Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income-Tax vs K.B. Investment And Finance Co. Ltd. on 20 March, 1995
Equivalent citations: [1995]53ITD410(DELHI)
ORDER
Manzoor Ahmed Bakhshi, Judicial Member
1. These cross-appeals, one by the assessee and one by the revenue, relating to assessment year 1981-82 are disposed of by this consolidated order. The learned counsel for the assessee Shri O.P. Vaish and the learned D.R. Shri Abrar Ahmed have been heard and records perused. Relevant facts are that assessee is an investment company. Earlier ihe company was doing banking business before the same was acquired by the State Bank of India in 1974. The realisation of the advances was not taken over by the State Bank of India and as such assessee continued to be engaged in the business of realisation of such advances. The assessee has also been advancing loans as a business activity.
2. It seems that certain dispute arose between Smt. Madhavrao Scindia and Rajmata Vijayaraje Scindia in regard to various properties and assets owned by the HUF and companies, namely, Scindia Investment P. Ltd., K.B. Bank Ltd., Scindia Potteries P. Ltd. and Manjri Stud Farms. The dispute was referred to the sole arbitrator Shri D.M. Harish, Advocate, who gave an award on 1-4-1980 concerning the various matters referred to him. This award has been made rule of the Bombay High Court on 11-7-1980. As per para 11 of the award certain assets with a book value of Rs. 30,21,434 were directed to be exchanged between the two companies, namely, Scindia Investment P. Ltd. and K.B. Bank Ltd. The said para reads as under :
I award and direct that SIPL and K.B. Bank exchange their aforementioned assets in the following manner :
(a) SIPL transfers 1,29,572 shares of Nirlon Synthetic Fibres & Chemicals Ltd. to K.B. Bank at the value of Rs. 20 per share. Rs. 25,91,440
(b) SIPL transfers 4,400 shares of Scindia Potteries to K.B. Bank at book value Rs. 1,28,750
(c) SIPL transfers the debt owed to it by Scindia Potteries to K.B. Bank to the extent of
(d) SIPL transfers the Rs. 2.27,460 following Motor cars and vehicles to K.B. Bank at book value :
Volvo Motor Car Rs. 4,916
Kaiser Jeep Rs. 738
Pugeot Motor Car Rs. 64,000 Rs. 73,784
Ambassador Motor car Rs. 4,130 ______________
Rs. 30,21, 434
SIPL receives the following assets from K.B. Bank in exchange of the aforesaid assets :
(i) Duplex flat on the 27th floor of
Samudra Mahal Apartments at Worli,
Bombay at book value Rs. 8,70,000
(ii) 67 shares of Manjri at the paid up
value of Rs. 1,000 per share Rs. 67,000
(iiii) Amount due from Manjri to K.B. Bank Rs. 1,59,550
(iv) Amount of interest due from Manjri to
K.B. Bank Rs. 1,63,994
(v) Amount due from Lashkar Investment
and Finance Company Ltd. to K.B. Bank Rs. 4,68,957
(vi) Amount due from Shri D.B. Singh to
K.B. Bank Rs. 3,15,826
(vii) Part of the amount due from Helieoper
Services P. Ltd. to K.B. Bank Rs. 8,16,047
(viii) Amount due from Rivets Manufacturing
Co. P. Ltd. to K.B. Bank Rs. 1,60,060
_______________
Rs. 30,21,434"
3. M/s Scindia Investments P. Ltd. owned 49,838 shares of K.B. Bank and the remaining shares were owned by the nominees of SIPL. Therefore, admittedly SIPL was the parent company and K.B. Bank Ltd. was its 100% subsidiary. However, as per the award of the arbitrator, SIPL was to transfer all the 50,000 shares of K.B. Bank Ltd. held by SIPL and its nominees to Rajmata at the value of Rs. 50 per share and Rajmata Vijayaraje Scindia was to pay the value of Rs. 25 lakhs to SIPL in the following manner as referred to in para 8 of the award :
I award and direct that SIPL transfers all the 50,000 shares of K.B. Bank held by SIPL and its nominees to Rajmata at the value of Rs. 50 per share and Rajmata pays the value of Rs. 25,00,000 to SIPL in the following manner :
(a) By adjustment of amount due to Rajmata from SIPL Rs. 1,87.015
(b) By transfer of 372 shares of Manjri from Rajmata to SIPL at the paid-up value of Rs. 1,000 per share Rs. 3,72,000
(c) By transfer of jewellery allotted to Rajmata on partial partition of the HUF as directed hereinafter and more fully described in the First Schedule annexed hereto at the value of Rs. 3,00,000
(d) By transfer of Government securities allotted to her on partial partition of the HUF as directed hereinafter Rs. 21,200
(e) By adjustment of the amount received from Madhavrao in the books of SIPL Rs. 2,00,000
(f) By payment of the amount received by Rajmata from the HUF on partial partition as directed hereinafter Rs. 8,79,326
(g) By transfer of 149-665 kgs of silver received by her from Madhavrao Rs. 4,87,627
(h) By payment out of the amount of Rs. 50,115 received by Rajmata on partial partition of the HUF as directed hereinafter and the balance of Rs. 2,717 out of the amount of Rs. 18,083 received from Madhavrao Rs. 52,832 _____________ Rs. 25,00,000"
As per the award assessee made adjustments in its books of account which for the assessment year 1981-82 were closed on 31st December, 1980. On the basis of the award and the entries made by the assessee in its books of account, Assessing Officer initially assessed the capital gains on the exchange of assets at Rs. 17,32,667 and computed the business income at Rs. 20,904 vide assessment order dated 24-3-1984. Subsequently, on 8-5 1985, order under Section 154 was passed revising the computation of capital gains to Rs. 27,41,174. Both these orders were challenged in appeal before the CIT(A), Central Range, Bombay. The CIT(A) in an appeal against the order passed Under Section 143(3) remanded the case to IAC (Asst.) with the direction to examine and decide the assessee's claim that no capital gain is assessable in its hands in view of the provisions of Section 47(v) of the Income-tax Act, 1961 and thereafter, if necessary, determine the quantum of capital gains assessable in the hands of the assessee. The order passed Under Sectio 154 was also set aside by the CIT(A) with the direction that the Assessing Officer shall first decide as to whether capital gains is assessable in view of the provisions of Section 47(v) and then decide the quantum of the capital gains, if any, assessable. In the meantime, the jurisdiction of the case was transferred to the Income-tax Officer A-ward, Gwalior, who vide order dated 22nd February, 1988 decided that Section 47(v) was not applicable in the case of the assessee as the SIPL had transferred the entire shareholdings of K.B. Bank Ltd. to Smt. Vijayaraje Scindia and that the exchange of the assets between SIPL and K.B. Bank Ltd. was not between a subsidiary company and a holding company. The Assessing Officer computed the capital gains at Rs. 27,41,174 as calculated earlier vide order under Section 154 of 8-5-1985. A perusal of the order Under Section 154 reveals that Assessing Officer has taken the market value of the assets transferred by SIPL to K.B. Bank Ltd. (Now K.B. Investments) determined at Rs. 57,86,970. The cost of the assets as given in the award transferred by K.B. Bank at Rs. 30,45,796 has been allowed as a deduction giving the resultant capital gain of Rs. 27,41,174.
4. Assessee appealed to the CIT(A), Bhopal, who vide order dated 14-8-1989 has upheld the view of the Assessing Officer that provisions of Section 47(v) are not applicable in the case of the assessee. However, with regard to the computation of the capital gains, the CIT(A) has held that the value shown in the arbitration award be taken as value of the consideration and the capital gains, if any, computed accordingly.
5. Whereas assessee is in appeal against the decision relating to the applicability of provisions of Section 47(v), revenue is aggrieved with the decision of the CIT(A) relating to the computation of capital gains.
6. The first dispute before us is as to whether provisions of Section 47(v) are applicable in this case. Section 47(v) provides as under :
47(d) any transfer pf a capital asset by a subsidiary company to the holding company, if-
(a) the whole of the share capital of the subsidiary company is held by the holding company, and
(b) the holding company is an Indian company.
A plain reading of Section 47(v) reveals that the benefit under the said section can be claimed if two conditions are satisfied. There must be a transfer of a capital asset by a subsidiary company of which the whole of the share capital is held by the holding company and subsequently, secondly, the holding company is an Indian company. Prior to the transfer of the assets, SIPL was the holding company and K.B. Bank Ltd., a subsidiary company. However, there has been a dispute between the two parties, namely, Mrs. Madhavrao Scindia and Smt. Rajmata Vijayaraje Scindia. That dispute was resolved by arbitration. As a result of the arbitration award the shares of K.B. Bank held by SIPL and its nominees had to be transferred to Smt. Rajmata Vijayaraje Scindia at the value of Rs. 50 per share. Thus when the award is implemented the SIPL no longer remains the holding company of the K.B. Bank as the entire share holding are transferred to Smt. Rajmata Vijayaraje Scindia. The transfer of assets by way of exchange from K.B. Bank to SIPL is again by reason of the arbitration award. As already observed, when the award is read as a whole and given full effect, there is no room for any doubt that the exchange of the assets has not been in reality between the subsidiary company and the holding company. The assessee-company on implementation of the award ceases to be the subsidiary of the SIPL. Transfer of assets is also part of the award. When we take the substance of the award into consideration the shares of K.B. Bank get transferred to Smt. Rajmata Vijayaraje Scindia and in that process she becomes the owner of the concern and SIPL cease to be the holding company of the K.B. Bank. The transfer of assets by K.B. Bank to SIPL cannot thus be held to be a transfer by a subsidiary company to a holding company. We, therefore, concur with the view expressed by the revenue authorities that assessee is not entitled to the benefit of provisions of Section 47(v). The appeal of the assessee on this ground is accordingly dismissed.
7. Now the question to be resolved is about the computation of capital gains. That is necessary for the purposes of disposal of assessee's appeal as well as for the disposal of the appeal of the revenue. Under Section 45 of the Income-tax Act, 1961, any profits or gains arising from the transfer of capital assets effected in the previous year are chargeable to income tax under the head 'Capital gains' and the same is deemed to be the income of the previous year in which the transfer took place. Under Section 2(47) of the Income-tax Act, 1961, 'transfer' in relation to a capital asset includes the exchange of assets. Since in this case, there has been undisputedly exchange of assets between the two parties, there is a transfer of assets within the meaning of Section 45. Now the question that arises for our consideration is as to whether any profits or gains have arisen from the transfer of capital assets which would be charged to tax in the previous year. As per para 11 of the award which we have reproduced elsewhere in this order, the assets having book value of Rs. 30,21,434 belonging to SIPL were exchanged with the assets of K.B. Bank Ltd. having the equal book value of Rs.- 30,21,434. The Assessing Officer has determined the market value of the shares of SIPL which have been transferred to K.B. Bank Ltd. and has deducted therefrom the book value of the assets transferred by K.B. Bank Ltd. to the SIPL and worked out the capital gains. In our view, it is not the fair determination of the capital gains, if any, arising as a result of the transfer of the assets.
8. Section 45 of the Income-tax Act, 1961 which relates to the taxation of capital gains reads as under :
45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54D, 54E, 54F, 54G and 54H be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place.
(2) Notwithstanding anything contained in Sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of Section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of Section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body of the previous year in which the said transfer takes place and, for the purposes of Section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.
(5) Notwithstanding anything contained in Sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer, the consideration for which was determined or approved by the Central Government or the Reserve Bank of India and the compensation or the consideration for such transfer is enhanced or further enhanced by any court. Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :-
(a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government, or the Reserve Bank of India shall be chargeable as income under the head 'Capital gains' of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received; and
(b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head 'Capital gains' of the previous year in which such amount is received by the assessee.
Explanation : For the purposes of this sub-section,-
(i) in relation to the amount referred to in Clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;
(ii) the provisions of this Sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;
(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in Clause (b) shall be deemed to be the income, chargeable to tax under the head 'Capital gains', of such other person.
(6) Notwithstanding anything contained in Sub-section (1), the difference between the repurchase price of the units referred to in Sub-section (2) of Section 80CCB and the capital value of such units shall be deemed to be the capital gains arising to the assessee in the previous year in which such repurchase takes place or the plan referred to in that section is terminated and shall be taxed accordingly.
Explanation : For the purposes of this Sub-section 'capital value of such units' means any amount invested by the assessee in units referred to in Sub-section (2) of Section 80CCB.
9. In order to attract Section 45, it is necessary that profits and gains arise to the transferor as a result of transfer of assets, which subject to certain deductions, are chargeable to tax as capital gains. Thus, in order to get Section 45 attracted, it is necessary to determine as to whether any profits or gains have arisen out of the transaction of a transfer. In this case, there has been a transfer of assets by exchange. Now, as per the books of K.B. Bank Ltd., the value of the assets transferred to SIPL was Rs. 30,45,796. The assets transferred by SIPL to assessee were also having the book value of Rs. 30,45,796. Whereas the Assessing Officer has determined the market value of the assets transferred by SIPL to the K.B. Bank Ltd., the assets transferred by K.B. Bank Ltd. to SIPL have not been valued. Unless the market value of the assets transferred by K.B. Bank is also determined, it is not possible to ascertain as to whether assessee has derived any profits or gains as a result of exchange of assets. Therefore, it was necessary for the Assessing Officer to ascertain the market value of the assets transferred by SIPL as well as the market value of the assets of K.B. Bank Ltd. when market value of the assets of the concerns was available then only the Assessing Officer would be in a position to invoke Section 45 and determine the profits and gains arising as a result of transfer. After recording a finding that profits and gains have arisen to the assessee as a result of exchange of assets then the question of determination of such profits would arise. As already stated, in this case, the Assessing Officer has not determined the market value of the assets transferred by the K.B. Bank Ltd. to SIPL. As such we are unable to record a finding as to whether any profits or gains have arisen as a result of exchange of assets between to two parties. We would have in these circumstances remitted the matter back to the Assessing Officer for the purposes of determination of the market value of the assets transferred by K.B. Bank Ltd. to SIPL in order to ascertain as to whether any profits and gains arose to the assessee as a result of exchange of assets. However, we feel that it is unnecessary as even if the result of the enquiry is against the assessee, the Assessing Officer would not be in a position to ascertain the capital gains chargeable to tax under the provisions of the Act, as there is another difficulty in computation of capital gains. Under Section 48 of the Income-tax Act, 1961, the income chargeable under the head 'Capital gains' are to be computed by deducting 'from the full value of the consideration' received or accruing as a result of the transfer of the capital asset certain amounts of expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition of the assets and the cost of improvement thereto. Here comes the difficulty. The capital gains are to be computed with reference to the full value of consideration'. Thus, the full value of consideration received or accruing as a result of the transfer of the capital asset has got to be there for the purposes of taxing the capital gains. There are two expressions used under Chapter (IV)E relating to capital gains. One is fair market value of the capital assets and another is the full value of the consideration received or accruing as a result of the transfer of capital asset. A question arises as to whether the market value of the assets can be taken as full value of consideration for the purposes of computation of capital gains. In certain circumstances, the Legislature in its wisdom has permitted the substitution of the fair market value of the asset for the full value of the consideration received or accruing as a result of the transfer. These circumstances are under Section 45 itself. Subsection (2) of Section 45 permits the substitution of the fair market value of the asset in place of the full value of the consideration in the case of conversion of stock-in-trade. Sub-section (3) of Section 45 deems the value recorded in the books of account of the firm, associated or paid, as the value of the capital asset to be the full value of the consideration received or accruing as a result of the transfer. Sub-section (4) of Section 45 permits substitution of the fair market value of the asset for full value of consideration in the case of transfer of capital asset by way of distribution of assets on the dissolution of the firm or association of persons or body of individuals. Sub-section (5) of Section 45 permits some adjustment in the full value of consideration in the case of acquisition of property by the Government. Sub-section (6) of Section 45 provides for computation of capital gains in the case of repurchase of units under Sub-section (2) of Section 80CCB.
10. Whereas the Legislature has included the exchange of assets as a transfer within the meaning of Section 45, the mode of computation of capital gains in the event of exchange of assets, has, in our view, been left wide open because there is difficulty in ascertaining the full value of consideration received or accrued as a transfer of the capital asset. As already observed, the full value of consideration can be determined with reference to the fair market value under the circumstances permitted under the statute. We have already referred to Section 45 under which the full value of the consideration can be substituted by the fair market value. But since there is no provision enabling to ascertain the full value of the consideration in the case of exchange of assets, in our view, provisions of Section 45 cannot be invoked. In the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), their Lordships of the Supreme Court have held that for the purposes of invoking Section 45, the consideration received within the meaning of Section 48 must be available in order to compute the profits. When such a consideration is not available, no profits or gains can be assessed to tax under Section 45. We are, therefore, of the considered view that since the capital gains, if any, cannot be determined in the absence of any enabling provision permitting the Assessing Officer to take the market value of the assets as full value of the consideration, Section 45 cannot be invoked. We may point out that provisions of Section 52 are also inapplicable to the facts of the case as there is no allegation that the transfer was effected with the object of avoidance or reduction of liability of the assessee Under Section 54. Moreover, for the purposes of invoking of Section 52, the fair market value of the capital assets has got to be compared with reference to the full value of the consideration declared by the assessee in respect of the transfer of capital asset. Moreover, their Lordships of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 have held that Section 52 is inapplicable in the case of bona fide transfers.
11. We, therefore, hold that assessee is not liable to tax Under Section 45 in respect of the transfer of assets to SIPL effected by way of exchange of the assets.
12. As a result of our above findings, the appeal of the assessee is partly allowed and in the circumstances of the case, appeal of the revenue is dismissed.