Income Tax Appellate Tribunal - Mumbai
Yasmin Properties (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 30 April, 1993
Equivalent citations: [1993]46ITD331(MUM)
ORDER
R.P. Garg, Accountant Member
1. These two appeals are by the assessee against the orders of the CIT(A) for the assessment year 1987-88 - the first in quantum and the other against penalty levied under Section 271(1)(c) of the Income-tax Act, 1961. For the sake of convenience, both the appeals are being disposed of by this common order.
2. The assessee was a beneficiary in a private trust, known as "Lokhandwala Developers", created by Abdulla F. Furniturewala on 4-1-1982 with a corpus of Rs. 1,000. The assessee was 10 per cent beneficiary in the income as well as the corpus of the trust. On 21-7-1986, the assessee assigned/sold its beneficial interest for a sum of Rs. 15 lac to M/s. Lokhandwala Builders (P.) Ltd. The other beneficiaries also transferred their shares to them and, thereafter, the trust was dissolved on 31-7-1986. The amount received by the assessee was credited straightaway to the profit and loss appropriation account and thereafter it was transferred to general reserve. The Assessing Officer brought the said amount to tax as capital gain by allowing a cost of acquisition of Rs. 100, i.e., the amount proportionate to its beneficial interest in the trust. After noticing certain facts leading to the formation of the trust, examining the balance-sheets, the relation between the settlor, beneficiaries and the trustees, the Assessing Officer concluded that it was a well planned and stage managed affairs by the family group of Lokhandwala to avoid possible tax on capital gain and for this, he placed reliance on the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148; that of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 and that of the Kerala High Court in the case of Neroth Oil Mills Co. Ltd. v. CIT [1987] 166 ITR 418. He also levied a penalty for concealment for not declaring this income from capital gains.
3. In appeals the CIT(A) upheld that assessment as well as the penalty imposed by the assessing officer for concealment, after considering the submissions advanced by the assessee to the effect that there was no cost of acquisition of the beneficial interests held by the assessee ; that the beneficiaries could not claim to be the owners of the property of the trust; and that there was no efforts to avoid tax. The CIT(A), noticed that there was no disputes on the following facts:
(i) That the beneficial interests enjoyed by the appellant in the Trust is a capital asset as envisaged in Section 2(14) of the IT Act, 1961;
(ii) That when this beneficial interest was assigned, in favour of M/s. Lokhandwala Builders P. Ltd., there was a transfer of a capital asset;
(iii) That the said transfer took place on 21-7-1986, which falls in the previous year, relevant to this assessment year;
(iv) That since the assignment of this asset was for a consideration of Rs. 15 lakhs, there is no doubt about the 'consideration' aspect as well.
The CIT(A) held that there was a cost of acquisition in this case and, therefore, the assessee was liable to capital gain tax on the consideration received on the assignment of the beneficial interests by the assessee. He also endorsed the finding of the assessing officer that the entire affairs were stage-managed to avoid tax and, therefore, the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) was applicable in the case. The penalty imposed by the assessing officer was also upheld by the CIT(A) on the basis of the aforesaid decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) and approving that the assessee's object in not declaring the income was to avoid payment of tax. In paragraphs 19 and 20 of his order in penalty appeal, the CIT(A) observed as under:
19. It is in the light of the above that one has to examine whether the appellant concealed the particulars of income or furnished inaccurate particulars thereof. If one looks at only at the surface, it may be said that the appellant did not commit either of the default. But having seen the entire transaction as a whole, it is found to be a something different than what was projected. It was designed to be make-believe situation. It is in this sense that it. has to be said that the appellant concealed the particulars of income and also furnished inaccurate particulars thereof.
20. Coming to the explanation. I agree that there was no failure to offer an explanation in respect of any facts material to the computation of income. The explanation was also not false. But the same cannot be said about the bona fide. The manner in which the appellant has gone about the transaction clearly shows that the explanation is not bona fide. The whole exercise was an exercise in evasion of tax. The device of beneficiary trust and the transactions entered through the medium of trust was to hoodwink the department from getting to the reality of the transaction. The transactions were stage-managed with the sole purpose of reducing the tax liability. Therefore, Clause (B) of Explanation 1 would be clearly applicable.
4. The learned counsel for the assessee. Sri Gautam Doshi, submitted that there was no cost of acquisition for the interest in the trust in the hands of the assessee. He further submitted that the previous owner had no such interest in the trust. He has only donated a sum of Rs. 1,000 for the creation of the trust. Section 49(1)(iit)(d) could apply to the trustees and not to the beneficiaries. He referred to Section 3, Section 58 and Sections 63 to 67 of the Trust Act. Relying upon the decision of the Tribunal in the case of Gopaldas T. Aggarwal v. ITO [1983] 6 ITD 451 (Bom.) the learned counsel for the assessee submitted that the assessee could not be charged to tax under the head 'capital gains' on assignment of its interest in the trust. He further submitted that the decisions of the Supreme Court in the cases of R.K. Palshikar (HUF) v. CIT [1988] 172 ITR 311 and A.R. Krishnamurthy v. CIT [1989] 176 ITR 417 relied upon by the CIT(A) in his order, would not be applicable in the present case, as there cannot be any creation out of any beneficial interest from the legal owners.
5. As regards the penalty, he submitted that all the material relevant for the computation of the income of the assessee were furnished to the assessing officer and, therefore, it cannot be said that the assessee was guilty of concealment or having furnished inaccurate particulars thereof. The trust was created on 4-1-1982 and is being assessed as such since then and it has not been declared as an invalid trust. The claim that the consideration received by the assessee on the assignment of its right was a genuine claim and merely because it was not accepted by the assessing officer, he submitted, the same does not lead to the inference that the assessee has concealed its income or furnished inaccurate particulars thereof.
6. The learned Departmental Representatives, Sri M.N. Bajpai, on the other hand, submitted that the interest of the assessee benefieiary was a property and this fact is not in dispute. That interest has been created by the settlor by settling a sum of Rs. 1,000 and that was the cost of acquisition for settling the interest. In these circumstances, he submitted that it cannot be said that there was no cost of acquisition in the present case. He further submitted that there might not be any cost of acquisition insofar as the assessee was concerned, but as per the provisions of Section 49(1)(iii)(d), the cost of acquisition in the hands of the previous owner who had gifted the property to the assessee has to be taken as cost to the assessee. Relying upon the two decisions of the Supreme Court, referred to in the order of the CIT(A), he submitted that capital gain was chargeable in the present case. As regards the decision of the Tribunal in the case of Gopaldas T. Aggarwal (supra), relied upon by the assessee, the learned Departmental Representative submitted that the said case has been considered by the Tribunal in the case of Smt. Kuniitxm S. Shah and distinguished in its order in [IT Appeal No. 4874 (Bom.) of 1986 dated 29-10-1990. This decision, he submitted, covers the case of the assessee wherein it was held that capital gain has been rightly charged. Referring to the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra), the learned Departmental Representative submitted that it was a clear case of planning and stage-management of the affairs of a family group of Lokhandwala to avoid capital gains and, therefore, the assessee was guilty of concealment for not disclosing the capital gain and paying the tax thereon.
7. We have heard the parties and considered their rival submissions. Section 45 of the Act provides for the chargeability of profits and gains arising to an assessee on transfer of capital asset. It is called as income under the head "capital gains". Section 48 of the Act provides for the mode of computation and deductions. It states that income chargeable under the head 'capital gain' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset,-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto.
Both the provisions of Sections 45 and 48, as held by the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, form an integral code and if either of the two is not applicable, there will be no charge to capital gain tax. There is no dispute in this case that the assessee's interest in Lokhandwala Developers Trust is a capital asset; that it is a transferable asset and was transferred by the assessee to Lokhandwala Builders Private Limited; and that the assessee had earned profits and gains as a result of such transfer. Therefore, the provisions of Section 45 of the Act apply. As regards Section 48 of the Act, also, there is no dispute that the transfer was for a consideration and its full value is Rs. 15 lac. The dispute is only with regard to the cost of acquisition.
8. Except for certain eventualities, the term "cost of acquisition" is not defined in the Act. Its general meaning which is understood in the commercial parlance is the amount paid or agreed to be paid in money or money's worth by the assessee for the transfer of the asset. The assessee had not paid any money or incurred any cost for acquiring the beneficial interests in the trust. We have, therefore, to turn to these eventualities where the statute provides for the cost of acquisition. These are stated in Sections 49 and 55 of the Act. Section 49(1) of the Act, provides that where the capital asset became the property of the assessee-
(i)...
(ii) under a gift or will;
(iii) (a)...
(b)...
(c)...
(d) under a transfer to a revocable or an irrevocable trust, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
Explanation, below Section 49(1) of the Act provides that the "Previous owner" means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in Section 49(1) of the Act. According to the revenue, the previous owner in this case is the settlor who had incurred a cost of Rs. 100 (10 per cent of the settled amount of Pis. 1,000) for granting the beneficial interest to the assessee and, therefore, this was the cost of acquisition of the property assigned/ sold by the assessee for a sum of Rs. 15 lac. In our opinion, the revenue is right in its approach.
9. When a trust is created, the ownership over the property is split into two: (i) the legal ownership which is acquired by and rests with the trustee; and (ii) the beneficial ownership which is acquired by the beneficiary by virtue of transfer under the trust and which is enjoyed by him. It is very important and curious instance of dual ownership which allows the separation of power of management and the rights of enjoyment. The former is owned by the trustee and is a matter of form and nominal and the latter is owned by the beneficiary and is a matter of substance and reality. It is by fiction of law that the trustees treated as the full owner of the property against third person but as between the trustees and beneficiaries, the property belong to the latter and not to the former. The trust ownership and beneficial ownership are separate and independent of each other in their destination and disposition both. Either of the two may be transferred or encumbered without affecting the other in any way. From the above, it is evident that the capital asset (beneficial interest in the trust) became the property of the assessee under a transfer of the trust within the meaning of Section 49(1)(iii)(d) of the Act and consequently, the cost of acquisition shall be the cost at which the settlor had acquired it. The settlor had the proprietory rights over the sum of Rs. 1,000 which was settled on trust. Its cost of acquisition was, therefore, Rs. 1,000 in the hands of the previous owner. This cost of acquisiton obviously includes the cost of rights therein, i.e. the legal and beneficial. It is like the cost of land which was held to include the cost of mining rights under the lease by the Supreme Court in the case of R.K. Palshikar (HUF) (supra) and also in A.R. Krishnamurthy's case (supra). Therefore, the cost acquisition of the property in the sum of Rs. 1,000 included the cost of acquisition of the beneficial rights granted to the assessee.
10. The learned counsel for the assessee relied on the decision of the Supreme Court in the casepf B.C. Srinivasa Setty (supra). In that case, the question was whether the transfer of the goodwill can give rise to a capital gain and the Court held that none of the provisions contained in Section 45 of the Act, the charging Section and Section 48, the computation Section, suggests the inclusion of the assets under the head "capital gain" in the acquisition of which, no cost at all could be conceived. This decision was considered by the Court again in the case of A.R. Krishnamurthy (supra) and distinguished the same in the following words:
Goodwill generated in an individual's business was held to be an asset in which no cost element can be identified or envisaged. It was also held that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to determine the same. The third reason for holding that the goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 of the Act was that it is impossible to determine its cost of acquisiton. None of the three reasons given by this Court in B.C. Srinivasa Setty's case [1981] 128 ITR 294 are applicable in the present case. We have held that the cost of acquisition of leasehold rights can be determined. The date of acquisition of the right to grant lease has to be the same as the date of acquiring the freehold rights. The ratio of B.C. Srinivasa Setty's case [1981] 128 ITR 294 (SC) is thus not attracted to the question involved in the present case.
11. In the case of A.R. Krishnamurthy (supra), the assessee purchased two pieces of land in the year 1966 for a price of Rs. 27,260. By a lease-cum-licence deed, a mining lease was granted in favour of the lessee for a period of ten years on the payment of a sum of Rs. 5 lac as premium or salami and a royalty of Rs. 12 per 100 cubic feet of clay extracted subject to a minimum of Rs. 60,000 per year. The assessee's contention that there was no cost of acquisition for the rights of limited enjoyment transferred by the grant of the lease and that the same was not determinable and the computation provision would not apply in view of the decision of the Supreme Court in the case of B.C. Srinivasa Setty (supra) was not accepted by the Supreme Court. The Court held as under:
If a transfer of a capital asset in Section 45 of the Act includes grant of a mining lease for any period, then, obviously, the cost of acquisition' of the land would include the 'cost of acquisition of the mining right under the lease. Undisputely, the grant of a lease being a transfer of an asset, there is no escape from the conclusion that there is a live nexus between the 'cost of acquisition' of the land and the rights granted under the lease. The amount of Rs. 27,260 paid by the assessee was not only the cost of acquiring the land but also of acquiring a bundle of rights in the said land including a right to grant lease. There is thus no force in the contention of the learned counsel that, conceptually, there is no 'cost of acquisition" which is attributable to the right of limited enjoyment transferred by the grant of the lease. So far as the apportionment of the cost of acquisition is concerned, it is a question of fact to be determined by the Income-tax Officer in each case on the basis of evidence. The determination of the cost of the right to excavate clay in the land in terms of money may be difficult but is none the less of a money value and the best valuation possible must be made.
12. In similar circumstances, the Tribunal, in the case of Smt. Kuntiben S. Shah (supra), held that there was cost of acquisition and the assessee would be chargeable to capital gain on assignment of her right in the trust. The Tribunal observed therein :
The point is that in terms of Section 49, the cost of acquisition has to be deemed to be the cost for which the settlor would have acquired it. Read with Explanation below Section 49(1) which is inserted by Finance Act. 1965, with effect from 1-4-1965, the previous owner of the property would be the last person who acquired it by any mode other than those specified in Section 49(1). Provisions of Section 47 would not be applicable to the release or sale of November/December 1982. In our opinion, therefore, it is a clear case of capital asset being transferred for consideration. Long term capital gains have been rightly charged.
In this case, the earlier question of the Tribunal in the case of Gopaldas T. Aggarwal (supra), relied upon by the assessee, was also considered and distinguished by observing as under:
The assessee's reliance on Tribunal's decision in Gopaldas T. Aggarwal v. ITO [1983] 6 ITD 451 (Bom.) is also not valid because in that case, the transfer was that of life interest which devolved on the assessee consequent upon the death of his wife and which in turn had equal shares devolved on the assessee and his wife on death of assessee's mother. The point is that the subject matter in that case was life interest of the person who was selling or releasing, though that life interest devolved on the successive deaths of two erstwhile life tenants.
13. In the light of the above discussion, we do not find any force in the contention of the assessee that there was no cost of acquisition of beneficial interest acquired by the assessee in the trust and assigned/sold by him; or that the settlor, as the previous owner, had no interest in the property settled on trust granting beneficial rights to the assessee. We also do not find any force in the alternate contention of the assessee that the proportionate amount equivalent to the value of the asset of the trust be allowed as 'cost of improvement as, in our opinion, no such cost was either incurred or borne by the assessee or the previous owner. In this view of the matter, we hold that the capital gain was rightly assessed in this case.
14. As regards the penalty, we find that it was a bona fide claim made by the assessee and all the facts relating thereto and material to the computation of the assessee's total income have been disclosed by the assessee. Therefore, it was neither a case of concealment nor the case of deemed concealment within the meaning of the provisions of Explanation 1 to Section 271(1)(c) of the Act. The only reason on the basis of which penalty has been levied by the Assessing Officer and upheld by the first appellate authority is that on consideration of the transaction as a whole, it is evident that it was a case of design and make-belief that the explanation could not be said to be bona fide as the transaction entered through the medium of trust was to hoodwink the department and to reduce the tax. We do not think so. The trust is being assessed in regular way for the past many years. It was not held an invalid one and was being acted upon by the parties. It was created by a legal document and the department cannot be allowed to come forward and say that the trust be disregarded. The decision of the Supreme Court in the case of McDowell &, Co. Ltd. (supra) comes into play when the terms of the deed are not clear and in view of the later decision of the Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479, the legal effects are to be given to the transaction. If the department's case is that the trust was invalid, then the settlor is to be assessed and visited with penalty and not the assessee. This is, therefore, not a fit case for levying penalty for. concealment, but a case of bona fide claim made by the assessee which did not find favour with the department. In these circumstances, neither the main provision of Section 271(1)(c) nor the Explanation 1 thereunder would not be applicable. We, accordingly, delete the penalty levied and sustained by the departmental authorities.
15. In the result, the quantum appeal is dismissed while the penalty appeal is allowed.