Kerala High Court
Commissioner Of Income-Tax vs H.H. Maharani Sethu Parvathi Bayi (By ... on 26 September, 1997
Equivalent citations: [1998]232ITR678(KER)
Author: N. Dhinakar
Bench: N. Dhinakar
JUDGMENT K.K. Usha, J.
1. ITR Nos. 77 of 1992 and 37 of 1990 are at the instance of the Revenue and ITR No. 48 of 1996 is at the instance of the assessee, even though, in the statement of case, it is wrongly shown that the applicant was the Commissioner of Income-tax, Trivandrum. ITR No. 77 of 1992 arises out of an order passed by the Income-tax Appellate Tribunal, Cochin Bench, in M.P. No. 25 (Coch.) of 1986 in ITA Nos. 377 and 416 (Coch) of 1982. ITR No. 37 of 1990 arises out of an order of the Income-tax Appellate Tribunal, Cochin Bench, in M. P. No. 33/Coch. of 1987 in M. P. No. 25/Coch of 1986 in ITA Nos. 377 and 416/Coch of 1982. ITR No 48 of 1996 at the instance of the assessee also arises from the above order. The relevant assessment year is 1976-77. The following are the questions raised for the opinion of this court under Section 256(2) of the Income-tax Act, in ITR No. 77 of 1992 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that there is a mistake apparent from the record and in rectifying its order ?
2. Whether, on the facts and in the circumstances of the case, does the case of the Supreme Court in Sunil Siddhartkbhai v. CIT [1985] 156 ITR 509 have direct application to this case ?
3. Whether, on the facts and in the circumstances of the case, should not the Tribunal have pierced the veil and considered whether the transaction was a ruse or device to evade tax ?"
2. The questions referred for opinion of this court in ITR No. 37 of 1990 under Section 256(1) of the Income-tax Act are as follows :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in dismissing the miscellaneous petition filed by the Revenue ?
2. Whether, on the facts and in the circumstances of the case, should not the Tribunal have recalled its order on the miscellaneous petition of the assessee and remitted the case to the Income-tax Officer to be considered afresh in the light of the Supreme Court decision and the facts highlighted in the reference application ?"
3. In ITR No. 48 of 1996, the questions referred for the opinion of this court under Section 256(2) are as follows :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal having dismissed a reference application filed at the instance of the Commissioner of Income-tax numbered as RA No. 143/Coch. of 1987 in their order dated September 9, 1989, is right in referring the questions at the instance of the Commissioner of Income-tax as brought out in the second reference application ?
2. Whether, on the facts and in the circumstances of the case, it was open to the Commissioner of Income-tax to file a fresh reference application for a second time modifying the questions already requested by him in RA No. 143/Coch of 1987 which was dismissed by the Tribunal by its order dated September 9, 1989 ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the questions of law as referred by the Commissioner of Income-tax in R. A. No. 39/Coch of 1988 have arisen only when their order in M. P. No. 33/Coch. of 1987 was passed and not when they passed order in MP No. 25/Coch of 1986 dated May 6, 1987, in ITA Nos. 377 and 416/Coch of 1987 ?"
4. The relevant facts are as follows : During the previous year relevant to the assessment year 1976-77, the assessee had transferred 4,000 shares of Nirlon Synthetic Fibres and Chemicals Ltd., by way of share capital to a partnership firm by name Padma Gowri in which the assessee was a partner. The value of the said shares was shown as Rs. 10 lakhs, that is, at the rate of Rs. 250 per share. The Income-tax Officer took the view that since the assessee had transferred 4,000 shares as share capital in the firm, she was liable for capital gains tax. Reliance was placed on the decision of this court in A. Abdul Rahim v. CIT [1977] 110 ITR 595 [FB]. The Income-tax Officer, while applying the provisions of Section 52(2) of the Income-tax Act, valued the shares at Rs. 544 per share as against Rs. 250 the value shown by the assessee. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals) who allowed the appeal deleting a sum of Rs. 32,64,945 added as long-term capital gains. The first appellate authority, following the dictum laid down by the Supreme Court in K. P. Varghese v. ITO [1981] 131 ITR 597, took the view that the provisions of Section 52(2) cannot be applied to the facts of the case in the absence of a finding by the Income-tax Officer that the appellant did receive any amount as consideration in excess of what was mentioned in the documents. But, the first appellate authority deleted the entire amount without limiting the deletion to the amount in excess of Rs. 250 shown as the share value by the assessee.
5. ITA No. 37/Coch of 1982 was filed by the assessee before the Tribunal challenging the order passed by the first appellate authority. The Revenue also filed an appeal as ITA No. 416 Coch of 1982. These appeals were heard together and disposed of by a common order dated February 18, 1984. The Tribunal took the view that the Commissioner of Income-tax (Appeals) had committed an error in deleting the entire levy of capital gains tax. Following the ratio of the decision of this court in A Abdul Rahim v. CIT [1977] 110 ITR 595 [FB], the Tribunal took the view that tax can be levied only on the basis of the stated consideration of Rs. 250 per share and not on the basis of the market value as determined by the Income-tax Officer. The tribunal was of the view that the appeal by the assessee was really incompetent as the entire levy had been set aside by the Commissioner of Income-tax (Appeals). But accepting the request made on behalf of the assessee, the Tribunal was inclined to treat the appeal filed by the assessee as cross-objection for the purpose of enabling the assessee to agitate the question as to whether transfer of the share to the firm can attract capital gains tax. Thus, the appeal filed by the Department was allowed and the appeal filed by the assessee was dismissed.
6. The assessee, thereupon, filed MP No. 25/Coch of 1986 under Section 254(2) of the Income-tax Act, 1961, for rectifying the order passed by the Tribunal on the ground that it suffered from a mistake apparent on the record. The contention raised by the assessee was that the Supreme Court had held in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 that the transferor of assets to a firm as capital, received no consideration within the meaning of Section 48 and consequently there could be no profit or gain accrued to the assessee under Section 45 in order to make her liable to pay capital gains tax. The assessee prayed for recalling the order passed by the Tribunal and rectifying the mistake. Even though the above prayer was opposed by the Revenue, the Tribunal allowed the petition. The order was recalled and it was held that no capital gains arose out of the transfer of shares of the assessee to the firm, Padma Gowri, and the appeal filed by the assessee, which was treated as cross-objection by the Tribunal, was allowed. The order in M. P. No. 25/Coch of 1986 does not contain a statement that the appeal filed by the Revenue was dismissed.
7. The Revenue, thereupon, filed M. P. No. 53/Coch of 1987 in M. P. No. 25/Coch of 1986 seeking to recall the order passed by the Tribunal on May 6, 1987, in M.P. No. 25/Coch of 1986 and to pass suitable orders directing the Income-tax Officer to go into the real nature of the transaction and find out whether the interpolation of the firm, Padma Gowri, was only a device or ruse for evading liability to income-tax on capital gains and to pass orders accordingly. In this petition, the Revenue placed reliance on the observations contained in the last but one paragraph of the decision of the Supreme Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. The relevant portion of the judgment reads as follows (at page 523) :
"We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to the partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the income-tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The Income-tax Officer will be entitled to consider all the relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the Income-tax Officer enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth."
8. It was stated by the Revenue in its petition that immediately after the transfer of the 4,000 shares by the assessee to the firm, Padma Gowri, there was a further transfer of those very same shares from the assessee on December 26, 1975, to the joint names of the assessee, Shri Padmana-bha Iyer and Bhagavathi Investments (Private) Ltd., Madras. These 4,000 shares were later transferred from the joint names of the above persons to Bhagavathi Investments (P.) Ltd., on March 24, 1976, in lieu of which, the assessee was allotted 10,000 shares of Rs. 100 each of Bhagavathi Investments (P.) Ltd. According to the Revenue, the above transactions would clearly show that the real transfer of shares in question was actually made to Bhagavathi Investments (P.) Ltd., by originally transferring the ownership to the joint names of the assessee, Shri Padmanabha Iyer and Bhagavathi Investments (P.) Ltd., and the name of the firm, Padma Gowri, to whom the shares were shown to have been transferred was interpolated to evade tax on the capital gain arising as a result of this transfer. According to the Revenue, the Tribunal should not have allowed the application for rectification submitted by the assessee without remitting the matter back to the Income-tax Officer to find out whether the transfer was not a device or ruse to avoid capital gains. The Revenue contended that the order passed by the Tribunal in M P. No. 25/Coch. of 1986 on May 6, 1987, is vitiated by a clear mistake apparent from the records and it has to be recalled and suitable orders as prayed in the petition, should be passed.
9. The miscellaneous petition filed by the Revenue was dismissed by the Tribunal by merely observing that at the time of hearing, it made an enquiry as to whether the firm in which capital contribution has been made, still continued and the answer was in the affirmative. Since the firm was still in existence and no other material was brought on record to hold that the transaction of contribution of capital was a ruse or device, there was no apparent mistake in the order dated May 6, 1987, which has to be rectified.
10. It is contended by learned standing counsel for the Revenue that the Tribunal has committed a serious error in rejecting the petition filed by the Revenue and also in allowing the petition filed by the assessee. The mistake pointed out by the assessee in her petition was non-consideration of the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC). While the above contention was entertained, the Tribunal should have considered the entire judgment of the Supreme Court. The last but one paragraph of the judgment would clearly show that an enquiry into the nature of the transaction of transferring of the personal assets to the partnership firm was necessary and that only in cases where the authorities are satisfied that the transfer by the partner of his personal assets to the partnership firm represents a genuine attempt to contribute to the share capital of the firm and that there was no unreal transaction involved, it can be held that the transfer of its shares to the partnership firm would not fall within the contemplation of Section 48 of the Income-tax Act and such transfer can be taken outside the scope of Section 45 of the Act. In the present case, according to learned counsel, there is evidence to show that within a few days of the transfer of the 4,000 shares to the firm, Padma Gowri, the very same shares were transferred by the assessee to the joint names of the assessee, Sri Padmanabha Iyer and Bhagavathi Investments (P.) Ltd., and within a few months' time, the very same shares were transferred to Bhagavathi Investments (P.) Ltd., as consideration for allotment of 10,000 shares of Rs. 100 each of Bhagavathi Investments (P.) Ltd., to the assessee. Learned counsel would contend that this is a clear case where the alleged transfer to the firm as assessee's capital, was brought in only for the purpose of escaping capital gains tax.
11. We find merit in the contention raised on behalf of the Revenue. One of the examples given by the apex court in that portion of the judgment which is quoted above, namely (page 523) : "whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it" would squarely apply to the case of the assessee if the allegation made by the Revenue in its miscellaneous application is correct. We are of the view that the Tribunal should have enquired into the real nature of the transaction in the light of the observations contained in the judgment of the Supreme Court before it allowed the rectification petition and recalled the original order by holding that the transfer of the asses-see's share to the partnership firm did not fall within the contemplation of Section 48 of the Income-tax Act and that her case falls outside the scope of Section 45. The Tribunal has committed an error in allowing the petition for rectification without such enquiry. So also, we find that the Tribunal rejected the miscellaneous petition filed by the Revenue without considering the contentions raised in its application. The Tribunal was satisfied with an answer in the affirmative to the question whether the firm was still in existence. The Tribunal has observed that no material was brought on record to hold that the transaction of contribution was a ruse or a device. The Revenue has made a clear statement in its petition as to the transactions relating to the 4,000 shares which followed immediately after the transfer to the firm on November 15, 1975. When these materials were placed before the Tribunal, it was the bounden duty of the Tribunal to have examined the same by making appropriate enquiry. We are of the view that the Tribunal has failed in its duty to examine the materials placed before it by the assessee. The rejection of the miscellaneous petition filed by the Revenue in the manner in which it was done by the Tribunal cannot be justified.
12. Learned counsel for the assessee pointed out that this court had occasion to consider the genuine nature of the transaction relating to the transfer of the shares in the judgment in I.T.R. No. 180 of 1984 and, therefore, the questions raised in the reference at the instance of the Revenue are only academic. We have gone through the judgment of this court in I. T. R. No. 180 of 1984. It arose in a gift-tax assessment. The question which was referred for the opinion of this court was whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the firm, Padma Gowri, was a separate entity and consequently contribution towards share capital in the form of shares in Nirlon Synthetic Fibres and Chemicals Ltd., Bombay, amounted to a transfer and hence attracted the provisions of the Gift-tax Act. This court answered the question in the affirmative against the assessee and in favour of the Revenue. We do not find that the issue raised in these references were involved in I. T. R. No. 180 of 1984. This court had no occasion to consider the nature of the transactions relating to the transfer of the shares to the firm and later in favour of Bhagavathi Investments (P.) Ltd. What was brought to gift-tax was the difference between the value of the shares at the market rate and the rate shown by the assessee. We do not find that the above judgment has any relevance in deciding the issue involved in these references.
13. The Tribunal has to consider M. P. No. 25 (Coch) of 1986 and M. P. No. 33/Coch of 1987 afresh in the light of the observations contained in this judgment by making necessary enquiry as contemplated by the judgment of the Supreme Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509.
14. As far as the questions referred in I. T. R. No. 48 of 1996 are concerned, we find that the second reference was made pursuant to a direction issued by this court in 0. P. No. 7949 of 1990.
15. We answer question No. 3 in the affirmative, in favour of the Revenue and against the assessee. In the light of the above, it is unnecessary to answer questions Nos. 1 and 2.
16. In I. T. R. No. 37 of 1990, we answer question No. 1 in the negative, in favour of the Revenue and against the assessee. Question No. 2 is answered in the affirmative, in favour of the Revenue and against the assessee.
17. We decline to answer the questions referred in I. T. R. No. 48 of 1996.
18. A copy of this judgment under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.