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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMIT SHUKLA
सुनवाई की तायीख / Date of Hearing : 22.08.2016 घोषणा की तायीख /Date of Pronouncement : 31.08.2016 आदेश / O R D E R
PER D. KARUNAKARA RAO, AM:
This appeal filed by the assessee on 10.8.2015 is against the order of the CIT (A)-54, Mumbai dated 19.4.2013 for the assessment year 2010-2011. In this appeal, assessee raised the following grounds which read as under:- “1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in disallowing maintenance charges amounting to Rs. 76,116/- claimed as a deduction while computing income under the head income from house property. 2.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that the gift of shares of UPL Limited (UPL) and Uniphones Enterprises Limited (UEL) by the appellant to Nerka Chemicals Private Limited (NCPL) is nothing but a device to avoid tax in so far as it involves transfer of capital assets of the firm by way of distribution for the ultimate benefit of partners and accordingly, the same is taxable under section 45(4) read with section 48 of the Act. 2.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not issuing a show cause notice and consequently violating the principles of natural justice by not providing an adequate and reasonable opportunity of being heard.
3. On the facts and in the circumstances of the case and in law, the CIT (A) also erred in holding that the fair market value of shares of UPL and UEL gifted by the appellant to NCPL is taxable in the hands of the partners of the appellant firm under section 28(iv) as a benefit arising in the course of business in proportion of share of profit / loss of each partner as per the partnership deed.
4.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO in holding the aforesaid transaction of gifting of UPL and UEL shares to NCPL as a colourable device to avoid tax by applying the decision of the Supreme Court in the case of McDowell & Co Ltd (154 ITR 148). 4.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in making various observations which are factually incorrect and contrary to the fact available on record which the appellant craves leave to elucidate at the time of hearing, leading to perverse finding that the aforesaid transaction as a colourable device to avoid tax.”
Briefly stated relevant facts of the case are that the assessee, a partnership firm, filed the return of income declaring the total loss at Rs. 22,72,961/-. Assessment was completed u/s 143(3) of the Act and the assessed income was determined at Rs. 30,15,49,630/-. During assessment, AO observed that the assessee is engaged in the business of manufacturing and trading of „pesticides‟ and assessee holds shares of United Phosphorus Ltd (UPL) (19,20,160 shares) and shares of United Enterprises Ltd (UEL) (1,92,016 shares). AO noted that the assessee transferred the said shares to M/s. Nerka Chemicals Private Limited (NCPL) free of consideration vide the „transfer agreement dated 26.2.2010. However, the same was considered by the AO as a transfer of capital asset and not a „gift transaction‟ as claimed by the assessee. Copy of the deed dated 26.2.2010 was filed by the assessee in support of the claim of the gift and the same is placed at page 5 of the paper book. The Recital-B and clause (1.1) of the Transfer Agreement are relevant in this regard. On considering the fact that the said transfer agreement does not contain a specific expression „gift‟ anywhere in the body of the agreement, Assessing Officer treated the same as normal taxable transaction of transfer of capital asset and proceeded to tax the same as „capital gains‟ u/s 45 of the Act. But the assessee pleaded that the said transaction being a gift transaction, stands covered by the provisions of section 47(iii) of the Act. AO rejected the applicability of provisions of section 47(iii) of the Act relating to transactions not regarded as transfer and also the provisions of section 56(vii)(a) of the Act. Accordingly, AO considered the purchase value of shares at NIL and the market value of the shares is taken at Rs. 30,37,69,312/-. The same amount considered as long term capital gains of the assessee u/s 48 of the Act. Aggrieved, assessee carried the matter in appeal before the first appellate authority.
During the proceedings before the first appellate authority, after considering the submissions of the assessee, CIT (A) disapproved the AO‟s line of assessment ie computation of long term capital gains u/s 45(1) r.w.s 48 of the Act and confirmed the addition for other reasons. He proceeded to dismiss the appeal of the assessee eventually by holding that the said share transfer transaction attracts the provisions of section 45(4) read with section 48 of the Act. Alternatively, according to the CIT (A), the provisions of section 28(iv) of the Act apply to these share transactions. In the impugned order, CIT (A) underlined the fact that the Transfer Agreement does not refer to the expression “gift”. Further, CIT (A) also mentioned that the transfer of shares is a part of colourable device and applied the ratio of the judgment in the case of McDowell & Co. Ltd (supra). Further, Ld CIT (A) is of the view (para 5.3.4 of his order) that the word „gift‟ as appeared in section 47(iii) of the Act should be understood as the gift between two biological persons only and not the present ones which are between the firm and the company-NCPL. Ld CIT (A) also reasoned that the transfer of shares by the assessee to NCPL cannot be voluntary act given fact that the said transfer is aimed at consolidation of all the shares of UPL and UEL held by many holders in the hands of NCPL. Accordingly, CIT (A) rejected the assessee‟s claim that the said transaction is covered by the provisions of section 47(iii) of the Act. CIT (A) also dismissed the AO‟s finding regarding the applicability of the provisions of section 45(1) of the Act (para 5.3.16.3 of the impugned order is relevant). Subsection (1) of section 45 of the Act is not to be invoked when there is no consideration involved. However, the CIT (A) justifies his decision to invoke section 45(4) of the Act by stating that it is the case of transfer of capital assets by way of distribution of capital assets for the ultimate benefit of partners. As held in para 5.3.16.3 of his order, CIT (A) confirmed the AO‟s decision to invoke the provisions of section 28(iv) of the Act. He held that the market value of shares of UPL / UEL is the benefit arose to the partners of the firm. Further, CIT (A) confirmed the AO‟s decision the applicability of the judgment in the case of McDowell & Co. Ltd (supra). Aggrieved with the said decision of the CIT (A), assessee is in further appeal before the Tribunal by raising the above mentioned grounds.
Before the ITAT 4. During the proceedings before us, Shri P. Pardiwala and other Ld AR for the assessee brought our attention to the grounds of appeal and submitted that the assessee is aggrieved on the adverse inferences drawn by the CIT (A) in his order. With special reference to (i) invoking of provisions of section 45(4) read with section 48 of the Act; (ii) applicability of section 28(iv) of the Act; (iii) applicability of ratio of judgment in the case of McDowell & Co. Ltd (supra)- colourable device.
5. Bringing our attention to ground no.1, Ld Counsel submitted that the „maintenance charges‟ incurred by the „land lord‟ is required to be reduced for the purpose of arriving at the ALV of the property u/s 23 of the Act. He relied on the decision of Tribunal in case of Sharmila Tagore vs JCIT (2005) 93 TTJ Mum 483.
6. A. Regarding the other issues raised in grounds no.2 to 4 of the appeal, Ld Counsel for the assessee pointed out that the provisions of section 45(4) of the Act are not applicable to the facts of the case. To justify the same, Ld Counsel for the assessee submitted that this is not a case of dissolution of the firm whereby the profits are transferred by way of distribution of capital assets to the partners. Further, Ld Counsel for the assessee mentioned that the facts of the case are that the firm holds certain shares of UPL and UEL and the same are transferred voluntarily to NCPL without any consideration. Assessee firm continues to exist and it is not dissolved and profits or gains never arose to the partners by transfer of capital asset by way of dissolution of the firm. Therefore, as per the Ld AR subsection (4) to section 45 of the Act has no application to the facts of the present case. In this regard, Ld Counsel for the assessee brought our attention to the relevant provisions. Further, relying on the Ahmedabad High Court judgment in the case of M/s. Prakriya Pharmachem vs. ITO in Special Civil Application No.20492 of 2015, dated 18.1.2016, Ld Counsel for the assessee submitted that this firm is one of the 17 concerns who similarly gifted shares, like the present assessee, by entering into the identical Transfer Agreement. In this case also, AO invoked the provisions of section 45(1) of the Act treating the transactions as earning of capital gains and denied the benefit of section 47(iii) of the Act. On this issue, Hon‟ble High Court came to a conclusion that section 45 has no application to the transaction and being a case of gift of shares, the provisions of section 47(iii) of the Act are applicable.
B. Regarding the allegation of „colourable devise‟, Ld counsel for the assessee submitted that the ratio of the judgement in the case of Mc Dowells Ltd is inapplicable to the facts of the present case. No tax evasion is made out by the AO in the present case and it is a straight transaction of gift by the firm to the NECL. C. Questioning the applicability of the provisions of section 28(iv) of the Act, Ld Counsel for the assessee demonstrated that the CIT (A) erroneously presumed that the assessee got benefit of the share transfer transactions, which is patently erroneous. Referring to the provisions, Ld Counsel for the assessee demonstrated that section 28(iv) of the Act deals with “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession constitutes income taxable under the head profits and gains of the business or profession”. Referring to the facts of the present case, where the assessee is a transferor of the shares without consideration, Ld Counsel for the assessee argued vehemently that the CIT (A) missed the whole point and invoked the said provisions invalidly. The fact is that the assessee did not gain by transfer of shares of UPL and UEL shares. As per the AR, when the assessee is the transferor of shares, where is the question of the assessee having earned any benefit / perquisite for taxing the same u/s 28(iv) of the Act?
On the other hand, Ld DR for the Revenue heavily relied on the order of the AO and the CIT (A) and argued vehemently stating that the transfer deed dated 26.2.2010 is deficient to the extent that there is no reference about the gift in it. Therefore, the same cannot be treated as gift deed. Further, Ld DR for the Revenue also supports the CIT (A)‟s logic that the gift can be made only by the living / natural person. 7.1 During the rebuttal time, Ld Counsel for the assessee stated that the gift can be made by all the persons specified in section 2(31) of the Act. For that proposition, he brought out attention to the proviso to section 47(iii) of the Act where the provisions refer to a company gifts are specified. Further, he also relied heavily on the orders of the Tribunal in the case of DP World (P) Ltd vs. DCIT
(2013) 140 ITD 694 (2014) and the decision in the case of DCIT vs. KDA Enterprises Pvt Ltd (2015) 39 ITR (Trib.) 657 (paras, 27, 31 and 39 of the said Tribunal‟s order are relevant) to support the view that the gifts are given by all the persons.
We have heard both the parties and perused the orders of the Revenue Authorities and the case laws cited before us. It is informed to us that there is no cross appeal in this case by the Revenue. The Assessing Officer invoked the provisions of section 45(1) r.w.s 48 of the Act for taxing the transaction of transfer of shares. The AO‟s approach in invoking the provisions of section 45(1) of the Act was not approved by the CIT (A) as there was no aspects payment received by the assessee. He confirmed the addition by invoking the provisions of section 45(4) of the Act and alternatively the provisions of section 28(iv) of the Act were invoked.
In this regard, after hearing both the parties, we have perused the relevant provisions of section 45(4) and section 28(iv) of the Act. For the sake of completeness of this order, we extract the above provisions as under:- “Sec. 45.(4):- The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co- operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.” Sec. 28(iv):- The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;]”
To start with, we proceed to analyse the provisions of section 45(4) of the Act if they are validly invoked. These provisions become relevant on the fact that there should be dissolution of a „firm‟ or „Association of Persons‟ (AOP) or „Body of Individuals‟ (BOI) and there shall be transfer of capital assets to the partners / retiring partners by way of distribution of capital assets. According to these provisions, the profits and gains arising to the said persons from such transfer becomes taxable as income of the firm / AOP / BOI in the previous year in which such transfer takes place, whereas in the present case, there is no dissolution of the assessee-firm. Further, the capital assets are not transferred to any partner or retiring partner by virtue of any dissolution deed. In fact, the shares held by the firm are transferred to NCPL and there is no dissolution of firm. Assessee continued to exist in the same form as existed earlier. Section 45(4) of the Act constitutes deemed provisions. Any deemed provision is required to be interpreted strictly and literally. In our considered opinion, the provisions of subsection (4) of section 45 of the Act have no application to the facts of the share transfer transaction under consideration. No dissolution of firm; no transfer of capital assets of the firm; no dissolution deed; the partners are not transferees of the shares of UPL / UEL held by the firm. There is no case for valid application of the provisions of subsection (4) of section 45 of the Act. Considering the above facts, we are of the opinion, there is no case for invoking the provisions of section 45(4) of the Act. As such, CIT (A) dismissed the applicability of the provisions of subsection (1) of section 45 of the Act considering the absence of “full value of consideration”. Therefore, the provisions of subsection (1) & (4) of section 45 of the Act have no application to the impugned transactions. These arguments of the Ld AR for the assessee are allowed. Relevant findings of the Revenue (AO / CIT (A)) stand reversed.
We have also perused the relevant recitals and the clauses from the „transfer agreement‟ and find relevant to extract the same as under:
Recitals: “A...... B. transferors on their own volition desires to transfer the above Equity Interests to Transferee without consideration in terms of money or kind..”
Clause 1.1 reads as under,- 1.1 Contribution of equity interests. Upon the terms and subject to the conditions set forth in this Agreement as of (4.pm) on the Effective Date...Transferors hereby voluntarily transfers and conveys irrevocably and forever, the Equity interests to Transferee without consideration and Transferee hereby accepts from Transferors the Equity interests”; 11.1. From the above, we find that the Equity interests are transferred by the assessee without consideration and it was a voluntary act. AO has not brought any adverse material against the above to conclude that the transactions involve the payment of consideration to the firm and the transfer of shares is not a voluntary act. In that sense, we find that the impugned Agreement dated 26.2.2010 has the required ingredients of the „gift‟ agreement. This view gets strength from the finding of Honble Ahmedabad High Court in the case of M/s. Prakriya Pharmachem vs. ITO in Special Civil Application No.20492 of 2015, dated 18.1.2016 and the related transfer of shares constitutes an exempt transfer under the provisions of sectin 47(iii) of the Act. We have also perused the order of Honble Bombay High Court in the case of the recipient company NECL reported in 371 ITR 280 during the Stay Petition related proceedings and find that the assessee‟s claim of gift agreement is prima facie approved. The relevant para 5 and 6 of the said judgment is extracted as under: “5. The AO in the assessment order held that the transfer agreement is purely in the nature of “transfer” as it does not mention the word „gift‟. He rejected the contention that the transfer of the shares was by way of „gift‟ as the agreement is titled as Transfer Agreement”. He observed that if it had been a “gift“ it would have been a gift deed”.
The petitioner has more than just a strong prima facie vase in this regard. The title given to a document is not determinative of its true character. The purport of the document must be ascertained on a consideration of the contents thereof. The respondents do not deny that no consideration in the terms of money or money’s worth was paid by the petitioner to the transferors.”
Regarding the arguments relating to if the gift transaction is done only between the biological persons and not the firms and the companies, we find the arguments and judgments relied by the Ld Counsel of the assessee are relevant and consequently, the conclusions of the CIT(A) are required to be dismissed. The decision of the Tribunal in the case of DP World (P) Ltd 140 ITD 694 and KDA Enterprises P Ltd 68 SOT 349 are relevant for the legal proposition that the gifts transferred by the Indian company to the foreign company constitutes a valid gift and the transfer is an exempt transfer u/s 47(iii) of the Act. Further, we accept the Counsel‟s proposition that share transfer by way of gift is allowable u/s 56(2)(viia) & 56(2)(viib) of the Act.
Similarly, we analyse the provisions of section 28(iv) of the Act. These provisions imply the arising of any benefit / perquisite to the assessee-firm. On facts of the present case, we find, there is no such any benefit or perquisite to the assessee firm by transfer of shares of UPL and UEL to NCPL. Assessee is the transferor and gained nothing in the process. It is the finding of the CIT (A) that the assessee did not receive any consideration.
Considering the above, we are of the opinion, there is no case for invoking the provisions of the said sections in the present case. Accordingly, the order of the CIT (A) is required to the reversed. Thus, the grounds no. 2 to 4 raised by the assessee are allowed.
Ground no.1 relates to the allowability of maintenance charges for the purpose of calculating the ALV of the property. In support of the assessee‟s claim, revising the ALV to the extent of maintenance charges on par with the municipal charges, assessee relied on the coordinate Bench decision in the case of Sharmila Tagore vs. JCIT (2005) 93 TTJ Mum 483.
On the other hand, Ld DR for the Revenue relied on the order of the AO and the CIT (A).
We have heard both the parties on this issue. Assessee owns a property at Worli and earns rental income. Firm incurred an amount of Rs. 76,116/- towards Municipal Taxes and maintenance charges and claimed deduction. AO denied the claim and CIT (A) confirmed the same. Therefore, the assessee is before us. We find, the claim of the assessee is allowable in view of the above cited binding coordinate Bench decision of the Tribunal in the case of Sharmila Tagore (supra). As such, no adverse judgment is brought to our notice by the Revenue. For the sake of completeness of this order relevant para 4 from the said Tribunal‟s order (supra) is extracted as under:- “4. As regards the non-occupancy charges, the claim is that the rent received cannot take the character of rental income till the obligation of the assessee on account of non- occupancy charges is discharged. A certified copy of the resolution passed at the AGM of the members of the housing society, held on 8th Aug., 1995, has been filed. The resolution says that the non-occupancy charges shall be charged to the members whose flats are not self-occupied or who have given their premises on leave and licence or similar other basis. ........... We find force in the assessee's contention. Though there is no provision in Section 24 for deduction of the non-occupancy charges, we are of the opinion that the non-occupancy charges will have a depressing effect upon the annual letting value of the property. Once we attempt to estimate the annual letting value of the property which is the sum for which the property might reasonably be expected to be let from year to year, there is no way we can ignore the non-occupancy charges because payment of non-occupancy charges arises only when the property is not self-occupied but is let out. In this view of the matter, we are of the opinion that the non-occupancy charges levied by the society will have to be considered under Section 23 even while arriving at the estimate of the annual letting value of the property. We accept the assessee's contention and direct the AO to recompute the annual letting value.”