NAVDEEP INVESTMENT PVT LTD Vs. INCOME TAX OFFICER
INCOME TAX APPELLATE TRIBUNAL
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B.L. CHIBBER, A.M. : -
(1.) THESE two appeals by the assessee are directed against the orders of the learned CIT(A). First we take up the appeal (ITA No. 249/Ahd/1990) as our findings in this appeal will have great consequential effect on appeal in ITA No. 1991/Ahd/90. 3. The first and the main grievance of the assessee is that the learned CIT(A) had erred in holding that the learned was fully justified in making addition of Rs. 15,76,019 being difference between the amount charged to 100% subsidiary company and the cost price as income from business. 4. The assessee is an investment company. It holds large investments in shares of companies and it is held to be a dealer in shares and the profit and/or loss therefrom is treated as income from business. IT is also having investment in immovable properties. The rent income received from the immovable properties has been shown and assessed under the head "for all the years ever since the inception of the company. 5. During the year under appeal, the assessee-company sold one of the immovable properties situated at Market Chambers, Nariman Point, Bombay to its 100% subsidiary company, viz., Ajib Investment P. Ltd. The assessee claimed before the ITO that the said property was a capital asset and the difference between the sale price and cost price on the said transfer of capital asset was exempt under s. 47(iv) of the IT Act, 1961. The learned ITO was of the view that the said property was stock-in-trade and it was not a capital asset and accordingly the difference between the sale price and the cost price amounting to Rs. 15,76,019 was taxable as income from business. He further observed that the sale of property to 100% subsidiary company was a colourable device to avoid tax and he accordingly held that the case of the assessee was hit by the judgment of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC). 6. On appeal, the learned CIT(A) concurred with the findings of the ITO that the transfer of Bombay property to the subsidiary company was a colourable device to avoid payment of tax and that the ratio of the decision of Supreme Court in the case of McDowell & Co. Ltd. (supra) applied to the facts and circumstances of the case. 7. Shri H.M. Talati, the learned counsel for the assessee, submits that the learned CIT(A) has erred in upholding the findings of the learned ITO. He submits that it was shown to the CIT(A) that the Assessing Officer was not correct in stating that the assessee-company has shown the income from the property as business income. It was shown from the income and expenditure account of every year that the income from letting out of the property was shown separately as rent Income and has not been shown as business income. The learned counsel for the assessee further submits that it was shown to the CIT(A) from the copies of assessment orders for various years that the IT Department has taxed the rent income as income for property under s. 22 and also depreciation was available as the income was from letting out of the property. The learned counsel took us through the past assessment orders-assessment orders as well as the appellate orders where income for the property was assessed under the head "property income" and not business income and the depreciation claim of the assessee had not been granted. The learned counsel for the assessee further submits that since the inception of the company till the year under appeal no property has been sold. When this property in question was completed and it was to be acquired from Supreme Industries of Bombay then only the right to acquire the property was transferred to the 100% subsidiary company and not to outsiders. The learned counsel further submits that the subsidiary company has its registered officer at Bombay and it will be using this premises as its officer with the consequence that for the purpose of municipal tax it would be treated as occupied by the company and given concessional treatment for taxation. The learned counsel further submits that the learned Assessing Officer had disallowed the interest pertaining to the investment in the immovable property. The learned counsel invited our attention to the order in appeal for asst. yr. 1983-84 (at pages 76 to 79 of the paper book) where the question of disallowance of interest on borrowings for investment in the property was considered and the then CIT(A) had held that the amount represented as interest on loan raised for the purchase of the property and since no income had been shown from the property, the interest was not allowable. The learned counsel for the assessee further submits that it was never the intention of the assessee to treat the immovable property as stock-in-trade and a single transaction like the one entered into by the assessee with its subsidiary company cannot make it an adventure in the nature of trade. In support of this contention the learned counsel relied upon the following decisions : (1) Janki Ram Bahadur Ram vs. CIT (1965) 57 ITR 21 (SC) (2) CIT vs. P.K.N. Co. Ltd. (1966) 60 ITR 65 (SC) (3) CIT vs. Anandlal Becharlal & Co. (1971) 107 ITR 677 (Bom) (4) Ch. Atchaiah vs. CIT (1965) 156 ITR 78 (AP) The learned counsel for the assessee further submits that both the learned ITO and the CIT(A) have erred in holding that the ratio laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) applied to the facts of the present case. He submits that there was no intention on the part of the assessee to evade any tax and to colourable device was adopted for the same. He extensively read from the judgment of the Supreme Court in the case of McDowell & Co. Ltd. (supra) to distinguish the facts of the case and a subsequent judgment of the Supreme Court in the case of CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC) and further relied upon the judgment of the Chancery Division in the case of Ensign Tankers (Leasing) Ltd. vs. Stokes (inspector of Taxes) (1990) 186 ITR 666 (Ch.D) wherein W.T. Ramsay Ltd. vs. IRC (1982) AC 300 (HL)(E). Fruniss vs. Dawson (1984) AC 474 (HL) followed in McDowells case (supra) have been distinguished. 8. The learned Departmental Representative Sri B.R. Meena heavily relied upon the orders of the authorities below and vehemently argued that the transfer of the property to 100% subsidiary company was a colourable device to evade tax. 9. We have considered the rival submissions and perused the facts on record. We find that the learned CIT(A) has simply relied upon the reasons given by the ITO and has not independently discussed the facts in detail. The Departmental has relied upon the reasons given by the ITO. Consequently, we shall deal with those reasons. 10. So far as legal position is concerned, there cannot be any doubt that the transfer of property to a subsidiary company is squarely covered by the provisions of s. 47(iv) of the Act and in such a case there will be no liability for capital gains tax. After going through the assessment orders and the appellate order relating to the preceding years, we are of the considered opinion that the authorities below have erred in holding that the property under transfer was not a capital asset in the hands of the assessee-company and was a stock-in-trade. Ever since the inception of the company this is a case of solitary transaction of sale/transfer of property and at no stage the property was purchased with the intention of keeping it as a stock-in-trade. In fact the assessee-company has held its properties as capital assets and the income accruing thereon has been declared and assessed as income from property under s. 22 of the Act and not as income from business. No depreciation has ever been allowed on the properties. Again the interest amounts in respect of borrowing for investment in properties not completed in the relevant years have been disallowed and such disallowances have been upheld by the appellate authorities. Thus the finding that the assessee had treated itself as a dealer in property is not drawn out by the facts. The learned ITO has further placed reliance on the Memorandum of Association to draw the conclusion that the assessee is a dealer in real estate. As regards the Memorandum of Association, it is well settled that the objects of an incorporated company as laid down in Memorandum of Association are not conclusive on the question whether the activities of the company amount to carrying on of the business. We have carefully perused the Memorandum of Association and find that there is no express provision in the Memorandum of Association for dealing in real estate. One of the clauses does mention about acquiring of real estate. However, that by itself does not indicate that the assessee company was authorised to deal in real estate as dealer and keeps the property as stock-in-trade. Various clauses in the Memorandum of Association of the assessee-company were similar to the clauses of the Memorandum of Association in the case of Bengal & Assam Investors Ltd. vs. CIT (1966) 59 ITR 547 (SC) where it has been held by the Supreme Court that "the mere fact that a company is incorporated to carry on investment does not show that it is carrying on business". As regards the reliance placed by the authorities below on the decision in the case of McDowell & Co. Ltd. (supra) after taking into consideration the facts and circumstances of the case, we are of the considered opinion that the ratio laid down by the Supreme Court in that case does not apply to the facts of the present case. In the case of McDowell & Co. Ltd. (supra) the facts related to liability of sales-tax which according to the statute (Andhra Pradesh Sales-tax Act) was payable by the manufacturer and it also included the excise duty. That was a case of colourable device to reduce the sales-tax liability by excluding the excise duty from the turnover of the manufacturer and the apex Court held that the tax planning may be legitimate provided it is within the framework of law. In the case before us no colourable device has been adopted, inasmuch as, the property at Bombay which was held as capital asset was transferred to 100% subsidiary company on market rate and the difference between cost price and the sale price was clearly exempt under s. 47(iv) of the Act. There was no question of benefit to the assessee because the property was held by 100% subsidiary company, i.e., the company itself. There is no extra benefit in the hands of the subsidiary company because though the cost price in the hands of 100% subsidiary company would appear at the higher figure but as per the provisions of Expln. 6 appended to s. 43(1) the original value would be considered to be its cost and whenever the said company transfers the property of determining the surplus in the hands of the subsidiary company it would be the original cost of the appellant-company that would be considered. Thus there would be no question of saving the tax by the subsidiary company by transfer of the property. Thus in the case of subsidiary company there cannot be any avoidance of the tax and hence we hold that since the assessee did not resort to any colourable device, reliance by the authorities below on the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) is misplaced. We accordingly hold that there is no justification for the impugned addition of Rs. 15,76,019 and the same is accordingly deleted. 11. Ground No. 2 reads as under : "The learned CIT(A) has erred in disallowing the claim of Rs. 45,957 being claim of interest payment. The appellant submits that what should be considered is total investment. Under the circumstances the claim of interest is admissible. It may be granted now." At the time of hearing it was not pressed and the same is accordingly dismissed. 12. Ground No. 3 reads as under : "The learned Assessing Officer has erred in considering the income from property under the head business and not under the head property as in all the years. It is submitted that it may be so done now." This ground is consequential in nature. Since we have held in ground No. 1 (supra) that income from property was not business income, the ITO is directed to treat the income from property as income assessable under s. 22 and not as business income. 13. The last ground pertains to charge of interest under s. 215 of the Act. This ground is also consequential in nature. The ITO is directed to charge interest under s. 215 , if any, after taking into consideration the relief allowed by this order. 14. In the result the appeal is allowed in part. 15. Now, we shall deal with the appeal ITA No. 1991/Ahd/1990. The assessee-company had declared loss of Rs. 21,603. An addition of Rs. 15,76,019 was made and the income finally determined at Rs. 16,03,380 on which income-tax payable worked out to Rs. 10,94,307. The ITO was of the view that the provisions of s. 104 of the Act were applicable and he accordingly levied additional tax of Rs. 1,27,268. On appeal the CIT(A) confirmed the action of the ITO for reasons recorded in his appellate order dt. 16th Feb., 1990. 16. Since vide our order in ITA No. 249/Ahd/90 we have deleted the addition of Rs. 15,76,019, consequently the provisions of s. 104 are not applicable and accordingly the impugned order of the ITO is cancelled. The assessees appeal is allowed. 17. In the result ITA No. 249/Ahd/90 is allowed in part and ITA No. 1991/Ahd/90 is allowed.;
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