RAVI PANDIT vs GOPAL DIGAMBAR APTE

THIS appeal is preferred by the Chartered Accountant Sri S.B. Pandit, partner in M/s. Kirtane & Pandit, Chartered Accountants having their office at Pune, against the order of the District Forum, Satara in Complaint No. 129 of 1995. As per the decision of the District Forum, the appellant is directed to pay Rs. 4,39,600/-, further amount of Rs. 50,000/- towards mental torture, etc. and cost of Rs. 10,000/-. THIS liability is imposed by the District Forum on account of the established negligence on the part of the appellant to render incorrect legal advice, which landed the complainant into payment of the Capital Gains Tax to the tune of Rs. 1,89,000/- and further deprived the complainant from his property namely building, land, machinery, etc. belonging to the complainant under the name of M/s. Apte Plastic Industries at Karanje, District - Satara. The complainant contended that he was put to double jeopardy on account of the wrong advice given by the appellant and that he was required to pay the Capital Gains Tax about which advice was given by the appellant that by following a particular method of disposal of the assets, the complainant would be totally exonerated from the liability of the Capital Gains Tax. Even if the payment is required to be made, it will be of a small and negligible amount. THIS was countered by the appellant on the ground that he had given the advice which was in keeping with the provisions of the Income-tax Act and also the ratio laid down by various High Courts and the Income-tax Appellate Tribunals and in that light the advice on no reckoning can be said to be insufficient or inefficient or even incorrect.

IN order to resolve this controversy, it is imperative on us to go through the salient facts canvassed in the complaint and the salient contentions raised by the appellant in his written statement. The complainant is engaged in the business of manufacturing Plastic Moulds and other allied plastic products for last many years and that in the course of his business activities, he was required to raise loans for working capital and cash credits from the Bank of Maharashtra. The complainant was running the small scale unit under the name and style of "Apte Plastic Industries". Out of loans, he had acquired land, building, machinery, plant, etc. for the purpose of business. The complainant had obtained credit facility from the Bank of Maharashtra, Satara Branch in or around the year 1978 and had deposited Title deeds in regard to the above property with the same Bank. It was mortgaged by way of deposit of Title deeds with the Bank and the Bank had a charge thereon towards the repayment of the loan by the complainant. In the year 1985-86, the complainant was under the liability of Rs. 9,37,085/-. On account of the persistent labour problems in the said unit, the complainant found it difficult to run the unit in a satisfactory or profitable manner, although the performance of the complainant, vis-a-vis the Bank was satisfactory and he was not in serious arrears of the Bank dues. The Bank also never pressed the complainant for repayment of the principal and the interest.

The further story of the complainant is that the opponent (now appellant) being a- Chartered Accountant/was consulted every now and then by the complainant in regard to the financial affairs of the Company. The appellant was acting as an auditor of all the industrial units and companies floated by the complainant and he was duly paid the professional fees for the services rendered by him. The complainant had utmost faith and confidence in the professional compentency of the opponent.

BEING tired of the persistent financial distress and difficulties, the complainant decided to close down the unit and sell his assets in the open market in the year 1983. One Elcont Electrical Equipments Pvt. Ltd. offered Rs. 9 lakhs for the assets of the complainant. With this sale, the complainant was likely to face the'' liability to payment of Capital Gains Tax on the appreciated value of his assets and in order to minimise this burden or in the alternative, in order to bring down this liability to zero, he consulted the appellant. The complainant was indeed aware that he could sell the assets, invest the proceeds in the approved securities or bonds as prescribed under the Income-tax Act and thus, obtain complete exemption from the liability of the Capital Gains Tax. He entrusted this work to the appellant and paid the professional fees. The complainant was ready to deposit the approved securities with the Bank and further pay the difference in interest which he would be required to pay under the terms of loan and the interest he would obtain from the above securities. However, the appellant advised that the Bank could not accept the Government securities and that the complainant would be denied the advantage of exemption u /Sec. 54(E) of the Indian Income-tax Act. The appellant wrote a letter dated 19.2.1986 to the Income-tax Officer, Satara that the complainant was depositing the sale proceeds in the approved Government Bonds. However, at this time, the opponent-appellant was working as an auditor of Bank of Maharashtra and was therefore, interested to please the said Bank and accordingly, advised the complainant to deposit the sale price directly from the purchaser to the Bank. Such payment by the purchaser to the Bank would be deductible as explained under the same provision of the Income-tax Act and that with this deduction, practically, no margin in appreciated value would be left which could be taxed for the Capital Gains. It is the story of the complainant that he did direct the purchaser - Elcont Electrical Equipments Pvt. Ltd. to deposit the amount with the Bank in 1986. However, the complainant received the notice from the Income- tax Officer about Capital Gains Tax liability. The complainant put up his case of total exemption on the basis of above transaction. But it was denied by the Income-tax Officer, Satara, Commissioner of Income-tax (Appellate) Kolhapur and lastly by the Income-tax Appellate Tribunal, Pune. The complainant was required to pay tax of Rs. 1,90,701/-, in this litigation towards the Capital Gains Tax. The complainant obviously suspected the bonafides of the opponent (appellant) and called upon him by letter dated 23.4.1991 about the grievances and the loss suffered by the complainant on account of wrong advice of the appellant. He again wrote on 12.10.1994, 5.3.1995, but the appellant did not respond to any of those letters, abstained himself from the hearing at Pune on 20th March, 1995. The second appeal before the Appellate Tribunal was dismissed on 24.4.1995. It is thereafter, that the complainant could clearly visualise that it was on account of wrong advice on the part of the appellant directing him to deposit the sale proceeds from the purchaser with the Bank, that the complainant suffered the loss and was put to lot of physical and mental agonies. Secondly, there was colossal waste of time for all these years. The complainant has claimed Rs. 5 lakhs comprising of Rs. 2.50 lakhs for mental agony, etc. and the amount of Capital Gains Tax paid by him. As indicated, the claim is of the aggregate amount of Rs. 5 lakhs. The respondent has filed an extensive written statement on 4.3.1996. We may here observe that although the question of limitation, jurisdiction and transfer to Civil Court has been pleaded, the same has not been seriously agitated by the learned Counsel for the appellant. We find that the reasoning given by the District Forum on these questions, is practically unassailable. But all the same, since there is no specific argument inviting us to give finding of these questions, we have not dilated on those aspects in this judgment and may do so in other appropriate matter.

THE appellant-opposite party has contended that the complainant is a knowledgeable person and that he was acting on his own and that the complainant used to obtain a sort of opinion/advice from the appellant and hence, there is no question of service or deficiency in service. Apart from that, appellant was working as an Auditor of Bank of Maharashtra at the relevant time under the appointment made by Reserve Bank of India and the Controller and Auditor General of India. This is in the nature of Government appointment and that it is the appointment for a period of about 3 years and that the auditors are rotated from one Bank to another. THEse periodical appointments are aimed at finding out the deficiencies in the working of the Bank. Regarding grievance of the complainant, it is stated that the complainant put up and prayed an exemption under the Capital Gains Tax in view of Section 54(E), Sub-section 2 and Explanation 2 of the same section of Income- tax Act and that there was no point in his selling the property to M/s. Elcont Electrical Equipments Pvt. Ltd., deposit the sale proceeds in approved Government securities and furnish them to the Bank in lieu of security for the loans. THEre was no question of substituting the Government securities for the mortgage of the immovable property and hence, there was no question of the complainant taking action of selling the property and converting the sale proceeds into Government Bonds. He could only advise for sale of the property, deposit the sale proceeds towards the Bank dues and claim the said repayment as deductible expenditure and minimise the liability on the Capital Gains Tax. THE appellant having some position with the Bank, prevailed on the Bank to give concession in the total dues and accordingly, the appellant succeeded in scaling down the dues by Rs. 2 lakhs. He has stoutly denied that he colluded with the Bank and beguiled the complainant in depositing the sale proceeds towards the satisfaction of the loan by the Bank. On the other hand, according to the appellant, the complainant indicated that he would deposit the sale proceeds converted into Government securities with the Bank and that the Bank would debit more interest on the deposit of Government securities and accordingly, he wrote letter to the Income-tax Officer, but surprisingly, little prior to that, the complainant sold the property to M/s. Elcont Electrical Equipments Pvt. Ltd. and deposited the amount with the Bank. THE purchaser was directed to deposit the sale proceeds directly with the Bank and that the complainant was acting on his own and not on the advice of the appellant. He has, therefore, prayed for dismissal of the complaint on the ground that even if it is construed that advice was given, the advice was correctly given, because the advice was based on the judgments of the various High Courts, Income-tax Appellate Tribunals, etc. and consistent with the wording of the relevant provision. Now, coming to the proposition canvassed on behalf of the complainant, we shall examine as to whether the appellant tendered the right advice to the complainant in selling the property and in directing the purchaser to straightaway deposit those sale proceeds with the Bank and thus obtain deductible expenditure on the Capital Gains as a result of appreciation in the value of the property, so as to minimise the liability of the Capital Gains Tax.

IN this regard, the learned Counsel for the respondent has urged that the appellant had three alternatives - (1) advising the complainant to sell the mortgaged property, convert the same into approved security bonds and deposit the same by way of substituted security in place of mortgage, (2) to sell the property and deposit the sale proceeds with the Bank towards the satisfaction of the loan and thereafter, claim deductible expenditure towards the development of the property; (3) to continue to held the property mortgaged with the Bank, for example, future time and reap the benefits of appreciation in the price of the immovable property and thus, avoid the liability of Capital Gains Tax. IN regard to the third suggestion, it is stated that the complainant had paid the interest instalments regularly to the Bank and that the Bank never called on the complainant to clear of the dues. No suit was filed for recovery of the Bank loans against the complainant. Among these three alternatives, the appellant pointed out the legal impediments u/Sec. 54(E) in the deposit of Government approved securities with the Bank, because that would amount to conversion of securities into new assets which would not be entitled to exemption from the Capital Gains Tax. Such a position is indeed borne out by legal. interpretation of the Section 54(E) of the Act. But, then, his advice to direct the purchaser to deposit the sale proceeds with the Bank towards the satisfaction of the loan dues has been successively negatived by the three Forums, namely INcome- tax Officer, Commissioner of INcome-tax (Appellate) and the INcome-tax Appellate Tribunal at Pune. All these three Forums concurrently held that the complainant was not entitled to exemption in Capital Gains Tax. Such an advice by the appellant, was therefore devoid of bona fides. The appellant was working as an auditor of the Bank and with a view to please the Bank, the appellant sacrificed the interest of the complainant and thus/the complainant suffered injury in payment of tax and loss of time in the litigation and further, put to physical and mental harassment.

WE may cut short the extensive proposition canvassed on behalf of the appellant that the appellant had not given advice to the complainant, and this can be done by referring to the opinion of Mr. Haribhakti, Chartered Accountant, who was referred to by the appellant for his opinion. And in that opinion, it is unequivocally observed by Mr. Haribhakti that the appellant had advised the complainant that if the complainant arranged the transaction of sale of capital assets in such a way, that the sale price of the assets directly reached the Bank of Mr. Apte with whom the assets have been mortgaged, Mr. Apte would have a good case before the Income-tax Authorities to argue that the doctrine of diversion of income by over- riding title laid down by the Privy Council in the case of Raja Bejoysingh Dudhuria v. C.I.T., 1 ITR 135, and approved by the Supreme Court and other High Courts in several subsequent cases viz. C.I.T. v. Shitaldas, in 41 ITR 367. Now, with this statement in the opinion which has been given at the instance of the appellant, we are unable to persuade ourselves to accept the contention on behalf of the appellant that the advice was not tendered. For this purpose, we may refer to the letter written by the appellant to the complainant on 3.3.1986. This is the letter according to the appellant, which contains an opinion rather than advice to the complainant. The appellant relied on the case of R. Srinivasan v. Sixth I.T.O; decided by the Income-tax Appellate Tribunal, Madras Bench ''A'' reported in 13 ITD 632. In that case, the appellant had claimed deduction from the sale proceeds of his assets for meeting the mortgage loan payable to L.I.C. The appellant contended that the loan was discharged by the purchaser by direct payment to L.I.C. The assessee never received the amount, and therefore, should not be called upon to pay the Capital Gains Tax from that amount. In the second appeal, the additional ground was made that the same mortgage loan should be considered as cost of acquisition or cost of improvement deductible under Section 48 of the Income-tax Act, and it was held in that case that the mortgage amount was utilised for the purpose of putting up construction and therefore, this amount was utilised in the asset itself. Therefore, the amount paid to the L.I.C. should have been considered as an amount representing the cost of improvement to the property which would be deductible. Para 3, reproduced below is relevant.

We assume that in your case too that the mortgage loan due to the Bank of Maharashtra on the said land, building and machinery was paid directly by the purchaser to the Bank and that the mortgage amount originally was utilised by you for acquisition of the above assets. If our above assumptions are correct, then the ratio of the above Tribunal decision can be relied upon in your case and the Taxable Capital Gains in that case may be nil or negligible. This is the-opinion which seems to be the origin of all the troubles that have arisen thereafter.

OUR plain reading of this opinion is that the opinion is based on the case law laid down by the Madras Bench of the Appellate Tribunal, which the appellant was certainly entitled to do. The appellant has secured the opinions of eminent Chartered Accountants in support of this view and we find that the opinions are delivered by Shri V.B. Haribhakti and Shri P.N. Shah of Shah & Co. who are the Chartered Accountants, stationed in Bombay and working in the field of Taxation for quite a long time. Shri Haribhakti in his opinion dated 16.10.1997, has also opined in the same manner in which the appellant has opined in the above letter. According to him, selling the assets under mortgage by the assessee and the purchaser directly depositing the loan amount with the Bank would amount to the fact that the amount had not reached the hands of the assessee. This would therefore entitle the complainant for deduction in the Capital Gains Tax. He has stated that the appellant was absolutely right in not advising the complainant to follow the alternative route namely converting the sale proceeds in the Government approved bonds, depositing the same with the Bank by way of substituted security and paying the interest thereof. Such an action would have amounted to conversion of Government securities into the new assets, which would be subject to Capital Gains Tax. This is borne out by our discussion in the succeeding paragraphs.

IN the further letter dated 17.10.1997, Mr. Haribhakti has stated that the Kerala High Court in the case of C.I.T. v. Thressiamma Abraham, reported in 227 ITR, Page 802, has supported the same view. The assessee sold the property and the entire consideration was appropriated by the State Financial Corporation towards discharge the mortgage loan. The Court held that the Corporation had exercised the overriding Title and not a Capital Gains accrued to the assessee. Mr. Shah of Shah & Co. has discussed extensively the case law in support of this proposition. We may state that this case law was available as early as in 1985. Important decisions have been delivered in the year 1985, supporting the proposition that the assessee was entitled to deductible expenditure under the heading, ''Improvement of the asset'', u/Sec. 48 of the INcome-tax Act, if the purchaser deposits the sale proceeds of the assessee towards the discharge of the mortgage loan. Such view is laid down by the Supreme Court in the case of INdian Molasses Co. (P) Ltd. v. C.I.T., 37 ITR 66. This decision was upheld by the INcome-tax Appellate Tribunal, Madras in its decision in the case of R. Srinivasan v. I.T.O., 13 ITD 632. This judgment is of 28.2.1985. Mr. Shah has also referred to the judgment dated 10.10.1985, delivered by the Appellate Tribunal, Hyderabad in the case of Attili Narayan Rao v. I.T.O., 16 ITD 35. The Tribunal held that the Capital Gains can be computed only with reference to the pro-tanto consideration received by the assessee towards his interest in the property sold. Similarly, in the judgment by the Madras Appellate Tribunal in the case of N. Vajrapani Naidu v. ITO, 28 ITD 459, it was held that the amount paid by the purchaser to discharge the mortgage has to be considered as an amount diverted by overriding Title and so far as the assessee is concerned, he has no right to receive this amount. The amount paid by the purchaser to discharge the mortgage debt has to be deducted while computing the Capital Gains u/Sec. 48 of the Income-tax Act. This ruling is based on several judgments including the judgment of the Supreme Court in the case of Dhun Dadabhoy Kapadia v. CIT, 63 ITR 651. Similar view has been taken by Income-tax Appellate Tribunal, Allahabad in the case of Kaliswaroop Sharma v. CIT, 41 ITD 242. Chartered Accountant Mr. Shah has stated that the doctrine of diversion of income by overriding title is applicable to the assessee and the stand taken by Mr. Apte in Income-tax proceedings was correct. He has also stated that the course of action proposed to be adopted by Shri Apte in converting the price consideration into Government approved bonds and keeping them in custody of the Bank towards the loan account was likely to breach the provisions of the Section 54(E) of the Income-tax Act. The Bonds cannot be transferred either by way of pledge or any other manner to any other person within the freeze period of three years. If the Bonds are pledged within the period of three years from the date of sale of the property, the exemption would be lost.

THE Supreme Court in the case of CIT v. Sitaldas Tirathdas, (1961) 41 ITR 367, laid down the ratio that "the true test is whether the amount sought to be deducted, in the truth, never reached the assessee as his income. THEre is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of obligation cannot be said to be a part of the income of the assessee. Whereby the obligation, income is diverted before it reaches the assessee, it is deductible. But where the income is required to be applied to discharge an obligation after such income reaches the assesses, the same consequences, in law, does not follow".

IN the case of Kantiswaroop Sharma v. I.T.O., Allahabad Bench of INcome-tax Appellate Tribunal thoroughly went through the various aspects of Capital Gains Tax u/Sec. 48 of the INcome-tax Act. IN para 5, it is observed that the Transfer of Property Act recognizes that ownership is a bundle of rights and when a property is mortgaged, some interest in the property is transferred with the result that the owner of the mortgaged property becomes a limited owner. Consequently, when he sells the property subject to the mortgage he should be selling only his limited ownership and the secured creditors would be entitled to receive the payments in discharge of the mortgage from the transferee with notice. IN such a case, what is sold is equity of redemption and therefore, the amount paid by the vendor directly to the Banks for discharging the debts as well as the amount utilised for discharging the other unsecured creditors of the business, cannot be treated as consideration received or accruing to the assessee, ITD 1992 (41) Page 246. The other facets of this provision are to be found in the judgment of the Delhi High Court in the case of C.I.T. v. Shakuntala Rajeshwar, (1986) 160 ITR 840. The Delhi High Court held that an amount required to be paid to the tenant to vacate the premises was deductible. In the case of Shakuntalal Kantilal (1991) 190 ITR 56, the Bombay High Court has laid down the same ratio. In that case, the assessee, who owned a piece of land entered into an agreement of sale of the said property with one ''R''. Subsequently the assessee entered info another agreement of sale with ''C''. The sale deed was executed in the last in favour of ''C'' on the assurance given by ''C'' to ''R'' that he will deduct Rs. 35,504/- from the total consideration and paid to him by way of compensation due to an earlier agreement by the assessee to sell the said property to him. Rs. 35,504/- was held to be deductible while computing the capital gain on the sale proceeds of the said land.

The Kerala High Court in the case of C.I.T. v. Mrs. Thressiamma Abraham, 227 ITR Page 812, has observed that if the entire sum is appropriated towards the discharge of the mortgage deed under the document, there could not be any income left to the assessee much less any Capital Gain.

WITH such copious case law in supporting the opinion given by the appellant, we are unable to read any negligence or deficiency in service on the part of the appellant. Of course, appellant should have made more homework and cited the ratio in other cases Attili Narayan Rao & Harsh Ulhas which were available to him on the date of which the opinion was delivered that is on 3.3.1986. Had these cases been cited, the opinion would have been viewed as full proof and not assailable on any count. Merely, because the subsequent case law has amply re-confirmed this proposition, subsequent to the opinion given on 3.3.1986, we cannot say that the opinion delivered in 1986 was not correct. We censure the contention of the respondent that the opinion delivered by the appellant could not appeal to any of the Income- tax Authorities including the Income-tax Appellate Tribunal. The judgment of the Income- tax Appellate Tribunal, Pune has taken note of the various judgments, but felt obliged to protect the revenue of the Government. It is observed by the Appellate Tribunal that if such stands are taken, the purpose of Capital Gains Tax would be totally frustrated. We do not wish to comment on this aspect of the judgment of the Income-tax Tribunal, but we say firmly that merely because the Income-tax Authorities including the Appellate Tribunal could take contradictory view against the above opinion, the opinion, as given by the appellant can on no reckoning could be treated as wrong and causing injury to the interest of the respondent.

ATTEMPTS have been made to point out that the appellant has colluded with the Bank and was interested in protecting the interest of the Bank and that is why he advised the complainant to deposit the sale proceeds at the hands of the purchaser directly with the Bank. We view these allegations of the complainant as unkind remark causing damage to the reputation of the appellant. On the other hand, the appellant rightly gave the opinion because any other course would not have protected the complainant in getting the advantage of deductible income. The facts clearly disclose that the loans were taken for purchasing the land, setting up the building, plant and machinery and therefore, the opinion given by the appellant was correct, bona fide and with no ulterior motive whatsoever to cause injury to the complainant. We do not wish to dwell on other aspects of the allegation of the complainant. We find that they pale into insignificance in view of overwhelming case law. Because the complainant was required to pay the Capital Gains Tax inspite of sale of the property and taking steps to discharge the loan obligation and that he did not succeed before the Income-tax Authorities, he appears to have indulged in mud slinging the appellant. Rather, we, at one stage felt that this was clearly an attempt to tarnish the image of the appellant and that the complainant should be saddled with penalty. However, in this case, looking to the facts that the complainant has been deprived of the property as well as the exemption from the Capital Gains Tax, we stay our hands in taking the above step. We, however, firmly believe that the complaint cannot be entertained. The District Forum did not probe into these aspects. The District Forum should have carefully gone through the provisions of the Income-tax Actand also the opinion delivered by the appellant and should have come to a logical conclusion of approving the opinion given by the appellant. We cannot subscribe to the suggestion of the complainant that appellant should have advised the complainant to postpone the entire transaction to reap advantage of appreciation in the value of capital assets. The business was running in loss. There were no immediate prospects of profits in the business. The interest burden was continuously rising. With the mind set of the complainant to get himself relieved from all these worries, any advice to postpone the deal would not have been appreciated or accepted by the complainant. Apart, the future was uncertain, whereas debt burden was continuously going up. It is a matter of common knowledge, the debtor is always at the mercy of the creditor and the creditor can victimise the debtor in under-pricing of the mortgaged properties.

LASTLY, we may say that the Chartered Accountants are amenable to the Consumer Protection Act when it is clearly established that they have given opinion or advice on payment of fees. If the opinion or the advice is clearly contrary to the explicit provisions of law and not supported by any judicial decision or textual commentary, the prayer for awarding the compensation in regard to deficiency in service can be agitated. However, we have stated that in this case, such is not the matter. We, therefore, proceed to pass the following order: ORDER "The appeal is allowed. The order of the District Forum is set aside. The complaint is dismissed. There should be, however, no order as to cost".

Appeal allowed.