COMMISSIONER OF INCOME-TAX vs. SARABHAI SONS PVT. LTD.

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ITR/239/1985HC GujaratGJHC24012369198511 June 2001Author: HONOURABLE MR. JUSTICE ANIL R. DAVE,HONOURABLE MR. JUSTICE D.A.MEHTA3 pages
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What did the High Court hold?

The High Court, in its oral judgment, referred to a prior decision in I.T.R. No. 243/85, decided on 8.3.2001, which had already answered the questions referred. For Question 1, the Court found that it was answered in the negative to a limited extent, in favor of the revenue and against the assessee. This implies that Section 41(2) could, to some extent, apply to the holding company. For Question 2, the Court found it was answered in the affirmative, in favor of the revenue and against the assessee, meaning the Assessing Officer's (AO) action was upheld. The reasoning, as per the prior judgment, was that while Section 41(2) applies to specific assets, Section 47 exempts certain transfers from capital gains tax, but this did not entirely preclude the application of Section 41(2) in this context. The reference was disposed of with no order as to costs.

What were the facts?

This case involves an Income Tax Reference before the High Court of Gujarat at Ahmedabad. The reference was made by the Income Tax Appellate Tribunal, Ahmedabad Bench 'A', under Section 256(2) of the Income-tax Act, 1961. The assessee is Sarabhai Sons Pvt. Ltd., and the petitioner is the Commissioner of Income-tax. The assessment years are not explicitly stated. The dispute concerns the assessment of profits under Section 41(2) of the Act in the hands of a holding company upon the sale of its undertaking as a going concern to its 100% subsidiary. The procedural history involves a reference to the High Court for its opinion on specific questions of law.

What were the issues?

The Tribunal referred two questions to the High Court for its opinion: 1. Whether, on the facts and in the circumstances of the case, no question of assessing profits u/s 41(2) of the Income-tax Act, 1961 in the hands of a holding company arises in case of sale by a holding company as a going concern to its 100% subsidiary company? 2. Whether, on the facts and in the circumstances of the case, the AAC was right in setting aside the assessment and requiring the ITO to reframe the assessment? The assessee's contentions, as noted in the referenced prior judgment, included that Section 41(2) only governs building, machinery, plant, or furniture, and thus other assets cannot be included for taxing the difference between written down value and actual cost. The assessee also relied on Section 47, which states that a transfer of capital assets by a company to its wholly-owned subsidiary company, where both are Indian companies, does not attract Section 45 relating to capital gains. The revenue's arguments are not explicitly detailed but are implied by the court's findings in favor of the revenue on certain aspects.

Which sections of the Income-tax Act were involved?

Section 41(2),Section 256(2),Section 47,Section 45

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 239 of 1985

For Approval and Signature:

Hon'ble MR.JUSTICE A.R.DAVE and Hon'ble MR.JUSTICE D.A.MEHTA

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus SARABHAI SONS PVT. LTD. -------------------------------------------------------------- Appearance: MR BB NAIK for MR MANISH R BHATT for Petitioner MR RK PATEL for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE A.R.DAVE and MR.JUSTICE D.A.MEHTA

Date of decision: 11/06/2001

ORAL JUDGEMENT (Per : MR.JUSTICE A.R.DAVE)

The following two questions have been referred to this Court for its opinion by the Income Tax Appellate Tribunal, Ahmedabad Bench 'A', under the provisions of sec. 256(2) of the Income-tax Act, 1961. 1. "Whether, on the facts and in the circumstances of the case, no question of assessing profits u/s 41(2) of the Income-tax Act, 1961 in the hands of a holding company arises in case of sale by a holding company as a going concern to its 100% subsidiary company?

2.

Whether, on the facts and in the circumstances of the case, the AAC was right in setting aside the assessment and requiring the ITO to reframe the assessment?"

2.

We have heard learned advocate Shri B.B. Naik appearing for the applicant-department and learned advocate Shri R.K. Patel appearing for the respondent-assessee.

3.

It has been very fairly submitted by the learned advocates that the questions, which have been referred to this court, have already been answered in I.T.R. No. 243/85 by this court. Upon perusal of the said ITR, which has been decided by this court on 8.3.2001, we find that question No. 1, which has been referred to this court, has been answered in the negative to a limited extent i.e in favour of the revenue and against the assessee whereas question No. 2 has been answered in the affirmative i.e. in favour of the revenue and against the assessee. Paragraphs 20 and 21 of the said judgment, which are relevant for our purpose, are reproduced hereinbelow :

"

20.

Before concluding, we must note that even while not accepting the major arguments urged on behalf of the assessee, there is some substance in the contention of Mr. R.K. Patel for the assessee that the provisions of section 41(2) govern only building, machinery, plant or furniture and that, therefore, other assets cannot be included within the scope of section 41(2) for taxing the difference between thew written down value and the actual cost. We also find that in view of the provisions of section 47 of the Act, transfer will not attract the provisions of section 45 relating to capital gains if the transfer of capital assets is by a company to its wholly owned subsidiary company and the holding company as well as the subsidiary company are Indian companies.

21.

In view of the above discussion, our answer to question No. 1 is in the negative to the above extent i.e. in favour of the revenue and against the assessee. Our answer to question No. 2 is in the affirmative to the above extent i.e. in favour of the revenue and against the assessee."

4.

In view of the decision referred to hereinabove and as the questions, which have been referred to this court have been finally concluded, we answer question No. 1 in the negative to the extent mentioned hereinabove i.e. in favour of the revenue and against the assessee whereas our answer to question No. 2 is in the affirmative to the limited extent as stated hereinabove i.e. in favour of the revenue and against the assessee.

The reference stands disposed of accordingly with no order as to costs.

(A.R. Dave, J.)

(D.A. Mehta, J.) (hn)

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