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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: AMALGAMATIONS (PVT.) LTD.
Court Name: Supreme Court of India Judge(s): K. S. Paripoornan, S. C. Agarwal Title: COMMISSIONER OF INCOME-TAX vs AMALGAMATIONS (PVT.) LTD. Case No.: Civil Appeals Nos.139 to 1>a2 with 7 to 11 of 1980 Date of Judgment:1997-04-25 Reported As: 1998 PTD 180 Result: Order accordingly
JUDGMENT
JUDGMENT ' S. C. AGRAWAL, J.---These appeals, by certificate of fitness granted by the Madras High Court under section 66-A (2) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the 1922 Act"), and section 261 of the Income Tax Act, 1961 (hereinafter referred to as "the 1961 Act"), read with Article 133 of the Constitution of India, are directed against the judgment of the said High Court (see (1977) 108 ITR 895), dated March 1, 1976, in Tax Cases Nos.160 of 1969 and 239 of 1971 (References Nos.52 of 1969 and 100 of 1971). Tax Case No, 160 of 1969 related to the assessment year 1958-59, wherein two questions were referred by the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") for the opinion of the High Court. Tax Case No, 239 of 1971 related to the assessm ent years 1958-59 to 1962-63, wherein the Tribunal referred six questions for the opinion of the High Court. By the impugned judgment both the questions in Tax Case No, 160 of 1969 and all the question, except question No,3, in Tax Case No 239 of 1971 were answered by the High Court against the Revenue and in favour of the assessee. Question No,3 in Tax Case No,239 of 1971 was answered in favour of the Revenue and against the assessee. Civil Appeals Nos.139 to 142 of 1980 have been filed by the Revenue in respect of the questions that have been answered against the Revenue and Civil Appeals Nos.7 to 11 of 1980 have been filed by the assessee in respect of question No,3 in Tax Case No,239 of 1971 which has been answered against the assessee. ' We will first take up Civil Appeals Nos.139 to 142 of 1980 filed by the Revenue. These appeals can be split up into two parts, one relating to the answers to the two questions in Tax Case No, 160 of 1969 and questions Nos.1 and 2 in Tax Case No,239 of 1971, and the other relating to answers to Questions Nos.4, 5 and 6 in Tax Case No, 239 of 1971. The two questions in T.C. No,160 of 1969 and questions Nos.1 and 2 in Tax Case No,239 of 1971 were as follows:
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' Tax Case No, 160 of 1969 (page 905): "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the basis of valuation adopted by the Income-tax Officer for the shares in Sri Rama Vilas Service (Private) Ltd. As on January 1, 1954? "(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proviso to section 12-B(2) has no application in regard to the sale of shares to Simpson & Company Ltd.?" ' Tax Case No, 239 of 1971 (page 905): "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proviso to section 12-B (2) has no application in regard to the sale of various shares by the assessee-company to Simpson & Company Ltd. Through Simpson and General Finance Co. (Private) Ltd. And that the assessee was entitled to a capital loss of Rs,9,47,541 in the assessment year 1958-59? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the second proviso to section 12-B (2) had no application and that the full value of the consideration accounted for by the assessee should not be altered?" ' These questions arise in the following facts and circumstances: ' Amalgamation (Private) Limited (hereinafter referred to as "the assessee-company") is a company incorporated on December 22, 1938, as a private limited company. The assessee- company held shares in several companies, such as Simpson & Company Ltd., Addison & Company (Pvt.) Ltd., George Oakes (Private) Ltd. Addison Paints and Chemicals (Private) Ltd., India Pistons (Private) Ltd., etc. Out of the issued capital of 7,50,000 shares of Rs,10 in Simpson & Company Ltd., the assessee-company held, at the material time, 7,06,933 ordinary shares. Simpson & Company Ltd. Had a subsidiary by name Simpson and General Finance Company (Private) Ltd. Carrying on the business of financing by way of hire purchase transactions to outsiders and by way of loans and advances to the companies of this group. As on July 1, 1956, a sum of Rs,1,85,16,000 was due to Simpson and General Finance Company (Private) Ltd. From the assessee- company. Under section 295 of the Companies Act, 1956, which came into force on April 1, 1956, no company could, without obtaining the previous approval of the Central Government in that behalf, directly or indirectly, make any loan to a company, which is its holding company. In subsection (3) of section 295 it was provided that where any loan made by a lending company and outstanding at the commencement of the Companies Act, 1956, could not have been made without the previous approval of the Central Government if that section had then been in force, then the lending company had to, within six months from the commencement of the Act or such further time not exceeding six months as the Central Government might grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made. The liability of Rs,1,85,16,000 to Simpson and General Finance Company Ltd. By the assessee-company was affected by the aforesaid provision and, therefore, it became necessary for the assessee-company to liquidate this liability. Simpson and General Finance Company (Private) Ltd. Owed a sum of Rs,1,05,21,750 to Simpson & Company Ltd. The assessee-company approached the Government of India for necessary approval to put through certain transactions of sale of shares held by it to Simpson and General Finance Company (Private) Ltd. In liquidation of the liability. Simpson and General Finance Company (Private) Ltd., in its turn, would discharge its liability to Simpson & Company Ltd. By selling its holdings to Simpson & Co. Ltd. The assessee- company as well as Simpson and General Finance Company (Private) Ltd. Proposed to sell the shares at certain specified prices per share and sought the approval of the Central Government for such sale. The Central Government, in approving the sale, fixed its own prices and stated that the said fixation was without prejudice to any valuation of shares for purposes of capital gains.
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Thereafter, the shares held by the assessee company in various companies in respect of which approval had been granted by the Central Government were transferred by the assessee- company to Simpson and General Finance Company (Private) Ltd. With effect from June 13, 1957, at the prices fixed by the Company Law Administration and Simpson and General Finance Company (Private) Ltd. Sold part thereof to Simpson & Company Ltd. The transaction between Simpson and General Finance Company (Private) Ltd. And Simpson & Company Ltd. Was also at the same prices. ' In submitting its income-tax return for the assessment year 1958-59, the relevant previous year ending June 30, 1957, the assessee-company claimed a capital loss of Rs,4,37,703 in respect of the above transactions. In arriving at this loss, the assessee-company opted for the substitution of the market value as on June 1, 1954, in respect of shares in (1) S.R.V.S. (Private) Ltd., (2) Addison & Company Ltd., (3) George Oakes (Private) Ltd. And (4) India Pistons (Private) Ltd. As regards the rest of the shares, the assessee-company adopted the cost prices. The Income-tax Officer, while making the assessm ent, proceeded on the basis that the price structure approved by the Department of Company Law Administration for the transfer of the aforesaid shares was pure and simple on an ad hoc basis and meant to serve the limited purpose of approval to be given under section 372 of the Companies Act, 1956, and that the price at which the sales took place could not, therefore, be taken to represent the fair market value of the shares. He took the break-up value as on January 1, 1954, for the purpose of computation of capital gains and revised the sale prices and arrived at Rs,6,95,082 as the net capital gains. Even according to his computation there were certain capital losses which were adjusted as against the capital gains determined by him. In the case of S.R.V.S. (Private) Ltd., the Income-tax Officer took the break-up value as on January 1, 1954, at Rs,36,35,350 and their sale value at Rs,21,88,395 resulting in the capital loss of Rs,14,46,955. ' The assessee-company appealed against the assessment of the capital gains to the Appellate Assistant Commissioner. While the said appeal was pending, the Commissioner of Income-tax Officer proceeded under section 33-B of the 1922 Act as he was of the view that the order of the Income-tax Officer was erroneous and prejudicial to the interest of the Revenue in so far as he had wrongly allowed the capital loss amounting to Rs,14,46,955 on the sale of the shares in S.R.V.S. (Private) Ltd. After considering the submission of the assessee-company, the Commissioner held that the appreciation in value of the shares of Simpson & Company Ltd. Held by S.R.V.S. (Private) Ltd. Should not have been taken into account and if the value of the shares held by S.R.V.S. (Private) Ltd. In Simpson & Company Ltd., as on January 1, 1954, had been Rs, 24,38,578, S.R.V.S. (Private) Ltd. Would not have parted with these shares at cost on July 31, 1955. The Commissioner revised the capital loss of Rs,14,46,955 allowed by the Income-tax Officer and considered that there was capital gains liable for assessm ent of Rs,3,91,579. This figure was directed to be substituted and the assessm ent of capital gains was revised accordingly. ' The assessee-company appealed against the said order of the Commissioner to the Tribunal contending that the sale value fixed by the Company Law Administration represented the correct value of the shares and the transactions were without any motive to avoid capital gains and they had been necessitated by the various provisions of the Companies Act which prohibited inter- company loans and that the method adopted by the Income- tax Officer, viz., the secondary valuation, was proper. The said appeal was allowed by the Tribunal and the order of the Commissioner of Income-tax was set aside and the method adopted by the Income-tax Officer of secondary valuation was held to be proper. The Appellate Assistant Commissioner took up the appeals of the assessee-company for this and other years subsequent to the order of the Tribunal and following the Tribunal's order he worked out the capital loss in respect of the other shares under consideration and in effect accepted the assessee-company's claim of capital loss of Rs,4,37,703. The said order led to appeals both by the assessee-company and the Revenue to the
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Tribunal. The assessee-company's appeal related to computation of the capital loss of Rs,4,37,703 as emerging from the order of the Appellate Assistant Commissioner instead of Rs,4,90,244 which would be the correct figure. The Revenue contested the acceptance of the claim of the assessee company with reference to the capital loss of Rs,4,37,703 as shown in the returns. ' On the first occasion when the matter came up before the Tribunal, it remanded the case to the Appellate Assistant Commissioner and called for a specific finding whether the sales under consideration were effected with the object of avoidance of tax or reduction of liability to tax and also wanted the full value of the consideration to be worked out, in case the first proviso to section 12-B(2) of the 1922 Act was held to be applicable. The Appellate Assistant Commissioner observed that there was ample evidence to show that the sale of shares was a forced one and that the assessee-company had no option but to comply with the statutory provisions and that the evidence produced clearly established the assessee-company's contention that the sale was not motivated by any desire to avoid capital gains tax and that the Revenue had not proved by any conclusive evidence that the motive underlying the transaction was the avoidance or reduction of the liability to capital gains tax. He worked out the figures in accordance with the rules framed under the Wealth Tax Act and found that the prices fixed by the Company Law Administration were not very much different from the figures worked out by him. After receiving the report of the Appellate Assistant Commissioner, the Tribunal considered the matter again and held that the proviso to section 12-B of the 1922 Act could not be invoked in the instant case there was no evidence to support the view that the sales were effected with a view to avoid the provisions of section 12-B. The Tribunal accepted the contention of the assessee-company and held that the Revenue was not justified in computing the capital gains and disturbing the figures fixed by the Government of India. The two questions referred in Tax Case No,160 of 1969 arise out of the proceedings under section 33-B of the 1922 Act, while questions Nos.1 and 2 referred in Tax Case No, 239 of 1971 arise out of the order of the Tribunal in the appeal against the order of the Appellate Assistant Commissioner in respect of the assessment year 1958-59. ' Since the second question in Tax Case No, 160 of 1969 and Questions Nos. 1 and 2 in Tax Case No, 239 of 1971 raise more or less the same issue, they were taken up together by the High Court. After referring to the provisions of section 12-B(2) and more particularly the first proviso to the said subsection, the High Court observed that the first requisite for the application of the said proviso, namely, that the person to whom the sale is made should be person with whom the assessee is directly or indirectly connected, was satisfied in the present case because the sale of shares to a subsidiary of the subsidiary is one to a person with whom the assessee company is directly or indirectly connected. As regards the second requirement of the proviso, as to whether the sale was effected with the object of avoidance or reduction of the liability of the assessee-company under the section, the High Court has pointed out that the Income-tax Officer had not given a finding that the object with which the transaction was put through was the avoidance or reduction of the liability to capital gains tax and the only observation that he had made in his order was that there was a reduction of liability to capital gains. According to the High Court, such a finding of taking the result as if it was the object, would not satisfy the requirement of the first proviso to section 12-B(2) of the 1922 Act. The High Court was of the view that the Tribunal had rightly called for a finding on this point specifically from the Appellate Assistant Commissioner. After referring to the finding recorded by the Appellate Assistant Commissioner, which was accepted by the Tribunal, that the object of the transaction was not to avoid or reduce such liability to capital gains tax, that the sale was a forced sale since the assessee-company had no option and that the prices had been fixed by the Company Law Administration, the High Court held that the first proviso to section 12-B(2) cannot be attracted to the present case. The High Court did not accept the contention urged on behalf of the Revenue that the sale price had been fixed by the Company Law Administration on ad
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hoc basis and, in this context, it has observed that the letter, dated May 18, 1957 (Annexure-G.VII.A to the remand report of the Appellate Assistant Commissioner), clearly shows that the Company Law Administration worked out the figures in consultation with the Central Board of Revenue and when the assessee-company sold the shares at those prices, it could not be validly contended that the assessee-company transferred the shares at certain prices with the object of avoidance or reduction of liability to capital gains. On that view, the High Court answered the second question in Tax Case No, 160 of 1969 and the second question in Tax Case No,239 of 1971 in the affirmative and against the Revenue. ' As regards the first question in Tax Case No,160 of 1969 which raises the question of valuation, the High Court felt that on the view it had taken as regards the second question it would not survive for consideration because, the question of valuation would be material only if the proviso applied. The High Court has, however, considered the said question and has indicated the answer to that question also. The High Court has expressed the view that this is a case of substantial holding and that there is textual backing to the method adopted by the Income-tax Officer and that the Commissioner had found fault with it without any valid reason. The High Court, therefore, answered the first question in Tax Case No, 160 of 1969 in the affirmative and in favour of the assessee- company. ' As regards the first question in Tax Case No,239 of 1971, the High Court felt that it did not require any independent treatment in view of the answer given with regard to second question in Tax Case No,160 of 1969 which would answer that question also. Therefore, that question also was answered in the affirmative and in favour of the assessee-company. ' We have heard Shri K.N. Shukla, learned senior counsel appearing for the Revenue, in support of the appeals in respect of the answers given by the High Court to these questions. Having considered the submissions of learned counsel, we are of the view that the High Court has rightly construed the provisions contained in the proviso to section 12-B(2) of the 1922 Act and, in view of the finding recorded by the Appellate Assistant Commissioner, which finding was accepted by the Tribunal, that the object of the transaction was not to avoid or reduce the liability to capital gains, the said proviso was not attracted. In our opinion, the said finding of the High Court does not suffer from any legal infirmity and there is no ground to interfere with the judgment of the High Court on this aspect of the case. ' We may now take up the appeals of the Revenue in respect of questions Nos. 4, 5 and 6 in Tax Case No,239 of 1971. ' The said questions were as follows (page 921): "(4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the loss sustained by the assessee on account of standing guarantee to Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in 1962-63 assessm ent after taking into account the amounts received from the liquidators during the years 1959-60 to 1962-63 ? (5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the receipts of Rs, 1,41,000, Rs, 2,29,627, Rs,1,10,500 and Rs, 4,381 from the liquidators of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation), from the assessments for 1959-60, 1960- 61, 1961-62 and 1962-63, respectively ? (6) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in folding that an amount of Rs,4,23,256 representing the real loss sustained by the assessee on account of standing guarantee of Sembiam Saw Mills (Private) Ltd. (in voluntary liquidation) should be allowed in the assessm ent for 1962-63?" ' There was a company by name Sembiam Saw Mills (Private) Ltd. (for short "S.S.M."), which was originally a subsidiary of Addison & Company (Private) Ltd. On and from February 1, 1954, the
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assessee company purchased all the shares of S.S.M. From Addison and Company (Private) Ltd. And S.S.M. Thus, became the direct subsidiary of the assessee company Sembiam Saw Mills (Private) Ltd. Had borrowed monies from the National Bank of India Ltd., and the assessee- company had guaranteed the loan to the said company by the said bank. Sembiam Saw Mills (Private) Ltd. Went into liquidation sometime in 1955. For the purpose of overdraft facilities S.S.M. Executed a promissory note in favour of the assessee company which was endorsed by the assessee-company to the bank along with a separate guarantee letter in favour of the bank. When S.S.M. Went into liquidation, the assessee-company, as guarantor, was required to clear those overdrafts in accordance with the terms of the guarantee. After adjusting the amount recovered from the liquidators, the sum due to the assessee-company from the liquidated company on account of the said overdraft was Rs,9.08,764. The assessee-company claimed this amount as a loss which arose in the course of and incidental to its business, in the assessment for the year 1958- 59. There were receipts by the assessee company in the course of the liquidation of S.S.M. In the later years. The total amount received came to Rs,4,85,508.28 spread over the relevant accounting years for the assessm ent years 1959-60 to 1962-63. The assessee company relied on the clause in the memorandum of association authorising it to be the guarantor for the loans and contended that the transactions in question sprang out of normal business transactions and hence the loss was an allowable deduction in the assessment for 1958-59. The Income-tax Officer held that the loss in question did not arise during the course of or incidental to the business of the assessee- company and in his view it was at best a capital loss which did not come within the scope of section 12-B of the 1922 Act. In making the assessments for the years 1959-60 to 1962-63, the Income-tax Officer treated the receipts from the liquidator as income, as a protective measure. In appeal, the Appellate Assistant Commissioner did not accept the claim of the assessee-company for allowance of the loss in 1958-59, as he was of the view that it was not a loss which arose during the course of or was incidental to its business. But the appeals for the years 1959-60 to 1962-63 were allowed in so far as they related to the question of the receipts in the respective years from the liquidator. As the guarantee loss had not been allowed as a deduction in 1958-59, the Appellate Assistant Commissioner held that the subsequent recoveries could not be included in the total income in the later years. The assessee-company as well as the Revenue preferred appeals against the said order of the Appellate Assistant Commissioner before the Tribunal. The Tribunal held that the assesseecompany had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. But since the assessee- company had received the last of the payments from the liquidator in the previous year relevant to the assessm ent year 1962-63, it was held that the balance of Rs,4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. At the instance of the Revenue, the Tribunal referred the aforementioned question Nos.4, 5 and 6 for the opinion of the High Court. ' The High Court, while dealing with said questions, has observed that the real point in issue was whether the guarantee that was executed in favour of the bank in respect of the loan to S.S.M., the subsidiary of the assessee-company, was done in the course of its own business. The High Court has referred to its earlier judgment in Amalgamations (P.) Ltd. v. CIT (1969) 73 ITR 380 (Mad), wherein the nature of the business of the assesseecompany has been considered and it has been held that the provisions of section 23-A of the 1922 Act were applicable to the assessee-company since the assessee-company's business includes furnishing guarantees to debts borrowed by subsidiary companies. The High Court has held that the said finding given in that case is clearly applicable to the questions under consideration before it and that the assessee-company had incurred the loss in carrying on its own business which includes furnishing guarantees to debts borrowed by its subsidiary companies. According to the High Court, the loss was allowable as a
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deduction in the year in which it came to be ascertained and in the instant case the High Court held that the assessee-company could have ascertained whether there was loss in the transaction of guarantee, only at the stage of final payment by the liquidators which was received in the relevant previous year for the assessment year 1962-63 and that the Tribunal was right in allowing it in that year. The High Court, therefore, answered questions Nos. 4,5 and 6 in the affirmative and against the Revenue. ' After hearing Shri Shukla on the appeals filed by the Revenue in respect of these questions, we are unable to hold that the judgment of the High Court in respect of these questions suffers from any legal infirmity. We,…
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