TMI Blog2016 (5) TMI 880X X X X Extracts X X X X X X X X Extracts X X X X ..... c Division had been paid to the shareholders of the Assessee by issue of fully paid-up shares, the same could not be stated to have been “received or accruing” in favour of the Assessee. The expression “accruing” as used in Section 48 of the Act is synonymous to entitlement. If the Assessee is entitled to the consideration, then the same must be taken into account for the purposes of computation of capital gains in terms of Section 48 of the Act. The consideration for the transfer of Panasonic Division is real and not hypothetical. The fact that the Assessee had agreed for part of the same being directly received by its shareholders would not make the consideration unreal in its hands; the income sought to be taxed cannot be stated to be hypothetical. - Decided in favour of the Revenue and against the Assessee. - ITA 12/2003 - - - Dated:- 13-5-2016 - S.MURALIDHAR JUSTICE VIBHU BAKHRU JJ. For the Appellant : Mr Ashok K. Manchanda, Senior Standing counsel with Ms Vibhooti Malhotra, Junior Standing counsel. For the Respondent : Mr Salil Kapoor, Mr Sanat Kapoor, Ms Ananya Kapoor and Mr Sumit Lal Chandani. JUDGMENT VIBHU BAKHRU, J 1. The Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that Section 50 of the Income Tax Act, 1961 was not attracted in the case of the assessee? 4. Since the second question was not pressed by the Revenue, we are called upon to consider only the first question as quoted herein above. 5. Briefly stated the facts necessary to address the aforesaid question are as under: 5.1 The Assessee is a Public Limited company and at the material time was, inter alia, engaged in manufacturing television sets, components, office automation equipment, etc. The Assessee states that it had five undertakings including one referred to as the Panasonic Division . 5.2 The Panasonic Division was set up during 1994 to manufacture colour televisions and audio systems under the brand name Panasonic in technical collaboration with a Japanese company, Matsushita Electric Industrial Company (hereafter MEI ). MEI desired to participate financially in the Panasonic Division and, accordingly, it was decided to hive off the Panasonic Division to a new company M/s Matsushita Television Audio India Ltd. (hereafter MTAIC ) in which MEI ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost of fixed assets ₹ 59,94,36,171/- Add: Current assets, Loans Adv. ₹ 42,29,63,886/- Rs.102,24,00,057/- Less: Liabilities taken over ₹ 58,61,68,361/- 43,62,31,696/- Short-term capital loss 11,14,31,696/- 5.6 The AO examined the Scheme and noticed that the full consideration for the Panasonic Division was fixed at ₹ 50,12,00,000/- and further the WDV of the assets as per the depreciation chart furnished by the Assessee was ₹ 41,09,32,331/-. He, accordingly, computed the short term capital gains on transfer of Panasonic Division as under: Total consideration as per para 12 of scheme of arrangement ₹ 50,12,00,000/- Less: WDV of fixed assets belonging to Panasonic Division as per dep. chart filed as per IT Rules 41,09,32,331/- Add: Current assets, loans and advances 42,29,63,886/- 83,38,96,217/- Less: liabilities taken over 58,61,68,361/- 24,77,27,856/- Short-term capital gain 25,34,72,144/- 5.7 The Assessee contended that it had received only ₹ 32.48 crores in terms of the Scheme and the balance amount of ₹ 17.64 crores was discharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry recognition. 7. The Tribunal noted that only ₹ 32.64 Crores had been received by the Assessee in terms of paragraph 12 of the Scheme and the amount of ₹ 17.64 crores was given to the Assessee s shareholders by MTAIC by allotment of its shares. The Tribunal noted that it was the Assessee s case that the same amounted to diversion of receipt at the very source and thus, could not be taken into account for computation of capital gains. The Tribunal then posed the question whether the amount of ₹ 17.64 crores given to the Assessee's shareholders was a diversion at source or whether it was application of Assessee's income. The Tribunal, answered the aforesaid question by referring to the decision of the Supreme Court in Commissioner of Income Tax v. Sitaldas Tirathdas: (1961) 41 ITR 367 (SC) and CIT v. Imperial Chemicals Industries (India) P. Ltd.: (1969) 74 ITR 17 (SC) and held that under the Scheme, the amount given to shareholders was diversion at the very source and could not be considered to be application of income because sum of ₹ 17.64 crores was not received by the Assessee at all. 8. The Tribunal rejected the Revenue's content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that consideration for sale of Panasonic Division was ₹ 50,12,00,000/- and the fact that part of the consideration was paid by MTAIC directly to the shareholders of the Assessee would not absolve the Assessee from computing the capital gains on the basis of the said consideration. 11. Next, she referred to the decision of the Supreme Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd.: (1997) 1 SCC 579 and on the strength of the said decision contended that the Court was not required to examine the merits of the Scheme or the commercial wisdom exercised by creditors and the members of the company. She earnestly contended that sanction of the Scheme by this Court was merely an approval of the arrangement already arrived at by the stakeholders. She further contended that the Director's report also indicated that the proposal for issue of shares by MTAIC to the Assessee s shareholders was made by the Board of Directors of the Assessee to directly benefit its shareholders. She urged that this clearly indicated that the arrangement was to divert part of the consideration by the Assessee to its shareholders. 12. Next, Ms Malhotra referred to the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 17.64 crores nor the same had accrued in favour of the Assessee in terms of the Scheme. He also relied on the decision of the Supreme Court in Sitaldas Tirathdas (supra) in support of his contention that the part consideration in question did not form a part of the Assessee s income. Further, he referred to the decision of the Supreme Court in Commissioner of Income Tax v. Excel Industries Ltd.: (2013) 358 ITR 295 (SC) in support of his contention that income tax could not be levied on hypothetical income. Reasoning and Conclusion 16. At the outset, it is necessary to notice that this Court is not called upon to consider the question whether any income chargeable under the head 'Capital Gains' could be computed under Section 48 of the Act (given that no separate asset had been transferred but the entire Panasonic Division has been transferred as a going concern by the Assessee to MTAIC). Although the Tribunal had noted that Section 50B of the Act was not applicable for AY 1997-98, as it was enacted subsequently, it did not hold that in the present case income chargeable under the head Capital Gains could not be computed. Further, it also does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Another company which is identically situated enters into a similar arrangement, however, follows a different route and instead of directly approaching its shareholders, files a scheme of arrangement before the Company Court and makes an application for the requisite meetings to be convened. The Court gives directions for holding of the meetings and the entire transaction (the scheme) is placed before the members and creditors for obtaining their approval. After following the prescribed procedure, the Company Court sanctions the scheme. In either case, the nature of the transaction essentially remains the same. In the first case, it is effected by means of an agreement, which is binding and in the later case, it is effected under the scheme of arrangement which too is binding under the provisions of the Companies Act, 1956 (or the Companies Act 2013). In our view, there would be no difference as to the incidence of taxation on the sale effected through the two modes. 19. During the course of the arguments, we had also put this illustration to Mr Kapoor and enquired whether the Assessee claimed that incidence of taxation in the two cases would be any different. Mr Kapo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and vesting in MTAIC in accordance with this scheme, being a sum of ₹ 50,12,00,000 (Rupees fifty crores twelve lakhs only) has been fixed and agreed to by SIL and MTAIC through their respective Boards which shall be discharged in the manner hereinafter provided. 23. Paragraph 12 of the Scheme provides for the manner in which the above consideration is to be discharged by MTAIC and reads as under:- 12. In consideration of the transfer and vestment of the running business of Panasonic Division to MTAIC and upon this Scheme being effective: a) Every member of SIL holding Equity Shares in SIL on the Effective Date or such other date as may be decided by the Board of Directors of SIL and MTAIC respectively (on the scheme becoming final and effective) shall in respect of every fully paid equity share of ₹ 10/- each held by him in SIL be entitled as of right to claim and receive from MTAIC an allotment of Two Equity Shares of ₹ 10/- each credited as fully paid up and that MTAIC shall so issue and allot two equity shares of ₹ 10/- each in its capital for one fully paid equity share of SIL ; Provided that in case any member's shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est in the assets of the company. The use of the word assets in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the case of Chiranjitlal Chowdhuri v. The Union of India and Others [1950] S.C.R. 869, 904]. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the look at test to ascertain its true legal nature. 27. In our view, if we look at the Scheme in the context in which it belongs, it would be plainly evident that it is an instrument for effecting sale of the Assessee s assets (the Panasonic Division) where the owner selling its assets (the Assessee) has called upon the buyer to pay a part of the consideration to a third party (its shareholders). Indisputably, the seller would be entitled to the entire consideration for the sale and the fact that at its instance a part of the consideration is diverted to a third party would not absolve the seller from recognizing the entire consideration. We are unable to accept Mr Kapoor's contention that merely because part of the consideration for the transfer of the Panasonic Division had been paid to the shareholders of the Assessee by issue of fully paid-up shares, the same could not be stated to have been received or accruing in favour of the Assessee. The expression accruing as used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. 29. The Supreme Court distinguished the case of Bejoy Singh Dudhuria (supra), by noticing that in that case, the claim of stepmother had been made a charge on the resources and, thus, she had become entitled to the specified income, prior to it becoming an income in the hands of the assessee in that case. 30. As explained by the Supreme Court in Sitaldas Tirathdas (supra), it is the nature of the obligation which is the decisive fact. And as stated hereinbefore, the nature of the transaction embodied in the Scheme is indisputably one of transfer of an undertaking which belonged exclusively to the Assessee. Thus, no other person had any right to cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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