Income Tax Appellate Tribunal - Mumbai
Nulsi N. Wadia, Mumbai vs Assessee
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Dy. Commissioner of I.T. 2(1), Vs. Shri Nusli Neville Wadia,
Mumbai. Neville House,
J. N. Herdia Marg, Bellard Estate,
Mumbai 400 001.
PAN: AAAPW 0990 M
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Shri Nusli Neville Wadia, Dy. Commissioner of I.T. 2(1),
Mumbai. Mumbai.
(Appellant) (Respondent)
Revenue by : Shri Vimal Gupta,
Sr. Standing Counsel.
Assessee by : S/Shri S.E.Dastur & M. D. Inamdar.
ORDER
P e rT .R O S D ,M A :
These are cross appeals by the Revenue and assessee and, therefore, they were heard together and are being disposed of by this common order.
2. I.T.A.No.4573/M/08 [Revenue's appeal]: In this appeal Revenue has raised the following grounds:
1. The learned CIT(A) erred in treating the receipt of Rs.71,63,36,000/- received on transfer of land as non taxable without appreciating the fact that the assessee is not the "residuary legatee" of Late Shri E.F.Dinshaw and the control, management and ownership of the properties consisting of the Estate of Shri E. F. Dinshaw vests totally with the assessee.
2. The learned CIT(A) ought to have treated the receipts either as short term capital gain or adventure in the nature of trade.
2 ITA NOS.4573 & 4424/Mum/08
3. Brief facts of the case are that assessee is an individual and had filed his return of income declaring salary income as well as income from other sources. During assessment proceedings, it was noticed that in the capital account accompanying the return a sum of Rs.71,63,36,000/- was credited. This amount consisted of a sum of Rs.44.5 crores on account of receipt by way of Government of India bonds and the balance sum of Rs.27,13,36,000/- through bank transfer. On enquiry, assessee explained the circumstances under which the capital account came to be credited which are as under:
4. [1] One Mr. Edulji Framroze Dinshaw [for short 'EFD'] a resident of USA executed his will on 4-2-1970. This will was registered in the Court of County of New York United States of America. EFD expired on 14-3-
1970. Through this will all the movable properties situated anywhere and immovable properties situated in India were bequeathed to Mrs. Bachoobai Wornozow [for short 'BW'], who was a sister of the deceased. Mrs. BW was also appointed as executrix of the will and was also the beneficiary of the EFD's estates. The immovable properties situated in India were to be settled in the trust and the trustees were required to collect receipt of rents and income from such properties which were to be applied for the benefit of BW during her life time. After the death of BW, the principal of the trust fund along with the income accrued thereon was to be given to "The Salavation Army New York and American Proprietary For the Prevention of Cruelty to the Animals New York [for short 'two American Charities'] equally. BW was also made as a residuary legatee.
3 ITA NOS.4573 & 4424/Mum/08
5. Mrs. BW obtained a probate of the will of Mr. EFD and appointed Mr. Jehangir Behram Dubhash as an Administrator of the estate of the deceased EFD and this appointment was confirmed by the Hon'ble Bombay High Court and letters of administration were issued accordingly on 12-11-1971. Mr. Jehangir Behram Dubhash later on requested to be released as the administrator of the estates of EFD. In his place Mr. Nusli Neville Wadia i.e., assessee, was appointed as the Administrator and his appointment was also confirmed by the Hon'ble Bombay High Court on 21-12-1972 and the properties of the estates were vested in him as an Administrator.
6. In the year 1995, the Administrator entered into agreements with some real estate development companies for developing the immovable properties of the estates. In these agreements, BW also signed as confirming party. The developers were required to develop the properties after removing the encroachments etc. The estate was to receive 12% of the gross sale proceeds. Pursuant to these agreements, the estate started receiving certain advances from purchasers of the constructed units and in some cases the final proceeds were also received. The estate filed income tax as well as wealth tax returns on the income on transfer of proportionate interest in the immovable properties. Originally these receipts were assessed as business receipts but when the matter was taken up to the Tribunal, the income was charged as capital gains in the hands of the estate of EFD.
4 ITA NOS.4573 & 4424/Mum/08
7. In the year 2000, the Administrator filed suit in the High Court of Bombay challenging the will for bequeathing the properties to two American Charities, because as per sec.118 of the Indian Succession Act, 1925 no property could be bequeathed for charitable purposes if near relatives were alive as heirs and the will has not been executed within one year in advance. During the pendency of this suit the assessee along with other four companies which were fully controlled by him, entered into an agreement with Mrs. BW on 26-9-2001 [this agreement has been described as 'Indenture']. Through this indenture, BW transferred and conveyed all her rights and interests over the sale proceeds of sale and/or disposal of the corpus to the assessee and four of his associate companies for a total consideration of Rs.20 lakhs. Thus, assessee acquired 60% interest and the other four companies acquired 10% each interest in the rights of BW. It was also expressly provided in this indenture that the transfer of BW's rights were subject to out-come of the decision of the Hon'ble Bombay High Court in the suit filed by the Administrator challenging the will of EFD for bequeathing the properties in favour of two American Charities. It was also clearly provided that the transferee, i.e. the assessee and his four associate companies, would be entitled to receive proceeds only after the death of BW, which means that during her life time BW retained the right to receive the sale proceeds.
8. On 22-10-01 Hon'ble Bombay High Court pronounced its judgment in the suit filed by the Administrator challenging the bequeathal of immovable properties in favour of the two American 5 ITA NOS.4573 & 4424/Mum/08 Charities. The court held that such bequeathal of immovable properties in favour of the two American Charities was void in view of sec.118 of the Indian Succession Act, 1925. The court also held that BW was the sole residuary legatee to the corpus of the estates of the EFD. Against this decision, it seems that the two American Charities filed an appeal but the same was withdrawn later on.
9. In the meantime, on 17-10-2001 BW also executed her last will in New York wherein Mr. Nusli Neville Wadia was appointed as the sole executor. Through this will she bequeathed all her movable properties to (i} Ms. Rutty C.P. Wadia and [ii] Ms. Mary C.P. Wadia, and all her rights and titles in the immovable properties including the share in the jointly owned immovable properties in equal portion with her late brother EFD, to Mr. Ness Nusli Wadia and Mr. Jeh Nusli Wadia, sons of Mr. Nusli N. Wadia i.e. the assessee. On 12-8-2003 Mrs. BW expired. On her death Mr. Nusli N. Wadia again filed an application before the Hon'ble Bombay High Court seeking approval for his continuance as an Administrator of the estate of EFD. The court vide order dated 20-11- 2003 permitted Shri Nusli N. Wadia to continue and act as an Administrator of the estate of Mr. EFD.
10. After the demise of BW in August, 2003, in December 2003 the Administrator distributed some of the estate funds to the assessee and his four companies in terms of the indenture dated 26-9-2001. This is how the assessee had received the funds in his capital account amounting to Rs.71,63,36,000/-.
11. The details of the funds noted by the AO are as under:
6 ITA NOS.4573 & 4424/Mum/08
1. Payments made Rs.27,13,36,000/-
2. 7% Government of India Bonds-2003 Rs.36,00,00,000/-
3. 6.5% Government of India Bonds-2003 Rs. 8,50,00,000/-
12. Against the proposal of the AO to tax these receipts, it was mainly submitted before him that [i] the distribution made under the will is a directionally disposition akin to a gift which is not in the nature of income in the hands of the assessee and such distribution is specifically exempted u/s.47[iii]. [ii] The estates of EFD had already paid taxes on transfer of immovable properties. [iii] The receipts in the hands of the assessee have same character as it would have been in the hands of BW and, therefore, assessee had stepped into the shoes of BW. [iv] That what was transferred to the assessee was only distribution of the sale proceeds and the properties were never transferred to the assessee because estates of EFD had already entered into the development agreement with the builders and the properties were given for the development and the estate was entitled to only 12% of the sale receipts. [v] Even if it was assumed that BW had become absolute owner after the order of the Hon'ble Bombay High Court on 22-10-2001, as per the indenture dated 26-9-2001 the only benefit intended to be passed over to the assessee was only the distribution out of the sale proceeds. [v] In response to a further proposal that why the same should not be taxed under the head 'capital gains' it was submitted that the assessee had not received the sale proceeds on transfer of any immovable property and the amounts were received by way of distribution from the estate of EFD out of the 7 ITA NOS.4573 & 4424/Mum/08 sale proceeds and advances received by the estates of EFD. Since the properties had been transferred by the estate, therefore, it was the estate of EFD which was liable to payment of capital gains tax. It was also contended that assessee had not transferred any assets because assessee had no ability to give the transferee possession of any property. It was also contended that, in any case, the Government of India Bonds were originally applied in the name of estate of EFD, but since as per the rules, application had to be made in individual name and assessee's name was used but P.A.No. given was that of EFD. There was further rule that such bonds could not have been transferred and these bonds were wrongly transferred to the assessee by the Administrator by way of making accounting entries and these entries were later on reversed.
13. After examining the submissions of the assessee, AO did not accept the proposition that the amounts received by the assessee are not chargeable to tax as income. The AO, firstly, observed that the amounts received by the assessee from the estates of EFD were in the nature of consideration receipts for transfer of properties because assessee had acquired the properties in terms of the indenture dated 26-9-2001 and the properties were transferred later on and the amounts received were liable to be taxed as capital gains. The AO was of the opinion that sec.47[iii] is not applicable because assessee was never a beneficiary under the will of EFD. He further observed that the assessee along with four other companies got a right to receive the sale proceeds by way of an indenture dated 26-9-01. Such rights, 8 ITA NOS.4573 & 4424/Mum/08 according to him, were incorporeal capital asset similar to intangible capital assets like right in managing agency, goodwill of a business, right to subscribe to shares etc. These valuable rights acquired by the assessee and other four companies got partly extinguished when the assessee and the other four companies received the sale proceeds. In this regard, he also placed reliance on the decision of the Hon'ble Supreme Court in the case of Kartikeya V. Sarabhai vs. CIT [228 ITR 162]. The submission that the Government of India bonds cannot be considered as receipt was also rejected because, according to the AO, estates of EFD could not have any legal existence at the relevant time and also that the bonds had been applied in the assessee's individual capacity.
14. Alternatively, without prejudice to the above that such receipts were taxable under the head 'capital gains', AO observed that since assessee was fully aware being Administrator of the estates of EFD that bequeathal of the properties to two American Charities were illegal and in order to take advantage entered into an adventure in the nature of trade by investing a small sum of Rs.20 lakhs along with the other four companies knowing fully well that if bequeathal of properties to two American Charities was held to be invalid by the High Court then assessee had a chance of making a huge fortune. In the assessment order finally he has subjected the receipt of Rs.71,63,36,000/- as business receipts.
15. Before the Ld. CIT(A) the submissions made before the AO were reiterated. It was further emphasized that BW did not have any 9 ITA NOS.4573 & 4424/Mum/08 children and the relationship she had with the assessee as Administrator of the estate since 1972 was that of a trust and she considered him as her own son as was stated in clause 16[e] of the petition dated 12-11-2003 filed before the Hon'ble High Court. Thus, she had a unique relationship with the assessee and, therefore, appeared to have identified him as a person fit to succeed her after her life time. It was further pointed out that BW was the sole executrix of the will left by EFD and was also residuary legatee by virtue of 5th clause of the will and this position continued even after the order of Hon'ble High Court dated 22-10-2001. This means that the estate would continue in law and the assessee would continue in the capacity of the Administrator unless discharged by the court that appointed him. In fact, it was clarified in para-5 of the indenture dated 26-9-2001 that no part of the immovable properties forming part of the deceased's Indian estates were being transferred by the indenture. It was urged that the AO himself was not sure whether the amounts received by the assessee should be taxed as capital gains or income from business receipts and that is why after detailed observations holding the receipts as capital gains, he changed the course and ultimately treated the receipts as business income. Before the Ld. CIT(A) it was also again explained that if the assessee is said to have acquired the capital asset in the form of rights to receive sale proceeds, then there was no transfer because that right has not been transferred by the assessee and, therefore, no capital gain was attracted. It was pointed out that the decision of the Hon'ble Supreme 10 ITA NOS.4573 & 4424/Mum/08 Court in the case of Kartikeya V. Sarabhai [supra] was distinguishable because in that case there was reduction in the face value of the shares which, according to the court, resulted in extinguishment of rights but in the present case there was no extinguishment of the rights.
16. It was further argued that the receipts could not be treated as business receipts being adventure in the nature of trade because assessee had obtained a right to receive the sale receipts vide indenture date 26-9-2001 and, therefore, it was clearly in the nature of capital receipts. Some case laws were also quoted for the proposition that receipts could not be treated as an adventure in the nature of trade.
17. Attention of the Ld. CIT(A) was also drawn to the provisions of sec.168 by which executor of an estate is separately taxable entity. It was pointed out that Explanation to the section clearly provides that executor would include the Administrator or other person administering the estate of a deceased person. Detailed submissions along with the case laws were made in this respect and it was emphasized that the deceased's estate had paid the taxes separately on the income earned by the estate.
18. The Ld. CIT(A) after examining the submissions observed that the AO was not correct in holding that the appointment of Administrator and continuance of estate of EFD under the control and management of the Administrator was only a façade because the appointment of the Administrator was approved by the jurisdictional 11 ITA NOS.4573 & 4424/Mum/08 High Court. The original appointment was made because the first Administrator Mr. Jehangir Behram Dhubhash did not want to continue. Further, the appointment of the assessee as an Administrator even after the death of Mrs. BW in 2003 was approved by the Bombay High Court vide order dated 20-11-2003. Therefore, a further finding that assessee as an individual along with his four companies was absolute owner of the properties of the estates of EFD cannot be accepted as correct. Mr. Wadia was only an Administrator of estates despite the fact that he entered into an indenture dated 26-9-2001 and even thereafter. He referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. P. K. Thakore [136 ITR 464] and extracted the following observations from page 472:
"held --- ---- that the rights and liabilities under a contract between the appellant and a third party, as determined by a competent Civil Court, cannot be overlooked or ignored while determining the legal nature of the receipts in the hands of the appellant".
19. The Ld. CIT(A) referred to the provisions of the Indian Succession Act, 1925 and observed that in view of these provisions once a letter of administration is granted, the administrator of the estate becomes the legal representative of the assessee and only he shall be competent to deal with the estate. Though sec.216 of Indian Succession Act, 1925 does not make it clear as to till what time the administration will continue, but after quoting some judgments, according to him, the powers of the administrator would continue in an estate until the estate is conveyed to the beneficial owner or such administrator is discharged by the court. In this background, the Ld. CIT(A) held that in his view the estate would continue in law and Mr. 12 ITA NOS.4573 & 4424/Mum/08 Nusli N. Wadia would continue as an Administrator and that position is distinct from his individual capacity. The Ld. CIT(A) also discussed whether the AO was correct in holding that the judgment of the Hon'ble Bombay High Court dated 22-10-2001 by which the bequeathal of properties to two American Charities was held to be invalid, would operate from 1970. In this respect, arguments were made even before us and ultimately both the parties had agreed that it would not make much difference whether the judgment would operate from 1970 or from 22-10-2001. The Ld. CIT(A) observed that the judgment would relate back to the original date, only when the issue involved interpretation of the law. However, when a particular issue was decided on the basis of clear law, then the judgment would operate from the date of the order. Thereafter, the Ld. CIT(A) dealt with the finding of the AO that assessee and his associate companies became absolute owners of the properties in terms of indenture dated 26-9- 2001, particularly after the effect of High Court's order dated 22-10- 2001 by which BW became residuary legatee. In this regard he referred to the decision of House of Lords in the case of Dr. Barnardo's Homes National incorporated Association vs. Commissioners for Special Purposes of the Income Tax Act, (1972) 2 A.C. 1, and extracted various observations of the court. In the light of the observations, he held that till 22-10-2001 BW had only a life interest and thereafter a residuary interest and residual legatee has no right in a property until the residuary is ascertained. Since the administration of the estate was not complete in the present case, therefore, despite the decision of the 13 ITA NOS.4573 & 4424/Mum/08 Bombay High Court vide order dated 22-10-2001 BW could not be considered to have become the legal owner of the immovable properties of the estate of EFD. Even after the said order, she could not have become absolute owner because the order of High Court could have been reversed by a larger Bench or by a higher forum. Even after withdrawal of an appeal by the two American Charities BW could not be considered to be the absolute owner of the immovable properties of her deceased brother EFD because as per sec.104 of Indian Succession Act, 1925, a legatee only has a vested interest in the property and the vesting is not full and absolute till the administrator gives his assent. It remains only as an inchoate right. He also quoted certain commentary. He observed that some of the confusion arose because assessee was acting in two capacities as Administrator as well as purchaser of certain rights. The situation would have been much simpler if the indenture dated 26-9-2001 was entered into by some outsider and, therefore, two different capacities of the assessee have to be recognized. In this background, he observed at para-61 as under:
"61. In the light of the foregoing discussion, it is apparent that the appellant had entered into an indenture on 26-09-2001 with BW for acquisition of only certain and specific rights and not any property. The said agreement very clearly indicated that it will have consequence only if the part of the Will relating to bequest of assets after the death of BW to the American Charities was declared as invalid and illegal by the Bombay High Court. The agreement also provided that there would be certain payment to EFD Trust and there would be absolutely no transfer of immovable properties in favour of the transferees, namely, the appellant and other parties. The appellant and other parties were entitled to receive by way of distribution of the accumulated funds over the years from the income, sale proceeds and advances lying with the Estate. The agreement went on to the extent of stating that the appellant and others will not
14 ITA NOS.4573 & 4424/Mum/08 have the right to object even to the manner in which the properties will be dealt with. In the circumstances, the appellant and others were absolutely excluded from receiving any property which was under the control and management of the Administrator. They did not even have the right to object to the manner in which the immoveable properties were administered or dealt with. There is no material on record to support the AO's conclusion that the stipulations were a mere pretence and they were not to be given effect to. Further, the distribution of monies/investments upon the death of B.W also bears witness to the effect that the appellant and others have not received any part of the immovable properties. In the circumstances, it is apparent that no part of the immovable properties was absolute or otherwise, of the properties which were part of the Estate. It is, therefore, apparent that the appellant could not have dealt with any of the properties of the Estate of EFD, and, therefore, no income could be assessed in his hands."
20. The Ld. CIT(A) also dealt with the finding of the AO that assessee is not covered by the exemption u/s.47[iii] by observing that by virtue of indenture dated 26-9-2001 assessee had acquired the rights of the original legatee and, therefore, assessee stepped into the shoes of original legatee and, accordingly, exemption u/s.47[iii] was available to the assessee.
21. The Ld. CIT(A) dealt with detail the other observation of the AO for subjecting the receipts under the head 'capital gains'. According to him, AO initially computed the capital gains on the basis of the value of the property at Rs.1,11,33,393/- reflected in the balance-sheet of Administrator which was transferred by the assessee for a consideration of Rs.71,63,36,000/-. The appellate authority observed that this conclusion was contrary to the conclusion reached earlier because AO in first place had already held that properties were never transferred by the Administrator/BW to the real estate developer and held that the said properties were capable of being transferred to the assessee by an indenture dated 26-9-2001. Therefore, it cannot be 15 ITA NOS.4573 & 4424/Mum/08 said that the properties have again been transferred because, AO had not indicated as to whom such properties were transferred and it appeared to the Ld. CIT(A) that AO had believed that the properties had already been transferred in Development Agreement of 1995. He also observed that part of the money received by the assessee consisted of advances received by the estate of EFD in the earlier years and since under the Act income of a particular year was only to be charged, such amounts should not be charged which were received in the earlier years. Further, income should be charged only in the hands of a person who earns the same and in the case before him the income was earned by the estate of EFD on which taxes have already been paid by the estate and that fact was also noted by the AO and this income was only distributed by the estate to the assessee, therefore, same was not chargeable to tax.
22. While dealing with the observation that the assessee, in any case, had acquired the right to the sale proceeds and such right has to be considered as incorporeal capital asset akin to the right in managing agency, goodwill or right to subscribe to shares and assessee was liable because this right got extinguished. The Ld. CIT(A) observed that the decision in the case of Kartikeya V. Sarabhai [supra] was distinguishable on its own facts. Though assessee did acquire a capital asset in the form of right to receive sale proceeds, but this right never got extinguished. For extinguishment, according to the Ld. CIT(A), there should be a complete destruction or annihilation of the right or wiping out of such right is necessary.. he compared this to a mining 16 ITA NOS.4573 & 4424/Mum/08 rights and, according to him, simply because after having acquired a mining right if a business man extracts some minerals, then the right to mining does not get extinguished and since assessee is still holding the right to receive the monies to be distributed, such right has not been extinguished.
23. Ld. CIT(A) has also discussed in detail as to why the receipts could not be treated even as revenue receipts arising out of an adventure in the nature of trade. The Ld. CIT(A) observed that this was treated as business income by the AO on the wrong assumption that after the death of BW there was a merger of the role of Mr. Nusli N. Wadia as an Administrator and Mr. Nusli N. Wadia as an individual. According to him, this observation suffered from a flaw, because there was no basis for holding that role of Mr. Nusli N. Wadia as an Administrator came to an end upon the death of BW because the appointment of Mr. Nusli N. Wadia as an Administrator was reaffirmed by the Bombay High Court even after the death of BW. Further, even after the so called distribution, the estate was left with immovable properties. Under the terms of Indenture dated 26-9-2001 the immovable properties were not to be handed over to the parties to the Indenture and properties were to remain with the estate. Therefore, the assumption of AO regarding merger of role of an Administrator and individual for holding that receipts were earned from an adventure in the nature of trade, was not correct. He also observed that assessee is an industrialist who is on the board of several listed companies and had no indulged in any activity of investing in residuary estate or 17 ITA NOS.4573 & 4424/Mum/08 acquisition of interest in the will. This was a solitary transaction. At times, even a single isolated transaction may fall within the definition of business, but then such transaction must bear clear features of a trade. But since in this case there was only an investment and there was no sale, therefore, this will not fall under the definition of an adventure in the nature of trade.
24. While concluding, the Ld. CIT(A) observed that the AO had completely over-looked the provisions of sec.168 of the I.T.Act. Sec.168[2] clearly provides that assessment of an executor/administrator under this section shall be made separately from any assessment that may be made on him in respect of his own income. Thus, a person who is appointed as an administrator enjoys two different statuses for the purpose of assessment of income and in this connection he also made reference to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Mrs Usha D. Shah [127 ITR 850].
25. It seems that an alternate contention was also made that an administrator could not have distributed any amounts till such time as the administration was not complete and, therefore, distribution made in A.Y 2004-05 should be ignored, was not dealt with by the Ld. CIT(A) by observing that this has become of an academic nature in view of the fact that he has already held that distribution made by the estates of EFD was not liable to tax.
26. Before us, Ld. Standing Counsel Shri Vimal Gupta appearing on behalf of the Revenue narrated the facts and pointed out that assessee 18 ITA NOS.4573 & 4424/Mum/08 has been appointed as an Administrator but he is not related to EFD or BW. He submitted that BW sold her rights to the assessee and his four associate companies to receive money where he is holding shares in excess of 99% by entering into an indenture dated 26-9-01, copy of which is placed at pages 31 to 40 of the assessee's paper book. He carried us through the main clauses of this indenture and further pointed out that this indenture was subject to two riders, namely, that this will come into operation if the High Court rules that two American Charities were not entitled to the properties of EFD and that matter was pending before the High Court on the date of this indenture. The other rider was that the sale of the rights would be effected only after the death of BW. He argued that since assessee was associated as an Administrator for long time and knew that because of sec.118 of Indian Succession Act, 1925 the bequeathal of immovable properties of EFD to two American Charities would not be valid and, therefore, he took a chance by investing a small sum of Rs.20 lakhs through which he can earn a fortune because after the death of BW he had a chance of inheriting the properties. Therefore, this arrangement has to be construed as an adventure in the nature of trade and, accordingly, AO was right in treating the receipts as business receipts and subjecting the same to tax under the head business and profession.
27. Ld. Sr. Standing Counsel while supporting the order of the AO further submitted that the indenture was signed within less than a month from the order of the High Court holding that the bequeathal to the two American Charities was void under the Indian Succession Act, 19 ITA NOS.4573 & 4424/Mum/08 1925 and confirmed that BW was the sole residuary legatee entitled to receive the properties left behind by EFD in India. He argued in detail that the order of the High Court dated 22-10-01 became effective from March, 1970 making BW entitled to the properties right from 1970. When this issue was argued in detail by the Ld. Counsel of the assessee, the Ld. Sr. Standing Counsel admitted that no serious implications would be there as to whether the order became effective from 1970 or 2001. He submitted that amounts in question were received by the assessee because of the indenture dated 26-9-01. The indenture was executed for a consideration which resulted in assessee getting the right to receive the sale proceeds of properties belonging to the estate and on the basis of this indenture sale proceeds as well as some advances received by the estate were distributed which resulted in receipt of the impugned sum of Rs.71.63 crores. He argued that purchase of a right has been rightly held by the AO to be in the nature of a capital asset and this fact has been upheld even by the ld. CIT(A) and admitted by the assessee also and in this regard he referred to para-68 of the appellate order. Since the rights acquired are valuable rights, therefore, these rights definitely constituted capital asset within the meaning of sec.2[14] of the I.T.Act. These rights would start flowing to the assessee subject to two riders i.e. the decision of the High Court in the suit filed by the Administrator challenging the bequeathal in favour of two American Charities and other being death of the BW. He pointed out that the first contingency was removed when the High Court passed its order on 22-10-01 declaring that 20 ITA NOS.4573 & 4424/Mum/08 bequeathal to the two American Charities was not valid in view of sec.118 of the Indian Succession Act, 1925. Later on when BW expired in August, 2003 assessee acquired full rights which were purchased through an indenture dated 26-9-2001. In view of these rights, assessee received a sum of Rs.71.63 crores during the year, which resulted in an extinguishment of assessee's rights and such extinguishment is specifically covered under definition of transfer in sec.2[47] of the Act. He argued that even if whole of the rights have not been extinguished then at least part of the rights became diluted to the extent of receiving money by the assessee and there was definitely a partial extinguishment. In this regard, he strongly placed reliance on the decision of the Hon'ble Supreme Court in the case of Kartikeya V. Sarabhai [supra]. Since the assets were held for less than three years, because they were purchased in September, 2001 and sold in A.Y 2004-05, therefore, same were liable to be taxed under the head 'short term capital gains'.
28. Ld. Sr. Standing Counsel further referred to paras 62 and 63 of the appellate order wherein it was held by the CIT(A) that assessee was entitled to exemption u/s.47[iii]. He referred to the provisions of sec.47[iii] and pointed out that this would come into operation when the beneficiary in a will receives something. He contended that assessee or his associate companies admittedly were never the beneficiaries in the original will of EFD and assessee and his associate companies have rather purchased the rights through an indenture and in no circumstances the assessee can be treated as a beneficiary, 21 ITA NOS.4573 & 4424/Mum/08 therefore, CIT(A) has arrived at a wrong conclusion by holding that assessee is entitled to the benefit of provisions of sec.47[iii]. He also made submissions that there is no force in the argument that Government of India bonds were never transferred to the assessee because such bonds were in the individual name of the assessee, therefore, it is clear that the intention was to give benefit to the assessee and that is why the bonds were purchased in the assessee's name and even accounting entries have been passed in the books of the assessee as well as the estate.
29. On the other hand Ld. Senior Advocate Shri S.E.Dastur who appeared on behalf of the assessee started his arguments by strongly supporting the order of the CIT(A) and pointed out that in the appellate order the issue has been discussed in detail at paras 36 to 83 and dealt with all the objections raised by the AO and reached a conclusion that the amounts received by the assessee were not liable to tax in his hands.
30. Shri Dastur then referred to ground No.1 raised by the Revenue and pointed out that the whole case has been based on a wrong footing by assuming that assessee was the owner of the immovable properties of the estate of EFD. He pointed out that as per the will of EFD, BW was the sole executrix and BW had only life interest in the immovable properties in India belonging to EFD. Upon her death, the corpus and the accrued income was to be given to two American Charities. BW was also made residuary legatee in the will. He pointed out that as per sec.118 of Indian Succession Act, 1925 bequeathal to 22 ITA NOS.4573 & 4424/Mum/08 any charity could be held to be void if the person making the will died within one year of making the will. Since EFD had expired within twelve months from the date of execution of his will and this issue was challenged before the High Court by the Administrator and the bequeathal was held to be void by the Hon'ble High Court. He also made detailed argument that how this judgment would be operative only from the date of the order because the matter did not involve interpretation of any law but only law provided u/s.118 was applied to the existing facts. However, he also agreed that whether the order of the High Court declaring bequeathal of the immovable properties to two American Charities void was operative from or 2001 or 1970 wil not make much difference. Even after the order of the High Court, BW was only a residuary legatee. Therefore, before the High Court's order BW was not a legal owner of the properties and even after such order she did not became the owner. The properties in the estate of EFD were in fact legally owned by the Administrator. The appointment of Mr. Nusli N. Wadia as an Administrator was again confirmed after the death of BW, in the year 2003. All these facts clearly show that BW was never a owner of the properties and she only had beneficiary interest during her life time and, therefore, there was no question of transferring the properties by an indenture dated 26-9-01. He argued that the first mistake committed by the AO is that he held that after the death of BW the estate of EFD came to an end because Mr. Nusli N. Wadia was allowed to continue as an Administrator by the High Court vide order dated 20-11-03 copy of which is available at pages 79 23 ITA NOS.4573 & 4424/Mum/08 to 96 of the paper book. Even after the death of BW this fact is further accepted by the department in the sense that estate of EFD had filed separate income tax as well as wealth tax returns and all the income arising from transfer of the rights in land to the developer was declared in the return of estate of EFD filed by the Administrator and such returns have been accepted by the department and in some years after scrutiny assessments orders u/s.143[3] have been passed [copies of the assessment orders were not filed in the paper book, therefore, ld. Sr. Advocate was directed to furnish the same and such assessment orders have been filed vide letter dated 16-6-2011 which are placed on record]. He pointed out that the fact that estate of EFD has filed separate returns was also taken specific note by the CIT(A) vide para 65 of the order. In this background, therefore, AO proceeded on the wrong footing that because of the indenture dated 26-9-01 assessee became the owner upon the death of BW and the properties fully vested in the assessee in his individual capacity.
31. Shri Dastur further argued that somewhere in 1995 Administrator had entered into a development agreement with some developers through which the developers were to develop the properties after removing encroachments and settling various legal disputes. These agreements were signed by BW also as confirming party. As per these agreements the estate was to receive 12% of the gross realisation and balance 88% was to go to the developers. The estate had received certain advances also which were reflected as liability in the books of estate. Whenever a conveyance was executed 24 ITA NOS.4573 & 4424/Mum/08 by the Administrator on behalf of the estate of EFD in favour of a purchaser, corresponding income was recognized and was duly reflected as capital gain and was also offered for taxation. It was only the income available with the Administrator after the payment of taxes or any other dues in terms of the will of the EFD which could be applied. In fact, a specific provision was made even in the indenture to this effect which is placed at pages 31 to 40 of the paper book and he invited our attention to clause 4[a] of this indenture whereby Administrator could make distribution of the sale proceeds or advances received only after meeting the cost of administration as well as payment of taxes. Therefore, income arising to an estate after payment of taxes could not be subjected to tax again on its distribution. He also pointed out that as far as advances are concerned, they were in the nature of liability and would be converted into income only when a conveyance was executed in favour of the purchasers and, therefore, such advances could not be termed as income in the hands of the recipient. Therefore, merely because the assessee along with his four associate companies received certain amounts by way of distribution, would not become chargeable in the hands of assessee and as far as the advances are concerned the nature would not change even in the hands of the recipient. He submitted that the amount could bear the character of income and brought to tax only once. Since under the law income could be taxed only in the hands of estate of EFD who was the owner of the properties, the same could not be taxed again at the time of distribution. In this regard, he also pointed out 25 ITA NOS.4573 & 4424/Mum/08 that in case of Sevakunj Investment and Trading Co. Pvt. Ltd.(later renamed as Go Investments Pvt. Ltd.) this appeal was also heard along with the assessee's appeal) the assessing authority in the assessment order itself had accepted that legally income would suffer tax only once in the hands of the estate and could not again suffer the tax on distribution being made by the Administrator. AO in this case while assessing the similar receipts as capital gains gave credit to the extent the same had already been taxed in the hands of the EFD's estate. The Ld. Sr. Advocate emphasized that the Administrator made the distribution of funds either out of tax paid income on sale proceeds of the properties or advances received from the purchasers, income from which could be assessed only when a conveyance deed was finally executed by the Administrator. Thus, payment from either of these sources could not be assessed as assessee's income again because the receipts did not bear the character of income and was not chargeable to tax accordingly. Shri Dastur further submitted that during BW's life she was entitled only to receive from the Administrator income derived from the estates of EFD i.e. immovable properties. However, the liability to pay the tax on income on disposal of such properties was that of Administrator and not of BW. In this regard, he referred to the provisions of sec.168 of the I.T.Act where it is clearly provided that liability to pay tax on income accruing to the estate was to be discharged only by the Administrator or the executor and not the legatee as the assessee continued to function as Administrator vide High Court's order dated 20-11-03 and his liability to pay taxes u/s.168 26 ITA NOS.4573 & 4424/Mum/08 continued to be there. Thus, liability to pay taxes on the assessee was in the capacity of the Administrator. Therefore, if the amounts received from the Administrator were not taxable in the hands of BW when she was alive then on the same principle the amount received by the assessee in the capacity of an individual and his four associate companies could not be taxed in their individual assessments because of the indenture dated 26-9-01 as they had stepped in the shoes of BW.
32. Shri Dastur further supported the impugned order passed by the CIT(A) holding that transaction in question did not constitute an adventure in the nature of trade as held by the AO. He argued that it is well settled that the term "business" refers to some systematic and organized course of activity with an object of deriving profits. Simple purchase of rights to distribution by the assessee vide indenture dated 26-9-01 could not be termed as an adventure in the nature of trade. While referring to clause [l] of the indenture, he pointed out that BW had entered into the said indenture in view of her advanced age and she was desirous of settling her affairs in her life time. Ld. Sr. Advocate further submitted that assessee had faithfully discharged his obligations as Administrator and that is why the Bombay High Court permitted him to continue to function as an Administrator even after the BW's death as the court was satisfied that administration of estate was not complete. The Ld. Sr. Advocate then invited our attention to the last will of BW copy of which is placed at pages 41 to 54 of the paper book which was executed on 17-10-2001. In this will, he pointed 27 ITA NOS.4573 & 4424/Mum/08 out that assessee was appointed as the sole executor. Further, all the immovable properties belonging to BW including the share in the properties with her late brother was bequeathed to the two sons of the assessee as residuary legatee, clearly shows that a close relationship had developed between the assessee and BW over the years. In fact that BW chose assessee as Administrator right from 1972 and also appointed him as the sole executor of her own will as well as the fact that all immovable properties were bequeathed to the two sons of the assessee, clearly shows that assessee enjoyed full trust and complete faith of BW. Thus, it is clear that the relationship was not based on commercial consideration and, therefore, the arrangement arrived at in the indenture dated 26-9-01 could not be viewed as an adventure in the nature of trade. He emphasized that in view of the fact that assessee's own sons were legatees of BW's will, there was no need for the assessee to embark upon any adventure in the nature of trade to realise gains from EFD properties.
33. The Ld. Sr. Counsel for the assessee further submitted that the assessee is an industrialist and is sitting in the Boards on various companies. The assessee has returned his income from mainly under the head "salaries" and is not doing any business activity. In any case, the assessee is not engaged in the business of making investments in residuary interest or acquisition of interest under the Wills. This was a solitary transaction indulged by the assessee. On a question from the Bench that whether a single transaction can never be construed as 28 ITA NOS.4573 & 4424/Mum/08 business in the nature of adventure in trade, he agreed that in some cases even a single transaction may constitute adventure in the nature of trade but in that case such transaction must have some elements or features of the business. In the present case, the assessee had not indulged any transaction on commercial considerations for earning a huge fortune by making a small investment. The transaction was entered into between the parties who had long personal relationship and at the instance of BW and the assessee was appointed Administrator of the estate of EFD right from 1972 onwards. As pointed out earlier, the assessee's sons were to inherit the properties of BW and, therefore, even in the absence of this transaction assessee's family would have been in any case inherited BW's interest in the estate of EFD. Therefore, under these circumstances, the transactions entered into by the assessee under the Indenture dated 26.9.2001 could not be construed as business transaction for the purpose of section 28 of the Act. For this proposition, Shri S.E. Dastur strongly relied on the decision of the Hon'ble Madras High Court in the case of Mothay Gangaraya vs. CIT ( 3 ITR 58). He argued that in that case, the facts were almost identical. The assessee was land owner and money lender and also had interest in some cotton mills. The assessee purchased in an auction the right, title and interest of a person who was one of his debtors in certain legacies for a sum of Rs.39,800/-. There was prolonged litigation and the assessee had to incur certain expenses on such litigation. Ultimately, the assessee was able to recover a sum of Rs.1,97,025/- which resulted into a surplus of 29 ITA NOS.4573 & 4424/Mum/08 Rs.1,50,399/-. The same was subjected to tax by tax authorities on the ground that this transaction was an adventure in the nature of trade. When the matter traveled to the High Court, it was held that the transaction was not an adventure in the nature of trade because same had no connection between the money lending business or other business of the assessee. The income was ultimately held to be not assessable. . He emphasized that fact of the assessee's case are almost identical and, therefore, ratio of this decision should be applied in this case. Since in the case before us, the assessee had entered into only a solitary transaction and the same is not connected with any of the businesses of the assessee and therefore same cannot be treated a transaction resulting in an adventure in the nature of trade. Therefore, the CIT(A) was correct in holding that the impugned receipts would not be construed as a business being adventure in the nature of trade for the purpose of section 28 of the Act.
34. Coming to the alternative finding and contentions of the revenue that the said receipt could be assessed as a short term capital gain, he submitted that this is totally misconceived because no transfer has taken place for attracting the provisions of section 45, there has to be an asset and the same must have been transferred only then the resultant gain or loss can be assessed as capital gains or capital loss. He admitted that the assessee along with four associate companies had purchased the rights to receive the sale proceeds on the disposal 30 ITA NOS.4573 & 4424/Mum/08 of the properties which belonged to the estate of EFD but such rights would vest in the transferees i.e. assessee and his four associate companies only after the death of BW. During the life time of BW, she could enjoy her life interest in the properties. He submitted that there was no intention to transfer the properties to the transferees in terms of the Indenture and in this regard specifically referred to clause 4(b) in the Indenture. Further BW herself was never the full owner of the EFD properties in India. Therefore, there was no question of transferees receiving full ownership of the properties. He admitted that despite of all these contentions as observed by the learned CIT(A), this right to receive the sale proceeds can be construed as capital asset but then bringing the same under the tax net, there has to be a transfer of such right. The Assessing Officer has alleged that the transfer has taken place in terms of extinguishment of these rights. He argued that no extinguishment has taken place. The rights acquired under the Indenture continued to remain there even after receiving some sale proceeds. Against these rights certain payments have been made by the Administrator out of the estate of EFD, however, these payments did not result in extinguishment of any of the assessee's rights acquired under the indenture. This is so, because prior to the receipts of impugned receipts the right to receive continued against the Administrator. Therefore, there was no extinguishment of any right which the assessee had acquired under the indenture. Since there was no extinguishment of any of the assessee's rights, the amounts received could not be charged under the head capital gains as sec.45 31 ITA NOS.4573 & 4424/Mum/08 comes into picture only after the transfer of assets. In the present case, since no transfer had taken place within the meaning of sec.2[47] of the I.T.Act, there could not be any assessment of the impugned sums under the head 'capital gains'. He emphasized that in the present facts of the case the decision of the Hon'ble Supreme Court in the case of Kartikeya V. Sarabhai [supra] was not applicable. In that case, assessee had received consideration upon part redemption of preference shares consequent to which the assessee's rights as share holder vis-à-vis the company and other share-holders suffered part extinguishment and that is why the court held that there was a transfer of capital asset which was held to be assessable under the head 'capital gains'. However in the case before us, the assessee's rights acquired under the indenture continued and remained unaffected even after the receipts of impugned sums. Under the indenture assessee was to receive 60% of the sale proceeds on disposal of the properties of the estates of EFD and these rights remained unchanged and, therefore, there was no extinguishment of any of the assessee's rights and, accordingly, no transfer has taken place during the year.
35. According to the Ld. Sr. Advocate, in fact, the receipts of various amounts of sums by the assessee and his four associate companies from the Administrator basically amounted to distribution of sums on taking out or "working out of rights". In this regard, he referred to the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai [91 ITR 393]. In that case a question arose 32 ITA NOS.4573 & 4424/Mum/08 whether relinquishment of interest in a partnership amounts to transfer of capital assets, and the Hon'ble High Court after detailed discussion, held that such relinquishment would not amount to transfer but is basically working out of the rights. Following this analogy, according to Ld. Sr. Advocate, receipts of certain sums from the Administrator in realisation of pre existing rights did not amount to transfer of any capital asset for the reason that before the payment was actually realised each party's respective entitlement therein was the same. On receipts of payments from Administrator neither any new rights were acquired, nor existing rights of the parties were extinguished and, therefore, this would amount to working out of the rights.
36. The Ld. Sr. Advocate further argued that ownership of the properties of EFD never belonged to BW because she had only life time interest. Even after the will being held to be invalid by the Bombay High Court to the extent that bequeathal of the properties to two American Charities, the properties remained vested in the Administrator and the estate of EFD continued to file income tax as well as wealth tax returns of the properties and the department have accepted these returns as income of the year and even assessment orders have been passed in some years after scrutinizing the same u/s.143[3]. This means the existence and continuance of estate have been recognized by the department. Therefore, the estate continued to be in existence even after the death of BW which in turn means that the properties were never transferred to the assessee and, therefore, there was no question of making any transfer by the assessee.
33 ITA NOS.4573 & 4424/Mum/08
37. The Ld. Sr. Advocate again emphasized that the amounts distributed by the Administrator included even certain advances received by the Administrator from the prospective buyers of the properties of the estate. Such advances were reflected as liability and obviously the estate was not liable to pay any capital gains tax on such advances. Since the Administrator was required to make payment of taxes u/s.168 only on the income arising from the transfer of immovable properties, the advances could not be subjected to capital gains tax in the hands of the assessee who did not transfer any rights and it was only a receipt of sale proceeds from the Administrator. Therefore, subjecting the sale receipts in the hands of the assessee again on distribution would amount to double taxation of the same amount which is not permissible under the law.
38. The Ld. Sr. Advocate strongly supported the order of the CIT(A) for holding that assessee was in any case entitled to claim exemption u/s.47[iii] of the Act. He argued that BW had the right to receive and enjoy the sale proceeds of properties belonging to the deceased. This right was provided to her under the will of EFD. BW had the right to claim and demand such receipts from the Administrator during her life time. Such right became absolute once bequeathal to two American Charities was set aside by the Bombay High Court. As the BW had acquired the rights in terms of the will of EFD, these rights were capable of being transferred by her for a consideration or even without a consideration. In case of such transfer, such transferee by her right had the same right to demand performance of the right from the 34 ITA NOS.4573 & 4424/Mum/08 Administrator. Therefore, merely because assessee acquired the rights from BW under indenture dated 26-9-01, it would not mean that the payments made by the Administrator ceased to be payments under the will. He submitted that the provisions of sec.47[iii] needs to be examined from the point of view of a transferor i.e. Administrator of the estate in the case before us and since the Administrator was legally obliged and liable to make payments to BW under the will and failing her, the payments were to be made to the persons nominated or appointed by her. Thus, the nature and character of the payments in the hands of the payer continued to be the same, i.e., payments under the will. He further submitted that as these amounts were received by BW from the estate, naturally, same would have qualified for exemption u/s.47[iii] of the Act, then by equal force and on the same footing, same exemption should be available to the assessee in terms of the indenture. According to him, it was not necessary to prove that the amounts have been received only by a person specified in the will and what is required to be proved is that the amounts have been received under the will. As in the present case, the Administrator was under the obligation to pay the income arising from the properties of the estates to BW or her nominees, the payments made by the Administrator even to the nominees were in terms of the said will and, accordingly, sec.47[iii] of the I.T.Act was not applicable.
39. The Ld. Sr. Advocate while dealing with the issue regarding transfer of government bonds referred to various documents placed in 35 ITA NOS.4573 & 4424/Mum/08 the paper book at pages 97 to 169 in respect of transfer of the Government of India bonds. He pointed out that as per notification of the Ministry of Finance and Company Affairs, dated 13-3-2003, bonds could be held in the name of individual and since estate was not a separate juristic entity, the bonds were applied in the personal name of the Administrator. He particularly referred to pages 121 to 125 of the paper book, which is a copy of the application and pointed out that P.A.N. of the estate was provided in the application which clearly shows that the bonds were acquired by the estate and assessee purchased them before the death of BW. He submitted that these bonds were accounted for in the books of estate as an asset and the bonds were not transferable in terms of the issue till maturity and as such the estate could not have legally transferred these bonds to the assessee. However, under misconception of law the transfer of bonds was recorded in the books of the assessee as well as the estate by passing accounting entries in their respective books. The Ld. Sr. Advocate argued that when such transfer was not possible under the law, then on merely passing the accounting entries the income cannot be said to have been accrued to the assessee because such transfer was invalid. In any case, these entries were rectified by reversing the entries in the books of the assessee as well as the estate in F.Y 2006- 07 and, therefore, no income can be said to have accrued to the assessee on account of transfer of these bonds.
40. We have considered the rival submissions carefully in the light of the relevant material on record as well as the decisions cited by the 36 ITA NOS.4573 & 4424/Mum/08 parties. Both the Counsels have filed written submissions also summarizing the oral arguments by them and these submissions have also been considered. We find that there is no dispute in respect of the facts of the case which have been noted by us at the beginning of this order. The disputes are basically on account of inferences or interpretations to be made on those facts. The Revenue has challenged the impugned order by raising two grounds. The first ground reads as under:
"1. The learned CIT(A) erred in treating the receipt of Rs.71,63,36,000/- received on transfer of land as non taxable without appreciating the fact that the assessee is not the "residuary legatee" of Late Shri E.F.Dinshaw and the control, management and ownership of the properties consisting of the Estate of Shri E. F. Dinshaw vests totally with the assessee."
Thus, in this background revenue has raised two disputes, [i] that the ld. CIT(A) erred in holding that receipt of Rs.71.63 crores on transfer of land is not taxable and [ii] the assessee is not the residuary legatee of EFD, as control, management and ownership of the properties of EFD vested totally with the assessee. We are of the view that first part of the ground is totally misconceived because revenue is going on the assumption that assessee has transferred some land. The facts show otherwise. EFD executed a will in 1970 by which his sister BW became beneficiary of the income from the estates of EFD and upon her death the properties were to go to the two American Charities. The bequeathal of the properties two American Charities was held to be invalid by the Bombay High Court. In the meantime, BW sold her rights to receive the distribution of sale proceeds after her death to the assessee. In fact, assessee has received the money out of such 37 ITA NOS.4573 & 4424/Mum/08 distribution. The estate had received monies either by way of advances or by sale proceeds against sale of properties. Here again, we have to remember that the properties have already been given for development to certain developers and estate was entitled only to 12% of the sale proceeds and the balance of 88% was to go to developers because they were not only required to develop the properties, but were also required to remove the encroachments and other legal impediments. Whenever any advance was received the same was treated as liability in the hands of the estate and whenever a conveyance was executed the same was treated as receipts of sale consideration and even proper taxes arising out of transfer were paid by the estate. Such sale proceeds and advances were accumulated over the years and during the relevant year assessee received certain sums out of distribution of such sale proceeds as well as advances. The assessee had not sold any particular piece of land during the year and, therefore, Ld. CIT(A) has correctly held that the receipts would not be chargeable to income tax. In the absence of sale of a particular asset, revenue cannot assume that the sums are taxable on transfer of land. The second part of the ground raises an objection against the finding of the Ld. CIT(A) that assessee was not a residuary legatee of the EFD because the control, management and ownership of the properties belonging to the estate were totally vested in the assessee. As noted earlier, BW had only the beneficiary interest from the properties which were vested in the trust and was also the sole executrix of the will. The assessee, i.e. Mr. Nusli N. Wadia was appointed as an Administrator in 38 ITA NOS.4573 & 4424/Mum/08 place of Mr. Jehangir Behram Dubash who had shown his inability to continue as Administrator by the order of the High Court dated 21-12- 1972. Therefore, the properties were vested in the administrator i.e. Mr. Nusli N. Wadia in his capacity as 'Administrator'. The Administrator was required to pay income of the properties to BW but before doing that assessee under the law i.e. sec.168 of the I.T.Act was required to pay taxes on behalf of the estate. Even after the death of BW assessee made an application before the Hon'ble High Court for continuing as Administrator. A copy of the order of the High Court is available at pages 79 to 96 of the paper book. The reasons for continuance of Mr. Nusli N. Wadia as an Administrator have been given at para-16 of the petition which are as under:
"16. The Petitioner submits that he, being appointed as Administrator of the deceased's estate in India by the aforesaid Order dated 21st December 1972, is entitled to continue with such administration. However, since the said Bachoobai was the sole Executrix of the deceased's Will dated 4th February 1970 of which Probate was granted to her under the Seal of the Surrogate's Court of the County of New York, New York, U.S.A. as aforesaid, the Petition has been advised to approach this Hon'ble Court by this Petition for orders authorizing and permitting him to continue with the administration of the deceased's estate in India for the following reasons which are stated without prejudice to one another.
(a) As stated above the Transferees are entitled to the proceeds of the sale and/or disposal of the corpus of the deceased's estate in India to the extent to which the same consisted of immoveable properties forming part thereof including monies received in advance and then invested in bonds, securities, deposits and bank balances subject o and reserving a charitable donation of Rs.100,000,000/- and are bound by all actions of the Petitioner in regard to the administration of the deceased's estate in India as aforesaid. The Petitioner as a transferee is entitled to sixty per cent of the deceased's said estate in India. The Petitioner is therefore the most appropriate person to continue with the administration of the deceased's estate in India. The remaining Transferees have, by the writing hereto annexed and marked Exhibit "A" expressed their unqualified agreement to the
39 ITA NOS.4573 & 4424/Mum/08 Petitioner continuing with the administration of the deceased's estate in India, have expressed full confidence in the Petitioner and have reaffirmed that they [the Transferees] are not entitled to call upon the Petitioner to transfer to them the immoveable properties located in India and forming part of the deceased's estate.
(b) The immovable properties located in India and forming part of the deceased's estate consist of lands susceptible to encroachments, trespassers and false claims by residents of the locality. During the three decades for which the Petitioner has handled the administration of the deceased's estate in India, he has constructed boundary walls/fencing to keep of the encroachers/trespassers, has engaged security guards, has instituted and defended suits and other Legal proceedings and has taken all appropriate measures to protect and preserve the said lands. Parts of the said lands have been acquired under the Land Acquisition Act, 1894 and the Petitioner has taken steps to recover proper compensation in land acquisition proceedings, including contesting names under Sac.18 of the Land Acquisition Act. 1894. The Petitioner has recovered benefits from surrender of parts of the said lands to the Municipal and other authorities in accordance with reservations relating thereto under the Development Plan of Greater Mumbai. There are inert than 30 suits and other legal proceedings pending by and against the Petitioner in respect of the said - lands various Courts inMumb no less than half of them in this Hon'ble Court. The Petitioner and under his guidance, the staff engaged by him deal with these legal proceedings. The Petitioner is a party to and ís in the know of all these legal proceedings anal if the Petitioner is not allowed to continue with the administration without any delay, the interests of the deceased's estate and of the Petitioner himself and the remaining Transferees will be adversely affected.
(c) With a view to maximize returns from the immoveable properties located in India and forming part of the deceased's estate, the Petitioner (with the concurrence of the said Bachoobai when she was alive)has entered into arrangements with developers of real esate to develop said lands on the basis that the said developers will, at their own costs, take all necessary steps for development (like laying out the said lands into plots constructing roads, drains, sewn, arranging power supply. providing infrastructure. getting approvals for construction work, etc.).carry out constriction work and sell premises in the development. In the course of such development and sale, the Petitioner will receive the value of the land which will be transferred to the buyers of premises. To enable the development to proceed smoothly and speedily the Petitioner is - required to execute various papers and documents and such execution cannot brook delay, which makes it all the more necessary for the Petitioner to continue with the administration.
40 ITA NOS.4573 & 4424/Mum/08
(d) The Petitioner has been most diligent in administering the deceased's estate in India, has maintained full and true accounts of his dealings and has caused the said accounts to be audited by independent practicing Chartered Accountants.
(e) The said Bachoobai had total confidence in the Petitioner and regarded him as her own son. The said Bachoobai has made a Will in respect of her personal properties of whatsoever nature or sort situated in India and has appointed the Petitioner as sole Executor thereof. The Petitioner is taking steps to obtain Probate of the said Will. The two sons of the Petitioner are the beneficiaries under the said Will.
Thus, from the above, it is clear that there were various reasons for the continuance for the existence of the estate, particularly, the reason that a sum of Rs.10 crores was reserved for charity. In fact, the fact that the sum of Rs.10 crores was required to be paid to charity was made clear even in the indenture dated 26-9-2001 vide clause 3[a] which reads as under:
Clause 3[a]: The transferees shall not do or omit to do anything touching the said premises which affects or is likely to affect in any manner the Transferor's right to receive the income of the said premises during her lifetime and down to her death and/or the donation of a sum of Rs.100,000,000/- [Rupees one hundred million] which the Transferor shall instruct the Administrator to make, at any time after the date of the Transferor's death, to the Trustees of the F. E. Dinshaw Trust constituted under the Indenture of Settlement dated 28th December, 1973 as aforesaid."
From the above, it is clear that the estate was required to continue because of various reasons like pendency of various litigations and the requirement to donate certain money to the charity. Since the estate was continuing, therefore, there was no possibility of the assessee acquiring of the rights of the properties of the estate of EFD. The assessee only acquired the rights to sale proceeds and the estate still continued because the Hon'ble High Court in its order dated 20-11- 2003 allowed the assessee to continue as Administrator. Thereafter, assessee kept on administering the estate and also filed income tax as
41 ITA NOS.4573 & 4424/Mum/08 well as wealth tax returns in the capacity of administrator. Copies of the income tax and wealth tax returns were not made part of the original paper book and on the direction of the Bench same have been filed vide letter dated 16-6-2011. A perusal of these documents clearly shows that the assessee in the capacity of Administrator has filed income tax and wealth tax returns on behalf of the estate of EFD for A.Yrs. 2004-05 to 2010-2011. For A.Yrs. 2005-06, 2006-07 and 2008- 09 the assessment orders have been passed u/s.143[3] in the name of the Administrator of the estate of late Mr. E. F. Dinshaw. This clearly shows that the existence of the estate of EFD was accepted even by the department. We further find that the Ld. CIT(A) has dealt with this aspect at paras 45 to 59 by referring to various provisions of Indian Succession Act, 1925 and various case laws as to how the estate was required to be administered and in whom such properties would vest. We are of the view that there is no need to deal with such provisions in detail again, but all these facts clearly show that estate of EFD was in existence under the administration of the assessee in the capacity of Administrator. The Ld. Sr. Standing Counsel of the Revenue has not made any submission or brought any material on record to prove that the finding of the CIT(A) in this respect are wrong. Further, it is also noted that even as per clause 4[b] of the indenture transferees did not have any right to get the properties transferred in their name. The relevant clause reads as under:
"Clause 4[b]: None of the Transferees shall call upon the Administrator to transfer to him, her them or it the immovable properties located in India and forming part of the deceased's estate in India."
42 ITA NOS.4573 & 4424/Mum/08 In view of these facts and discussion, we are of the view, that even second part of the first ground raised by the Revenue is not maintainable and, therefore, we reject ground No.1 of the appeal of the Revenue.
41. Ground No.2 raised by the Revenue is as under:
"The learned CIT(A) ought to have treated the receipts either as short term capital gain or adventure in the nature of trade."
42. For deciding this ground let us recapitulate the facts again which would clearly show the nature of receipts. The receipt of sum of Rs.71.63 crores consisted of following:
1. Payments made Rs.27,13,36,000/-
2. 7% Government of India Bonds-2003 Rs.36,00,00,000/-
3. 6.5% Government of India Bonds-2003 Rs. 8,50,00,000/-
EFD who was resident of U.S. was the owner of various immovable properties in India. He executed a will in 1970 through which a trust was created and BW was appointed as sole executrix. BW was the sister of EFD and was also made sole beneficiary of the incomes of the trust properties. On the death of BW the properties were to go to two American Charities as per the will. Since BW was living in USA she appointed Mr. Jehangir B. Dubash as Administrator of the properties, however, he showed a reluctance to continue as Administrator of the estates, therefore, assessee i.e. Mr. Nusli N. Wadia was appointed as Administrator at the request of BW and his appointment was confirmed by the Bombay High Court vide its order dated 21-12-1972. In and around 1995 the Administrator of the estate entered into various 43 ITA NOS.4573 & 4424/Mum/08 development agreements with certain developers for development of the immovable properties. The developers were required to remove all encroachments as well as other legal impediments. BW who had life interest in the properties was confirming party to these agreements. In consideration, estate of EFD was to receive 12% of the sale proceeds received from the customers for the built up area and 88% of the sale proceeds were to go to the developers as their share. Consequent to these development agreements, the estate started receiving certain advances as well as sale consideration. Now before these amounts could be distributed the estate was required to file separate income tax returns in terms of sec.168 of the I.T.Act. From the copies of the returns made available before us, it becomes clear that estate of EFD had regularly filed income tax returns upto A.Y 2010-2011, some of which have been scrutinized and assessment orders have been passed u/s.143[3]. The returns have been filed in the name of the Administrator of estate of late EFD and assessment orders have also been made in that name. Initially the income received by the estate were assessed as business income in the hands of the estate, but the Ld. Sr. Advocate of the assessee pointed out that the estate challenged these assessments and the Tribunal held that income of the estate from sale proceeds of the properties should be assessed under the head 'capital gains' and accordingly revenue has assessed the same under the head 'capital gains. Whenever a sale was executed such receipts were treated as sale proceeds and offered to tax under the head 'capital gains'. But whenever only advances were received by the 44 ITA NOS.4573 & 4424/Mum/08 estate, same were treated as liabilities in the books of estate and when actual conveyance was executed in favour of the customers who had paid the advances, then such receipts were transferred to sale receipts and the same were offered for taxation at the time of execution of conveyance. Before making any distribution of income as per the provisions of sec.168 of the I.T.Act, the Administrator was liable to pay taxes and only thereafter any distribution could have been made in favour of the beneficiary of the will. Therefore, once the taxes are paid by the estate, naturally, the beneficiary receiving any distribution of such sale receipts could not have been taxed again by the revenue.
43. During the course of hearing, Ld. Sr. Advocate of the assessee further pointed out that out of the total sum of Rs.27,13,36,000/- by bank transfers, only a sum of Rs.13.47 crores was distributed by the Administrator out of the income which was accumulated over the period of years by the estate of EFD. He had also argued that once the estate had suffered the tax, then the same amount could not be taxed again in the hands of the transferees. We find merit in this argument that same item of income cannot be taxed twice because this receipt could not have been treated as taxable item in the hands of BW. Merely because assessee has entered into an indenture dated 26-9- 2001 by which assessee became entitled to receipt of distribution of sale proceeds from the Administrator in place of BW, would not change the basic principal that no item of income can be taxed twice. In fact, same view has been taken by the department itself in the case of M/s Sevakunj Investments & Co. Pvt. Ltd. [which has now been renamed 45 ITA NOS.4573 & 4424/Mum/08 as Go Investments & Trading Pvt. Ltd]. This fact became clear because appeals of four associate companies were also heard together and in I.T.A.No.1646/M/09 pertaining to M/s Sevakunj Investments & Co. Pvt. also similar issues raised in the Revenue's appeal also arise as raised in the case of the assessee. In case of this company the assessment was reopened on the basis that income has escaped assessment on account of the sum of Rs.11,93,88,000/- which was credited to the capital reserve account, but not offered for taxation. As observed right at the beginning of this order that assessee had entered into the indenture dated 26-9-01 along with four associate companies and assessee along with these four companies had paid a consideration of Rs.20 lakhs to BW for getting the right to receive the sale proceeds from the Administrator of the estate. 60% of the rights were to go to the assessee and 10% each of the rights were to go to each of these associate companies. Therefore, M/s Sevakunj Investments & Co. Pvt. also became entitled to receive 10% of the sale proceeds by way of distribution. In the case of the assessee the argument that this income had suffered tax in the hands of the estate was rejected by the AO because details were not available. However, Ld. CIT(A) has accepted this position who after detailed discussion held that same item of income cannot be taxed twice. While dealing with this argument at page 10 clause [vii] of the assessment order in the case of M/s Sevakunj Investments & Co. Pvt. it has been observed as under:
"(vii) The submission of the assessee, without prejudice to his stand that no tax liability arises in his hand, that in any case sum of Rs.13.47 crores, being the consideration on which Estate has already paid appropriate capital gains tax in the relevant years not being the
46 ITA NOS.4573 & 4424/Mum/08 current year has been considered. It has been brought out by the assessee that similar request was made in the assessment of Mr. Nusli. Wadia but the same was not considered by the assessing officer for want of details. Now the assessee has produced the necessary details in this regard. Accordingly since there are four companies as beneficiaries each having a distinct and identified share, 10% of Rs.13.47 crs which works out to Rs.1.35 crs is excluded from the taxable income."
After this observation, the income was finally computed as under:
Total receipts on account of sale of properties Rs.11,93,88,000 Less: Cost attributable to assessee's share as discussed Rs. 19,000 Less: Portion of capital gains which had already Rs. 1,37,00,000 been subject to capital gains tax in the hands of the estate
---------------------
Short Term Capital Gains Rs.10,56,78,000
===========
Thus, from the above, it is clear that sale receipt against which conveyance deed was already executed and which were assessed in the hands of estate of EFD, were not subjected to tax again.
44. Now let us examine the other portion of the receipts. It was pointed out that in the case of the assessee also out of the total receipts of Rs.71.63 crores, a sum of Rs.63.5 crores distributed by the Administrator was out of the advances received from the purchasers and developers. Such advances were paid by the prospective customers against the purchases. It is not denied by the Revenue that these amounts represented advances because as and when same were converted into sale, same were offered to tax in the hands of estate of EFD. Now, if the receipts on which taxes have been paid were not taxed by the revenue in the case of M/s Sevakunj Investments & Co.
Pvt., then the receipts which never had the character of income, can
47 ITA NOS.4573 & 4424/Mum/08 also not be taxed, because, such advances would represent only liability as and when they would be converted into sale proceeds and taxes would be payable by the estate and, in fact, has already been offered for taxation in the hands of estate of EFD. Even if such advances have been distributed by the Administrator to the transferees which included the assessee also, would not change the basic character of the receipts. As pointed out earlier, the estate of EFD continued to be the owner of the properties in question at least for income tax purposes because as per sec.168 of the I.T.Act it is the Administrator who has to pay taxes on the income of such estate.
45. Section 168 reads as under:
168. (1) Subject as hereinafter provided, the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor,--
(a) if there is only one executor, then, as if the executor were an individual; or
(b) if there are more executors than one, then, as if the executors were an association of persons;
and for the purposes of this Act, the executor shall be deemed to be resident or non-resident according as the deceased person was a resident or non-resident during the previous year in which his death took place. (2) The assessment of an executor under this section shall be made separately from any assessment that may be made on him in respect of his own income.
(3) Separate assessments shall be made under this section on the total income of each completed previous year or part thereof as is included in the period from the date of the death to the date of complete distribution to the beneficiaries of the estate according to their several interests. (4) In computing the total income of any previous year under this section, any income of the estate of that previous year distributed to, or applied to the benefit of, any specific legatee of the estate during that previous year shall be excluded; but the income so excluded shall be included in the total income of the previous year of such specific legatee. Explanation.--In this section, "executor" includes an administrator or other person administering the estate of a deceased person.
48 ITA NOS.4573 & 4424/Mum/08 Explanation to above section very clearly provides that executor would include the administrator. Further, as observed by the Ld. CIT(A) the Hon'ble Bombay High Court in the case of CIT vs. Mrs. Usha D. Shah [supra] has clearly held that in the case of estate the taxes have to be paid by the executor. In this case assessee was a widow of other deceased member of an HUF. For A.Yrs. 1961-62 to 1963-64, the AO included the income of the assessee's 1/6th share of income arising from the HUF property, rejecting the assessee's contentions that as the income from the estate of the property in question has remained undistributed, she had not received any portion of the income and the whole of which had been received by her mother-in-law who administered the estate. On appeal, AAC upheld the assessee's claim which was further confirmed by the appellate Tribunal. On a reference, the Hon'ble High Court held as under:
"Held, that though the deceased not left any will, there was no executor in that sense nor were any letters of administration obtained, the mother of deceased was in fact in management of the estate after his death. In view of the wide definition of "executor" in the Expln. to s. 168[1] of the Act, she would be covered by the definition and, since there was no discretion left with the tax authorities, the income from the estate of the deceased could be charged to tax only in the hands of his mother of the deceased. The assessee was not, therefore, liable to be taxed on the income from the undistributed personal estate of the deceased or the income from the undistributed share of the interest of the deceased in the HUF."
Thus, it is clear from the above that whenever an estate is in existence, which in the case before us is definitely there, then taxes on the income of the estate are required to be paid only by the executor which would include administrator also and in the case before us the Administrator had already filed income tax returns which had been 49 ITA NOS.4573 & 4424/Mum/08 assessed also, which means, Revenue has accepted that income arising from the estate belonged to the estate. In these circumstances, advances received by the estate cannot be treated as income unless the same have been converted into the sale proceeds by execution of the conveyance deed. In fact, such advances have been treated as liabilities and whenever sales have been affected, they have been transferred to the sales account and offered for tax accordingly by the estate. Therefore, such advances if cannot be treated as income in the hands of the estate, then in turn, the same cannot be treated as income in the hands of the beneficiary, particularly because the liability of the estate existed to pay the taxes whenever such advances were converted into sale. Thus, if the distribution made by the Administrator could not be treated as income in the hands of BW, then similarly same cannot be treated as income in the hands of the assessee also. In our opinion, the sum of Rs.71.63 crores count not have been treated as income in the hands of the assessee.
46. We would also like to observe that the sum of Rs.71.63 crores received by the assessee included a sum of Rs.44.50 crores being the value of tax free Government of India bonds was also transferred only by way of mere accounting entry. As pointed out by the Ld. Sr. Advocate of the assessee as per the notification of Government of India, Ministry of Finance & Company Affairs dated 13th March, 2003 [copies of the relevant documents are placed at pages 97 to 159 of the paper book] the bonds could have been applied only in the name of an individual and there was no provision for making an application in the 50 ITA NOS.4573 & 4424/Mum/08 name of the estate. The bonds were applied in the name of Administrator in his individual name and even P.A.No. of estate was given which becomes clear from the copy of the application, particularly page 122 where the P.A.No. has been given as AAEPD8394A which we have verified from the assessment order of the estate and same belongs to the estate of EFD. Further, these bonds were not transferable and assessee might have transferred the bonds by way of distribution under a wrong notion. It was stated that even such entries have been reversed. Moreover, these bonds have been distributed out of the advance receipts and, therefore, could not have been included in the income of the assessee as observed in the above para.
47. Coming specifically to the two issues raised by the Revenue in the second ground, let us first deal with the issue whether the receipts constitute income from an adventure in the nature of trade or not. The AO has originally made the whole discussion as if the receipts were to be taxed as short term capital gains, but later on, as an alternative he also observed that alternatively these receipts can be treated as business receipts out of the adventure in the nature of trade. The main reason AO has given for this is that since assessee was acting as the Administrator for almost 30 years and he knew that bequeathal of the properties to two American Charities may be held invalid in view of sec.118 of Indian Succession Act, 1925 therefore, by investing a small sum assessee could make a big fortune if ultimately the bequeathal to the two American Charities was held to be invalid. The Ld. Sr. Standing 51 ITA NOS.4573 & 4424/Mum/08 Counsel has also laid lot of stress on this fact and pointed out that assessee would not have received anything but for the indenture dated 26-9-2001 entered into by the assessee with BW. He had also laid emphasis on the fact that the indenture was subject to the order of the Bombay High Court wherein bequeathal of the properties to two American Charities was challenged and, therefore, this clearly shows that assessee had protected himself by making the indenture subject to the out come of the order of the High Court. Thus, by taking practically no risk assessee had invested the total sum of Rs.20 lacs along with four associate companies and has obtained 60% rights for receiving the sale proceeds from the immovable properties for his personal consideration of Rs.12 lacs. But after examining all the facts, we are of the opinion that facts do not support the case of revenue. It cannot be said that the assessee had entered into transactions which can be called as adventure in the nature of trade. First of all, there was a close relationship between the assessee and BW and this fact is borne out from the fact that assessee was appointed as administrator way back in 1972. There is no allegation by the revenue that till the date of entering into an indenture, assessee had received any benefit out of the estate of EFD. It seems that BW had developed a close relationship with the assessee. Further, as mentioned clause [l] of the indenture dated 26-9-01 BW had entered into the indenture in view of her advanced age and was desirous of settling her affairs in her own life time. It was also mentioned in para-16 in petition before the High Court for continuing the appointment of the assessee as administrator 52 ITA NOS.4573 & 4424/Mum/08 that BW had total confidence in the assessee and treated him like her son. This assertion is supported by BW's personal will which was executed on 21-10-2001 i.e. almost within a month's time from the date of indenture [Copy of the said will has been placed in the paper book at pages 41 to 54]. Through this will BW had bequeathed her movable properties to her two cousins, namely, Ms. Rutty C.P.Wadia and Ms. Mary C.P.Wadia and all the immovable properties have been bequeathed to Mr. Ness N. Wadia and Mr. Jeh N. Wadia, who were the sons of the assessee. This clearly shows that BW had a very close relationship with the assessee and his sons. Naturally, before writing the will she must have expressed her desire to give the properties to assessee's sons and if that is so there was no need for the assessee to do any business with BW because in any case assessee's family would have got those assets through the will of BW.
48. We also find that for constituting the transaction as adventure in the nature of trade there has to be some business relationship or some commercial features in the transactions, but, apart from transaction nothing has been brought forward by the AO or Ld. Sr. Standing Counsel even before us. Clearly assessee was having a close relationship and BW was in advanced age and with a desire to settle her affairs she made these arrangements. However, if assessee was aware of the huge gain to be made out of this indenture, then it cannot be said that BW was not aware of this fact because after all she was also the owner of the other half share of the properties which had been inherited by her as well as EFD from their late father. Moreover, 53 ITA NOS.4573 & 4424/Mum/08 the right to receive sale consideration was to commence as per the indenture dated 26-9-2001 only after the death of BW. These facts do not indicate any commercial relationship.
49. In any case, the issue also stands covered by the decision of the Hon'ble Madras High Court in the case of Mothay Ganga Raju vs. CIT [supra]. In that case assessee was a land owner and money lender and also had interest in certain cotton mills. The assessee purchased on 22- 3-1926 right, title and interest of one Shri Parthasarthy Appa Rao in the legacy left by one Shri Venkayamma through the court auction. The purchase price was Rs.39,800/-. There was some protracted litigations between the date of purchase and the date of realisation of money along with the purchase cost the total expenditure came to Rs.46625-15-0. The assessee ultimately realised a sum of Rs.1,97,025/- from the reversions of the estate in question towards the amount due to him under the decree. Thus, assessee realised a surplus of Rs.1,50,399/-. The ITO held this excess receipt as assessable to income tax and the matter traveled upto the Hon'ble High Court. The Hon'ble High Court observed as under:
"In our view, this cannot be described as an adventure or concern in the nature of trade. The trading activities of the assessee were limited to lending money, owning land, if that can be called a trade, and having an interest in cotton mills and this is in no sense a transaction related to any of those activities. In this case, the interest in the legacies was not even purchased from anybody who was indebted to the assessee in his money lending business. It was an isolated transaction, although probably entered into by him as a speculation, as he happened to make a good profit out of it. We are quite unable to see that it has any connection whatever with any other trades or businesses carried on by the assessee. By itself, the purchase of an interest in legacies, the subject of litigation, cannot 54 ITA NOS.4573 & 4424/Mum/08 certainly be described as a trade or business. Reference has been made to the case of Rutledge vs. IRC (1929) 14 Tax Cases 490 (C. Sess.) : TC12R.572 by Mr. Patanjali Sastri in support of his argument. In that case, the appellant was a money lender who was also in 1920 interested in a cinema company. He had since that time been interested in various businesses. Being in Berlin in 1920 on business connected with the cinema company he was offered an opportunity of purchasing very cheaply a large quantity of paper. He effected the purchase and, within a short time after his return to England, sold the whole consignment to one person at a considerable profit and it was held that the profits in question were liable to assessment to income-tax and to excess profits duty as being profits of an adventure in the nature of trade. The facts of that case are quite dissimilar to those here. There, what was purchased was a quantity of toilet paper and it was a very large quantity, not a quantity which an ordinary person would buy for private use. It was of such a large quantity as clearly to make it a business transaction; and, obviously, the intention with which this large quantity was bought at an exceedingly low price was with the object of selling it later on at a favourable opportunity at an enhanced price and getting the benefit of the profit therefrom. This is quite clear, I think, from the judgment of Lord Sands who says at p. 497 :
"The nature and quantity of the subject dealt with exclude the suggestion that it would have been disposed of otherwise than as a trade transaction. Neither the purchaser nor any purchaser from him was likely to require such a quantity for his private use."
The view we take of the matter is that that case is certainly of no assistance to us, and that, with regard to this case, this was an isolated transaction in no way connected with any other trade or business activities of the assessee. That being so, we are unable to hold that it was an adventure in the nature of trade and, if that is so, then the sum in question was not clearly assessable to income-tax."
In the case before us also assessee is an industrialist but his main source of income is only salary. He is not doing any business directly. In no other case he has entered into any other transaction of purchasing residuary legacy. Therefore, in view of the above decision, the transaction entered into by the assessee for purchasing the right to receive the sale proceeds cannot be construed as a transaction which 55 ITA NOS.4573 & 4424/Mum/08 can be called an adventure in the nature of trade. Here we would like to mention that sometimes if facts so warrant even a single transaction can constitute the business transaction which may be called an adventure in the nature of trade but then same must have some commercial features. As pointed out above, in this transaction the relationship the assessee had with BW was of close proximity based on mutual faith and trust, but did not involve any element of commerciality. The other circumstance like BW bequeathing her personal properties to the sons of the assessee also shows that no commercial angle was involved. Therefore, in view of this transaction, it cannot be treated as an adventure in the nature of trade.
50. Coming to the second aspect regarding taxability of the receipt as capital gains, the Ld. Sr. Standing Counsel in the alternative had argued that, in any case, after the order of the High Court dated 22- 10-2001 declaring BW as having absolute right over the properties after declaring bequeathal in favour of the two American Charities as invalid, therefore, in terms of an indenture dated 26-9-01 assessee got the rights over the properties which have been transferred and the amounts received by the assessee are chargeable to tax under the head 'capital gains'. In any case, the right to receive sale proceeds would definitely constitute a capital asset and even the Ld. CIT(A) has also held that right to receive the proceeds would definitely constitute a capital asset and this fact was not disputed by the assessee, therefore, atleast transfer of these rights in terms of extinguishment would constitute transfer and same is taxable under the head 'capital 56 ITA NOS.4573 & 4424/Mum/08 gains'. In this regard he had strongly relied on the decision of the Hon'ble Supreme Court in the case of Kartikeya V. Sarabhai [supra]. However, these submissions seem quite attractive on the face of it but a closure scrutiny of the facts would show things otherwise. First of all, through an indenture dated 26-9-2001 only right to receive the sale proceeds was given to the assessee along with his four associate companies who were described as transferees. In fact, there was no transfer of the properties through the indenture dated 26-9-01. Clause 4[b] of the indenture specifically made it clear that transferees should not demand from the Administrator for transfer of immovable properties. Clause 4[b] reads as under:
"None of the Transferees shall call upon the Administrator to transfer to him, her them or it the immovable properties located in India and forming part of the deceased's estate in India."
This clearly shows that estate of EFD continued to be the owner of the properties and that fact has been accepted by the Revenue by assessing the estate in the hands of the Administrator because income tax as well as wealth tax returns have been accepted by the revenue. In fact, assessee's right was restricted only for receiving of sale proceeds from the properties. Since assessee was not owner of the properties, there is no question of transferring any rights in such properties. Further, the administrator could not distribute the proceeds from sale of the properties unless the administration was complete i.e. expenses and taxes of the estate were paid. Then there was a further condition for payment of donation of Rs.10 crores to a trust. After payment of such taxes etc., some sale proceeds and advances were 57 ITA NOS.4573 & 4424/Mum/08 distributed by the Administrator on which taxes were paid by the estate, therefore, there was no question of assessment of capital gains in the hands of the assessee as no capital asset was transferred. Even the High Court's order dated 22-10-01 declaring BW as having absolute rights of the properties would not result in giving any further rights to the assessee, because assessee's rights were limited to the rights provided in the indenture dated 26-9-01.
51. However, as far as the contentions of the Ld. Sr. Standing Counsel that atleast the right to receive the sale proceeds would constitute a capital asset is acceptable to us. Firstly, because this submission was not seriously challenged by the Ld. Sr. Advocate of the assessee. Secondly, even any right in a property has to be construed as a capital asset. However, for charging any amount under the head 'capital gains', the same has to be covered by sec.45 of the I.T.Act. section 45 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 [***] [54, 54B, [***] [54D, [54E, [54EA, 54EB,] 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."
The above clearly shows that for any capital receipt which can be brought under the provisions of sec.45 there has to be disposal of an asset by any of the mode referred to the definition of transfer u/s.2[47]. Unless and until there is a transfer of an asset as envisaged in sec.2[47], no capital gain or loss can be computed under these provisions, which mean that if there is any gain or loss on account of 58 ITA NOS.4573 & 4424/Mum/08 any receipt but transfer of asset is not involved then provisions of sec.45 cannot be applied. Thus, it is clear from the provision itself that transfer of an asset is the primary condition which must be satisfied before a receipt can be called as capital gain and/or capital loss u/s.45. The sine qua non of the capital gain or loss is that receipt or accrual thereof must have originated in the transfer of the capital asset within the meaning of sec.45[1] r.w.s. 2[47]. Section 2[47] reads as under:
Sec.2 (47) ["transfer", in relation to a capital asset, includes,--
(i) the sale , exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ;] [or] [(iva) the maturity or redemption of a zero coupon bond; or] [(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immov-
able property.
Explanation.--For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA;] From the above it is clear that one of the modes prescribed for disposal of an asset which can be covered by the definition of transfer is extinguishment. Now in the case before us, assessee obtained the right to receive sale proceeds along with four companies through indenture dated 26-9-01 which we have already observed would constitute a capital asset. Now whether the receipt of proceeds which consisted of 59 ITA NOS.4573 & 4424/Mum/08 sale proceeds as well as advances would constitute extiguishment. These rights were purchased by the assessee along with the four associate companies and assessee became entitled to receive 60% of sale proceeds of the immovable properties from the administrator. These rights were acquired by the assessee in F.Y 01-02 and rights were to come into effect only after the death of BW who expired in August, 2003. in the meantime, after taking up the accounts Administrator chose to make distribution of certain money and in that process assessee received the impugned sum in F.Y 03-04 i.e. A.Y 04- 05 which we are adjudicating. Now, even after such distribution the right to receive the sale proceeds continued, therefore, this right has not extinguished. The Ld. Sr. Advocate had argued that at best this can be termed as working out of rights as held by the Hon'ble Gujarat High Court in the case of CIT vs. Mohanbhai Pamahai [supra] which has been confirmed in turn by the Hon'ble Supreme Court in the case of Addl. CIT vs. Mohanbhai Pamabha [165 ITR 163]. Though this case pertained to a partner and the issue involved was whether relinquishment of interest in partnership upon retirement would amount to transfer or not and the ratio of this decision may not be strictly applicable to the case of the assessee, but the concept of "working out of the rights" in our view, can be applied to the facts of the case, because, assessee had acquired the rights to receive the sale proceeds in terms of indenture dated 29-6-01 which would come into operation after the death of BW. But this right will not vanish just because some payment has been received. Assessee's right on receipt 60 ITA NOS.4573 & 4424/Mum/08 of such payment does not suffer any diminution consequent to the receipt of the impugned sum. The AO as well as the Ld. Sr. Standing Counsel have strongly relied on the decision of the Hon'ble Supreme Court in the case of Kartikeya V. Sarabhai [supra]. In that case assessee had purchased certain non cumulative preference shares and some money was paid to the assessee by reducing the face value of the preference shares. The revenue was of the view that receipt of this money was taxable under the head 'capital gains'. The Hon'ble apex court held that since upon part redemption and reduction in the paid up value of preference shares, the right of the assessee as a shareholder against the company as well as other shareholders was partly extinguished and, therefore, transfer took place within the meaning of sec.2[47] of the I.T.Act and assessee was liable to pay capital gains tax. The head note reads as under:
"Section 2[47] of the Income-tax Act, 1961, defines "transfer" in relation to a capital asset. It is an inclusive definition which, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of capital asset. Sale is only one of the modes of transfer envisaged by s. 2(47) of the Act. Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under s. 45. A company under s. 100(1)(c) of the Companies Act has a right to reduce the share capital and one of the modes, which can be adopted, is to reduce the face value of the preference shares. Section 87(2)(c) of the Companies Act, inter alia, provides that "Where the holder of any preference share has a right to vote on any resolution in accordance with the provisions of this sub- section, his voting right on a poll, as the holder of such share, shall, subject to the provisions of s. 89 and sub-s. (2) of s. 92, be in the same proportion as the capital paid up in respect of the preference share bears to the total paid-up equity capital of the company". Hence when as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference share holder to the dividend or his share capital and the right to share in the distribution of
61 ITA NOS.4573 & 4424/Mum/08 the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such reduction of the right in the capital asset would clearly amount to a transfer within the meaning of that expression in s. 2(47) of the Income-Tax Act, 1961." Thus, from the above, it is clear that reduction in the face value of the preference shares was held to be an extinguishment because certain rights in terms of certain provisions of Companies Act, 1956 also stood reduced. However, in the case before us, the right of the assessee to receive the sale consideration has continued. The Ld. Sr. Standing Counsel did not elaborate as to how the assessee's right acquired under the indenture dated 26-9-01 got extinguished or diminished. In fact, as observed above such rights which were acquired in the F.Y 01- 02 and became enforceable only on the death of BW and Administrator paid the amounts on the pre existing rights in the proportion in which the rights were acquired by the assessee and his four associate companies, the payment of money by the Administrator in part satisfaction or in settlement of the pre existing rights cannot be considered as extinguishment of any rights. This situation can be easily understood by way of a simple example. Let us say one Mr. 'A' acquired rights to take out water from a well belonging to 'X'. Now whenever some water is extracted, can we say that right to take out water is extinguished? In our opinion, it cannot be said that right to extract the water comes to an end the moment few buckets of water are taken out. This right may come to an extinguishment when Mr.'A' gives further rights to say Mr.'B' to take out the water from 5 p.m. to 8 p.m. or any other hour, then it can be said that right of Mr. 'A' is 62 ITA NOS.4573 & 4424/Mum/08 curtailed or partly extinguished to that extent. In these circumstances, we are of the view, that since there was no transfer of any capital asset during the previous year, therefore, no capital gain tax can be charged on the impugned sum.
52. Both the parties have also made submissions on the applicability of sec.47(iii) and according to the Ld. Sr. Standing Counsel these provisions could not apply in the assessee's case because assessee is not a beneficiary under the will. On the other hand, Ld. Sr. Advocate for the assessee had argued mainly that this provision can be applied in every case where an asset was transferred under a will whether distribution is made to a beneficiary or to any other person. However, after considering the submissions, we are of the view that relevant portion of sec.47[iii] reads as under:
47. Nothing contained in section 45 shall apply to the following transfers :--
[i] .............
[ii] ..........
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust :
[Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under [any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued by the Central Government in this behalf];] Thus, it is clear that the above provision basically relates to a situation where some transfers shall not be considered as transfer. As observed by us earlier the transfer is sine qua non for attracting the provisions relating to capital gains. Since in above detailed discussion we have already held that mere receipt of sale proceeds by the assessee from 63 ITA NOS.4573 & 4424/Mum/08 the estate of EFD would not amount to any extinguishment of his rights and, accordingly, the receipt of the sum cannot be taxed under the head 'capital gains'. Therefore the issue regarding applicability of sec.47[iii] is only of an academic importance and, accordingly, we decline to go in further discussion and interpretation of this provision.
In view of the above detailed discussion, we are of the opinion, that there is no need to interfere in the order of the Ld. CIT(A) and accordingly we confirm the order of the Ld. CIT(A) and hold that receipt of Rs.71.63 crores is not taxable as business profits or short term capital gains in the hands of the assessee.
53. I.T.A.No.4424/M/08 [assessee's appeal]: In this appeal assessee has raised the following grounds:
1. The learned Commissioner of Income-tax (Appeals) erred in not adjudicating the alternative plea of the appellant that as the amounts received by the appellant could not have been distributed by the Estate of Mr. E. F. Dinshaw, the question of any amount being taxed in the hands of the appellant does not arise.
2. The learned Commissioner of Income-tax (Appeals) erred in not giving a specific finding that the amounts received were 'advances' and not proceeds of sale and/or disposal of the corpus of the Estate of Mr. E. F. Dinshaw in India to the extent to which the same consists of immovable properties and accordingly to that extent, the same ought to be excluded in computing the quantum received by the appellant in terms of the Indenture.
3. Each one of the above grounds of appeal is without prejudice to the other.
54. Ld. Sr. Advocate had submitted that these issues have not been adjudicated by the Ld. CIT(A) despite submissions made. Ultimately assessee had returned the funds received from the estate of EFD because of various legal issues. He submitted that in case the order of the ld. CIT(A) is reversed, then assessee's appeal would require to be 64 ITA NOS.4573 & 4424/Mum/08 remanded to the file of the CIT(A) for consideration of those submissions.
55. The Ld. Sr. Standing Counsel had agreed with this proposition.
56. As we have already upheld the order of the Ld. CIT(A), therefore, the issues raised in the assessee's appeal are only of academic nature and we decline to adjudicate the same.
57. In the result, the appeal of the revenue as well as assessee are dismissed.
Order pronounced in the open Court on this day of 15/7/2011.
Sd/- Sd/-
(D.K.AGARWAL) (T.R.SOOD)
Judicial Member Accountant Member
Mumbai: 15/7/2011.
P/-*