COMMISSIONER OF INCOME TAX vs H. H. MAHARANI SETHU PARVATHI BAYI.

SMT. K. K. USHA, J. :

IT Ref. Nos. 77/92 and 37/90 are at the instance of the Revenue and IT Ref. 48/96 is at the instance of the assessee, even though, in the statement of case, it is wrongly shown that the applicant was the CIT, Trivandrum. IT Ref. 77/92 arises out of an order passed by the Tribunal, Cochin Bench in MP No. 25/Coch/86 in ITA Nos. 377 & 416/Coch/1982. IT Ref. 37/90 arises out of an order of the Tribunal, Cochin Bench in MP No. 33/Coch/1987 in MP No. 25/Coch/1986 in ITA Nos. 377 & 416/Coch/1982. IT Ref. No. 48/96 at the instance of the assessee also arises from the above order. The relevant assessment year is 1976-77. Following are the questions raised for the opinion of this Court under s. 256(2) of the IT Act, in IT Ref. 77/92 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that there is a mistake apparent from the record and in rectifying its order ?

Whether, on the facts and in the circumstances of the case, does the case of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, have direct application to this case ?

Whether, on the facts and in the circumstances of the case, should not the Tribunal have pierced the veil and considered whether the transaction was a ruse or device to evade tax ?"

The questions referred for opinion of this Court in IT Ref. 37/90 under s. 256(1) of the IT Act are as follows :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in dismissing the misc. petition filed by the Revenue ?

Whether, on the facts and in the circumstances of the case, should not the Tribunal have recalled its order on the misc. petition of the assessee and remitted the case to the ITO to be considered afresh in the light of the Supreme Court decision and the facts highlighted in the reference application ?"

In IT Ref. No. 48/96, the questions referred for opinion of this Court under s. 256(2) are as follows :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal having dismissed a reference application filed at the instance of the CIT numbered as RA 143/Coch/87 in their order dt. 9th September, 1989 is right in referring the questions at the instance of the CIT as brought out in the second reference application ?

Whether, on the facts and in the circumstances of the case, it was open to the CIT to file a fresh reference application for a second time modifying the questions already requested by him in RA No. 143/Coch/87 which was dismissed by the Tribunal by its order dt. 9th September, 1989 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the questions of law as referred to by the CIT in RA No. 39/Coch/88 have arisen only when their order in MP No. 33/Coch/87 was passed and not when they passed order in MP No. 25/Coch/86 dt. 6th May, 1987 in ITA Nos. 377 & 416/Coch/87 ?"

The relevant facts are as follows : During the previous year relevant to the asst. yr. 1976-77, assessee had transferred 4000 shares of M/s Nirlon Synthetic Fibres & Chemicals Ltd., by way of share capital to a partnership firm by name M/s Padma Gowri in which the assessee was a partner. The value of the said shares was shown as Rs. 10 lakhs, that is, at the rate of Rs. 250 per share. The ITO took the view that since the assessee had transferred 4000 shares as share capital in the firm, she was liable for capital gains tax. Reliance was placed on the decision of this Court in A. Abdul Rahim, Travancore Confectionery Works Vs. Commissioner of Income Tax, ITO, while applying the provisions of s. 52(2) of the IT Act, valued the shares at Rs. 544 per share as against Rs. 250, the value shown by the assessee. Assessee took up the matter in appeal before the CIT(A) who allowed the appeal deleting a sum of Rs. 32,64,945 added as long-term capital gains. First appellate authority, following the dictum laid down by the Supreme Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , took the view that the provisions of s. 52(2) cannot be applied to the facts of the case in the absence of a finding by ITO that the appellant did receive any amount as consideration in excess of what was mentioned in the documents. But, the first appellate authority deleted the entire amount without limiting the deletion to the amount in excess of Rs. 250 shown as the share value by the assessee.

ITA 37/Coch/82 was filed by the assessee before the Tribunal challenging the order passed by the first appellate authority. Revenue also filed an appeal as ITA 416/Coch/1982. These appeals were heard together and disposed of by a common order dt. 18th February, 1984. Tribunal took the view that the CIT(A) had committed an error in deleting the entire levy of capital gains. Following the ratio of the decision of this Court in A. Abdul Rahim, Travancore Confectionery Works Vs. Commissioner of Income Tax, Tribunal took the view that tax can be levied only on the basis of the stated consideration of Rs. 250 per share and not on the basis of the market value as determined by the ITO. Tribunal was of the view that appeal by the assessee was really incompetent as the entire levy had been set aside by the CIT(A). But, accepting the request made on behalf of the assessee, Tribunal was inclined to treat the appeal filed by the assessee as cross-objection for the purpose of enabling the assessee to agitate the question as to whether transfer of the share to the firm can attract capital gains tax. Thus, appeal filed by the Department was allowed and the appeal filed by the assessee was dismissed.

Assessee, thereupon, filed MP 25/Coch/86 under s. 256(2) of the IT Act, 1961 for rectifying the order passed by the Tribunal on the ground that it suffered from a mistake apparent on the record. The contention raised by the assessee was that Supreme Court had held in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, that the transferor of assets to a firm as capital, received no consideration within the meaning of s. 48 and consequently, there could be no profit or gain accrued to the assessee under s. 45 in order to make her liable to pay capital gains tax. Assessee prayed for recalling the order passed by the Tribunal and rectifying the mistake. Even though, the above prayer was opposed by the Revenue, Tribunal allowed the petition. The order was recalled and it was held that no capital gains arose out of the transfer of shares of the assessee to the firm M/s Padma Gowri and the appeal filed by the assessee, which was treated as cross objection by the Tribunal, was allowed. Order in MP 25/Coch/86 does not contain a statement that the appeal filed by the Revenue was dismissed.

Revenue, thereupon, filed MP 33/Coch/87 in MP 25/Coch/86 seeking to recall the order passed by the Tribunal on 6th May, 1987 in MP 25/Coch/86 and to pass suitable orders directing the ITO to go into the real nature of the transaction and find out whether the interpolation of the firm M/s Padma Gowri was only a device or ruse for evading liability to Income Tax on capital gains and to pass orders accordingly. In this petition, Revenue placed reliance on the observations contained in the last but one paragraph of the decision of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, . The relevant portion of the judgment reads as follows :

"We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction and that the transfer by the partner of his personal asset to partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership business. If the transfer of the personal asset by the assessee to a partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to Income Tax on a capital gain, it will be open to the IT authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The ITO will be entitled to consider all the relevant indicia in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the ITO enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth."

It was stated by the Revenue in its petition that immediately after the transfer of the 4000 shares by the assessee to the firm M/s Padma Gowri, there was a further transfer of these very same shares from the assessee on 26th December, 1975 to the joint names of the assessee, Shri Padmanabha Iyer and M/s Bhagavathi Investments (P) Ltd., Madras. These 4000 shares were later transferred from the joint names of the above persons to M/s Bhagvathi Investments (P) Ltd., on 24th March, 1976, in lieu of which, the assessee was allotted 10,000 shares of Rs. 100 each of M/s Bhagvathi Investments (P) Ltd. According to the Revenue, the above transactions would clearly show that real transfer of shares in question was actually made to M/s Bhagvathi Investments (P) Ltd., by originally transferring the ownership to the joint names of the assessee Shri Padmanabha Iyer and Bhagvathi Investment (P) Ltd., and the name of the firm M/s Padma Gowri to whom the shares were shown to have been transferred was interpolated to evade tax on the capital gain arising as a result of this transfer. According to the Revenue, the Tribunal should not have allowed the application for rectification submitted by the assessee without remitting the matter back to the ITO to find out whether the transfer was not a device or ruse to avoid capital gains. Revenue contended that the order passed by the Tribunal in MP 25/Coch/86 on 6th May, 1987 is vitiated by a clear mistake apparent from the records and it has to be recalled and suitable orders as prayed in the petition, should be passed.

The miscellaneous petition filed by the Revenue was dismissed by the Tribunal by merely observing that at the time of hearing, it made an enquiry as to whether the firm in which capital contribution has been made, still continued and the answer was in the affirmative. Since the firm was still in existence and no other material was brought on record to hold that the transaction of contribution of capital was a ruse or device, there was no apparent mistake in the order dt. 6th May, 1987 which has to be rectified.

It is contended by the learned standing counsel for the Revenue that the Tribunal has committed a serious error in rejecting the petition filed by the Revenue and also in allowing the petition filed by the assessee. The mistake pointed out by the assessee in her petition was non-consideration of the decision in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, . While the above contention was entertained. Tribunal should have considered the entire judgment of the Supreme Court. The last but one paragraph of the judgment would clearly show that an enquiry into the nature of the transaction of transferring of the personal assets to the partnership firm was necessary and that only in cases where the authorities are satisfied that the transfer by the partner of his personal assets to the partnership firm represents a genuine attempt to contribute to the share capital of the firm and that there was no unreal transaction involved, it can be held that the transfer of its shares to the partnership firm would not fall within the contemplation of s. 48 of the IT Act and such transfer can be taken outside the scope of s. 45 of the Act. In the present case, according to learned counsel, there is evidence to show that within few days of the transfer of the 4,000 shares to the firm M/s Padma Gowri, the very same shares were transferred by the assessee to the joint names of the assessee, Shri Padmanabha Iyer and M/s Bhagvathi Investments (P) Ltd. and within few months time very same shares were transferred to M/s Bhagvathi Investments (P) Ltd., as consideration for allotment of 10,000 shares of Rs. 100 each of M/s Bhagvathi Investments (P) Ltd., to the assessee. Learned counsel would contend that this is a clear case where alleged transfer to the firm as assessees capital, was brought in only for the purpose of escaping capital gains tax.

We find merit in the contention raised on behalf of the Revenue. One of the examples given by the apex Court in that portion of the judgment which is quoted above, namely, whether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it would squarely apply to the case of the assessee if the allegation made by the Revenue in its miscellaneous application is correct. We are of the view that the Tribunal should have enquired into the real nature of the transaction in the light of the observations contained in the judgment of the Supreme Court before it allowed the rectification petition and recalled the original order by holding that the transfer of the assessees share to the partnership firm did not fall within the contemplation of s. 48 of the IT Act and that her case falls outside the scope of s. 45. Tribunal has committed an error in allowing the petition for rectification without such enquiry. So also, we find that the Tribunal rejected the miscellaneous petition filed by the Revenue without considering the contentions raised in its application. Tribunal was satisfied with an answer in the affirmative to the question whether the firm was still in existence. Tribunal has observed that no material was brought on record to hold that the transaction of contribution was a ruse or a device. Revenue has made a clear statement in its petition as to the transactions relating to the 4,000 shares which followed immediately after the transfer to the firm on 15th November, 1975. When these materials were placed before the Tribunal, it was the bounden duty of the Tribunal to have examined the same by making appropriate enquiry. We are of the view that the Tribunal has failed in its duty to examine the materials placed before it by the assessee. Rejection of the miscellaneous petition filed by the Revenue in the manner in which it was done by the Tribunal cannot be justified.

Learned counsel for the assessee pointed out that this Court had occasion to consider the genuine nature of the transaction relating to the transfer of the shares in the judgment in IT Ref. 180/84 and, therefore, the questions raised in the reference at the instance of the Revenue are only academic. We have gone through the judgment of this Court in IT Ref. 180/84. It arose in gift-tax assessment. The question which was referred for opinion of this Court was whether the Tribunal was right in holding that the firm, M/s Padma Gowri partnership was a separate entity and consequently contribution towards share capital in the form of shares in Nirlon Synthetic Fibres & Chemicals Ltd., Bombay, amounted to a transfer and hence, attracted the provisions of the GT Act. This Court answered the question in the affirmative against the assessee and in favour of the Revenue. We do not find that the issue raised in these references were involved in IT Ref. 180/84. This Court had no occasion to consider the nature of the transactions relating to the transfer of the shares to the firm and later in favour of M/s Bhagvathi Investments (P) Ltd. What was brought to gift-tax was the difference between the value of the shares at the market rate and the rate shown by the assessee. We do not find that the above judgment has any relevance in deciding the issue involved in these references.

The Tribunal has to consider MP 25/Coch/86 and MP No. 33/Coch/1987 a afresh in the light of the observations contained in this judgment by making necessary enquiry as contemplated by the judgment of the Supreme Court in (1985) 156 ITR 109 (supra).

As far as the questions referred in IT Ref. 48/96 are concerned, we find that the second reference was made pursuant to a direction issued by this Court in OP 7949/90.

We answer question No. 3 in the affirmative, in favour of the Revenue and against the assessee. In the light of the above, it is unnecessary to answer questions 1 and 2.

In IT Ref. 37/90, we answer question No. 1 in the negative, in favour of the Revenue and against the assessee. Question No. 2 is answered in the affirmative, in favour of the Revenue and against the assessee.

We decline to answer the questions referred in IT Ref. 48/96.