PCIT Vs Gracy Babu (Kerala High Court)
Kerala High Court held that consideration received by the trustees for relinquishment of trusteeship in the Trust cannot be treated as a capital receipt for the purposes of assessing the same under the head of capital gains.
Facts- The Carmel Educational Trust is engaged in running educational institutions that impart education in the subjects of Engineering and Management. The 12 trustees of the trust belong to three closely related family groups. Due to difficulties in managing the college and also due to personal differences, the trustees decided to discontinue the business and entered into an agreement with the Believers Church on 10.03.2009, whereby all the existing trustees resigned from their trusteeship and, simultaneously, new trustees nominated by the Believers Church were inducted. The agreement between the parties also provided for the payment of Rs. 37.5 crores to the erstwhile trustees for settling their liabilities as well as completing certain construction activities that had been commenced by them prior to the agreement. The agreement also provided for the sale of 55.15 acres of land belonging to some of the erstwhile trustees for a consideration of Rs 12.50 crore.
A search u/s. 132 of the Income Tax Act was conducted at the residence of the trustees on 04.03.2009 and certain documents were seized. An unsigned draft agreement dated 23.02.2009 was found which indicated that the amount envisaged for settlement of liability was Rs. 43.50 crore and that the value of the rubber estate extending to 55.15 acres of land was Rs. 6.50 crore.
Assessments were completed u/s. 143(3) r.w.s 153A for A.Y.s 2003-04 to 2008-09 and u/s. 143(3) for A.Y. 2009-10 in relation to the persons who were searched, namely, Gracy Babu, Jose Thomas, and P.J. Paulose, who were the heads of the respective trustee families. No assessments in consequence of the search were made in relation to other family members who were trustees by invoking the provisions of Section 153C of the I.T. Act.
Placing reliance on the seized documents, the Assessing Authority found that the erstwhile trustees had in fact received approximately Rs. 37.5 crores towards consideration for relinquishing their trusteeship, but they had camouflaged these receipts under different heads by showing the receipt of Rs. 14.55 crores towards reimbursement of amounts paid by assessees for clearing outstanding debts and liabilities of the Trust as on the date of the agreement and also for completing certain ongoing constructions that had been undertaken by them. An amount of Rs 12.5 crore was shown as received by way of consideration for the sale of approximately 56 acres of rubber plantation to the Believers Church.
The additions to the income of the trustees by way of excess consideration received for the sale of the rubber plantation were made in relation to Jose Thomas, Gracy Babu, and Reena Jose. While the Assessing Authority and the First Appellate Authority had found that the excess sale consideration received by the said assessees in fact amounts to consideration paid by the Believers Church for their relinquishment of their trusteeship in the Carmel Educational Trust and was liable to be assessed in their hands, the Tribunal, in the order impugned in these appeals, found otherwise.
Conclusion- Held that the en banc resignation/relinquishment by the assessees, of their position as trustees of the Carmel Educational Trust, that too for a consideration, cannot get the imprimatur of this Court. The consideration received by them for such relinquishment cannot be treated as a capital receipt for the purposes of assessing the same under the head of capital gains. The consideration will have to be treated as the individual income of the assessees and assessed accordingly under the appropriate head. We therefore set aside the said findings in the impugned order of the appellate tribunal and remand the matter back to the tribunal to pass a fresh order on this issue in the light of our findings above.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
As all these appeals filed by the Revenue arise out of a common order dated 30.09.2019 of the Income Tax Appellate Tribunal [hereinafter referred to as the ‘Tribunal’], Cochin Bench, they are taken up for consideration together and disposed by this common judgment. For the sake of convenience, the details of the various appeals with reference to the assessee and the assessment year concerned, as also co-relating it to the appeals that were filed before the Tribunal, are provided in tabular form below:-
