Income Tax Appellate Tribunal - Agra
Kiran Garg, Aligarh vs Department Of Income Tax on 17 October, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
AGRA BENCH, AGRA
BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER AND
SHRI P.K. BANSAL, ACCOUNTANT MEMBER
ITA No.29/Agr/2009
Asst. Year: 1999-2000
D.C.I.T. Circle-1, Aligarh. Vs. Smt. Kiran Garg,
C/o. Prag Oil Mills Limited,
Ramghat Road, Aligarh.
(PAN : AAVPG 1199 B).
ITA No.30/Agr/2009
Asst. Year: 1999-2000
D.C.I.T. Circle-1, Aligarh. Vs. Smt. Shobha Agrawal,
C/o. Prag Oil Mills Limited,
Ramghat Road, Aligarh.
(PAN : AAUPA 2115 L).
ITA No.31/Agr/2009
Asst. Year: 1999-2000
D.C.I.T. Circle-1, Aligarh. Vs. Shri Praveen Narayan Agrawal,
C/o. Prag Oil Mills Limited,
Ramghat Road, Aligarh.
(PAN : AAUPA 2116 K).
ITA No.32/Agr/2009
Asst. Year: 1999-2000
D.C.I.T. Circle-1, Aligarh. Vs. Smt. Sonal Agrawal,
C/o. Prag Oil Mills Limited,
Ramghat Road, Aligarh.
(PAN : ACOPA 8844 L).
ITA No.33/Agr/2009
Asst. Year: 1999-2000
D.C.I.T. Circle-1, Aligarh. Vs. Shri Ajai Narayan Agrawal,
C/o. Prag Oil Mills Limited,
Ramghat Road, Aligarh.
(PAN : AAUPA 2114 M).
(Appellant) (Respondents)
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Appellant by : Smt. Seema Raj, CIT (D.R.)
Respondents by : Shri Deepak Singh, Advocate
ORDER
PER P.K. BANSAL, A.M.:
All these appeals have been filed by the Revenue against the common order of the CIT(A) dated 17.10.2008. Since the issues involved in all these appeals are common, therefore, all these appeals are disposed of by this common order. The common grounds taken by the Revenue read as under :-
"(1) Whether on the facts and circumstances of the case, the Ld. CIT (Appeals) was right in holding that there existed no liability on the date of merger of the firm M/s Prag Agro Farm with the company, inspite of the facts that liability on the firm existed on the date of merger of the firm with the company i.e. M/s Prag Agro Farm Ltd. and relying on the future occurring that during the tenure of lease period there were neither any arbitration proceedings nor liability was claimed or disputed by the lessor/lessee?
(2) Whether on the facts and circumstances of the case, Ld. CIT (Appeals) erred in holding the liability as contingent liability on the date of merger of the firm M/s Prag Agro Farm with the company, inspite of the facts that the liability on the firm stood confirmed by the recasted balance sheet of the firm M/s Prag Agro Farm and as the company M/s Prag Agro Farm Ltd. has taken over the total assets and liabilities of the firm, so this liability must have been taken over by the company as a result of take over of the firm by the company ?"
2. The brief facts of the case are that in all these cases notice under section 148 of the Act was issued to all the five assessees namely Smt. Kiran Garg, Smt. Shobha Agrawal, Shri Praveen Narayan Agrawal, Smt. Sonal Agrawal & Shri Ajai Narayan Agarwal for the escapement of 3 capital gains chargeable to tax for the A.Y. 1999-2000 detailed as under after recording the reasons as appeared from page 2 to 9 of Assessment Order :-
Sl. Name of the person Loss declared by Capital gains Concealment of No. the assessee determined as income above 1 2 3 4 5
1. Ajay Narain Agrawal 760000 10362712 11122712
2. Praveen Agrawal 633333 1055556 10555560
3. Sonal Agrawal 253333 3454236 3707569
4. Shobha Agrawal 253333 3454234 3707567
5. Kiran Garg 380000 5181382 5561382
3. The reasons under section 148 were recorded on the basis of the observations made by the Auditor of the Company as reproduced hereunder :-
"The company was incorporated on April 25th, 1997 on conversion of the erstwhile partnership firm M/s Prag Agro Farm as per provision of part ix of the company's Act, 1956. the assets and liabilities of the firm including the lease hold land at Kichchha District Udham Singh Nagar, Uttar Pradesh belonging to the partners of the firm valued at Rs.3,80,00,000/- and cash in hand of Rs.200/- were transferred to the Company and 38,00,020/- equity shares of Rs.10 cash were issued at par in lieu thereof.
The erstwhile partnership firm M/s. Prag Agro Farm had entered into a sub-lease of the leasehold land of the company for 8 years with M/s WIMCO GREENS w.e.f. Oct. 01 1996 and advance for the full period had been received by the partners of the firm. The amount pertaining to the unexpired period was neither transferred to the partnership firm nor to the company on incorporation. In view thereof, lease rentals amounting to Rs.64,31,967/- for the current period and advance lease rentals of Rs.2,50,50,000/- as at June 30, 1998 pertaining to the land of the company have not been considered in the accounts."
4. In response to the notice under section 148, each of the assessee filed written reply stating therein that the return already filed be taken as filed in response to the notice. The brief facts as 4 gathered from the record are that after the death of Shri Prag Narain, all the five members were holding land in the following ratios :-
Shri Ajay Narain Agrawal 33.33%
Shri Praveen Narain Agrawal 27.77%
Smt. Kiran Gargh 16.68%
Smt. Shobha 11.11%
Smt. Sonal 11.11%
5. On 16.07.1996, a partnership firm under the name and style of M/s Pragb Agro Farm was constituted by the aforesaid five persons. The ownership rights of all the land measuring about 1000 acres were devolved into the partnership firm and the partner's account were credited in the books of the firm by following amount:-
Shri Ajay Narain Agrawal 1,26,66,670/-
Shri Praveen Agrawal 1,05,55,560/-
Smt. Kiran Garg 63,33,330/-
Smt. Shobha 42,22,220/-
Smt. Sonal 42,22,220/-
6. Subsequently the said land was leased out to M/s Wimco Green for 8 years w.e.f. 01.10.1996 to 30.09.2004 and the total lease rent payable for the said period was decided at Rs.3,71,95,000/- in the following manner :-
Rent for the period 01.10.1996 to 31.03.1997 Rs.50,000/-
Rent for the period 01.04.1997 to 30.09.1997 Rs.12,00,000/-
Rent for each of the balance completed year ending on 30th September Rs.51,35,000/- per year 5
7. It was mutually decided that in case rent is paid in advance M/s Wimco Greens will pay Rs.3,20,50,000/- and accordingly M/s Wimco Greens paid lease rent for the period of 8 years at Rs.3,20,50,000/- in lump sum. Subsequently, on 25.04.1997 the firm M/s Prag Agro Farm was converted into a company M/s Prag Agro Farm Limited which took over all assets and liabilities of the firm including given on land. Later on, the return of income of the company for the A.Y. 1998-99 was filed. In lieu of the capital account of the partners of the erstwhile firm Prag Agro farm, shares were allotted to them as under :-
Sl.No. Name of Share holder Balance shown No. of shares Value of shares in capital account held of firm as on 31.03.97
1. Ajay Narain Agrawal 1266670 126666 1266670
2. Praveen Agrawal 10555560 1055556 10555560
3. Sonal Agarwal 4222220 422222 4222220 4. Vivek Agrawal 100 10 100 5. Kamal Agrawal 100 10 100
6. Kiran Garg 6333330 633333 6333330
7. Shobha Agrawal 4222220 422222 4222220 Total 38000200 3800020 38000200
8. Shri Ajay Narain Agrawal and family members sold all their shares to M/s Gladhill Trading Pvt. Ltd.,a subsidiary of M/s Wimco Limited. These shares were sold at Rs.3,80,00,200/- in June 1998 relevant to A.Y. 1999-2000. M/s Gladhill Trading Pvt. Ltd. later on merged into M/s Wimco Seedlings Limited whose all the holdings were owned by M/s Wimco Limited. M/s Wimco Green was dissolved on 01.04.2002 and all its assets and liabilities were taken over by M/s Wimco Seedlings Limited. The A.O. was of the view that the value of Kichha farm taken over by the company was shown at Rs.3,80,00,000/- in the asset side and accordingly the share capital was issued. The assessee, however, ignored to account for the 6 value of these rentals for unexpired period amounting to Rs.64,31,967/- for the F.Y. 1997-98 and advance lease rentals of Rs.2,50,00,000/- pertaining to the land of the company for the subsequent period upto September 2004. Thus, he was of the view that the assessee should have shown the unexpired lease rental on the liability side amounting to Rs.3,14,81,967/- and the partner's capital should have stood at Rs.65,81,033/-. Therefore, the cost of acquisition of the share of Ma/s Prag Agro Farm in the hands of the family members of Shri Ajay Narain Agrawal should have taken to be Rs.65,81,033/- not Rs.3.80,00,000/- as shown by them in their Income-
tax return for the A.Y. 1999-2000. Each of the assessee has computed the capital gain in their return in the following manner :-
Late Shri Ajai Narain Agrawal A.Y. 1999-2000
Sale consideration Rs.1,26,66,670/-
Less: indexed cost Rs.1,34,26,670/-
Loss Rs.7,60,000/-
Cost of acquisition of Rs.1,26,66,670/- in F.Y. 1997-1998 Smt. Kiran Garg A.Y. 1999-2000 Sale consideration Rs.63,33,330/-
Less: indexed cost Rs.67,13,330/-
Loss Rs.80,000/-
Cost of acquisition of Rs.63,33,330/- in F.Y. 1997-1998 Smt. Shobha Agrawal A.Y. 1999-2000 Sale consideration Rs.42,22,220/-
Less: indexed cost Rs.44,75,553/-
Loss Rs.2,53,333/-
Cost of acquisition of Rs.42,22,220/- in F.Y. 1997-1998 Shri Praveen Narain Agrawal A.Y. 1999-2000 7 Sale consideration Rs.1,05,55,560/-
Less: indexed cost Rs.1,11,88,893/-
Loss Rs.6,33,333/-
Cost of acquisition of Rs.1,05,55,560/- in F.Y. 1997-1998 Mrs. Sonal Agrawal A.Y. 1999-2000 Sale consideration Rs.42,22,220/-
Less: indexed cost Rs.44,75,555/-
Loss Rs.2,53,333/-
Cost of acquisition of Rs.42,22,220/- in F.Y. 1997-1998.
9. The A.O., therefore, recomputed the capital gain in each of the case as under :-
Late Shri Ajai Narain Agrawal A.Y. 1999-2000
Sale consideration Rs.1,26,66,670/-
Less: Cost of acquisition Rs.21,72,678/-
Capital gains Rs.1,04,93,992/-
Cost of acquisition Rs.21,72,678/- in F.Y. 1997-98 Smt. Kairan Garg A.Y. 1999-2000 Sale consideration Rs.63,33,330/-
Less: Cost of acquisition Rs.10,86,338/-
Capital gains Rs.52,46,992/-
Cost of acquisition Rs.10,86,338/- in F.Y. 1997-98 Smt. Shobha Agrawal A.Y. 1999-2000 Sale consideration Rs.42,22,220/-
Less: Cost of acquisition Rs.7,24,225/-
Capital gains Rs.34,97,995/-
Cost of acquisition Rs.7,24,225/- in F.Y. 1997-98
8
Shri Praveen Narain Agrawal A.Y. 1999-2000
Sale consideration Rs.1,05,55,560/-
Less: Cost of acquisition Rs.18,10,565/-
Capital gains Rs.87,44,995/-
Cost of acquisition Rs.18,10,565/- in F.Y. 1997-98 Smt. Sonal Agrawal A.Y. 1999-2000 Sale consideration Rs.42,22,220/-
Less: Cost of acquisition Rs.7,24,225/-
Capital gains Rs.34,97,995/-
Cost of acquisition Rs.7,24,225/- in F.Y. 1997-98
10. The assessee, being aggrieved, went in appeal before the CIT(A). The CIT(A), after going through the submissions of the assessee, called for the remand report of the A.O. and subsequently deleted the addition made on account of capital gain in each of the case by giving the following common finding except the change of the figure.
11. The relevant finding in the case of the Ajay Narain Agarwal in ITA No.33/Agra/2009 are reproduced hereunder :-
"The issue under appeal has been considered along with material brought on record by the AO. The submissions and the arguments taken by the learned AR along with the remand report of the AO have been considered. The sole issue under dispute is with respect of valuation of shares. The AO has considered that since the assets were leased out for a period of 8 years, transfer of shares in respect of those assets before expiry of 8 years would proportionately reduce the value of shares.
The learned AR has taken the plea that the proposition pointed out by the AO is hypothetical. The learned AR has pointed out that the lease money is not refundable in terms of provisions of Sub Lease Deed dated 01.10.1996 between Prag Agro Farms and Wimco Greens. The agreement does not provide for 9 refund of lease money under any circumstance and hence there is no scope for altering the value of shares.
The impugned agreement has been examined. From the perusal of the agreement under reference, it is seen that in terms of para 17, it has been envisaged that in case of disagreement, differences and disputes, the matter has to be referred to for arbitration to a sole arbitrator to be mutually decided by all parties. In short, it is seen that though there is no scope for refund of lease money, the agreement envisages arbitration proceedings in case of differences between the parties to the agreement. Thus even if there is no direct stipulation in respect of refund of lease money in case of breach/differences between the parties, the agreement provides for arbitration and, therefore, theoretically, the lease money is possible in case of breach of terms of agreement. However, the refund of amount is possible only pursuant of arbitration proceedings. The learned AR has stated that since no arbitration proceedings has taken place between the parties, there is no scope of refund and hence no accrual of liability. It has also been argued that in case of arbitration proceedings, and in the case of determination of liability as a result of arbitration proceedings, such a liability will accrue only as a result of arbitration proceedings. In the absence of arbitration proceedings such a liability is theoretically a contingent liability, which cannot be considered for the valuation of shares.
The terms of agreement has been examined. There appears to be logic in the plea of the learned AR that any liability on account of breach of agreement will accrue only after determination of liability by the arbitrator. In absence of any arbitration proceedings, any liability remains a contingent liability. The liability will become real only when the same is determined in terms of para 17 of the said agreement.
Further more, the learned AR has also pointed that the period of 8 years have already expired and no arbitration proceedings has been taken place and hence there is no scope of any liability which could be taken into account for the valuation of shares.
The issue has been examined in the light of legal proposition as well as material fact brought on record. Any liability will be taken into account for the valuation of shares only when either the liability exists or the same has already accrued. The facts brought on record as well as the submissions made by the learned AR show that since arbitration proceedings has not taken place, the liability has not accrued in respect of the said shares and hence the said liability remains a contingents liability and contingent liability connote legally taken into account for the determination of value of shares.
The plea of the AO in the Remand Report that M/s Prag Agro Farm was no legal firm as it was constituted to earn agriculture income needs to be seen 10 from the previous intent which is manifested in the subsequent conduct of the firm. In the entire transaction there is a dominant commercial motive.
In view of the above, the action of the AO in working out the value of shares for the purpose of capital gains does not appear to be legally tenable. Accordingly, the addition made on account of capital gain amounting to Rs.1,04,93,992/- is hereby deleted."
12. We have carefully considered the rival submissions along with the orders of the Tax Authorities below as well as the material placed before us. We noted, the only issue in this case relates to the computation of the capital gain in the hands of each of the share holders. Each of the share holders has sold their shares to Gland trading Pvt. Ltd in June, 1998. These shares were acquired by them in M/s Prag Agro Farm Limited when M/s Prag Agro Farm was converted into a company. Each of the share holders has taken the cost of acquisition of the share to be the value at which they have contributed land in the partnership firm M/s Prag Agro Farm. The firm has leased out the said land to M/s Wimco Greens for 8 years and whatever the least rent was received, i.e. amounting to Rs.3,20,50,000/-, which was shown by the firm as its income in the A.Y. 1998-99 as argued by the ld. A.R. not disputed by the ld. D.R. The rental income was duly assessed in the hands of the firm. Each of the assessees has also claimed indexation of the cost of acquisition. The A.O. was of the view that since the firm M/s Prag Agro Farm has leased out the land for 8 years and the rent received by the firm also includes rent for the period subsequent to the year in which the rent was received, therefore, there remains a liability to be discharged by the firm M/s Prag Agro Farm and to that extent the liability remains. The cost of acquisition will get reduced which will ultimately reduce the partner's capital and the fact will be that the cost of acquisition of the shares in the hands of each of the partners of the assessee will be reduced by unexpired lease rental. In our opinion, the approach of the A.O. was not correct. The firm M/s Prag Agro Farm has duly received the consideration for leasing out the 11 rent for 8 years. The amount has duly been assessed as its income in the year in which the rent was received.
13. The ld. D.R. could not find out any provision in the lease deed which entitles the tenant to get the refund from the owner under any circumstances. Under these facts, in our opinion, there remains no unexpired liability to be discharged by the firm. The value of the assets owned by the firm remains the same and the value of unexpired lease rent has not to be deducted to recompute the value of shares. The CIT(A) has given detailed and exhaustive finding after appreciating the facts and the agreement. Since at the time of conversion of the firm into company, there remains no liability, even no liability can be said to have accrued. In our opinion, the cost of acquisition of the share cannot be reduced in respect of lease rent received by the assessee for unexpired period. Even we also noted that the period of 8 years have already expired and no dispute about the refund of the lease money has arisen. Therefore, the CIT(A) has rightly held that no scope for any liability which could be taken into account for the valuation of the shares arises. The A.O. has hypothetically reduced the cost of acquisition by working out the value of the shares by recasting the balance sheet after showing the liability for the unexpired period. This approach of the A.O., in our opinion, is not correct. M/s. Prag Agro Farm Limited has taken over the assets, consisting of the land valued at Rs.3,80,00,200/- against which it has issued shares to each of the persons of the erstwhile firm M/s Prag Agro Farm in which all the five assessees have contributed their land on 16.07.1996. The assessment of the firm for the A.Y. 1997-98 was not reopened. The capital account of each of the owners were credited by the following amounts :-
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Shri Ajay Narain Agrawal 1,26,66,670/-
Shri Praveen Agrawal 1,05,55,560/-
Smt. Kiran Garg 63,33,330/-
Smt. Shobha 42,22,220/-
Smt. Sonal 42,22,220/-
14. These balances in the capital account of each of the partners were duly accounted for in the year ended 31.03.1997 and the value of the land was also accepted at Rs.3,80,00,000/-.
15. Ld. D.R. has not denied this fact. It is only on 25.04.1997 i.e. during the A.Y. 1998-99 the firm was converted into company which took over this land and has issued the share in the company to each of the partners to the extent there was balance in their capital account. Thus, each of the assessees got the shares in exchange of balance standing in their capital account. This, in our opinion, will represent the cost of acquisition of the shares in the company. In our opinion, it is not a fit case which warrant interference in the order of the CIT(A). The CIT(A) has rightly held that the action of the A.O. was not correct. We accordingly confirm the order of the CIT(A), deleting the capital gain added by the A.O. in the case of each of the assessees.
16. In the result, all the appeals filed by the Revenue stand dismissed.
(Order pronounced in the open Court on 27.08.2010).
Sd/- Sd/-
(R.K. GUPTA) (P.K. BANSAL)
Judicial Member Accountant Member
Place: Agra
Date: 27th August, 2010.
PBN/*
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Copy of the order forwarded to:
1. Appellant
2. Respondent By Order
3. CIT concerned
4. CIT (Appeals) concerned
5. DR, ITAT, Agra Bench, Agra
6. Guard File Assistant Registrar
Income-tax Appellate Tribunal, Agra
True Copy