Income Tax Appellate Tribunal - Madras
Burnside Investments & Holdings Ltd. vs Deputy Commissioner Of Income-Tax on 30 December, 1996
Equivalent citations: [1997]61ITD501(MAD)
ORDER
G.E. Veerabhadrappa, A.M.
1. These cross appeals arise out of the order dated 8-2-1996 of the CIT (Appeals) for the assessment year 1992-93.
2. The first issue in dispute in the assessee's appeal relates to the assessee's claim for depreciation on paintings. According to the assessee, these paintings constituted part of interior decoration and part of the furniture and fittings used in the course of business and these paintings are eligible for depreciation. The departmental representative on the other hand argued that the paintings cannot be taken to constitute items of furniture and fitting. The learned departmental representative pointed out that the paintings instead of depreciating in value in fact appreciates in value and there are several assets which are used by the assessee but are not entitled for depreciation. The learned departmental representative strongly supported the disallowance of depreciation.
3. We have carefully considered the rival submissions. The word 'furniture' is not defined in the Act and therefore it is proper to refer to the dictionary meaning. Webster's New International Dictionary defines furniture to mean 'articles of convenience or decoration used to furnish a house, apartment, place of business or of accommodation.' According to the Shorter Oxford English Dictionary, the word 'furniture' inter alia means 'movable articles in a dwelling house, place of business, or a public building'. From the above it is clear, so far as dictionary meaning is concerned, that all articles of convenience or decoration used for the purpose of furnishing a place of business or an office are articles of furniture. There is no dispute that these paintings were used as decorations in the office and the office was used for the purpose of business. We, therefore, are of the opinion that these paintings constitute interior decoration to give a good look to the place of business. We, therefore, accept the assessee's claim and direct the Assessing Officer to allow depreciation on paintings as part of furniture and fittings.
4. The next dispute in the assessee's appeal relates to the disallowance of Rs. 1,82,754 relating to spares, stores and building repairs. At the time of hearing, this issue was not pressed. The findings of the CIT(A) on this issue are therefore confirmed.
5. The next dispute relates to the addition of Rs. 2,64,000 in respect of interest on loans of Rs. 20 lakhs granted to Sri B. Ratnakar, former Chairman of Canara Bank. According to the learned counsel, the debtor has passed away in February, 1992 and in the absence of details regarding his net worth and also in the light of investigations and enquiries conducted in the Fair Growth group of companies owned by Shri Ratnakar, the assessee was not hopeful of the recovery of either the principal amount of or the interest and that is why no interest was taken credit by the assessee in respect of this loan. The departmental representative supported the order of the Assessing Officer in the light of the discussions made by the CIT (Appeals) in his order.
6. On careful consideration of the rival submissions and perusal of the records, we find that the assessee has subsequently recovered the entire loan and a part of the interest and the department has rightly brought the income of Rs. 2.64 lakhs to tax during the previous year on mercantile basis. In the light of the discussions made by the CIT(A) with which we agree, we decline to interfere.
7. The next dispute in the assessee's appeal relates to the assessment of Rs. 53,88,763 realised on the sale of shares as 'business income.' The assessee-company was incorporated in 1984-85 and was a subsidiary of M/s. Lucky Valley (NH) Tea Estates Ltd. under a scheme of arrangement approved by the High Court of Madras, it has taken over the tea estates of its holding company for a total consideration of Rs. 1,58,00,000 with effect from 1-1-1985. By a deed of transfer dated 20-6-1990 it had sold 553.63 acres of tea estates of Southern Tree Farms, a subsidiary company of the assessee for a consideration of Rs. 6,08,00,000. It was found by the Assessing Officer that after the sale of the tea estate, the assessee was engaged in the purchase and sale of shares and the profit on such sale of shares was claimed to be on the investment account and was shown as short-term capital gains/short-term capital loss. It was found by the assessee that prior to 1-4-1991 it held shares of three companies within the group under investment portfolio. During the year it had traded in shares of 30 companies and such transactions in shares, according to the Assessing Officer, constituted the business of trading in shares. The Assessing Officer has assessed the profit on sale of shares as business income. The CIT (Appeals) upheld the order of the Assessing Officer in the following manner :-
"9. The next dispute is with regard to treatment of a sum of Rs. 53,88,763 realised by the assessee on sale shares as business income of the company. The appellant had claimed it as income under the head 'Capital Gains' and claimed the above-referred capital loss as set off against this income. The assessing authority held that after the sale of the tea estate, the company was doing business in real estate and purchase and sale of shares. The profit of Rs. 53,88,763 derived from the purchase and sale of shares was therefore treated by him as business income. In my opinion the Deputy Commissioner was perfectly justified in treating the amount involved as business income of the appellant. The Chartered Accountant's contention is that these shares had been acquired as an investment only and it had been shown accordingly in the balance sheet also. But this contention obviously has no merit as all the shares in question had been purchased and sold during the relevant accounting year itself. The intention to trade in these shares is therefore very clear; the mere manner of characterisation of the item in the accounts cannot always be the determining factor to decide its real nature. I confirm the treatment of the amount as business income."
The assessee is aggrieved.
8. The learned counsel for the assessee re-iterated the submissions that were made before the revenue authorities and argued that the shares, that were dealt in the previous year, were part of investments. Such shares were reflected in the Schedule of investment forming part of the annual accounts for the year ended 31-3-1992 and accordingly the profit realised on these shares are necessarily to be assessed under the head 'capital gains' and not under the head 'business.'
9. The departmental representative, on the other hand, drew our attention to pages 1 to 4 of the paper book filed by the assessee which discloses the transactions in shares. He argued that looking to the magnitude and quantum of transactions, the shares were on the trading account and held as stock-in-trade and the income arising therefrom has to be assessed as business income.
10. We have carefully considered the rival submissions in the light of the materials placed before us. In our view, the stand taken by the department has some force. After the sale of the tea estate the assessee-company was doing business in real estate and purchase and sale of shares. The shares were purchased with a view to sell them at a profit and in fact these shares were sold within the same accounting year. The conduct of the assessee is not to hold them as investment and earn some interest income but to trade in shares. This is clear from the frequency and nature of transactions in shares. Merely because the assessee has shown these shares as investments in its books of account, it cannot be said that these shares were held on the investment account, whereas in fact the close perusal of the paper book clearly shows how the assessee has purchased and sold shares. In fact, we find that the shares of 40,000 of Reliance were sold by the assessee on 26-2-1992 whereas they were actually purchased on 3-3-1992. The same is the position with regard to 7000 shares of Reliance sold on 13-2-1992 whereas the same were purchased on 18-2-1992. It cannot be accepted that the assessee purchased the shares with a view to keep them as investment and earned some income therefrom. The intention of the assessee from the perusal of these details clearly shows that it was to make gain by dealing in them. Applying the principle laid down by the Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253 (SC), we are of the opinion that the present transaction in shares have resulted in the business profits assessable as such in the hands of the assessee. We, therefore, decline to interfere.
11. The next dispute relates to the exclusion of the value of two flats bought by the company for the purpose of granting depreciation on the block of building. The department has taken steps on the reasoning that there is no evidence to indicate that the asset has been put to use for any business purpose during the year. The learned counsel for the assessee has submitted that the assessee has bought S-24 and D-6 from M/s. India Builder Corporation, Bangalore and the possession was taken on 2-3-1992. The flats were used by the company for storing office records and other assets and these flats were not let out during the previous year ended 31-3-1993 and they were in fact used in the course of business. The Director of the assessee-company has also filed an affidavit and has also filed the letter from India Builders Corporation. The departmental representative, on the other hand, strongly justified the denial of depreciation.
12. On careful consideration of the material placed before us, we are of the opinion that the issue needs to be re-considered by the Assessing Officer in the light of the averments made in the sworn affidavit and also in accordance with law. The Assessing Officer shall give reasonable opportunity of being heard.
13. In the revenue's appeal, the first ground relates to the assessee's claim for loss on sale of shares of Rs. 44,05,391. The assessee claimed short-term capital loss of 9,99,999 shares in Southern Tree Farms Ltd./(STF), a subsidiary company owned by the assessee-company. According to the assessee, the shares were acquired at a face value of Rs. 10 each for an amount of Rs. 99,99,990 and the shares were sold for a price of Rs. 56,00,000 resulting in short-term capital loss. The claim of the assessee was negatived by the Assessing Officer on the reasoning that the transaction of sale of shares to R. Anandakumar, son of M. Rengaswamy was really in the nature of private arrangement and should be viewed from a transfer of 557 acres of tea farms along with the factory buildings owned by the subsidiary company which was sold for a consideration of Rs. 6.38 lakhs. According to the Assessing Officer the assessee has not explained the basis for fixation of the sale value of Rs. 56 lakhs as against the face value of Rs. 99.99 lakhs. The whole arrangement was only with an attempt to reduce tax liability. The CIT(A) however accepted the assessee's contention on the reasoning that the prices for the shares were fixed after taking into account of the attendant facts and circumstances like fall in the tea price from Rs. 37.45 per kg. in June, 1990 to Rs. 32.25 per Kg. in March, 1991 and it was further declining and the Assessing Officer has not proved that the assessee had received a price higher than what has been disclosed. Placing reliance on the decision of the Supreme Court in the case of K.P. Varghese v. ITO (1981) 131 ITR 597/7 Taxman 13, the CIT (Appeals) held that the disallowance of short-term capital loss was not justified and he held that such loss is available for adjustment or set off against other income of the assessee. The revenue disputes these findings of the CIT (Appeals) for the same reasons as are mentioned in the assessment order.
14. A ground was taken by the revenue pleading the invocation of Explanation to section 73 and the same was withdrawn. The departmental representative argued that the entire transaction in shares is a package deal involving the transfer of 557 acres of tea estate, in favour of R. Anandakumar. The learned departmental representative strongly relied upon the discussions in the assessment order and argued that there was no basis for fixing Rs. 56 lakhs as the value of 9,99,999 shares of STF Ltd. The steep fall of Rs. 46 lakhs in the value of the shares in less than one year is inexplicable. Such a deliberate low-pricing of the shares a part of tax-driven scheme and a device patently colourable. The assessee has arranged it affairs so as to claim capital loss by assigning arbitrary price of the shares in the agreement. It was pointed out that the gains arising on transfer of tea estates are not liable to capital gains. This has prompted the assessee to place an arbitrary valuation of shares so as to show the fall in the value of shares. Alternatively, the learned departmental representative pointed out that there is a fall of Rs. 33 lakhs in the total consideration for the tea estate and the capital loss on sale of shares should be worked out on proportionate basis.
15. The learned counsel for the assessee, on the other hand, strongly supported the findings of the CIT (Appeals) on the issue. The department has no material to show that the assessee has received any consideration over and above what has been recorded in the documents in respect of the sale of shares. Under these circumstances, according to the learned counsel, the CIT (Appeals) has rightly accepted the assessee's claim. The assessee has filed a copy of the agreement entered into on 25-3-1991 by the assessee with R. Anandakumar in relation to this transaction.
16. We have carefully considered the rival submissions and perused the relevant materials. At the cost of repetition it may be stated that on 1-1-1985 the assessee acquired a tea estate by virtue of a scheme of arrangement approved by the High Court of Madras for a consideration of Rs. 1.58 crores.
In 1986 M/s. S.T.F. Ltd. was incorporated as a subsidiary of the assessee. By a deed of transfer dated 1-6-1990 553.63 acres of agricultural lands comprising of tea area and other plantations and labour lines, roads etc. owned by the assessee to STF Ltd. for a total consideration of Rs. 6.08 crores. S.T.F. Ltd. paid the assessee a sum of Rs. 1 lakh at the time of execution and registration of the documents towards consideration and the balance of the consideration of Rs. 6.07 crores remained unpaid together with interest payable and consequently the assessee retained the vendor's lien over the property in respect of the said sum of Rs. 6.07 crores. Pursuant to the agreement between Burnside (the assessee) and STF, Burnside was allotted and issued 999,883 shares of Rs. 10 each as fully paid up out of the authorised capital and was adjusted against the balance consideration and further 101 shares of Rs. 10 each was allotted to Burnside and 6 shares of Rs. 10 each were allotted to the nominees of Burnside on actual payment. Consequently, as on 25-3-1991 the assessee was holding 999,984 shares of Rs. 10 each in its own name and 6 shares of Rs. 10 each were held in the names of their nominees. By an agreement of sale dated 15-3-1991, the assessee transferred to S.T.F. Ltd. 3.37 acres of agricultural and together with factory, buildings and machinery in the factory for a total consideration of Rs. 50 lakhs. S.T.F. Ltd. paid an advance of Rs. 10,000 for this transaction. Thus by the two agreements the assessee sold the entire tea estate to its subsidiary (STF Ltd.) for a consideration of Rs. 6.58 crores. However, as already mentioned, the assessee retained the lien over the estate as the consideration was not fully received.
17. An agreement constituting the Memorandum of Understanding was entered into on 25-3-1991 between the assessee and Sri R. Anandakumar, son of M. Rengaswamy wherein it was agreed to transfer the tea factory, bungalow and buildings together with the tea estate for a total consideration of Rs. 6.25 crores. The consideration of Rs. 6.25 crores is stated to constitute of the following :-
(a) Rs. 56,00,000 Consideration for transfer of 9,99,990 shares
both held by the assessee and its nominees.
(b) Rs. 5,07,01,170 Unpaid purchase consideration payable by STF
to the assessee in terms of the transfer deed
dated 1-6-1990.
(c) Rs. 49,90,000 Towards cost of tea factory, bungalows,
ancillary buildings and tea machineries.
(d) Rs. 12,08,830 Third party liabilities to be taken over.
18. As can be seen from the above discussion, the entire transaction in shares is a package deal in connection with the transfer of the tea estate of 557 acres. One has to now consider the contentions of the parties in the light of the above undisputed facts. The assessee's claim for reduction in the value of shares was explained to be fall in the tea prices between June, 1990 and March, 1991. Taking into consideration the entire transaction, we find that the fall in the tea prices has already been reflected in terms of fall in the total consideration for the tea estate. The assessee sold the tea estate for a consideration for Rs. 6.58 crores to its subsidiary and in the arrangement with R. Anandakumar the tea estate is agreed to be sold for Rs. 6.25 crores. The net fall of Rs. 33 lakhs in the deal cannot be attributed only to the transfer of shares involved.
That will only distort the clear facts of the case. In other words, the departmental stand that the consideration of Rs. 56 lakhs placed in respect of the shares in baseless and arbitrary and we agree with the revenue's stand that the steep fall of Rs. 46 lakhs in their value in less than a period of one year is clearly inexplicable. We therefore are not persuaded to agree with the reasoning given by the CIT (Appeals) to allow the loss in the transaction of shares of S.T.F. Ltd. as short-term capital loss. But the fall in the tea prices has led to a fall in the value of the estate as a whole including the value of the shares in the tea company. We, in the circumstances, are of the opinion that such fall in the value of the shares cannot be more than a proportion which may be worked out as under :-
Purchase consideration of the shares Total fall in the value x _____________________________ Total purchase consideration = 33,00,000a 99,99,990 = 5,01,519 x ------------
6,58,00,000 The Assessing Officer shall treat the sum of Rs. 5,01,519 as a deficit in the realisation in respect of shares of S.T.F. Ltd. The balance loss shall be regarded as a loss in the sale of tea estate.
19. The next dispute in the revenue's appeal relates to the assessment of Rs. 8,95,000 as long-term capital gains. The assessee hand sold 3.3 acres of land with factory buildings, manager's bungalow etc. by a sale deed dated 3-6-1991 for a consideration of Rs. 30 lakhs. According to the Assessing Officer, the buildings involved in the transaction were depreciable assets and on the basis of their written down value and sale value, a sum of Rs. 9,66,628 was brought to tax as short-term capital gains as per section 50 of the Income-tax Act. The assessee had no dispute with regard to this. However, out of the land sold a portion of 1.7 acres was treated by the Assessing Officer as non-agricultural and worked out the long-term capital gains of Rs. 8.95 lakhs. According to the assessee, these were situated in a Panchayat and do not come within the definition of 'capital assets' under section 2(14) of the Income-tax Act. The CIT(A) accepted the assessee's stand and the revenue is aggrieved.
20. According to the department the land might have been agricultural land upto the time structures were built over the land. The moment structures were built over the land, it ceased to be agricultural land. According to the departmental representative, the land is part of the capital asset within the meaning of section 2(14) of the Act and sale of such asset give risk to chargeable capital gains.
21. The learned counsel for the assessee, on the other hand, strongly supported the order of the CIT (Appeals) on the issue.
22. We have carefully considered the rival submission in the light of the material placed before us. The details of the property conveyed and the market value of such property are filed. Properties at serial numbers 1 to 26 measuring 1.7 acres have yielded short-term capital gains of Rs. 9,66,628 in respect of which there is no dispute. The only dispute relates to three properties at serial Nos. 27, 28 and 29 measuring 1.6 acres wherein the market value of the property is shown at Rs. 1.92 lakhs. It is not known how the department has computed the capital gains of Rs. 8.95 lakhs in respect of the same. The Assessing Officer will decide the issue afresh after bringing out the correct facts of the case and the exact nature of the land which has been transferred. In respect of this issue the matter stands restored to the Assessing Officer for fresh decision.
23. In the result, both the appeals are partly allowed.