Case Law Details
PVR Tourist Home Vs CIT (Kerala High Court)
The Kerala High Court recently delivered a significant judgment in the case of PVR Tourist Home Vs CIT, addressing the applicability of capital gains tax on the transfer of depreciable assets. This ruling provides clarity on the interpretation of Sections 45(4) and 50 of the Income Tax Act, 1961, particularly in the context of partnership firms undergoing reconstitution. The case revolves around the tax implications of transferring a depreciable capital asset and whether such transactions attract capital gains tax under Section 45(4).
PVR Tourist Home, a partnership firm running a hotel, appealed against the order of the Income Tax Appellate Tribunal (ITAT) Cochin, which had implications for the assessment year 2012-2013. The case stemmed from the sale of land and building by the partnership firm and subsequent reconstitution, including the introduction of new partners.
During the previous year relevant to the assessment year 2012-2013, the firm reconstituted with one partner retiring and three new partners joining. Prior to this reconstitution, on 3rd May 2011, the firm sold its land and building to Poonghat Shrinivas for Rs. 8.40 crores, of which Rs. 7.40 crores was attributed to the building. Poonghat Shrinivas later became a partner in the reconstituted firm and reintroduced the building into the firm’s accounts at the same value.
Issues Raised
The primary issues raised were:
1. Whether the ITAT was correct in allowing an additional ground by the Revenue that was not raised by the Assessing Officer or the CIT (Appeals).
2. Whether the transfer of depreciable assets attracted capital gains tax under Section 45(4) in the absence of any distribution of capital assets among partners post-dissolution.
3. Whether the provisions of Sections 50A and 45(4) were applicable, or if Section 50 was the correct provision for the transfer of the depreciable asset.
Assessment and Appeals
The Assessing Officer, during scrutiny, made substantial additions to the appellant’s declared income, attributing a significant portion to short-term capital gains under Section 50A. However, the First Appellate Authority found errors in the Assessing Officer’s computations and adjusted the values, leading to the deletion of the addition.
In the Revenue’s appeal, the ITAT accepted an additional ground, contending that the capital gains should be charged under Section 45(4) instead of Section 50A. The ITAT sided with the Revenue, holding that the transfer of depreciable assets must be taxed under Section 45(4).
High Court’s Judgment
The Kerala High Court considered the submissions and upheld that Section 45(4) applied to the case. The court noted that the ITAT should have computed the extent of short-term capital gains under Sections 48 and 50(1). The matter was remanded back to the ITAT for a detailed computation of the tax liability.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The appellant is a partnership firm engaged in the business of running a hotel to which a restaurant and bar are also attached. In the appeal, it impugns the order dated 29.11.2018 of the Income Tax Appellate Tribunal, Cochin in ITA No.428/COCH/2015 pertaining to the assessment year 2012-2013. The following substantial questions of law have been raised by the appellant:
(i) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in allowing the additional ground raised by the Revenue before the second appellate forum, which were not raised either by the Assessing Officer or the Commissioner of Income Tax (appeals) nor considered by them?
(ii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the transfer of the depreciable capital assets attracted capital gains tax under Sec.45(4) of the Act, in the absence of distribution of any capital asset among the partners following a dissolution of the appellant firm?
(iii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in upsetting the conclusion reached by the CIT (Appeals) that under Sec.50 of the Act, the transfer in question was not exigible to capital gains tax?
(iv) Are not the provisions of Sections 50A and 45(4) of the Act inapplicable to the facts and circumstances of the case and is not Sec.50 of the Act the correct provision of law applicable to the transfer of the depreciable asset in issue?
2. The brief facts necessary for the disposal of the appeal are as follows:
During the previous year relevant to the assessment year 20122013, there was a reconstitution of the appellant firm with effect from 07.07.2011, whereby one of the partners of the erstwhile firm retired from the partnership, and three other new partners were admitted into the partnership. Just prior to the reconstitution of the firm with effect from 07.07.2011, the partnership firm had on 03.05.2011 sold the land and building belonging to it to one Poonghat Shrinivas for a total value of Rs. 8.40 crores, of which Rs.7.40 crores was the value of the building and Rs.1 crore the value of the land. It is significant that the aforementioned Poonghat Shrinivas was one of the persons, who subsequently became a partner in the firm upon its reconstitution with effect from 07.07.2011. It is also on record that he brought back the building which he had purchased from the firm to the accounts of the firm, at the same value at which he had purchased it from the erstwhile firm, namely, Rs.7.40 crores.
3. While submitting its returns for the assessment year 20122013, the appellant firm declared a taxable income of Rs.67,59,315/- in its return dated 31.10.2013. The Assessing Officer, pursuant to a scrutiny of the said return, completed the assessment under Section 143(3) of the Income Tax Act by making a substantial addition to the declared income to the tune of Rs.9,77,46,777/-. Of the said amount, an amount of Rs.6,50,77,334/- was attributed to the short-term capital gains alleged to have accrued to the appellant firm by computing the same in accordance with S.50A of the IT Act.
4. In an appeal carried by the appellant before the First Appellate Authority, the said Authority found that the Assessing Authority, while making this computation of short-term capital gains, had not factored in the addition of the building valued at Rs.7,40,00,000/-, that was brought into the firm by the incoming partner, namely, Poonghat Shrinivas, and hence the written down value as on 31.03.2012, at the end of the previous year, after allowing depreciation, would be Rs.41,94,640/-. He, therefore, found that the addition of Rs.6,50,77,334/- made by the Assessing Officer had to be deleted.
5. In a further appeal carried by the Department against the order of the First Appellate Authority, the Department raised an additional ground, which was accepted on record by the Appellate Tribunal, where under it contended that the capital gains had to be charged in accordance with Section 45(4) of the Income Tax Act, and that the computation methodology adopted by the Assessing Officer and the First Appellate Authority was not correct.
6. The Appellate Tribunal after hearing the rival contentions found force in the submission of the revenue and held that the charge of short-term capital gains had to be in accordance with the provisions of Section 45(4) of the Income Tax Act. The Appellate Tribunal did not, however, proceed to determine the tax effect, if any, that would follow pursuant to its finding as regards the charge of short-term capital gains. It is under these circumstances that the appellant is before us in this appeal raising the questions of law aforementioned.
7. We have heard Sri. Mohan Pulickkal, the learned counsel for the appellant and Sri. Jose Joseph, the learned Standing counsel for the Income Tax Department.
8. On a consideration of the rival submissions, we find that it is not seriously disputed by the appellant that the charging provisions for short-term capital gains under the Income Tax Act, on the facts of the instant case, are as stipulated under Section 45(4) of the Income Tax Act. If that be so, then the only other question to be considered is regarding the manner in which the short-term capital gains that are chargeable under Section 45(4) of the Income Tax Act have to be computed. A reading of the provisions of Section 45(4) would indicate that the computation has to be in the manner prescribed under Section 48, as modified by Section 50(1) of the Act. The consequence of an application of the said provisions of the IT Act to the income assessed in respect of the appellant firm, has not been discussed by the Tribunal in the impugned order. We are of the view that the Tribunal ought to have considered the said aspect also while disposing the appeal preferred by the revenue, especially because the order of the First Appellate Authority, that was impugned by the revenue before it, was in favour of the appellant herein.
9. Thus, while we uphold the finding of the Tribunal that the charge of Short Term Capital Gains, in the instant case, has to be as mandated in Section 45(4) of the Income Tax Act, we remand the matter back to the Tribunal for computing the extent of short-term capital gains, if any, that would be brought to tax in relation to the appellant herein. The Appellate Tribunal would have to do the said exercise by taking into account the totality of transactions effected during the previous year relevant to the assessment year in question.
10. Thus, this appeal is allowed by answering question Nos. 1 and 2 against the assessee and in favour of the revenue and by not answering question Nos. 3 and 4, in the light of the discussions in this judgment and the remand necessitated to the Tribunal for a specific finding on the extent of short term capital gains, if any, that would accrue to the appellant firm during the assessment year in question. The Appellate Tribunal shall examine the provisions of Section 48, as modified by Section 50(1) of the Income Tax Act, and determine whether or not any short-term gains had accrued to the appellant firm for the assessment year in question. Taking note of the time that has elapsed since the filing of this appeal before this Court, we direct that the above computation exercise be completed by the Appellate Tribunal within an outer time limit of six months from the date of receipt of a copy of this judgment, after hearing the appellant firm.
The IT Appeal is disposed as above.
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