V.Swaminathan B.Sc., BL. FCA
It is commonly believed and often said that change is the only concept that never undergoes any change or can be changed. On the contrary, what is never realised or tacitly conceded is that every known concept is changed, violently more often than not, according to individual’s own perception or perspective; and to suit own purpose. That this is an untouchable rule has come to be glaringly pronounced and demonstrated, with the utmost clarity and greater force, in any such instance in which the subject matter is ‘taxation’, -be it of ‘income’, or ‘wealth’ or any other type, qualifying as solely mundane.
2. The subject chosen for study herein is the recently reported itat decision in Shantikumar D Majitia’s case (2012) 28 Taxman.com 149 (Mum).
On the first blush, one is likely to be carried away with an impression that is a case where the issues adjudicated are no different from those commonly noted to come up in a dispute of this kind. However, if it were to be pointedly asked, – is that really so, one’s forthright but fair answer, again in own individual perception, has to be, YES and NO.
Why should that be so?
3. The facts and the mutually varying stance taken by the parties, so also the resultant issues, though seem to be simple, are, in fact, not proven so. Particularly, should a conscious note be made and due regard be had to, besides others, the following clinching observations of the adjudicating authority:
“In fact, to circumvent the said part of section 2(22)(a), the assessee has wrongly declared stock in trade as fixed assets of Rs. 4,01,00,707/- and Rs. 5,26,00,007/- as on 31.3.2005 and 31.3.2006. This subterfuge has led to an absurd situation where both the parties i.e. company as well as shareholder claim to be the ‘de lure’ owner of the same flats while the flat owner being in possession is the ‘de facto and de lure’ owner both.” (Para 7)
(‘de lure’ presumably intended to refer, and to be be read,- ‘de jure’)
3.1. Pithily stating, what instantly come to one’s mind are the following controversies which have come to be increasingly raised and continue to be debated in learned circles:
(A) Form v Substance
For purposes of taxation of income arising from any commercial transaction, which one of these two approaches (i.e. Form or Substance) must prevail; and/or be prudently and justifiably adopted?
In the not so unfamiliar but lately oft repeated words of the judiciary, the view taken, it appears, is that the Revenue may be justified in appropriate instances to look through the documentation evidencing a transaction; not simply look at it.
(B) Avoidance v Evasion
Is the line of demarcation between these two distinct concepts of (avoidance and evasion), not so thin as canvassed by some, but is fairly, if not in a wholesome manner, conclusively ascertainable in any or all given cases or situations?
3.2 It is noted from the itat‘s Order, both the Revenue and taxpayer have chosen, for own reasons- bluntly stating, probably because of fear of treading into a path which even angels would prudently try to avoid, – not to advance any arguments on the referred two vital aspects; so much so, was not required to be, hence not, gone into by the adjudicating authority,
3.3. All not said, in one’s conviction, a point of grave doubt nonetheless anises; that is, – whether the view(s) handed down by the itat in settling the points of issue could be considered the only and better view which, in any case, could have been taken; provided, of course, and in the event, the parties have, as expected of them, urged / forcefully argued out all the crucial points having a bearing on the dispute. One such point that is noted to have been, unwittingly or otherwise, left to be covered, adequately or otherwise, is related to the concept of ‘Flat’. For, after all, the tax dispute pertains to that unique kind of property i.e. ‘Flat’.
4. Special law on “Flats’:
For resolving the dispute, in all its ramifications, it is, for obvious reasons, imperative the fundamental nature of the said property is consciously made a note of / kept in mind.
To explain: Flat is a ‘unit’ of a building, and has its own but peculiar characteristics. They are distinguishable in many respects from the characteristics of the commonly known property i.e. a building / house property. In common as also legal parlance, that general concept connotes an independently and exclusively owned property. Besides, it is a property wholly governed by the age-old enactment, called the Transfer of Property Act.
On the other hand, if a Flat, both the activities of construction, so also conveyance thereof, are governed by a specially structured enactment. In Maharashtra, that is called, – Maharashtra Ownership Flats Act (the Flats Act). Accordingly, therefore, being a special creature of the Act, except as provided otherwise, not merely ‘ownership’ but also any other rights or interests in a Flat, including right to its transfer of any kind or conveyance (sale), are to be taken as those spelt out by the Flats Act. To be precise, in order that a person can claim to have acquired not only ownership of, but also any other rights or interests in, a Flat, the provisions of the Flats Act, as mandated, are required to have been strictly followed/complied with.
4.1. In the ITAT case, the Flats in one of the three buildings, in the normal circumstances, would or could only have been sold/ conveyed to third party purchasers. If so, the Flats Act would require to have been strictly complied with. The actual fact, however, is that, instead, the promoter, a family-owned company, has resorted to a special scheme. Where under the ‘property rights’ in the Flat in dispute have been transferred to, and been vested in the assessed, being a shareholder of the company itself. Even so, strictly speaking, in one’s sound reasoning, the provisions of the Flats Act cannot be regarded to have no application, or in any case be bypassed or ignored. To be precise, the facts that the property comprising Flats was constructed by a family-owned company, its shareholders, of whom the assessee was one, were the beneficiaries to whom certain rights /interests were transferred by the company, so on, should make no difference.
4.2. Be that as it should, the aforementioned clinching aspects do not, as are gathered from the itat’s Order, seem to have been urged in any form or manner; hence, have not been gone into by the itat.
5. 1. it is observed, in a write-up (paper submitted in the workshop) published in the booklet (Year 2001) of the Bangalore Branch of SIRC of the ICAI, under the topic of -TITLE, TRANSFER, TAXATION AND DOCUMENTATION OF TRANSACTIONS IN IMMOVABLE PROPERTIES, there is a discussion of a special scheme (5.8 SCHEME OF ACQUISITION OF RIGHTS AND INTERESTS IN FLATS…., (pg. 25 to 31)).
The scheme of arrangement framed and adopted in the itat case has, it is noted, a strikingly close resemblance to that devised and suggested in the referred article, in more than one respect. One of them, primarily jutting out, calls for a pointed mention; Transfer of the rights in the ‘flat’ has been linked to and affected by using the shareholding as the vehicle for its implementation.
5.2. With reference to the points discussed in that article, a few observations require to be pertinently made:
(i) On the relevance or otherwise of the stamp duty implication, specifically on transfer / sale of Flats the opinion / viewpoints of the authority functioning in Bangalore may have to be gathered from the answers to the FAQs available in public domain. Presumably, the viewpoints of the authorities in other States, also in Maharashtra, could not be expected to be materially any different. It requires a mention that, it is more or less the same scheme of the Flats Act in force in Maharashtra that has been the source of/ been adopted in framing the like enactment in Karnataka (dealt with in the article).
(ii) “Share’ in a company, as commonly and conventionally understood, both in its general as well as legal connotation, represents a ‘bundle of rights’, with which its holder is vested. As such, on its transfer, the transferee becomes entitled to the selfsame bundle of rights as the transferor possessed.
Further, it s a long established and well settled legal position that a company and its shareholder(s) are two different legal entities, mutually distinct and separate. Accordingly, therefore,, the bundle of rights embedded in a company share, as commonly believed all along, and rightly so, has never been believed or imagined that it could include any rights or interests in any asset or property acquired as, and recorded in the company’s book of account as, its own asset; and none or a part of it to be capable of being treated as or being given away , be it for consideration or otherwise, to a shareholder qua or per se as a shareholder; except, of course as envisaged by the company law itself, on its winding-up /dissolution.
On that premise, any linking and regarding the share to have attached to it any rights in company’s property in the Flats being assets of the company, in one’s conviction,- it could be strongly urged forcefully, – offend not only the very concept but is an attempt to rewrite the scheme of the things as per the special law on flats so also the tax law. So as to accomplish that on share transfer the rights in the Flat could be passed on, with no further formality of complying with the normal and otherwise applicable mandates of the law.
(iii) In the extant law on income-tax, there are special provisions aimed at roping within the tax net certain transactions the subject matter whereof are the property rights in ‘unit’ of a building. They principally are, – Sections 2 (47), 27, and 269UA(d).
Those are ostensibly intended, and could be rightly invoked, only for the limited purpose of taxing (NOT FOR NOT TAXING) any income from a specified type of transaction squarely falling within their ambit. In one’s firmly rooted conviction, to say or urge that those sections go to lend any support to the suggested viewpoints, – on the strength whereof any such special scheme of arrangement has been framed and effected, with the aim of getting out of the tax net – prima facie offends the common understanding of the underlying legal frame work not only in the income-tax law but also in the special law on Flats. To be precise, as common sense should tell, the IT Act can, by no stretch of imagination or valid argument, be urged to yield to the special property law governing Flats. If at all, it should only be the other way.
Aside: On some of the foregoing aspects, the well reasoned Decision of the Mumbai Bench of itat in the case of Yogesh Sunderlal Shah v ACIT (2012) 25 Taxman. Com 300 (Mum) is noted to rightly focus on, and throw sufficient light.
6. Other Aspects:
Some of the areas impinging on the issues in the itat case, not readily or clearly understood, are these:
(1) Why and how the result of the arrangement is tantamount to ‘distribution of accumulated profits’ as envisaged- within its legal or accounting sense.
(2) Can the expression ‘whether capitalised or not’ be regarded to apply or obtain on the given facts, so as to conclusively clinch the point of issue for or against the Revenue?
Key Note (to provide some useful clues):
The term ‘accumulated profits’, as defined in the Act (vide Explanation 2 under section 2(22)) has proved to have immense scope for being misconstrued, and wrongly invoked and applied, without having regard to the actual facts and physically obtaining state of affairs, not necessarily borne out by the accounting entries in the books of account or the audited final accounts in a given case. The scope for an absurd and wrong application of the provision, in one’s understanding, arises because of the confusion or scope for misunderstanding inherent in the concept itself. For that matter, it is not just the one concept (i.e. of accumulated profits) mentioned; but others, so also other connected propositions as well, impinging on the subject. That is so because of the fact that, as well, for identifying where the blame lies. Topping them all is that it is a ‘deeming ‘provision. Besides, it suffers from an inbuilt fallacy, by failing to recognise the reality that book profits of a company are not necessarily cash profits or profits actually available for ‘distribution’ as envisaged. The line of court cases may be found to bear testimony to the foregoing.
Out of sheer impulsive but irresistible curiosity it is worth an attempt to refresh nearly four decades old memory on the several related propositions of law, which happen to have been taken to courts. At the end, one may be left with a strong feeling that the arguments advanced by both sides, and the discussion and the view (s) the itat has taken on the points of issue, are worth the pains to be given an in-depth study. All the more reason for doing so, not only by the taxpayers but also by the Revenue, simply because, by reason of the high stakes involved, it is quite likely that both the parties being aggrieved might pursue the battle further up.
Be that as it may, in any case, purely from the viewpoint of academic interest, the learned professionals, if so inclined, would do well to, in order to form their independent ideas and views, insightfully study the plethora of case law and expert commentary in Kanga, Palkhivala, and Vyas’s Book on Income Tax, Vol. I, Ninth Edition- on inter alia section 2 (22), pages 118 to 132.
Now, over to the enlightened readers, no bar to experts at large, having an unquenchable thirst for ‘knowledge’ on such sensational topics in general, on this special topic on hand in particular.
-For, such matters, the subject matter being no exception, can never ever be believed to have any scope for ONE!