INCOME TAX OFFICER Vs. MILLARS MACHINERY CO LTD
LAWS(IT)-1989-7-8
INCOME TAX APPELLATE TRIBUNAL
Decided on July 07,1989

Appellant
VERSUS
Respondents

JUDGEMENT

Anoop Sharma, Judicial Member - (1.)THIS is an appeal filed by the revenue against the order of the Commissioner of Income-tax (Appeals) dated 24-3-1984 for the assessment year 1980-81.
(2.)Two substantive grounds taken in this appeal are against the deletion of the addition of Rs. 6,00,000 by the Commissioner of Income-tax (Appeals) on account of the income from business transferred by the assessee to M/s. Acme Manufacturing Co. Ltd. and the deletion of the addition Under Section 40A(8) in respect of interest paid to the directors.
As regards the first ground, the facts are that the assessee is a public company. Besides other activities, the company carried on the activity of manufacture of road and building construction machines. By an agreement dated 1-1-1979 the activity of manufacturing road and building construction machinery was transferred to one M/s. Acme Manufacturing Co. Ltd. The Income-tax Officer was of the opinion that the transfer was not legal nor in substance of a real transfer because of the following reasons :

(1) The transfer was effected with a view to absorb the profit of the assessee from this activity against the losses of the transferee company.

(2) This was a Tax Planning, which was not legal.

(3) The agreement dated 12-1-1979 was not a valid agreement being only on a stamp paper of Rs. 5.

(4) Since immovable property was sought to be transferred, a conveyance deed had necessarily to be executed, which had not been done so.

The Income-tax Officer was, therefore, of the opinion that since no legal valid transfer had taken place, the income earned from this activity was the income of the asseseee and not that of M/s. Acme Mfg. Co. Ltd. He, therefore, estimated this income at Rs. 6,00,000. This income related to the period from January 1979 to 30th September, 1979, as the accounting period of the assessee ended on 30-9-1979. On appeal, the Commissioner of Income-tax (Appeals) not agreeing with the stand taken by the Income-tax Officer, deleted this addition on the ground that in sum and substance the entire business stood transferred to the transferee company and that since all the steps had been taken by the asses-see, after the agreement to get the conveyance deed executed and merely in the absence of a conveyance deed, such a conclusion as had been drawn by the Income-tax Officer was unwarranted. He was further of the opinion that the intention of the assessee to have its profits from this activity absorbed against the losses of the transferee company was not borne out from the facts on record. He was of the opinion that the tax rate being the same, there was no intention on the part of the assessee to divert any income. In any case, since this very income had been assessed on substantive basis in the hands of the transferee company in view of the Bombay High Court decision in CIT v. Cotton Agents Ltd. [1957] 31 ITR 744, he deleted the addition made by the Income-tax Officer.

(3.)THE revenue is in appeal before us against the above deletion. THE learned Departmental Representative vehemently contended that the transfer recognized by the Commissioner of Income-tax (Appeals) was not a valid transfer under law. He emphasised that the immovable property could only be transferred by executing a registered conveyance deed, in the present case only on the basis of an agreement entered into between the parties, it could not be said under law that a valid transfer had taken place. He further urged that the director of the two companies were related to each other and hence the transfer was a made-up affair, a device to reduce the burden of tax. He further submitted that the consideration of Rs. 11 lakhs and odd was not adequate and that even the earnest money stipulated in the agreement had not been paid. He took us through the various clauses of the agreement and in particular Sub-clauses (iii), (iv) and (v) of clause 3 of the agreement and also clauses 6, 14 and 16 to impress upon us that the agreement was a made-up affair and that the transfer was effected from 1st January, 1979, while the agreement was executed on 12th January, 1979. He emphasised that the consideration was highly inadequate in view of the property which was agreed to be transferred as mentioned in clause 14 of the Agreement. He, therefore, urged that in view of the decisions of the Supreme Court in CIT v. Bhurangya Coal Co. [1958] 34 ITR 802 and CIT v. Gangadhar Banerjee & Co. (P.) Ltd. [1965] 57 ITR 176, no legal transfer having been effected, the Income-tax Officer was right in taxing the income from this activity in the hands of the assessee. On the other hand, the learned counsel for the assessee contended that what had agreed to be transferred was the business as a whole, the agreement was a valid agreement acted upon by the parties and that subsequently the conveyance deed in 1974 had also been executed. He pointed out that the Central Excise Department had also accepted this transfer and therefore, it is established that the manufacturing activity after the execution of this agreement of the company was carried on by the transferee company and not by the assessee. He submitted that the income arising from this activity had already been assessed in the hands of the transferee company and therefore, the same income could not be assessed in the hands of the assessee as this would be a case of double taxation which was impermissible under law.


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