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ITA No. 13/2008
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HIGH COURT OF JAMMU AND KASHMIR AT JAMMU
ITA No. 13/2008
Date of order: 12.09.2017 M/s Jamkas Vehicleades (P) ltd vs. Income Tax Officer Coram:
Hon’ble Mr Justice Alok Aradhe, Judge
Hon’ble Mr Justice B. S. Walia, Judge Appearing counsel: For Petitioner/appellant(s) : Mr.Virender Bhat, Advocate For respondent (s) : Mr. K.D. S. Kotwal, Advocate i/ Whether to be reported in
Yes/No
Press/Media?
ii/ Whether to be reported in
Yes/No
Digest/Journal?
Per Alok Aradhe-J
This appeal under section 260-A of Income Tax Act, 1961 was admitted by a Bench of this Court vide order dated 05.04.2011 on the following substantial questions of law: i) Whether the stocks transferred on cost price can be assessed to tax
on a notional price? ii) Whether the assessee has the right to fix the price of the stock and
transfer the same at a price less than the market value, if so
whether the tax can be levied on notional profits or on actual
profits? iii) Whether the principles of assessing the value of the stock of a
dissolved firm for assessing the mutual adjustment of partner's
shares can be applied to a running company?. 2. The facts giving rise to the filing of this appeal briefly stated are that there was a change in the Management and Shareholdings of the Company. M/s Janki Motor Pvt. Ltd. was having dealership rights for sale of vehicles etc.
ITA No. 13/2008
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of Maruti Udyog Ltd. In the aforesaid company, one Krishan Kumar and Ushal Amla were the shareholders and Directors having 4 lacs equity shares of Rs. 10 per share. By an agreement dated 26.07.2001, the Directors agreed to transfer dealership rights of Maruti Udyog ltd. and the entire shareholdings to one Daveder Singh Rana for consideration of Rs. 40 lacs. In the balance sheet the assessee had shown goodwill of Rs. 40 lacs as the transferee had purchased the dealership rights from the then Directors and assets and liabilities of the company as on the date of takeover were transferred to the outgoing Directors. The Assessing Officer observed that there was no change in the company which continued to carry out the business. Despite several opportunities being granted, the assessee did not produce the books of accounts. The Assessing Officer thereafter issued Show Cause Notice dated 04.03.2005. The assessee submitted its reply on 21.03.2005. Thereafter, the Assessing Officer observed that the outgoing Directors of the Company were entitled only to an amount of Rs. 40.00 lacs being share held by them and it was observed that amount of goodwill shown in the balance sheet was only to create an impression that no amount was due towards the company and that assets were equal to that of the liabilities. Accordingly, the Assessing Officer came to the conclusion that it was merely a device to evade tax. He applied gross profit @ 9.6 per cent and estimated profit to transfer tradable assets worth R. 70,11,090/- and made an addition of Rs. 6,35,204/- 3. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) in relation to addition to Rs. 40 lacs amount on account of short term capital gains by Assessing Officer, which was withdrawn. Commissioner of Income Tax (Appeals) allowed the appeal. Being aggrieved the Revenue approached the Income Tax Appellate Tribunal. The Tribunal set aside the order passed by the Commissioner of Income Tax (Appeals) and restored the order of the Assessing Officer. In the aforesaid factual background, this appeal has been filed.
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Learned counsel for the appellant submitted that principle which is to be applied while dissolving the firm cannot be applied to continue the Company. It is further submitted that the Tribunal has failed to appreciate that the decision of the Supreme Court in the case of A.L.A. Firm vs. C.I.T 189 ITR 285 has no application to the fact situation of the case. It is further submitted the profit, if any, can be in the hands of the outgoing Directors in their individual capacity and not in the hands of the Assessee. Therefore, no addition could be made in the hands of the Assessee. 5. On the other hand, learned counsel for Revenue has submitted that the plea that principle which is to be applied while dissolving the firm cannot be applied to continue the company, has been taken for the first time in this appeal, which is not permissible. It is further submitted that instant case is a case of transfer of the capital assets and orders passed by the Assessing Officer as well as Tribunal are perfect, just and legal. 6. We have considered the submissions made by the learned counsel for the parties and have perused the record. The outgoing Directors and Shareholders had the dealership of Maruti Cars and the stock of cars and spare parts, which were part of the trading assets of the company. The resultant profits of these assets also stood transferred to the outgoing Directors as these were transferred at book value. It is also the admitted position that assessee had shown profit @ 9.6 per cent on the sale of cars and spare parts. By virtue of transfer of trading assets at cost price, the profit component also stood transferred to the outgoing Directors, which otherwise belonged to the Company. The profit so transferred would form part of cost of acquisition of the shares, dealership rights and the goodwill. The transferee was required to incur extra cost for acquisition of these assets. Such cost being capital in nature is not an allowable expenditure. Therefore, component of gross profit on the transfer of trading assets
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belonging to the assessee at cost price is a profit liable to tax in the hands of the company. 7. In our considered view the Tribunal has rightly applied the ratio laid down in the case of A.L.A Firm (supra) to the fact situation of the case. Even otherwise, the fact that the Assessing Officer has made the addition in the hands of the Directors would not make any difference in the present case for the reason that such income actually belongs to the assessee and therefore, taxable as such in its hand. 8. In the preceding analysis, first substantial question of law in the fact situation of the case is answered in negative. The second substantial question of law is answered by stating that the tax is to be levied on actual profits as has been done in the instant case. The third substantial question of law is also answered in affirmative in favour of the Revenue. 9. In the result, we do not find any merit in this appeal. The same fails and is hereby dismissed.
(B. S. Walia ) (Alok Aradhe)
Judge Judge Jammu 12.09.2017 Karam Chand