COMMISSIONER OF INCOME TAX-I, BARODA vs. BIO PHARMA

O/TAXAP/124/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 124 of 2006

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE KS JHAVERI

and HONOURABLE MR.JUSTICE K.J.THAKER

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX-I, BARODA....Appellant(s) Versus BIO PHARMA....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MR MANISH J SHAH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 6

O/TAXAP/124/2006 JUDGMENT

Date : 13/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. While   admitting   the   appeal   on   08.09.2006,   the   following substantial question of law was formulated for our consideration; “Whether on facts and in the circumstances of the case and in law,   the   Appellate   Tribunal   is   justified   in   deleting   the addition of Short Term Capital Gain of Rs.2,03,50,292/­ by acting upon the decree of the Civil Court which was based on collusive agreement?” 2. Briefly   stated,   the   facts   are   that   the   assessee­firm   was engaged in the business of manufacture of pharmaceuticals up to 31.12.1995. The firm is comprised of two partners each having 50% share. On 31.12.1995 the assessee sold the business to M/s. Century  Pharmaceuticals  Ltd.  as  a  going concern   at a price  of Rs.3,64,00,000/­   as   per   the   agreements   dated   19.12.1995   and 08.06.1996. As per the said agreements, the two partners of the assessee­firm   became   Directors   of   the   Company   and   the   sale consideration was paid to them by M/s. Century Pharmaceuticals Ltd. mainly through allotment of shares. On the basis of the facts of the case, the Assessing Officer computed short term capital gain aggregating   to   Rs.2,03,50,292/­.   The   CIT(A)   vide   order   dated 19.03.1999   sustained   the   addition.   The   assessee   filed   appeal against the order of CIT(A) before the Appellate Tribunal. Page 2 of 6

O/TAXAP/124/2006 JUDGMENT 3. In the meanwhile, the concerned Civil Court vide order dated 03.10.2000   passed   in   Civil   Suit   No.855/2000   reduced   the   sale consideration to Rs.1,41,49,707/­   and directed the assessee firm and its Partners to refund the sum of Rs.2,03,50,292/­ to M/s. Century  Pharmaceuticals Ltd., which has  been  refunded by the Partners of the assessee­firm by surrendering the equity shares. Therefore,   during   the   course   of   hearing   before   the   Appellate Tribunal,   the   assessee   sought   permission   to   add   the   additional ground capital gain of Rs.2,02,50,292/­ may not be taxed in view of the order passed by the concerned Civil Court. 4. The Appellate Tribunal admitted the additional ground and remitted the matter to the A.O for fresh adjudication. Pursuant to the remand, the A.O gave effect to the order of the Appellate Tribunal wherein, he repeated the addition of Rs.2,03,50,292/­ as made in the original order of assessment. The CIT(A) sustained the order of the A.O in appeal. On further appeal by the assessee, the Appellate Tribunal deleted the addition of Rs.2,03,50,292/­ vide order dated 06.09.2005. Being aggrieved by the same, the Revenue has filed the present appeal. 5. Mr. K.M. Parikh learned Standing Counsel appearing for the Revenue   submitted   that   the   Appellate   Tribunal   had   earlier considered the decree passed by the competent Civil Court as an evidence for taking cognizance by the A.O. He submitted that the decree of a Civil Court was not binding to the Income Tax Authority in proceedings under the Income­tax Act. However, subsequently, the Appellate Tribunal held that the order of the Civil Court is Page 3 of 6

O/TAXAP/124/2006 JUDGMENT conclusive evidence, ignoring all facts discussed in the orders of the A.O and the CIT(A). The A.O only got the opportunity to verify the evidence   of   decree   while   setting   aside   the   re­assessment proceedings and at that time, it was found that the decree from the Civil Court was only a consent decree and thus, the collusive decree was obtained for  self­service.   He, therefore,   submitted that  the impugned   order   of   the   Appellate   Tribunal   is   bad   in   law   and deserves to be quashed and set aside. 6. Mr. M.J. Shah learned counsel appearing for the assessee submitted that the order of the concerned Civil Court is final and binding and that it is not disturbed by any appellate Court. It was submitted   that   out   of   the   sale   consideration   received   by   the assessee,   the   Civil   Court   had   directed   to   refund   the   sum   of Rs.2,03,50,292/­, which has been refunded by the Partners of the assessee­firm by surrendering 20,35,020 equity shares of Rs.10/­ each. The refund of sale consideration directed by the Civil Court is equal to the capital gain worked out by the Revenue. Therefore, once   the   sale   consideration   is   reduced   by   the   sum   of Rs.2,03,50,292/­, there would remain no capital gain. 7. We have heard learned counsel for both the sides. It is a matter   of   fact   that   the   judgment   and   decree   passed   by   the competent Civil Court has not been disturbed by any appellate Court. Hence, the decree passed by the Civil Court has become final and is binding. While decreeing the suit, the Civil Court observed as under; Page 4 of 6

O/TAXAP/124/2006 JUDGMENT “Suit of the plaintiff is hereby decreed. It is declared that the true   transaction   value   for   transferring   the   assets   and liabilities   of   M/s.   Bio   Pharma   as   going   concern   as   on 31.12.1995 be Rs.1,41,49,707.43 and that the consideration payable   to   the   defendants   no.2   &   3   be   adjusted   at Rs.1,41,49,707.43.   The   defendants   to   pay   to   the   plaintiff company Rs.2,03,50,392.52 along with running interest @ 12% p.a from the date of the suit till realization...” 8. From the above, it is clear that out of the sale consideration received by the assessee, the Civil Court had directed to refund the sum of Rs.2,03,50,292/­, which has been refunded by the Partners of the assessee­firm by surrendering 20,35,020 equity shares of Rs.10/­ each. The refund of sale consideration directed by the Civil Court is equal to the capital gain worked out by the Revenue. Therefore, once the sale consideration is reduced by the sum of Rs.2,03,50,292/­, there would remain no capital gain and once there is no capital gain, the argument whether the sale by the assessee is slump sale and liable to capital gain tax or not has become   academic   and   needs   no   adjudication.   Accordingly,   the addition of Rs.2,03,50,292/­ was deleted. Considering the aforesaid factual aspects, the question of law raised is answered in favour of the assessee and against the Revenue. The appeal is, accordingly, dismissed. (K.S.JHAVERI, J.) Page 5 of 6

O/TAXAP/124/2006 JUDGMENT (K.J.THAKER, J) Pravin/* Page 6 of 6