IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN THURSDAY, THE 21ST JANUARY 2010 / 1ST MAGHA 1931 ITA.No. 90 of 2009() -------------------- IT.103/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ------------------------------ SHRI ANTO THOMAS ALIAS K.T.ANTO, CHALAKUDY. BY ADV. SRI.V.RAMACHANDRAN, SENIOR ADVOCATE SRI.V.P.K.PANICKER SRI.JACOB THOMAS VELLIKKUNNEL RESPONDENTS/APPELLANTS: --------------- 1. COMMISSIONER OF INCOME TAX, ERNAKULAM. 2. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-II, ERNAKULAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/01/2010, ALONG WITH ITA NO.91 OF 2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal Nos.90 & 91 of 2009 .................................................................... Dated this the 21st day of January, 2010. JUDGMENT Ramachandran Nair, J. The connected appeals are filed by an individual assesseee and and AOP constituted by the very same assessee with his wife against orders issued by the Tribunal in departmental appeals sustaining block assessment made under Section 158BC of the Income Tax Act (hereinafter called "the Act") on the individual assessee and the assessment made under Section 158BC read with Section 158BD on the AOP. We have heard Senior counsel Sri.V.Ramachandran appearing for the appellants and Senior Standing Counsel Sri.P.K.R. Menon appearing for the respondent-department. 2. The brief facts that led to the controversy are the following. A partnership firm by name Kanichai Movie Enterprises owned 39.195 cents of land and a building thereon, where the firm had a theatre building to carry on business of exhibition of movies. However, in the course of time, the building was converted into a hotel and the same 2 was leased to a partnership firm by name M/s.Hotel Lucia Drive-in Restaurant. As on 1.4.1989 the lessor-firm namely Kanichai Movie Enterprises consisted of only two partners who are husband and wife by name Anto Thomas and Mariamma Anto who are members of the AOP. Similarly as on 1.4.1989, the lessee-firm namely, M/s.Hotel Lucia Drive-in Restaurant, which was carrying on bar hotel business in the building leased out from the same firm, also had the same partners namely, Sri.Anto Thomas and Mariamma Anto, which constituted the AOP, the appellant in I.T.A. 91/2009. In the course of search conducted on 28.7.1998 by the Income Tax Department in the premises of another firm by name M/s.Puther Drugs and it's partners and in the premises of common partner of these two firms namely, Anto Thomas, the Department recovered several documents which prove the transaction of sale of land and building with bar hotel by the firm M/s.Hotel Lucia Drive-in Restaurant to M/s.Puther Drugs consisting of seven partners namely, Sri.Stephen Thomas, Sri.Joy Thomas, Sri.T.M.Thomas, Sri.Sebastian Thomas, Sri.Benny Joseph, Sri.E.O.Lawerance and Sri.K.F.Russel. The sale consideration as 3 disclosed by the seized document was Rs.83.5 lakhs and the document showed that the amount payable to the two partners of M/s.Hotel Lucia Drive-in Restaurant will be reduced by 1% commission to those who arranged the sale. The seized document contained an indemnity bond signed by Sri.Anto Thomas and his wife Smt.Mariamma Anto, which clearly establish that the transaction was sale of the land with building, goodwill, bar licence, furniture and all fittings. Based on the evidence collected by the Department, the Assessing Officer concluded that the sale deed between the two firms Kanichai Movie Enterprises and M/s.Hotel Lucia Drive-in Restaurant, both the firms consisting of the same partners namely, Sri.Anto Thomas and Smt.Mariamma Anto who are husband and wife, the subsequent partnership deed executed on 28.4.1995 inducting 18 partners most of whom are partners of M/s.Puther Drugs and the subsequent deed of retirement on 12.4.1996 are part of a scheme contrived to camouflage actual sale of the hotel and bar business as a going concern with land and building, furnitures, fittings and bar licence. It is also found from the terms of the partnership deed executed on 28.4.1995 by which the appellants 4 inducted the partners of M/s.Puther Drugs, that they have not even retained adequate capital contribution and the transfer of business is established beyond doubt because existing employees of the appellants were retrenched and new employees were inducted by the incoming partners who have really started business, and to camouflage the actual sale, the appellants, husband and wife were retained as partners. In the block assessments made, the disputed income assessed is the capital gains on sale of the land and building wherein bar hotel business is carried on, one at the hands of Anto Thomas and the other at the hands of Sri.Anto Thomas and his wife Mariam Anto as AOP. Even though assessments were vacated by the first appellate authority holding that there was no transfer of assets assessable either under Section 45(3) or 45(4) of the Income Tax Act, the Tribunal reversed the findings and held that the scheme of transaction amounts to transfer of the land with hotel building thereon as a going concern. Even though the Tribunal has sustained the block assessment in principle in both the assessees, the Tribunal has not gone into the appellants' dispute on quantum assessed. 5 3. In appeal, the appellants have raised questions challenging the validity of assessment, status in which assessment is made and also the manner and method of determination of capital gain in block assessment. The contention raised by Senior counsel appearing for the appellants is that block assessment in the hands of AOP under Section 158BC read with Section 158BD is untenable because according to him, AOP does not exist at all. Similarly, so far as I.T.A. No.90/2009 is concerned, counsel contended that there is no scope for assessment of the individual assessee-appellant under Section 158BC because Section 45(4) provides for only assessment of capital gains at the hands of the partnership firm, that too, only when there is dissolution of the firm and distribution of the assets. The further contention raised by the counsel is that Section 45(3) has no application because the said Section provides for assessment in the hands of the partners joining a firm when the sale consideration to be treated as transfer value is the amount credited in the capital account of the partner joining the firm. Senior Standing counsel appearing for the respondents on the other hand heavily relied on the evidence and materials gathered during 6 inspection, based on which block assessment under Section 158BC read with Section 158BD was made and contended that even though the Tribunal has not relied on detailed facts, their findings go to show that they have taken into account evidence and materials gathered on inspection to substantiate their finding that the assessment for capital gain in block assessment is tenable. Even though both sides have relied on some decisions and the Tribunal has also relied on several decisions of the High Courts and the Supreme Court, we do not think there is any need to go into the legal question because in this case the clear finding based on seized documents including indemnity bond executed by appellants is that appellants have sold the bar hotel with land, building, furniture, fixtures and with bar licence as a going concern for a consideration of Rs.83.5 lakhs. When transaction is proved to be a sale based on seized documents and the statements recorded from purchasers, the applicability of sub-section (3) or sub-section (4) of Section 45 does not arise at all. Section 45(3) specifically covers the situation of a person joining a firm by bringing capital asset other than cash as his contribution. Similarly Section 45(4) provides for 7 assessment of capital gain on the distribution of assets of a firm or other association of persons or body of individuals among the members on dissolution or otherwise. In this case the clear finding based on evidence collected on inspection is that the purpose of transfer of the land and building by one firm to the other, the partners of both firms being the same persons who are none other than husband and wife, the members of the AOP-appellant in one of the appeals herein, was only to facilitate the firm engaged in hotel and bar business which had only leasehold rights in respect of the land and building to confer title on the very same firm for the purpose of sale through induction of new partners who are none other than the actual purchasers and then retirement of the original partners namely, the appellants. It is pertinent to note that the Kanichai Movie Enterprises which originally owned the land and building, executed sale deed in favour of the partnership firm M/s.Hotel Lucia Drive-in Restaurant on 24.4.1995. Admittedly both the firms have the very same two partners namely, Sri.Anto Thomas and Smt.Mariamma Anto. Shortly after execution of this transfer deed of the land and hotel building, the two partners 8 namely, Sri.Anto Thomas and Smt.Mariamma Anto, inducted 18 other persons by reconstitution of the partnership on 28.4.1995. The finding of the departmental authorities based on seized documents is that ever since execution of this deed, the appellants have retained only a nominal capital in their account and they have actually withdrawn from business, though on paper they continued as partners. In other words, the execution of the transfer deed of the property on 24.4.1995, the reconstitution of the partnership with purchasers on 28.4.1995 and subsequent retirement by the two partners namely, Sri.Anto Thomas and his wife along with few others on 12.4.1996 is a clear scheme of transfer of land and building and bar hotel with licence as a going concern on the specific consideration of Rs.83.5 lakhs. So much so, in our view, assessment was rightly made for capital gains as the transaction is a clear transfer of property within the meaning of Section 2(47) of the Act without reference to Section 45(3) or Section 45(4) of the Act. We, therefore, uphold in principle the orders of the Tribunal holding that the transaction by the appellants amounts to transfer of capital asset which attracts liability for tax for capital gains. 9 4. Another question raised by counsel for the appellants is that there is no justification for assessment of Sri.Anto Thomas and his wife Smt.Mariamma Thomas as constituting an AOP. However, Senior counsel appearing for the Revenue contended that seized documents prove beyond doubt that Sri.Anto Thomas and his wife have discontinued from business and their whole effort was to transfer the land and building and hotel as a going concern with bar licence and to get the sale consideration of Rs.83.5 lakhs. Since there is no partnership between these two persons after the reconstitution of the firm on 28.4.1995 and the purpose was found to be only sale of the property and to earn profit therefrom, we do not think there is anything wrong in treating both of them being admittedly beneficiaries, as an AOP. We, therefore, hold that block assessment under Section 158BC read with Section 158BD in the hands of Sri.Anto Thomas and his wife Smt.Mariamma Thomas as AOP is tenable. We, therefore, reject this contention as well. 5. Counsel for the appellants also objected against assessment of the same income in the hands of the AOP as well as one individual 10 partner namely, Sri.Anto Thomas who is the appellant in I.T.A. No.90/2009. However, Standing Counsel for the Revenue contended that since assessment is under Section 158BC, rate of tax is the same and so much so, tax effect is same irrespective of in whose hands assessment is sustained. He has further submitted that even though two separate assessments are sustained by the Tribunal, recovery will be limited from one of them. We do not think appellants can have any grievance against double assessment, if recovery is limited only under one. Since we have upheld the assessment in the hands of AOP, we direct recovery of arrears of tax with interest from Sri.Anto Thomas and his wife Smt.Mariamma Anto. 6. Counsel for the appellants challenged the method of computation of capital gains which was not considered in detail by the Tribunal. We feel this requires consideration because once the assessment is sustained by us as a sale disguised under cover of reconstitution and retirement from partnership firm, necessarily the appellants are entitled to examine the true nature and character of the transaction. Admittedly the two partners namely, Sri.Anto Thomas and 11 his wife Smt.Mariamma Anto, became absolute owners of the property when they became the sole partners in the firm M/s.Kanichai Movie Enterprises which happened on 1.4.1989. We have already found that the transfer of land by one firm consisting of two partners to another firm consisting of the very same partners on 24.4.1995 was only part and parcel of a scheme for sale of property to strangers, which happened when the partnership firm M/s.Hotel Lucia Drive-in Restaurant after purchase of the land inducted 18 partners by partnership deed dated 28.4.1995. So much so, for the purpose of determination of long term capital gains, the date of acquisition of the property by the two sellers namely Sri.Anto Thomas and Smt.Mariamma Anto should be taken as 1.4.1989. Section 158BB provides for assessment of undisclosed income also in the same manner in which tax is computed under the provisions of the Act. Long term capital gain entitles for deduction of cost of acquisition with indexation thereon. Since the two persons namely, Sri.Anto Thomas and Smt.Mariamma Anto got absolute right over the land as sole partners of the partnership firm Kanichai Movie Enterprises as on 1.4.1989, we 12 feel acquisition of the land and building should be estimated on that date and they are entitled to claim deduction towards further improvements and indexation cost of acquisition. Therefore, computation of net capital gain requires recomputation by the officer in the light of what we have stated above. Further, substantial amount of sale consideration is attributable to the consideration paid for the acquisition of bar licence, which the hoteliers find difficult to get in Kerala. Therefore, in the first place, sale consideration has to be apportioned towards consideration for goodwill, charges for transfer of bar licence, though in an indirect manner, and cost of furnitures, fixtures etc. It is for the Assessing Officer to estimate the cost of the land and building after making exclusion of these items. However, sale consideration for the purchase of goodwill and for the licence fee are also assessable as undisclosed income under Section 158BB. 7. We, therefore, dispose of the appeals by upholding the assessments confirmed by the Tribunal in principle, but by remanding the matter to the Assessing Officer for recomputation of capital gains after granting eligible deduction to the assessee and after giving an 13 opportunity of hearing to them. Even though counsel for the appellants contended that assessment should be made as a regular assessment and not as a block assessment under Section 158BC read with Section 158BD, we are unable to accept this contention because assessment in the case of AOP is permissible under Section 158BD because in the course of search in the premises of M/s.Puther Drugs and Sri.Anto Thomas, the department got enough materials based on which assessment was made at the hands of the AOP. Consequently rate of tax applied namely, 60%, is the appropriate one. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms