Kerala High Court
Commissioner Of Gift-Tax vs Elixir Plantations (P.) Ltd. on 21 November, 1994
Equivalent citations: [1995]214ITR243(KER)
JUDGMENT T.L. Viswanatha Iyer, J.
1. These references and petitions concern the assessments made on the assessee, the Elixir Plantations (P.) Ltd., Kottayam, either under the Income-tax Act, 1961, or under the Gift-tax Act, 1958, for the years 1973-74, 1974-75 and 1975-76. Income-tax References Nos. 109 and 110 of 1983, and 7 to 9 of 1993 concern the assessments to income-tax while Income-tax Reference No. 189 of 1988 and Original Petitions Nos. 860 and 861 of 1985 relate to the gift-tax assessments. Income-tax References Nos. 109 and 110 of 1983 are at the instance of the assessee, under Section 256(1) of the Income-tax Act, and relate to the assessment years 1973-74 and 1975-76. Income-tax References Nos. 7 to 9 of 1993 are at the instance of the Revenue for the assessment years 1973-74 to 1975-76 and are under Section 256(2) of the Income-tax Act. We shall refer to the gift-tax matters later.
2. The facts leading to all these cases may be summarised as follows. The assessee is a private limited company which owns a coffee estate purchased by it in the year 1958. The estate contained a large number of rosewood trees which were being disposed of by the assessee since the date" of its purchase. The capital gains arising on such sales had also been brought to assessment during the years right up to the assessment years in question. The shareholders of the assessee are members of three families. Their descendants and wives are the beneficiaries of a private trust known as K and K Trust which was doing business in timber. There is also another firm by name Mysore Farms and Enterprises, which is also a sister concern of the assessee and of the K and K Trust.
3. During the accounting years relevant to the assessment years 1973-74 to 1975-76, the assessee had sold certain rosewood trees to the K and K Trust. Thus, 50 rosewood trees were sold during the accounting year ending March 31, 1973, for a price of Rs. 1,08,000 ; 56 trees during the accounting year ending March 31, 1974, for Rs. 1,12,000 and 65 trees during the accounting year ending March 31, 1975, for Rs. 1,30,000. The purchaser-trust sold these trees soon after the sale to them (within a period of about one month) to the other firm, Mysore Farms and Enterprises, for substantially higher prices of Rs. 2,65,000, Rs. 5,25,000 and Rs. 5,30,000 during the three years. The income-tax assessment for the year 1973-74 was completed assessing the capital gains on the value of Rs. 1,08,000 received from the trust. The assessment was taken up in appeal right up to the Tribunal, when the Tribunal confirmed the assessment to capital gains but directed the cost of acquisition to be fixed at Rs. 2,000 per tree. The matter rested there and was not taken up in reference before this court.
4. At the time the original assessment was completed, the Income-tax Officer was not aware that the trees had been sold by the trust to the Mysore Farms and Enterprises in the matter of a few days. On getting information about these subsequent sales, the Income-tax Officer reopened the assessment for 1973-74 under Section 147 and completed a fresh assessment under Section 143 treating the price of the trees as Rs. 2,65,000 being the amount at which the trust sold the trees to Mysore Farms. In completing this assessment on January 23, 1979, the Income-tax Officer adopted three postures. The first was that the transaction between the assessee and the K and K Trust was only a sham transaction in order to understate the sale consideration to evade capital gains tax and that the real sale was the one between the assessee and Mysore Farms, Alternatively, the Income-tax Officer also applied Section 52(2) of the Income-tax Act, 1961, and fixed the real consideration for the transaction at the market value of Rs. 2,65,000. Thirdly, the Income-tax Officer felt that the cost of acquisition, Rs. 2,000, fixed by the Tribunal in the earlier appeal from the original assessment was not liable to be accepted as other material reliable data was available from which it could be discerned that the cost of acquisition was much less. Accordingly, he fixed the cost of acquisition at Rs. 900 per tree and completed the assessment accordingly. The matter reached the Tribunal in second appeal and the Tribunal entered a finding in the first instance that the reopening of the assessment under Section 147 was not valid in law. The Tribunal did not accept the Income-tax Officer's conclusion that the transaction between the assessee and the K and K Trust was sham. The Tribunal held it was a real transaction. Thirdly, the Tribunal held that the provisions of Section 52(2) clearly applied to the facts of this case, a conclusion which it based on the decision of this court in ITO v. Varghese (K. P.) [1973] 91 ITR 49 [FB], Fourthly, the Tribunal held that the cost of acquisition of the trees has to be taken as Rs. 2,000 as fixed by it in the earlier appeal from the original assessment. The appeal for 1973-74 was thus allowed. Income-tax Reference No. 109 of 1983 arises out of this order and the question referred is :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in its construction of Section 52(2) of the Income-tax Act, 1961, and in holding on the basis of that construction that the Income-tax Officer was justified in computing the capital gains in this case and the assessee is liable to pay the impugned capital gains tax under Section 45 read with Section 52(2)?"
5. For the year 1974-75, the assessment originally made by the Income-tax Officer was challenged in appeal by the assessee before the Appellate Assistant Commissioner, who set it aside on the ground that the Income-tax Officer had fixed the cost of acquisition of the trees as their value on January 1, 1954. The Appellate Assistant Commissioner held that since the acquisition of the asset itself was only in 1958, a reassessment of the cost of acquisition was called for and accordingly remanded the matter to the Income-tax Officer to redo the assessment on the basis of the cost as on the date of acquisition of the estate. The assessee challenged this order unsuccessfully in appeal before the Tribunal, the Tribunal making short shrift of the matter, stating that the appeal was really infructuous as the Appellate Assistant Commissioner had only directed the Income-tax Officer to redo the assessment and that therefore there was nothing in the appellate order by which the assessee could be aggrieved. The appeal was accordingly dismissed. The Income-tax Officer completed the fresh assessment on December 29, 1977, in which significantly he did not treat the transaction between the assessee and the K and K Trust as sham as he did for 1973-74 subsequently, but merely applied Section 52(2). He also adopted the cost of acquisition of the trees at Rs. 900, feeling himself not bound by the order passed by the Tribunal for the year 1973-74. The appeal arising out of this order was also dealt with by the Tribunal along with the appeal for 1973-74 and the Tribunal rendered the findings which we have referred earlier for the year 1973-74. The appeal for 1974-75 was thus allowed.
6. For the year 1975-76, the original assessment was completed on December 29, 1977, which followed the same pattern as for 1974-75. This appeal was also dealt with by the Tribunal along with the appeals for 1973-74 and 1974-75 with the same findings as entered therein. The same question of law has also been referred as in 1973-74, for the opinion of this court.
7. These references, at the instance of the assessee for 1973-74 and 1975-76, are Income-tax References Nos. 109 and 110 of 1983.
8. It will be noted from the above narration of facts that certain findings had been rendered against the Revenue in the order of the Appellate Tribunal. The Revenue was not successful in getting certain questions of law referred to this court for opinion and, therefore, it filed applications under Section 256(2) of the Income-tax Act for all the three years. Consequent on the directions of this court in those applications, the following questions have been referred for the opinion of this court under Section 256(2) for the years 1973-74 to 1975-76, namely :
"1. Whether, on the facts and in the circumstances of the case, the sales to the trust are sham ?
2. Whether, on the facts and in the circumstances of the case, the refixation of the cost of acquisition by the Income-tax Officer was valid and with jurisdiction?"
9. We shall deal with these matters before we take up the other matters arising under the Gift-tax Act. The question referred in Income-tax References Nos. 109 and 110 of 1983 has to be answered in favour of the assessee, in view of the fact that the decision of the Tribunal justifying the invocation of Section 52(2) of the Income-tax Act was based on the decision of this court in ITO v. K.P. Varghese [1973] 91ITR 49 [FB], which was subsequently reversed by the Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597. The Supreme Court held therein that Section 52(2) becomes applicable only when there is understatement of the consideration actually received and not otherwise, that is, if the full value of the consideration in respect of a transfer is shown at a figure less than that actually received by the assessee. The burden of proving such understatement or concealment is on the Revenue. The sub-section has no application to an honest and bona fide transaction where the consideration received by the assessee has been correctly disclosed or declared by him. This being the law, we have to see whether the consideration received by the assessee was really more than what was declared as having been received from the K and K Trust. But we do not find any case for the Revenue that the actual amount of consideration received by the assessee from the K and K Trust was more than what was declared and disclosed in the returns (subject of course to the contention that the transaction between the assessee and the K and K Trust was sham, which we shall consider separately). If that be so, the provisions of Section 52(2) do not apply to this case, and the decision of the Tribunal applying Section 52(2) was unjustified. The answer to the question referred in Income-tax References Nos. 109 and 110 of 1993 has, therefore, to be against the Revenue.
10. We shall now come to the questions referred in Income-tax References Nos. 7 to 9 of 1993. The first question referred is whether the sales by the assessee to the trust are sham. Really this question arises only for the year 1973-74 and not for the other two years. The assessments for the subsequent two years had been completed on December 29, 1977, and in both those assessments, the Income-tax Officer had not taken up the stand that the transactions were sham. The question of the sham nature of the transaction was raised and considered by him only in the year 1973-74. But the Tribunal discussed the matter as if this question arose for all the three years, though there was no justification for it. The Tribunal has entered a finding of fact that the transactions were not sham. Adequate reasons have been given by the Tribunal for reaching this conclusio'n. The Tribunal referred to the decision of the Supreme Court in Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 about the distinction between a benami and a sham transaction. The Tribunal noted that there was nothing to show that the title to the rosewood trees continued to be with the assessee-company till they were cut by Mysore Farms after it purchased them from the trust. It is noteworthy that there is no case for the Revenue that the trust was not a real entity but a make believe. There is also no evidence to show that the assessee did actually receive the amount of consideration paid by Mysore Farms to the trust and not merely the amount mentioned as the sale price to the trust. It may be that the assessee has undersold the trees to the trust, but that by itself is not a ground for holding that the transaction between the two was a sham transaction. The conclusion of the Tribunal on this essential question of fact is binding on us and we do not find any particular infirmity in the said finding of the Tribunal. We have, therefore, to hold that the finding about the alleged sham nature of the transaction, rendered by the Tribunal is correct and that the sale by the assessee to the trust was a real genuine transaction. The other question referred at the instance of the Revenue is about the refixation of the cost of acquisition by the Income-tax Officer at Rs. 900 as against Es. 2,000 fixed by the Tribunal in the appeal against the original order of assessment for 1973-74. So far as the year 1973-74 is concerned, we must hold that the Assessing Officer had no jurisdiction to go behind the cost of acquisition fixed by the Tribunal in relation to the very same year and fix it at Rs. 900 as done by him. But the position is different so far as the years 1974-75 and 1975-76 are concerned. For those two years, there was no appellate order as in the year 1973-74. The Income-tax Officer has placed adequate materials in his orders of assessment to hold that the cost of acquisition of the trees was really only Rs. 900 for the year 1958 and that it could not be Rs. 2,000. The plea of binding nature of the Tribunal's order for 1973-74 for these years is not acceptable for the reason that the said finding related only to 1973-74. Secondly, the said finding need not be conclusive, when adequate materials were available with the Income-tax Officer to make a departure from that finding. We are, therefore, of the view that on the facts and in the circumstances of the case the refixation of the cost of acquisition at Rs. 900 per tree for the years 1974-75 and 1975-76 was within the officer's powers and is not vitiated by any absence of jurisdiction or other invalidity.
11. But a subsidiary contention was argued before us as arising out of this question relating to the year 1974-75. This plea found acceptance with the Tribunal also. This plea is based on the remand made by the Appellate Assistant Commissioner after setting aside the original order of assessment, with a direction to the Income-tax Officer to redo the assessment after fixing the cost of acquisition with reference to the year 1958. This order was confirmed by the Tribunal, as we have mentioned earlier, holding that the appeal was practically infructuous and dismissing it. But the Tribunal, by a very curious line of reasoning, has now held that the Appellate Assistant Commissioner's order merged with the Appellate Tribunal's order and since there was no direction in the Tribunal's order to redo the assessment, the Income-tax Officer who was carrying out the order of the Appellate Assistant Commissioner could not reappraise or fix the cost of acquisition on the basis of fresh evidence. We cannot agree with this line of reasoning adopted by the Tribunal. What the Tribunal did was only to dismiss the appeal of the assessee as meritless. Thereby it confirmed the directions given by the Appellate Assistant Commissioner which, therefore, continued to be operative. It is not as if by dismissing the appeal without stating anything more the directions given by the Appellate Assistant Commissioner ceased to be valid. On the other hand, by dismissing the appeal, the Tribunal put its seal of approval to the directions contained in the Appellate Assistant Commissioner's order and affirmed it. In other words, the direction to redo the assessment and to fix the cost of acquisition afresh with reference to the year 1958 continued to be operative and had to be implemented by the Income-tax Officer. This was what was done by the Income tax Officer in making the fresh assessment. The remand was an open one and it was therefore open to the Income-tax Officer to redo the assessment in all its aspects in accordance with law. But as noted above, the question of applying Section 52(2) does not survive in view of the subsequent decision of the Supreme Court disapproving the decision of this court and in the absence of any case for the Department that anything more than the amount of consideration disclosed had been received by the assessee.
12. This plea of the assessee does not, therefore, deserve any consideration.
13. We must at the same time observe that so far as the year 1973-74 is concerned, none of these questions require consideration at all for the reason that we are concerned with a reopened assessment under Section 147. The reopening itself was found to be invalid by the Tribunal and there is no reference before us at the instance of the Revenue questioning the validity of the reopening. Even otherwise, since Section 52(2) is not applicable, the only question that really survived for consideration was the refixation of the cost of acquisition at Rs. 2,000 which again was not valid for this year in view of the prior order of the Tribunal. The reassessment for the year 1973-74 is not therefore open to challenge in any manner. Really the questions dealt with by us arise only for the subsequent years 1974-75 and 1975-76.
14. The answer to the question raised in Income-tax References Nos. 109 and 110 of 1983 has therefore to be in favour of the assessee and against the Revenue. The answer to the first question raised in Income-tax References Nos, 7 to 9 of 1993 is again in favour of the assessee and against the Revenue. But the second question referred in these references has to be answered in favour of the Revenue and against the assessee holding that the Income-tax Officer was justified and well within his jurisdiction in fixing the cost of acquisition for these two years at Rs. 900 per tree.
15. This discussion will dispose of the cases under the Income-tax Act. We now come to the assessments under the Gift-tax Act, which are covered by Income-tax Reference No. 189 of 1988 relating to the year 1973-74 and Original Petitions Nos. 860 and 861 of 1985 relating to the subsequent two years.
16. We have already mentioned that the income-tax assessments for the years 1974-75 and 1975-76 were made on December 29, 1977. The corresponding assessment for 1973-74 was made on January 23, 1979. Since the addition proposed for 1973-74 was over Rs. 1,00,000, the Income-tax Officer made a draft assessment order on July 24, 1978, in which he purported to hold that the transaction between the assessee and the K and K Trust was sham. He completed the assessment subsequently after getting the approval of the Inspecting Assistant Commissioner under Section 144B. The assessee had not filed any returns under the Gift-tax Act. In the view that a taxable gift had escaped assessment, the Income-tax Officer functioning as the Gift-tax Officer as well sent notices on July 25, 1978, under Section 16(1)(a) of the Gift-tax Act calling upon the assessee to file returns of the gifts for the years 1973-74 to 1975-76. The Gift-tax Officer evidently attempted to invoke Section 4(1)(a) as the sale of the trees to the trust was for inadequate consideration. This was resisted by the assessee, inter alia, with the contention that the Income-tax Officer had, on July 24, 1978, entered a finding for the year 1973-74 that the transaction between the assessee and the K and K Trust was sham. Thereafter and on the next day the Income-tax Officer functioning as the Gift-tax Officer cannot have reason to believe that any gift had escaped assessment. The proceedings under Section 16(1)(a) were, therefore, without jurisdiction. This contention did not find favour with any of the authorities including the Tribunal. The Tribunal dealt with the assessment for 1973-74 by one order and the assessments for the other two years by another order. So far as the first order is concerned, they made a reference at the instance of the assessee of the following question of law, namely :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the reopening of the gift-tax assessment under Section 16(1)(a) was not valid?"
17. The Tribunal, however, refused to state a case or refer any question of law for the subsequent years and the assessee has therefore filed Original Petitions Nos. 860 and 861 of 1985 to compel reference of the said question of law and others under Section 26(3) of the Gift-tax Act, 1958.
18. We shall deal with Original Petitions Nos. 860 and 861 of 1985 in the first instance. The reason recorded by the Gift-tax Officer for the reopening of the case is similar for all the years, namely, that the assessee had transferred the rosewood trees at amounts which were far lower than the market value of the trees. The trees had been transferred otherwise than for adequate consideration, the difference was therefore assessable under Section 4(1)(a). The Gift-tax Officer had therefore reason to believe that a taxable gift had escaped assessment by reason of the omission on the part of the assessee to make a return under Section 13. Accordingly, he directed issue of notice under Section 16(1)(a). But the gravamen of the charge by the assessee is that the Income-tax Officer had, on July 24, 1978, a day prior to the issue of the notice under Section 16(1)(a) held that the transaction between the assessee and the K and K Trust was sham and therefore he could not have entertained a belief on the next day that the transfer was for inadequate consideration. But this plea has absolutely no basis so far as the years 1974-75 and 1975-76 are concerned, whatever may be its tenability, for 1973-74, for the reason that the Income-tax Officer had no case in the assessments for those years under the Income-tax Act, which he completed on December 29, 1977, that the transactions for those years were sham. He had only invoked Section 52(2) and fixed the full value of the consideration at the amounts at which the trees were sold by the trust to Mysore Farms. Since the Income-tax Officer had not adopted any posture for these two years that the transactions were sham, there is absolutely no substance in the assessee's plea that he could not have had reason to believe that the transfers were for inadequate consideration. The Tribunal has come to the conclusion that having regard to the facts relating to the assessments under the Income-tax Act for these two years, the plea of the assessee is not capable of acceptance and that the invocation of Sections 4(1)(a) and 16(1)(a) was valid. We are in agreement with the Tribunal. We do not find any referable question of law arising out of the Tribunal's order. Original Petitions Nos. 860 and 861 of 1985 are only liable to be dismissed.
19. So far as Income-tax Reference No. 189 of 1988 is concerned, the plea as stated above is that the Gift-tax Officer could not have entertained a reasonable belief about any gift having escaped assessment. It is true that the very foundation for the reopening of an assessment under Section 16(1)(a) is the existence of reasons to believe that a gift had escaped assessment by reason of the failure of an assessee either to make a return or otherwise. It is also true that the belief must be that of an honest and reasonable person based upon reasonable grounds. As reiterated by the Supreme Court recently in Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456, while the sufficiency of the reasons for forming the belief is not for the court to judge, it is open to the assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. The case of the assessee before us is that the belief of the Gift-tax Officer was not a bona fide one.
20. We have referred earlier to the reasons noted by the Gift-tax Officer for initiating proceedings under Section 16(1)(a). There can be no doubt that those reasons by themselves constitute relevant and sufficient material to form the foundation for the proceedings under Section 16(1)(a). The only question is whether the finding entered in the draft income-tax assessment order on July 24, 1978, that the transaction between the assessee and the K and K Trust was sham strikes at the bona fides of the belief. We do not think so. The position in which the Income-tax Officer was placed when he was dealing with the assessment for 1973-74 was that, on the facts disclosed, it was possible to entertain the doubt that the transaction between the assessee and the trust was sham. This he held, despite the objections of the assessee. At the same time, the opposing point of view was also an equally possible one, depending on the view one may take of the facts disclosed. That was why the Income-tax Officer did not rest content by treating the transaction as sham, and chose to base his assessment on Section 52(2) as well. The assessee was contesting the proceedings and if ultimately it turned out that the transactions were real and not sham, necessarily there will be a gift liable to assessment under the Gift-tax Act. The Gift-tax Officer had perforce to initiate proceedings under the Act for bringing the gift to tax. In the state of uncertainty in which the matter was placed at that time, it could not be postulated for a moment that the Gift-tax Officer did not entertain the belief bona fide or that he acted against the materials on record. As a matter of fact, the position about the real nature of the transaction had not been settled when he issued the notice on July 25, 1978. Only a draft assessment order had been made which may or may not be accepted by the Inspecting Assistant Commissioner. That the Gift-tax Officer acted bona fide and reasonably will be evident from his note in support of the reopening. The belief entertained by him was not a mere pretence, but one which could be entertained on the facts disclosed. The fact that he preferred one view in the income-tax proceedings need not necessarily brand the opposite view as held not bona fide or contrary to material. We are, therefore, of the opinion that the issue of the notice under Section 16(1)(a) is not vitiated in any manner. The question referred to us should be answered in favour of the Revenue.
21. We dispose of the various cases as follows : Original Petitions Nos. 860 and 861 of 1985 are dismissed. The question referred in Income-tax References Nos. 109 and 110 of 1983 and the first question referred in Income-tax References Nos. 7 to 9 of 1993 are answered against the Revenue and in favour of the assessee. The second question referred in Income-tax References Nos. 7 to 9 of 1993 and the sole question referred in Income-tax Reference No. 189 of 1988 are answered in favour of the Revenue and against the assessee, except for 1973-74 for which the answer will be in favour of the assessee.
22. There will be no order as to costs.
23. Communicate a copy of this judgment under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Cochin Bench, for information and compliance.