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I.T.A No.201/2017
1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2ND DAY OF DECEMBER, 2022 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE UMESH M. ADIGA
I.T.A NO.201 OF 2017
BETWEEN:
M/S. EVERGREEN HARDWARE STORES REPRESENTED BY ITS PARTNER SRI. MANNAN M. AERANPURWALA NO.77/78, 2ND MAIN DRC POST, HOSUR ROAD CHIKKALAXMAIAH LAYOUT BENGALURU-560 029 PAN: AAAFE7755Q
…APPELLANT
(BY SHRI. A. SHANKAR, SENIOR ADVOCATE FOR SHRI. U.A. MADHUSUDHA, ADVOCATE)
AND:
THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-7(1) PRESENTLY CIRCLE-7(1) (2) BMTC BUILDING 6TH BLOCK, 80 FEET ROAD KORAMANGALA BENGALURU-560 095 …RESPONDENT
(BY SHRI. E.I. SANMATHI, STANDING COUNSEL)
THE ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23.01.2017 PASSED IN ITA NO.1550/BANG/2013, FOR THE ASSESSMENT
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2 YEAR 2009-2010 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED HEREIN AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT AND ETC.
THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 13.09.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR J, PRONOUNCED THE FOLLOWING:-
JUDGMENT
This appeal by the assessee challenging the order dated 23.01.2017 in ITA No.1550/Bang/2013 for the A.Y. 2009-10 has been admitted to consider the questions framed in the memorandum of appeal. After hearing learned Advocates on both sides, in our view, only the following questions arise for consideration:
Whether the Tribunal is justified in law in holding that the provisions of section 45(4) are attracted when there has been no distribution or dissolution of the firm and consequently confirming the addition to an extent of Rs.68,86,826/- as short term capital gains in respect of the building at Audugodi on the facts and circumstances of the case.
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3 2. Without prejudice, whether the computation of short term capital gains at Rs.68,86,826/- is in accordance with law and whether the excess over the cost of the building ought to have been taxed as long term capital gains on the facts and circumstances of the case.
Whether the Tribunal was justified in law in holding that an amount of Rs.1,47,79,298/- is to be taken as deemed profit on transfer of stock and consequently passed a perverse order on the facts and circumstances of the case.
Whether the Tribunal was justified in confirming the disallowance of Rs.53,367/- under Section 14A of the Act on the facts and circumstances of the case.
Whether the Tribunal was justified in confirming the disallowance of Rs.3,33,333/- being the disallowance of premium paid on Keymen Insurance Policy taken in the name of the partner of the Appellant firm on the facts and circumstances of the case.
Heard Shri. A Shankar, learned Senior Advocate for the assessee and Shri. E.I. Sanmathi, learned Advocate for the Revenue.
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Brief facts of the case are, assessee, a partnership firm engaged in trading of pipes, tubes and fittings, transferred certain assets and stock to M/s. Evergreen Seamless Pipes and Tubes Pvt. Ltd., under a BTA1. The Partners of the Firm were the Directors in the Private Limited Company. Assessee filed its return for A.Y. 2009-10 declaring an income of Rs.2,02,10,167/-. The assessment under Section 143(3) was completed determining a total income of Rs.19,00,48,398/- by making various additions and disallowances. The CIT(A)2 partly allowed assessee's appeal. Feeling aggrieved, both assessee and Revenue filed their appeals before ITAT and the ITAT has dismissed both appeals. In this appeal, assessee is aggrieved by: (i) disallowance of Rs.53,367/- under Section 14A of the IT Act;
1 Business Transfer Agreement 2 The Commissioner of Income Tax (Appeal)
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5 (ii) addition under Section 45(4) with regard to:
(a) land at Adugodi Rs.54,89,677/- (b) Building Rs.68,86,826; (iii) disallowance of premium on Insurance Policy of Rs.3,33,333/-.
Re-disallowance of Rs.53,367/- under Section 14A of the IT Act.
Shri. Shankar submitted that assessee had made investment of Rs.1,06,73,419/- in various mutual funds from out of the Bank loans and Partners' Capital Account and paid interest on the borrowings. The Assessing Officer called upon the assessee to show cause as to why disallowance should be made under Section 14A of the IT Act and Rule 8(D) of the Rules. The assessee has explained that the investment is in the nature of savings or to keep some amount out of the
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6 business mainly to pay the advance Income tax whenever required.
Further, assessee had suo moto disallowed Rs.1,39,239/- as expenditure incurred towards exempt income and the total exempt income earned is Rs.2,12,146/-. He contended that in order to disallow a portion of the expenditure, the Assessing Officer ought to have satisfied himself that the suo moto disallowance made is incorrect. Without recording such satisfaction, the Assessing Officer could not have arbitrarily disallowed the amount of Rs.53,367/- by invoking Rule 8D of the Rules. In support of this contention, he relied upon Hindustan Aeronautics Ltd., Vs. ACIT3.
Shri. Sanmathi argued in support of the order passed by the ITAT, on this aspect.
3 (2021)125 Taxman.com 80 (Karnataka) (para 12)
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7 6. We have considered rival submissions and perused the authority cited by Shri. Shankar. It is held therein that the sine qua non for invocation of power under Section 14A of the Act read with Rule 8D of the Rules is recording of satisfaction by the Assessing Officer. In that case, the Assessing Officer had not recorded any satisfaction with regard to the genuineness of assessee's claim before invoking the powers under Section 14A read with Rule 8D and quashed the order passed by ITAT.
In this case also, the Assessing Officer has not recorded his satisfaction with regard to the suo moto deduction made by the assessee. Therefore, following the authority in Hindusthan Aeronautics Ltd., we are of the view that disallowance of Rs.53,367/- under Section 14A read with Rule 8D of the Rules is not sustainable.
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Re:Addition under Section 45(4) in respect of:
(a) land at Adugodi Rs.54,89,677/- (b) Building Rs.68,86,826;
Shri. Shankar submitted that a plot was purchased by one of the partners Shri. Mannon M. Aeranpurwala in the year 1994. The same was deleted from the fixed assets. In response to Assessing Officer's notice, assessee explained that the plot was purchased by the partner, but by mistake, it was not debited in Partner's account. The Firm needed an Office, but could not afford to purchase a plot. The Partner had offered his plot and a construction was put up thereon. Shri. Aeranpurwala had also offered his plot as collateral security. When the firm was restructured in 2008-09 by selling the business of the Firm to the Private Limited Company under the same Management and the Company being a
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9 separate legal entity, the value of the site and building which was 13 years old was debited to the Partner's account. The Assessing Officer not being satisfied, held that the transaction amounted to transfer of Capital assets and would fall under Section 45(4) of the Income Tax Act. The CIT(A) directed the Assessing Officer to value the land at Rs.2,200/- per sq. ft. and the said view has been upheld by the ITAT.
Shri. Shankar argued that there was no transfer of Capital Asset. The plot was purchased by Shri. Aeranpurwala and it was his property. However, inadvertantly/erroneously, it was not debited in partner's account. He urged that in order to attract Section 45(4) of the IT Act, the following two conditions have to be fulfilled: • there should be a transfer of Capital Asset;
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10 • the transfer should be by way of distribution of Capital Asset on dissolution of the Firm or otherwise.
Shri. Shankar submitted that in this case, both the conditions mentioned above, are not fulfilled. Therefore, invocation of Section 45(4) of the Act, is not sustainable in law.
Shri. Sanmathi, submitted that the plot was admittedly reflecting in the Firm's books. Further construction was also made by the Firm. It was transferred in 2008-09 to the partner. Therefore, the transaction is one traceable to Section 45(4) of the Act.
We have considered rival submissions. It is not in dispute that the sale deed is executed in the name of Shri. Aeranpurwala. The assets of the Firm was sold to the Private Limited Company in which the partners of the firm were the Directors.
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11 Section 45A of the IT Act is applicable where any person receives any Capital Asset from a specified entity in connection was the reconstitution of such specified entity. It is not the case of the Revenue that there was reconstitution of the Firm. On the other hand, the assets of the Firm have been sold to the Private Limited Company. It is settled that title to an immovable property worth more than Rs.100/- can be trasferred only by way of a Deed of Conveyance duly executed and registered and not by Book entry (See: Jansons Vs. CIT4). In view of the settled position, Section 45(4) of the Act has no application in this case. Consequently, the addition of Rs.54,89,677/- made by the Assessing Officer under Section 45(4) of the IT Act as long term Capital gains, is not sustainable.
It was argued by Shri. Shankar that by applying the same logic, the Assessing Officer has
4 (1984)17 Taxmann. 330 KAR (para 4)
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12 added short-term Capital gains at 30% on the building which was constructed on the plot owned by Shri. Aeranpurwala.
For the reasons recorded hereinabove, with regard to the plot, we hold that the addition made by the Assessing Officer on the ground of short-term Capital gains is also not sustainable. We may record that the building in question is situated on the plot in respect of which the Assessing Officer had added long term Capital gains Tax. We have held that the plot belonged to the Partner Shri. Aeranpurwala. By logical corollary, the building thereon, also must belong to him. Hence, the short term Capital gains added by the Assessing Officer is not sustainable.
Re-Disallowance of premium on Insurance Policy Rs.3,33,333/-
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Assessee Firm had taken a Insurance Policy on its Partner Shri. Aeranpurwala. The assessee has held that Shri. Aeranpurwala had become a Director of another Company in which the business was carried on. Assessee contended before the Assessing Officer that the Firm had paid One time premium of Rs.10 Lakhs; Shri. Aeranpurwala had continued to be the Partner of the Firm; the Policy could not be transferred to a Private Limited Company and when premium is not paid, the Policy would lapse and the surrender value will be very low. The Assessing Officer has held that the Firm could have surrendered the Policy and received the proceeds and accordingly disallowed Rs.3,33,333/- as inadmissible Business Expense.
Shri. Shankar contended that the purpose of 'Keyman Insurance Policy' is to protect the business against a financial set-back occurring as a result of premature death of the insured.
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14 Since the assets of the Firm were sold to the Private Limited Company, it was not prudent to continue the Keyman Insurance in the name the Partner. The Firm is still in existence and is receiving the rental income and other receivables. The expenditure incurred towards the Insurance Policy was for the benefit of the Firm. Therefore, disallowance of 1/3rd expenditure by the Assessing Officer is not sustainable.
Shri. Sanmathi submitted that the Firm has discontinued the policy. Therefore, the Firm ought to have surrendered the Policy and offered the proceeds received to tax.
Keyman Insurance Policy is taken to protect a Firm from a Financial loss due to the death of the insured person in charge of the affairs of the Firm. In this case, policy was taken in the name of Shri. Aeranpurwala and a premium of
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15 Rs.10 Lakhs was paid by the Firm. The assets of the Firm have been sold to the Private Limited Company and the Firm has discontinued the Policy. Whilst the Firm was doing business and Shri. Aeranpurwala was managing the affairs the Policy was taken by the Firm. Since the assets of the Firm were sold, the Firm in its wisdom has decided not to continue with the Policy. Therefore, in our view, the expenditure towards Insurance Policy cannot be disallowed because, the sale of assets is based on Commercial expediency and whenever such transactions take place, it would not be expedient for the Firm to continue the Keyman Insurance, but the Policy was necessary when the Firm was doing the business. Once the assets are sold, the Keyman policy for the Firm becomes redundant. At the same time, a portion of the Premium cannot be disallowed as expenses, because, discontinuance of the policy has occurred
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16 due to sale of assets. Therefore, in our considered view, the disallowance of Rs.3,33,333/- being 1/3rd of the premium amount, is not sustainable.
Addition of profit margin at 8% on transfer of stock - Rs.1,97,05,731/-. Shri. Shankar, learned Senior Advocate submitted that: • the Assessing Officer has held that transfer of assets in favour of the Private Limited Company at book value was not at arm's length price. The Assessing Officer has arbitrarily determined a net margin at 8% on the transfer price of Rs.24,63,21,641/- and added Rs.1,97,05,731/-. The CIT(A) without addressing the grounds of appeal, has mechanically reduced the margin to 6% resulting in net addition of Rs.1,47,79,298/-;
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17 • assessee's firm was transferred on 'as is where is' basis as per 'agreement to sell' dated November 15, 2008 (Annexure-H). Among several assets, one of the asset was Stock-in trade valued at Rs.24,63,21,641/-.
In substance, Shri. Shankar's argument is, there is no provision in the Act to make a notional addition. Therefore, the margin of 8% fixed by the Assessing Officer and 6% fixed by the CIT(A) are unsustainable in law. The ITAT, without recording any reasons has upheld CIT(A)'s order. He contended that Revenue cannot substitute its opinion with the business decisions taken by an assessee. In this case, assessee has transferred a bundle of assets and in view of commercial expediency, transferred Stock-in-trade at a
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18 particular value. In support of this contention, he has placed reliance on SA Builders Ltd., Vs CIT(A)5.
In reply, Shri. Sanmathi submitted that whenever goods are transferred/sold, the sale value shall not be less than the market value. Therefore, the Assessing Officer has rightly estimated the margin at 8% and the CIT(A) in his wisdom has reduced it to 6% and the same has been upheld by the ITAT. Hence, no interference is called for on this edition.
We have considered rival submissions. The assessee has transferred the 'Stock in Trade' to M/s. Evergreen Seamless Pipes and Tubes Pvt. Ltd., under a BTA. Assessee's case is, it has transferred a bundle of assets which includes Stock- in-trade transferred at book value. The Assessing Officer has recorded thus:
5 (2007) 158 Taxman 74 (SC)
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"The AR states that the if the firm offers to sell the whole stock, none of the companies would be interested to purchase. If that is the case, how was the Company able to sell and pay the entire consideration of about 25 crores in a short span of 4 months. The acts of the firm have resulted in gross reduction in GP ratio at the rate of 16% of 24 crores. The contentions of the AR have no legal support and backing. Hence, I hold to bring the lost GP margin of 16% minus 8% for selling expenses net margin of 8% of Rs.24,63,51,641 that is 1,97,05,731 to tax."
The CIT(A) has held that considering the facts and nature of appellant's business, he was of the view that the gross profit on the Stock transferred to the Company could be estimated at 6% because, the transaction is not at arm's length. On this aspect, the ITAT has recorded that the stock should have been valued at market value and found decision of CIT(A) as justified.
The question for our consideration is whether the Revenue can decide the price at which the Stock-in-trade ought to have been transferred.
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20 In para 34 of SA Builders, the Apex Court has held that Revenue cannot justifiably claim to put itself in the arm chair of a Businessman or in the position of the Board of Directors and assume their role to decide. In this case, the assessee - Firm has transferred the Stock-in-trade to the Private Limited Company at book value. The assessee, in its reply to the Assessing Officer, has stated that the end user of the products of the firm are Public Sector Units and other Companies. If the firm offered to sell its whole stock, none of those Companies would be interested to purchase the same if there was no requirement. The firm's products cannot be sold in open market like any other consumer goods or Industrial Hardware on account of its unique usage and specifications which are to be certified by various third party inspection agencies. No dealer would be interested to purchase them as these products can be purchased directly from the
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21 manufacturers. The stock could not be sold at a price more than the cost price and therefore, it has been sold at cost price.
It is not in dispute that the Stock-in- trade are pipes and tubes made of carbon and alloy steel for Refineries, Boiler industries etc. Therefore, they cannot be sold in the open market as any other consumer goods. It is also not is dispute that the partners of the firm are the promoters of the Company. In the light of these facts, the firm has taken a decision to transfer the goods at book value. As held in S.A. Builders, the Revenue cannot substitute its opinion with a business decision of an assessee.
In our considered view, the gross profit estimated by the Assessing Officer and modified by the CIT(A) are notional and not traceable to any provision in the IT Act and therefore it is imaginary and perverse.
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In view of the above discussion, this appeal merits consideration. Hence, the following: ORDER
(a) Appeal is allowed.
(b) Questions of law framed above are answered in favour of the assessee and against the Revenue.
Sd/- JUDGE
Sd/- JUDGE SPS