Shri Amrut B. Patel.............................................................. Appellant
Vs.
ACIT................................................................................. Respondents
(Per : Honourable Mr. Justice KS Jhaveri)
1. Since all these appeals arise from the common order of the Income Tax Appellate Tribunal, they are being disposed of by this common judgment.
2. By way of these appeals, the appellants assessees have challenged the common order dated 03.05.2002 passed by the Income Tax Appellate Tribunal, Ahemdabad [for short "the Tribunal"] in ITA Nos. 1785 to 1788/Ahd/96, whereby the Appeals filed by the revenue were allowed by the Tribunal.
3. The facts and question of law involved in these appeals are identical, therefore, we discuss only the facts of Tax Appeal No.293 of 2002 for our convenience.
4. The facts in brief are that the appellant-assessee was beneficiary in S.K. Patel Specific Family Trust. The appellant sold his 3% beneficiary interest in S.K.Patel Family Trust for Rs. 85,000/-. The said amount was considered not taxable in the Return of Income. The Assessing Officer passed an order, holding that the capital gain accrued to the appellant. For this purpose, the cost of acquisition was computed at Rs. 29/-. The cost of acquisition was calculated based on the amount settled by the settlor at Rs. 1,000/-, at the time of settlement of S.K. Patel Family Trust, which is divided by 34, being total number of beneficiaries, which comes to Rs. 29/-. Therefore, the Capital gain of Rs. 84,971 was added.
4.1. Against the said order, the assessee filed an appeal before the Deputy Commissioner of Income Tax (Appeals). The Deputy Commissioner of Income Tax (Appeals) allowed the appeal of the assessee and deleted the addition holding that the capital gain is not leviable. Against the order of the DCIT(A), the revenue filed appeal before the Tribunal. The Tribunal allowed the appeal of the revenue and held that the capital gain is chargeable to tax. Hence, these appeals are filed at the instance of the assessees.
5. While admitting these appeals, the Court had formulated the following substantial question of law:-
"Whether, in law and on facts and circumstances of the appellant's case the Tribunal was justified in law in holding that the capital gain is chargeable to tax on transfer of beneficial interest in the trust".
6. Mr. Soparkar, learned senior counsel appearing for the appellants-assessees has submitted that the Tribunal has committed error in reversing the order of the DCIT(A). He further submitted that the tribunal has not appreciated the fact that there was no cost of acquisition to the capital asset "Beneficial interest", therefore, the amount of settlement by settlor cannot be treated as cost of acquisition. He, therefore, urged that this Court may quash and set aside the impugned order of the Tribunal.
6.1. In support of his contentions, he relied upon the decisions of the Apex Court in the case of Commissioner of Income Tax v. D.P. Sandu Bros. Chembur P. Ltd., reported in [2005] 273 ITR, page 1 , and in the case of PNB Finance Ltd. v. Commissioner of Income Tax, reported in [2008] 307 ITR 75 .
6.2. Learned senior counsel for the appellants-assessees has also relied upon the decision of this Court in the case of Chntan N. Parikh v. Commissioner of Income Tax, reported in [2002] 253 ITR 564 and contended that in view of the above decisions, the present appeals deserve to be allowed.
7. Learned senior advocate for the respondent-revenue has supported the order of the Tribunal and submitted that the Tribunal in paragraph No.4 of its order has given cogent and convincing reasons in arriving at the conclusion. Therefore, he submitted that there is no germane reasons to interfere with the impugned order of the Tribunal.
8. We have heard learned counsel appearing for both the parties and perused the material on record and find that the CIT(A) rightly held that taking 1/34 share will be improper as this is not the cost to the previous owner i.e. settler as far as appellant are concerned. Therefore, we are of the considered opinion that no capital gains can be levied on the assesees.
9. The Apex Court in the case of D.P. Sandu Bros. Chembur P. Ltd.(supra) has held in paragraph Nos. 8 and 9 as under:-
"8. In 1981 this Court in Commissioner of Income Tax V. B.C. Srinivasa Setty held that all transactions encompassed by Section 45 must fall within the computation provisions of Section 48. If the computation as provided under Section 48 could not be applied to a particular transaction, it must be regarded as "never intended by Section 45 to be the subject of the charge". In that case, the Court was considering whether a firm was liable to pay capital gains on the sale of its goodwill to another firm. The Court found that the consideration received for the sale of goodwill could not be subjected to capital gains because the cost of its acquisition was inherently incapable of being determined. Pathak J. as his Lordship then was, speaking for the Court said:
"What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class it may, on the facts of a certain case, be acquired without the payment of money."
9. In other words, an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head 'capital gains' as opposed to assets in the acquisition of which no cost at all can be conceived. The principle propounded in Srinivasa Setty has been followed by several High Courts with reference to the consideration received on surrender of tenancy rights. [See: Among others Bawa Shiv Charan Singh Vs. Commissioner of Income Tax, Delhi (1984) 149 ITR.29; The Commissioner of Income Tax Vs. Mangtu Ram Jaipuria (1991) 192 ITR 533 (Cal.); Commissioner of Income Tax Vs. Joy Ice Cream (Bang) Pvt. Ltd. (1993) 2001 ITR 895 (Kar.) Commissioner of Income Tax Vs. Markapakula Agamma (1987) 165 ITR 386 (A.P.); Commissioner of Income Tax Vs. Merchandisers (P) Ltd. (1990) 182 ITR 107) (Ker.)]. In all these decisions the several High Courts held that if the cost of acquisition of tenancy rights cannot be determined, the consideration received by reason of surrender of such tenancy rights could not be subjected to capital gains."
10. The Apex Court in another decision in the case of PNB Finance Ltd.(supra) has held in paragraph Nos. 17 to 19 as under:-
"17. As regards applicability of Section 45 is concerned, three tests are required to be applied. In this case, Section 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated Code. Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is Section 45. That section contemplates that any surplus accruing on transfer of capital assets is chargeable to tax in the previous year in which transfer took place. In this case, transfer took place on 18.7.1969. The second test which needs to be applied is the test of allocation/attribution. This test is spelt out in the judgment of this Court in Mugneeram Bangur & Co. (supra). This test applies to a slump transaction. The object behind this test is to find out whether the slump price was capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual difference between an undertaking and its components. Plant, machinery and dead stock are individual items of an Undertaking. Business Undertaking can consists of not only tangible items but also intangible items like, goodwill, man power, tenancy rights and value of banking licence. However, the cost of such items (intangibles) is not determinable. In the case of CIT v. B.C. Srinivasa Setty reported in (1981) 128 ITR 294, this Court held that Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the "asset" must be one which falls within the contemplation of Section 45. It is further held that, the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45. In the present case, the Banking Undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On facts, we find that item-wise earmarking was not possible. On facts, we find that the compensation (sale consideration) of ? 10.20 cr. was not allocable item- wise as was the case in Artex Manufacturing Co. (supra).
18. For the aforestated reasons, we hold that on the facts and circumstances of this case,which concerns assessment year 1970-71, it was not possible to compute capital gain and, therefore, the said amount of Rs. 10.20 cr. was not taxable under Section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside.
19. Before concluding, we may state that in this case, Section 55(2)(i) did not operationalize. Under Section 55(2), fair market value as on 1.1.1954 could have substituted the figure of cost of acquisition provided the figures of both "cost of acquisition" and "fair market value as on 1.1.1954" were ascertainable. The letter dated 30.9.1970 does not indicate the choice. Even the working done by the AO based on capitalization of last 5 years' profits would give the Enterprise Value of the Undertaking and not the cost of acquisition. Hence, Section 55(2) was not applicable."
11. The decision of this Court in the case of Chintan N. Parikh (supra) will also enure of the benefit of the appellant.
12. Taking into considering the facts of the case and also the principle laid down in the case of D.P. Sandu Bros. Chembur P. Ltd.(supra), PNB Finance Ltd.(supra) and Chintan N. Parikh (supra), we are of the considered opinion that the present appeals deserve to be allowed. Hence, all these appeals stand allowed. Accordingly, the order of the Tribunal is quashed and set aside and the order of the CIT(A) is restored. The question of law involved in these appeals is answered in favour of the assessee and against the revenue. Therefore, we hold that the Tribunal was not right in holding that the capital gain is chargeable to tax on transfer of beneficial interest in the trust.