Madras High Court
Shri. S.Palaniappan vs The Commissioner Of Income Tax on 21 December, 2022
Author: S.Vaidyanathan
Bench: S.Vaidyanathan, C.Saravanan
TCA.Nos.441 of 2010 and 172 of 2012
IN THE HIGH COURT OF JUDICATURE AT MADRAS
RESERVED ON : 20.09.2022
PRONOUNCED ON : 21.12.2022
CORAM
THE HON'BLE MR. JUSTICE S.VAIDYANATHAN
and
THE HON'BLE MR. JUSTICE C.SARAVANAN
T.C.A.Nos.441 of 2010 and 175 of 2012
T.C.A.No.441 of 2010
Shri. S.Palaniappan,
Rep. by its Power Holder Mr.A.Sethu. ... Appellant
(Causelist accepted vide order of this
Court dated 11/02/2010 made in
M.P.No.1/2010.)
vs
The Commissioner of Income Tax,
Salem. ...
Respondent
Prayer: Tax Case Appeal filed under Section 260-A of the Income Tax
Act, 1961 against the order of the Income Tax Appellate Tribunal, 'A'
Bench, Chennai dated 22.10.2009 passed in I.T.A.No.1362/Mds/2007.
T.C.A.No.175 of 2012
Shri. S.Manickavasagam
Rep. by its Power Holder
https://www.mhc.tn.gov.in/judis
1/18
TCA.Nos.441 of 2010 and 172 of 2012
Mr.A.Sethu. ... Appellant
-vs-
The Income Tax Officer,
Ward-I, Salem. ... Respondent
Prayer: Tax Case Appeal filed under Section 260-A of the Income Tax
Act, 1961 against the order of the Income Tax Appellate Tribunal, 'A'
Bench, Chennai dated 17.12.2008 passed in I.T.A.No.382/Mds/2007.
For Appellant : Mr.P.J.Rishikesh
(in both T.C.A.'s)
For Respondent : Ms.V.Pushpa
(in both T.C.A.'s) Junior Standing Counsel
*****
COMMON JUDGMENT
S.VAIDYANATHAN,J AND C.SARAVANAN,J By this Common order, both the Tax Case Appeals are being disposed.
2. The appellants have filed these appeals against the separate impugned orders dated 22.10.2009 and 17.12.2008 passed by the Income https://www.mhc.tn.gov.in/judis 2/18 TCA.Nos.441 of 2010 and 172 of 2012 Tax Appellate Tribunal, A Bench, Chennai [Appellate Tribunal for brevity] in I.T.A.Nos.1362/Mds/2007 and 382/Mds/2007 respectively. Details of the respective assessment orders in both these appeals are as under:-
T.C.A.No. Assessment Date of Order of Income Tax Year Assessment Commissioner Appellate Order of Income Tax Tribunal 175/2012 2003-04 31.01.2006 C.No.9544(29)/ 382/Mds/2007 2006-07/SLM dt.17.12.2008 dt.18.12.2006 441/2010 2003-04 31.01.2006 C.No.9544(22)/ 1362/Mds/2007 2006-07/SLM dt.22.10.2009 dt.02.03.2007
3. The operative portion of the impugned order dated 17.12.2008 of the Appellate Tribunal in ITA.No.382/Mds/2007 impugned in TCA.No.175/2012 reads as under:-
“13. We considered the arguments advanced by both sides in detail. We do not have any quarrel with the arguments of the Id.Chartered Accountant on the propositions explained by him in the light of the judicial pronouncements referred before us. We agree with the Id.C.A that unless and otherwise proved by materials, the stated consideration has to be treated as real consideration for the purpose of computing the capital gains. We do not have any iota of disagreement to the legal propositions advanced by the Id.C.A.
14. But, we have to state that the principle of law and such propositions must be applied depending upon the facts of each case . The break-up value https://www.mhc.tn.gov.in/judis 3/18 TCA.Nos.441 of 2010 and 172 of 2012 of the shares may not be a valid statutory tool in working out the capital gains as argued by the Id.C.A. It is a statutory rule for the purpose of wealth tax. But, the case is that even if that rule is not applicable, it was the duty of the Assessing Officer to verify and examine the intrinsic value of shares transferred by the assessee in favour of his father. Then only the Assessing Officer can compare the consideration stated in the agreement with the de facto value of the shares. It is only after such comparison, the question arises-
whether the consideration stated in the agreement was the actual consideration or not? Therefore, it is necessary for the Assessing Officer to examine the basic facts before applying the principle laid down by the Supreme Court in the case of K.P.Varghese v. Income Tax Officer & Another (1981) 131 ITR 597(SC).
15. In the present case, it is obvious that the Assessing Officer has not computed the break-up value of shares transferred by the assessee to his father. It is very pertinent to note that the companies are closely held companies. It is further to be noted that the transaction was between father and son. The close personal relationship of the parties involved in the transaction ought to have invoked inquisitiveness in the mind of the Assessing Officer while examining the computation of long term capital loss. Only on the basis of such a necessary inquisitiveness that the Assessing Officer could make a meaningful examination of the circumstances leading to the long term capital loss. This is more necessary because the shares were transferred by the assessee in favour of his father for a value less than the face value of the https://www.mhc.tn.gov.in/judis 4/18 TCA.Nos.441 of 2010 and 172 of 2012 shares. The face value of share is Rs.10 per share. The share was sold for Rs.4 per share. This disparity should have been investigated. Thereafter, it was necessary to again verify what is the break-up value of the shares sought to be sold by the assessee. As pointed out by the Commissioner in his revision order, the break-up value of each share is Rs.19.33. It is against the above break-up value that the shares were sold for Rs.4 per share. This huge difference in sale value was definitely a matter of concern which called for a thorough examination of the circumstances leading to such a transaction. The Assessing Officer has not considered this aspect. Therefore, we have to hold that the assessment order was erroneous.
16. The resorted method by the assessee on sale of the shares has gone to reduce the taxable income of the assessee by way of setting off of the loss against the positive business income. Therefore, the transaction has resulted in prejudice to the interests of the Revenue. Therefore, as rightly argued by the Id.Senior D.R., the assessment order passed in this case is erroneous as well as prejudicial to the interests of the Revenue. Therefore, we find that the Commissioner has rightly exercised his power under Section 263 of the Income Tax Act, 1961 and revised the impugned assessment order.
17. For the reason explained by the Commissioner in his order, we agree with him that the entire transaction was a make belief arrangement. It is a sham transaction. There is no statutory Rule to decide whether a transaction is sham or not. It is to be decided in the light of https://www.mhc.tn.gov.in/judis 5/18 TCA.Nos.441 of 2010 and 172 of 2012 the facts available on record. Here, the case is that the company was incurring loss in the earlier assessment years and has stopped its business. Therefore, there was no attraction for anybody to purchase the shares of the company. But, the assessee's father came forward to purchase the shares. Even if such a move was justified, the consideration for the same must be comparable to actual worth of the share. The shares of Sri.Solaiandavar Textile Mills Limited represented assets and immovable properties of the said company in its books of accounts in historical costs. Therefore, the balance sheet per se does not reflect the realisable value of the assets owned by Sri.Solaiandavar Textile Mills Limited. Therefore, the value of the shares on the basis of balance sheet figures could not be an appropriate value for the purpose of consideration and real benefits flowing out of the sale transaction. The break-up value is one of the accepted methods of finding of value of shares in a realistic manner. The Commissioner has adopted that method. There is no illegality or infirmity in that method. Therefore, the computation suggested by the Commissioner is also justified on the facts of the case.
18. Therefore, in the facts and circumstances of the case, the revision order passed by the Commissioner is upheld and the appeal filed by the assessee is dismissed.”
4. The above order was followed by the Tribunal in its order dated https://www.mhc.tn.gov.in/judis 6/18 TCA.Nos.441 of 2010 and 172 of 2012 22.10.2009 in I.T.A.No.1362/Mds/2007 for the same assessment year which has been impugned in T.C.A.No.441/2010. T.C.A.No.441 of 2010 and T.C.A.No.175 of 2012 was admitted on 08.06.2010 and 20.06.2012 respectively on the following substantial question of law:
"Whether on the facts and circumstances of the case, the Tribunal was right in sustaining the order of revision passed by the Commissioner of Income Tax by invoking the provisions of Section 263 of the Income Tax Act, 1961?"
5. In these cases, the respective appellants are brothers namely S.Palaniappan and S.Manickavasaga, who had filed their returns of income on 27.02.2004 declaring a total income of Rs.3,81,623/- and Rs.4,10,144/- respectively. The returns were initially processed under Section 143 (1) of the Income Tax Act, 1961 on 08.03.2004 resulting in refund of Rs.5,65,193/- and Rs.5,66,035/- respectively. The returns were thereafter scrutinized and the notices u/s 143(2) were issued to the assessee. The Assessment for both of the assessees were therefore completed on 31.01.2006 under Section 143(3) of the Income Tax Act, 1961.
6. Subsequent to the above assessment orders dated 31.01.2006 https://www.mhc.tn.gov.in/judis 7/18 TCA.Nos.441 of 2010 and 172 of 2012 and on going through the records, the Commissioner of Income Tax invoked the power under Section 263 of the Income Tax Act,1961 and issued notice on 18.11.2006 in the case of the appellant in T.C.A.No.175 of 2012 and on 31.08.2006 in the case of the appellant in T.C.A.No.441 of 2010 stating that the orders are erroneous and prejudicial to the interest of the revenue. The reasoning given in the notices reads as below:-
“It is found that while working out long term capital loss on sale of shares, the assessee has shown huge loss on the sale of shares of Sri Solaiandavar Textile Mills Limited. In order to verify the rate of sale, the Assessing Officer had called for the Annual Report of the Company for the year ending 31.03.2009 which is placed in records. However, it appears the break up value of the shares of the same as on 31.03.2003 has not been worked out in order to compare the same with the rate of sale of shares, as the sale has been effected to his father only to claim huge loss”.
7. These notices ultimately culminated in the order of the Commissioner under Section 263 of the Income Tax Act, 1961 on 02.03.2007 and 18.12.2006 in the case of the appellant in T.C.A.No.441 of 2010 and T.C.A.No.175 of 2012 respectively. The operative portion of the https://www.mhc.tn.gov.in/judis 8/18 TCA.Nos.441 of 2010 and 172 of 2012 order of the Commissioner in T.C.A.No.441 of 2010 is extracted below:-
“ The reply has been carefully considered. The learned Authorised Representative is not correct in stating that the Assessing Officer had taken the view that the break-up value cannot be taken on the fact the case and that it was not a colourable device. In fact, the Assessing Officer had not made proper enquires as to the claim of huge loss in respect of shares of Sri Solaiandavar Textile Mills Limited. In fact, after obtaining the Annual Report of the Company for the year ended 31.03.2003, he has failed to reach any logical conclusion about the genuineness of the claim of loss in shares of the company. There is no mention of break-up method by the Assessing Officer anywhere in the assessment record. In these circumstances, when no proper enquires have been made before accepting the claim of loss, the assessment order is erroneous and prejudicial to the interest of revenue in view of the following rulings:
K.A.Ramaswamy Chettiar and another vs. CIT 220 ITR 657 (Mad.) CIT vs. South India Shipping Corporation Ltd., 333 ITR 546 (Mad.) The learned Authorised Representative claims that for computing Capital Gains only, full value of consideration received should be considered received should be considered ( for which he relies on apex court rulings). However, the same applies to genuine sales only. In the present case, the assessee has claimed huge capital loss through colourable device by selling the shares at the rate of Rs.4 per share against break up value of Rs.19.33 as on 31.03.2003. It is not understood as to why https://www.mhc.tn.gov.in/judis 9/18 TCA.Nos.441 of 2010 and 172 of 2012 the father wanted controlling interest in the company alter the closure of business w.e.f. 01.04.2002. There is no evidence produced to show that there were no buyers for the shares other than the father. So, the claim of loss through such colourable device cannot be allowed in view of the ratio of Medowell & Co.Ltd., vs. CIT 154 ITR 148 (SC).
In fact, the issue has been discussed in detail in the order u/s.263 dated 18.12.2006 in the case of his brother Sri.S.Manickavasagam ( assessed with the same Assessing Officer) for the Assessment Year 2003-2004, who has also claimed such huge loss. For the same reasons as discussed in that order, the long term capital loss on the sale of shares of M/s.Solaiandavar Textile Mills Ltd., should not be allowed. The Assessing Officer should enhance the assessment by disallowing such capital loss of Rs.7,95,420/-.”
8. The operative portion of the order of the Commissioner in TCA.No.175 of 2012 is extracted below:-
The break up value of the equity share of Solaiandavar Textile Mills Ltd on 31.03.2003 has been worked at Rs.19.33 as under:-
Value of Assets :-
Fixed Assets – Net Block : Rs. 14,767.116
Net Current Assets, loans
and advances : Rs.61,56,991
https://www.mhc.tn.gov.in/judis
10/18
TCA.Nos.441 of 2010 and 172 of 2012
Less :- Income Tax advance : Rs. 5,58,318 : Rs. 55,98,673
Total Value of Assets : Rs.2,03,65,789
Less:- Total funds : Rs. 39,31,423
Net amount : Rs.1,64,34,366
Issued, subscribed and paid up capital : 8,50,000 shares
of Rs.10 each
Value of equity shares Rs.19.33”
It is not understood as to why the shares were purchased by the father when the business stopped w.e.f.03.04.2002 or in other words why the father wanted controlling interest in the Mills after the closure of business. In the circumstances, the sale of share @ Rs.4 against break-up value of Rs.19.33 as on 31.03.2003 is not genuine and the Long Term Capital Loss claimed on the sale of shares of M/s.Solaiandavar Textile Mills Ltd. Should not be allowed. The Assessing Officer should enhance the assessment by disallowing capital loss of Rs.7,76,611/- claimed on the sale of the above shares.
9. The Appellate Tribunal has sustained these orders passed by the Commissioner under Section 263 of the Income Tax Act, 1961. The assumption of powers under Section 263 on the ground that the sale of shares held by the respective appellants in Sri Solaiandavar Textile Mills https://www.mhc.tn.gov.in/judis 11/18 TCA.Nos.441 of 2010 and 172 of 2012 Limited was sold to their father for a sum of Rs.4/- per share as against the nominal value of share at Rs.10/- per share was against the market value of Rs.19.33 per share.
10. The case of the respective appellant is that the power to revise an order of assessment under Section 263 of the Income Tax Act, 1961 can arise only when the order passed by the Assessing Officer is both erroneous and prejudicial to the interest of the revenue. The respective appellants contend that the Commissioner of Income Tax has no power to re-determine the value of shares as against the value determined by the Assessing Officer while exercising power under Section 263 of the Income Tax Act, 1961.
11. It is further submitted that the Assessing Officer while scrutinizing the taxable income in the case of the respective appellant passed the assessment orders taking a different plausible view and accepted the valuation declared by the respective appellants. Thus, the total tax liability was reduced by Rs.25,47,704/- and Rs,25,34,508/- for the appellant in Mr.S.Palaniappan in TCA.No.441 of 2010 & https://www.mhc.tn.gov.in/judis 12/18 TCA.Nos.441 of 2010 and 172 of 2012 Mr.S.Manickavasam in TCA.No.175 of 2012 respectively.
12. The learned counsel for the appellants has relied on the following decisions:-
Principal Commissioner of Income Tax, New Delhi., vs. M/s Brahma Centre Development Pvt Ltd, ITA.Nos.116 & 118 of 2021, dated 05.07.2021
13. In these appeals, the learned counsel for the Income Tax department defended the impugned orders and submits that the orders of the Tribunal are well reasoned and requires no interference.
14. The learned counsel for the Income Tax Department further submits that the assessment completed by the Assessment Officer resulted in erroneous orders which were prejudicial to the interest of the revenue and therefore the Assessing Officer's orders were correctly revised under Section 263 of the Act and therefore these appeals filed by the respective appellants are liable to be dismissed.
15. The learned standing counsel for the Income Tax Department has relied on the following decisions:-
https://www.mhc.tn.gov.in/judis 13/18 TCA.Nos.441 of 2010 and 172 of 2012
i) McDowell and Co., Ltd., vs. Commercial Tax Officer, Man/SC/0154/1985;
ii) Jeevan Investment & Finance (P.) Ltd. vs. Commissioner of Income Tax, City-I, Mumbai, (2017)88 Taxmann.com 552 (Bombay)
16. We have considered the arguments advanced by the learned counsel for the appellants and the learned Junior Standing Counsel for the Income Tax Department.
17. We are of the view that the order passed by the Assessing Officer while finalising the assessment under Section 143(3) of the Income Tax Act, 1961 has indeed resulted in erroneous order which were prejudicial to the interest of the revenue.
18. The Supreme Court in the case of Malabar Industrial Co. Ltd. v CIT [2000] 109 Taxman 66 (SC)/ 243 ITR 83 held that an order can be said to be erroneous, if no inquiries or verification are made by the AO before passing an order; or if an order is passed “without application of mind” i.e. non application of mind to relevant material; or if an order is https://www.mhc.tn.gov.in/judis 14/18 TCA.Nos.441 of 2010 and 172 of 2012 not in accordance with fact or law i.e. if there is an incorrect assumption of facts or an incorrect application of law.
19. The facts of the present case reveal that the invocation of power under Section 263(3) was justified. Though the said company viz., M/s.Sri Solaiandaver Textile Mills Limited had closed down its business in the year 2002, it was endowed with sufficient valuable assets in the form of land. Therefore, the value of the shares ought to have been properly determined by the appellant and the Assessing Officer. The value of the share has been under valued by making it seem that the transfer to their father was only at Rs.4/- per share without any records. When the records were culled out by the Commissioner, the value of the share was re-determined at Rs.19.33 per share as against the nominal value of Rs.10/- per share. We therefore, find no reason to differ with the views expressed by the Tribunal the value of the shares were undervalued. We therefore answer the substantial questions of law against the appellant and in favour of the Income Tax Department. https://www.mhc.tn.gov.in/judis 15/18 TCA.Nos.441 of 2010 and 172 of 2012
20. Under these circumstances, these appeals are liable to be dismissed and are accordingly dismissed. No costs.
(S.V.N.,J.,) ( C.S.N.,J.)
21.12.2022
Index : Yes/No
Internet : Yes/No
Speaking : Non-Speaking Order
kkd
https://www.mhc.tn.gov.in/judis
16/18
TCA.Nos.441 of 2010 and 172 of 2012
To
1. The Commissioner of Income Tax,
Salem.
2. The Income Tax Officer,
Ward -I, Salem.
3.The Income Tax Appellate Tribunal, Chennai 'D' Bench.
https://www.mhc.tn.gov.in/judis 17/18 TCA.Nos.441 of 2010 and 172 of 2012 S.VAIDYANATHAN,J.
and C.SARAVANAN,J.
kkd Pre-delivery Common Judgment in TCA.Nos.441 of 2010 & 175 of 2012 21.12.2022 https://www.mhc.tn.gov.in/judis 18/18