HIGH COURT OF KARNATAKA
Commissioner of Income-tax
IT APPEAL NOS. 274 OF 2004 and 68 OF 2010
IT APPEAL CROB NO. 1 OF 2005
JULY 4, 2012
RE : ITA No. 274/2004
D.V. Shylendra Kumar, J.
This appeal by the revenue under section 260A of the Income Tax Act, 1961 [for short ‘the Act’] is against the order of the Tribunal dated 18.12.2003 in Appeal No. IT[SS] A53/Bang/2003.
2. The Tribunal having reversed the orders passed by the assessing authority and affirming order of the first appellate authority holding that the respondent – assessee was liable to pay certain tax in respect of its undisclosed income for the block period 1.4.1988 up to 22.7.1998 in view of certain transfer of the assets of the respondent – assessee that such transfer had taken place as on 1.6.1992 and therefore the respondent – assessee which is otherwise liable to pay tax on the income by way of capital gain earned by the firm in respect of assets that had been transferred and as per valuation as indicated in an agreement amongst the respondent – assessee and its erstwhile partners, had been suppressed or not disclosed by the firm and therefore the tax liability under Chapter-XIV-B of the Act, but this order having been reversed by the Tribunal on an erroneous assumption of facts and law, the order is vitiated and is liable to be set aside etc.
3. At the time of admitting this appeal, this court had framed the following questions as arising out of the order of the Tribunal and meriting our examination in this appeal.
“1. Whether the Tribunal was correct in holding that capital gains should be brought to tax in the year in which the dissolution of the firm takes place and not the year in which consequent to such dissolution the distribution of assets takes place as per Section 45(4) of the Act?
2. Whether the Tribunal was correct in arriving at a conclusion that the assets held by the assessee was treated as its stock in trade and therefore could not be brought to tax under the head ‘capital gains’ despite there being no evidence to arrive at such a conclusion or a categorical assertion from the assessee that these assets had been treated as its stock in trade except the stray observation of the Appellate Commissioner which could not be treated as a conclusion?
3. Whether the Tribunal has ignored the material seized during search as inventorised as A/HC/23, A/HC/12, etc., property tax payment made by the assessee on 4.11.1988 statement of one of the partners admitting that the firm was not dissolved on 25.3.1987 but continued to exists up to 1988-89 and the categorical finding of the Appellate Commissioner that the firm continued up to 1992 and consequently, recorded a perverse finding that the income derived from the sale of the assets of the firm was not liable to tax under the head ‘Capital Gains’, for the Block period?”
4. Any income earned during the block period had not been disclosed by the assessee, it can be made subject matter of assessment under the Act, if such information relating to undisclosed income had been unearthed pursuant to a search of the premises of the assessee who is liable to pay tax or pursuant to search of the premises of any other person, but the material there leading to the revelation of undisclosed income of the assessee, which can be brought to tax as the income of the block period.
5. A few undisputed facts as can be inferred from the records are that partnership firm by name Gayathri Enterprises came to be formed by the joining together of as many as seven partners as on 19.5.1980. It appears while three minors were admitted to the benefit of the partnership firm and later the company by name M/s. ASK Brothers Private Limited was also admitted as a partner as on 1.3.1986 and thereby the number of partners swell to eleven.
6. It is the version of the assessee that the partnership came to be dissolved as on 25.3.1987; that it is confirmed by the subsequent agreement dated 25.5.1987 and the manner of distribution of the shares of the partners of the dissolved firm which had been indicated in the agreement dated 25.5.1987 came to be realigned and so also the valuation of the assets of the firm as per the further agreement dated 1.6.1992. While such is the version insofar as these three events are concerned as asserted by the assessee, the view of the revenue is that the events said to have taken place, such as dissolution of the firm on 25.3.1987 and the sharing ratio of the assets, claimed on the basis of the agreement dated 25.5.1987 are all documents which are either antedated or fabricated for the purpose of avoiding legal consequence of transfer of the assets of the firm taking place as on 1.6.1992 under the agreement of the even date and this development had been deliberately withheld from the revenue for evading payment of tax on the possible capital gains that arises in the hands of the firm for transferring the assets of the firm which were two parcels of immovable properties in favour of some of the partners alone and in consideration of the other partners relinquishing their entitlement to the shares in the company which was a partner to which the assets came to be transferred and such value of shares which were relinquished by some of the partners in favour of the company itself or other partners was indicated to be Rs. 4 crores and based on this value of two parcels of land which were assets of the firm, the assessing authority computed the capital gains worked out at a sum of Rs. 3,43,49,543/-and brought this amount to tax as the income of the firm during the block period. It is this liability which became the bone of contention between the assessee and the revenue.
7. The assessee carried the matter by way of appeal to the Commissioner of Income Tax (Appeals), but without much success as the Commissioner dismissed the appeal and the assessee having pursued the matter by way of second appeal to the Tribunal, found success before the Tribunal as the Tribunal allowed the appeal for more than one reason and as a result of these orders, the assessee was relieved of the tax liability as determined by the assessing authority and therefore the revenue is in appeal and as noticed above raising the questions referred to above.
8. We have heard Sri M.V. Seshachala, learned senior standing counsel appearing for the appellant – revenue and Sri Shankar, learned counsel for the respondent-assessee at some length.
9. What is essentially urged before us by the learned senior standing counsel appearing for the appellant – revenue is that the Tribunal has totally ignored the material which was available; that it has recorded findings contrary to the findings recorded by the authorities even without any basis or without any rationale; that the Tribunal failed to see or has ignored specific material which is virtually in the nature of admission made by the very partners of the firm to indicate that the firm, in fact, had not been dissolved as on 25.3.1987; that it has continued to exist even during the year 1988 and onwards and the Tribunal has also overlooked the documentary evidence in the form of certain entries in the revenue records showing the names of erstwhile owners and then firm even much later to the year 1987 and such material could not have been ignored by the Tribunal for reversing the order passed by the authorities below.
10. However, Sri Seshachala, learned counsel appearing for the appellant – assessee has also taken us through the provisions of section 45(4) of the Act, its legislative history, definition of ‘transfer’ as it occurs in section 2(47) of the Act, history of clause (6) of sub-section (ii) to Section 47 of the Act coming on to the statute book on 1.4.1987 changes brought about by the Finance Act, 1987 and also the change of legal position on and after 1.4.1992 in the provisions of sections 182, 183 and 184 of the Act which has come into effect from 1.4.1992 and therefore has urged that the combined effect of these amendments operating is capital gains arising due to the transfer of a capital asset by way of transfer of an asset due to the distribution of the assets on dissolution of the firm has to be necessarily brought to tax as the capital gains of the firm in the year in which the transfer has taken place in terms of the provisions of section 45(4) of the Act.
11. In support of such submission, Sri M.V. Seshachala, learned counsel has placed reliance on the Judgment of the Bombay High Court in the case of CIT v. A.N. Naik & Associates  265 ITR 346/136 Taxman 107 which has been followed and applied by this court in the case of CIT v. Gurunath Talkies  328 ITR 59/189 Taxman 171. The two cases wherein the legislative history of section 45(4) read with section 2(47) had been elaborately discussed and therefore urges that the Tribunal is definitely in error in not following the ratio of these cases for disposing the appeal before the Tribunal and concluding to the contrary.
12. Mr. Seshachala has urged with some vehemence that the Tribunal overlooking the legal position and particularly by opining that the subject assets had been held as stock in trade is a finding which is not based on any material on record and is more an assumption and allowing the appeal on such premise is also an error committed in law etc.
13. Sri Shankar, learned counsel appearing for the respondent – assessee, on the other hand, has sought to raise three issues and the first and foremost submission is that the revenue had never made good the factual position of the firm not having been dissolved as on 25.3.1987 even as indicated in the document which was sought to be relied upon, but which has been conveniently avoided by the authorities though had been called for production by the assessee by indicating that it is antedated or otherwise is not acceptable etc.
14. It is secondly urged that the provisions of section 45(4) have no application as the firm having been dissolved and therefore the assets to be shared as on the date of dissolution of the firm in terms of the provisions of section 47(ii) of the Act as it stood at the relevant point of time, any distribution of the capital assets on the dissolution of a firm, body of individuals or other association of persons is not to be regarded as transfer and as this legal position held the field on the day of dissolution, all other questions do not arise for examination and therefore irrespective of the findings recorded by the Tribunal, if the subject transaction is not to be regarded as transfer and therefore there is no need for disturbing the order of the Tribunal.
15. By way of abundant caution, Mr. Shankar, learned counsel for the assessee has also urged that the provisions of Chapter-XIV-B of the Act will be attracted only in respect of the undisclosed income of the assessee relating to the block period has come to the knowledge of the assessing authority and such information is attributable to material unearthed during a search pursuant to an authorization under section 132 of the Act.
16. It is also asserted that even on a combined reading of the instruments reflecting the three events, the transfer has taken place much prior to 1.6.1992; that the instrument dated 1.6.1992 is only an instrument for revaluing the assets of the firm and not for transfer, but settling the accounts on revaluation as on that day etc.
17. Sri A Shankar, has also asserted that the search was of the business premises of Hotel Chalukya at No. 44, Racecourse Road, Bangalore belonging to M/s Atria group, but no document or material revealing non-disclosure of any income on the part of the assessee was found as such and it is only based on some account books relating to M/s Ramaleela Enterprises, which were available at the place of search and claimed to be seized documents and it is further claimed that the source of information is certain entries in the books of account of M/s Ramaleela Enterprises, wherein the assessee’s name figured as a debtor and a statement said to be given by a partner, and the three documents referred to and relied upon by the authorities were not part of the material unearthed during the search and therefore has submitted that the other materials could not have been used for the purpose of bringing to tax the undisclosed income of the block period.
18. It is also submitted by Sri Shankar that even the factum of dissolution, distribution of shares and revaluation were all part of the revelation made by each of the partners of the firm and not as though there was a total nondisclosure of the development to the revenue.
19. In support of these contentions, Sri Shankar has placed reliance on a good number of authorities.
20. We have bestowed our attention to the submissions made at the Bar and perused the order of the tribunal, as also the grounds urged in support of the memorandum of appeal.
21. We find that the tribunal has basically proceeded on the premises that the seized material per se did not indicate any undisclosed income of the assessee i.e. the firm and it is also opined that this is so because the information which is sought to be used was not directly one relating to the assessee, but an indirect one, such as in the account books of some other person the name the firm figures in some capacity. The tribunal also did not agree with the finding that the firm had continued on and after 1-4-1987, based on the statement of Sri Ramachandra Raje Urs was not a correct approach etc.
22. Though it is brought to our notice by Sri M.V. Seshachala, learned senior standing counsel for the appellant-revenue that the finding to the effect that the firm was dissolved with effect from 25-3-1987 was not warranted in the facts and circumstances of the case and particularly in the wake of the entries in the books of account of M/s Ramaleela Enterprises indicates the existence of the firm and the statement of the partner etc., we are of the opinion that in matters where a plausible view can be taken and more so in a matter where a finding is based on a reading of the contents of a couple of documents and its inference, which becomes a finding and if more plausible views or inferences can be drawn, such matters are not matters which are required to be examined as a pure question of law within the scope of Section 260A of the Act.
23. We find in the facts and circumstances of the case, the, material on record was definitely not of clinching nature and that the only conclusion could be that the firm was not dissolved on 25-3-1987, but only later. It may be or may not be!
24. The entire proceedings being on the premise that the firm continued to exist even during 1988 and because of which position, the provisions of the Finance Act, 1987 are to be made applicable and therefore the further consequences, we are of the view that it is not possible, unless there is a positive finding that the firm did exist after 25.03.1987 or after 01.04.1987. This factual position is not definite or clear, deserving a conclusion in law. In such circumstance, in our considered opinion, an inference on the legal position is not warranted.
25. Though Sri Seshachala has very vehemently urged that the consequences that follow in law by operation of the provisions of sub-section (4) of Section 45 of the Act even assuming that the firm was dissolved after 25-3-1987, in the sense that the firm was dissolved on or before 1-4-1987 also, the provisions of sub-section (4) of Section 45 of the Act is good enough and this coupled with the provisions of Section 189 of the Act, has a legal effect of bringing to tax the gain of the firm in view of transfer being on 1-6-1992, as on this date, this argument is again on an assumption of facts and therefore not warranting an examination in law. We say so for the reason that even the fact that the transfer took place only on 1-6-1992 is a fact which is not definite as a finding on fact and on the other hand it is one to be inferred on a reading of all three documents, referred to above.
26. If the revenue is to rely upon these three documents for some part of them to claim that the documents reveal some undisclosed income of the assessee which has escaped tax and earned during the block period, we find at the same time not giving same importance to the other parts of the documents, but understanding the other clauses by way of inference or on a logic attributing certain motives to the assessee is not a proper way of reading the document, assuming that it is relatable to the search and has a link to the search.
27. In the scheme of Section 158B in Chapter XIV-B of the Act, revelation of any undisclosed income should be clear and direct. As we and that it is not so in the present facts and circumstances of the case, we hold that the scope for interference with the order of the tribunal under Section 260A of the Act is very less and therefore we do not propose to examine the questions as had been formulated at the time of admission of this appeal and do not answer the questions as one not warranting answer in the facts and circumstances of the case and accordingly dismiss the appeal without disturbing the order passed by the tribunal.
RE: ITA-CROB 1 OF 2005
28. This cross-objection is dismissed following the judgment delivered by this court in ITA No. 274 of 2004, holding that a cross objection is not tenable in an appeal under section 260A of the Act. Even otherwise, the assessee having come up with a separate appeal in respect of the very questions by filing ITA No 68 of 2010, this cross-objection does not survive and it is accordingly dismissed.
RE: ITA No 68 OF 2010:
29. Sri A Shankar, learned counsel for the appellant- assessee submits that in the wake of dismissal of the appeal of the revenue in ITA No 274 of 2004, as per the judgment above, the question has become academic and the appeal does not survive for examination. It is accordingly dismissed.