supreme Court in Kartikeya(supra)while considering the scope of ‘transfer’ within the meaning ofSection 2(47) of the Act, where the company had sought toreduce the share capital by reducing the face value of thepreference shares, had held the same to be ‘transfer’ underSection 2(47) of the Act. The Hon’ble Supreme Courtdistinguishing earlier judgment inR.M. Amim’s(supra) observed:- “8.The company under s.100(1)(c) of theCompanies Act has a right to reduce the share capitaland one of the modes, which can be adopted, is toreduce the face value of the preference shares. Thisis precisely what has been done in the instant case.Instead of there being a 100 per cent extinction of theright which was there in the Anarkali’s case (supra),here the right as a preference shareholder of theappellant stands reduced from Rs.500/-to Rs.50/-pershare. A sum of Rs.450/-per share has been paid by the company to the appellant on account of theextinguishment of his right to the aforesaid extent.9.Yet another right which is apparently effected asa consequence of this reduction is with regard to thevoting right. According to s.87(2)(a) of the CompaniesAct, a holder of a preference share has a right to voteonly on resolution placed before the company whichdirectly affect the rights attached to his preferenceshares. In the case of cumulative preference share, ifdividend remains unpaid for not less than two yearspreceding the date of commencement of the meeting,then even a preference shareholder, by virtue of s.87(2)(b) of the Companies Act, gets a right to vote onevery resolution placed before the company at anymeeting like a member holding equity shares. What isimportant for our purposes is the provisions of s.87(2)(c) which, inter alia, provides. “Where the holder of any preference share hasa right to vote on any resolution in accordance withthe provisions of this sub-section, his voting right on apoll, as the holder of such share, shall, subject to theprovisions of s.89 and sub-s.(2) of s.92, be in thesame proportion as the capital paid up in respect ofthe preference share bears to the total paid-up equitycapital of the company”. Therefore, with the reduction in the face of the sharefrom Rs. 500/- per share to Rs. 50/- per share, thevalue of the vote of the appellant in the event of therebeing a poll would stand considerably reduced. Suchreduction of the right in the capital asset would clearlyamount to a transfer within the meaning of thatexpression in Section 2(47) of the Act. “Where the holder of any preference share hasa right to vote on any resolution in accordance withthe provisions of this sub-section, his voting right on apoll, as the holder of such share, shall, subject to theprovisions of s.89 and sub-s.(2) of s.92, be in thesame proportion as the capital paid up in respect ofthe preference share bears to the total paid-up equitycapital of the company”. Therefore, with the reduction in the face of the sharefrom Rs. 500/- per share to Rs. 50/- per share, thevalue of the vote of the appellant in the event of therebeing a poll would stand considerably reduced. Suchreduction of the right in the capital asset would clearlyamount to a transfer within the meaning of thatexpression in Section 2(47) of the Act. 10. The decision in R.M. Amin's case (supra) canbe of no help to the appellant. In that case, thecompany had gone into voluntary liquidation and theassessee had received a sum in cash of the amountwhich he had paid for the share. It was held thatwhen share holder receives money representing hisshare on the distribution of the net assets of acompany in liquidation, he receives that money insatisfaction of the right which belongs to him by virtueof his holding the share and not by any operation ofany transaction which amounted to sale, exchange,relinquishment, transfer of a capital asset orextinguishment of any right in capital assets.The payment received by the contributories on theliquidation of the company would not amount to atransfer and it is for this reason that R.M. Amin's case(supra) was distinguished by this Court in Anarkali'scase.” In view of above, the answer to the first question thatassets given at written down value in exchange of shares wouldamount to ‘transfer’ within the meaning of Section 2(47) of theAct. 11. Adverting to the second limb, it would be profitable toreproduce Section 41(2) of the Act as it stood at the relevant time.The same reads as under:- (2) Where any building, machinery, plant or furniture,which is owned by the assessee and which was orhas been used for the purposes of business orprofession is sold, discarded, demolished or destroyed and the moneys payablein respect of suchbuilding, machinery, plant or furniture, as the casemay be, together with the amount of scrap value, ifany, exceeds the written down value, so much of theexcess as does not exceed the difference betweenthe actual cost and the written down value shall bechargeable to income-tax as income of the businessor profession of the previous year in which themoneys payable for the building, machinery, plant orfurniture became due: Provided that where the building sold, discarded,demolished or destroyed is a building to whichExplanation 5 to section 43 applies, and the moneyspayable in respect of such building, together with theamount of scrap value, if any, exceed the actual costas determined under that Explanation, so much of theexcess as does not exceed the difference betweenthe actual cost so determined and the written downvalue shall be chargeable to income-tax as income ofthe business or profession of such previous year: Provided further that where an asset representingexpenditure of a capital nature on scientific researchwithin the meaning of clause (iv) of sub-section(2B) ofsection35, read with clause (4) of section43 ownedby the assessee which was or has been used for thepurposes of business after it ceased to be used forthe purpose of scientific research related to thebusiness is sold, discarded, demolished or destroyed,the provisions of this sub-section shall apply as if forthe words “actual cost”, at the first place where theyoccur, the words, “actual cost and increased bytwenty-five per cent thereof” had been substituted. Provided further that where an asset representingexpenditure of a capital nature on scientific researchwithin the meaning of clause (iv) of sub-section(2B) ofsection35, read with clause (4) of section43 ownedby the assessee which was or has been used for thepurposes of business after it ceased to be used forthe purpose of scientific research related to thebusiness is sold, discarded, demolished or destroyed,the provisions of this sub-section shall apply as if forthe words “actual cost”, at the first place where theyoccur, the words, “actual cost and increased bytwenty-five per cent thereof” had been substituted. Explanation.—Where the moneys payable in respectof the building, machinery, plant or furniture referredto in this sub-section become due in a previous yearin which the business or profession for the purpose ofwhich the building, machinery, plant or furniture wasbeing used is no longer in existence, the provisions ofthis sub-section shall apply as if the business orprofession is in existence in that previous year.” 12. The aforesaid provision applies wherever the sale proceeds of the capital asset of an assessee exceeds the writtendown value. The amount that is chargeable to tax under thisSection is so much of the excess as does not exceed thedifference between the actual cost and the written down value.This is taxed as income arising from business or profession of theassessee in the previous year in which the asset is sold. Thesaid charge is termed as balancing charge. This represents thedepreciation allowance which is allowed in the previous yearsfrom the profits earned by the assessee in those years and wheresubsequently the capital asset has been sold for excess value,then the difference between original cost and the written downvalue is treated as income under Section 41(2) of the Act by wayof balancing charge. 13. The Allahabad High Court in Chandra KathaIndustries’s case (supra) while considering the scope of Section41(2) of the Act has observed as under:- “The principle underlying this provision is that where abuilding, machinery, plant or furniture owned by theassessee is sold, discarded, demolished or destroyed,the depreciation allowance and the balancingallowance under s.32(1) would recoup to theassessee the entire capital loss on the asset. If theassessee is able to recover more than the writtendown value out of the “moneys payable” in respect ofthe asset together with the amount of scrap value, ifany, a balancing charge is levied by this sub-sectionon the excess recovered to the extent of the total ofdepreciation allowances granted in, the past. In otherwords, the Revenue takes back what it had given byway of depreciation allowance in the earlier years.Thus, to attract this provision, there must be sale,discarding, demolition or destruction; such sale,discarding, demolition or destruction should be of abuilding, machinery, plant or furniture. Such assetshould be owned by the assessee and the moneyspayable in respect of such asset together with theamount of scrap value, if any, should exceed the totalof the depreciation granted on such asset in the past.If it is so, the excess to the extent of the total ofdepreciation allowances granted in the past isdeemed to be income liable to tax. For our purposeswhat is required to be seen is the scope ofexpressions “sold” “moneys payable” and the “assetsold”. The word “sold” which occurs in this sub-section includes a transfer by way of exchange or acompulsory acquisition under any law for, the timebeing in force and the expression “money payable”includes the sale price or insurance, salvage orcompensation moneys as provided in cl. (iii) of sub-s. (1) of s.32 r/w the Explanation. In our opinion, ananalysis of these provisions furnish a clear answer tothe two contentions urged on behalf of the assessee.Here, there was a sale of all the assets and liabilitiesof the assessee including land, building, plant andmachinery. In respect of land, building, plant andmachinery, which constitutes immovable property, thesale was effected by a sale deed executed on August1, 1970, i.e., within the previous year underconsideration. The agreement to sell which wasexecuted on July, 31, 1970 i.e. which fell within thepreceding accounting year, would not create any rightin favour of the vendee in respect of immovableproperty. In respect of immovable property of thevalue exceeding Rs.100 unless the transaction isevidenced by a written instrument duly registered, thetransfer does not become complete in the eye of law.Sec. 53A of the Transfer of Property Act would not beattracted because it has not been found by theTribunal that the possession over the immovableproperty was transferred as a result of the agreementto sell. At any rate, such transaction would becomecomplete in the eye of law only when a proper saledeed is executed and registered.” 14. In view of judgment of the Hon’ble Supreme Court inKartikeya’s case (supra) and judgment of the Allahabad HighCourt inChandra Katha Industries’case (supra), we are of theview that transfer of assets at written down value for shares ofhigher value amounts to transfer and attract tax under Section 41 (2) of the Act. View taken by the Tribunal, thus, cannot beupheld. 15. The question referred is answered accordingly. (ADARSH KUMAR GOEL) JUDGE July 12, 2010ashwani ( AJAY KUMAR MITTAL ) JUDGE