COMMISSIONER OF INCOME-TAX VS SIMPSON GENERAL FINANCE CO. LTD
1999 P T D 3380
[230 I T R 222]
[Madras High Court (India)]
Before K. A. Fhanikkachalam and Sidickk, JJ
COMMISSIONER OF INCOME-TAX
Versus
SIMPSON GENERAL FINANCE CO. LTD
Tax Case No. 496 of 1983 (Reference No.249 of 1983), decided on 28/01/1997.
Income-tax---
--Capital gains or business income ---Assessee-company purchasing lands from one a lied concern and retaining them for more than a decade-- Assessee selling the lands to other allied concerns, one of them being holding company of assessee-company---Lands surrendered to allied concerns to settle financial accounts---Only sale made to an outsider worth only a negligible amount for rounding off land with factories---Some lands sold to comply with restrictions on owning urban lands---Transactions were between parent company and subsidiary---No evidence that lands transferred at market value---Assessee was not dealer in land---Transfer was only of capital asset or investment and not stock-in-trade---Gains arising from sale of land to be assessed as capital gains and not as business income---Transfer by subsidiary to holding company exempt---Indian Income Tax Act, 1961, Ss.45 & 47(v).
In a transaction between a parent company and a subsidiary company, transfer of asset could be made at any price without damaging the finances of either the parent company or the subsidiary company. It would only increase or decrease the value of shares of either. It is an unrealistic transfer, virtually transferring the asset from the books of one company to the other, the latter acquiring a notional- increase in share value or extra shares. In a transaction between a parent company and a subsidiary company, the nature of the transaction and the value of the transferred asset cannot be treated as the same as in the case of transfer at arm's length between two different persons or entities. Mostly this is only a book adjustment appearing as profit on the one hand and loss on the other.
The assessee acquired 1,773 grounds and 1,741 sq. ft. from a group company on April. 30, 1957. Portions of these lands were sold to the various units of the group. In the previous year relevant to the assessment year 1975-76, there were certain sales of lands by the assessee to the other companies. The total gains on the sale of these lands came to Rs.32,12,184. The assessee had claimed that the gains of Rs.3,15,716 arising consequent to the sale of lands by the assessee to S Co., which was the holding company of the assessee-company, was exempt under section 47(v) of the Income Tax Act, 1961. The balance sum of Rs.28,96,468 was offered by the assessee under the head "Capital gains". The Income-tax Officer for the reasons stated in the assessment order for the year 1973-i4, held that the sum of Rs.32,12,184 being the surplus realised on the sale of land in this year i.e., 1975-76 should be assessed under the head' "business". On appeal, the Appellate Assistant Commissioner, following his order for the assessment year 1973-74, held that the profits arising on sale of lands were assessable only as capital gains. Regarding the profit on sale of lands to the holding company amounting to Rs.3,15,716, he held that the same was exempt under section 47(v) of the Act. The Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference:
Held, that so far as the lands were concerned, the assessee had purchased them from an allied concern and sold them also to allied concerns. After purchase of the land, the assessee retained it for more than a decade. Even when a portion of the land was surrendered to one or other of the allied concerns, that was done in order to settle some financial accounts. The only sale to an outsider was of 1-I/2 acres of land, worth only a negligible amount of Rs.10,000. This was done for the purpose of rounding off the land with the factories. The sale to the holding company was also a sale to an allied concern. From the conduct of the assessee, it was clear, that the purchase of land had not been intended for business, but only for transfers to allied concerns, the financial effect of which would depend more on the overall finance of the concerns rather than the individual transfer of the land. Land owners holding large quantities of land always feared that legislation would come curtailing their right to hold large extents of land. The price at which the lands were sold was not the market value. These facts would go to show that the assessee was not a dealer in lend and the transfer in the present case was only of a capital asset. The transaction in the present case was between a parent company and its subsidiary. Therefore, the gains arising from the sale of the land had to be assessed under the head "Capital gains", since what was sold was only investment and not stock-in-trade. The sum of Rs.3,15,716 representing gain on the transfer to the holding company was exempt under section 47(v).
C. V. Rajan for the Commissioner.
P. H. Aravindh Pandian for the Assessee
JUDGMENT
K. A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following four questions, for the opinion of this Court, under section 256(1) of the Income Tax Act, 1961:
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provision for monetary value for unavailed leave salary of the assessee's employees was an admissible deduction?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the surplus of Rs.32,12,184 realised on the sale of lands at Sembiam was assessable only under 'Capital gains' and not as business profits?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the profits of Rs.3,15,716, arising on transfer of lands and buildings to Simpson & Co., was assessable only under the head 'Capital gains' and since the transfer was by a subsidiary company to a holding company, the same is exempt under section 47(v) of the Income Tax Act, 1961?
(4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's view that the holding, viz., lands transferred by the assessee during the year were held by the assessee only as investment and not as stock-in-trade, is based on valid and relevant material and is sustainable in law?"
In so far as question No. (1) is concerned, that was not pressed at the time of the hearing. Accordingly, we are returning the same unanswered.
The assessee, Simpson General Finance Company Ltd., is one of the Amalgamation group of companies. The assessment for the assessment year 1,975-76 was completed on a total income of Rs.34,59;470. In the assessment made, the Income-tax Officer included a sum of Rs.32,12,184 being the profit on sale of land and buildings.
The assessee acquired 1,773 grounds and 1,741 sq. ft. from Amalgamations Ltd., on April 30, 1957. A portion of these lands was cold to the various units of the Simpson group. In the previous year, relevant to the assessment year 1975-76, there were certain sales of lands in Sembiam by the assessee to the other companies. The total capital gains on the sale of these lands in Sembiam came to Rs.32,12,184. The assessee has claimed that the capital gains of Rs.3,15,716 arising consequent to the sale of lands by the assessee to Simpson & Company, which is the holding company, is exempt under section 47(v) of the Income Talc Act, 1961. The balance sum of Rs.28,96,468 was offered by the assessee under the head "Capital gains". For the detailed reasons stated by the Income-tax Officer in the assessment order for the year 1973-74, he held that a sum -of Rs.32,12,184 being the surplus realised on the sale of land should be assessed under the head "business".
On appeal, the Appellate Assistant Commissioner, following his order for the assessment year 1973-74, held that the profits arising on sale of (ands are assessable only as capital gains. Regarding the profit on sale of lands to Simpson & Company, amounting to Rs.3,15,716 he held that the same is exempt under section 47(v) of the Act.
On appeal by the Department, the Tribunal, following its earlier order in I.T.A. No.430/Mds. of 1977-78, dated September 27, 1978, for the assessment year 1973-74 in the case of the same assessee, held that the surplus arising on the sale of lands, amounting to Rs.32,12,184 should be assessed only as "capital gains' and not under the head "business" and that the capital gains of Rs.3,15,716 on the sale of lands to Simpson Co., is exempt under section 47(v) of the Act.
Before us, learned standing counsel appearing for the Department, submitted as under:
The fact that the lands, other than ponds and roads, had been leased out, for a long period ranging from 20 to 25 years; will not go against the finding that the gains realised by the assessee on the sale of the land over cost price, was profit, assessable under the head "business". Due to necessity or convenience, the period for which a land is leased may vary. Leases were in favour of the group companies, and, therefore, the continued possession by the assessee of the land was not regarded as an impediment by the lessees, who had put up superstructures. If this had not been the arrangement between the group companies, the companies, which had put up the structures, would themselves have purchased the land and would not have resorted to the arrangement of lease. Obviously, the arrangement' had been to assign different rules to different companies in long term plan. It would have put the companies to great financial strain if they had purchased the lands and hence till they build up resources, possession by another group company had been resorted to, and the intention must always have been to make the group, companies sooner or later owners of the land, the assessee selling the same. The contentions that the assessee had not been dealing in investments of immovable properties and it was formed for the main business of hire purchase financing are contradictory to what has transpired, viz., acquisition by the assessee of the lands from Amalgamations Ltd., and leasing of the land to the group companies for long periods. The conduct of the assessee -company to hold the lands and providing services to the companies, who had put up structures, was in keeping with the scheme formulated and, therefore, the conduct for the time being will not constitute evidence of the ultimate intention to sell the lands to the group companies. The methods in which the accounts are maintained will not also be relevant in understanding the true implications of the transactions. If the transaction denotes that the land has been neither stock-in-trade nor possession and disposal of the land was an adventure in the nature of trade, no amount of book keeping, treating the land as fixed asset, can stand in the way of liability to tax on the gain. The question whether a certain asset is stock-in-trade or not, has to be decided on the facts of the case and cannot depend upon how the assessee chooses to give a nomenclature to the same in its balance-sheet. A considerable portion of the land acquired was on lease arrangement and such leases were attorney in favour of the assessee. It was not established that the assessee required the lands as a fixed investment. The assessee had to acquire the lands on account of compulsion creased by the statute, preventing upstream loans and had, therefore, per force to acquire the land, though considerable portions thereof had been under lease arrangement, involving attornment of the leases in its favour. The possession by the assessee of the land was obviously for the period till the group companies find the necessary resources. Therefore, it is only an exchange of the circulating capital of amounts advanced to Amalgamations Ltd., into lands to be held for some time with the ultimate intention to realise in cash sooner or later what has taken place and not a permanent investment by way of acquisition by the assessee of fixed asset. The fact that there was necessity to sell the lands in prior years to India Pistons Ltd., as required by I.C.I.C.I. does not establish that the land: are fixed assets. It is not possible to accept the contention that the transaction of the assessee with Amalgamations Ltd., were not money-lending transactions. Therefore, the fact that the group companies had to be provided for by Amalgamations is not one suggesting that the advance was made by the assessee otherwise than as a money-lending transaction. The fact that there was no mortgage of the land when moneys were advanced by the assessee to Amalgamations is not significant. The take over of the land by the assessee from Amalgamations is certainly equal to take over of land by a money lender from a debtor, in lieu of the debt. The question whether the transaction constitutes business will depend upon the facts of the case. The transactions such as advances of funds to Amalgamations Ltd., recoupment of the loan by taking over land belong to that company, utility of the land as provision of site by the group companies for the duration till they are capable of acquiring the land and providing services, such as maintenance of roads, lighting, watch and ward, etc., and ultimate disposal of the land to the group companies should be considered as forming an adventure in the nature of trade or as constituting business in real estate. Therefore, the gain arising from the sale of the lands should be assessed under the head "business" and not under the head "Capital gain"
On the other hand, learned counsel appearing, for the assessee submitted as under:
The assessee had never been dealing in investments of immovable properties. The assessee-company was formed for the main business of hire purchase financing. The fact that lands and buildings had been fixed assets was not disputed by the Department at any time in the earlier assessments. The only question whether roads and compound walls were entitled to depreciation or not, had been decided. Except roads, ponds, etc., which could not be leased out, lands had been leased to various companies under the lease agreements for very long periods ranging from 20 to 25 years. The conduct of the assessee-company from the time the lands were acquired has a vital bearing on the factual position. If there had been any intention to treat the lands as circulating capital, the treatment under the account would have been different and would have been disclosed therein as stock-in-trade, whereas these are disclosed in the accounts as fixed assets. These assets are capital assets and had never been taken as circulating capital. When these lands were acquired, considerable portion was on lease arrangement and such, leases were attorned in favour of the asses see-company at the time of acquisition, which proves that there was no intention to sell the lands to the companies, who are lessees. The assessee had no intention to treat the land as stock-in-trade. The necessity to sell the land to India Pistons Ltd., in prior years arose in view of the requirements by I.C.I.C.I. that the lands must be owned by India Pistons. The decision taken to sell away the lands was in view of the impending restrictions on holding of urban land to the mutual benefit of the lessors and lessees. Unless these lands were sold, it would have been very difficult for the company to comply with the restrictions on owning urban lands. The lands were sold only to the group companies. Either for sale or for purchase, sanction from the assessee's bankers had to be taken.
Amounts have been advanced by the assessee from time to time to Amalgamations Ltd., prior to the acquisition of the lands under reference, but this should not be treated as money-lending transactions. Moneys were drawn by Amalgamations Ltd. from the assessee-company for financial transactions as they were the companies in the same group. The general object clause in the memorandum of association of the assessee-company, empowering the assessee to make advances is not to be interpreted to mean that the assessee advanced moneys to Amalgamations Ltd., in the course to business. In view of legislation in 1956, preventing upstream loans, the lands had been taken over from Amalgamations Ltd., after obtaining the approval of the central Government. This cannot be equated with the statement of a debit of a money-lender by taking over the assets. It is not as if a forced sale was brought upon. The advances made to Amalgamations Ltd., by the assessee were unsecured and had not been secured on the lands. Therefore, the transactions should not be equated to a case where the property of a debtor is brought by the lender towards realisation of the loan with the object of reselling the property at a profit. This establishes the fact that this is not a sale in the normal course of business, giving of sale of capital assets, giving rise to capital profit. The profit is not available for distribution of dividends. Under a resolution authorising sale of land, sale took place. It is not a sale of stock-in-trade. Therefore, the gains from the sale of the land should be assessed under the head "Capital gains" and not under the head "business".
We have heard both learned standing counsels appearing for the Department as well as learned counsel appearing for the assessee. In the present case, as far as the lands are concerned, the assessee had purchased them from an allied concern and sold them also to allied concerns. After purchase of the land, the assessee retained it with them for more than a decade. Even when a portion of the land was surrendered to one or other of the allied concerns, that was done in order to settle some financial accounts. The only sale to an outsider is a nearly 1-1/2 acres of land, worth a negligible amount of Rs.10,000. This is stated to be for the purpose of rounding off the land with the factories. The present sale to Simpson Ltd.; is also a sale to an allied concern. From the conduct of the assessee, it is clear that the purchase of land has not been intended for business. The assessee has kept a major part of the land with itself for a considerable long time. Even the lands sold were not out of pure business transactions, but only transfers to allied concerns, the financial effect of which would depend more on the overall finance of the concerns rather than the individual transfer of the land. Land owners holding large quantities of land always feared that legislation would come curtailing their right to hold large extents of land. The price at which the present lands were sold, has not been proved to be with any evidence the market value of the land. These facts would go to show that the assessee was not a dealer in land and the transfer in the present case is only of a capital asset. These lands had been transferred to the parent company at what is treated to be the market value the transaction in the present case is between a parent company and its subsidiary. There is no proof of the alleged market value of the land. In a transaction between the parent and the subsidiary company, transfer of assets could be made at any price without damaging the finances of either the parent company or the subsidiary company. It would only increase or decrease the value of shares of either. It is an unrealistic transfer, virtually transferring the asset from the books of one company to the other, the latter acquiring a notional increase in share value or extra shares. In a transaction between a parent and subsidiary company, the nature of the transactions and the value of the transferred asset cannot be treated as the same as in the case of transfers at arm's length between two different persons or entities. Mostly this is only a book adjustment appearing as profit on the one hand and loss on the other. For the abovesaid reasons, the Tribunal came to the conclusion that the lands in question were not stock-in-trade and this transaction cannot be regarded as a commercial transaction, resulting in profit or loss for income-tax purposes. The provisions of section 47(v) would apply only to capital assets, but not to stock-in-trade. It is for these reasons, the Tribunal held that the gains arising out of the sale of the land cannot be treated as business income.
A similar question carne up for consideration before this Court in the case of the same assessee in T.C.P. No:226 of 1980 wherein by an order, dated October 21, 1980, this Court held that the gains arising out of the sale of the land should be taxed under the head "capital gains" and it cannot be treated as "business income". Thus, considering the facts arising in this case, we are also of the opinion that the assessee was not selling the land in question as stock-in-trade. Considering the nature of the transaction, we have to hold that the gains arising from the sale of the land, should be assessed under the head "capital gains", since what was sold was only investment and not stock-in-trade. Accordingly, we answer questions Nos.(2) to (4) referred to us in the affirmative and against the Department. No costs. '
M.B.A./3115/FC Reference answered