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Sivakami Company Private Ltd. and ors. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 79, 83, 98 and 99 of 1966 (Reference Nos. 26, 28, 29 and 30 of 1966)
Judge
Reported in[1973]88ITR311(Mad)
ActsIncome Tax Act, 1922 - Sections 12B and 12B(2)
AppellantSivakami Company Private Ltd. and ors.
RespondentCommissioner of Income-tax
Appellant AdvocateS. Swaminathan and ;K. Ramagopal, Advs. for Venkataraman, Adv.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredPujabhai Dipchand v. Commissioner of Excess Profits Tax
Excerpt:
.....liable to tax on the difference between the consideration for the transaction and the fair market value. income-tax officer, [1970]77itr719(ker) when construing the provisions of section 52 of the income-tax act, 1961, which corresponds to the first proviso to section 12b(2) of the income-tax act, 1922. it was held in that case that section 52 of the income-tax act is intended to operate only in cases of under-statement of the consideration done with a view to dishonestly escape from the liability to capital gain and that the section does not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being on an assumption hauled up for having attempted to avoid or reduce the tax liability. in dealing with the meaning of the main..........said break-up value, a sum of rs. 91,599 and rs. 54,000 respectively have been determined as the capital gain under the first proviso to section 12b(2) of the act in respect of the sale of shares in east india corporation ltd. and madura insurance company ltd. the tribunal gave a finding that there was no capital gain in respect of the sale of the shares in pudukottah company private ltd.3. the assessee in t. c. no. 79/66 is sivakami company private ltd. which is a private limited company with a paid up capital of 16 fully paid up shares of rs. 1,000 and the shareholders during the material time were padmanabha private ltd. and pudukottah corporation pvt. ltd. holding 8 shares each. the assessee-company sold its 800 shares in east india corporation ltd. to maragathavalli private ltd......
Judgment:

V. Ramaswami, J.

1. An identical question of law has been referred in these four tax cases under Section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as ' the Act'), at the instance of the respective assessees.

2. The assessee in T. C. 83/66 is Rukmani Co. Private Ltd. It is a private limited company incorporated in the former Pudukottai State and now a company under the Companies Act, 1956. The paid up capital of the assessee-company consists of 50 shares of the face value of Rs. 1,000 each, fully paid up and the shareholders during the material time were Padmanabha Private Ltd. holding 25 shares and Pudukottah Corporation Private Ltd. holding the remaining 25 shares. On March 14, 1957, the assessee sold 800 shares held by it in East India Corporation Ltd. and 1,000 shares held by it in Madura Insurance Company Ltd. to Pachnayaki Private Ltd., Coimbatore, for a sum of Rs. 60,000 and Rs. 75,000, respectively. The cost price of the 800 East India Corporation Ltd. shares was Rs. 81,201 and that of the 1,000 Madura Insurance Company Ltd. was Rs. 1,00,000. On the same day the assessee also sold its 499 shares in Pudukottah Company Private Ltd, to Padmanabha Company Private Ltd.for the cost price of Rs. 4,990. The shares in East India Corporation Ltd., Madura Insurance Company Ltd. and Pudukottah Company Private Ltd. are not quoted in stock-market. It has now been ascertained in the order of the Tribunal that the break-up value on the date of sale of the 800 shares in East India Corporation Ltd. was Rs. 1,72,800 and the 1,000 shares in the Madura Insurance Company Ltd. was Rs. 1,54,000. Deducting the cost price of Rs. 81,201 and Rs. 1,00,000 respectively from the above said break-up value, a sum of Rs. 91,599 and Rs. 54,000 respectively have been determined as the capital gain under the first proviso to Section 12B(2) of the Act in respect of the sale of shares in East India Corporation Ltd. and Madura Insurance Company Ltd. The Tribunal gave a finding that there was no capital gain in respect of the sale of the shares in Pudukottah Company Private Ltd.

3. The assessee in T. C. No. 79/66 is Sivakami Company Private Ltd. which is a private limited company with a paid up capital of 16 fully paid up shares of Rs. 1,000 and the shareholders during the material time were Padmanabha Private Ltd. and Pudukottah Corporation Pvt. Ltd. holding 8 shares each. The assessee-company sold its 800 shares in East India Corporation Ltd. to Maragathavalli Private Ltd. for Rs. 60,000 and 747 shares in Madura Insurance Company Ltd. to Pachanayaki Private Ltd. for Rs. 56,000. The cost price of these shares was Rs. 81,202 and Rs.,74,700 respectively. In respect of these two sales, on the basis of the break-up value on the date of sale, the Tribunal held that the assessee was liable to pay capital gains tax under the first proviso to Section 12B(2) of the Act. The assessee also sold 499 shares in Pudukottah Company Private Ltd. to Padmanabha Private Ltd. for Rs. 4,990, in respect of which the Tribunal held there was no capital gain.

4. The assessee in T. C. No. 98/66 is Pudukottah Company Private Ltd. which is a private limited company with a paid up capital of 3,000 shares of the face value of Rs. 100 each with Rs. 10 per share paid up and the shareholders during the material time were - Padmanabha Private Ltd. holding 1,500 shares and Pudukottah Corporation Private Ltd., Sivakami Company Private Ltd. and Rukmani Company Private Ltd., each holding 500 shares. On March 14, 1957, the assessee sold its 100 shares in East India Corporation Ltd., 450 shares in Sree Rajendra Mills Ltd. and 1,940 ordinary shares and 1,486 preference shares in Sree Meenakshi Mills Ltd. to Pacha-nayaki Private Ltd. for Rs. 7,500, Rs. 4,500 and Rs. 61,090 respectively. The assessee also sold its one share in Padmanabha Private Ltd. to Mrs. Radha Thiagarajan, wife of Mr. Thiagarajan Chettiar, for a sum of Rs. 1,100, the cost price being Rs. 100. The cost price of 100 East India Corporation Ltd. was Rs. 10,189, 450 Sree Rajendra Mills Ltd. was Rs. 2,700 and the 940 ordinary and 1,486 preference shares in Sree Meenakshi Mills Ltd.was Rs. 73,279. In respect of these sales also, on the basis of the break-up value of the shares on the date of sale, the Tribunal held that the assessee was liable to pay tax on the capital gain under the first proviso to Section 12B(2)of the Act.

5. In T.C. No. 99/66 the assessee is Pudukottah Corporation Private Ltd., which is a private limited company with a paid up capital of 4,250 shares of the face value of Rs. 100 each with Rs. 50 per share paid up and the shareholders during the material time were Padmanabha Private Ltd. holding 1,100 shares, Saroja Mills Ltd. holding 2,125 shares and Sree Meenakshi Mills Ltd. holding 1,025 shares. On March 14,1957, the assessee sold its 800 shares in East India Corporation Ltd. for a sum of Rs. 60,000 to Maragadavalli Private Ltd.; the cost price of these shares was Rs. 80,919. The break-up value as on the date of sale of these shares was found to be Rs. 1,72,800 and after deducting the cost price of Rs. 80,919 the capital gain was ascertained at Rs. 91,881. On this capital gain of Rs. 91,881 the Tribunal held that the assessee was liable to pay tax under the first proviso to Section 12B(2) of the Act.

6. In all these cases, in the original proceedings for assessment for the year 1958-59, it was held by the Appellate Assistant Commissioner, accepting the contention of the respective assessees, that the profit or loss on the sale of the aforesaid shares should not be considered as a trading profit or loss on the ground that the shares were held as an investment and not as stock-in-trade of a business and the assessments were modified by excluding therefrom the profits on the sale of these shares included in the assessment. The Income-tax Officer thereafter reopened the assessment under Section 34(1 )(b) with a view to assess the capital gain arising on the sale of the shares. The Tribunal has now held in all these cases that the transferees of the shares are persons with whom the assessees are directly or indirectly connected and this finding is not in dispute and could not be disputed in these references. The Tribunal was also of the view that since the explanation given by the assessees for sale of these shares was not acceptable, the department was right in invoking the first proviso to Section 12B(2) of the Act.

7. The following question has been referred by the Tribunal under Section 66(1) in T.C. No. 83/66:

' Whether on the facts and in the circumstances of the case, the conclusion of the Tribunal, that for the purpose of the computation of capital gain on the sale of the shares in East India Corporation Ltd., Madura Insurance Company Ltd. and Pudukottah Company Private Ltd. the first proviso to Sub-section (2) of Section 12B of the Indian Income-tax Act, 1922, was applicable, is correct in law '

8. Identical questions of law have been referred in the other tax cases also except that the names of the companies whose shares were sold were different.

9. The Tribunal has found that the sales in these cases were true and genuine and that the consideration shown in the accounts alone was received and there was no under-state ment of the consideration. Before the Tribunal and the income-tax authorities it was contended on behalf of the assessee that the real and main object in effecting these sales was to safeguard the assets of the assessee from being proceeded against by the Government in settlement of or for the recovery of taxes due by the asscssee-companies. It was stated that the assessments for 1947-48 and 1948-49 of the assessee-companies were completed on January 31, 1957, which raised a total demand of Rs. 1,50,314 payable on March 5, 1957, and the assessee had effected the sales a few days thereafter on March 14, 1957, in order to put these shares beyond the reach of the income-tax department and that the sales were not effected with the object of avoidance or reduction of the liability of the assessees for capital gain. This explanation was not accepted by the Tribunal and it was characterised as an afterthought. The assessees in T.Cs. Nos. 98 and 99 of 1966 have repurchased the shares sold at a later date for the same price but in the case of the other assessees in T.Cs. Nos. 79 and 83 of 1966 there was no such repurchase. In all these cases the shares sold were not quoted in stock market but the break-up value of the shares were much more than the consideration for which they were sold. On these material facts found, the Tribunal inferred that ' there was some premeditation and concerted action in regard to these transactions ' and that the department was justified in applying the first proviso to Section 12B(2) of the Act.

10. The learned counsel for the assessees submitted that the Tribunal was not correct in law in drawing the inference on the facts found that the sales were effected with the object of avoidance or reduction of liability of the assessees for capital gain. But, the learned counsel for the revenue, relying on the decision of the Supreme Court in Commissioner of Income-tax v. Greaves Cotton & Company Ltd., [1968] I.T.R. 200 and Commissioner of Income-tax v. Imperial Chemical Industries, : [1969]74ITR17(SC) contended that it is the duty of the High Court, while hearing a reference under Section 66(1), to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts and that though the finding of fact will be defective in law if there was no evidence to support it and if the finding is unreasonable or perverse, it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of the specific question under Section 66(1).

11. But, we are of opinion that, on the facts and circumstances of the case, the learned counsel for the assessee is entitled to ' challenge the inference drawn by the Tribunal from the facts found as not warranted in law. We are fortified in this opinion by the decision of the Supreme Court in Commissioner of Intome-tax v. Rajasthan Mines, [1970] I.T.R. 78. It was held in that case by the Supreme Court that:

' If the finding of fact is based on an inference from the primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within narrow limits. It is open to the parties to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence or that the impugned conclusion drawn from the relevant facts is not rationally possible. If such a plea is established, the court has to consider whether the conclusion in question is not perverse and should not, therefore, be set aside. '

12. In the instant case, the facts found, as already stated, were that the sale was true, the consideration was not under-stated and that the explanation given by the assessees for effecting the sale was not acceptable. On these facts, does it follow that the sales were effected with the object of avoidance or reduction of liability of the assessees for capital gain The' Tribunal, though specifically did not find that the sales were effected with the object of avoidance or reduction of the liability for capital gain, concluded that the department was justified in applying the first proviso to Section 12B{2) of the Act.

13. We are of opinion that the Tribunal was not justified in law on the facts proved in drawing the inference that the sales were effected with the object of avoidance or reduction of the liability for capital gain. In -this connection we have to keep in mind that the burden of proving that the sales were effected with the object of avoidance or reduction of liability for capital gain was on the department. Except for the fact that the explanation offered by the assessees was not acceptable to the Tribunal and a strong suspicion on the real motive which prompted the assessee to sell, the shares, there was nothing positive to suggest that the sales were effected with the object of avoidance or reduction of liability for capital gain.

14. The next point that arises for consideration is whether, on the factsand circumstances of the case, the first proviso to Section 12B(2) applies.The scope of the proviso came up for consideration by a Division Bench ofthis court in Sundaram Industries Private Ltd. v. Commissioner of Income-tax, [1969] 741 I.T.R. 243 . The facts of the case were these : The assessee-company purchased669 shares in Southern Roadways Private Ltd. in August, 1954, for a sum ofRs. 93,660 and sold them in December, 1968, for Rs. 66,900 to three ladies. The Income-tax Officer determined the market price of the shares as onMarch 31, 1958, at Rs. 1,56,064 and treated the difference between the cost and the market price as capital gain liable to be taxed. The Tribunal had found as a fact that the sale was a real transaction which was given effect to and acted upon by the parties thereto and it was not made with the object of avoidance or reduction of tax liability but made for the purpose of benefiting the ladies. On these facts, the question for consideration was whether the proviso to Section 12B(2) of the Act could be invoked. The learned judges held:

' What the proviso gets at for charge is the actual capital gain which the vendor should, in the circumstances, have made, but is made to appear that the gain as shown by the consideration for the transaction to be much less or nil. We are not persuaded to think that the proviso discourages or avoids honest transactions made out of love and affection or for other conceivable reasons on pain of being on an assumption, hauled up, if we may use the expression, for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value. That simply, as we read the proviso, is not its purpose. It does not treat what is not an actual capital gain as a deemed capital gain. In fact, occurring as it does, as the first proviso to Sub-section (2) dealing with the procedural aspect of computation, it should, we think, be interpreted as limited to escaped capital gain, which is so in truth and in fact, and not intended to bring about fictional gain on an assumption and charge the same. '

16. A similar view was taken by the Kerala High Court in K. P. Varghese v. Income-tax Officer, : [1970]77ITR719(Ker) when construing the provisions of Section 52 of the Income-tax Act, 1961, which corresponds to the first proviso to Section 12B(2) of the Income-tax Act, 1922. It was held in that case that Section 52 of the Income-tax Act is intended to operate only in cases of under-statement of the consideration done with a view to dishonestly escape from the liability to capital gain and that the section does not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being on an assumption hauled up for having attempted to avoid or reduce the tax liability.

17. These two decisions really conclude the issue. But the learnedcounsel for the revenue wanted to reargue the point on the basis of certainobservations of the Supreme Court in Commissioner of Income-tax v. GeorgeHenderson & Co. Ltd., : [1967]66ITR622(SC) . He contended that in cases falling under the firstproviso to Section 12B(2) if the sale consideration was less than the fairmarket value then the difference between the fair market value and the costprice shall be deemed to have been received by the assessee, and taxable assuch. In other words, according to the learned counsel, ' deemed gain,' isthe subject-matter of the proviso. In our opinion, the observations of the Supreme Court do not warrant such a contention. In that case the share's book value was Rs. 136 and the same was sold on April 1, 1946, for Rs. 136 though the market value as on that date was found to be Rs. 620. The Income-tax Officer held that the first proviso to Section 12B(2)was applicable. But the Tribunal held that it was not a sale with the object of avoiding or reducing the tax liability. The revenue conceded before the Supreme Court that the transfer did not come within the mischief of the first proviso to Section 12B(2) because the transfer was effected at a time when Section 12B had not been enacted and the transfer could not, therefore, possibly have been made with the object of avoidance or reduction of tax liability under Section 12B. Thus, it could be seen that the decision of the Supreme Court was not one on the scope or interpretation of the first proviso to Section 12B(2). But, the Supreme Court, while considering the meaning of the expression 'full consideration ' in the main part of Section 12B(2), invoked the assistance of the proviso in the construction of the main part. In dealing with the meaning of the main part, the Supreme Court observed that the legislature itself had made a distinction between the two expressions ' full value of the consideration ' and ' fair market value of the asset transferred ' and that in pointing out such a distinction the Supreme Court stated that it is provided in the proviso that if certain conditions are satisfied as mentioned in the proviso, the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. These observations, in our opinion, do not in any way support the argument of the learned counsel for the revenue.

18. On the other hand, the Supreme Court in Killick Nixon and Co. v. Commissioner of Income-tax, : [1967]66ITR714(SC) had made the following observation with reference to the scope of that proviso :

' It is open to the Income-tax Officer, if it appears to him, that with the object of avoiding or reducing the liability of the assessee to pay tax, the full value of the consideration for which the sale, exchange or transfer is made is under-stated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected, to determine the fair market value of the capital asset on the date on which the sale, exchange or transfer took place.'

19. This passage clearly shows that the proviso deals with under-statement of the consideration.

20. That Section 12B(1) itself does not seek to charge 'deemed' or 'fictional' gain admits of no doubt. That the main provision of Sub-section (2) of Section 12B is a computation or machinery provision also admits of no doubt. A proviso normally deals with the subject dealt with in the main part though it is recognised that in certain exceptional cases a proviso may be a substantive provision itself It is true that it is a matter of style. In fact in the Income-tax Act, 1961, the proviso is dealt with as a separate provision in Section 52. But, in the context in which the proviso is placed in Section 12B of the Act, we consider that it is also a part of the machinery or computation provision and as a machinery provision it is intended merely to provide for the method of assessment or collection of the tax and not to increase or vary it.

21. On a reading of the entire provisions in Section 12B of the Act, we are of the opinion that what is intended to be taxed is the real capital gain^ and not a fictional gain. The first proviso to Section 12B(2) deals with cases of avoidance of the tax liability. In this connection we may also usefully refer to the decision in Commissioner of Income-tax v. Sakarlal Balabhai, : [1968]69ITR186(Guj) in which the meaning of the expression 'has thereby avoided ' occurring in Section 44F of the Income-tax Act was considered. That provision also is a provision against avoidance of tax. It was held therein:

' Tax avoidance postulates that the assessee is in receipt of the amount which is really and in truth his inconie liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use 'and enjoyment to the assessee as in a case falling within Section 44D or mask the true character of the income by disguising-it as a capital receipt as in a case falling within Section 44E or assume diverse other forms as in the Australian cases (references to Australian cases omitted). But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income.'

22. A similar observation is found in the decision in Pujabhai Dipchand v. Commissioner of Excess Profits Tax, : [1949]17ITR482(Bom) . In this case, in considering the question as to what would be an avoidance of tax within the meaning of Section 10A of the Excess Profits Tax Act, a Division Bench-of the Bombay High Court held that the section really aims at fraudulent acts on the part of an assessee. It was held that when an assessee, who is liable to pay excess profits tax, enters into any transaction or transactions or takes resort to some subterfuge or device in order to avoid tax which he is liable to pay, then only the powers under Section 10A would be invoked. Provisions against tax avoidance have, therefore, to be construed with reference to the mischief that is sought to be prevented.

23. We are of opinion that the avoidance or reduction of liability referredto in the proviso is the avoidance of tax on the gain actually received. Themischief that is sought to be remedied by the proviso is avoidance of taxby under-statement of the consideration payable or paid. The first condition which has to be satisfied before invoking the proviso is, therefore, an under-statement of the consideration. If this condition is satisfied, then the next question will be to find out whether the proviso is applicable. If the proviso is applicable then what need to be ascertained is the fair market value of the capital asset transferred and not the full value of the consideration. If the proviso is not applicable, then, under the main provision of Sub-section (2) of Section 12B, the full value of the consideration will have to be ascertained. It may be difficult to ascertain the real or full value of the consideration paid in the case of transfers to a person with whom the assessee is directly or indirectly connected. The proviso in such a case helps or enables the department by providing to determine the fair market value. The proviso also is in the nature of a penalty for understatement of the consideration in cases where the transfer was to a person who is intimately connected with the vendor. The following passage in the judgment of the Supreme Court in Commissioner of Income-tax v. George Henderson & Co. Ltd., : [1967]66ITR622(SC) in our view, also supports the above construction of the proviso:

' If the conditions of this proviso are not satisfied the main part of Section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer.'

24. The proviso is, therefore, part of the machinery or computation provision and deals with cases of under-statement of the consideration and it is not intended to impose a tax on a deemed or fictional basis.

25. For the foregoing reasons, the conclusion of the Tribunal that the first proviso to Sub-section (2) of Section 12B of the Income-tax Act, 1922, was applicable is not correct and, therefore, we answer the reference in the negative and in favour of the assessee with costs (one set). Counsel's fee, Rs. 250.


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