Sri.George Thomas Valy, Kottayam V. The ACIT, Kottayam

ITA 255/COCH/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 2597 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2016
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 09-12-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 30-05-2014
• Court: TRIBUNAL
• Department Lawyers: K P GOPAKUMAR; TRIPTHI BISWAS CITDTR
• Assessee Lawyers: K P PAULSON
• Keywords: Share purchase agreement; Principle of natural justice; Cost of acquisition
• Section: 54F; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH C OCHIN BEFORE S/SHRI B.P. JAIN, AM AND GEORGE GEOR GE K., JM I.T.A. NO.255/COCH/2014 ASSESSMENT YEAR : 2007-08 SHRI GEORGE THOMAS VALY, PROP. NATIONAL TRADING SYNDICATE, KOORALY, P.O., PONKUNNAM, KOTTAYAM-686 522. [PAN:AABPV 7673F] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOTTAYAM. (ASSESSEE -APPELLANT) (REVENUE-RESPONDENT) I.T.A. NO.256/COCH/2014 ASSESSMENT YEAR : 2007-08 SMT. ANCY G. VALY, PROP. SUPREME RUBBER COMPANY, KOORALI, P.O., PONKUNNAM, KOTTAYAM-686 522. [PAN:ACRPV 5018Q] VS. THE INCOME TAX OFFICER, WARD-1, KOTTAYAM. (ASSESSEE -APPELLANT) (REVENUE-RESPONDENT) ASSESSEE BY SHRI K.P. PAULSON, CA REVENUE BY SMT. TRIPTHI BISWAS, CIT(DTR) AND SHRI K.P. GOPAKUMAR, SR. DR DATE OF HEARING 09/12/2015 DATE OF PRONOUNCEMENT 04 /01/2016 O R D E R PER B.P.JAIN, ACCOUNTANT MEMBER: THESE TWO APPEALS OF THE ASSESSEE ARISE FROM T HE DIFFERENT ORDERS OF THE LD. CIT(A)-IV, KOCHI DATED 20-03-2014 FOR THE ASSES SMENT YEAR 2007-08. I.T.A. NOS.255&256/COCH/2014 2 2. SINCE THE ISSUES IN BOTH THE APPEALS ARE IDENTI CAL, ACCORDINGLY, BOTH THE APPEALS ARE BEING TAKEN UP BY THIS CONSOLIDATED ORD ER. 3. FIRST WE SHALL TAKE UP THE APPEAL IN THE CASE OF SHRI GEORGE THOMAS VALY IN I.T.A. NO. 255/COCH/2014 FOR THE ASSESSMENT YEAR 2007-08 AND OUR ORDER HEREINBELOW SHALL BE IDENTICALLY APPLICABLE I N THE CASE OF SMT. ANCY G. VALY IN I.T. A. NO.256/COCH/2014 FOR THE ASSESSMENT YEAR 2007-08. I.T.A. NO. 255/COCH/2014 :A.Y. 2007-08 : SHRI GEORGE THOMAS VALY, PROP. NATIONAL TRADING SYNDICATE, KOORALI, KO TTAYAM 4. THE ASSESSEE IS A PROPRIETOR OF M/S. NATIONAL T RADING SYNDICATE AND IS ENGAGED IN THE BUSINESS OF TRADING IN NATURAL RUBBE R. FOR THE RELEVANT ASSESSMENT YEAR 2007-08, THE ASSESSEE FILED HIS RET URN OF INCOME ON 12/11/2007 DECLARING TOTAL INCOME OF RS.7,49,031/-. 5. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCR UTINY BY ISSUANCE OF NOTICE U/S. 143(2) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED THAT THE ASSESSEE ALONG WITH HIS WI FE AND TWO BROTHERS WERE HOLDING 97.63% OF THE EQUITY SHARES OF M/S. CO CHIN CEMENTS LTD. THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR ON 19/10/2 006 ENTERED INTO A SHARE PURCHASE AGREEMENT WITH M/S. CEMENTRUM I.B.V. , A COMPANY INCORPORATED IN NETHERLANDS AND M/S. COCHIN CEMENTS LTD. WHEREIN THE I.T.A. NOS.255&256/COCH/2014 3 ASSESSEE AND HIS OTHER FAMILY MEMBERS HAD AGREED TO TRANSFER THEIR SHARE HOLDING IN M/S. COCHIN CEMENTS LTD. TO M/S. CEMENTR UM I.B.V. 6. IT WAS STIPULATED IN THE AGREEMENT THAT THE S HARES WOULD BE TRANSFERRED TO THE BUYER COMPANY AT A CONSIDERATION AGREED TO AFTER ASCERTAINING THE VALUE OF ENTERPRISE AS A WHOLE AND THE VALUE TOWARDS 97.63% OF EQUITY SHARES. THE NET CONSIDERATION WAS TO BE ARRIVED AT BY DEDUCTING FROM THE ENTERPRISE VALUE, THE NET FINANC IAL DEBT, AS ON 15.11.2006 AS CERTIFIED BY THE AUDITORS. IT WAS FU RTHER AGREED THAT A SUM OF USD 10 LAKHS WOULD BE RETAINED IN SPECIAL ESCROW AC COUNT MAINTAINED WITH STANDARD CHARTERED BANK TO MEET ANY LIABILITY RELAT ING TO THE PERIOD PRIOR TO 15.11.2006 WHICH WAS NOT PROVIDED IN THE BOOKS OF A CCOUNT OR NOT INCLUDED IN THE NET FINANCIAL DEBT. THE AMOUNT RETAINED IN THE ESCROW AMOUNT WAS TO BE RELEASED AFTER DEDUCTING ANY CLAIMS IN THREE ANNUAL INSTALLMENTS. THE AGREEMENT FURTHER STIPULATED THAT THE VENDOR (THE A SSESSEE) WOULD COMPENSATE THE BUYER FOR ALL THE LIABILITIES OF M/S . COCHIN CEMENTS LTD. ARISING OUT OF ANY TRANSACTION PRIOR TO THE DATE OF SHARE PURCHASE AGREEMENT. 7. ANY COMPENSATION WHICH WAS TO BE RECEIVED BY T HE ASSESSEE WAS THEREFORE, DEPENDENT UPON THE CALCULATION OF NET FI NANCIAL DEBT OF M/S. COCHIN CEMENTS LTD. AS ON 15/11/2006, THE SUM ASCER TAINED FOR LIABILITY ON I.T.A. NOS.255&256/COCH/2014 4 ACCOUNT OF SUITS PENDING BEFORE THE ARBITRATORS (IF ANY) AND THE SUM ASCERTAINED FOR ANY LIABILITY FOR WHICH NO PROVISIO NS WERE MADE IN THE ACCOUNTS OF THE COMPANY. THE ADVANCE CONSIDERATIO N FOR THE PURCHASE OF THE SHARES HAD ALREADY BEEN RECEIVED BY THE ASSESSE E AND THE POSSESSION OF THE SHARES WAS HANDED OVER TO THE SELLER. IT IS PE RTINENT TO REFER TO SECTION 2A AND CLAUSE 3.1.3 OF THE SHARE PURCHASE AGREEMENT WHICH IS EXTRACTED HEREINBELOW: SECTI ON 2A PRICE CALCU LATION 2A.1 PRICE CALCULATION : THE PRICE OF THE SALE SAHRES SHALL BE CALCULATED AS FOLLOW: NUMBER OF SALE SHARES DIVIDED BY THE TOTAL SHARES A ND MULTIPLIED BY (USD 8,500,000 NET FINANCIAL DEBT (SALE CONSIDER ATION). 2A.2 ON THE CLOSING DATE THE PARTIES SHALL JOINTLY APPOINT THE AUDITORS TO CONDUCT AN AUDIT O THE BOOKS OF ACCOUNT OF THE COMP ANY, INCLUDING THE BALANCE SHEET OF THE COMPANY, AS ON THE CLOSING DAT E, AFTER GIVING EFFECT TO ALL OF THE TRANSACTIONS OF THE COMPANY PR IOR TO THE CLOSING DATE, AND ISSUE A REPORT (NFD REPORT), WITHIN ONE MONTH OF THE CLOSING DATE, STARTING THE TOTAL NET FINANCIAL DEBT OF THE COMPANY AT THE CLOSING DATE. 3.1.3 USD 1,000,000 TO BE RETAINED IN THE ESCROW AC COUNT. THIS AMOUNT TO BE RELEASED IN THREE INSTALLMENTS :- FIRST INSTA LLMENT OF USD 500,000 ON THE FIRST ANNIVERSARY OF THE CLOSING DATE, SECON D INSTALLMENT ON THE SECOND ANNIVERSARY OF THE CLOSING DATE AND THE LAST INSTALLMENT OF USDS 250,000 ON THE THIRD ANNIVERSARY OF THE CLOSING DAT E. PROVIDED THAT ANY AMOUNT TO BE RELEASED FROM THE ESCROW ACCOUNT OUT OF THE SAID USD 1,000,000 SHALL BE REDUCED BY THE TOTAL MONETARY AM OUNT (CLAIMED AMOUNT) OF ALL NOTICES OF CLAIM THAN MADE BY THE BU YER. THE CLAIMED AMOUNTS SHALL REMAIN IN THE ESCROW ACCOUNT UNTIL FIN AL DETERMINATION OF THE SUBJECT MATTER OF THE NOTICE OF CLAIM EITHER BY SETTLEMENT BETWEEN THE PARTIES OR BY ARBITRATION PURSUANT TO THE TERMS OF THIS SPA. I.T.A. NOS.255&256/COCH/2014 5 8. IT IS REVEALED FROM THE ASSESSMENT PROCEEDING S THAT AT THE TIME OF SIGNING OF THE SHARE PURCHASE AGREEMENT, TWO ISSUES WERE PENDING WITH RESPECT TO M/S. COCHIN CEMENTS LTD. I) ARBITRATION REGARDING PRICE OF FLY ASH PAYABLE TO HINDUSTAN NEWSPRINTS LTD. II) APPEAL FIL ED BY THE COMPANY AGAINST THE ADDITIONAL ELECTRICITY CHARGES LEVIED BY ELECTRI CITY BOARD. 9. THE AFORESAID CLAIMS COULD NOT BE QUANTIFIED IN THE RELEVANT ASSESSMENT YEAR AND THEREFORE, WERE NOT INCLUDED IN THE NET FI NANCIAL DEBT. CONSEQUENTLY, ON 04/04/2007, THE LIABILITY REGARDING PRICE OF FLY ASH PAYABLE TO HINDUSTAN NEWSPRINT LTD. CRYSTALLIZED ON 19/09/2007 WHEN THE ARBITRAL TRIBUNAL AWARDED AGAINST M/S. COCHIN CEMENTS LTD. WITH RESPECT TO T HE APPEAL PENDING BEFORE THE HIGH COURT OF KERALA, REGARDING THE DISPUTE OF ELECTRICITY CHARGES, THE LIABILITY OF M/S. COCHIN CEMENTS LTD., IT WAS FINAL LY ASCERTAINED ON 04/04/2007. 10. APART FROM THE AFORESAID TWO DISPUTES, THE SAL ES TAX DEPARTMENT WITHDREW THE EXEMPTION AWARDED TO M/S. COCHIN CEMEN TS LTD AND RAISED THE DEMAND OF RS.44 CRORES ON 06.02.2007. THE ASSESSEE WAS OF THE OPINION THAT SINCE IN THE RELEVANT ASSESSMENT YEAR 2007-08, THE SALES TAX DEMAND WAS PENDING AND THE SAME WAS DEDUCTED FROM THE ADVA NCE CONSIDERATION RECEIVED, THE NET CONSIDERATION WOULD BE NEGATIVE A ND THEREFORE, HE DID NOT OFFER ANY CAPITAL GAINS ON ACCOUNT OF TRANSFER OF S HARES TO TAX IN THE RETURN OF INCOME. I.T.A. NOS.255&256/COCH/2014 6 11. THE AFORESAID SALES TAX DEMAND WAS CHALLENGED BY M/S. COCHIN CEMENTS LTD. BEFORE VARIOUS JUDICIAL FORUMS UPTILL THE HON BLE SUPREME COURT WHEREIN THE HONBLE COURT VIDE ORDER DATED 07/04/2008 REMAN DED THE CASE TO THE HONBLE HIGH COURT OF KERALA TO HEAR THE SAME ON CE RTAIN SPECIFIC GROUNDS. SUBSEQUENTLY, THE HONBLE HIGH COURT OF KERALA RULE D IN FAVOUR OF M/S. COCHIN CEMENTS LTD. VIDE ORDER DATED 16.6.2008. THE DEMAN D WAS NULLIFIED AND ON 06.08.2008 AFTER RECEIVING THE COMMUNICATION FROM T HE REVENUE, THAT THE ORDER WILL NOT BE CHALLENGED BEFORE THE HONBLE SUP REME COURT, THE MATTER REACHED THE FINALITY AFTER A LONG DRAWN LITIGATION OF TWO YEARS. 12. IN THE MEANTIME, THE BUYERS HAD ALSO ISSUED NOTICES TO THE ASSESSEE FOR RECOVERY OF THE ADVANCE AMOUNT GIVEN TO THE ASS ESSEE, VIDE THEIR LETTERS DATED 19.02.2007 AND 15.03.2007. 13. THEREAFTER IN ORDER TO RESOLVE THE PENDING UNCERTAINTY OVER THE SHARE PURCHASE AGREEMENT DATED 19/10/2006, THE ASSESSEE H AD ENTERED INTO A FINAL SETTLEMENT AGREEMENT WITH THE BUYER ON 06/08/2009 W HEREIN THE LIABILITIES CRYSTALLIZED IN THE ELECTRICITY MATTER, ARBITRATION MATTER WITH M/S. HINDUSTAN NEWSPRINT LTD. AND THE SALES TAX CLAIM WERE CONSIDE RED AND STIPULATIONS WERE MADE REGARDING THE SAME. AFTER THE SAID AGREEMENT, THE BALANCE AMOUNT OF I.T.A. NOS.255&256/COCH/2014 7 RS.70,29,891/- REMAINING IN THE ESCROW ACCOUNT WAS RELEASED TO THE ASSESSEE BY THE BUYERS. 14. THE ASSESSING OFFICER WAS OF THE OPINION THA T THE CAPITAL GAINS ARISING OUT OF THE SALE OF SHARES BY THE ASSESSEE IN THE IN STANT CASE WAS TO BE ASSESSED TO INCOME TAX UNDER THE HEAD CAPITAL GAINS FOR THE ASSESSMENT YEAR 2007-08 ONLY AND THEREBY, VIDE ASSESSMENT ORDER DAT ED 28.12.2009, AN ADDITION OF LONG TERM CAPITAL GAIN OF RS.4,08,82,33 2/- AND SHORT TERM CAPITAL GAIN OF RS.1,19,78,296/- WAS MADE. 15. AGGRIEVED BY THE AFORESAID ORDER, THE ASSESSE E CHALLENGED THE SAME BEFORE THE LD. CIT(A) WHO DISMISSED THE SAME VIDE H IS IMPUGNED ORDER DATED 20/03/2014. THE ASSESSEE IS IN APPEAL BEFORE US AN D HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES, THE LEA RNED ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT EFFECTIVE CAPITAL GA IN WAS NOT DETERMINABLE IN THE RELEVANT ASSESSMENT YEAR AS THE QUANTUM OF E FFECTIVE CONSIDERATION WAS DEPENDENT ON THE OUTCOME OF FUTURE LITIGATIONS, AND ACCORDINGLY, THE FINAL AMOUNT WHICH COULD BE SUBJECTED TO TAX UNDER THE HEAD INCOME FROM CAPITAL GAINS WAS INDETERMINABLE ON THE DUE DATE FOR FILING THE RETURN OF INCOME U/S. 139. CONSEQUENTLY, DISCLOSING INCOME FROM CAPITAL GAINS IN THE IT RETURN OF THE IMPUGNED ASSESSMENT YEAR WAS A N ACT, IMPOSSIBLE OF PERFORMANCE BY THE ASSESSEE. HENCE ASSESSING INCOME FROM CAPITAL GAINS IN THE IMPUGNED ASSESSMENT YEAR, BASED ON FIGURES W HICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE SAID RELEVANT POIN T OF TIME, AND WHICH CAME TO LIGHT AT A MUCH LATER DATE, IS AGAINST THE BASIC PRINCIPLES OF NATURAL JUSTICE, AND HENCE BAD IN LAW. I.T.A. NOS.255&256/COCH/2014 8 2. WITHOUT PREJUDICE TO THE ABOVE, LEARNED ASSESSI NG OFFICER OUGHT TO HAVE ASSESSED CAPITAL GAINS IN THE RELEVANT ASSESSM ENT YEAR, BASED ON THE FIGURE OF CONSIDERATION WHICH WAS AVAILABLE AT THE RELEVANT POINT OF TIME, WHEN THE RETURN OF INCOME WAS REQUIRED TO BE FILED U/S. 139. CONSEQUENTLY, SINCE THE CONSIDERATION IS NEGATIVE ( BECAUSE OF THE BUNDLED LIABILITIES) AT THAT POINT OF TIME, THE AO SHOULD H AVE ARRIVED AT CAPITAL LOSS, ELIGIBLE TO BE CARRIED FORWARD TO BE SET OFF AGAINS T FUTURE CAPITAL GAINS, IN THE RELEVANT ASSESSMENT YEARS WHEN THE BUNDLED LIAB ILITIES ARE EXTINGUISHED AND CAPITAL GAIN ARISES. 3. HONBLE COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN LAW AND FACTS BY SUSTAINING THE ADDITION OF RS.5,28,60,628/- (LON G TERM CAPITAL GAIN RS.4,08,82,332/- AND SHORT TERM CAPITAL GAIN RS.1,1 9,78,296) ON ACCOUNT OF TRANSFER OF SHARES, FOR THE FOLLOWING REASONS: 3.1 THE LEARNED ASSESSING OFFICER OUGHT TO HAVE AP PRECIATED THE TERMS AND CONDITIONS OF THE SHARE PURCHASE AGREEMENT AND OUGHT TO HAVE HELD THAT THERE WAS NO CONSIDERATION RECEIVABLE BY THE A PPELLANT IN THE RELEVANT ASSESSMENT YEAR TO HOLD THAT THERE WAS CAPITAL GAIN IN THE RELEVANT YEAR WHICH WAS AMENDABLE TO THE PROVISIONS OF SECTION 45 OF THE ACT FOR COMPUTATION OF CAPITAL GAINS. 3.2 UNDISPUTEDLY, THE LEARNED ASSESSING OFFICER OU GHT TO HAVE APPRECIATED THAT THERE WAS LIABILITY THAT WAS FASTENED ON THE A PPELLANT IN PURSUANCE OF THE AGREEMENT IN RESPECT OF SALES TAX LIABILITY OF THE COMPANY WHICH WAS REIMBURSABLE TO THE BUYER AND ACCORDINGLY, THERE WA S NO CONSIDERATION ON TRANSFER OF SHARES AND ON THE OTHER HAND, THE CONSI DERATION ON SALE WAS NEGATIVE AND THAT BEING SO, NO CAPITAL GAIN HAD ARI SEN IN THE RELEVANT ASSESSMENT YEAR TO APPLY THE PROVISIONS OF SECTION 45 RWS 48 OF THE ACT TO BRING TO TAX THE INCOME FROM CAPITAL GAINS. 3.3 THE LEARNED ASSESSING OFFICER HAVING PERUSED THE AGREEMENT AND ALSO HAVING OBTAINED ALL THE DETAILS ON FACTS IN TH IS REGARD, OUGHT TO HAVE REFRAINED FROM HOLDING THAT CAPITAL GAINS ON TRANSF ER OF SHARES OF COCHIN CEMENTS LTD. WOULD ARISE DURING THE RELEVANT ASSESS MENT YEAR TO BE BROUGHT TO TAX U/S. 45 OF THE ACT. 3.4 ON THE FACTS, THE VARIOUS CASE LAW CITED BY THE ASSESSING OFFICER AND THE HONBLE CIT(APPEALS) WERE NOT APPLICABLE TO THE FACTS OF THIS CASE AND THEY WERE DISTINGUISHABLE AND ACCORDINGLY THE RELIA NCE MADE BY HIM WAS MISPLACED. 4. ON THE FACTS, THE LEARNED ASSESSING OFFICER O UGHT TO HAVE APPRECIATED THAT THE ULTIMATE SETTLEMENT BEING IN AUGUST, 2009, THE CAPITAL GAINS HAD I.T.A. NOS.255&256/COCH/2014 9 ARISEN ONLY IN THE FINANCIAL YEAR 2009-10 AND ACCOR DINGLY THE CAPITAL GAINS WAS LIABLE TO BE ASSESSED TO TAX FOR THE ASSESSMENT YEAR 2010-11, AND NOT FOR AY 2007-08. 5. WITHOUT PREJUDICE TO ABOVE GROUNDS, THE LEARNE D ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT THERE WAS DIRECT NEX US TO BE CONSIDERATION RECEIVABLE BY THE APPELLANT AND THE LITIGATIONS PEN DING AND THUS HE OUGHT TO HAVE ALLOWED THE LEGAL CHARGES PAID BY THE APPEL LANT AGAINST THE COMPUTATION OF CAPITAL GAINS IN THE CASE OF THE APP ELLANT. 6. WITHOUT PREJUDICE TO ABOVE GROUNDS, THE LEARNE D ASSESSING OFFICER OUGHT TO HAVE ALLOWED THE DEDUCTION U/S. 54F OF THE ACT AS CLAIMED AT THE TIME OF HEARING BY THE APPELLANT FOR THE INVESTMENT MADE, FOR WHICH DETAILS WERE FURNISHED IN THE COURSE OF THE ASSESSM ENT PROCEEDINGS. 6.1 WHEN THE LEARNED ASSESSING OFFICER HAD PROCEED ED TO COMPUTE THE CAPITAL GAINS ON TRANSFER TO SHARES IN THE RELEVANT ASSESSMENT YEAR, THE CLAIM U/S. 54F IS ALSO REQUIRED TO BE CONSIDERED AC CORDINGLY AS THE APPELLANT WAS STATUTORILY ENTITLED TO THE DEDUCTION FOR WHICH NECESSARY EVIDENCE HAD BEEN PLACED BEFORE HIM IN THE ASSESSME NT PROCEEDINGS. 6.2. THE LEARNED ASSESSING OFFICER OUGHT TO HAVE AP PRECIATED THAT THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT HAD NO APPLICATION IN THE CASE OF THE APPELLANT SINCE THE APPELLANT COULD NOT CLAIM THE DEDUCTION U/S. 54F OF THE ACT IN THE RETURN OF INCOME SINCE T HE CAPITAL GAINS ITSELF WAS NOT ASCERTAINABLE FOR OFFERING FOR TAXATION IN THE RETURN. 7. THE AO ERRED IN CHARGING INTEREST UNDER SECTION S 234A, 234B, 234C, 244A, 234D AND 220(2) OF THE ACT AND THE SAME IS REQUIRED TO BE DELETED. 8. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OF THE ABOVE GROUNDS OF APPEAL. 16. THE LD. AR SUBMITS THAT THE INCOME FROM CAPITAL GAINS WAS INDETERMINABLE ON THE DUE DATE FOR FILING THE RETUR N OF INCOME FOR ASSESSMENT YEAR 2007-08 AND THE ASSESSEE COULD NOT BE ASSUMED TO DO AN IMPOSSIBLE ACT UNDER THE LAW. HE FURTHER ASSERTS THAT THE FINAL I.T.A. NOS.255&256/COCH/2014 10 SETTLEMENT BEING IN AUGUST 2009, THE CAPITAL GAIN H AD ARISEN ONLY IN THE ASSESSMENT YEAR 2010-11 AND NOT IN ASSESSMENT YEAR 2007-08. IT IS THE CASE OF THE ASSESSEE THAT THE NET CONSIDERATION AS ON 31-03-2007 WITH RESPECT TO THE SHARES OF THE ASSESSEE AFTER DEDUCTI NG THE SALES TAX DEMAND AS ON 19.02.2007 WAS NEGATIVE AT RS.1,66,39, 687/-. THEREFORE, THE SAME WAS NOT INCLUDED IN THE COMPUTATION OF INC OME. HE HAS BROUGHT OUR ATTENTION TO THE PROVISIONS CONTAINED I N SECTION 45(2A) AND SECTION 2(47) OF THE ACT TO SUPPORT HIS SUBMISSIONS THAT THE SALE WOULD BE COMPLETE ONLY WHEN THE SALE CONSIDERATION IS DETERM INED. 17. THE LD. DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND THE LD. CIT(A) AND HAS ASSERTED THAT TH E ADDITION SHOULD BE CONFIRMED. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE MATERIAL AVAILABLE ON RECORD. WE SHALL TAKE UP GROUND NOS. 1 TO 5 AT THIS STAGE AS THE ISSUES INVOLVED ARE COMMON. THE ONLY QUESTION T O BE DETERMINED IN THE PRESENT APPEAL IS WHETHER CAPITAL GAINS ARISING OUT OF TRANSFER OF SHARES IN THE CASE OF THE ASSESSEE IS TO BE ASSESSE D IN THE ASSESSMENT YEAR 2007-08 OR IN THE ASSESSMENT YEAR 2010-11. SECTION 48 OF THE ACT PROVIDES FOR COMPUTATION OF CAPITAL GAIN WHEREIN FR OM THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUED, THE EXPENDITURE INCURRED WHOLLY OR I.T.A. NOS.255&256/COCH/2014 11 EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND TH E COST OF ACQUISITION OF AN ASSET ARE DEDUCTED. 19. IN THE PRESENT CASE, THE LIABILITIES OF M/S. COCHIN CEMENTS LTD. HAD NOT CRYSTALLIZED AT THE END OF THE RELEVANT ASSESSM ENT YEAR 2007-08. THE LIABILITY WITH RESPECT TO ELECTRICITY CHARGES CRYST ALLIZED ONLY ON 04/04/2007 AND WITH RESPECT TO ARBITRATION MATTER ON 19/09/200 7. THE SALES TAX LIABILITY WAS FINALLY ASCERTAINED WHEN THE APPEAL O F M/S. COCHIN CEMENTS LTD. WAS ALLOWED BY THE HONBLE HIGH COURT OF KERAL A ON 16/06/2008 AND THE SUBSEQUENT COMMUNICATION OF THE REVENUE THAT TH E ORDER WILL NOT BE CHALLENGED ON 06.08.2008. PURSUANT TO THE AFORESAID LIABILITIES, THE BUYER HAD EVEN DEMANDED BACK THE ADVANCE PAID TO THE SELL ERS. IN VIEW THEREOF, THE BUYER HAD TO ENTER INTO ANOTHER AGREEM ENT DATED 06/08/2009 SO AS TO INCORPORATE THE EFFECT OF LIABI LITIES ASCERTAINED PURSUANT TO THE SETTLEMENT OF THREE DISPUTES PERTAI NING TO M/S. COCHIN CEMENTS LTD. 20. IT IS CLEAR FROM THE INTENTION OF THE PARTIES BY ENTERING INTO SUBSEQUENT AGREEMENT THAT THE SHARE PURCHASE CONCLU DED AFTER THE SAID AGREEMENT ONLY. OTHERWISE THERE WAS NO NEED FOR THE PARTIES TO ENTER INTO A FRESH AGREEMENT, IF THE PARTIES WERE AD IDEM ONLY ON THE FIRST INSTANCE ONLY. THE CONTRACT WAS FINALIZED BY THE F INAL SETTLEMENT I.T.A. NOS.255&256/COCH/2014 12 AGREEMENT DATED 06/08/2009 WHEREIN THE PARTIES WERE AD IDEM ON ALL THE ISSUES. 21. SALE IS ONE OF THE MODES OF DISPOSAL OF PROPERTY INCLUDED IN THE DEFINITION OF TRANSFER IN SECTION 2(47) OF THE AC T. THE SAME REFERS TO THE TRANSACTION BY PASSING OF LEGAL TITLE BY THE SELLER TO THE BUYER. THE PRINCIPLE CONSIDERATION TO BE SEEN IN THE PRESENT C ASE IS WHEN THE PROPERTY IN GOODS STOOD TRANSFERRED TO THE BUYER. I N VIEW OF THE FACTS THAT THE LIABILITIES WERE ASCERTAINED IN THE ASSESS MENT YEAR 2010-11 AND THE PARTIES HAD ENTERED INTO A FRESH AGREEMENT ON 0 6/08/2009, WE HAVE NO HESITATION IN HOLDING THAT THE MERE GRANT OF POS SESSION OF SHARES OR RECEIPT OF ADVANCE AMOUNT OF SALE CONSIDERATION, WI LL NOT HAVE THE EFFECT OF TRANSFER OF PROPERTY IN GOODS TO THE SELLER IN T HE ASSESSMENT YEAR 2007-08. THE TRANSFER, AS CONTEMPLATED UNDER THE A CT FOR THE PURPOSE OF SECTION 48 AND SECTION 2(47), TOOK PLACE IN THE ASS ESSMENT YEAR 2010-11 ONLY. 22. IT IS A MATTER OF FACT THAT THE ASSESSEE REC EIVED A SALE CONSIDERATION OF RS.70,29,891/- IN THE ASSESSMENT YEAR 2010-11 PU RSUANT TO THE NEW AGREEMENT ONLY. WE ARE IN AGREEMENT WITH THE SUBMIS SIONS OF THE ASSESSEE THAT THE ASSESSEE COULD NOT HAVE BEEN ASKE D TO PERFORM AN IMPOSSIBLE TASK OF DETERMINING THE LIABILITIES WHIC H HAD NOT EVEN I.T.A. NOS.255&256/COCH/2014 13 CRYSTALLIZED AT THE END OF THE ASSESSMENT YEAR 2007 -08. THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M.S. MADHUSOOD ANAN AND ANOTHER VS. KERALA KAUMUDY PRIVATE LTD. (2004 AIR 909) AND HON BLE HIGH COURT OF KERALA IN THE CASE OF SHAH VRAJLAL MADHAVJI VS. CIT (95 ITR 614) ARE DISTINGUISHABLE ON THE FACTS AS IN THE PRESENT CASE , A NEW AGREEMENT WAS ENTERED INTO BY THE PARTIES. ON THE CONTRARY, SECTION 63 O F THE CONTRACT ACT EMBODIES THE PRINCIPLE OF DISCHARGE OF CONTRACT BY ACCORD AND S ATISFACTION. THE APEX COURT IN NATIONAL INSURANCE CO. LTD. VS. BOGHARA POLYFAB (P) LTD., (2009) 1 SCC 267, EXPLAINED THE PRINCIPLE OF DISCHARGE OF CONTRACT BY ACCORD AND SATISFACTION. IN PARAGRAPH 27 OF THE DECISION, IT HELD AS FOLLOWS: 27. WHILE DISCHARGE OF CONTRACT BY PERFORMANCE REF ERS TO FULFILLMENT OF THE CONTRACT BY PERFORMANCE OF ALL THE OBLIGATIO NS IN TERMS OF THE ORIGINAL CONTRACT, DISCHARGE BY ACCORD AND SATISFA CTION REFERS TO THE CONTRACT BEING DISCHARGED BY REASON OF PERFORMANCE OF CERTAIN SUBSTITUTED OBLIGATIONS. THE AGREEMENT BY WHICH THE ORIGINAL OBLIGATION IS DISCHARGED IS THE ACCORD, AND THE DIS CHARGE OF THE SUBSTITUTED OBLIGATION IS THE SATISFACTION. A CONTR ACT CAN BE DISCHARGED BY THE SAME PROCESS WHICH CREATED IT, THAT IS, BY M UTUAL AGREEMENT. A CONTRACT MAY BE DISCHARGED BY THE PARTIES TO THE ORIGINAL CONTRACT EITHER BY ENTERING INTO A NEW CONTRACT IN SUBSTITUT ION OF THE ORIGINAL CONTRACT; OR BY ACCEPTANCE OF PERFORMANCE OF MODIFI ED OBLIGATIONS IN LIEU OF THE OBLIGATIONS STIPULATED IN THE CONTRACT. IN PARAGRAPH 28 OF THE SAME DECISION, THE APEX COUR T APPROVED THE DECISION OF THE PRIVY COUNCIL IN PAYANA REENA SAMINATHAN VS. PANA LANA PALANIAPPA, 41 INDIAN APPEALS 1941, WHEREIN IT WAS HELD AS UNDE R: ..THE RECEIPT GIVEN BY THE APPELLANTS AND ACCEP TED BY THE RESPONDENT, AND ACTED ON BY BOTH PARTIES PROVES CON CLUSIVELY THAT ALL THE PARTIES AGREED TO A SETTLEMENT OF ALL THEIR EXI STING DISPUTES BY THE ARRANGEMENT FORMULATED IN THE RECEIPT. IT IS A C LEAR EXAMPLE OF WHAT USED TO BE WELL KNOWN AS COMMON LAW PLEADING AS AC CORD AND I.T.A. NOS.255&256/COCH/2014 14 SATISFACTION BY A SUBSTITUTED AGREEMENT. NO MATTER WHAT WERE THE RESPECTIVE RIGHTS OF THE PARTIES INTER SE THEY ARE ABANDONED INCONSIDERATION OF THE ACCEPTANCE BY ALL FOR A NEW AGREEMENT. THE CONSEQUENCE IS THAT WHEN SUCH AN ACCORD AND SATISFA CTION TAKES PLACE THE PRIOR RIGHTS OF THE PARTIES ARE EXTINGUISHED. THEY HAVE IN FACT BEEN EXCHANGED FOR THE NEW RIGHTS; AND THE NEW AGRE EMENT BECOMES A NEW DEPARTURE, AND THE RIGHTS OF ALL THE PARTIES ARE FULLY REPRESENTED BY IT 23. IN VIEW OF AFORESAID REASONING AND THE JUDG MENT OF HONBLE APEX COURT IN THE CASE OF NATIONAL INSURANCE CO. LTD. (S UPRA), WE HOLD THAT THE CAPITAL GAINS MUST BE ASSESSED IN THE CASE OF THE A SSESSEE WITH RESPECT TO THE AFORESAID TRANSACTION IN THE ASSESSMENT YEAR 2010-11 AND NOT IN THE ASSESSMENT YEAR 2007-08. IN VIEW THEREOF, GROU ND NOS. 1 TO 5 RAISED BY THE ASSESSEE ARE ALLOWED. 24. GROUND NOS. 6, 7 AND 8 DO NOT REQUIRE ANY ADJUDICATION IN VIEW OF THE AFORESAID FINDINGS. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IN I.T.A. NO.255/COCH/2014 IS ALLOWED. I.T.A. NO. 256/COCH/2014 :A.Y. 2007-08 SMT. ANCY G. VALY, PROP. SUPREME RUBBER COMPANY, KOORALI, KOTTAYAM 25. NOW WE SHALL TAKE UP THE APPEAL OF THE ASS ESSEE IN I.T.A. NO. 256/COCH/2014 WHEREIN THE GROUNDS OF APPEAL AND THE FACTS OF THE CASE ARE IDENTICAL TO THE FACTS OF THE CASE AND THE GROU NDS OF APPEAL IN THE CASE OF GEORGE THOMAS VALY IN I.T.A. NO. 255/COCH/2 014 DECIDED BY US HEREINABOVE. ACCORDINGLY, AS MENTIONED HEREINABOVE , OUR ORDER IN I.T.A. I.T.A. NOS.255&256/COCH/2014 15 NO. 255/COCH/2014 SHALL BE IDENTICALLY APPLICABLE T O THE FACTS IN THE PRESENT CASE. ACCORDINGLY, THE APPEAL OF THE ASSESS EE IN I.T.A. NO. 256/COCH/2014 IS ALLOWED. 26. IN THE RESULT, BOTH THE APPEALS IN I.T.A. N O.255/COCH/2014 AND I.T.A. NO.256/COCH/2014 FILED BY BOTH THE ASSESSEE ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON 04-01-2016 SD/- SD/- (GEORGE GEORGE K.) (B.P. JAIN) JUDICIAL MEMBER ACC OUNTANT MEMBER PLACE: KOCHI DATED: 04TH JANUARY, 2016 GJ COPY TO: 1. SHRI GEOORGE THOMAS VALY, PROP. NATIONAL TRADING SYNDICATE, KOORALI, P.O., PONKUNNAM, KOTTAYAM-686 522. . 2. SMT. ANCY G. VALY, PROP. SUPREME RUBBER COMPANY, KOORALI, P.O., PONKUNNAM, KOTTAYAM-686 522. 3. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOTTAYAM. 4. THE INCOME TAX OFFICER, WARD-1, KOTTAYAM. 5. THE COMMISSIONER OF INCOME-TAX(APPEALS)-IV, KOCH I 6. THE COMMISSIONER OF INCOME-TAX, KOTTAYAM. 7. D.R., I.T.A.T.,COCHIN. 8. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COC HIN