2017-TIOL-INSTANT-ALL-456
22 June 2017   
CASE LAWS

2017-TIOL-1168-HC-MAD-WT

BALAJI INDUSTRIES LTD Vs DCWT (Dated: April 18, 2017)

Wealth Tax Act, 1957 - Schedule III - Rules 3 & 8

Keywords - unused land - acquisition - buildings - amalgamation - transferor - transferee.

The assessee company filed its return of wealth for the AY 1990-91 declaring deficit wealth of Rs.99,38,700/- in response to the notice issued u/s 17 of the Wealth Tax Act. According to the assessee, its property at Mount Road was being held for productive use and the asset was not assessable to wealth tax. Without prejudice to this contention, the assessee contended that, on the valuation date, the property consisted of buildings and land appurtenant thereto, was to be valued as per Rule 3 of Schedule III to the Wealth Tax Act. It was the further contention of assessee that since the property was not let out, the annual value fixed for the property tax purposes at Rs.56,784/- is to be taken as the annual rent payable. According to the AO, the provision of Rule 3 for the valuation of the property cannot be applied to the Mount Road Property as the property has not fetched any income to the assessee and that the rule applicable is clause (a) to Rule 8. In so far as lands at Nellore is concerned, in view of proviso 3(v) to section 40 of the Finance Act, 1983, the unused land by the assessee for the purpose of construction of a hotel for a period of two years from the date of acquisition would be liable to wealth tax. The assessee had acquired the land during the previous year relevant to AY 1988-89. Accordingly, the AO determined the total tax payable as Rs.14,85,990/- for the AY 1991-92. Against this order, an appeal was preferred before the CIT(A). Before the CIT(A) it was also argued that  M/s. Balaji Industries Ltd., Chennai, was not in existence. Therefore, the assessment order passed against a non-existent entity is ab-intio void. The CIT(A) allowed the claim of the assessee in respect of the lands at Nellore and confirmed the findings with regard to the property at Mount Road and accordingly, the appeal was partly allowed. Against this order, appeals were preferred before the Tribunal. The appellate Tribunal considered the validity of the assessment made after amalgamation and held that as per the scheme of amalgamation, all actions and legal proceedings by or against the transferor company pending on the completion of procedure date shall be continued and be enforced or against the transferee company as the case may be. Therefore, the Tribunal has held even after amalgamation, the transferee company, M/s. Balaji Hotels and Enterprises Ltd., will discharge the wealth-tax liabilities of the transferor company i.e., M/s.Balaji Industries Pvt.Ltd. Regarding valuation of the property at Mount Road, the assessee did purchase the Mount Road Property in the year 1986. The property in question was not considered by the appellant within the prescribed period of two years. Therefore, it was held that the property was a fixed asset and not as stock in trade and hence, liable to pay wealth tax. In respect of the other contention in respect of the conclusion, the appellate Tribunal confirmed the order passed by the CIT(A). Therefore, challenging the said order, the present appeal was filed.

Having heard the parties, the High Court held that,

Whether proceeding initiated by wealth tax authorities in case of an amalgamated company would be valid if the proceeding relate to a period prior to amalgamation and notices were issued before the date of amalgamation - YES: HC

Whether existing liability of the transferor company under the Wealth Tax Act would be discharged by the transferee company upon amalgamation particularly when the scheme of amalgamation provides for the same - YES: HC

++ by relying upon the relevant clauses of the scheme of amalgamation, proceedings initiated by the authority has been continued for the completion of wealth tax assessment against the assessee company. The liability of the notices u/s 17 was not challenged at the relevant time. Therefore, the proceedings initiated is valid and in accordance with law. Also, the factum of amalgamation was not disclosed in the return filed and only intimated on 5.1.1999 about the amalgamation and the assessment related to the period prior to the date of amalgamation. The present case relates to the period prior to the date of amalgamation. Returns were also filed prior to the amalgamation and the notices were issued before the date of amalgamation when the assessee existed during the assessment. Amalgamation was done with effect from 1.4.1995 before the date of completion of assessment. As per the scheme, all actions and legal proceedings pending on the completion of procedures date shall be continued to enforce transfer as held by the CIT. The existing liability has to be discharged by M/s. Balaji Industries Ltd., as continued. Therefore, the contention of the assessee would not be valid and cannot be accepted. The said proviso for continuation of the liabilities forms part and parcel of the scheme of the amalgamation and the same was approved by the High Court of Andhra Pradesh.

Whether a piece of land purchased for productive use but which is unused for a period of two years from the date of acquisition would be treated as fixed asset and not as stock in trade, thereby making it liable to wealth tax - YES: HC

++ further, it is seen that both the appellate authority and the Tribunal has come to the conclusion on factual aspects that the property at Mount Road was purchased in the year 1986 and the period of two years from the date of purchase was over during the relevant AY. Therefore, on examination of the Balance Sheet for the relevant AY, the property has been held as fixed asset and not stock in trade. Therefore, the assessee is liable to be assessed to the wealth tax. Insofar as the lands at Nellore is concerned, the same was purchased to establish Aqua Farm. As the water on the lands was not suitable for breeding fishes, the project had been given up. Therefore, the land is amenable to wealth tax. The aforesaid contention was decided by the appellate authority as well as the Tribunal on facts. Therefore, no interference is required insofar as the aforesaid question of law raised by the assessee.

++  the guideline value fixed by the State Government for value of the property is disputed by the assessee before the Court. In the absence of any other evidence produced before the authority by the assessee, the authority has considered the guideline value fixed by the CIT and directed the AO for valuation and directing the AO to apply Rule 3. That was also confirmed by the Tax Tribunal. The contention of the assessee for the valuation of the property which are not in accordance with the law cannot be accepted. In the absence of any documentary evidence produced before the appellate authority, there cannot be an acceptance of valuation as declared in the declaration in respect of the aforesaid properties.

Assessee's appeal dismissed

2017-TIOL-1167-HC-MUM-IT

BA MOHOTA TEXTILES TRADERS PVT LTD Vs DCIT: BOMBAY HIGH COURT (Dated: June 12, 2017)

Income Tax - capital gains - transfer of shares - arbitration - separate legal entity - family settlement.

The assessee is a Private Limited Company. Over 80 % of it's share capital is held by the family members of Mr.Girdhardas Mohota, Mr.Gwaldas Mohota and Mr.Ranchhoddas Mohota referred to by the Tribunal as Groups 'A', 'B' and 'C' respectively. The Mohota family, besides holding a majority stake in the appellant/Company, had joint interest in various other Limited Companies and Partnership Firms, besides the family also owned immovable properties jointly. Disputes and differences arose between three groups of Mohota family i.e. Groups A, B and C and the same were referred for arbitration. Arbitrator rendered his Arbitration Award by way of family settlement. The Arbitration Award thereafter became decree of the Court. The above Award distributed the properties belonging to Mohota family amongst it's three groups. The assessee was allotted to Group 'B'. M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. were allotted to Groups 'A' and "C' collectively. The assessee in terms of the Award transferred 25,650 shares held by it in M/s.Rekhchand Mohta Spinning and Weaving Mills Ltd. and 1,22,000 shares held by it in M/s. Vaibhav Textiles Pvt. Ltd. to the members of the family of Group 'A' and Group 'C'. The assessee filed return for AY 1995-96 and contended that transfer of shares in M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Group 'A' and 'C' was done in pursuance of family arrangement, therefore, it was contended that no Capital gains would be attracted. However, AO held that the Company being a separate legal entity distinct from it's share holders, cannot be as part of family settlement/arrangement. Assessee carried the issue in appeal to the CIT(A) noted that notwithstanding the fact that the assessee was under control and management of the members of Mohota family, who were part of family settlement, yet the transfer of shares by the Company would be covered within the meaning of Section 2(47) so as to be assessable to Capital Gains Tax. Thus, the appeal of assessee was dismissed. Assessee preferred an appeal to the Tribunal who upheld the view of the lower Authorities and dismissed the assessee's appeal.

Having heard the parties, the High Court held that,

Whether transfer of shares by one company to another would be liable to capital gains when such transfer takes place as part of a family settlement between the promoters of such companies - YES: HC

++ shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are held by the assessee and not it's members. The members, therefore, cannot claim any rights to the property of assessee Company i.e. shares of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. as rightly held by the Authorities under the Act. It was submitted by the assessee that the objective/purpose of family settlement would restrict itself only to the persons who entered into the family arrangement and are part of the settlement. It cannot extend to the persons who are strangers to the settlement. In this case, assessee is not a member of Mohota family so as to be a part of the family settlement.  It was also contended that assessee had no volition in transferring the shares. It was observed by the Court that this submission overlooks the fact that an artificial entity such as a Company only acts through it's Directors and in no case, does the Company has a mind of it's own to decide the course of action to be adopted.

++ it was also submitted that no consideration was received by the assessee for the transfer of shares. It was submitted that the fair market value of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. arrived at Rs.225/- per share and that of M/s. Vaibhav Textiles Pvt. Ltd. arrived at Rs.10/- per share by the Arbitrator was only for the purposes of adjustment of rights amongst the parties. In this regard it was held that this submission overlooks the fact that the Arbitration Order itself records that the shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are to be transferred at a consideration of Rs.225/- and Rs.10/- per share respectively. Thus, the consideration has been determined and accepted by the members of the family, who are in management of the Assessee.

++ further, lifting of corporate veil at the instance of the assessee would mean that it is denying it's corporate existence. This, after taking advantage of the separate existence of a Company under the Act. Therefore, after having incorporated the Limited Company and given it separate existence from it's share holders, it is not open to the Company to urge "Please ignore my separate existence and look at the persons behind me." If that be so, the assessee must opt for voluntarily winding up and then the shares being allotted to the individual members on liquidation would be governed by the family arrangement/settlement. Thus, the Tribunal was correct in holding that the transaction of transfer of shares by the independent corporate entity was assessable to capital gain tax. The appeal is accordingly dismissed.

Assessee's appeal dismissed

2017-TIOL-1166-HC-MAD-IT

CIT Vs ESSORPE HOLDINGS PVT LTD: MADRAS HIGH COURT (Dated: April 18, 2017)

Income Tax - Section 45(2).

Keywords - capital gains - demerger - financial services - real estate - capital gains - business profits - transfer of property.

The assessee, is a company engaged in the business of real estate, financial services and other business. M/s. Essorper Mills Limited (EML) was demerged with the assessee company M/s. Essorpe Holdings Pvt. Ltd. (EHPL), as per the scheme of demerger, approved by this Court, transferring the real estate division of EML as a going concern. Both the companies entered into a Memo of Agreement, for a sale of 10.150 acres of land belonging to M/s. EML, for a total sale consideration of Rs.41 crores, in lieu of loan of Rs.26,50,36,747/- advanced to both the companies. The assessee company filed its return for the AY 2011-12, bringing to tax income on sale of land, as Long Term Capital gains. The land and building which were transferred by EHPL was never treated as investment/ capital asset by the demerged company EML, due to conversion of such assets or by the assessee EHPL. Hence, the profit on sale of such asset was to be assessed only under the head 'Profits and gains of business' and not under the head 'capital gains'. Further, the assessee had submitted that M/s. EML had converted 10.150 acres of land at Saravanampatti village, as stock in trade, on 01.04.2007. According to the assessee, as per Section 45(2) such conversion is deemed to be a transfer and the difference between the market value on the date of conversion and cost is to be assessed as capital gains. Out of the entire land, area measuring 5.075 acres were sold in the year 2008 and the same was assessed in the hands of EML. The capital gains of the land to an extent of 5.075 acres was computed at Rs.17,84,39,545/-, out of the total consideration value of the property. However, the ACIT, Company Circle I(2), Coimbatore, passed an assessment order u/s 143(3) for the AY 2011-12, by demanding a total taxable income of Rs.34,49,89,695/-. Before CIT(A) assessee argued that the balance 5.075 acres of the land, development division was demerged with EHPL, with effect from 01.01.2009. As demerger is not a transfer, u/s 47(vi)(b), the applicability of provisions of Section 45(2), is postponed till the asset is actually sold by the Transferee company. The CIT(A) rejected the appeal for the reason that plea of the assessee that the land before demerger, was converted into stock in trade by EML and so the capital gains as accrued u/s 45(2), as on the date of conversion, has to be actually charged at the time of actual sale of the land, deserves no merit. The assessee company, is a new company formed on the basis of demerger, as approved by this Court and hence the provisions u/s 45(2), are not applicable to the sale of land made by the assessee. Accordingly, CIT(A) dismissed the appeal. Upon further appeal, the Tribunal observed that based on the market value upto the date of conversion i.e., in the year 2007, the profit should be assessed as capital gains u/s 45(2) and the balance assessed as business profits. Thus, the appeal was partly allowed. Aggrieved Revenue preferred appeal.

Having heard the parties, the High Court held that,

Whether when a land which is originally treated as investment is converted into stock in trade then profits upto the date of conversion would be treated as capital gains - YES: HC

++ Section 45(2) is the charging section for capital gains. It will apply, whenever a land, which originally was treated as investment and later converted into a stock in trade, is sold or transferred. So the land in this case was converted into a stock in trade in the hands of EML and as demerger is not a transfer, the capital gains under that section is charged when the land was sold by the assessee company. The capital gains accruing on conversion of the land in stock in trade can be determined in the hands of EML and the computation cannot be questioned by the department. Levy of tax is postponed at the time of actual transfer or sale. U/s 45(2), the section charges to capital gains conversion of investment, into stock in trade but postpones the charge of tax to the time, such stock in trade is sold or transferred. Once converted into stock in trade, the asset will continue to be treated as stock in trade, as mentioned in the section itself. Application of provisions of Section 45(2) will not reconvert the converted stock in trade back into an investment. Consideration of sale of such converted asset will always be assessed as profits of business. The said provision was interpreted by the Assessing Officer under the said section. The decision of Supreme Court in the case of Commissioner of Income Tax vs. Groz-Beckert Saboo Ltd., held that where an assessee converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock-in-trade and not the original cost of the assessee. Therefore, in the light of the decisions rendered by this court as well as the Supreme Court and the orders passed by the coordinate bench of the Income Tax Appellate Tribunal, in the case of ITA No. 2256/Mds/2012 wherein the revenue has accepted the sale of 50% of the same property by the EHPL,  to an extent of 5.075 acres of land for the assessment year 2009-10, directing the AO to apply the provisions of Section 45(2) of the Act and compute the capital gains upto to the date of conversion into stock in trade, and thereafter on actual sale of the land i.e. the difference between the value of sale and stock in trade to be considered as "business income". Thus, the substantial questions of law framed u/s 260A is answered against the Revenue.

Revenue's appeal dismissed

2017-TIOL-1165-HC-MUM-IT

ELLORA PAPER MILLS LTD Vs CIT: BOMBAY HIGH COURT (Dated: June 9, 2017)

Income Tax - Section 40A(3) - Income Tax Rules - Rule 6DD

Keywords - cash payments - banking facilities.

The assessee has its factory at village Devada in Bhandara district. The village had no banking facilities as a result of which assessee had no occasion to make cash payments to contractors, labourers etc. Some of the payments made were in excess of Rs.10,000/- (the upper limit during the subject AY). The above payment in excess of Rs.10,000/- in cash aggregated to Rs. 21.37 lakhs to labourers, contractors etc. Hence the appellant claimed that the above payments would be entitled to deduction even u/s 40A(3) as it satisfied the second proviso thereto. Therefore, along its return for the subject AY, the assessee submitted a Chartered Accountant’s audit report which indicated the fact that village Devada is not served by the Bank and that the payment in excess of Rs.10,000/- made in cash was exempted as it satisfied the condition under Rule 6DD(h) of the Rules in accord with the second proviso to Section 40A(3) of the Act. However, AO held that the benefits of Rule 6DD(h) of the Rules would not be available to the assessee. This is so as it is available only in respect of the payments made in cash in excess of the prescribed limit to the persons ordinarily resident in village Devada or who carried on business at village Devada, as there ware no banking facilities available at Devada. AO disallowed the entire expenditure to the extent of Rs.21.37 Lakhs on the ground that the assessee has failed to prove the expenditure as no bills/vouchers were produced. Upon appeal, the CIT(A) dismissed the claim of the assessee. Tribunal also confirmed the same.

Having heard the parties, the High Court held that,

Whether payment in excess of Rs.10,000/- made in cash would be exempted in terms of second proviso of Section 40A(3) and Rule 6DD if assessee fails to prove the expenditure by way of bills/vouchers or other documents - NO: HC

++ in terms of Rule 6DD(h) of the Rules, a person who makes the payment in a village, which does not have the facility of banking, to a person who ordinarily resides therein or is carrying on business therein, will be allowed the benefit of deduction even when the expenditure is not paid by a crossed cheque drawn on a bank or by a crossed bank draft. However, it is for the assessee who seeks to claim the benefit of the second proviso of Section 40A(3) of the Act and Rule 6DD of the Rules to establish that its case falls within the precincts of Rule 6DD(h) of the Rules. The assessee has led no evidence before the Authorities under the Act to show that the transporters, contractors and suppliers of rice straw to whom the payment is made in cash, were carrying on business in village Devada. Assessee submitted that the transporters, contractors and suppliers of rice straw who carried on business in village Devada, when the goods are supplied or taken from the assessee's factory premises. Therefore, the payment made in cash to such persons would be payments which are made to persons carrying on business under Rule 6DD(h) of the Rules. Thus, carrying on of business in the context of having banking facilities would mean, where the main office or the administrative head of the business is situated. Then that would be the place where a person could be said to be carrying on business. Therefore, where the head office or the place from where all the business operations are controlled or directed is a village or town which has a banking facilities, even such transporter would not be covered by Rule 6DD(h) of the Rules. Therefore, in the present case the benefit of Rule 6DD(h) was not available and could not be extended to the assessee. Thus the claim had to be examined in terms of the residuary clause. Rule 6DD (j) of the Rules are satisfied to allow the appellant’s claim. Therefore, no fault can be found with the impugned order of the Tribunal.

Assessee's appeal dismissed

 

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