TMI Blog2014 (6) TMI 600X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration. Transfer of shares of Nestle India Ltd and Hindustan Lever Ltd held as investment by members of Bilakhia family to the assessee-company as per family arrangement dated 16-02-2001 claimed to have been transferred without any monetary consideration cannot be held to be a gift- thus, the order of the CIT(A) is set aside – Decided in favour of Revenue. Gifts received from the family members - Assignment of the right to receive back the loans and advances given to third parties by the directors – Held that:- Assessee-company itself has treated the money as its own money and taken the amount to the capital reserve, therefore, the full amount was treated as income of the assessee by the AO while finalizing the assessment under regular provisions and under special provisions of section 115JB of the Act - gift of Rs. 14 crores by the family members to the assessee-company and Rs. 17,11,839/- received by the company on account of the assignment of the right to receive back loans and advances given to third party by the directors of the assessee-company, to equalize the wealth of three brothers of the family as per the understanding reached by way of family agreement, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares directly to capital reserve account without routing through profit and loss account - AO has rightly taken the credits for the purpose of adjustment to book profit u/s 115JB of the Act – Decided against Assessee. - ITA Nos. 981 to 985/Ahd/2009 - - - Dated:- 30-5-2014 - Sri D. K. Tyagi And Shri T.R. Meena,JJ. For the Petitioner : Sri Subhash Bains, CIT-DR with Sri O.P. Batheja, Sr. D. R. For the Respondent : Shri S.E. Dastur, Sr. Advocate with Sri M.K. Patel, A.R. ORDER Per Bench:- All these cross appeals have been filed against the separate orders of Ld. CIT(A) dated 20-01-2009. Since all these appeals belong to same assessee, we are disposing them by passing a consolidated order. 2. At the time of hearing both the parties agreed that ITA Nos. 982/Ahd/2009 1035/Ahd/2009 for assessment year 2002-03 are lead cases as Ld. CIT(A) has followed the order for assessment year 2002-03 in rest of the assessment years. So both the parties advanced their arguments in respect of grounds for assessment year 2002-03 which will take care rest of the years as grounds in those years are similar. Synopsis of the arguments was also filed on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the same was re-opened and assessment was completed u/s. 143(3) r.w.s. 147 of the Act on 12th December, 2007. During assessment proceedings on perusal of the return of the income and having submissions it was found that assessee-company has credited Rs. 45,58,654/- directly to its capital reserve being profit on sale of shares of Nestle India Ltd and Hindustan Lever Ltd. received as gift. This sum was not routed through the profit and loss account of the company and hence was not considered for calculation of book profit u/s. 115JB of the Act. As per the details of capital gain arising from the transfer of shares which was transferred to capital reserve account, the asssessee-company earned capital gain of Rs. 45,58,654/-. The capital reserve was also credited by a sum of Rs. 14,17,11,839/- being gift/loans from the promoters of the company. Before AO assessee-company s claim was that the transaction of transfer of shares as per family arrangement from various persons belonging to Bilakhia family was gift to the assessee. However AO was of the view that since the members of the Bilakhia family have transferred their shares to the asssessee company in pursuance of deed of family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angement arrived at between various family members. It was further submitted on behalf of the revenue that the shares have in fact been purchased by the assessee at the cost to the previous owner. 7.1 Ld. DR concluded his argument by submitting that the assessee was not entitled to take the period of holding of the previous owner and hence the gain arising on the sale of shares was in fact short term capital gain and not long term capital gain as claimed by the assessee. 8. The arguments advanced by Ld. Sr. counsel of the assessee as per the synopsis of arguments are as under:- a) Whether the transfer of shares was a gift? i. It is submitted that there is no requirement that a gift can be only out of natural love and affection: 1. Since gift has not been defined under the Act, its meaning as per the Transfer of Property Act, 1882 becomes relevant. S.122 of the Transfer of Property Act, 1882 defines gift thus: 122 Gift defined.- Gift is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee. From the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is consideration either of money or of money's worth. ' (Emphasis supplied) From the above and insofar as the donee is concerned, it follows that for the transfer to be regarded as a gift in the hands of the donee, no consideration, in money or monies worth must have been paid by or on behalf of the donee. In the present case it cannot be disputed that no consideration in monies or monies worth has been paid by the Assessee Company. ii. Insofar as the contention of the Learned DR that the transfer is not voluntary since it is effected pursuant to the family arrangement, it is submitted that if the Learned DR s contention is to be accepted then no transfer effected pursuant to an agreement to transfer can be regarded as voluntary. It is undisputed that the brother executed the family arrangement voluntarily and of their own free will, in that, it is nobody's case that any of the brothers have been forced into signing the family arrangement. Once that is so, the transfer of shares to the Assessee -company is only in continuation and to give effect to the family arrangement. Hence to say that the transfer is not voluntary since its pursuant to a family arrangemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent; i.e. whether or not such payment would constitute gift by the mother to the son under section 122 of the Transfer of Property Act. d. In present case, there is no dispute that the family arrangement between the brothers is binding and enforceable. The question in the present case is whether the transfer of shares was gift under section 122 of the Transfer of Property Act, 1882. As stated earlier the Apex Court has in Km.Sonia Bhatia Vs. State of UP (AIR 1981 SC 1274) held that consideration as referred to in section 122 must be consideration in money or monies worth. Hence the decision in the case relied upon by the Learned DR is completely distinguishable both on facts and in law. b) Insofar as the contention of the Learned DR that the shares have in fact been purchased by the assessee at a discounted price at the price recorded in the books of accounts. This contention is factually incorrect. The fallowing finding of the CIT(A) remains unassailed and in any event is not shown to be incorrect in any manner: The family arrangement has been entered into between the parents, the three brothers their wives and children. The rearrangement has been mainly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In pursuance to this family arrangement, the family members transferred the shares of Nestle India Ltd and Hindustan Lever Ltd (HLL) held by them as investment to assessee -company which was claimed by assessee-company a gift. The AO issued a show cause notice to the assessee company as to why this transfer of shares effected by the members of Bilakhia family to the assessee-company be treated as gift. It was also asked as to why the period of holding shall not be counted from the date of acquisition of the shares by the assessee-company. The asssessee company s contention before the AO was that shares received from the family members were gifts and for making this submission reliance was placed on the decision of Apex Court in the case of Kale and others vs. Dy. Director of Consolidation and other and therefore holding period of the shares be accordingly calculated in accordance with the provisions of explanation 1(b) of section 2(42A) of the Act. The AO however did not agree with the assessee-company and relying on the same decision of Hon ble Apex Court held that the family arrangement was an agreement with consideration and therefore considered the receipt of shares by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50,00,000/- if her elder son did not pay any portion thereof. It is, well established that such a consideration is a good consideration which brings, about an enforceable agreement between the parties. Section 25 of the Contract Act does not hit this. It is clear from the above that Hon ble Apex Court held that family arrangement cannot be regarded as being without consideration so as to render them unenforceable. Since it is an admitted position that family arrangement in the present case is enforceable and binding, the assessee cannot take the plea that transfer of shares by the family members to the assessee in pursuance to the family arrangement was without consideration. 11. The next question arises whether this consideration can be measured in money or monies worth or not. To answer this question we will have to examine the various clauses of the family arrangement dated 16-02-2001. The main clauses of which are as under:- 5. The various business and companies of the parties hereto are under the control and joint management of the three-brothers viz. Yunus, Anjum and Zakir 6. To avoid any future disputes, differences and disagreements which may affect the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets held by each of the parties herein and specified in Annexure C-1 to C-4 hereto the parties will gift to BHL all the assets held by each party in the Companies specified in Annexure Cl to C-4. (Emphasis provided) It is clear from the above that family arrangement was to equalize the holdings between the respective families of three brothers. Therefore, it cannot be said that consideration for transfer of shares cannot be measured in terms of money or monies worth. The equalization of wealth has only monetary connotation. It is also pertinent to mention that assessee-company in its synopsis of argument has emphasized on the fact that Bilakhia family was a closely knit family and was living in peace and to avoid any future dispute this family arrangement was signed and acted upon. To avoid disputes cannot be said to be without monetary consideration as it is common knowledge that family disputes ruin the family financially. The family disputes are being settled in monetary terms by resorting to arbitration and in case such settlements is not done, matter travels to the court and the family suffers heavily not only mentally but also financially. There is a proverb accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 17,11,839/- received on account of the assignment of the right to receive back the loans and advances given to third parties by the directors of the assessee-company. During the course of assessment proceedings AO observed that certain sums to the tune of Rs. 14 crores and Rs. 17,11,839/- were received by the assessee from the directors as gifts and on account of assignment of the right to receive back the loans given to third parties by the directors of the assessee-company. The directors in the earlier years have given certain loans and the right to receive the loans were assigned to the company as a gift without consideration to the assesseecompany. The assessee-company credited the amount to the capital reserve account and contended that the receipt has no relation with its investment activities. The AO did not accept the contention of the assessee and concluded that transfer of assignment of right cannot be treated as gift in the absence two factors i.e. voluntary and without consideration. It was further observed that assessee-company being investment company received loans and advances in the regular course of carrying its business. The amounts were treated as loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned assessing Officer in re-opening the assessment without recording proper reasons or bringing on record new facts not disclosed by the appellant in its Return of Income which can lead to a proper inference / reason to believe that income has escaped assessment. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 4. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the earned assessing Officer in making the re-assessment under the regular provisions of the Act after issuing notice U/s.148 of the Act for re-computing the book profit U/s. 115JB of the Act. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 5. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned assessing Officer in recomputing the book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 18901000 equity shares of Rs. 10/- each of its group and subsidiary companies as gift from promoters and relatives pursuant to a family arrangement. These shares are accounted for and disclosed at Re. 1/- per gift. (emphasis supplied). These shares in companies other then group companies received with out consideration pursuant to the family arrangement of the promoters of the company have been accounted at the cost to the original owner and the profits and gains arising out of sale of such shares have been treated as capital receipts and credited to the capital reserve account. And thus the company has credited a sum of Rs.45,58,654 directly to its capital reserve being profit on sale of shares received as gift. This sum was not routed through the P .L a/c of the company and hence this was not considered for calculation of book profit u/s 115 JB. However, the treatment given by the company is patently wrong and is not in accordance with the generally accepted accounting principles. Assessee is involved in investment activities. Hence any gain or loss on sale of securities/ shares will be treated as normal income accruing to the company and should be credited to profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to tax had escaped assessment was not correct. (ii) That there was a change in opinion which the AO had formed earlier while framing the order for A.Y. 2002-03. (iii) That the AO recomputed the book profit which had been certified by the statutory auditor as being in compliance with Schedule VI of the Companies Act, without any audit qualification. The appellant company also stated that the AO wrongly assumed the notes to the accounts as an audit qualification and accordingly the reopening of the assessment to re-compute the book profit u/s. 115JB was contrary to the ratio laid down by the Apex Court in the case of Apollo Tyres Ltd. (iv) That the notice u/s. 148 was issued by the AO to re-compute the book profit u/s 115JB and no notice was issued to re-compute the income under the regular provisions of the Act and accordingly reassessment framed determining the total income under the regular provisions was without jurisdiction. 21. After taking into consideration these submissions of the assessee, Ld. CIT(A) confirmed the action of AO by observing as under:- I have considered the submissions. The appellant company is trying to state that the profit on sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains on sale of shares. ii A e response dated 14.12.04- 1. P-46- gives details of gains on sale of shares which was credited to P L A/c 2. P48- gives details of gains on sale of gifted shares credited to Capital Reserve. 3. P92 P 93- Computation of gains under the Act on sale of gifted shares. c. Following decisions were relied upon by the Appellant in support: i. Parixit Industries [207 Taxman 140 (Guj)] ii Telco Dadjee (Mumbai Tribunal F Bench) (3rd Member) iii CIT vs Mysore Paper Mills Ltd. (322 ITR 428 Ker) iv HV Transmissions (Mumbai Tribunal H Bench) v CIT vs. Orient Craft Ltd (2013 354 ITR 536 Delhi) And in respect of no income has escaped assessment assessee s submission is as under:- a. The loss under MAT as returned is Rs. 53,33,307 (P2) and hence original assessment concluded on the basis of income of Rs. 89,960/- returned under normal provision b. As per reasons recorded Rs. 45,58,654 is required to be added to MAT computed (P117) c. Even if the above is carried out- the loss returned under MAT will stand reduced to 7,74,553 and once again the income returned under normal computation would prevail viz. Rs. 89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caped assessment. Therefore ratio of Gujarat High Court in the case of Parixit Industries Pvt. Ltd is not applicable to the facts of this case. 24.2 Assessee also placed reliance on the decision dated 12th May, 2010 of Third Member in the case of Telco Dadajee vs. DCIT for the proposition that proceedings initiated by the AO u/s. 147 were liable to be quashed, where there was no fresh material available with the AO and the assessment had been completed originally u/s. 143(1). Assessee further relied on a decision of Special Bench ITAT Delhi in the case of DCIT vs. Padam Prakash (HUF) to submit that decision in Third Member case is entitled to as much weight and respect as a decision of a Special Bench and it should be followed and applied by regular benches and same cannot be disregarded by them. In the case of Telco Dadajee returned filed by the assessee on 31-11- 1998 was accepted u/s. 143(1). In the return, the assessee had claimed deduction for payment of non compete fee at Rs. 75 lacs which included payment of Rs. 15 lacs to a director. The assessee had also claimed depreciation of Rs. 1,41,858 on leased premises. The AO issued notice u/s. 148 on the ground that these were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o material before the Assessing Officer for such a belief. The Ld. Accountant Member has not disputed that there was no tangible material before the Assessing Officer on the basis of which he can reopen the assessment. He has, however held that it is not necessary for the Assessing Officer to have some tangible material before him to issue notice under section 148 in a case where the return was originally processed under section 143(1). With respect, I am unable to subscribe to this view for the reasons stated in the earlier paragraphs. In my humble opinion, on a proper understanding of the judgments of the Supreme Court both in the case of ACIT vs. Rajesh Jhaveri stock Brokers P Ltd (supra) and CIT vs. Kelvinator of India Ltd (supra), it is still open to an assessee to challenge the notice under section 148, in a case where the return was earlier processed under section 143(1), on the ground that the there was no tangible material before the AO to enable him to entertain a prima facie belief that income chargeable to tax has escaped assessment. I may also add that neither before the learned Members who heard the appeal originally nor before me did the Department produce any tangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(1), as held by the Hon'blc Supreme in the case of Rajesh Jhaveri Slock Brokers P. Ltd, (supra), it cannot be said that the AO has looked into till all the aspects contained in return of income. When he has not looked into the return of income, question of relooking and coining to a new conclusion does not arise. In cases where, the returns are processed u/s 143(1), and where at a later date, the AO notices certain wrong claims etc. in the return of income, and forms a prima facie opinion that income has escaped assessment, he is authorized to record reasons and reopening of the assessment u/s 147. In view of the above, we have no hesitation in holding that ratio as laid down in the case of Telco Dadajee is not applicable to the facts of this case in view of the decision of M/s. Rajesh Jhaveri Stock Brokers P. Ltd which was followed by the Mumbai Bench in the case of Kanga Co. 24.4 As far as decision of Karnataka High Court in the case of CIT vs. Mayur Paper Mills reported in 322 ITR 424 relied by the assessee, we find that reopening of assessment u/s. 147 was not the issue before the court, therefore the same is not relevant. 24.5 As far as decision of Mumbai Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that in the absence of tangible material available with the AO to form the requisite belief regarding escapement of income, the re-opening of the assessment made u/s. 143(1) is bad in law. The hon ble High Court answered this question in the affirmative in favour of assessee and against the revenue by observing as under:- 13. Having regard to the judicial interpretation placed upon the expression reason to believe, and the continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words reason to believe have to be understood in a liberal manner where the finality of an intimation under Section 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the word reason to believe vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(l) can be subjected to proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that that assessing officer should have reason to believe that income chargeable to tax has escaped assessment. In our opinion, the said expression should apply to an intimation in the same manner and subject to the interpretation as it would have applied to an assessment made under section 143(3). The argument of the revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri (supra) would also appear to be self-defeating, because if an intimation is not an assessment ' then it can never be subjected to section 147 proceedings, for, that section covers only an assessment and we wonder if the revenue would be prepared to concede that position. It is, nobody's case that an intimation cannot be subjected to section 147 proceeding; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the profit and loss account and the same had been credited to capital reserve directly thereby to that extent income u/s. 115JB of the Act had escaped assessment. As during the assessment proceedings neither any query was raised by the AO nor any submission was made on behalf of the assessee. This view of ours gets support from the judgment of Mumbai High Court in the case of Export Credit Warranty Corporation of India vs. ACIT wherein within 4 years after completion of assessment u/s. 143(3), the AO issued notice u/s. 148 seeking to reopen the assessment stating five grounds which formed his reasons to believe that income had escaped assessment. The arguments before the court were that notice was issued without jurisdiction as there was complete disclosure on the part of the assessee of material facts during the course of assessment and there was absence of fresh or tangible material on the basis of which assessment could be re-opened. The fact that AO had relied upon the notes forming part of the accounts was indicative of the fact that that there was no failure on the part of the assessee to disclose material facts. The argument of the revenue on the other hand was that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the accounting year consequently. Evidently the Assessing Officer had not considered paragraph 6.1 of the Notes forming part of the accounts. At this stage: it would be necessary for the Court to record that we have not been called upon to decide as to whether any addition to the income would have to be made on that ground since that is a matter which has to be decided after the assessment opened. All that is relevant at this stage is whether there is reason to believe on the part of Assessing Officer that income had escaped assessment. The answer is in the affirmative. It would not be appropriate for this Court to preempt an enquiry whatsoever by the Assessing Officer, once a tangible basis has been disclosed for reopening, the assessment. Similarly, in respect of the revision of pay scales, Assessing Officer has sought to reopen the assessment on the ground that the liability had not crystallized before the balance-sheet date. Here again, it is apparent that there has been no application of mind to the relevant facts by the Assessing Officer during the course of the assessment proceedings. As regards the first ground, on the basis of which the assessment is sought to be reopen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above, the order passed by Ld. CIT(A) upholding the action of AO in reopening of assessment is hereby upheld. Ground No. 3 4 of assessee s appeal are dismissed. 27. Ground no. 5 6 relate to adjustment to book profit u/s. 115JB of the Act. The AO during the assessment proceedings made an addition of Rs. 45,58,654/- being surplus to sale of shares to the book profit for taxation u/s. 115JB which has been confirmed by Ld.CIT(A). Before us reliance was placed on the following submission:- 1. The AO has no authority to adjust book profits once the accounts are audited and accepted by the general body, save and except such adjustment as are provided for in Explanation to section 115JB. Reliance was placed on the decision of the Supreme Court in the case of the Apollo Tyres Vs. CIT (255 ITR 273), where the Supreme Court had held that while determining the book profit under Section 115JB, the Assessing Officer could not re-compute the profit and loss account by excluding the provisions made for arrears or depreciation. The decision of the Apex Court has been followed in the following other decisions:- a. Malayala Manorama Co. Ltd vs. CIT [2008] 300 ITR 251 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be routed through profit and loss account falls flat ( case laws in support of this argument are therefore not applicable to the facts of this case), the assessee was not justified in crediting the sale proceeds of the shares directly to capital reserve account without routing through profit and loss account. We are therefore of the considered opinion that AO has rightly taken these credits for the purpose of adjustment to book profit u/s. 115JB of the Act. The order passed by Ld. CIT(A) confirming the action of AO is hereby upheld. Ground No. 5 6 of assessee s appeal are also dismissed. 28. In the result, assessee s appeal is dismissed. 29. In the combined result, revenue s appeal is allowed and assessee s appeal is dismissed. Now coming to other cross appeals for the assessment years 2001-02, 2003-04, 2004-05 and 2006-07. 30. Since the Ld. CIT(A) has followed his order for assessment year 2002-03 in rest of the assessment years grounds of which being similar, following our order for assessment year 2002-03, we hereby dismiss appeals filed by the assessee for assessment years 2001-02, 2003-04, 2004-05 and 2006-07 and allow appeals filed by the revenue for these y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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