Income Tax Appellate Tribunal - Mumbai
Navin R. Kamani (Huf) vs Income-Tax Officer on 11 January, 1991
Equivalent citations: [1991]36ITD576(MUM)
ORDER
G.K. Israni, Judicial Member
1. By this appeal, theassessee has challenged the order of the learned CIT(A) dated 26-6-1986 for the assessment year 1981-82.
2. The following grounds have been raised in this appeal, viz :
I. Capital gains on sale of shares:
1.1 On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the levy of capital gains of Rs. 67,334 in respect of sale of shares of Kamani Metals & Alloys Limited and Indian Rubber Regenerating Co. Ltd.
1.2 The Commissioner of Income-tax (Appeals) failed to appreciate that the shares were not capable of improvement by expending money and accordingly do not constitute capital asset contemplated under Section 45.
1.3 Without prejudice to the aforesaid ground of appeal, the appellant submits that the Commissioner of Income-tax (Appeals) further erred in rejecting the appellant's submission that since the sale proceeds of the shares sold by auction had been appropriated towards repayment of the loan, there was a diversion of income by overriding title under a legal obligation which was enforceable in a Court of Law and accordingly no capital gains was chargeable on sale of the said shares.
3. The arguments of the learned authorised representative of the assessee and the learned Departmental Representatives were heard.
4. Ground No. 1.2. No arguments were advanced before us in relation to this ground. However, from a reading of the impugned order of the learned C.I.T.(A) we find that it was contended before him that since there could be no improvement in respect of the shares they could not constitute capital asset at all and hence Section 45 could not come into play. Support on this point was sought from the decision of the Bombay High Court in the case of Evans Fraser & Co. Ltd. v. CIT [1982] 137 ITR 493. The learned C.I.T.(A), however, took the view that the said decision of the Bombay High Court was distinguishable inasmuch as it dealt with the case of goodwill, which was an intangible asset, whereas the present case pertains to shares, which constitute a tangible asset. After consideration of the matter and study of the aforesaid ruling of the Bombay High Court, we find that there is no merit in this contention of the assessee and the same is liable to be rejected.
5. Grounds No. 1.1 and 1.3. These two grounds involve the question as to whether there had been capital gains on the sale of shares deposited by the assessee as a security for the debt due from the firm in which the assessee was a partner. The facts relevant to this question are that the assessee is one of the partners of the firm, M/s. Tube Distributors Agency. The said firm was indebted to M/s. Imkemex India Ltd., Calcutta. The said firm deposited the shares of the assessee and also of the other partners with the creditor company as a security for the repayment of the loan. This guarantee was evidenced by the agreement dated 19-1-1972 between the partners of the firm and the creditor company. On the default being made by the firm in repayment of the loan, the shares were sold by auction and the sale proceeds thereof were appropriated towards the repayment of the loan due to the creditor company by the firm. Since the entire sale proceeds were so appropriated, no part thereof came to be received by the assessee. On this basis, it was pleaded before the I.T.O. that no capital gains had arisen so as to be included in the total income of the assessee. This plea did not find favour with the I.T.O., who held that this was a case of capital gain and computed the same at Rs. 67,334 and taxed it as such. In the first appeal, the learned C.I.T.(A) has upheld the I.T.O.'s order.
6. Before us, the order of the learned C.I.T(A) was assailed by the learned authorised representative of the assessee, Shri Kamdar, on the following grounds, viz. :
(i) On a similar set of facts relating to another partner of the same firm, viz. Navnit R.Kamani, the assessing officer vide his assessment order dated 7-7-1988 has held this not to be a case of capital gains and has not subjected it to tax.
(ii) Since the sale proceeds of the shares were not received by the assessee and there was a diversion of income by overriding title under a legal obligation, which was enforceable in a Court of Law, there was no capital gain so as to be chargeable to tax.
7. So far as the first limb of the above argument is concerned, we are of the opinion that the assessment order dated 7-7-1988 passed by the assessing officer does not in any way render any assistance to the present assessee's case before us. A view of a matter, in volving a mixed question of law and facts, taken by an assessing officer in the assessment proceedings pertaining to one assessee cannot ipso facto be made applicable to the assessment proceedings pertaining to another assessee. This would be so even though the factual situation in both the cases may be the identical. This would be more particularly so where such order of the assessing officer is sought to be made the basis of a favourable finding on a mixed question of law and facts from an appellate authority. There may not be quarrel with the principle that a finding purely of facts on a given set of facts in assessment proceedings may be allowed to govern the decision on identical facts in another connected assessment proceedings. But then, this principle holds good in so far as the finding purely of facts is concerned. The position would be materially different where a question under consideration is a mixed question of law and facts. The present issue before us involves a mixed question of law and facts and, therefore, any decision of the assessing officer on the legal aspect of that question cannot be allowed to have any bearing on the decision of the Appellate Tribunal on such aspect. In this view of the matter, we are of the opinion that the present assessee is not entitled to any assistance from the decision of the assessing officer made in the assessment order pertaining to another partner, viz. Navnit R. Kamani.
8. The question which next requires consideration is as to whether a capital gain had arisen to the present assessee on the auction and sale of his shares deposited as a security with the creditor. It was argued by the learned authorised representative of the assessee that since the entire proceeds of the sale were appropriated by the creditor and no part thereof came to be received by the assessee, there was no case of capital gains so as to be taxable in the hands of the assessee. Supporton this point was sought from the decision of the Bombay 'E' Bench of the Tribunal in the case of Durgaprasad Parasrampuria [IT Appeal Nos. 1315 & 1316 (Bom.) of 86 and 300 (Bom.) of 1988, dated 18-3-1988] and the decision of the Hyderabad Bench of the Tribunal in the case of Attili NarayanaRao [IT Appeal No.l330/1312(Hyd.) of 1983 dated 10-10-1985.] Now, the decision of the Hyderabad Bench was earlier in time and it was that decision which was heavily relied upon by the Bombay Bench in the case of Durgaprasad Parasrampuria (supra). From a study of the aforesaid Bombay Bench decision, we find that the reasons which weighed with that Bench in arriving at its conclusion are stated in paragraph 12 of its decision and read as under:
12. ...There is no doubt that the decision of the Hyderabad Bench fully supports the appellant's claim. There is nothing wrong to accept the contention that the full value of the consideration received or accrued as a result of sale of capital assets to the appellant is only the net amount after satisfying the mortgage debt. As the mortgage debt in respect of the properties sold in the three years under consideration was more than the sale consideration, we are of the opinion that no capital gain accrued to the assessee because the entire sale consideration went towards meeting the mortgage debt only. We, therefore, following the judgment of the Hyderabad Bench (supra) hold that no capital gain was assessable in the assessment years 1981-82, 1982-83 and 1983-84. If that is so, there is no question of carry forward of any capital loss because after satisfying the mortgage debt the sale consideration became Nil and there cannot be any negative figure.
The relevant part of the decision of the Hyderabad Bench as reported in (1986) Case Digest/ITAT page 99, reads as under :
Capital gains can be computed only with reference to the pro tanto consideration received by an assessee towards his interest in the property sold. Suppose, a person's interest is not full-fledged and he is holding a limited interest, then, for the purposes of computing capital gains tax the whole price realised by the sale of the whole interest in the property cannot be taken for the simple reason that no man can convey a better title than what he himself has. In the present case, the assessee created a mortgage or a charge in the said property in favour of the Government. Therefore, by the date of auction conducted by the State Government two persons were having interest in the same property. The assessee, no doubt, held the property subject to the mortgage deed or a charged debt due to the Government, but the debt due to the Government was a secured debt. In the auction the property was sold free of the charge or mortgage in favour of the Government. Thus, the full sale price realised by the sale of the property was having two components: (i) the price which would be ascribed to the interest of the assessee in the property and (ii) the arrears of debt as well as interest due to the Government. Therefore, as there was a clear charge or mortgage over the same property which was subsequently sold by public auction by the Government the amount realised under the charge or mortgage was an amount which never reached the hands of the assessee but which reached the Government by an overriding title and, therefore, the amount which was realised by the sale of the assessee's interest in the property was only Rs. 4,33,960, i.e. Rs. 5,62,980 minus Rs.l,29,020.
Even assuming that the expression 'full value of the consideration received, as a result of transfer of actual asset' occurring in Section 48 represents full sale price actually paid, one fact could not be forgotten that it is only when the full interest in the property was conveyed, then only the full sale price of the property, in the present case, would have been realised. Before getting full interest in the property sold, the assessee had to discharge the secured mortgage debt or debt charged on the property. Then, in such a case the amount that was payable to discharge the mortgaged debt or the charged debt over the property with a view to acquire the full title or complete title over the property could be legitimately called an expenditure incurred towards the cost of acquisition of the capital asset and acquiring part interest in the asset also came under incurring expenditure towards cost of acquisition of capital asset.
Therefore, viewed from any angle, the assessee's claim had to be accepted.
9. After a deep consideration of the matter and a careful study of the views expressed by the two Benches of the Tribunal in their aforesaid decision, we have come to the conclusion that the present case cannot validly be treated as a case of diversion of income by an overriding title or that the assessee cannot be held to have not received any capital gain in his hands. The case of overriding title can be construed only from a situation where there has been pre-existing charge or encumbrance upon a property before or at the time of its acquisition by an assessee or charge or encumbrance has been subsequently created on account of operation ofanyprovisionoflaw. In such a case, if there is diversion or appropriation of income on account of such charge/ encumbrance, then such diversion or appropriation can validly be treated as diversion by overriding title. But where diversion or appropriation of the sale proceeds of a property is on account of charge or encumbrance created by its owner in lieu of a voluntary transfer made by him for a consideration, then such diversion or appropriation of the sale proceeds or any part thereof cannot validly be treated as a diversion by overriding title. In the case in hand, it is an admitted position that the present assessee had deposited his shares with the creditor as a security against a loan taken by the firm in which the assessee was one of the partners. Therefore, the amount of that loan and the interest there on constituted part of the consideration paid to and received by, the owner on the sale of his shares. It appears that this fact of advance of loan amount and the adjustment of that amount and the interest thereon by the creditor by making appropriation of the sale proceeds or part thereof has been lost sight of and not taken into consideration, by the two Benches of the Tribunal. Had this fact been taken into consideration, the Benches could not have come to the conclusion that the Owner of the capital asset had not come to receive any sale proceeds or had received only such net profits as had remained after the deduction of the expenses of the sale and appropriation of the outstanding loan amount by the creditor. Another aspect of the matter, which does not seem to have been taken into consideration in the aforesaid two decisions of the Tribunal was that after the appropriation of the entire sale proceeds or any part thereof by the creditor, the liability of the debtor stood extinguished to the extent of the amount so appropriated and the amount so adjusted also constituted part of the consideration paid to and received by, the debtor-owner for the sale of his capital asset. One more fact which also needs to be taken into consideration in the present case is that on the adjustment of the debt of the debtor-firm on appropriation of the sale proceeds of the capital asset by the creditor, the debt liability of the firm stood extinguished to the extent of such appropriation. Therefore, the assessee, who is only one of the partners of the firm, stood benefited to the extent of his own share in such debt liability and he would further be entitled to seek contribution of respective shares of such extinguished liability from other partners of the firm. Such benefit and right which accrued to the assessee by reason of extension of the debt liability of the firm is also part of the consideration and of sale proceeds, which shall be deemed to have been received by the assessee as an owner of his shares sold.
10. As a result of the above discussion, we hold that the revenue authorities were not unjustified in holding that a capital gain arose to the assessee on the sale of his shares by the creditor company. We thus see no error in the impugned order of the learned C.I.T.(A) so as to warrant any interference at our hands. This appeal thus has no merit and is dismissed.