Bombay High Court

Mrs. Alpana Chinai vs Ito on 29 November, 2003

Equivalent citations: 2004 134 TAXMAN 484 Bom

Author: J Devadhar

JUDGMENT

J.P. Devadhar, J.

This Tax Appeal is filed by the appellant/assessee under section 260A of the Income Tax Act, 1961 relating to the assessment year 1986-87.

2. According to the assessee, the following substantial questions of law do arise out of the order of the Tribunal. They are :

"1. Whether in determining the capital gains chargeable to tax can the assessing officer have regard to a so-called notional benefit in determining the full value of the consideration that accrues or arises as a result of the transfer ?

2. Whether capital gains would be chargeable only on the full value of the monetary consideration accruing or arising to an assessee and whether any incidental or remote benefit which benefit does not flow directly to the appellant is to be ignored in determining the chargeability to tax of the capital gains ?

3. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the full value of the consideration accruing to the appellant on the transfer of the shares of Piramal Rasayan Limited would be Rs. 16,23,000 and not rupee 1 which was the amount that the appellant received as a result of the transfer ?

4. Whether the Tribunal having found that there was no evidence brought on record to justify that the appellant had received any monetary consideration in excess of rupee one was yet justified in determining the full value of the consideration at Rs. 16,23,000."

3. The assessee is an individual belonging to the Piramal family (hereinafter referred to as 'Piramal Group'). The said Piramal Group consisted of 6 family members including the petitioner. The Piramal Group had controlling interest in the company M/s. Piramal Rasayan Limited as they were holding 2,70,600 equity shares out of 7,40,000 equity shares of the company. Out of 2,70,600 equity shares held by the Piramal group, 81,150 shares belonged to the assessee.

4. By an agreement dated 1-11-1985 Dr. Mohanlal Piramal (father of the assessee), head of the Piramal Group transferred the controlling interest of the Piramal Group in Piramal Rasayan Limited, by selling the entire 2,70,600 equity shares held by the Piramal Group to Akshar Investments Private Limited and Anusandhan Investments Private Limited (hereinafter referred to as 'purchasers') for a consideration of Re. 1 per share-holder (irrespective of number of shares held by each shareholder). Thus, by the aforesaid transaction, 2,70,600, equity shares having face value of Rs.10 each were sold for total consideration of Rs. 6 (at the rate of Re. 1 per shareholder). Accordingly, the assessee a member of the Piramal group received cash consideration of Re. 1 on sale of 81,150 equity shares of Piramal Rasayan Limited and declared the same in the return of income.

5. The assessing officer during the course of assessment proceedings called upon the assessee to furnish further particulars of the sale transaction. On perusal of the sale agreement, the assessing officer noticed that in addition to Re. 1 per shareholder several benefits were received by the Piramal Group as sale consideration and, therefore, the Assessing officer invoked section 52(2) of the Income Tax Act and adopted the market value at Rs. 24 per share as sale price of the shares and assessed the long-term capital gain income of the assessee accordingly.

6. On appeal filed by the assessee, the Commissioner (Appeals) set aside the assessment on the ground that prior approval of Inspecting Assistant Commissioner was not obtained by the assessing officer before invoking the provisions of section 52(2) of the Income Tax Act. Thereupon the assessing officer, obtained requisite approval from the Inspecting Assistant Commissioner and passed a fresh assessment order under section 143(3) of the Income Tax Act determining the long-term capital gains income on sale of shares by taking the consideration at market value of Rs. 22.25 ps. per share. On appeal filed by the assessee, the Commissioner (Appeals) upheld the assessment on further appeal filed by the assessee, the Tribunal confirmed the order passed by the authorities below, but directed the assessing officer to recompute the capital gains by adopting the sale value at Rs. 20 per share and work out the capital gains accordingly. Hence, this appeal.

7. Mr. Mistry, learned counsel appearing for the assessee submitted that under the Income Tax Act, the capital gains are to be computed by taking full value of consideration actually received or accrued to the assessee on transfer of the capital asset. He submitted that there is no provision under the Income Tax Act to make additions to the full value on account of the incidental or ancillary benefits, if any received, to the full value of consideration received by the assessee. He submitted that capital gains can be taxed only with reference to the amount actually received on transfer of shares. He submitted that the only provision under which the full value received by the assessee can be disturbed is under section 52(2) of the Income Tax Act if the revenue establishes that something more than what is declared is actually received by the assessee. In the present case, section 52(2) of the Income Tax Act has been invoked by the revenue on the ground that in addition to the cash consideration of Re. 1 the assessee has received consideration in the form of three additional benefits as per clauses 2, 3 and 4 of the sale agreement dated 1-11-1985 which reads as under :

"2. The purchasers agree to arrange for repayment of the said deposits/ loans as specified in the Second Schedule hereto (together with interest thereon to the date of payment) by the Company by bringing in fresh deposits from their nominees, in the company for this purpose, simultaneously with the transfer of shares.

3. The Vendor has given his personal guarantees and undertakings to the Financial Institutions and banks in respect of loans to the Company. The Purchasers shall arrange for release/replacement of the guarantees given by the Vendor in respect of loans of the Financial Institutions and Banks to the Company within 4 months from the date hereof. In the meantime, and until the Vendor is freed and discharged from all liabilities and undertakings the purchasers agree to indemnify and keep indemnified the Vendor from all obligations, liabilities, claims, actions, and demand made under or arising out of or in connection with each and every one of the aforesaid personal guarantees and undertakings.

4. The Registered Office of the Company is at present situated at Piramal Bhavan, Ganpatrao Kadam Marg, Bombay 400 013, the purchasers shall forthwith cause to remove the said registered Office in other place of the choice of the purchasers and also further cause the company to surrender the tenancy in respect of the said premises and give vacant - possession of the premises."

8. Referring to clause 2 of the sale agreement, Mr. Mistry submitted that securing repayment of loan which is legally due and payable by Piramal Rasayan Limited to the two companies viz., Piramal Spinning & Weaving Mills Limited and Alpana Investments Private Limited, does not mean any benefit is derived by the assessee because the repayment of loan cannot be said to be a benefit and in any event the same was not received by the assessee, but by the two companies which were separate and distinct legal entities. Referring to clause 3 of the sale agreement, Mr. Mistry submitted that release of the personal guarantees given by Dr. Mohanlal Piramal for securing loans to M/s. Piramal Rasayan Limited does not constitute benefit and in any event it does not constitute benefit to the assessee. Mr. Mistry submitted that the Tribunal has infact recorded a finding that on account of repayment of loan or on account of release of the guarantees given by Dr. Mohanlal Piramal no substantial benefit is received by the assessee. Therefore, having held that no substantial benefit is received by the assessee on account of the above clauses 2 and 3 of the sale agreement, the Tribunal could not have inferred that the consideration declared by the assessee was understated so as to invoke section 52(2) of the Income Tax Act. As regards surrender of tenancy, Mr. Mistry submitted that, firstly, the surrender of tenancy was not a consideration for sale of shares, secondly the surrender of tenancy was to the landlord, namely, Piramal Spinning & Weaving Mills Limited and not to the assessee, and thirdly even assuming that the Piramal Group had substantial interest in Piramal Spinning & Weaving Mills Limited who were the landlords, even then no benefit accrued to Piramal Group, because under the Rent Act on surrender of tenancy no consideration was payable and in fact, consideration for surrender of tenancy was punishable under the Rent Act. He submitted that even assuming that there was any benefit to the landlords i.e., to Piramal Spinning & Weaving Mills Limited or to the Piramal Group, no benefit accrued to the assessee from surrender of tenancy rights. Mr. Mistry referred to para 25 of the order of the Tribunal, wherein it is held that the vacant possession of the property obtained by the assessee can give substantial income by way of rent, deposit, pagdi etc. He submitted that on the basis of future income that the landlord may derive on surrender of tenancy cannot be treated as consideration for sale of shares and bring the same to tax. He submitted that having recorded a finding that no consideration other than Re. 1 was received by the assessee, the Tribunal could not have presumed that any other consideration by way of benefits were received by the assessee. He submitted that Piramal Rasayan Limited has been consistently making losses for last 10-12 years resulting in a negative network of the shares and, therefore, the shares were sold at a nominal value subject to the purchasers agreeing to discharge certain obligations for which there was no monetary consideration received by the Piramal Group. He submitted that as the revenue has failed to establish that the assessee has received consideration more than what is declared, the provisions of section 52(2) of the Income Tax Act could not be invoked and the fair market of the shares could not be adopted for computing the capital gain.

9. Mr. Mistry relied upon the decision of the Apex Court in the case of K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) and submitted that section 52(2) can be invoked only if the consideration for the transfer of capital asset has been understated by the assessee, or that the full value of the consideration in respect of the transfer is shown at lesser figure than what is actually received by the assessee. He submitted that the burden of proving such understatement or concealment is on the revenue and that the revenue has failed to discharge that burden in the present case. He submitted that having recorded a findings in para 17 of its judgment that there is no evidence on record to establish that the assessee has received more than what is stated in the agreement, the Tribunal ought not to have upheld the contention of the revenue that the assessee has received consideration in the form of benefits and therefore, the market value of the shares should be taken for the purpose of computing the long-term capital gains. He submitted that as the revenue has failed to establish that the assessee has actually received more than what is declared, the provisions of section 52(2) could not be invoked. He submitted that the Tribunal could not have arbitrarily fixed the fair market value of the shares at Rs. 20 per share. Accordingly, it was submitted that the order of the Tribunal being totally perverse, the same be quashed and set aside.

10. Mr. Desai, learned Senior Advocate appearing on behalf of the Respondents, on the other hand, submitted that in view of the concurrent findings of facts given by the authorities below that apart from cash consideration of Re. 1, the assessee has received consideration in the form of benefits, it was evident that there was understatement regarding full value received on sale of shares and, therefore, the revenue was justified in adopting the market value in respect of the sale of the shares. He submitted that at the relevant time value of the shares of Pirarnal Rasayan Limited quoted at the stock exchange was more than Rs. 20 per share and, therefore, it is inconceivable that the shares held by the assessee worth more than Rs. 16 lakhs were sold for just Re. 1. Mr. Desai submitted that once it is established that the assessee has received more than what is declared, it was not necessary for the revenue to establish as to how much more was actually received by the assessee and under section 52(2) the revenue was entitled to adopt the fair market value prevailing on the date of transfer of shares. He submitted that at the relevant time the market rate of the shares of Piramal Rasayan Limited at the stock exchange being more than Rs. 20 per share, the authorities below were justified in adopting the fair market value of the shares @ Rs. 20 per share.

11. We have heard the counsel on both sides and perused the records placed before us. Under section 45 of the Income Tax Act which is a charging section, any profits or gains arising on transfer of capital assets effected in the previous year are liable to be charged to income-tax under the head 'Capital gains' and is deemed to be income of the previous year in which the transfer took place. Section 48 of the Income Tax Act provides that the income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accrued to the assessee as a result of the transfer of the capital assets such amounts as more particularly set out therein. Therefore, for computing the capital gains, the basis is the full value received or accrued to the assessee on transfer of the capital assets. Section 52(2) as it stood at the relevant time (Section was omitted by Finance Act, 1987 with effect from 1-4-1988) provides that if the Income Tax Officer is of the opinion that the market value of the capital asset as on the date of transfer exceeds the full value of the consideration declared by the assessee by an amount not less than 15% of the value so declared, then, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value of the date of its transfer.

12. The scope and ambit of section 52(2) of the Income Tax Act was considered by the Apex Court in the case of K.P. Varghese (supra) and it was inter alia held as follows :

"...We think that, having regard to this well recognised rule of interpretation, a fair and reasonable construction of section 52, sub-section (2), would be to read into it a condition that it would apply only where the consideration for the transfer is understated or, in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in the case of a bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee...."

13. Thus, to invoke section 52(2) it is not only necessary for the revenue to establish that the fair market value of the capital asset transferred by the assessee exceeds the full value of the consideration declared in respect of the transfer by not less than 15% of the value so declared, but it is also necessary for the revenue to establish that the full value of the consideration declared by the assessee is less than the amount actually received by the assessee. In other words, even if the market value of the capital asset on the date of its transfer is 15% more than the value declared by the assessee, the fair market value of the shares as on the date of transfer cannot be taken into account for computing the capital gains unless it is established by the revenue that the assessee has actually received consideration more than what is declared. Thus, without establishing that the consideration actually received or accrued to the assessee is more than what is declared, the revenue cannot invoke section 52(2) of the Income Tax Act, 1961.

14. In the present case, clause 1 of the sale agreement specifically provides that apart from cash consideration of Re. 1 per shareholder, further consideration for sale of 2,70,600 shares would be as described in clauses 2 & 3 of the sale agreement. Clause 4 of the sale agreement further provides that on sale of 2,70,600 shares of Pirarnal Rasayan Limited, the purchasers shall cause the registered office of Piramal Rasayan Limited situated at Piramal Bhavan, Ganpatrao Kadam. Marg, Bombay 400 013 vacated and surrender the tenancy in respect of the said premises and give vacant possession of the premises. Although, the sale agreement does not specifically state that the surrender of tenancy is a consideration for sale of shares it is a conditional requirement for sale of 2,70,600 shares. It is not in dispute that the purchasers have complied with all the requirements set out in the above three clauses i.e., on sale of 2,70,600 equity shares of Piramal Rasayan Limited, (1) the loan of Rs. 63,46,975 payable by Piramal Rasayan Limited to Piramal Spinning & Weaving Mills Limited and Alpana Investments Pvt. Ltd. has been actually repaid, (2) Dr. Mohanlal Piramal of the Piramal Group has been released and discharged from the guarantee of Rs. 7.22 crores which he had executed while securing loan from financial institutions to Piramal Rasayan Limited, and (3) Piramal Rasayan Limited has actually vacated and handed over the vacant possession of the tenanted premises to the landlords, i.e., Piramal Spinning & Weaving Mills (P) Limited. It is also not in dispute that the Piramal Group has substantial interest in Piramal Spinning & Wvg. Mills Ltd. From the above, it is clear that the assessee on sale of 81,150 shares, apart from cash consideration of Re. 1 has received further consideration in terms of clauses 2, 3 and 4 of the sale agreement.

15. Once it is established by the revenue that on sale of shares the assessee apart from cash consideration of Re. 1 has received other consideration, then it is not necessary for the revenue to establish as to how much additional consideration was actually received by the assessee. When the consideration is received in kind, it will be impossible for the revenue to establish as to how much consideration is actually received by the assessee in kind. Once the conditions set out in the sale deed are complied with by the purchasers, then the consideration flowing therefrom stand received by the assessee. In such circumstances, it will not be open to the assessee to contend that no consideration flows on performance of clauses 2, 3 and 4 of the sale agreement. The contention of the assessee that because Piramal Rasayan Limited was consistently making losses for 10-12 years, the shares have been sold for a nominal price of Rs. 6 cannot be accepted. Mr. Mohanlal Piramal, Chairman of the Company in the 'Directors' report' as recorded in the 11th Annual report of the company has stated that the turnover of the company for the year ended 31-3-1985 stood at Rs. 5.13 crores as compared to Rs. 3.85 crores of previous year and for the first time since inception, the company has made an operating profit before depreciation of Rs. 14.84 lakhs. The fact that at the relevant time the share value of Piramal Rasayan Limited at the Stock Exchange was more than Rs. 20 per share cannot be ignored. Therefore, it is clear that the year in which the shares were sold, the financial position of the Company was not as bad as claimed by the assessee. As the fair market value of 81,150 shares was more than Rs. 20 per share as compared to the full value of consideration of Re. 1 declared by the assessee and it is established that apart from the declared consideration of Re. 1 the assessee has received other consideration, section 52(2) of the Income Tax Act was clearly attracted in the instant case.

16. The contention of the assessee that by performance of clauses 2,3 and 4 of the sale agreement, the assessee has not actually received any benefits or consideration in addition to cash consideration of Re. 1 is also without any merit. Once it is accepted by the assessee, that compliance of clauses 2 and 3 (in our opinion clause 4 also) of the sale agreement constitutes sale consideration, it is not open to the assessee to contend that compliance of the terms of the sale agreement do not constitute consideration. The consideration attached thereto is the actual consideration and not notional consideration. In other words, on the purchasers complying with the terms contained in clauses 2,3 and 4 of the sale agreement, it will have to be held that the consideration attached thereto stands actually received by the assessee.

17. The findings of the Tribunal that there is nothing on record to show that the assessee has received more than what is declared cannot be construed to mean that apart from cash consideration of Re. 1 no other consideration was received by the assessee. As stated hereinabove, other considerations were as contained in clauses 2, 3 and 4 of the sale agreement itself. The contention that on sale of shares assuming any benefit accrued to the Piramal group or the group of companies, no benefit accrued to the assessee is also without any merit. It is the assessee who has voluntarily chosen that the benefits arising out of sale of shares must go to the Piramal group. Having voluntarily agreed that the additional consideration should go to the Piramal group the assessee cannot say that no benefit accrued on sale of shares. It may be that the additional consideration may not be capable of evaluation in terms of money but, that does not mean that there is no consideration at all. Once it is accepted by the assessee that fulfilling the obligation contained in the sale agreement constituted consideration then, it is not necessary to evaluate actual consideration flowing from each of the clauses in the sale agreement. Thus, in the facts of the instant case, the revenue has established that the market value of the shares sold by the assessee were more than the value declared by the assessee and the revenue has also established that the assessee on sale of shares has received consideration more than what is declared. Therefore, all the conditions set out in section 52(2) of the Income Tax Act being satisfied the authorities below were justified in invoking the provisions of section 52(2) of the Income Tax Act.

18. In this view of the matter, in the facts and circumstances of the present case, we are of the opinion that instead of answering the larger issues raised in the appeal, it would be just and proper to restrict the decision to the facts of the present case.

19. Accordingly, we hold that in the present case the revenue has established that the fair market value of the shares sold by the assessee were more than Rs. 20 per share as against the full value of Re. 1 declared by the assessee and the revenue has established that apart from the declared value of Re. 1, the assessee has received additional consideration and therefore, the valuation of shares under section 52(2) of the Income Tax Act is justified.

20. The appeal is disposed of in above terms, with no order as to costs.