TaxTMI 
TaxTMI 
2001 (3) TMI 250
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....e appeals. 2. The Revenue has raised as many as six grounds of appeal but the only grievance of the Revenue is against CIT(A)'s deleting the addition, made by the AO, on account of capital gains on transfer of certain shares held by the assessee-companies, details of which are set out in the subsequent paragraph of this order. We, therefore, deem it expedient to take up all these grounds together for disposal. 3. Briefly stated, undisputed material facts of the case are that the General Electric Company plc UK (hereinafter referred to as GEC plc) is a holding company of the Associated Electric Industries Ltd., UK (hereinafter referred to as AEI Ltd.) and the English Electric Company Limited, UK (hereinafter referred to as EEC Ltd.). The shareholdings of three companies inter alia included holdings of equity shares in certain Indian companies as under: ---------------------------------------------------------------- Sl. Name of No of Name of the Indian % of capital No. foreign equity company....
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.... which was issued, pursuant to administrative instructions issued by the Chief CIT on 21st Dec, 1990, upon GE Group's furnishing bank guarantee to the tune of Rs. 10 crores. It may be mentioned that GE group did not disclose precise 'consideration' for which the shares were transferred to GEC Alsthom NV but furnished the details of valuation of these shares as on 1st April, 1989. On this basis, tentative capital gains tax liability was also computed by GE plc Group itself at Rs. 10.76 crores. This sum was of Rs. 10.76 crores was paid by the GE plc Group as advance tax, in the month of March, 1991 and, consequently, the bank guarantee was released by the Revenue authorities. GE plc Group also claims that the computation of tax liability is said to have been made by their counsel but 'the same was got certified from the then Dy. CIT, Spl. Range 7, Calcutta'. 5. During the course of assessment proceedings under s. 143(3) of the Act learned AO noticed that even though the assessee-companies had paid the advance tax of Rs. 10.76 crores, their income-tax returns did not reflect any capital gains but, on the contrary, claimed refund of taxes already paid. On AO's questioning, the asses....
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.... to increase the capital gains liability since the NOC was issued under s. 162(2) of the IT Act. The assessee further submitted that transfer of India shares to GEC Alsthom NV did not come in purview of s. 47(v) and (vi), because GEC. Alsthom NV was not an Indian company. The learned AO was not impressed with any of these arguments and he was of the view that the transfer of shares by GE Group to GEC Alsthom NV comes within the ambit of s. 45 r/w s. 2(47) of the IT Act and that since the assessee-companies have not furnished any details about the consideration for transfer of these shares, the sale consideration is to be taken at quoted value of these shares as on the date of transfer of these shares, or nearest date thereto for which stock market quotations were available. Regarding purported agreement, between the GEC and CGE, and AO observed that the assessee has avoided producing a copy of this agreement on the ground that the same is voluminous. The AO further observed that it is not clear as to what are the terms and conditions of the said agreement and that the assessee 'did not produce the details of shares allotted to the GE Group, by the GEC Alsthom NV, in spite of severa....
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....he hands of EEC at Rs. 19,88,21,000 and in the hands of AEI at Rs. 2,73,35,000. 6. Aggrieved, the assessee-companies carried the matter in appeal before the CIT(A). Basically, submissions before the AO were reiterated in appeal also and it was further submitted that the merger date was 1st April, 1989, and even if actual transfer was delayed for some reasons, it would not affect the transfer consideration which was to be determined as on 1st April, 1989 only. A reference was then made to the doctrine of estoppel, said to have been 'upheld by the Supreme Court in a catena of case', in support of assessee's submission that in any event capital gains tax liability of GEC plc Group companies could not exceed Rs 10.76 crores. The assessee had also taken some additional grounds of appeal, mentioned elsewhere in this order, which were not disposed of by the first appellate authority. On the strength of all these submissions, the assessee prayed that the additions made by the AO be deleted or be at least restricted to the amount of Rs. 10.76 crores already paid by the company. Learned CIT(A), after extensively reproducing from written submissions filed by the learned counsel, concluded ....
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....e us. 7. Shri A.K. Das, Departmental Representative, placed his strong reliance on the assessment order and took us through the order to demonstrate the merits of AO's stand. It was submitted that since the capital asset was situated in India, the capital gains arising from transfer of the said asset is liable to be taxed in India and that it is not in dispute that the shareholdings of the assessee-companies were transferred within meaning of s. 2(47) of the IT Act, but the case of the assessee is that such a transfer does not give rise to taxable capital gains. However, the assessee has not been able to substantiate the claim that these capital gains are exempt from tax under any specific statutory provisions though the assessee has referred to certain judicial precedents which are entirely distinguishable on facts. It was pointed out that although the assessee has made some references to an agreement said to have been entered into between the GE Group and CGE Group, a copy of this agreement was never produced before the lower authorities and, therefore, assessee's bland statements about purported contents of the agreement do not carry any weight. It was further submitted that ....
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....like Stamps Act and Companies Act cannot have any bearing on connotations of certain expressions under the IT Act. Shri Das concluded by submitting that, under these circumstances, interference of the learned CIT(A) was totally uncalled for, inappropriate to facts of the case and contrary to applicable law. On the strength of these submissions, we were urged to set aside the order of the learned CIT(A) and restore the order passed by the distinguished AO. 8. Dr. Debi Pal, learned senior advocate for the assessee, submitted that GEC Alsthom NV was formed as GEC plc and CGE, in December, 1988, agreed to combine their respective worldwide activities in energy and transport businesses and, as a result of this decision, a formal agreement was signed on 22nd March, 1989, and the new company was formed in the Netherlands on 29th June, 1989. This new company, according to the learned counsel, was owned on 50 : 50 basis by the two companies, and the shares were allotted to two groups in equal proportion immediately on incorporation for all the assets transferred, and accepted to be transferred, as per composite arrangement According to the learned counsel, the key question that arises fo....
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....e Supreme Court in judgment CIT vs. Rasiklal Maneklal (HUF) (1989) 77 CTR (SC) 31 : (1989) 177 ITR 198 (SC). Our attention was also invited to the fact that the SLP against Hon'ble Karnataka High Court's aforesaid judgment was dismissed, as report in 187 ITR (St) 45. The learned counsel also invited our attention to the judgment of Hon'ble jurisdictional High Court in the case of CIT vs. B.S. Atwal (1982) 32 CTR (Cal) 3 : (1982) 140 ITR 928 (Cal) wherein it is observed that capital gain being an artificial income created by the provisions of the IT Act, these provisions should be strictly construed and in case of doubt, the assessee would be entitled to the benefit of doubt. Turning to the provisions of Indo-Netherlands, DTAA, it was submitted that in view of provisions of Art. 13(5) of DTAA, dt. 13th July, 1988, which came into effect on 21st Jan., 1989, capital gain on alienation of any property will only be taxable in the country in which alienator is resident. Gains from alienation on shares issued by a company resident in the other state will remain taxable only in the state in which alienator is resident, if such gains are realized in the course of corporate reorganization an....
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.... The assessment order has been posted at Esplanade Post Office, Calcutta only on 4th April, 1994, which is beyond time. 2. Notice under s. 143(2) having been issued and complied with in April, May, September and October, 1992, the assessment made on 31st Dec, 1992, although called an intimation under s. 143(1)(a) is a regular assessment. There can be no further assessment in 1994. 3. The assessment order has determined the previous year as calendar year 1991 as against the previous year ended 31st March, 1991, declared by the assessee. The assessment for 1991-92 is, therefore, illegal," 10. We may also place on record the fact that no submissions were made in support of these cross-objections but in response to our question, the learned counsel stated that he has nothing to add and prayed that the grounds may be adjudicated on the merits. The learned Departmental Representative at the outset prayed that since no arguments have been advanced in support of the cross-objections, they do not call for any adjudication and may be dismissed summarily. On merits, learned Departmental Representative placed his reliance on the order and action of the AO, and thus, left the matter to....
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....see-companies, by the virtue of assessee-companies having been incorporated in United Kingdom and by the virtue their effective management also being situated there, was in United Kingdom. Accordingly, for the purposes of Indo-UK DTAA, the assessee-companies were required to be treated as 'residents of United Kingdom'. 14. We have further noticed that art. 14 of the aforesaid DTAA provides that, "except as provided in art. 8 (Air Transport) and art. 9 (Shipping) of this Convention, each contracting state may tax capital gain in accordance with the provisions of the domestic law'. In other words, the taxation of capital gains was not protected by the DTAA provisions and, even under the express provisions of this DTAA, capital gains are to be taxed as per domestic law i.e. Indian IT Act, 1961 in the present case. Therefore, Indo-UK DTAA only supports the case of the AO to the extent that as far as taxability of impugned capital gains in India is concerned, taxability per se in India is not in doubt at all. 15. We may now turn to the provisions of DTAA dt. 30th July, 1988, entered into between India and the Netherlands. This Indo-Dutch DTAA, which has been heavily relied upon by....
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....and lasting attachment to a country or state with its own separate legal system-one only in each case- which initially is acquired by birth ('domicile by origin'), and capable of being altered later by a personal decision ('domicile by choice'). In the case before us, the assessee-companies were incorporated in United Kingdom and there is nothing on record to even remotely suggest that the assessee-company was domiciled in the Netherlands. Since there can only be one country of domicile and since the assessee-companies are already domiciled in United Kingdom by the virtue of its incorporation in that country, the assessee-companies cannot be said to be domiciled in the Netherlands. Coming to the 'residence test', it is admittedly not the assessee's case that the assessee-companies are residents of Netherlands. Similarly, it is also not in dispute that 'place of effective management' is United Kingdom and the case of the assessee-companies cannot even be covered by this criterion. That leaves us only with 'any other criterion of similar nature'. It may be useful to first refer to the principle of 'ejusdem generis' in interpretation of statutes. Simply stated, the principle of ejusde....
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....try can be said to be a 'locality related attachment' with such foreign country. We must, therefore, conclude that cases of the assessee-companies are not covered by the provisions of art. 4(1) of the Indo-Netherlands DTAA, and, accordingly, their payment of taxes on dividend income, even if any, cannot earn 'treaty entitlements' under the treaty. We have already held that in terms of the Indo-UK DTAA, the capital gains income of the assessee was not treaty protected. We, therefore, reject the contentions of the learned counsel and hold that the assessee-companies were liable to capital gains tax, as provided for under the Indian IT Act, and that they were not eligible for any concessions under DTAAs entered into by India with the Netherlands. 17. We now take up other contentions in support of the proposition that since transfer of shares has taken place under a scheme of merger of companies, and since fresh equity in GEC Alsthom NV is issued to the assessee-companies, in lieu of shares transferred, this transaction does not give rise to any taxable capital gains. 18. Before proceeding further to examine assessee-companies' taxability in accordance with the provisions of the ....
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....der receives money or other assets representing his share in distribution of net assets of the company in liquidation he receives that money or assets in satisfaction of the right which belonged to him by the virtue of his holding the shares and not by operation of any transaction which amounts to-sale, exchange, relinquishment of the asset or extinguishments of any rights in the capital assets. We have all respect for this legal proposition enunciated by the Hon'ble Karnataka High Court, but as there is no liquidation of amalgamating companies and, as, strictly speaking there is no merger or amalgamation at all, the ratio of Raghuvir Trust's case have no application in the case before us. 20. According to learned senior counsel, as we have noted earlier, the key question that arises for our adjudication is whether allotment of shares of the new company i.e. GE Alsthom NV, to GE plc Group companies constitutes transfer of shares and whether by such allotment of shares, it can be said that any consideration has passed from GE Alsthom NV to GE plc Group companies. The learned counsel has thus supported CIT(A)'s stand, in the impugned order, that the law is settled that there is no....
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....n turn, was a subsidiary of Guest Keen Williams Ltd. (GKW)-GKW holding balance 83.64 per cent of SES equity. GKW wanted to acquire 16.36 per cent shares in SES which were held by TISCO, so as to make SES a 100 per cent subsidiary and then merge SES with itself. In this backdrop of facts, TISCO transferred its entire 16.36 per cent SEE shareholdings to GKW, and, in consideration thereof, GKW allotted share capital in GKW itself on the basis of 1.38 face value capital in GKW for 1.00 face value capital in SES. The shares thus allotted to TISCO were out of newly issued capital, as evident from AGM resolution dt. 31st May, 1963, reproduced in the judgment. In other words, TISCO subscribed to GKW in money's worth i.e. by way of transferring in 16.36 per cent SES equity capital to GKW. On these facts, Hon'ble Bombay High Court held that, 'the transaction clearly falls within the definition of "transfer" contained in s. 2(47) of the Act, and, consequently, the assessee would be liable to capital gains tax as provided in s. 45 of the Act." Rejection assessee's reliance on reported judgments specifically in the case of Secretary, Bombay of Revenue vs. Madura Mills Co. Ltd. and Shri Gopal Ja....
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....said firm. The computation of sales price, which was annexed to sale agreement, indicated goodwill of Rs. 2,50,000 and this entire sale price was paid by way of issue of fresh equity in the company. On these facts, Revenue's case was that the sum of Rs. 2,50,000, although shown as goodwill was really excess value of the land over and above book price reflected in the sale agreement. Hon'ble Supreme Court rejected this plea to hold that, 'the sale was the sale of a whole concern and no part of the price was attributable to the cost of land and no part of the price was taxable'. In the case of Syndicate Bank Ltd. also, Hon'ble Karnataka High Court has merely followed Mugnee Ram's case to reiterate that a business undertaking as a whole, would constitute 'capital asset' and that price of an undertaking cannot be apportioned amongst individual assets. We do not see any assistance to assessee's cause by the ratio of these judgments. 26. Coming to Sunil Siddarthbhai's case, which is also known as Kartikeyan V. Sarabhai vs. CIT, it dealt with introduction of capital asset by partner, and the firm crediting market price of the asset to partner's capital account. On these facts, Hon'ble ....
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....y event, introduction of s. 45(3) of the Act has nullified the impact of the aforesaid judgment. To understand true ratio of the aforesaid judgment, we find it useful to recall that, at the time of introduction of s. 45(3) vide Finance Act 1987, CBDT Circular No. 495, dt. 22nd Sept., 1987, observed as follows: 24.1. One of the devices used by the assessees to evade tax on capital gains is to convert an asset individually into the asset held individually into an asset of the firm in which the individual, is a partner. The decision of the Supreme Court in Kartikeyan V. Sarabhai vs. CIT (1983) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC), has set at rest the controversy as to whether such a conversion amounts to transfer. The Court held that such a conversion is outside the scope of capital gains taxation. The rationale advanced by the Court is, that the consideration for transfer of the personal assets is indeterminate, being the right which arises or accrues to the partner during the subsistence of partnership to get his share of the profits from time to time and, on dissolution of the partnership, to get the value of his share from the net partnership assets." The CBDT has then ....
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....it would not mean that the transaction is outside the ambit of taxable capital gains altogether. 29. The learned counsel has emphatically argued that the legislature's omission in not including contributions by shareholders to the company, in s. 45(3), makes it abundantly clear that the legislature did not intend to treat the same within the scope of a transaction leading to taxable capital gains. In other words, the omission to specifically provide for the exemption of such a transaction from the taxable capital gains is, at worse, an inadvertent omission or a drafting error. We are unable to be persuaded by this reasoning because it is well settled in law that a casus omissus will not be created by interpretation save where it is inevitable. In any case, it is also clear from the CBDT Circular No. 495, referred to above, that s. 45(3) was introduced 'with a view to blocking this escape route' created by the virtue of Hon'ble Supreme Court's judgment in the case of Sunil Siddarthbhai. As rightly observed in the aforesaid CBDT circular, 'the effect of this amendment is that profit and gains arising from the transfer of a capital asset by a partner to the firm shall be chargeable....
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....' by the Revenue authorities. It is fairly well settled that notwithstanding the rule of estoppel, where public duties cast by the statute are involved, private parties cannot prevent performance by invoking the rule of estoppel. AO is principal functionary in the scheme of the IT Act and he has to determine, each year, assessable income in accordance with the statutory provisions of the Act. Such, statutory provisions cannot be set at naught by invoking the rule of estoppel. In other words, estoppel cannot operate against the statute. In the case before us, it is not in dispute that the no objection certificate was issued at the instance of the Chief CIT and the AO did not even have the liberty of applying his independent mind to the taxability of capital gains arising from the transfer of shares in question. Such an issuance of NOC cannot fetter AO's exclusive domain of powers of framing the assessment order; there is no scope for any administrative interference in AOs quasi-judicial powers to assess the income of the assessee. NOC is not a substitute to the assessment order but it only serves to safeguard the interests of Revenue in an inherently limited manner. In our considere....
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....urn to assessee's cross-objection. The first ground of the cross-objection is that the orders passed by the learned AO are time-barred as the assessment orders were passed on 4th April, 1994 from the Esplanade Office. We see little substance in this ground of cross-objection because the assessment orders were admittedly passed on 25th March, 1994 being well within the time-limit laid down under s. 153(1) which was available upto 31st March, 1994, in these cases. It is true that the assessment orders were mailed on a later date but this was within reasonable time of passing the order and, in any event, it is settled law that time-limit under s. 153(1) is for passing the order which may be communicated later within a reasonable time. It is not the case of the assessee-companies that mailing of these orders on 4th April, 1994, does not constitute 'mailing the orders within reasonable time'. We, therefore, reject the first ground of cross-objection. 37. The second ground of cross-objection is that since intimation under s. 143(1)(a) is passed after compliance to notices under s. 143(2), the intimation itself is to be treated as a regular assessment order under s. 143(3) and there ca....