The Commissioner of Income-tax, Thrissur v. K.V. Mohammed Zakir
[Citation -2017-LL-0410-117]

Citation 2017-LL-0410-117
Appellant Name The Commissioner of Income-tax, Thrissur
Respondent Name K.V. Mohammed Zakir
Court HIGH COURT OF KERALA AT ERNAKULAM
Relevant Act Income-tax
Date of Order 10/04/2017
Judgment View Judgment
Keyword Tags benefit of exemption • cost of acquisition • cost of improvement • competent authority • civil construction • show-cause notice • fresh assessment • intangible asset • capital gain tax • sole proprietor • capital asset • voting power • total income
Bot Summary: Is the Tribunal justified in passing the order under challenge in this appeal, in favour of the assessee, treating the amount in the current account of the proprietorship concern, as a 'loan to the proprietor', which was stated as taken over by the Company, despite the absence of any such case before the Commissioner, whose order under Section 263 of the Act was subjected to challenge before the Tribunal at the instance of the assessee These are the substantial questions of law, on which the parties were heard in this appeal. Pursuant to scrutiny under Section 143(3) of the Act, the assessment was finalized by the assessing officer as per Annexure A order dated 30.10.2003, treating the assessed income as Rs.50,49,130/- and fixing tax liability accordingly. As the transfer of goodwill would attract capital gain tax under the Income Tax Act and since the goodwill valued at Rs.2,45,00,0000/- remained untaxed under the Capital Gain Tax, Annexure A assessment finalized by the Assessing Officer was noted as erroneous and prejudicial to the interest of the revenue. The learned counsel sought to defend the order passed by the Tribunal, also placing reliance on the I. T. Appeal No. 1797 of 2009 :9: decisions referred to and relied on by the Tribunal in the very same order, contending that invocation of power under Section 263 of the Act by the Commissioner was quite wrong. With regard to the observation made by the Tribunal, finding fault with the course pursued by the Commissioner for invoking the power under Section 263 of the Act, it is to be noted that, Section 263 confers adequate power upon the Commissioner to call for and examine any proceedings under the Act, if he considers that the order passed by the assessing officer is erroneous, in so far as it is 'prejudicial to the interest of the revenue'. Non-satisfaction of the ingredient under Section 47(c) in toto is a major defect and as such, value of the 'goodwill' i.e. Rs.2,45,00,000/- admittedly I. T. Appeal No. 1797 of 2009 : 11 : forming part of the assets transferred, required to be taxed under such circumstances. If at all any exemption is to be claimed to come outside the purview of 'transfer' envisaged under Section 45 of the Act, various requirements mentioned under Section 47 have to be I. T. Appeal No. 1797 of 2009 : 12 : satisfied.


IN HIGH COURT OF KERALA AT ERNAKULAM PRESENT: HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON & HONOURABLE MR. JUSTICE A.HARIPRASAD MONDAY, 10TH DAY OF APRIL 2017/20TH CHAITHRA, 1939 ITA.No. 1797 of 2009 ( ) AGAINST ORDER IN ITA 270/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 12-06-2009 APPELLANT(S)/APPELLANT/RESPONDENT: COMMISSIONER OF INCOME TAX THRISSUR. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT: SHRI.K.V.MOHAMMED ZAKIR PROP.KAP INDIA CONSTRUCTIONS, CITY CENTRE, ROUND WEST, THRISSUR. BY ADV. SRI.P.BENNY THOMAS ADV. SRI.P.GOPINATH ADV. SRI.K.JOHN MATHAI ADV. SRI.E.K.NANDAKUMAR ADV. SRI.RAJA KANNAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13-02-2017, COURT ON 10-04-2017 DELIVERED FOLLOWING: [CASE REPORTABLE] P.R. RAMACHANDRA MENON & A. HARIPRASAD, JJ I. T. Appeal No. 1797 of 2009 Dated, this 10th day of April, 2017 JUDGMENT Ramachandra Menon J. Can, person borrow from himself and whether 'sole proprietor' and his 'business concern' can be treated as two separate entities in realm of assessment of long term Capital Gain Tax ?. Is it not necessary to satisfy all requirements under Section 47 (xiv) [proviso a, b and c] of Income Tax Act [herein after referred to as 'Act'] separately, to have exemption from transfer envisaged under Section 45 of Act, involving taxability/exigency to tax ?. Is Tribunal justified in passing order under challenge in this appeal, in favour of assessee, treating amount in current account of proprietorship concern, as 'loan to proprietor', which was stated as taken over by Company, despite absence of any such case before Commissioner, whose order under Section 263 of Act was subjected to challenge before Tribunal at instance of assessee ? These are substantial questions of law, on which parties were heard in this appeal. I. T. Appeal No. 1797 of 2009 :2: 2. respondent assessee was running proprietorship concern under name and style as KAP (India) Constructions, Thrissur. said establishment, which was pursuing business in civil construction on contract basis, was having head office at Bangalore and site offices at different places, including in Kerala. proprietorship concern was run upto 30.09.2000 and thereafter, it was taken over by limited Company by name KAP (India) Projects and Constructions (P) Limited, with all assets and liabilities of former, as per terms agreed and settled. 3. respondent assesee filed return for year 2001 - '02, declaring total income of Rs. 47,83,440/-; of course revealing income received from proprietorship concern up to 30.09.2000 and income from other sources as well. Pursuant to scrutiny under Section 143(3) of Act, assessment was finalized by assessing officer as per Annexure order dated 30.10.2003, treating assessed income as Rs.50,49,130/- and fixing tax liability accordingly. 4. On further scrutiny/perusal of records, appellant/Commissioner of Income Tax observed that, as per terms and conditions of agreement, all assets of proprietorship concern amounted to Rs.9,64,39,231.19 [including I. T. Appeal No. 1797 of 2009 :3: goodwill valued at Rs.2,45,00,000], which was taken over by Company, as per values reflected in Balance Sheet of proprietary concern, as on 30.09.2000. It was also noted that credit balance in capital and current account of assessee in balance sheet of proprietorship concern, as on 30.09.2000, amounted to Rs.5,17,03,897.63. amount of Rs.1,52,94,900/- represented value of 1,52,949 shares of face value of Rs.100/- each and balance amount was payable at end of year, which was shown as 'amount due to assessee' under unsecured loans due to assessee. As per relevant records, assesee had transferred to Company his individual business consisting of all assets amounting to Rs.9,64,39,231.19 [which includes goodwill value of Rs.2,45,00,000/-] and liabilities amounting to Rs.4,47,35,333.56. As transfer of goodwill would attract capital gain tax under Income Tax Act and since goodwill valued at Rs.2,45,00,0000/- remained untaxed under Capital Gain Tax, Annexure assessment finalized by Assessing Officer was noted as erroneous and prejudicial to interest of revenue. It was accordingly, that show-cause notice dated 14.10.2004 was issued to assessee to explain why amount of goodwill I. T. Appeal No. 1797 of 2009 :4: should not be brought to tax net under Capital Gain Tax. 5. On receipt of said notice, reply was submitted by assessee, pointing out that he had satisfied conditions prescribed under Section 47 (xiv) of Act, to have exemption from liability. It was pointed out, with reference to Section 47 (xiv) (a), that all assets and liabilities of sole proprietorship concern stood transferred as assets and liabilities of Company. In respect of Section 47 (xiv) (b), it was pointed out that assessee was holding shares worth 51% of paid up capital and that his share holding had never come down below 50% at any point of time. In respect of Section 47 (xiv) (c), it was stated that assessee had not received consideration/benefit directly or indirectly in any form or manner other than by way of 'allotment of shares' in Company and that he had not received any interest on balance to his credit under loan account as well. After considering explanation and also after perusing records, Commissioner observed that all conditions laid down under Section 47 (xiv) of Act had not been fullfilled by assessee. It was observed that assessee had received consideration in some form other than by way of allotment of shares i.e. out of net asset of Rs.5,17,03,897.63 I. T. Appeal No. 1797 of 2009 :5: [Rs.9,64,39,231.19 - Rs.4,47,35,333.56]; as allotment of shares was only to extent of Rs.1,52,94,900/-, whereas sum of Rs.2,73,07,905/- was treated as 'unsecured loan'. Based on said finding, it was held as per Annexure B order dated 24.11.2004 that, 'goodwill' to extent of Rs.2,45,00,000/- omitted to be taxed under Capital Gain Tax and hence Annexure order passed by Assessing Officer was set aside, directing to recompute assessee's total income, taking into account said figure as well and to fix liability accordingly. 6. Pursuant to Annexure B order, fresh assessment was done by Assessing Officer, as borne by Annexure C order dated 21.12.2005. But on being aggrieved of Annexure B order passed by Commissioner, assessee took up matter in appeal before Income Tax Appellate Tribunal. After hearing both sides, Tribunal, as per Annexure D order dated 12.06.2009, intercepted Annexure C order passed by Commissioner; holding that invocation of power by Commissioner under Section 263 of Act was wrong and further that there was no violation of Section 47 (xiv) at hands of assesee, as deficit figure was to be treated as genuine liability of sole proprietorship concern, to proprietor. It was also I. T. Appeal No. 1797 of 2009 :6: observed that, no consideration was received by assessee in respect of transfer of assets and liabilities, except to extent as mentioned by assessee and further, even if disputed amount shown in 'current account' of proprietorship concern as due to proprietor [stated as taken over by Company as loan, to be repaid on demand], no such amount/consideration was received by assessee in particular year, to be reckoned for purpose of computation. It was accordingly, that Annexure B order passed by Commissioner was interdicted and appeal was allowed, which forms subject matter of challenge in this appeal preferred by Commissioner/Department. 7. Heard Mr. Jose Joseph, learned standing counsel appearing for appellant and Mr. Gopinatha Menon, learned counsel appearing for respondent/assessee at length. 8. Any profits or gains arising from transfer of capital assets effected in previous year shall, save as otherwise provided in particular situations referred to under Section 45 of I.T. Act, are chargeable to income tax under head capital gains and it shall be deemed to be income of previous year in which transfer took place. Certain transactions I. T. Appeal No. 1797 of 2009 :7: have been taken outside purview of Section 45, as dealt with under Section 47 of Income Tax Act. Since we are concerned only with Section 47 (xiv), it is extracted below : (xiv) where sole proprietary concern is succeeded by company in business carried on by it as result of which sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to company : Provided that - (a) all assets and liabilities of sole proprietary concern relating to business immediately before succession become assets and liabilities of company ; (b) shareholding of sole proprietor in company is not less than fifty per cent of total voting power in company and his shareholding continues remain as such for period of five years from date of succession; and (c) sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in company; 9. According to learned standing counsel for appellant, amount pumped in by sole proprietor to his 'proprietorship concern' and shown in current account, can be nothing other than investment, which, when taken over, will form I. T. Appeal No. 1797 of 2009 :8: liability of Company, to be discharged only by allotting shares and in no other manner; to be in conformity with Section 47 (xiv) (c) and to have benefit of exemption accordingly. Same is position in case of partnership as well, as it is always open for partners to effect capital contributions, shown as liability, and it can be sought to be compensated only by allotment of shares for availing benefit of exemption in terms of Section 47 (xiv) of Income Tax Act. In other words, it is only accounting gimmick displayed by assessee in books of accounts, showing disputed amount as part of current account and liability. statutory provision makes it obligatory to have it reckoned and compensated only by 'allotment of shares' and no other manner, if exemption is claimed in respect of Capital Gain Tax. 10. According to Mr. Gopinatha Menon, learned counsel appearing for respondent, disputed portion of amount does not form part of consideration at all and that, as pointed out by Tribunal in paragraph 11 of Annexure D order, no such consideration was ever received by assessee in very same financial year '2001 - '02'. learned counsel sought to defend order passed by Tribunal, also placing reliance on I. T. Appeal No. 1797 of 2009 :9: decisions referred to and relied on by Tribunal in very same order, contending that invocation of power under Section 263 of Act by Commissioner was quite wrong. learned counsel also pointed out that, even if two views are possible, it is not ground for interference, when view already expressed is also sustainable. 11. We have gone through decisions cited across Bar and as referred to in Annexure D order passed by Tribunal. With regard to observation made by Tribunal, finding fault with course pursued by Commissioner for invoking power under Section 263 of Act, it is to be noted that, Section 263 confers adequate power upon Commissioner to call for and examine any proceedings under Act, if he considers that order passed by assessing officer is erroneous, in so far as it is 'prejudicial to interest of revenue'. Under such circumstances, appropriate orders can be passed, after affording opportunity of hearing, as circumstances of case would justify, which includes order enhancing or modifying assessment or cancelling or directing fresh assessment. 12. There is no dispute as to factual position that worth of assets of proprietorship concern transferred to I. T. Appeal No. 1797 of 2009 : 10 : Company by assessee amounted to Rs.9,64,39,231.19 and liabilities were to tune of Rs.4,47,35,333.56. value of assets transferred includes 'goodwill' as well, which was valued at Rs.2,45,00,000/-. By virtue of mandate under Section 55(1)(b) and 55(2)(a) of Income Tax Act, it was noted that cost of acquisition and cost of improvement of 'goodwill' shall be taken as 'nil' and it was accordingly, that differential portion was worked out and shown as amount actually due to assessee. Out of this amount, since value of total shares amounted to only Rs.1,52,94,9000/- [while showing Rs.2,73,07,905/- as unsecured loan], it was observed that Section 47 (xiv) (c) was not satisfied completely and 'good will' portion to extent of Rs.2,45,00,000/- was also liable to be taxed. This is not attempt on part of Commissioner 'to generate some more revenue' by refixing assessment, if two views were possible. It is not question of two alternate views, but case of only 'one view', which came to be wrongly decided by Tribunal. As it stands so, it is correct view that can be sustained and not impaired one. Non-satisfaction of ingredient under Section 47 (xiv)(c) in toto is major defect and as such, value of 'goodwill' i.e. Rs.2,45,00,000/- admittedly I. T. Appeal No. 1797 of 2009 : 11 : forming part of assets transferred, required to be taxed under such circumstances. This being position, judicial precedents cited and sought to be relied on by assesee [as relied on by Tribunal] actually do not come to rescue of assesee. This Court is of firm view that power exercised by Commissioner under Section 263 of Act is correct and that finding rendered by Tribunal, to contrary, is not sustainable. 13. Coming to reasoning given by Tribunal, that 'deficit' has to be treated as 'loan' given by proprietorship concern, to proprietor; [n turn taken over by Company as 'loan' to be cleared on demand], it is to be noted that, under no circumstances can person borrow from himself and transpose as 'creditor' and 'borrower' at same time. To this extent, 'proprietor' and 'proprietorship concern' are not two different entities. Whatever is pumped in by 'proprietor' to his proprietorship, is nothing other than investment and it forms part of asset, which, when taken over by Company, will have to be compensated [after deducting liabilities]. If at all any exemption is to be claimed to come outside purview of 'transfer' envisaged under Section 45 of Act, various requirements mentioned under Section 47 (xiv) have to be I. T. Appeal No. 1797 of 2009 : 12 : satisfied. There may not be any dispute to fact that all assets and liabilities of proprietorship concern have been taken over, but if there is wrong description of part of assets concerned as 'liability', such wrong procedure/accounting cannot be glibly swallowed, disregarding mandate of provisions of law in relation to exigibility to tax. proprietorship concern could have borrowed any amount to have categorized as 'loan', only if it was procured from some other source, than himself/the proprietor. finding and reasoning given by Tribunal are not at all correct and it is liable to be intercepted. 14. With regard to further observation made by Tribunal in Annexure D order, that even if amount in dispute is treated as part of consideration, no such consideration was ever received by assesee in year '2001- 02' and hence Section 47 (xiv)(c) was not attracted; it is to be noted that 'transfer' was effected as on 01.10.2000, on which date, disputed amount described as liability of 'proprietorship concern', to proprietor, was stated as taken over by Company as 'unsecured loan' to be discharged to proprietor on demand. This by itself shows that Company could not have borrowed any amount from proprietor/assessee, unless amount was I. T. Appeal No. 1797 of 2009 : 13 : credited to latter's account. Though amount actually did not come to hands of assessee/proprietor, moment it is shown as 'loan' repayable to proprietor, there results indirect admission that said amount had already come to credit of proprietor/assessee; from whom Company had taken over 'loan'. By virtue of legal fiction in this regard, it can be easily said that, part of consideration was paid by Company to 'proprietor' pursuant to taking over proprietorship concern with all assets and liabilities; which included cost of 'goodwill' as well, to extent of Rs.2,45,00,000/-. In so far as there is no dispute that total number of shares transferred was only 1,52,949 [having face value of Rs.100/- each], with total worth of Rs.1,52,94,900/-, there was clear deficit, which was never paid or satisfied in form of shares as envisaged under Section 47 (xiv) (c) of Act. In other words, terminology used under Section 47 (xiv) (c) is quite categoric, that proprietor shall not receive any consideration or benefit directly or directly, in any form or manner, other than by way of allotment of shares in Company. very usage of expression, asserting same to appropriate extent, clearly reveals intent of law makers that, it shall only be by way of I. T. Appeal No. 1797 of 2009 : 14 : 'shares' and in no other way at all. When Statute says something to be done in particular manner, it shall be done only in that manner and not in other manner. We find support from ruling rendered by Apex Court in Competent Authority Vs. Barangore Jute Factory and Ors. [(2005) 13 SCC 477] and by this Court in Lakshmikutty Amma Vs. Vijayalakshmikutty [1992 (2) KLT 341] taking cue from celebrated English decision 1875 (1) Ch.D 426 [Taylor Vs. Taylor]. value of 'goodwill' of proprietorship firm passed on to Company, having value of Rs.2,45,00,000/-as part of consideration/benefit which has been indirectly/wrongly shown as 'loan' from proprietorship concern, to proprietor , taken over by Company, to be satisfied as and when demanded. Viewed in above circumstances, said consideration had legally come to credit of proprietor/assessee on 01.10.2000 itself, to have transposed latter as creditor of Company, who sought to show said amount as 'loan' procured from proprietor. 15. In this context, it is also relevant to note stand of assesee as per 'case/explanation' projected by him, in response to show-cause notice issued by Commissioner I. T. Appeal No. 1797 of 2009 : 15 : proposing to exercise power under Section 263 of Act. said version is specifically taken note of by Commissioner in Annexure B order and it has been extracted by Tribunal in 'paragraph 4' of Annexure D as well, which is to following effect: In response to said notice assessee vide his letter dated 15-11-2004 has stated as under :- 1. All conditions prescribed u/s 47(xiv) (c) have been complied with by assessee. total issued and paid up capital of Company as on 31.03.2002 was Rs.3 Crores of which, I subscribed Rs.153 lacs being 50% of Paid-up capital. conditions of provisions (b) have been satisfied. So far, percentage of my share holding has not come down. All assets and liabilities of Company. Nowhere in Section, it is mentioned that shares should be issued for whole amount. As and when shares are issued, my shareholding should not be less than 50% of total voting power. That condition is fully satisfied. 2. Regarding provision (c), I may inform you that I have not received any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in Company. I have not received any interest on balance to my credit under loan account also. 3. Provision 'b' also does not stipulate that shares should be issued for value of entire assets taken over by I. T. Appeal No. 1797 of 2009 : 16 : Company. 4. For reasons mentioned above, I strongly object to your proposal to set aside assessment to bring to tax value of Good will of Rs.2,45,00,000/- under head 'Capital Gains'. It was with reference to said stand/case, that matter was considered and decided by Commissioner. But on challenging said order before Tribunal, assessee/respondent sought to improve his case by contending something more, as referred to in paragraph 7 of Annexure D. 16. Tribunal has said much in 'paragraph 10' of its order, stretching proceedings/provisions even beyond logical limits, when it says that parties [proprietor and Company] at time of taking over, had agreed that 'current account balance' of proprietor in books of whole proprietary concern was to be taken over as liability under loan account and was to be discharged as 'loan'. reference is also made to definition of term 'consideration' as given in Indian Contract Act [Section 23 mentioned therein appears to be mistake, which might be Section 2(d)]. It is quite fundamental, that there cannot be any agreement contrary to provisions of law. When Tribunal propounds that there was agreement between I. T. Appeal No. 1797 of 2009 : 17 : 'proprietor' and 'proprietorship concern' [treated as two different entities], necessity to have two legal persons to arrive at contract (lender and borrower), based on consideration paid or agreed to be paid, was quite conveniently ignored. role of two different persons/entities and their status unfortunately has been conferred upon same person, i.e. 'proprietor'; thus propounding strange proposition that 'proprietorship concern' had borrowed amount from 'proprietor', to be satisfied in due course on demand; which liability in turn was stated as taken over by Company. 17. crux of above discussion is that, legal position applied correctly by Commissioner to given set of facts and circumstances, as per Annexure B order, came to be disturbed by Tribunal, as per Annexure D order. It is true that in tax parlance, 'partnership' is different from 'partners' and both can be taxed, though partnership firm is not legal entity. But coming to proprietorship concern, there is no identity to 'proprietorship concern', leaving 'proprietor' and assessee is always proprietor in such cases. In other words, there can not be any assessment separately for 'proprietor' and 'proprietorship concern'. There is absolutely no rhyme or reason to I. T. Appeal No. 1797 of 2009 : 18 : have interfered with Annexure B order. finding and reasoning given by Tribunal is per se wrong and unsustainable in all respects. Annexure D order passed by Tribunal stands set aside. Annexure B passed by Commissioner is restored. Appeal stands allowed. No cost. sd/- P. R. RAMACHANDRA MENON, JUDGE sd/- A. HARIPRASAD, JUDGE kmd /True copy/ P.A. to Judge Commissioner of Income-tax, Thrissur v. K.V. Mohammed Zakir
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