Income Tax Appellate Tribunal - Madras
Mrs. Umayal Ramanathan vs Income-Tax Officer on 31 August, 1989
Equivalent citations: [1989]31ITD390(MAD)
ORDER
T.C.A. Ramanujam, Accountant Member
1. In this appeal the assessee challenges the assessment of a sum of Rs. 3,78,409 as deemed dividend Under Section 2(22) (e) of the IT Act, 1961 in the assessment year 1979-80. Objection is also taken to the computation of capital gains.
2. The assessment for 1979-80 was originally completed on 28-11-81 on a total income of Rs. 1,365. The I.T.O. found that the assessee was a substantial shareholder in M/s Indo Agencies (Pharma) Private Limited, Madras, and she had taken loans from the company totalling Rs. 3,78,409. This fact was not disclosed in the return filed originally. The I.T.O. reopened the assessment Under Section 147(a) and brought the sum of Rs. 3,78,409 to tax as deemed dividend Under Section 2(22)(e) inasmuch as the company was possessed of accumulated profits exceeding this amount. The assessee agitated to the reopening of the assessment and also the computation of the figure of deemed dividend. The GIT(A) held that there was failure to disclose the relevant particulars at the time of completion of the original assessment and, therefore, the reopening was valid. As regards the objection to the inclusion of the sum of Rs. 3,78,409 as deemed dividend, he held that the "accumulated profits" available were to the extent of Rs. 7,83,312 up to 30-6-79 and this supported the finding that the loan taken was assessable as deemed dividend.
3. In the appeal before us, the assessee again urged that the reopening is bad in law. According to the learned counsel for the assessee, the provisions of Section 147(a) were not attracted to the facts and circumstances of the case. Adverting to the merits of the case, the learned counsel argued that the company from which loans were taken did not possess enough accumulated profits and the amount could not be treated as dividend Under Section 2(22)(e) of the Act. He also referred to the proceedings taken against M/s Indo Agencies (Pharma) Private Ltd. and contended that the levy of additional super-tax Under Section 104 and the assessment of deemed dividend on the shareholder amounted to double taxation of the same amount.
4. The learned departmental representative, on the other hand, referred to the facts mentioned in the order of the C.I.T.(A) pointing to the failure of the appellant to disclose the material particulars relevant to the completion of the assessment 1979-80 and urged that the reopening was validly done. As regards the argument about double taxation, the learned departmental representative brought to our notice the fact that the order Under Section 104 passed against M/s Indo Agencies (Pharma) Private Ltd. was cancelled by the Appellate Tribunal and, therefore, the argument did not survive. He also supported the findings of the C.I.T.(A) about the quantum of deemed dividend.
5. We find that the original return in this case was accompanied by dividend warrants; but no other particulars relating to the account of the assessee with M/s Indo Agencies (Pharma) Private Ltd. and the shareholding therein were disclosed. The assessee held shares to the extent of 93% of the paid up capital of the company. Neither this fact nor the fact of loan came to be disclosed. These are relevant and material particulars. The reopening is, therefore, valid in law. It is noteworthy that it was only from a scrutiny of the records of the company that the I.T.O. came to know about the loan transactions.
6. On the question of the company having accumulated profits, elaborate particulars were furnished before us. It was argued that the figure of accumulated profits taken by the I.T.O. included amounts other than profits. The company was only incurring losses throughout. In the year ending 30-6-75 it received bonus shares of the value of Rs. 2,20,700/- from Hochest Pharma Ltd. and this amount was taken to the Profits and Loss Appropriation Account. In the year ending 30-6-71 the company was again in receipt of bonus shares of the value of Rs. 4,39,400/- from the same company. These two amounts represented the face value of the bonus shares and did not mean realisation of any share. They did not represent profits. The assessee was not a trader in shares. Whatever shares were held represented only investment and there was no closing stock worth the name. The company's business was in drugs and pharmaceuticals and even this business was stopped in 1957. The ultimate position about the accumulated profits in this case is summarised in the statement furnished before us, which is reproduced below:-
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Accounting Assessment General Profit Amounts Closing
year ending Year Reserves for the other than balance
30th June opening year profits
balance
Rs. Rs. Rs.
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1970-71 1971-72 (3,02,179) 41378 439400 177599
Loss
1971-72 1973-74 1,77,599 100615 - 278214
1972-73 1974-75 2,78,214 13004 - 291222
1973-74 1975-76 2,91,222 17572 - 308794
1974-75 1976-77 3,08,794 (18376) 220700 511118
Loss
1975-76 1977-78 5,11,118 6220 - 517338
1976-77 1978-79 5,17,338 29,631 - 546969
1977-78 1979-80 5,46,969 (30,397) - 516572
Loss
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It will be obvious from the above that but for the inclusion of the two sums of Rs. 4,39,400 h the year ending 30-6-71 and Rs. 2,20,700 in the year ending 30-6-75, the net result of the computation would have been a negative figure and there is no profit available to support the advance to the shareholder. The receipt of bonus shares will not amount to profits in the normal sense as understood for applying the provisions of Section 2(22)(e) of the Act. Since there is no accumulated profits available without taking these two figures into account, it is obvious that there can be no question of the loan being deemed to be a dividend. While the reopening is upheld, the treatment of the sum of Rs. 3,78,000 as deemed dividend will have to be annulled. The assessee succeeds on this issue.
7. The next issue agitated in this appeal relates to the computation of capital gains. The appellant sold a gold necklace for Rs. 90,000. In the return filed in response to the notice Under Section 148, she offered a sum of Rs. 28,200 as capital gains on the sale. She, however, stated that the return was under protest and that the sale of the necklace was made to repay a loan taken from the Bank of Madura. The loan amount was discharged on 21-4-78. According to the appellant, no capital gains arose. The I.T.O. overruled the objection and recomputed the capital gain at a figure of Rs. 78,000, the fair market value as on 1-1-64 being Rs. 12,000. The C.I.T.(A) agreed with the conclusions reached by the I.T.O.. He observed that liability to capital gains arose regardless of the motive for which the transfer was effected. He rejected the argument that the loan due to the bank should be added to the cost.
8. In the appeal before us arguments were advanced to the effect that the loan from the bank should be deducted in working out the capital gains. Reliance was placed on two orders of the Tribunal in N.MA. Mohammed Haneefa v. ITO [1987] 23ITD 409 (Mad.) and N. Vajrapani Naidu v. ITO [1989] 28 ITD 459 (Mad.) in support of this plea. The learned departmental representative rebutted these arguments and supported the orders of the I.T.O. and the conclusions of the C.I.T.(A).
9. We are unable to accept the argument of the learned counsel for the appellant. The I.T. Act is a code by itself and computation has to be done as per the definitions and terms used under the I.T. Act. Profits arising from the transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head "capital gains" Under Section 45. Under Section 48 capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer the following amounts, namely -
(a) expenditure in connection with the transfer;
(b) the cost of acquisition of the capital asset;
(c) and the cost of any improvement thereto Section 45 is a charging provision and Section 48 provides for the basis of computation. The expression "full consideration" refers to the price bargained for by the parties, the whole price without any deduction whatsoever. This section deals not merely with sale but with all other types of transfers like exchange where the consideration was other than money. The entire consideration accrued only to the vendor. If it is argued, as was in this case, that the bank had an overriding title over the sale proceeds, then also it will not detract from the computation of capital gains inasmuch as what is sold is the entire property and if something is to be deducted from the full value of consideration received, then the identical amount will have to be deducted from the cost also. What is deductible from the full value of the consideration is only the cost and nothing else apart from the expenditure incurred in connection with the transfer of the cost of improvement. The term "cost" means what is laid out or suffered to obtain anything. Section 48 provides for deduction from the full value of the consideration the cost of acquisition of the asset. If by pledging or mortgaging the property some part of the interest in the same is taken as transferred, then there should be a diminution in the cost as well as in the full consideration for the property and the one will offset the other. It is true that property is a bundle of rights and the pledgee or the loanee or the mortgagee gets an interest in the property. That may not be a ground for subtracting the loan value from the full consideration due to the assessee. The doctrine of overriding title and the concept of real income cannot be imported to subtract only one part of the transaction to defeat the claims of the Revenue in the computation of capital gains. If the loan amount is to be deducted from the full value of the consideration, then logically there should be an assessment to capital gains at the time the loan transaction was entered into inasmuch as some part of the interest is transferred. There is no loophole in the scheme of capital gains taxation and the arguments of the type advanced before us will only mean creating loopholes where none exists in the law. The ruling of the Courts in the following cases are all categorical in explaining what is deductible in arriving at the capital gains assessable under the Act:-
(a) CIT v. A. Venkataraman [1982] 137ITR 846 (Mad.)
(b) CIT v. V. Indira [1979] 119 ITR 837 (Mad.)
(c) Ambat Echukutty Menon v. C/T[1978] 111 ITR 880 (Ker.)
(d) Vashist Bhargava v. ITO [1975] 99 ITR 148 (Delhi) There is no conflict between the income-tax law and the Transfer of Property Act in working out the computation of capital gains. We uphold the computation made by the I.T.O. in this case.
10. In the result, the appeal is partly allowed.
Per Shri D.S. Meenakshisundaram, Judicial Member - I agree with my learned Brother Shri T.C.A, Ramanujam in the order proposed by him on both the points. However, I would like to add a few words on the second issue relating to the computation of capital gains on the sale of a gold necklace by the appellant for Rs. 90,000. The facts relating to this issue are fully set out in paragraph 7 of the order of my learned Brother.
2. The decision of the Madras High Court in F. Indira's case (supra) came up for consideration before a Full Bench of the Madras High Court in Smt. S. Valliammai v. CIT [1981] 127 ITR 713. His Lordship Mr. Justice Ramanujam delivering the judgment of the Full Bench held as follows at page 727 of the reports: -
In the light of what we have staled above, we are not inclined to accept the assessee's contention that the removal of any burden, encumbrance or obligation on the asset will amount to an addition to the asset as such. Nor are we inclined to hold that any expenditure resulting in any addition to the value of the asset has to be treated as the cost of making any addition to the asset as such.
In the view we have taken, no exception could be taken to the decision in CIT v. V. Indira [1979] 119 ITR 837 (Mad.). It neither conflicts with the decision in CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319 (Cal.) nor does it require reconsideration.
(Emphasis supplied by us) The aforesaid ratio of this Full Bench decision shows that the repayment of the loan to the bank out of the sale proceeds by the appellant would not qualify for deduction under Section 48 of the Act either as the cost of acquisition or as the cost of any improvement of addition to the said asset. The two decisions of the Appellate Tribunal in N.M-A, Mohammed Haneefa's case (supra) and N. Vajrapani Naidu's case (supra) relied on by the assessee's learned counsel, run counter to the ratio of this Full Bench decision of the Madras High Court and are, therefore, of no avail to the appellant. No doubt in N. Vajrapani Naidu's case (supra) at 464, this Full Bench decision of the Madras High Court is referred to in para 11 and is distinguished. But we find ourselves unable to agree and follow the line of distinction sought to be made out in Vajrapani Naidu's case (supra). We would, therefore, respectfully follow this Full Bench decision of the Madras High Court in Smt. S. Valliammai's case (supra) and confirm the computation of capital gains as made by the departmental authorities,
3. In the result, the appeal is partly allowed as held in the order of my learned Brother.