B.A.Mohota Textiles Traders ... vs The Deputy Commissioner Of ...
2017 Latest Caselaw 3039 Bom

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    IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                      NAGPUR BENCH : NAGPUR



             INCOME TAX APPEAL NO.73 OF 2002




B.A.Mohota Textiles Traders Pvt. Ltd.,
A limited Co. registered under the
Companies Act, 1956 having its
registered Office at Hinganghat
acting through its Director/
Authorised signatory Shri
Arunkumar Gwaldas Mohota
resident of Hinganghat, Distt.
Wardha, State of Maharashtra.          ....               APPELLANT



      // Versus //




1. The Deputy Commissioner of
   Income-tax, Special Range-2,
   Nagpur Aaykar Bhavan,
   Telankhedi Road, Civil Lines,
   Nagpur, Tah. and Distt.
   Nagpur, State of Maharashtra.

2. The Commissioner of Income-tax,
   Aaykar Bhavan, Telankhedi Road,
   Civil Lines, Nagpur, State of
   Maharashtra.                         ....                  RESPONDENTS




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-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
   Mr.C.J.Thakkar and Mr.S.C.Thakkar, Advocate for the Appellant.
            Mr.B.N.Mohta, Advocate for the Respondents.
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-


                                    CORAM : M.S.SANKLECHA &
                                            MANISH PITALE, JJ.

DATED : June 12, 2017.

ORAL JUDGMENT (Per M.S.Sanklecha, J)

1. This appeal under Section 260A of the Income Tax Act,

1961 (Act) challenges the order dt.23.4.2002 of the Income Tax

Appellate Tribunal, Nagpur (Tribunal) relating to Assessment Year

1995-96.

2. This appeal was admitted on 23 March, 2007 on the

following substantial questions of law :

a) Whether in the facts and circumstances of the case and in law the Tribunal was right in holding that the transaction of transfer of shares by the assessee company in pursuance of family arrangement amounted to transfer and was exigible to capital gains tax ?

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b) Whether in the facts and circumstances of the case and in law the Tribunal was right in not accepting the fact that the transfer of shares by the assessee company being only incidental and in consequence of allotment and control of management of companies in pursuance of family arrangement, took the transaction out of purview of Section 2 (47) of I.T. Act, 1961 ?

c) Whether in the facts and circumstances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement ?

3. It is agreed between the parties that Question (a) above

brings out the real controversy between the parties, Questions (b)

and (c) are mere facets of Question (a).

4. This appeal relates to A.Y. 1995-96.

5. The brief facts leading to this appeal are as under :

(a)             The appellant is a Private Limited Company. Over 80 %





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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.

(b). Disputes and differences arose between three groups of

Mohota family i.e. Groups A, B and C. Consequently, with a view to

settle the differences between them and restore family peace and

harmony, it was decided by the three groups to refer their dispute

by an agreement dt.15.1.1994 to the sole arbitration of Mr. Justice

S.W.Puranik. The scope of reference to the Arbitration were as

under :

(a) Allotment and/or division of properties

mentioned in schedule 'B' and related matters;

(b) Allotment, management and control of

partnership firms and limited companies mentioned

in schedule 'A' and related matters;

              (c)           All matters connected with or related to or





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ancillary to the above referred matters; and

(d) To give suitable orders and directions for

implementation thereof .

(c). On 30.4.1994, Justice Puranik rendered his Arbitration

Award by way of family settlement. The Arbitration Award

thereafter became decree of the Court dt.7.11.1994 under the

erstwhile Arbitration Act, 1940. The above Award distributed the

properties belonging to Mohota family amongst it's three groups.

The Appellant/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.

(d) Thus, the settlement inter alia required members of

Group 'B' (Mr.Gwaldas Mohta group), who were in control of

appellant/assessee, to transfer the shares held by the

appellant/assessee in M/s.R.S.Rekhchand Mohta Spinning and

Weaving Mills Ltd. and M/s. Vaibhav Textiles Mills Ltd. in favour of

members of Groups 'A' and 'C' collectively i.e. Mr.Girdhardas

Mohota and Mr.Ranchhoddas Mohota. The Award directed the

transfer of shares at a consideration of Rs.225/- per share of

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M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and at

a consideration of Rs.10/- per share of M/s. Vaibhav Textiles Mills

Ltd.

(e) Therefore, the appellant/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'.

(f). On 30.11.1995, the appellant/assessee filed return of

income for the Assessment Year 1995-96 declaring an income of

Rs.58.35 Lakhs. During the Assessment proceedings, the

appellant/assessee 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/settlement as reflected

in the Arbitration Award dt.30.4.1995. Therefore, it was

contended that no Capital gains would be attracted as there was

no transfer as it was working out of family

settlement/arrangement. However, the Assessing Officer, by

order dt.7.4.1997, negatived the same and inter alia held that

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the Company being a separate legal entity distinct from it's share

holders, cannot be as part of family settlement/arrangement.

Thus, transfer of shares done by independent entity such as the

Appellant/assessee would not be covered by the 'Family

Settlement' and consequently, brought the transfer of 25,650

shares for consideration of Rs.225/- per share of M/s.Rekhchand

Mohota Spinning and Weaving Mills Ltd. and 1,22,000 shares for

consideration of Rs.10/- per share of M/s.Vaibhav Textiles Pvt. Ltd.

to Capital Gains Tax. Resultantly, it determined the total income

of the appellant for the Assessment Year 1995-96 at Rs.66.80

Lakhs.

(g). Being aggrieved, the appellant carried the issue in

appeal to the Commissioner of Income Tax (Appeals) {CIT(A)}. By

an order dt.17.6.1998, the CIT accepted the position in law that

family settlement cannot amount to transfer or create any

interest and it is binding upon all the members of the family.

However, the same can only be applied to members of the family

who are parties to the settlement. In this case, the

appellant/assessee was a Company incorporated under the

Companies Act having a distinct and independent entity from it's

share holders. Thus, while holding that the Award dt.30.4.1994 is

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a family settlement, the same can only be applied to members of

Mohota family, who were party to the proceedings before the

Arbitrator and not to a Limited Company such as

Appellant/Company. Therefore, notwithstanding the fact that the

Appellant/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) of the Act so as to be

assessable to Capital Gains Tax. Thus, the appeal of

Appellant/assessee was dismissed by the order dated 17.6.1998

of the CIT (A).

(h) Being aggrieved with the order dated 17.6.1998 of the

CIT(A), the Appellant/assessee preferred an appeal to the

Tribunal. The impugned order dtd. 23 April, 2003 upheld the view

of the lower Authorities by holding that a family settlement would

not amount to transfer as it only recognizes pre-existing rights.

However, it held that the Appellant/assessee (even if controlled

by members of a family), on incorporation as a Limited Company

becomes a separate legal entity and the members who own

shares in the Company and the Company are in law different

persons. It held that there exists a veil between the members of

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the Company and the Company. Thus, the family settlement

arrived at between the members of a family will not inure to the

benefit of the Appellant/assessee as it is not a member of the

family. Consequently, the impugned order dated 23.4.2002 of

Tribunal dismissed the appellant/assessee's appeal.

6. Being aggrieved with the impugned order, the

Appellant/assessee is in appeal before us on the substantial

questions of law as reproduced above.

7. Mr.S.C.Thakkar, learned Counsel for the

appellant/assessee in support of the appeal submits as under :

(a) It is undisputed position as settled by the Apex Court

that a family settlement/arrangement would not give rise to any

transfer. The transfer of shares by the Appellant/assessee was in

pursuance of and to give effect to the family arrangement as

reflected in the Award dt.30.4.1994. There was no choice with the

Appellant/assessee not to transfer the shares and such transfer of

shares cannot be seen de hors the family arrangement. Thus, it is

submitted that the entire transaction has to be looked at

wholistically.

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(b)             The corporate veil can be lifted to ascertain the real

nature of the transaction and the person behind the transfer. In

support, reliance is placed upon the decision of the Calcutta High

Court in the case of Shaw Wallace and Company Ltd. vs.

Commissioner of Income Tax reported in 119 ITR 399.

(c) The transfer of shares was mere adjustment of rights

between the parties and no consideration has been received by

the appellant/assessee The fair market value attributed to the

shares by the Arbitrator was only for ascertaining and adjusting

the rights of the parties to reach a family settlement.

8. As against this, Mr.Mohta, learned Counsel appearing for

the Revenue submits as under :

a) The appellant/assessee is a Company incorporated

under the Companies Act having a separate and independent

existence, different from that of it's share holders/members. Thus,

the distinction between the incorporated Company and it's

members cannot be ignored.

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b)             It is undisputed that the appellant/assessee who has

transferred the shares of M/s.R.S.Rekhchand Mohota Spinning and

Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are not

members of Mohota family and therefore, they were not part of

family settlement. Consequently, the Arbitration Award

dt.30.4.1994 arrived at as a family settlement cannot, in any

manner, have any impact on the appellant/assessee's liability to

tax under the Act.

c) Transfer done by the appellant/assessee of it's shares in

M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and

M/s. Vaibhav Textiles Pvt. Ltd. to members of Groups 'A' and 'C'

is a transfer within the meaning of Section 2(47) of the Act. It

does not fall under any of the exclusions provided in Section 47 of

the Act. Thus, the impugned order dated 23 April, 2002 calls for

no interference.

9. We have considered the rival submissions. There is no

dispute before us that a family arrangement/settlement would not

amount to a transfer. In fact, all the three Authorities under the

Act have not disputed the aforesaid position in law. So far as the

members of Mohota family are concerned, who are parties to the

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family settlement, any transfer inter se between them on account

of family settlement would not result in a transfer so as to attract

the provisions of the Capital gain tax under the Act. However, in

the present case, we are not concerned with the members of

Mohota family who were parties to the family settlement, but with

transfer of share done by the Company incorporated under the

Companies Act having separate/independent corporate existence,

perpetual succession and common seal. This Company is

independent and distinct from it's members. In fact, this principle

dates back to the decision of House of Lords in Saloman .vs.

Saloman & Co. Ltd., 1897 AC 22. Our Court in T.R. Pratt

(Bombay) Ltd. vs. E.D. Sassoon and Co. Ltd., AIR 1936

(Bombay) 62 has observed as under :

" As held in 1897 A.C. 22 (23), under the law, an incorporated Company is a distinct entity and although shares may be practically controlled by one person, in law a Company is a distinct entity and it is not relevant to enquire whether the directiors belonged to the same family or whether it is compendiously described 'a one-man Company'.

10. However, the Courts have permitted the lifting of corporate

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veil to prevent injustice. One such class of cases, where the Court

has disregarded the corporate entity is where it is used for tax

evasion. A classic illustration of this is found In Re. Dinshaw

Maneckjee Petit, AIR 1927 (Bombay) 371, where the Court

lifted the corporate veil as it found that "the Company in this case

was formed by the assessee purely and simply as a means of

avoiding super tax and that the Company was nothing more than

the Assessee himself. It did no business but was created purely

and simply as a legal entity to ostensibly receive dividends and

interest and handed them over to the assessee as pretended

loan". In the present case, the Revenue does not seek to lift the

corporate veil. It is not the case of the Revenue that the

Corporate identity is a sham and it has been formed only to

circumvent the law. In this case, it is the Assessee which seeks to

lift the corporate veil so as to identify the members of the

Assessee/Company as those who entered into family settlement

as reflected in the Arbitration Award dt.30.4.1994 and call upon

the authority to ignore the corporate existence of the Appellant.

This lifting of the corporate veil is not allowed when it is not for

the benefit of the Revenue. The Apex Court in the case of M/s.

Bacha F. Guzdar vs. CIT, 27 ITR 1 has inter alia observed that "A

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shareholder has no interest in the property of the Company...... It

has only a right to participate in the profits of the Company as

and when the Company decides to divide them. The Company is a

juristic person and is distinct different from it's share holders. It is

the Company which owns the property and not the share

holders." Therefore, the attempt of the share holder to lift the

corporate veil at the instance of the share holder was rejected. In

this case also, shares in M/s.R.S.Rekhchand Mohota Spinning and

Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are held by

the appellant/assessee and not it's members. The members,

therefore, cannot claim any rights to the property of

appellant/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.

11. The submission of learned Counsel Mr.Thakkar that the

entire transaction should be looked at wholistically bearing in

mind the purpose and object of the settlement as recorded in the

Arbitration Award dt.30.4.1994 so as to settle the dispute

between members of the family and it was to achieve aforesaid

objective that the shares in the appellant/assessee were directed

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to be transferred. 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, admittedly, the Appellant/assessee is not a member of

Mohota family so as to be a part of the family settlement. The

appellant/assessee having been formed under the Companies Act

have certain advantages and disadvantages attached to it. But

once a Company comes into existence under the provisions of the

Companies Act and it is considered to be an independent entity,

then it's obligation under the law as a separate legal entity has to

be complied with and settlement arrived at between it's members

cannot discharge the appellant/assessee from complying with it's

obligations under the Law. It was also contended that the

Appellant/assessee had no volition in transferring the shares. 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.

12. It was also submitted that no consideration was

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received by the Appellant/assessee for the transfer of shares. It is

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. This submission

overlooks the fact that the Arbitration Order annexed to the

decree (Page 62 of the Appeal memo) 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/Company.

13. Mr.Thakkar, learned Counsel also placed reliance upon

the decision of the Calcutta High Court in the case of Shaw

Wallace and Co. Ltd. (supra) in support of the submission that one

is entitled to lift corporate veil and look behind to find out who are

the real persons in control of the incorporated Company. In the

aforesaid case, the issue was with regard to amalgamation of

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100% subsidiary company to it's holding company. The question

which arose for consideration before the Calcutta High Court was

whether an amalgamation between holding and subsidiary

Companies would amount to transfer of capital asset in terms of

Section 45 r/w. 2 (47) of the Act. The Calcutta High Court

specifically referred to Section 47 of the Act and in particular, to

Section 47, sub-clause (v) of the Act to hold that a transfer by a

subsidiary company to the holding Company of the whole of it's

share capital will not be regarded as transfer for the purposes of

computing capital gains under Chapter IV-E of the Act. Further

observations made by the Calcutta High Court to the effect that,

on looking behind the facade of the Company, one would notice

that all the assets of the subsidiary company are held by it's

parent company which owns 100 % of it's shares. The aforesaid

observations of the Calcutta High Court seems to provide the

rationale for Section 47(v) of the Act in excluding a transfer of the

entire share capital of a subsidiary to it's holding company which

owns 100% of it's shares from being considered a transfer. In the

present facts, we are not concerned with transfer between

holding and subsidiary companies. It is not the case of the

appellant that Section 47 of the Act is applicable.

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14. 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 Appellant/Company 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.

15. In the above view, the Tribunal was correct in holding

that the transaction of transfer of shares by the independent

corporate entity was assessable to capital gain tax. Therefore, the

substantial questions of law which arise for our consideration are

all decided in favour of the respondent/revenue and against the

appellant/assessee. Accordingly, the appeal is dismissed. No

order as to costs.

                            JUDGE                           JUDGE

jaiswal