IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA I.T.A No. 12 of 2005. Date of decision: 2.9.2009 Commissioner of Income Tax, Shimla …. Appellant Versus M/s.Kshitij Hotels Pvt. Ltd. Shimla. ….. Respondent Coram:` The Hon’ble Mr. Justice Deepak Gupta, J. The Hon’ble Mr.Justice V.K.Ahuja, J. Whether approved for reporting? No For the appellant: Mr.Vinay Kuthiala, Advocate For the respondent: M/s.K.D.Sood, Advocate _____________________________________________________ Deepak Gupta, J.(Oral) This appeal has been admitted on the following substantial questions of law:- “i) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law holding that capital gains tax is not chargeable on the transfer of all assets and liabilities of the company as a result of the complete change of management and 100% change of the shareholding of the 2 company and it does not amount to succession. ii) Whether the sale of 100% share-holding of the company to the new management would not constitute ‘transfer’ as envisaged in section 2(47) (vi) of the Income-tax Act, 1961 and would not thus attract the Capital Gains Tax.” The facts of the case are that the assessee- M/s.Hotel Kshitij is a Private Limited Company engaged in the business of running of a hotel at Shimla. The company was a closely held company and all the shares were held by one family. An agreement was entered into by the erstwhile share-holders and management of the company on 14.3.1993 agreeing to transfer the shares and the management to a new set of share-holders w.e.f. 31.3.1993. It was also agreed that the liabilities of the company were to be borne by the outgoing group of Directors/shareholders. Though as per the agreement, the change in management was to be effected from 31.3.1994, it was actually formalized some time in the end of May, 1993. The Assessing Officer held that since there was a change of Directors/share-holders, two assessments one for the period 1.4.1993 to 31.5.1993 in the hands of the 3 old management and other for the period 1.6.1993 to 31.3.1994 in the hands of the new group of Directors were required to be made and one assessment only on behalf of the assessee-M/s.Kshitij Hotels was not proper. The Assessing Officer further held that as per the balance- sheet of the assessee-company as on 31.3.1993, its total liability were shown at Rs.71,95,585/- whereas the old management transferred/sold all shares of its company for a total consideration of Rs.1.82 crores and as such assessee-company was liable to pay capital gains tax. The Assessing Officer also did not permit the carry forward of the depreciation. The assessee filed an appeal which was allowed by the Commissioner, Income Tax (Appeals), Shimla on the ground that the transfer of the shares could not be termed to be succession within the meaning of Section 170(1) of the Act and the identity of the assessee remained the same. The appeal filed by the Department before the ITAT has been rejected. Hence the present appeal. The moot question which arises for consideration is whether the transfer of the share-holding would amount to transfer of business in terms of Section 170(1) of the Income Tax Act which read as follows:- 4 “170 (1) Where a person carrying on any business or profession (such person hereinafter in this Section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession- (a) the predecessor shall be assesseed in respect of the income of the previous year in which the succession took place up to the date of succession. (b) The successor shall be assesseed in respect of the income of the previous year after the date of succession.” The Apex Court in Commissioner of Income Tax, Madras v. K.H.Chambers, ITR, Volume 55, 1965 considered the import of Section 25(4) of the Income Tax Act, 1922 which corresponds to the provisions of Section 170 of the Income Tax Act, 1961. It held as follows:- “Succession involves change of ownership; that is, the transfer goes out and the transferee comes in; it connotes that the whole business is transferred; it also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any 5 other appropriate collateral purpose cannot detract from the locality of the succession. The expression “succession” has acquired a somewhat artificial meaning. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person “succeeded” to the business of another.” It is apparent that to fall under the ambit of Section 170, there must be a transfer of ownership. Sh.Vinay Kuthiala, learned counsel for the revenue contends that in view of the definition of transfer under Section 2(47) of the Act even a transfer of shares or the right to enjoy a capital asset is a transfer and by transferring the shares, there has been a transfer in the right to use the capital assets of the company and, therefore, the case is covered under Section 170 of the Act. Even if for the sake of arguments, we accept that the transfer of shares amounts to transfer of capital assets in terms of Section 2(47), then also in our considered view, Section 170 will not apply. A bare reading of Section 170 shows that the transfer of the business should be from one asssessse to another. Person under Section 2(31)(iii) of the Income Tax Act includes a company. 6 Under Company Law, a company is a juristic person. The share holders are not the owners of the company. It is the company itself which is its own owner having its own seal and succession. Where shares are transferred, at best this would be a transfer vis-à-vis, the person who was the holder of the shares to the person to whom the shares are transferred. Therefore, when an individual share-holder sells his shares to some other person then it may amount to a transfer while considering the income of these two persons but this cannot be deemed to be a transfer as far as the company is concerned. Section 170 may be attracted to both the previous and subsequent owner of the shares but cannot apply to the company itself. This is no transfer as far as the assessee, i.e., M/s.Kshitij Hotel is concerned. Reliance placed by Sh.Kuthiala on the judgment of the Apex Court in Commissioner of Income Tax v. Mrs.Grace Collis and others ITR (248) 2001 is misplaced. In that case there was amalgamation of companies and the share-holders of one company got shares of the other company. The value of the shares in the transferee company was much higher and the question arose whether the assesseees, i.e., individual 7 share-holders were liable to pay capital gains tax or not. The Apex Court held that it is a transfer within the meaning of Income Tax Act and, therefore, the share-holders were liable to pay tax. It is obvious that the question was answered in relation to the share-holders and not in respect of the company. In the present case, we are concerned with the one assessee whose entire share- holding and management was transferred by one group of people to another. A company is a juristic person having its distinct legal entity separate from that of the share-holders. The change in the share-holders of the company does not change the legal identity of the company. Therefore, Section 170 had no application to the facts of the case. Reliance in this behalf may be placed on the judgment of the Allahabad High Court in Commissioner of Income Tax v. Mass Products (Ind.) Ltd. ITR 221, 1996 wherein it was held as follows:- “In our opinion, the first question referred to us has to be answered in the negative and against the Department because it is settled law that a limited liability company is a distinct legal entity separate from its shareholder. Change in the shareholders of the company does not change the legal identity of the company. A limited liability company is thus different 8 from a partnership-firm because while a company is distinct from its shareholders and directors, a partnership- firm is not different from its partners and it is not a distinct legal entity. Since the asssessee is a limited liability company change in the ownership of its shares will have no effect on the legal identity of the company.” We are in respectful agreement with the observation of the Allahabad High Court. In view of the above discussion, we find no merit in the appeal which is dismissed and both the questions are answered in favour of the assessee. No order as to costs. ( Deepak Gupta ) Judge September 2, 2009 (V.K.Ahuja) (m) Judge