Wp/7978/2001 Of M/S.cauvery Spg & Weavin Mills v. Dy Commr Of Income Tax Spl

The petitioner is a company under liquidation. The same isnow represented by the Official Liquidator of this Court. AMill belonging to the petitioner company was ordered to be soldby the Company Court in public auction. Accordingly, it wassold in public auction for a sum of Rs.4.49 Crores. The bidderin whose favour the sale was confirmed filed two applicationshttps://hcservices.ecourts.gov.in/hcservices/before the Company Court in C.A.Nos.979/1991 and 980/1991 praying the Company Court to permit him to pay a part ofconsideration of Rs.2.23 Crores in 80 instalments and furtherpraying to grant lease of the Mill namely, Cauvery Spinning andWeaving Mills Limited. He further submitted that he was readyto pay a sum Rs.2.26 Crores towards part sale consideration.The Company Court by order dated 12.8.1991 accordingly grantedpermission to the bidder to pay Rs.2.26 Crores within six monthswithout interest and to pay the balance of Rs.2.23 Crores in 80monthly instalments regularly commencing from 1.12.1991. He wasfurther directed that for the said amount, the bidder shall payflat rate of interest of 18% per annum on reducing balance from1.1.1991. It was only in pursuance of this order, the bidderpaid Rs.2.23 Crores within six months which carried no interest.The balance of amount, as per the order of the Court, hestarted paying in instalments and that also he could not carryout promptly. He filed another application in C.A.No.1762/93before the Company Court to pay the balance of Rs.1.39 Croresand to relieve him from payment of interest. In the saidapplication, this Court by order dated 2.11.1993 reduced theinterest from 18% to 15%. Similarly in respect of the paymentof the balance of consideration, some concession was shown inthe matter of time. Subsequently, there were few more suchapplications in respect of the payment. Ultimately, the entiresale consideration was paid and accordingly, a Sale Certificatewas issued in favour of the purchaser. 2.In this regard, a sum of Rs.57.89 Lakhs was paid bythe purchaser in the name of "interest" as directed by theCompany Court. The 1[st] respondent proposed to assess the saidamount as income under the head of "income from other sources"for the purpose of payment of income tax. Thepetitioner/Liquidator opposed the same on the ground that thesaid amount has been received by the Official Liquidator only aspart of sale consideration and therefore, it will fall under thehead of "Capital Gains" for the purpose of income tax and notunder the head of "income from other sources". The same was notaccepted by the 1[st] respondent. The 1[st] respondent assessed thesame as "income from other sources" and accordingly computed theamount of income tax for the same. Against the said order ofthe 1[st] respondent, an appeal was preferred by the OfficialLiquidator to the 2[nd] respondent which was also rejected.Challenging the same, the petitioner/Official Liquidator filed aCompany Application before this Court in C.A.No.2012/1997praying the Company Court to direct the Income Tax Department totreat the interest amount paid by the purchaser of the Mill asforming part of sale consideration. In the said CompanyApplication, notice was issued to the 1[st] respondent by theCompany Court. When the matter was taken up on 14.12.2000 forhearing, a preliminary objection was raised by the 1[st] respondentin respect of the maintainability of the Company Application.It was contended that when there was an alternative efficacioushttps://hcservices.ecourts.gov.in/hcservices/remedy available to the petitioner/Liquidator, the Company Application was not maintainable. Having considered the same,the Company Court by order dated 14.12.2000 dismissed the saidpetition as not maintainable, however, with a direction to theOfficial Liquidator to challenge the order of assessment byfiling a Writ Petition before this Court. It was also directedthat in fairness, the Income Tax Department should not raise theplea of availability of alternative remedy or the delay inchallenging the order of assessment. It is in pursuance of thesaid direction issued, the petitioner/Official Liquidator hascome forward with this Writ Petition. 3.The foremost question involved in this Writ Petitionis as to whether the amount in question received by the OfficialLiquidator forms part of the sale consideration so as to fallwithin the head of "Capital Gain" or the same is interest, pureand simple, so as to fall within the head of "income from othersources" for the purpose of assessment for payment of incometax. 4.The contention of the learned Senior Counsel for thePetitioner is that though in the orders of the Company Court, ithas been mentioned that the amount represents the interest, as amatter of fact, in legal sense, it is not interest, but it isonly a part of sale consideration. In this regard, the learnedSenior Counsel would submit that though the Company Courtdirected the bidder to pay a part of the bid amount ininstalments, since there was no transfer effected immediatelyand since the possession was not also transferred in terms ofSection 53-A of the Transfer of Property Act, whatever wasreceived by the Official Liquidator until the transfer of titlewas effected, would only be a part of Capital and the same willnot fall within the ambit of income from other sources. Thelearned Senior Counsel would further point out thatindisputably, when the bidder was permitted to pay the part ofthe bid amount in instalments, the Company Court by order dated2.11.1993 in C.A.No.980/1991 directed the Official Liquidator tolease out the Mill to the bidder for a reasonable lease rentwhich was also fixed by the Company Court. Relying on this, thelearned Senior Counsel would submit that though possession wastaken by the bidder even before the sale was effected, the samewill not amount to transfer since the possession was nottransferred by way of part performance under Section 53-A of theTransfer of Property Act. In this regard, the learned SeniorCounsel would rely on Section 48 of the Income Tax Act and thedefinition of the term interest as found in Section 2(28A) ofthe said Act. 5.To substantiate his contention, the learned SeniorCounsel would also take me through various orders passed by theCompany Court including the tender notification wherein it hasbeen stated that the interest amount to be collected from thehttps://hcservices.ecourts.gov.in/hcservices/bidder will be treated as part of sale consideration. 5.To substantiate his contention, the learned SeniorCounsel would also take me through various orders passed by theCompany Court including the tender notification wherein it hasbeen stated that the interest amount to be collected from thehttps://hcservices.ecourts.gov.in/hcservices/bidder will be treated as part of sale consideration. Therefore, the learned Senior Counsel would submit that it wasthe intention even of the Company Court, which had full controlover the property, to have the amount collected by way ofinterest as part of sale consideration. Therefore, he wouldsubmit that it cannot be contended that the amount in questionwas received by the Official Liquidator in the name of interestin legal sense. For the purpose of Income Tax Act, it is not atall interest, but it forms part of the sale considerationfalling under the head of Capital Gain. The learned SeniorCounsel has relied on the judgment of Kerala High Court inKarvalves Limited Vs. Commissioner of Income Tax reported in(1992) 197 ITR 95, wherein the Court had occasion to consider asto whether the amount paid as Solatium on account of the landsacquired under the Land Acquisition Act would form part of thesale consideration or the income from other sources. Thelearned Senior Counsel would submit that the various High Courtshave taken the consistent view that the Solatium forms part ofonly the sale consideration and therefore, it is not an incomefrom other sources for the purpose of income tax. To put it innutshell, the learned Senior Counsel would submit that the orderof assessment made by the 1[st] respondent which was later onconfirmed by the 2[nd] respondent wherein they have assessed thesaid amount, treating the same as income from other sources isnot at all sustainable and therefore, the same requiresinterference at the hands of this Court. 6.The learned Counsel for the respondent would have adifferent stand. He would also take me through variousproceedings of the Company Court wherein two differentexpressions viz. consideration and interest have been employed.According to him, the intention of the Company Court itself wasto treat the bid amount as consideration and any amount receivedfrom the bidder for the delayed payment towards interest is onlyas an income from other sources. In this regard, the learnedCounsel would also submit that even in the Sale Certificateissued by the Company Court, it has been treated separately asconsideration and interest, thereby denoting that the bid amountis the consideration and the amount in question is onlyinterest. The learned Counsel would further submit that in aCatena of decisions, it has been held that any amount accrued asinterest on the capital amount is only income from other sourcesas defined in the Income Tax Act. In this case, according tothe learned Counsel for the respondent, the amount in questionwas received by the Official Liquidator from the bidder only byway of interest on the capital amount, namely, the considerationand therefore, the assessment order is sustainable under law.The learned Counsel would further submit that though it is truethat the transfer of title to the property was effected only onthe issuance of the Sale Certificate, it is immaterial. Hewould further point out that the moment, the sale is confirmedand the part payment is made, there is notional transfer of thehttps://hcservices.ecourts.gov.in/hcservices/property in favour of the bidder and therefore, any excess amount received subsequently because of the deferred payment ininstalments would be only income on the bid amount. He wouldfurther submit that such interest is paid only as an obligationon the part of the bidder arising out of some arrangement.Therefore, the said amount is the amount due from the bidderwhich in turn will fall within the definition of interest asdefined in the Income Tax Act. amount received subsequently because of the deferred payment ininstalments would be only income on the bid amount. He wouldfurther submit that such interest is paid only as an obligationon the part of the bidder arising out of some arrangement.Therefore, the said amount is the amount due from the bidderwhich in turn will fall within the definition of interest asdefined in the Income Tax Act. 7.The learned Counsel for the respondents relies on ajudgment of this Court in Mount Stuart Tea Estate and AmarCoffee Plantation reported in (1999) 239 ITR 489 (Madras),wherein this Court has held that the interest received from thepurchaser on the sale consideration is only income from othersources for the purpose of the Income Tax Act. The learnedCounsel would submit that in that case also, possession was nottransferred under Section 53-A of the Transfer of Property Act.De hors the said fact, this Court has taken the view that when apart payment is made, then whatever is received by way ofinterest on the balance amount will be only income from othersources. Relying on this judgment, the learned Counsel wouldsubmit that in the instant case though it is true thatpossession was transferred in favour of the bidder by way oflease, that is immaterial. He would point out that from thedate on which the tender was confirmed in favour of the bidder,what was paid on account of the deferred payment is interestwhich is an income on the capital amount. The learned Counselwould take me through various provisions of Income Tax Act aboutwhich I will make appropriate reference during the course ofthis order. 8.Let me now examine the rival contentions.Indisputably, the amount in question was received by theOfficial Liquidator in the name of interest only. Regardingthis, there is no doubt. A perusal of various proceedings ofthe Company Court would clear all possible doubts in thisregard. However, as pointed out by the learned Senior Counselfor the Petitioner, the Company Court in more than one place inthe orders passed on various dates has directed that theinterest received from the bidder shall be part of the saleconsideration. This direction issued by the Company Court alsocannot be lost sight of. With these undisputed facts, let menow look into the provisions of the Act. 9.At the outset, I may refer to Section 45(1) of theIncome Tax Act dealing with Capital Gains which reads asfollows: "45(1) Any profits or gains arising from the transfer ofa capital asset effected in the previous year shall saveas otherwise provided in sections 54, 54B, 54D, 54E,54EA, 54F, 54G and 54H be chargeable to income of thehttps://hcservices.ecourts.gov.in/hcservices/previous year in which the transfer took place." A close reading of Section 45(1) of the Income Tax Actwould make one to clearly understand that any profit or gainarising out of the transfer of a capital asset shall bechargeable only as "Capital Gain". 10.Now turning to Section 48 of the Act, it speaks of themode of computation of Capital Gains as follows: "48. The income chargeable under the head 'CapitalGains' shall be computed by deducting from the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset thefollowing amounts namely: i.Expenditure incurred wholly and exclusively inconnection with such transfer, A close reading of Section 45(1) of the Income Tax Actwould make one to clearly understand that any profit or gainarising out of the transfer of a capital asset shall bechargeable only as "Capital Gain". 10.Now turning to Section 48 of the Act, it speaks of themode of computation of Capital Gains as follows: "48. The income chargeable under the head 'CapitalGains' shall be computed by deducting from the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset thefollowing amounts namely: i.Expenditure incurred wholly and exclusively inconnection with such transfer, ii.The cost of acquisition of the asset and thecost of any improvement thereto.(Provisos are omitted)"A glance through the said provision would show that what isto be taken into consideration is the full value of theconsideration received or accruing as a result of transfer ofthe capital asset. It clearly indicates that any amount whichaccrues on account of the transfer of capital asset is also acapital asset and after deducting the expenditure incurred andcost of acquisition and the cost of improvement, if any, thegain is calculated. The amount so accrues on account oftransfer may be called in any name without attaching any legalsense to the same by the parties to the transaction. In thecase on hand, though the amount paid by the bidder apart fromthe bid amount is called as interest, it cannot be given themeaning of the term 'interest' in the legal sense in which it isreferred to in Income Tax Act. This amount only represents theamount accrued on account of transfer of the capital asset. Toput it otherwise, the bid amount and the amount received by theLiquidator in the name of interest are to be added and then theexpenditure incurred and the cost of acquisition and the cost ofimprovement are to be deducted to calculate the capital gain forthe purpose of charging the same for income tax. 11.Now coming to the definition of the term transfer asemployed in Section 48, reference is to be made to Section 2(47)of the Act which reads as follows: "2(47) Transfer in relation to a capital assetincludes;i.the sale, exchange or relinquishment of theasset; orii.The extinguishment of any rights therein; oriii. The compulsory acquisition thereof under anylaw; or https://hcservices.ecourts.gov.in/hcservices/ iv.In a case where the asset is converted by theowner thereof into or is treated by him as, stock-in-trade of a business carried on by him, such conversionor treatment; (or) (iva) the maturity or redemption of a zero couponbond or) v.any transaction involving the allowing of thepossession of any immovable property to be taken orretained in part performance of a contract of the naturereferred to in Section 53A of the Transfer of PropertyAct, 1882 (4 of 1882); or vi.Any transaction (whether by way of becoming amember of, or acquiring shares in, a co-operativesociety, company or other association of persons or byway of any agreement or any arrangement or in any othermanner whatsoever) which has the effect of transferring,or enabling the enjoyment of, any immovable property. Explanation : For the purposes of sub-clauses (v)and (vi) 'immovable property' shall have the samemeaning as in clause (d) of Section 269 UA)" (iva) the maturity or redemption of a zero couponbond or) v.any transaction involving the allowing of thepossession of any immovable property to be taken orretained in part performance of a contract of the naturereferred to in Section 53A of the Transfer of PropertyAct, 1882 (4 of 1882); or vi.Any transaction (whether by way of becoming amember of, or acquiring shares in, a co-operativesociety, company or other association of persons or byway of any agreement or any arrangement or in any othermanner whatsoever) which has the effect of transferring,or enabling the enjoyment of, any immovable property. Explanation : For the purposes of sub-clauses (v)and (vi) 'immovable property' shall have the samemeaning as in clause (d) of Section 269 UA)" 12.Here 2(47)(v) needs to be under scored. Thisprovision creates a notional or artificial transfer on the daywhen possession is transferred in terms of Section 53-A of theTransfer of the Property Act. It is common knowledge thattransfer of title by way of sale takes place only on theexecution of the sale deed as provided in Section 54 of theTransfer of Property Act. But, for the purposes of the IncomeTax Act notional/artificial transfer is effected on the datewhen transfer of possession is made under Section 53-A of theTransfer of Property Act. The object of introduction of Section2(47)(v) in this Act is easily discernible. In my consideredopinion, it was only to make any amount which is received bytransfer from the date of such notional/artificial transfer asincome, this provision has been made. Before introduction ofthis provision by Finance Act of 1988 with effect from 1.4.1988,there was no such provision anywhere in the Act. Therefore,prior to 1.4.1988, the legal position was that the transfer willtake place only as per the provisions of the Transfer ofProperty Act. Therefore, any amount received prior to suchtransfer would be only part of sale consideration, though itmight have been received under any name like interest. Only toprevent such kind of evasion, probably, the Parliament hadthought it fit to introduce the said provision with effect from1.4.1988. This would only go to indicate the correctness of theargument advanced by the learned Senior Counsel for thepetitioner that any amount received, whatever name it may bear,prior to the transfer will be only part of sale considerationand the same can never be considered as income from othersources. https://hcservices.ecourts.gov.in/hcservices/ 13.In the instant case, such notional transfer was noteffected on account of the transfer of possession to the bidderby the Official Liquidator. As I have narrated earlier, as perthe order of the Company Court, the possession of the Mill wastransferred to the bidder only by way of lease and not in termsof Section 53-A of the Transfer of Property Act. Therefore,there was neither actual transfer nor artificial transfer oftitle on account of the transfer of possession. Such transferof title took place only on payment of the entire amount by thebidder and only after the Sale Certificate was issued by theCompany Court. 14.Now coming to the contention of the learned SeniorCounsel as to what the term interest means. Section 2(28 A) ofthe Act defines the same as follows: 13.In the instant case, such notional transfer was noteffected on account of the transfer of possession to the bidderby the Official Liquidator. As I have narrated earlier, as perthe order of the Company Court, the possession of the Mill wastransferred to the bidder only by way of lease and not in termsof Section 53-A of the Transfer of Property Act. Therefore,there was neither actual transfer nor artificial transfer oftitle on account of the transfer of possession. Such transferof title took place only on payment of the entire amount by thebidder and only after the Sale Certificate was issued by theCompany Court. 14.Now coming to the contention of the learned SeniorCounsel as to what the term interest means. Section 2(28 A) ofthe Act defines the same as follows: "Interest means interest payable in any manner inrespect of any moneys borrowed or debt incurred(including a deposit, claim or other similar right orobligation) and includes any service fee or other chargein respect of the moneys borrowed or debt incurred or inrespect of any credit facility which has not beenutilised."A close reading of the above provision would make itclearly understandable that to call an amount received asinterest, atleast one of the conditions should be satisfied,namely, the same should have been received as a due on accountof any money either borrowed or debt incurred. Here, in thiscase, the amount which was agreed to be paid, though by way ofinterest by the bidder as per the order of the Company Court, isnot on account of any money either borrowed or debt incurred.Therefore, the amount in question cannot be treated as interestat all as defined in the above provision. 15.Now coming to the judgment relied on by the learnedSenior Counsel for the petitioner in the Judgment of KeralaHigh Court in Karvalves Limited Vs. Commissioner of Income Taxreported in (1992) 197 ITR 95, the question, as I have alreadyreferred to, was as to whether the Solatium paid as per theprovisions of the Land Acquisition Act would be income throughother sources or the same would form part of the consideration.The Courts have consistently held that it is only towardsconsideration and not towards any income through other sources.But at the same time, in these judgments, the interest paid bythe Government as per the provisions of the Land Acquisition Acthas been treated as income through other sources only for thepurpose of Income Tax assessment. This position is explained bythe learned Senior Counsel to say that in those cases byoperation of law, the property vests with the Government as soonas the declaration is made under Section 6 of the Act. Thus,https://hcservices.ecourts.gov.in/hcservices/according to him, the transfer of title takes place on the date of declaration. Therefore, the consideration for the said landbecomes due from the Government to the erstwhile land owners andfor that fixed consideration, interest is thereafter paid forthat amount due and thus whatever paid, is surely interest.That is the reason why the Kerala High Court has held that theSolatium is part of consideration whereas the interest accruedis not part of consideration. Even there, there are two parts.The interest is paid not only from the date of the declarationmade under Section 6 of the Act, but from the date on which the4(1) notice under the Land Acquisition Act is issued.Therefore, in my considered opinion, the interest paid for theperiod from the date of 4(1) notice till the title vests withthe Government by issuance of Declaration under Section 6 of theAct, the amount so received by the erstwhile owner will be onlya part of sale consideration for the purposes of Income Tax. Itis only the interest received by the erstwhile owners from thedate of Section 6 Declaration, the same would be income throughother sources. This question is not very relevant for this caseso as to have more discussion on this. From these judgments,one thing is clear, that is, after the transfer of title,whatever is received apart, from the sale consideration fixed atthe time of transfer, is income through other sources. 16.Now coming to the judgment relied on by the learnedCounsel for the Respondents i.e. in Mount Stuart Tea Estate andAmar Coffee Plantation V. Commissioner of Income Tax reportedin (1999) 239 ITR 489 that is a case where this Court has heldthat though possession was not transferred on account ofagreement for sale, still the amount received by way of interestfor the sale consideration mentioned in the sale agreement willbe only income through other sources. But the facts aredistinguishable. In that case, the Court had to consider as towhether the amount received by the seller forms part of the saleconsideration or it was under a different transaction whereinterest for a fixed amount was calculated and received by him.In the given set of facts and circumstances of that case, it hasbeen held that the amount received by way of interest was not onaccount of transfer of capital asset, but on account of adifferent transaction under which interest was received.Therefore, the principles stated in the said case do not come tothe rescue of the respondents. 17.In view of the foregoing discussion I hold that theamount in question, in this Writ Petition received by theOfficial Liquidator as per the orders of the Company Court,though repeatedly referred to as interest, for the purpose ofassessment of income tax, it is part of sale consideration andtherefore, the same cannot be treated as income from othersources as defined in Section 56 of the Income Tax Act. Thesaid amount should be treated only as Capital Gain under Section45 of the Income Tax Act for the purpose of assessment. https://hcservices.ecourts.gov.in/hcservices/ 18.In the result, the Writ Petition is allowed, theimpugned order passed by the 1[st] respondent and confirmed by the2[nd] respondent is set aside and the matter is remitted to the 1[st]respondent for issuance of appropriate assessment order treatingthe amount in question as Capital Gain. No costs. Sd/- Asst.Registrar. /true copy/ Sub Asst.Registrar.tsiTo1. The Deputy Commissioner of Income-Tax, Special Range, Tiruchirappalli.2. The Commissioner of Income Tax (Appeals) XI, 121, Mahatma Gandhi Salai, Chennai-600 034.3. The Joint Commissioner of Income-Tax, Special Range, Tiruchirappalli.1 cc to Mr.K. Subramaniam, Advocate, Sr. 559481 cc to M/s. Anitha Sumanth Sr. 558431 cc to Mr.S.R. Sunder, for Official Liquidator, Sr. 56358 W.P.No.7978 of 2001LA (CO)kk 25/8