9911796707
TMI Blog2024 (9) TMI 1046X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., took loan of Rs. . 20,00,00,000/- and M/s. Navadurga Industries Ltd., took loan of Rs. .33.07 crores. (These are the details as has been provided by the ld AR on behalf of the assessee). The said companies did not pay the loans in time. The loans were taken from SREI Equipment Finance ltd., wherein, the assessee had stood guarantor for the loans and had consequently mortgaged certain immovable properties owned by her to SREI Equipment Finance ltd. As these companies had not repaid the loans, SREI Equipment Finance ltd., took over immovable properties, which were mortgaged by the assessee as the guarantor for the repayment of the loans. The issue in appeal is in regard to levy of capital gains on the takeover of the immovable properties of the assessee by SREI Equipment Finance ltd., which were mortgaged as the security against the loans. Ld AR has placed before us the copy of the sale deed by which SREI Equipment Finance ltd., has taken over the immovable properties. The sales consideration in the said documents is Rs. .1,89,13,000/-. It was the submission that the assessee did not receive even a single pie out of the said amount and consequently, no capital gains could be le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 18 Gujarat Municipal Finance Board vs. Dy. CIT (Assessment) 221 ITR 317 (Guj.) 6 19 Indermani Jatia vs. CIT 35 ITR 298 (SC) 5 20 K. | P. Varghese vs. ITO 131 ITR 597(SC) 6 21 K.A. Ramachar v. CIT [1961] 42 ITR 25 (SC) 24 22 K.A. Ramachar v. CIT [1961] 42 ITR 25 (SC) 5 23 Moti Lal Chhadami Lal Jain vs. CIT [1991] 190 ITR 1 (SC) 16 24 Murlidhar Himatsingka v. CIT [1966] 62 ITR 323 (SC) 24 25 Nariman B. Bharucha's case (1981) 130 ITR 863 (Bom) 9 26 P. C. Mullick vs. CIT [1938] 6 ITR 206 (SC) 13 27 Poona Electric Supply Co. Ltd. vs. CIT [1965] 57 ITR 521 (SC) 2 28 Raja Bejoy Singh Dudhuria vs. CIT [1933] 1 ITR 135 (SC) 13 29 Rajkot District Gopalak Co-op. Milk Producers' Union Ltd. vs. CIT 204 ITR 590 (Gujarat) 5 30 RSM & Co. Vs. Addl. CIT (2010) 125 ITD 243 (Mum.) 24 31 Shroff Eye Centre vs. ACIT (ITAT Delhi) 20 32 Somaiya Organo Chemicals Ltd. vs. CIT 216 ITR 291(Bom.) 5 33 State Bank of Travancore vs. Commissioner of Income Tax 158 ITR 102 (SC) 2 34 T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai) 28 35 U.P. Bhumi Sudhar Nigam vs. CIT [2006] 280 ITR 197(Allahabad) 17 36 V. N. V. Devarajulu Chetty and Co. v. CIT [1950] 18 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the Capital Asset has been transferred but consideration was neither received nor accrued to the assessee. Hence, the Income is not taxable under Capital gain as consideration never received or accrued to the assessee. That apart, Capital Asset of the assessee is mortgaged to lenders to extend loan to Group Companies. As the loan became bad, the Capital Asset was transferred to lenders by execution of the Sale Deed without any monetary exchange. Since the asset was transferred to lenders without any monetary transaction falls under the principle of "Diversion of Income by Overriding Title". As the Income is diverted at source the said income is not real hence not subjected to tax. 2. The Ld. CIT (Appeals) mis applied the ratio decidendi of CIT v. Attilli N. Rao 252 ITR 880 (SC) and T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai) in the Appeal Number: ITA No. 2686/CHNY/2018 which is squarely not applicable to the instant case. The Ld. CIT sighted the cases which are factually different from the instant case. In both the cases assets mortgaged with the Bank or Excise Department was sold auctioned and consideration amount received in both the cases were utilised to recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise. There are many grey areas as to whether a particular receipt is income or a particular payment is a revenue expenditure on which a decisive answer was not forthcoming. The concept of real income is often invoked to decide the issue one way or the other. Courts have used this concept for ensuring that what is taxed is nearly real as possible within the constraints of statutory limitations. The concept of real income, i.e, what is to be subject to tax is only the real income and not income in the hypothetical sense, has been established for a long time. In Poona Electric Supply Co. Ltd. vs. CIT [1965] 57 ITR 521 (SC) it was held that tax is exigible only on income earned in reality. Even if entries are made in the books of account, what is relevant is the entries that are made on accrual basis i.e, accrual of right to receive payment or the accrual of liability to disburse or pay, as held by the Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd vs. CIT 225 ITR 746 (SC). When income is in fact received but subsequently given up, it remains the income of the recipient and tax is payable in the year of accrual. When income has not accrued at all, i.e, ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y have accrued but in the reality of the situation no income had resulted because the income did not really accrue (iii) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed (iv) Where the Act applies, the concept of real income should not be so read as to defeat the provision of the Act. (v) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (vi) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (vii) Mere improbability of recovery, where the conduct of the assessee is unequivocal cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry, but taking the interest merely in suspense account, cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee (viii) The concept of real income is certainly applicable in judging whether there has been income or not, but in every case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration was whether income of the project assigned to a Co-operative Society on lease and license basis and profits of which were to be paid to the State Governmem, could be treated as 'income' of the assessee? It was held that the entire income belonged to the Government and it could not be treated as the income of the assessee and was thus not taxable. Similarly, in CIT vs. Pepur Round Transport Corpn 253 ITR 303 (Prom & Har), the Court considered the question as to whether the amount forfeited by the employer out of the provident fund where it was categorically mentioned that the said amount belonged to the Trust, was mcome of the assessee Invoking the concept of 'real income, the High Court held the same not to be the income of the assessee. A somewhat similar view was taken in Gujarat Municipal Finance Board vs. Dy CIT (Assessment) 221 ITR 317 (Guj) It was decided by the Supreme Court in the case of K. P. Varghese vs. ITO 131 ITR 597(SC) that what in fact never accrued or was never received cannot be computed as capital gains under section 48. Though the aforesaid case was related to capital gains, it equally applies to the case of principle of real inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two conditions were met whereas the last condition is not fulfilled. The Consideration was neither received nor accrued in the hand of the assessee as the asset was transferred by virtue of a contractual obligation overriding the income. At this juncture, it is of paramount significance to understand the provision of law particularly under the Income Tax Act regarding "Diversion of Income by Overriding Title". One of the fundamental principles of taxation is to tax income accruing or deemed to accrue in favour of the taxpayer. The concept of diversion of income and application of income though fundamental has great tax implication since it is a court made concept. It is well known that income when diverted before reaching the assessee is called as diversion of income, whereas when the income is applied after it reaches the assessee, either due to contractual obligation or exercise of discretion, it is called as application of income. As explained by the Apex Court The essence of the concept of diversion of income could be found in CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC). The Apex Court laid out the tests for determining when an income can be said to have been diverte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The deed of partnership contained a recital that in the event of the demise of the erstwhile proprietor, the surviving partners have to pay 25 percent share of profits of the firm to the widow of the deceased partner (i.e. wife of erstwhile proprietor and mother of two surviving partners). It so happened that the erstwhile proprietor deceased and the firm paid 25 percent of profits to the widow of the deceased partner and claimed the same as expenditure. The claim of the assessee was negative by the revenue. The court made a reference to the precedent in the case of CIT v. Patuck (1969) 71 ITR 713 (Born) wherein it was held that whenever a charge is created, the income which has been made the subject of the charge ceases to be the income of the assessee and the charge creates an overriding title in favour of the charge-holder to recover the income before it reaches the hands of the assessee. The court held that it is obvious from the deed of partnership that 25 percent of income of the firm did not belong to any of the two partners and if at all that income was received by them, it was for and on behalf of the charge-holder. The nature of the charge created by the document VIZ. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any semblance of revenue nature. The Tribunal held that the assessee had received the amount from the firm and such receipt was not in relation to any service or business done by her for the firm. It was not to compensate for any loss suffered by her because of the firm. Similarly, it is not a compensation for the services rendered by her either in present or in future. The Tribunal applied the Circular No.573, dated 21.08.1990 which exempts lump sum ex-gratia payment received by widow or legal heir of an employee who dies while in active service. The Tribunal held that the very spirit of the Circular is to exempt any payment made to the legal heirs of the deceased employee to support them in hardship and ensure livelihood and accordingly, such receipt is not chargeable to tax. It may be noted that the facts of the case relate to the financial year after the insertion of section 56(2) (v) (introduced by Finance Act, 2004 w.e.f. 01.09.2004) meant for taxing gifts from non-relatives. Conclusion Tax laws and for that matter any law has to accommodate the requirements of the users and administrators. The aspects of practical relevance and application are always the corner stones of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a certain way, still it remains the income of the assessee. This distinction has been maintained by Hon'ble Supreme Court on numerous occasions. See for example Raja Bejoy Singh Dudhuria vs. ClT [1933J 1 ITR 135 (PC); P. C. Mullick vs. CIT [1938J 6 ITR 206 (PC); ClT vs. Sitaldas Tirathdas [1961J 41 lTR 367 (SC) and Vibhuti Glass Works vs. ClT [1989J 177 lTR 439 (SC). In the case of CIT vs. Sunil J Kinariwala [2003 J 259 ITR 10, the Hon'ble Supreme Court has, after referring to various precedents on the subject, explained the aforesaid expression in the following manner: "When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title. "Further, recently the Hon'ble Supreme Court in the case of DClT vs. T Jayachandran [2018J 406 lTR 1 has clarified that the income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diversion of income by overriding title and where the income can be said to have been applied after it is received by a taxpayer. The assessee in that case, claimed a deduction from his total income, the amount paid under a consent decree as maintenance to his wife and children. The assessing officer however disallowed said deduction, which was confirmed by the Commissioner and also the Tribunal. On reference, the Hon'ble Bombay High Court held that the income to the extent of the decree must be taken to have been diverted to the wife and children, and never became income in the hands of the assessee and hence, was an allowable deduction. The revenue challenged this before the Hon'ble Supreme Court. Justice M. Hidayatullah (as His Lordship then was), reversed the decision of the High Court and while doing so, held as under: "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of income. See Moti Lal Chhadami Lal Jain vs. CIT [1991] 190 ITR I (SC) wherein the above has been laid down. Further, the appearing or non-appearing of a particular income in the books of account of un assessee is not a relevant criterion to determine the question of diversion of income As held by the Hon'ble Supreme Court, the expressions 'reaches the assessee and has been received have been used not in the sense of the income being received by one person or whether it has entered into the books of account. Therefore, just because certain income is not recorded in the books of account of an assessee but in some other person's books, one can still hold that such income was of the first person. It will not be out of place to clarify here that what is relevant is a charge on the source of income. The fact that a charge has been created on some assets by itself cannot take a case out of the category of application of income' Though a charge of asset may aid in determining the vital question of 'diversion' vs. 'application' However, it is certainly not a conclusive yardstick. Say a charge created by an assessee on some assets voluntarily and by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are now left with the argument of the revenue that constructively the assessee should be treated to have received the amounts of sale proceeds. It is argued that credit institutions sold the shares in question on behalf of the assessee and the sale proceeds were applied in discharge of debts owed to the credit institutions by Pertech and Swati on behalf of the assessee. We do not see any basis for these arguments of the revenue. It is not the case of the revenue that the assessce sold the shares belonging to him first and deposited sale proceeds with the credit institutions as security. What the assessee parted with and entirely for the benefit of Pertech & Swati, were the share certificates themselves. The assessee had at that stage completed his part of the transferor and it was open to anybody to insert his name as transferee and claim the ownership of the shares in question. If at all the assessee applied anything for the benefit of Pertech & Swati, it was the share certificates themselves and not sale proceeds of the share certificates. Credit institutions subsequently sold these shares in the open market not on behalf of the assessee but on behalf of Pertech & Swan. By ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the holding company and the assessee. The flats to be constructed, by the assessee company were the source of income and the holding company had created a lien over 25% for a quid pro quo thereof and therefore took away 25% shares from the sale proceeds. It is not a case that the entire sale proceeds of flats and therefore, the income there from would have accrued to the assessee and 25% thereof had been applied or given away by the assessee to the holding company. The assessee acts as a collector of revenue for the holding company of the receipt to the extent of 25% of the sale proceeds. The 25% belongs to the holding company by virtue of the contributions made and the agreement entered. Where a superior title is created before any income accrues or arises, it would be the diversion of income by overriding title but where there is no obligation attached and income is applied as per assessee's own choice after it accrues, it will not be a case of diversion by superior title as no superior title existed. In diversion, there is no earmarking by the assessee of a particular income but a charge is created upon his property being source of income. A charge created voluntarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue sharing agreement entered with the holding company by the assessee is a diversion of income by overriding title, we allow ground number one of the appeal following the reasoning given by the coordinate bench. Shroff Eye Centre vs. ACIT (ITAT Delhi) The Id. AR relied upon the number of decisions in this connection. In CIT Vs Sitaladas Tirathdas, (1961) 41 ITR 367, Hon'ble Apex court while referring to decisions in Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC) and in P.C Mullick's case [1938] 6 ITR 206 (PC) laid down a test to determine as to whether or not income is diverted before it reaches the assessee and observed as under: - "In our opinion, the true test is whether the amount sought to be deducted in truth never reached the assessee ax his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee Where by the obligation income is diverted before it reaches the assessee, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Devarajulu Chetty and Co. v. CIT [1950] 18 ITR 357, Hon'ble Madras High Court held that that where a new firm which merely collected the money on behalf of the old firm and bank the same to the new firm (sic), the new firm could not be assessed. In CIT v. Sunil J. Kinariwala [2003] 259 ITR 10, Hon'ble Apex court, after referring to the decisions of the Privy Council in the cases of Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 and P.C Mullick v. CIT (1938) 6 ITR 206 and of the apex court in the cases of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367; ΚΑ Ramachar v CIT [1961] 42 ITR 25, Moti Lal Chhadami Lal Jain v. CIT (1991) 190 ITR 1; CIT v Bagyalakshmi and Co. (1965) 55 ITR 660 (SC) and Murlidhar Himatsingka v. CIT [1966] 62 ITR 323 has held that if a third person becomes entitled to receive an amount under an obligation of an assessee even before he could lay claim to receive it as his income, there would be a diversion of income by overriding title but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. ACIT (ITAT Chennai) in the Appeal Number: ITA No. 2686/CHNY/2018 which is squarely not applicable to the instant case. The Ld. CIT (Appeal) heavily relied on the judgements of CIT v. Attilli N. Rao 252 ITR 880 (SC) and T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai). However, relevant extracts of the judgements stated in the order are stated below; A. In the case of CIT v. Attilli N. Rao 252 ITR 880 (SC), wherein, the Hon'ble Supreme Court has observed and held as under: 4. The assessment year with which we are concerned is the assessment year 1982-83. The assessee carried on abkari business. In the course of the financial year 1970-71 he mortgaged to the Excise Department of the State of Andhra Pradesh immovable property belonging to him at Waltair. He did so to provide security for the amounts of "kist" which were due by him to the State. The State, in the assessment year with which we are concerned, sold the immovable property by public auction, without the intervention of the court, to realise its dues A sum of Rs. 3,62.980 was realised at the auction. Therefore, the State deducted the amount of Rs. . 1.29,020 due to it towards kist and interest and paid over the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first question is answered in the negative and in favour of the Revenue The other questions do not arise for consideration. B. Similarly, in the case of T.S. Hajee Moosa & Co Vs. ACIT (ITAT Chennai). the operative part of the judgement is stated below, 5. The next is in connection with the additional ground. It is submitted that the assessee firm had given guarantee / security for the borrowals made by other entities. The assessee did not receive any benefit or accrue any benefits from the transfer and therefore, the levy of Capital Gains Tax is not correct. "The assessee contends that since it has not received any benefit from the transfer of its property given as security to bank & others for borrowals made by other entities, no capital gain is leviable The Appellant relies on the case law ITA (2006) 102 ITD 227 (Delhi) - Additional Commissioner of Income-Tax, Special Range- 26. New Delhi Vs. Glad Investments (P) Ltd, a copy of which is enclosed. The appellant submitted that the property was sold for Rs. .30 crores, the sale proceeds of which were disbursed to Bank and creditors of other entities and the disbursement details are also submitted herewith. In view of the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, consideration is said to have been received by the assessee before the presence of Sub- Registrar. The sale deed having been executed by SREI Equipment Finance ltd., and the sale deed mentioning the consideration and as per the sale deed consideration has passed, the capital gains is liable to be taxed. It was the further submission that the ld CIT(A) has considered the fact that the immovable properties of the assessee nor the sale consideration has been used for settling any of the loans and, therefore, there is no question of transfer on account of overriding title. He vehemently relied upon the order of the ld CIT(A). 5. We have considered the rival submissions. A perusal of the paper book as filed by the assessee at page-1, which is extracted as follows shows the details of the land sold/ transferred to SREI Equipment Finance ltd., and the companies to which the loan relates. 6. A perusal of the loan agreement between SREI Equipment Finance limited and various companies shows that the same was entered into on 22nd September 2014. Article VIII of the said Article is the guarantee clause. Clause (b) of the said Article is of importance insofar as in the event of the failur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration has been received in full and final satisfaction from the vendee/purchaser. Admittedly, there is no clarity in the sale deed as to how the consideration has passed, whether it is in cash. Clause (2) of the sale deed specifically refers that vendors/sellers have delivered the possession of the scheduled property physically to the purchasers. Clause (6) of the sale deed specifically mentions that the scheduled land or any portion thereof have not been acquired by the government by way of lease nor it has been given as equitable mortgage to any bank or financial institution. A perusal of the above recording in the sale deed when compared with the recording as the guarantor to the loans and the guarantee clause and the mortgage clause clearly shows that though admittedly originally the said immovable properties were mortgaged, something has happened between them by which the mortgage has been released and the properties have been sold to the financial institutions as an asset free from any incumbrance. A perusal of the provisions of section 2 (47) of the Act defines the transfer to be inclusive definition. The facts in the present case clearly shows that the sale deed what has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en repaid by the acquisition of the immovable properties in which she had put as guarantee, the consideration become evident insofar as she become the creditors to that extent. This view of our also find support from the decision of the Hon'ble Supreme Court in the case of CIT vs Attili N Rao (2001) 252 ITR 880 (SC). The decision relied upon by ld AR in the case of ACIT vs Glad Investments Pvt Ltd., (2006) 102 ITD 227 (Del) would not apply insofar as in the said case, first; the guarantor was third party whereas in assessee's case, it is the Director and has substantial shareholding patterns and secondly the said decision does not discussion anything as to the status of the guarantor in respect of the loan amount, he has repaid. On account of third party, whereas the assessee's case admittedly, the assessee would become the creditor to such extent of loan repayment on account of acquisition of the immovable property. In view of above aforesaid reasons, the findings of the Assessing Officer as upheld by the ld CIT(A) stands confirmed.
14. In the result, appeal of the assessee stands dismissed.
Order dictated and pronounced in the open court on 5/9/2024. X X X X Extracts X X X X X X X X Extracts X X X X
|
