2023 (4) TMI 1003 - HC - Income Tax

Appeal Delay Excused; Tribunal's Non-Taxable Ruling on Trunk Infrastructure Transfer Upheld by Higher Court.

Pr. Commissioner of Income Tax-1 Versus M/s. Ansal Properties And Infrastructure Limited

The court condoned a 200-day delay in filing the appeal by the appellant/revenue. The case focused on the interpretation of Section 47(iv) of the Income ... Transactions not regarded as transfer - exemption of income arising on account of transfer of “Trunk Infrastructure Asset” to its 100% subsidiary - CIT(A) concluded that the surplus generated by the respondent/assessee on transfer of what was, essentially, capital work-in-progress would be chargeable to tax, as it was an asset employed in the business - HELD THAT:- “Trunk Infrastructure”, which includes roads etc., were, admittedly, transferred by the respondent/assessee to its 100% subsidiary. Transfer of “Trunk Infrastructure”, concededly, led to generation of surplus. The record shows that the respondent/assessee had included this surplus in its return of income albeit, with a note which explained as to how the surplus arose. Tribunal, in reversing the view of the CIT(A), has, in our view, rightly, concluded that an assessee employees both capital assets and trading assets in his business; the fact that a capital asset (i.e., Trunk Infrastructure), which was, as noted above, a capital work-in-progress, on transfer, generated surplus, could not be treated as income, in view of the provisions of Section 47(iv) of the Act. There is no dispute raised before us that the prerequisites provided in Section 47(iv) of the Act stand fulfilled i.e., the transfer of the Trunk Infrastructure/capital work-in-progress was made by the respondent/assessee to its 100% subsidiary and the subsidiary was an Indian company. Whether Tribunal could not have gone beyond the assessment order, given the fact that the respondent/assessee itself had included the surplus as income chargeable to tax in its return of income? - This argument misses the point (something which the Tribunal has noted) which is that the assessee had entered a caveat in the return of income. It is not disputed that a note was incorporated in the return wherein it was explained as to how the surplus arose in the instant case on transfer of Trunk Infrastructure/capital work-in-progress. In our view, it is more than well-established that merely because the assessee inadvertently offers a receipt for levy of tax, tax cannot be levied by the revenue if it is not otherwise constitute income of the assessee. Every receipt is not an income chargeable to tax under the provisions of the Act. Decided against revenue. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether surplus arising on transfer of 'Trunk Infrastructure' (capital work-in-progress) by a company to its 100% subsidiary is exigible to tax as capital gains or is covered by the exclusion in Section 47(iv) of the Income Tax Act such that Section 45 will not apply. 2. Whether the Tribunal could examine and allow the claim of non-taxability under Section 47(iv) notwithstanding that the assessee had included the surplus in its return of income (with a note), and whether the voluntary offer in the return estops the assessee from claiming exemption. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 47(iv) to surplus on transfer of Trunk Infrastructure Legal framework: Section 45 governs chargeability of 'profits or gains arising from the transfer of a capital asset' as capital gains. Section 47 enumerates transfers to which Section 45 does not apply; clause (iv) provides that any transfer of a capital asset by a company to its subsidiary company will not be regarded as a transfer if (a) the parent or its nominees hold the whole of the share capital of the subsidiary, and (b) the subsidiary is an Indian company. Precedent Treatment: The Tribunal applied Section 47(iv) to exclude the transaction from Section 45; the appellate authority (CIT(A)) had treated the surplus as taxable on the view that the infrastructure was an asset employed in business. The Court accepted the Tribunal's reasoning and reversed the CIT(A)'s approach on this point. Interpretation and reasoning: The Court observed that the statutory prerequisites in Section 47(iv) are conjunctive and factual: whole share capital of the subsidiary must be held by the parent or nominees, and the subsidiary must be Indian. In the instant case both prerequisites were admitted to be fulfilled. The Court reasoned that an assessee may employ both capital assets and trading assets in its business; the mere fact that a capital asset (capital work-in-progress) generated a surplus on transfer does not convert that surplus into taxable income where the transfer falls within the exclusion in Section 47(iv). The Court further noted that Section 45 applies only to profits or gains arising from transfer of a capital asset, and where Section 47(iv) operates, Section 45 is inapplicable. Ratio vs. Obiter: Ratio - where a transfer by a company of a capital asset to its wholly owned Indian subsidiary satisfies the conditions of Section 47(iv), any surplus or gain arising from that transfer is not exigible to tax under Section 45 as capital gains. Obiter - general observations that an assessee may employ capital and trading assets concurrently and that capital work-in-progress can generate surplus were made to explain the statutory operation. Conclusions: The Tribunal was correct to hold that the surplus of Rs. 70,05,71,000 arising from transfer of Trunk Infrastructure to the wholly owned Indian subsidiary was not chargeable to capital gains tax under Section 45 because Section 47(iv) excluded the transfer from being regarded as a transfer for the purposes of Section 45. Issue 2 - Effect of inclusion of the surplus in the return of income and scope of the Tribunal to go beyond the assessment order Legal framework: Taxability depends on whether a receipt constitutes income under the Act. An assessee's voluntary inclusion of a receipt in the return does not by itself determine the legal character of the receipt where a statutory provision exempts it; assessment and appellate adjudication consider legal character and statutory exclusions. Procedural limits on appellate bodies derive from the record and the nature of issues raised before them. Precedent Treatment: The CIT(A) treated the assessee's inclusion of the surplus as indicative that the receipt arose from assets employed in business and hence taxable; the Tribunal examined the legal character despite the return entry and allowed the exemption under Section 47(iv). The Court endorsed the Tribunal's willingness to consider the legal effect of the transaction notwithstanding the return entry. Interpretation and reasoning: The Court accepted the Tribunal's observation that the assessee had inserted a caveat in the return by way of an explanatory note regarding the nature of the surplus. The Court emphasized that mere inadvertent offering of a receipt for taxation does not preclude the assessee from asserting that the receipt is not taxable if, on legal analysis, it is not income under the Act. The Court stated the established principle that not every receipt is income chargeable to tax and that the revenue cannot levy tax where the receipt does not constitute income under the statute, even if the assessee had initially offered it to tax. Ratio vs. Obiter: Ratio - inclusion of a receipt in the return (even with caveat) does not estop an assessee from successfully claiming non-taxability where a statutory provision (here Section 47(iv)) clearly exempts the transaction; appellate authorities can examine and apply such statutory provisions notwithstanding the initial return entry. Obiter - comments on the insufficiency of the assessment officer's materials to establish capital or income character (as noted by CIT(A)) were noted but not treated as determinative. Conclusions: The Tribunal properly went beyond the bare fact of inclusion in the return and considered the explanatory note and statutory exclusion. The assessee was not estopped by the return entry; therefore the Tribunal's allowance of the Section 47(iv) exemption was proper and the revenue's contention that the Tribunal could not go beyond the assessment order was rejected. Cross-references Issue 1 and Issue 2 are interrelated: the factual satisfaction of Section 47(iv)'s prerequisites (Issue 1) is decisive of the legal character of the surplus, which in turn renders the return-entry immaterial for taxability purposes (Issue 2). The Court relied on both the statutory scheme (Sections 45 and 47) and the principle that a mere offer in a return cannot create taxable income where the law excludes it. Final disposition The impugned order of the Tribunal was upheld; no substantial question of law was found to arise for further consideration.