Appeal Details
Counselvise Citation
[2011] 140 COUNSELVISE.COM (IT) 49522 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 18 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
15-07-2011
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
I
Next Hearing Date
09-06-2011
Assessment Year
2004-2005
Appeal Filed On
27-06-2008
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI D.K.AGARW AL, JUDICIAL MEMBER & SHRI T.R.SOOD, ACCOUNTANT MEMBER I.T.A.NO.4573/MUM/2008 - A.Y 2004-05 DY. COMMISSIONER OF I.T. 2(1), MUMBAI. VS. SHRI NUSLI NEVILLE WADIA, NEVILLE HOUSE, J. N. HERDIA MARG, BELLARD ESTATE, MUMBAI 400 001. PAN: AAAPW 0990 M AND I.T.A.NO.4424/MUM/2008 - A.Y 2004-05 SHRI NUSLI NEVILLE WADIA, MUMBAI. DY. COMMISSIONER OF I.T. 2(1), MUMBAI. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI VIMAL GUPTA, SR. STANDING COUNSEL. ASSESSEE BY : S/SHRI S.E.DASTUR & M. D. INAMDAR. O R D E R PER T.R.SOOD, AM: THESE ARE CROSS APPEALS BY THE REVENUE AND ASSESSE E AND, THEREFORE, THEY WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS COMMON ORDER. 2. I.T.A.NO.4573/M/08 [REVENUES APPEAL] : IN THIS APPEAL REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED CIT(A) ERRED IN TREATING THE RECEIPT OF RS.71,63,36,000/- RECEIVED ON TRANSFER OF LAND AS N ON TAXABLE WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS NOT THE RESIDUARY LEGATEE OF LATE SHRI E.F.DINSHAW AND TH E CONTROL, MANAGEMENT AND OWNERSHIP OF THE PROPERTIES CONSISTI NG OF THE ESTATE OF SHRI E. F. DINSHAW VESTS TOTALLY WITH THE ASSESSEE. 2. THE LEARNED CIT(A) OUGHT TO HAVE TREATED THE RECEIP TS EITHER AS SHORT TERM CAPITAL GAIN OR ADVENTURE IN THE NATU RE OF TRADE. ITA NOS.4573 & 4424/MUM/08 2 3. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS AN INDIVIDUAL AND HAD FILED HIS RETURN OF INCOME DECLARING SALARY INCOME AS WELL AS INCOME FROM OTHER SOURCES. DURING ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT IN THE CAPITAL ACCOUNT ACCOMPANYING THE RETURN A SUM OF RS.71,63,36,000/- WAS CREDITED. THIS AMOUNT CONSIST ED OF A SUM OF RS.44.5 CRORES ON ACCOUNT OF RECEIPT BY WAY OF GOVE RNMENT OF INDIA BONDS AND THE BALANCE SUM OF RS.27,13,36,000/- THRO UGH BANK TRANSFER. ON ENQUIRY, ASSESSEE EXPLAINED THE CIRCUM STANCES UNDER WHICH THE CAPITAL ACCOUNT CAME TO BE CREDITED WHICH ARE AS UNDER: 4. [1] ONE MR. EDULJI FRAMROZE DINSHAW [FOR SHORT EFD] A RESIDENT OF USA EXECUTED HIS WILL ON 4-2-1970. THIS WILL WAS RE GISTERED IN THE COURT OF COUNTY OF NEW YORK UNITED STATES OF AMERICA. EFD EXPIRED ON 14-3- 1970. THROUGH THIS WILL ALL THE MOVABLE PROPERTIES SITUATED ANYWHERE AND IMMOVABLE PROPERTIES SITUATED IN INDIA WERE BEQ UEATHED TO MRS. BACHOOBAI WORNOZOW [FOR SHORT BW], WHO WAS A SIST ER OF THE DECEASED. MRS. BW WAS ALSO APPOINTED AS EXECUTRIX O F THE WILL AND WAS ALSO THE BENEFICIARY OF THE EFDS ESTATES. THE IMMO VABLE PROPERTIES SITUATED IN INDIA WERE TO BE SETTLED IN THE TRUST A ND THE TRUSTEES WERE REQUIRED TO COLLECT RECEIPT OF RENTS AND INCOME FRO M SUCH PROPERTIES WHICH WERE TO BE APPLIED FOR THE BENEFIT OF BW DURI NG HER LIFE TIME. AFTER THE DEATH OF BW, THE PRINCIPAL OF THE TRUST F UND ALONG WITH THE INCOME ACCRUED THEREON WAS TO BE GIVEN TO THE SALA VATION ARMY NEW YORK AND AMERICAN PROPRIETARY FOR THE PREVENTION OF CRUELTY TO THE ANIMALS NEW YORK [FOR SHORT TWO AMERICAN CHARITIES ] EQUALLY. BW WAS ALSO MADE AS A RESIDUARY LEGATEE. ITA NOS.4573 & 4424/MUM/08 3 5. MRS. BW OBTAINED A PROBATE OF THE WILL OF MR. EF D AND APPOINTED MR. JEHANGIR BEHRAM DUBHASH AS AN ADMINIS TRATOR OF THE ESTATE OF THE DECEASED EFD AND THIS APPOINTMENT WAS CONFIRMED BY THE HON'BLE BOMBAY HIGH COURT AND LETTERS OF ADMINISTRA TION WERE ISSUED ACCORDINGLY ON 12-11-1971. MR. JEHANGIR BEHRAM DUBH ASH LATER ON REQUESTED TO BE RELEASED AS THE ADMINISTRATOR OF TH E ESTATES OF EFD. IN HIS PLACE MR. NUSLI NEVILLE WADIA I.E., ASSESSEE, W AS APPOINTED AS THE ADMINISTRATOR AND HIS APPOINTMENT WAS ALSO CONFIRME D BY THE HON'BLE BOMBAY HIGH COURT ON 21-12-1972 AND THE PROPERTIES OF THE ESTATES WERE VESTED IN HIM AS AN ADMINISTRATOR. 6. IN THE YEAR 1995, THE ADMINISTRATOR ENTERED INTO AGREEMENTS WITH SOME REAL ESTATE DEVELOPMENT COMPANIES FOR DEV ELOPING THE IMMOVABLE PROPERTIES OF THE ESTATES. IN THESE AGREE MENTS, BW ALSO SIGNED AS CONFIRMING PARTY. THE DEVELOPERS WERE REQ UIRED TO DEVELOP THE PROPERTIES AFTER REMOVING THE ENCROACHMENTS ETC . THE ESTATE WAS TO RECEIVE 12% OF THE GROSS SALE PROCEEDS. PURSUANT TO THESE AGREEMENTS, THE ESTATE STARTED RECEIVING CERTAIN AD VANCES FROM PURCHASERS OF THE CONSTRUCTED UNITS AND IN SOME CAS ES THE FINAL PROCEEDS WERE ALSO RECEIVED. THE ESTATE FILED INCOM E TAX AS WELL AS WEALTH TAX RETURNS ON THE INCOME ON TRANSFER OF PRO PORTIONATE INTEREST IN THE IMMOVABLE PROPERTIES. ORIGINALLY THESE RECEI PTS WERE ASSESSED AS BUSINESS RECEIPTS BUT WHEN THE MATTER WAS TAKEN UP TO THE TRIBUNAL, THE INCOME WAS CHARGED AS CAPITAL GAINS IN THE HAND S OF THE ESTATE OF EFD. ITA NOS.4573 & 4424/MUM/08 4 7. IN THE YEAR 2000, THE ADMINISTRATOR FILED SUIT IN THE HIGH COURT OF BOMBAY CHALLENGING THE WILL FOR BEQUEATHING THE PROPERTIES TO TWO AMERICAN CHARITIES, BECAUSE AS PER SEC.118 OF THE I NDIAN SUCCESSION ACT, 1925 NO PROPERTY COULD BE BEQUEATHED FOR CHARI TABLE PURPOSES IF NEAR RELATIVES WERE ALIVE AS HEIRS AND THE WILL HAS NOT BEEN EXECUTED WITHIN ONE YEAR IN ADVANCE. DURING THE PENDENCY OF THIS SUIT THE ASSESSEE ALONG WITH OTHER FOUR COMPANIES WHICH WERE FULLY CONTROLLED BY HIM, ENTERED INTO AN AGREEMENT WITH MRS. BW ON 2 6-9-2001 [THIS AGREEMENT HAS BEEN DESCRIBED AS INDENTURE]. THROU GH THIS INDENTURE, BW TRANSFERRED AND CONVEYED ALL HER RIGHTS AND INTE RESTS OVER THE SALE PROCEEDS OF SALE AND/OR DISPOSAL OF THE CORPUS TO T HE ASSESSEE AND FOUR OF HIS ASSOCIATE COMPANIES FOR A TOTAL CONSIDERATIO N OF RS.20 LAKHS. THUS, ASSESSEE ACQUIRED 60% INTEREST AND THE OTHER FOUR COMPANIES ACQUIRED 10% EACH INTEREST IN THE RIGHTS OF BW. IT WAS ALSO EXPRESSLY PROVIDED IN THIS INDENTURE THAT THE TRANSFER OF BW S RIGHTS WERE SUBJECT TO OUT-COME OF THE DECISION OF THE HON'BLE BOMBAY H IGH COURT IN THE SUIT FILED BY THE ADMINISTRATOR CHALLENGING THE WIL L OF EFD FOR BEQUEATHING THE PROPERTIES IN FAVOUR OF TWO AMERICA N CHARITIES. IT WAS ALSO CLEARLY PROVIDED THAT THE TRANSFEREE, I.E. THE ASSESSEE AND HIS FOUR ASSOCIATE COMPANIES, WOULD BE ENTITLED TO RECEIVE P ROCEEDS ONLY AFTER THE DEATH OF BW, WHICH MEANS THAT DURING HER LIFE T IME BW RETAINED THE RIGHT TO RECEIVE THE SALE PROCEEDS. 8. ON 22-10-01 HON'BLE BOMBAY HIGH COURT PRONOUNCED ITS JUDGMENT IN THE SUIT FILED BY THE ADMINISTRATOR CHA LLENGING THE BEQUEATHAL OF IMMOVABLE PROPERTIES IN FAVOUR OF THE TWO AMERICAN ITA NOS.4573 & 4424/MUM/08 5 CHARITIES. THE COURT HELD THAT SUCH BEQUEATHAL OF I MMOVABLE PROPERTIES IN FAVOUR OF THE TWO AMERICAN CHARITIES WAS VOID IN VIEW OF SEC.118 OF THE INDIAN SUCCESSION ACT, 1925. THE COURT ALSO HEL D THAT BW WAS THE SOLE RESIDUARY LEGATEE TO THE CORPUS OF THE ESTATES OF THE EFD. AGAINST THIS DECISION, IT SEEMS THAT THE TWO AMERICAN CHARI TIES FILED AN APPEAL BUT THE SAME WAS WITHDRAWN LATER ON. 9. IN THE MEANTIME, ON 17-10-2001 BW ALSO EXECUTED HER LAST WILL IN NEW YORK WHEREIN MR. NUSLI NEVILLE WADIA WAS APP OINTED AS THE SOLE EXECUTOR. THROUGH THIS WILL SHE BEQUEATHED ALL HER MOVABLE PROPERTIES TO (I} MS. RUTTY C.P. WADIA AND [II] MS. MARY C.P. WADIA, AND ALL HER RIGHTS AND TITLES IN THE IMMOVABLE PROPERTIES INCLU DING THE SHARE IN THE JOINTLY OWNED IMMOVABLE PROPERTIES IN EQUAL PORTION WITH HER LATE BROTHER EFD, TO MR. NESS NUSLI WADIA AND MR. JEH NU SLI WADIA, SONS OF MR. NUSLI N. WADIA I.E. THE ASSESSEE. ON 12-8-2003 MRS. BW EXPIRED. ON HER DEATH MR. NUSLI N. WADIA AGAIN FILED AN APPL ICATION BEFORE THE HON'BLE BOMBAY HIGH COURT SEEKING APPROVAL FOR HIS CONTINUANCE AS AN ADMINISTRATOR OF THE ESTATE OF EFD. THE COURT VIDE ORDER DATED 20-11- 2003 PERMITTED SHRI NUSLI N. WADIA TO CONTINUE AND ACT AS AN ADMINISTRATOR OF THE ESTATE OF MR. EFD. 10. AFTER THE DEMISE OF BW IN AUGUST, 2003, IN DECE MBER 2003 THE ADMINISTRATOR DISTRIBUTED SOME OF THE ESTATE FUNDS TO THE ASSESSEE AND HIS FOUR COMPANIES IN TERMS OF THE INDENTURE DATED 26-9-2001. THIS IS HOW THE ASSESSEE HAD RECEIVED THE FUNDS IN HIS CAPI TAL ACCOUNT AMOUNTING TO RS.71,63,36,000/-. 11. THE DETAILS OF THE FUNDS NOTED BY THE AO ARE AS UNDER: ITA NOS.4573 & 4424/MUM/08 6 1. PAYMENTS MADE RS.27,13,36,000/- 2. 7% GOVERNMENT OF INDIA BONDS-2003 RS.36,00,00,000/- 3. 6.5% GOVERNMENT OF INDIA BONDS-2003 RS. 8,50,00,000 /- 12. AGAINST THE PROPOSAL OF THE AO TO TAX THESE REC EIPTS, IT WAS MAINLY SUBMITTED BEFORE HIM THAT [I] THE DISTRIBUTI ON MADE UNDER THE WILL IS A DIRECTIONALLY DISPOSITION AKIN TO A GIFT WHICH IS NOT IN THE NATURE OF INCOME IN THE HANDS OF THE ASSESSEE AND SUCH DIS TRIBUTION IS SPECIFICALLY EXEMPTED U/S.47[III]. [II] THE ESTATES OF EFD HAD ALREADY PAID TAXES ON TRANSFER OF IMMOVABLE PROPERTIES. [II I] THE RECEIPTS IN THE HANDS OF THE ASSESSEE HAVE SAME CHARACTER AS IT WOU LD HAVE BEEN IN THE HANDS OF BW AND, THEREFORE, ASSESSEE HAD STEPPE D INTO THE SHOES OF BW. [IV] THAT WHAT WAS TRANSFERRED TO THE ASSESS EE WAS ONLY DISTRIBUTION OF THE SALE PROCEEDS AND THE PROPERTIE S WERE NEVER TRANSFERRED TO THE ASSESSEE BECAUSE ESTATES OF EFD HAD ALREADY ENTERED INTO THE DEVELOPMENT AGREEMENT WITH THE BUI LDERS AND THE PROPERTIES WERE GIVEN FOR THE DEVELOPMENT AND THE E STATE WAS ENTITLED TO ONLY 12% OF THE SALE RECEIPTS. [V] EVEN IF IT WA S ASSUMED THAT BW HAD BECOME ABSOLUTE OWNER AFTER THE ORDER OF THE HO N'BLE BOMBAY HIGH COURT ON 22-10-2001, AS PER THE INDENTURE DATE D 26-9-2001 THE ONLY BENEFIT INTENDED TO BE PASSED OVER TO THE ASSE SSEE WAS ONLY THE DISTRIBUTION OUT OF THE SALE PROCEEDS. [V] IN RESPO NSE TO A FURTHER PROPOSAL THAT WHY THE SAME SHOULD NOT BE TAXED UNDE R THE HEAD CAPITAL GAINS IT WAS SUBMITTED THAT THE ASSESSEE HAD NOT RECEIVED THE SALE PROCEEDS ON TRANSFER OF ANY IMMOVABLE PROPERTY AND THE AMOUNTS WERE RECEIVED BY WAY OF DISTRIBUTION FROM THE ESTAT E OF EFD OUT OF THE ITA NOS.4573 & 4424/MUM/08 7 SALE PROCEEDS AND ADVANCES RECEIVED BY THE ESTATES OF EFD. SINCE THE PROPERTIES HAD BEEN TRANSFERRED BY THE ESTATE, THER EFORE, IT WAS THE ESTATE OF EFD WHICH WAS LIABLE TO PAYMENT OF CAPITA L GAINS TAX. IT WAS ALSO CONTENDED THAT ASSESSEE HAD NOT TRANSFERRED AN Y ASSETS BECAUSE ASSESSEE HAD NO ABILITY TO GIVE THE TRANSFEREE POSS ESSION OF ANY PROPERTY. IT WAS ALSO CONTENDED THAT, IN ANY CASE, THE GOVERNMENT OF INDIA BONDS WERE ORIGINALLY APPLIED IN THE NAME OF ESTATE OF EFD, BUT SINCE AS PER THE RULES, APPLICATION HAD TO BE MADE IN INDIVIDUAL NAME AND ASSESSEES NAME WAS USED BUT P.A.NO. GIVEN WAS THAT OF EFD. THERE WAS FURTHER RULE THAT SUCH BONDS COULD NOT HA VE BEEN TRANSFERRED AND THESE BONDS WERE WRONGLY TRANSFERRE D TO THE ASSESSEE BY THE ADMINISTRATOR BY WAY OF MAKING ACCOUNTING EN TRIES AND THESE ENTRIES WERE LATER ON REVERSED. 13. AFTER EXAMINING THE SUBMISSIONS OF THE ASSESSEE , AO DID NOT ACCEPT THE PROPOSITION THAT THE AMOUNTS RECEIVED BY THE ASSESSEE ARE NOT CHARGEABLE TO TAX AS INCOME. THE AO, FIRSTLY, O BSERVED THAT THE AMOUNTS RECEIVED BY THE ASSESSEE FROM THE ESTATES O F EFD WERE IN THE NATURE OF CONSIDERATION RECEIPTS FOR TRANSFER OF PR OPERTIES BECAUSE ASSESSEE HAD ACQUIRED THE PROPERTIES IN TERMS OF TH E INDENTURE DATED 26-9-2001 AND THE PROPERTIES WERE TRANSFERRED LATER ON AND THE AMOUNTS RECEIVED WERE LIABLE TO BE TAXED AS CAPITAL GAINS. THE AO WAS OF THE OPINION THAT SEC.47[III] IS NOT APPLICABLE B ECAUSE ASSESSEE WAS NEVER A BENEFICIARY UNDER THE WILL OF EFD. HE FURT HER OBSERVED THAT THE ASSESSEE ALONG WITH FOUR OTHER COMPANIES GOT A RIGH T TO RECEIVE THE SALE PROCEEDS BY WAY OF AN INDENTURE DATED 26-9-01. SUCH RIGHTS, ITA NOS.4573 & 4424/MUM/08 8 ACCORDING TO HIM, WERE INCORPOREAL CAPITAL ASSET SI MILAR TO INTANGIBLE CAPITAL ASSETS LIKE RIGHT IN MANAGING AGENCY, GOODW ILL OF A BUSINESS, RIGHT TO SUBSCRIBE TO SHARES ETC. THESE VALUABLE RI GHTS ACQUIRED BY THE ASSESSEE AND OTHER FOUR COMPANIES GOT PARTLY EXTING UISHED WHEN THE ASSESSEE AND THE OTHER FOUR COMPANIES RECEIVED THE SALE PROCEEDS. IN THIS REGARD, HE ALSO PLACED RELIANCE ON THE DECISIO N OF THE HON'BLE SUPREME COURT IN THE CASE OF KARTIKEYA V. SARABHAI VS. CIT [228 ITR 162]. THE SUBMISSION THAT THE GOVERNMENT OF INDIA B ONDS CANNOT BE CONSIDERED AS RECEIPT WAS ALSO REJECTED BECAUSE, AC CORDING TO THE AO, ESTATES OF EFD COULD NOT HAVE ANY LEGAL EXISTENCE A T THE RELEVANT TIME AND ALSO THAT THE BONDS HAD BEEN APPLIED IN THE ASS ESSEES INDIVIDUAL CAPACITY. 14. ALTERNATIVELY, WITHOUT PREJUDICE TO THE ABOVE T HAT SUCH RECEIPTS WERE TAXABLE UNDER THE HEAD CAPITAL GAINS, AO OBS ERVED THAT SINCE ASSESSEE WAS FULLY AWARE BEING ADMINISTRATOR OF THE ESTATES OF EFD THAT BEQUEATHAL OF THE PROPERTIES TO TWO AMERICAN C HARITIES WERE ILLEGAL AND IN ORDER TO TAKE ADVANTAGE ENTERED INTO AN ADVE NTURE IN THE NATURE OF TRADE BY INVESTING A SMALL SUM OF RS.20 LAKHS AL ONG WITH THE OTHER FOUR COMPANIES KNOWING FULLY WELL THAT IF BEQUEATHA L OF PROPERTIES TO TWO AMERICAN CHARITIES WAS HELD TO BE INVALID BY TH E HIGH COURT THEN ASSESSEE HAD A CHANCE OF MAKING A HUGE FORTUNE. IN THE ASSESSMENT ORDER FINALLY HE HAS SUBJECTED THE RECEIPT OF RS.71 ,63,36,000/- AS BUSINESS RECEIPTS. 15. BEFORE THE LD. CIT(A) THE SUBMISSIONS MADE BEFO RE THE AO WERE REITERATED. IT WAS FURTHER EMPHASIZED THAT BW DID N OT HAVE ANY ITA NOS.4573 & 4424/MUM/08 9 CHILDREN AND THE RELATIONSHIP SHE HAD WITH THE ASSE SSEE AS ADMINISTRATOR OF THE ESTATE SINCE 1972 WAS THAT OF A TRUST AND SHE CONSIDERED HIM AS HER OWN SON AS WAS STATED IN CLAU SE 16[E] OF THE PETITION DATED 12-11-2003 FILED BEFORE THE HON'BLE HIGH COURT. THUS, SHE HAD A UNIQUE RELATIONSHIP WITH THE ASSESSEE AND , THEREFORE, APPEARED TO HAVE IDENTIFIED HIM AS A PERSON FIT TO SUCCEED HER AFTER HER LIFE TIME. IT WAS FURTHER POINTED OUT THAT BW WAS T HE SOLE EXECUTRIX OF THE WILL LEFT BY EFD AND WAS ALSO RESIDUARY LEGATEE BY VIRTUE OF 5 TH CLAUSE OF THE WILL AND THIS POSITION CONTINUED EVEN AFTER THE ORDER OF HON'BLE HIGH COURT DATED 22-10-2001. THIS MEANS THA T THE ESTATE WOULD CONTINUE IN LAW AND THE ASSESSEE WOULD CONTIN UE IN THE CAPACITY OF THE ADMINISTRATOR UNLESS DISCHARGED BY THE COURT THAT APPOINTED HIM. IN FACT, IT WAS CLARIFIED IN PARA-5 OF THE IND ENTURE DATED 26-9-2001 THAT NO PART OF THE IMMOVABLE PROPERTIES FORMING PA RT OF THE DECEASEDS INDIAN ESTATES WERE BEING TRANSFERRED BY THE INDENTURE. IT WAS URGED THAT THE AO HIMSELF WAS NOT SURE WHETHER THE AMOUNTS RECEIVED BY THE ASSESSEE SHOULD BE TAXED AS CAPITAL GAINS OR INCOME FROM BUSINESS RECEIPTS AND THAT IS WHY AFTER DETAIL ED OBSERVATIONS HOLDING THE RECEIPTS AS CAPITAL GAINS, HE CHANGED T HE COURSE AND ULTIMATELY TREATED THE RECEIPTS AS BUSINESS INCOME. BEFORE THE LD. CIT(A) IT WAS ALSO AGAIN EXPLAINED THAT IF THE ASSE SSEE IS SAID TO HAVE ACQUIRED THE CAPITAL ASSET IN THE FORM OF RIGHTS TO RECEIVE SALE PROCEEDS, THEN THERE WAS NO TRANSFER BECAUSE THAT R IGHT HAS NOT BEEN TRANSFERRED BY THE ASSESSEE AND, THEREFORE, NO CAPI TAL GAIN WAS ATTRACTED. IT WAS POINTED OUT THAT THE DECISION OF THE HON'BLE SUPREME ITA NOS.4573 & 4424/MUM/08 10 COURT IN THE CASE OF KARTIKEYA V. SARABHAI [SUPRA] WAS DISTINGUISHABLE BECAUSE IN THAT CASE THERE WAS REDUCTION IN THE FAC E VALUE OF THE SHARES WHICH, ACCORDING TO THE COURT, RESULTED IN E XTINGUISHMENT OF RIGHTS BUT IN THE PRESENT CASE THERE WAS NO EXTINGU ISHMENT OF THE RIGHTS. 16. IT WAS FURTHER ARGUED THAT THE RECEIPTS COULD N OT BE TREATED AS BUSINESS RECEIPTS BEING ADVENTURE IN THE NATURE OF TRADE BECAUSE ASSESSEE HAD OBTAINED A RIGHT TO RECEIVE THE SALE R ECEIPTS VIDE INDENTURE DATE 26-9-2001 AND, THEREFORE, IT WAS CLE ARLY IN THE NATURE OF CAPITAL RECEIPTS. SOME CASE LAWS WERE ALSO QUOTED F OR THE PROPOSITION THAT RECEIPTS COULD NOT BE TREATED AS AN ADVENTURE IN THE NATURE OF TRADE. 17. ATTENTION OF THE LD. CIT(A) WAS ALSO DRAWN TO T HE PROVISIONS OF SEC.168 BY WHICH EXECUTOR OF AN ESTATE IS SEPARATEL Y TAXABLE ENTITY. IT WAS POINTED OUT THAT EXPLANATION TO THE SECTION CLE ARLY PROVIDES THAT EXECUTOR WOULD INCLUDE THE ADMINISTRATOR OR OTHER P ERSON ADMINISTERING THE ESTATE OF A DECEASED PERSON. DETAILED SUBMISSIO NS ALONG WITH THE CASE LAWS WERE MADE IN THIS RESPECT AND IT WAS EMPH ASIZED THAT THE DECEASEDS ESTATE HAD PAID THE TAXES SEPARATELY ON THE INCOME EARNED BY THE ESTATE. 18. THE LD. CIT(A) AFTER EXAMINING THE SUBMISSIONS OBSERVED THAT THE AO WAS NOT CORRECT IN HOLDING THAT THE APPOINTM ENT OF ADMINISTRATOR AND CONTINUANCE OF ESTATE OF EFD UNDE R THE CONTROL AND MANAGEMENT OF THE ADMINISTRATOR WAS ONLY A FAADE B ECAUSE THE APPOINTMENT OF THE ADMINISTRATOR WAS APPROVED BY TH E JURISDICTIONAL ITA NOS.4573 & 4424/MUM/08 11 HIGH COURT. THE ORIGINAL APPOINTMENT WAS MADE BECAU SE THE FIRST ADMINISTRATOR MR. JEHANGIR BEHRAM DHUBHASH DID NOT WANT TO CONTINUE. FURTHER, THE APPOINTMENT OF THE ASSESSEE AS AN ADMI NISTRATOR EVEN AFTER THE DEATH OF MRS. BW IN 2003 WAS APPROVED BY THE BOMBAY HIGH COURT VIDE ORDER DATED 20-11-2003. THEREFORE, A FUR THER FINDING THAT ASSESSEE AS AN INDIVIDUAL ALONG WITH HIS FOUR COMPA NIES WAS ABSOLUTE OWNER OF THE PROPERTIES OF THE ESTATES OF EFD CANNO T BE ACCEPTED AS CORRECT. MR. WADIA WAS ONLY AN ADMINISTRATOR OF EST ATES DESPITE THE FACT THAT HE ENTERED INTO AN INDENTURE DATED 26-9-2 001 AND EVEN THEREAFTER. HE REFERRED TO THE DECISION OF THE HON' BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. P. K. THAKORE [136 ITR 464] AND EXTRACTED THE FOLLOWING OBSERVATIONS FROM PAGE 472: HELD --- ---- THAT THE RIGHTS AND LIABILITIES UNDE R A CONTRACT BETWEEN THE APPELLANT AND A THIRD PARTY, AS DETERMINED BY A COMPETENT CIVIL COURT, CANNOT BE OVERLOOKED OR IGNORED WHILE DETERM INING THE LEGAL NATURE OF THE RECEIPTS IN THE HANDS OF THE APPELLAN T. 19. THE LD. CIT(A) REFERRED TO THE PROVISIONS OF TH E INDIAN SUCCESSION ACT, 1925 AND OBSERVED THAT IN VIEW OF T HESE PROVISIONS ONCE A LETTER OF ADMINISTRATION IS GRANTED, THE ADM INISTRATOR OF THE ESTATE BECOMES THE LEGAL REPRESENTATIVE OF THE ASSE SSEE AND ONLY HE SHALL BE COMPETENT TO DEAL WITH THE ESTATE. THOUGH SEC.216 OF INDIAN SUCCESSION ACT, 1925 DOES NOT MAKE IT CLEAR AS TO T ILL WHAT TIME THE ADMINISTRATION WILL CONTINUE, BUT AFTER QUOTING SOM E JUDGMENTS, ACCORDING TO HIM, THE POWERS OF THE ADMINISTRATOR W OULD CONTINUE IN AN ESTATE UNTIL THE ESTATE IS CONVEYED TO THE BENEFICI AL OWNER OR SUCH ADMINISTRATOR IS DISCHARGED BY THE COURT. IN THIS B ACKGROUND, THE LD. CIT(A) HELD THAT IN HIS VIEW THE ESTATE WOULD CONTI NUE IN LAW AND MR. ITA NOS.4573 & 4424/MUM/08 12 NUSLI N. WADIA WOULD CONTINUE AS AN ADMINISTRATOR A ND THAT POSITION IS DISTINCT FROM HIS INDIVIDUAL CAPACITY. THE LD. CIT( A) ALSO DISCUSSED WHETHER THE AO WAS CORRECT IN HOLDING THAT THE JUDG MENT OF THE HON'BLE BOMBAY HIGH COURT DATED 22-10-2001 BY WHICH THE BEQUEATHAL OF PROPERTIES TO TWO AMERICAN CHARITIES WAS HELD TO BE INVALID, WOULD OPERATE FROM 1970. IN THIS RESPECT, ARGUMENTS WERE MADE EVEN BEFORE US AND ULTIMATELY BOTH THE PARTIES HAD AGREED THAT IT WOULD NOT MAKE MUCH DIFFERENCE WHETHER THE JUDGMENT WOULD OPERATE FROM 1970 OR FROM 22-10-2001. THE LD. CIT(A) OBSERVED THAT THE J UDGMENT WOULD RELATE BACK TO THE ORIGINAL DATE, ONLY WHEN THE ISS UE INVOLVED INTERPRETATION OF THE LAW. HOWEVER, WHEN A PARTICUL AR ISSUE WAS DECIDED ON THE BASIS OF CLEAR LAW, THEN THE JUDGMEN T WOULD OPERATE FROM THE DATE OF THE ORDER. THEREAFTER, THE LD. CIT (A) DEALT WITH THE FINDING OF THE AO THAT ASSESSEE AND HIS ASSOCIATE C OMPANIES BECAME ABSOLUTE OWNERS OF THE PROPERTIES IN TERMS OF INDEN TURE DATED 26-9- 2001, PARTICULARLY AFTER THE EFFECT OF HIGH COURTS ORDER DATED 22-10- 2001 BY WHICH BW BECAME RESIDUARY LEGATEE. IN THIS REGARD HE REFERRED TO THE DECISION OF HOUSE OF LORDS IN THE C ASE OF DR. BARNARDOS HOMES NATIONAL INCORPORATED ASSOCIATION VS. COMMISS IONERS FOR SPECIAL PURPOSES OF THE INCOME TAX ACT, (1972) 2 A.C. 1, AN D EXTRACTED VARIOUS OBSERVATIONS OF THE COURT. IN THE LIGHT OF THE OBSERVATIONS, HE HELD THAT TILL 22-10-2001 BW HAD ONLY A LIFE INTERE ST AND THEREAFTER A RESIDUARY INTEREST AND RESIDUAL LEGATEE HAS NO RIGH T IN A PROPERTY UNTIL THE RESIDUARY IS ASCERTAINED. SINCE THE ADMINISTRAT ION OF THE ESTATE WAS NOT COMPLETE IN THE PRESENT CASE, THEREFORE, DESPIT E THE DECISION OF THE ITA NOS.4573 & 4424/MUM/08 13 BOMBAY HIGH COURT VIDE ORDER DATED 22-10-2001 BW CO ULD NOT BE CONSIDERED TO HAVE BECOME THE LEGAL OWNER OF THE IM MOVABLE PROPERTIES OF THE ESTATE OF EFD. EVEN AFTER THE SAI D ORDER, SHE COULD NOT HAVE BECOME ABSOLUTE OWNER BECAUSE THE ORDER OF HIGH COURT COULD HAVE BEEN REVERSED BY A LARGER BENCH OR BY A HIGHER FORUM. EVEN AFTER WITHDRAWAL OF AN APPEAL BY THE TWO AMERI CAN CHARITIES BW COULD NOT BE CONSIDERED TO BE THE ABSOLUTE OWNER OF THE IMMOVABLE PROPERTIES OF HER DECEASED BROTHER EFD BECAUSE AS P ER SEC.104 OF INDIAN SUCCESSION ACT, 1925, A LEGATEE ONLY HAS A V ESTED INTEREST IN THE PROPERTY AND THE VESTING IS NOT FULL AND ABSOLUTE T ILL THE ADMINISTRATOR GIVES HIS ASSENT. IT REMAINS ONLY AS AN INCHOATE RI GHT. HE ALSO QUOTED CERTAIN COMMENTARY. HE OBSERVED THAT SOME OF THE CO NFUSION AROSE BECAUSE ASSESSEE WAS ACTING IN TWO CAPACITIES AS AD MINISTRATOR AS WELL AS PURCHASER OF CERTAIN RIGHTS. THE SITUATION WOULD HAVE BEEN MUCH SIMPLER IF THE INDENTURE DATED 26-9-2001 WAS ENTERE D INTO BY SOME OUTSIDER AND, THEREFORE, TWO DIFFERENT CAPACITIES O F THE ASSESSEE HAVE TO BE RECOGNIZED. IN THIS BACKGROUND, HE OBSERVED A T PARA-61 AS UNDER: 61. IN THE LIGHT OF THE FOREGOING DISCUSSION, IT I S APPARENT THAT THE APPELLANT HAD ENTERED INTO AN INDENTURE ON 26-09-20 01 WITH BW FOR ACQUISITION OF ONLY CERTAIN AND SPECIFIC RIGHTS AND NOT ANY PROPERTY. THE SAID AGREEMENT VERY CLEARLY INDICATED THAT IT W ILL HAVE CONSEQUENCE ONLY IF THE PART OF THE WILL RELATING T O BEQUEST OF ASSETS AFTER THE DEATH OF BW TO THE AMERICAN CHARITIES WAS DECLARED AS INVALID AND ILLEGAL BY THE BOMBAY HIGH COURT. THE A GREEMENT ALSO PROVIDED THAT THERE WOULD BE CERTAIN PAYMENT TO EFD TRUST AND THERE WOULD BE ABSOLUTELY NO TRANSFER OF IMMOVABLE PROPER TIES IN FAVOUR OF THE TRANSFEREES, NAMELY, THE APPELLANT AND OTHER PA RTIES. THE APPELLANT AND OTHER PARTIES WERE ENTITLED TO RECEIV E BY WAY OF DISTRIBUTION OF THE ACCUMULATED FUNDS OVER THE YEAR S FROM THE INCOME, SALE PROCEEDS AND ADVANCES LYING WITH THE ESTATE. T HE AGREEMENT WENT ON TO THE EXTENT OF STATING THAT THE APPELLANT AND OTHERS WILL NOT ITA NOS.4573 & 4424/MUM/08 14 HAVE THE RIGHT TO OBJECT EVEN TO THE MANNER IN WHIC H THE PROPERTIES WILL BE DEALT WITH. IN THE CIRCUMSTANCES, THE APPEL LANT AND OTHERS WERE ABSOLUTELY EXCLUDED FROM RECEIVING ANY PROPERTY WHI CH WAS UNDER THE CONTROL AND MANAGEMENT OF THE ADMINISTRATOR. THEY D ID NOT EVEN HAVE THE RIGHT TO OBJECT TO THE MANNER IN WHICH THE IMMO VEABLE PROPERTIES WERE ADMINISTERED OR DEALT WITH. THERE IS NO MATERI AL ON RECORD TO SUPPORT THE AOS CONCLUSION THAT THE STIPULATIONS W ERE A MERE PRETENCE AND THEY WERE NOT TO BE GIVEN EFFECT TO. F URTHER, THE DISTRIBUTION OF MONIES/INVESTMENTS UPON THE DEATH O F B.W ALSO BEARS WITNESS TO THE EFFECT THAT THE APPELLANT AND OTHERS HAVE NOT RECEIVED ANY PART OF THE IMMOVABLE PROPERTIES. IN THE CIRCUM STANCES, IT IS APPARENT THAT NO PART OF THE IMMOVABLE PROPERTIES W AS ABSOLUTE OR OTHERWISE, OF THE PROPERTIES WHICH WERE PART OF THE ESTATE. IT IS, THEREFORE, APPARENT THAT THE APPELLANT COULD NOT HA VE DEALT WITH ANY OF THE PROPERTIES OF THE ESTATE OF EFD, AND, THEREF ORE, NO INCOME COULD BE ASSESSED IN HIS HANDS. 20. THE LD. CIT(A) ALSO DEALT WITH THE FINDING OF T HE AO THAT ASSESSEE IS NOT COVERED BY THE EXEMPTION U/S.47[III ] BY OBSERVING THAT BY VIRTUE OF INDENTURE DATED 26-9-2001 ASSESSEE HAD ACQUIRED THE RIGHTS OF THE ORIGINAL LEGATEE AND, THEREFORE, ASSE SSEE STEPPED INTO THE SHOES OF ORIGINAL LEGATEE AND, ACCORDINGLY, EXEMPTI ON U/S.47[III] WAS AVAILABLE TO THE ASSESSEE. 21. THE LD. CIT(A) DEALT WITH DETAIL THE OTHER OBSE RVATION OF THE AO FOR SUBJECTING THE RECEIPTS UNDER THE HEAD CAPITAL GAINS. ACCORDING TO HIM, AO INITIALLY COMPUTED THE CAPITAL GAINS ON THE BASIS OF THE VALUE OF THE PROPERTY AT RS.1,11,33,393/- REFLECTED IN THE B ALANCE-SHEET OF ADMINISTRATOR WHICH WAS TRANSFERRED BY THE ASSESSEE FOR A CONSIDERATION OF RS.71,63,36,000/-. THE APPELLATE A UTHORITY OBSERVED THAT THIS CONCLUSION WAS CONTRARY TO THE CONCLUSION REACHED EARLIER BECAUSE AO IN FIRST PLACE HAD ALREADY HELD THAT PRO PERTIES WERE NEVER TRANSFERRED BY THE ADMINISTRATOR/BW TO THE REAL EST ATE DEVELOPER AND HELD THAT THE SAID PROPERTIES WERE CAPABLE OF BEING TRANSFERRED TO THE ASSESSEE BY AN INDENTURE DATED 26-9-2001. THEREFORE , IT CANNOT BE ITA NOS.4573 & 4424/MUM/08 15 SAID THAT THE PROPERTIES HAVE AGAIN BEEN TRANSFERRE D BECAUSE, AO HAD NOT INDICATED AS TO WHOM SUCH PROPERTIES WERE TRANS FERRED AND IT APPEARED TO THE LD. CIT(A) THAT AO HAD BELIEVED THA T THE PROPERTIES HAD ALREADY BEEN TRANSFERRED IN DEVELOPMENT AGREEME NT OF 1995. HE ALSO OBSERVED THAT PART OF THE MONEY RECEIVED BY TH E ASSESSEE CONSISTED OF ADVANCES RECEIVED BY THE ESTATE OF EFD IN THE EARLIER YEARS AND SINCE UNDER THE ACT INCOME OF A PARTICULAR YEAR WAS ONLY TO BE CHARGED, SUCH AMOUNTS SHOULD NOT BE CHARGED WHICH W ERE RECEIVED IN THE EARLIER YEARS. FURTHER, INCOME SHOULD BE CHARGE D ONLY IN THE HANDS OF A PERSON WHO EARNS THE SAME AND IN THE CASE BEFO RE HIM THE INCOME WAS EARNED BY THE ESTATE OF EFD ON WHICH TAXES HAVE ALREADY BEEN PAID BY THE ESTATE AND THAT FACT WAS ALSO NOTED BY THE AO AND THIS INCOME WAS ONLY DISTRIBUTED BY THE ESTATE TO THE AS SESSEE, THEREFORE, SAME WAS NOT CHARGEABLE TO TAX. 22. WHILE DEALING WITH THE OBSERVATION THAT THE ASS ESSEE, IN ANY CASE, HAD ACQUIRED THE RIGHT TO THE SALE PROCEEDS A ND SUCH RIGHT HAS TO BE CONSIDERED AS INCORPOREAL CAPITAL ASSET AKIN TO THE RIGHT IN MANAGING AGENCY, GOODWILL OR RIGHT TO SUBSCRIBE TO SHARES AN D ASSESSEE WAS LIABLE BECAUSE THIS RIGHT GOT EXTINGUISHED. THE LD. CIT(A) OBSERVED THAT THE DECISION IN THE CASE OF KARTIKEYA V. SARABHAI [ SUPRA] WAS DISTINGUISHABLE ON ITS OWN FACTS. THOUGH ASSESSEE D ID ACQUIRE A CAPITAL ASSET IN THE FORM OF RIGHT TO RECEIVE SALE PROCEEDS , BUT THIS RIGHT NEVER GOT EXTINGUISHED. FOR EXTINGUISHMENT, ACCORDING TO THE LD. CIT(A), THERE SHOULD BE A COMPLETE DESTRUCTION OR ANNIHILAT ION OF THE RIGHT OR WIPING OUT OF SUCH RIGHT IS NECESSARY.. HE COMPARED THIS TO A MINING ITA NOS.4573 & 4424/MUM/08 16 RIGHTS AND, ACCORDING TO HIM, SIMPLY BECAUSE AFTER HAVING ACQUIRED A MINING RIGHT IF A BUSINESS MAN EXTRACTS SOME MINERA LS, THEN THE RIGHT TO MINING DOES NOT GET EXTINGUISHED AND SINCE ASSES SEE IS STILL HOLDING THE RIGHT TO RECEIVE THE MONIES TO BE DISTRIBUTED, SUCH RIGHT HAS NOT BEEN EXTINGUISHED. 23. LD. CIT(A) HAS ALSO DISCUSSED IN DETAIL AS TO W HY THE RECEIPTS COULD NOT BE TREATED EVEN AS REVENUE RECEIPTS ARISI NG OUT OF AN ADVENTURE IN THE NATURE OF TRADE. THE LD. CIT(A) OB SERVED THAT THIS WAS TREATED AS BUSINESS INCOME BY THE AO ON THE WRO NG ASSUMPTION THAT AFTER THE DEATH OF BW THERE WAS A MERGER OF T HE ROLE OF MR. NUSLI N. WADIA AS AN ADMINISTRATOR AND MR. NUSLI N. WADIA AS AN INDIVIDUAL. ACCORDING TO HIM, THIS OBSERVATION SUFFERED FROM A FLAW, BECAUSE THERE WAS NO BASIS FOR HOLDING THAT ROLE OF MR. NUSLI N. WADIA AS AN ADMINISTRATOR CAME TO AN END UPON THE DEATH OF BW B ECAUSE THE APPOINTMENT OF MR. NUSLI N. WADIA AS AN ADMINISTRAT OR WAS REAFFIRMED BY THE BOMBAY HIGH COURT EVEN AFTER THE DEATH OF BW . FURTHER, EVEN AFTER THE SO CALLED DISTRIBUTION, THE ESTATE WAS LE FT WITH IMMOVABLE PROPERTIES. UNDER THE TERMS OF INDENTURE DATED 26-9 -2001 THE IMMOVABLE PROPERTIES WERE NOT TO BE HANDED OVER TO THE PARTIES TO THE INDENTURE AND PROPERTIES WERE TO REMAIN WITH THE ES TATE. THEREFORE, THE ASSUMPTION OF AO REGARDING MERGER OF ROLE OF AN ADMINISTRATOR AND INDIVIDUAL FOR HOLDING THAT RECEIPTS WERE EARNED FR OM AN ADVENTURE IN THE NATURE OF TRADE, WAS NOT CORRECT. HE ALSO OBSER VED THAT ASSESSEE IS AN INDUSTRIALIST WHO IS ON THE BOARD OF SEVERAL LIS TED COMPANIES AND HAD NO INDULGED IN ANY ACTIVITY OF INVESTING IN RES IDUARY ESTATE OR ITA NOS.4573 & 4424/MUM/08 17 ACQUISITION OF INTEREST IN THE WILL. THIS WAS A SOL ITARY TRANSACTION. AT TIMES, EVEN A SINGLE ISOLATED TRANSACTION MAY FALL WITHIN THE DEFINITION OF BUSINESS, BUT THEN SUCH TRANSACTION MUST BEAR CL EAR FEATURES OF A TRADE. BUT SINCE IN THIS CASE THERE WAS ONLY AN INV ESTMENT AND THERE WAS NO SALE, THEREFORE, THIS WILL NOT FALL UNDER TH E DEFINITION OF AN ADVENTURE IN THE NATURE OF TRADE. 24. WHILE CONCLUDING, THE LD. CIT(A) OBSERVED THAT THE AO HAD COMPLETELY OVER-LOOKED THE PROVISIONS OF SEC.168 OF THE I.T.ACT. SEC.168[2] CLEARLY PROVIDES THAT ASSESSMENT OF AN EXECUTOR/ADMINISTRATOR UNDER THIS SECTION SHALL BE MADE SEPARATELY FROM ANY ASSESSMENT THAT MAY BE MADE ON HIM IN RESP ECT OF HIS OWN INCOME. THUS, A PERSON WHO IS APPOINTED AS AN ADMIN ISTRATOR ENJOYS TWO DIFFERENT STATUSES FOR THE PURPOSE OF ASSESSMEN T OF INCOME AND IN THIS CONNECTION HE ALSO MADE REFERENCE TO THE DECIS ION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MRS USHA D . SHAH [127 ITR 850]. 25. IT SEEMS THAT AN ALTERNATE CONTENTION WAS ALSO MADE THAT AN ADMINISTRATOR COULD NOT HAVE DISTRIBUTED ANY AMOUNT S TILL SUCH TIME AS THE ADMINISTRATION WAS NOT COMPLETE AND, THEREFORE, DISTRIBUTION MADE IN A.Y 2004-05 SHOULD BE IGNORED, WAS NOT DEALT WIT H BY THE LD. CIT(A) BY OBSERVING THAT THIS HAS BECOME OF AN ACADEMIC NA TURE IN VIEW OF THE FACT THAT HE HAS ALREADY HELD THAT DISTRIBUTION MADE BY THE ESTATES OF EFD WAS NOT LIABLE TO TAX. 26. BEFORE US, LD. STANDING COUNSEL SHRI VIMAL GUPT A APPEARING ON BEHALF OF THE REVENUE NARRATED THE FACTS AND POINTE D OUT THAT ASSESSEE ITA NOS.4573 & 4424/MUM/08 18 HAS BEEN APPOINTED AS AN ADMINISTRATOR BUT HE IS NO T RELATED TO EFD OR BW. HE SUBMITTED THAT BW SOLD HER RIGHTS TO THE ASS ESSEE AND HIS FOUR ASSOCIATE COMPANIES TO RECEIVE MONEY WHERE HE IS HO LDING SHARES IN EXCESS OF 99% BY ENTERING INTO AN INDENTURE DATED 2 6-9-01, COPY OF WHICH IS PLACED AT PAGES 31 TO 40 OF THE ASSESSEES PAPER BOOK. HE CARRIED US THROUGH THE MAIN CLAUSES OF THIS INDENTU RE AND FURTHER POINTED OUT THAT THIS INDENTURE WAS SUBJECT TO TWO RIDERS, NAMELY, THAT THIS WILL COME INTO OPERATION IF THE HIGH COURT RUL ES THAT TWO AMERICAN CHARITIES WERE NOT ENTITLED TO THE PROPERTIES OF EF D AND THAT MATTER WAS PENDING BEFORE THE HIGH COURT ON THE DATE OF TH IS INDENTURE. THE OTHER RIDER WAS THAT THE SALE OF THE RIGHTS WOULD B E EFFECTED ONLY AFTER THE DEATH OF BW. HE ARGUED THAT SINCE ASSESSEE WAS ASSOCIATED AS AN ADMINISTRATOR FOR LONG TIME AND KNEW THAT BECAUSE O F SEC.118 OF INDIAN SUCCESSION ACT, 1925 THE BEQUEATHAL OF IMMOVABLE PR OPERTIES OF EFD TO TWO AMERICAN CHARITIES WOULD NOT BE VALID AND, T HEREFORE, HE TOOK A CHANCE BY INVESTING A SMALL SUM OF RS.20 LAKHS THRO UGH WHICH HE CAN EARN A FORTUNE BECAUSE AFTER THE DEATH OF BW HE HAD A CHANCE OF INHERITING THE PROPERTIES. THEREFORE, THIS ARRANGEM ENT HAS TO BE CONSTRUED AS AN ADVENTURE IN THE NATURE OF TRADE AN D, ACCORDINGLY, AO WAS RIGHT IN TREATING THE RECEIPTS AS BUSINESS RECE IPTS AND SUBJECTING THE SAME TO TAX UNDER THE HEAD BUSINESS AND PROFESS ION. 27. LD. SR. STANDING COUNSEL WHILE SUPPORTING THE O RDER OF THE AO FURTHER SUBMITTED THAT THE INDENTURE WAS SIGNED WIT HIN LESS THAN A MONTH FROM THE ORDER OF THE HIGH COURT HOLDING THAT THE BEQUEATHAL TO THE TWO AMERICAN CHARITIES WAS VOID UNDER THE INDIA N SUCCESSION ACT, ITA NOS.4573 & 4424/MUM/08 19 1925 AND CONFIRMED THAT BW WAS THE SOLE RESIDUARY L EGATEE ENTITLED TO RECEIVE THE PROPERTIES LEFT BEHIND BY EFD IN INDIA. HE ARGUED IN DETAIL THAT THE ORDER OF THE HIGH COURT DATED 22-10-01 BEC AME EFFECTIVE FROM MARCH, 1970 MAKING BW ENTITLED TO THE PROPERTIES RI GHT FROM 1970. WHEN THIS ISSUE WAS ARGUED IN DETAIL BY THE LD. COU NSEL OF THE ASSESSEE, THE LD. SR. STANDING COUNSEL ADMITTED THA T NO SERIOUS IMPLICATIONS WOULD BE THERE AS TO WHETHER THE ORDER BECAME EFFECTIVE FROM 1970 OR 2001. HE SUBMITTED THAT AMOUNTS IN QUE STION WERE RECEIVED BY THE ASSESSEE BECAUSE OF THE INDENTURE D ATED 26-9-01. THE INDENTURE WAS EXECUTED FOR A CONSIDERATION WHICH RE SULTED IN ASSESSEE GETTING THE RIGHT TO RECEIVE THE SALE PROCEEDS OF P ROPERTIES BELONGING TO THE ESTATE AND ON THE BASIS OF THIS INDENTURE SALE PROCEEDS AS WELL AS SOME ADVANCES RECEIVED BY THE ESTATE WERE DISTRIBUT ED WHICH RESULTED IN RECEIPT OF THE IMPUGNED SUM OF RS.71.63 CRORES. HE ARGUED THAT PURCHASE OF A RIGHT HAS BEEN RIGHTLY HELD BY THE AO TO BE IN THE NATURE OF A CAPITAL ASSET AND THIS FACT HAS BEEN UPHELD EV EN BY THE LD. CIT(A) AND ADMITTED BY THE ASSESSEE ALSO AND IN THIS REGAR D HE REFERRED TO PARA-68 OF THE APPELLATE ORDER. SINCE THE RIGHTS AC QUIRED ARE VALUABLE RIGHTS, THEREFORE, THESE RIGHTS DEFINITELY CONSTITU TED CAPITAL ASSET WITHIN THE MEANING OF SEC.2[14] OF THE I.T.ACT. THESE RIGH TS WOULD START FLOWING TO THE ASSESSEE SUBJECT TO TWO RIDERS I.E. THE DECISION OF THE HIGH COURT IN THE SUIT FILED BY THE ADMINISTRATOR C HALLENGING THE BEQUEATHAL IN FAVOUR OF TWO AMERICAN CHARITIES AND OTHER BEING DEATH OF THE BW. HE POINTED OUT THAT THE FIRST CONTINGEN CY WAS REMOVED WHEN THE HIGH COURT PASSED ITS ORDER ON 22-10-01 DE CLARING THAT ITA NOS.4573 & 4424/MUM/08 20 BEQUEATHAL TO THE TWO AMERICAN CHARITIES WAS NOT VA LID IN VIEW OF SEC.118 OF THE INDIAN SUCCESSION ACT, 1925. LATER O N WHEN BW EXPIRED IN AUGUST, 2003 ASSESSEE ACQUIRED FULL RIGHTS WHICH WERE PURCHASED THROUGH AN INDENTURE DATED 26-9-2001. IN VIEW OF TH ESE RIGHTS, ASSESSEE RECEIVED A SUM OF RS.71.63 CRORES DURING T HE YEAR, WHICH RESULTED IN AN EXTINGUISHMENT OF ASSESSEES RIGHTS AND SUCH EXTINGUISHMENT IS SPECIFICALLY COVERED UNDER DEFINI TION OF TRANSFER IN SEC.2[47] OF THE ACT. HE ARGUED THAT EVEN IF WHOLE OF THE RIGHTS HAVE NOT BEEN EXTINGUISHED THEN AT LEAST PART OF THE RIG HTS BECAME DILUTED TO THE EXTENT OF RECEIVING MONEY BY THE ASSESSEE AN D THERE WAS DEFINITELY A PARTIAL EXTINGUISHMENT. IN THIS REGARD , HE STRONGLY PLACED RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF KARTIKEYA V. SARABHAI [SUPRA]. SINCE THE ASSETS WER E HELD FOR LESS THAN THREE YEARS, BECAUSE THEY WERE PURCHASED IN SEPTEMB ER, 2001 AND SOLD IN A.Y 2004-05, THEREFORE, SAME WERE LIABLE TO BE TAXED UNDER THE HEAD SHORT TERM CAPITAL GAINS. 28. LD. SR. STANDING COUNSEL FURTHER REFERRED TO PA RAS 62 AND 63 OF THE APPELLATE ORDER WHEREIN IT WAS HELD BY THE CIT( A) THAT ASSESSEE WAS ENTITLED TO EXEMPTION U/S.47[III]. HE REFERRED TO THE PROVISIONS OF SEC.47[III] AND POINTED OUT THAT THIS WOULD COME IN TO OPERATION WHEN THE BENEFICIARY IN A WILL RECEIVES SOMETHING. HE CO NTENDED THAT ASSESSEE OR HIS ASSOCIATE COMPANIES ADMITTEDLY WERE NEVER THE BENEFICIARIES IN THE ORIGINAL WILL OF EFD AND ASSES SEE AND HIS ASSOCIATE COMPANIES HAVE RATHER PURCHASED THE RIGHTS THROUGH AN INDENTURE AND IN NO CIRCUMSTANCES THE ASSESSEE CAN BE TREATED AS A BENEFICIARY, ITA NOS.4573 & 4424/MUM/08 21 THEREFORE, CIT(A) HAS ARRIVED AT A WRONG CONCLUSION BY HOLDING THAT ASSESSEE IS ENTITLED TO THE BENEFIT OF PROVISIONS O F SEC.47[III]. HE ALSO MADE SUBMISSIONS THAT THERE IS NO FORCE IN THE ARGU MENT THAT GOVERNMENT OF INDIA BONDS WERE NEVER TRANSFERRED TO THE ASSESSEE BECAUSE SUCH BONDS WERE IN THE INDIVIDUAL NAME OF T HE ASSESSEE, THEREFORE, IT IS CLEAR THAT THE INTENTION WAS TO GI VE BENEFIT TO THE ASSESSEE AND THAT IS WHY THE BONDS WERE PURCHASED I N THE ASSESSEES NAME AND EVEN ACCOUNTING ENTRIES HAVE BEEN PASSED I N THE BOOKS OF THE ASSESSEE AS WELL AS THE ESTATE. 29. ON THE OTHER HAND LD. SENIOR ADVOCATE SHRI S.E. DASTUR WHO APPEARED ON BEHALF OF THE ASSESSEE STARTED HIS ARGU MENTS BY STRONGLY SUPPORTING THE ORDER OF THE CIT(A) AND POINTED OUT THAT IN THE APPELLATE ORDER THE ISSUE HAS BEEN DISCUSSED IN DET AIL AT PARAS 36 TO 83 AND DEALT WITH ALL THE OBJECTIONS RAISED BY THE AO AND REACHED A CONCLUSION THAT THE AMOUNTS RECEIVED BY THE ASSESSE E WERE NOT LIABLE TO TAX IN HIS HANDS. 30. SHRI DASTUR THEN REFERRED TO GROUND NO.1 RAISED BY THE REVENUE AND POINTED OUT THAT THE WHOLE CASE HAS BEEN BASED ON A WRONG FOOTING BY ASSUMING THAT ASSESSEE WAS THE OWNER OF THE IMMOVABLE PROPERTIES OF THE ESTATE OF EFD. HE POINTED OUT TH AT AS PER THE WILL OF EFD, BW WAS THE SOLE EXECUTRIX AND BW HAD ONLY LIFE INTEREST IN THE IMMOVABLE PROPERTIES IN INDIA BELONGING TO EFD. UP ON HER DEATH, THE CORPUS AND THE ACCRUED INCOME WAS TO BE GIVEN TO TW O AMERICAN CHARITIES. BW WAS ALSO MADE RESIDUARY LEGATEE IN T HE WILL. HE POINTED OUT THAT AS PER SEC.118 OF INDIAN SUCCESSION ACT, 1 925 BEQUEATHAL TO ITA NOS.4573 & 4424/MUM/08 22 ANY CHARITY COULD BE HELD TO BE VOID IF THE PERSON MAKING THE WILL DIED WITHIN ONE YEAR OF MAKING THE WILL. SINCE EFD HAD E XPIRED WITHIN TWELVE MONTHS FROM THE DATE OF EXECUTION OF HIS WIL L AND THIS ISSUE WAS CHALLENGED BEFORE THE HIGH COURT BY THE ADMINISTRAT OR AND THE BEQUEATHAL WAS HELD TO BE VOID BY THE HON'BLE HIGH COURT. HE ALSO MADE DETAILED ARGUMENT THAT HOW THIS JUDGMENT WOULD BE OPERATIVE ONLY FROM THE DATE OF THE ORDER BECAUSE THE MATTER DID NOT INVOLVE INTERPRETATION OF ANY LAW BUT ONLY LAW PROVIDED U/S .118 WAS APPLIED TO THE EXISTING FACTS. HOWEVER, HE ALSO AGREED THAT WH ETHER THE ORDER OF THE HIGH COURT DECLARING BEQUEATHAL OF THE IMMOVABL E PROPERTIES TO TWO AMERICAN CHARITIES VOID WAS OPERATIVE FROM OR 2 001 OR 1970 WIL NOT MAKE MUCH DIFFERENCE. EVEN AFTER THE ORDER OF T HE HIGH COURT, BW WAS ONLY A RESIDUARY LEGATEE. THEREFORE, BEFORE THE HIGH COURTS ORDER BW WAS NOT A LEGAL OWNER OF THE PROPERTIES AND EVEN AFTER SUCH ORDER SHE DID NOT BECAME THE OWNER. THE PROPERTIES IN THE ESTATE OF EFD WERE IN FACT LEGALLY OWNED BY THE ADMINISTRATOR. TH E APPOINTMENT OF MR. NUSLI N. WADIA AS AN ADMINISTRATOR WAS AGAIN CO NFIRMED AFTER THE DEATH OF BW, IN THE YEAR 2003. ALL THESE FACTS CL EARLY SHOW THAT BW WAS NEVER A OWNER OF THE PROPERTIES AND SHE ONLY HA D BENEFICIARY INTEREST DURING HER LIFE TIME AND, THEREFORE, THERE WAS NO QUESTION OF TRANSFERRING THE PROPERTIES BY AN INDENTURE DATED 2 6-9-01. HE ARGUED THAT THE FIRST MISTAKE COMMITTED BY THE AO IS THAT HE HELD THAT AFTER THE DEATH OF BW THE ESTATE OF EFD CAME TO AN END BE CAUSE MR. NUSLI N. WADIA WAS ALLOWED TO CONTINUE AS AN ADMINISTRATO R BY THE HIGH COURT VIDE ORDER DATED 20-11-03 COPY OF WHICH IS AV AILABLE AT PAGES 79 ITA NOS.4573 & 4424/MUM/08 23 TO 96 OF THE PAPER BOOK. EVEN AFTER THE DEATH OF B W THIS FACT IS FURTHER ACCEPTED BY THE DEPARTMENT IN THE SENSE THAT ESTATE OF EFD HAD FILED SEPARATE INCOME TAX AS WELL AS WEALTH TAX RETURNS A ND ALL THE INCOME ARISING FROM TRANSFER OF THE RIGHTS IN LAND TO THE DEVELOPER WAS DECLARED IN THE RETURN OF ESTATE OF EFD FILED BY THE ADMINI STRATOR AND SUCH RETURNS HAVE BEEN ACCEPTED BY THE DEPARTMENT AND IN SOME YEARS AFTER SCRUTINY ASSESSMENTS ORDERS U/S.143[3] HAVE BEEN P ASSED [COPIES OF THE ASSESSMENT ORDERS WERE NOT FILED IN THE PAPER B OOK, THEREFORE, LD. SR. ADVOCATE WAS DIRECTED TO FURNISH THE SAME AND S UCH ASSESSMENT ORDERS HAVE BEEN FILED VIDE LETTER DATED 16-6-2011 WHICH ARE PLACED ON RECORD]. HE POINTED OUT THAT THE FACT THAT ESTATE O F EFD HAS FILED SEPARATE RETURNS WAS ALSO TAKEN SPECIFIC NOTE BY TH E CIT(A) VIDE PARA 65 OF THE ORDER. IN THIS BACKGROUND, THEREFORE, AO PROCEEDED ON THE WRONG FOOTING THAT BECAUSE OF THE INDENTURE DATED 2 6-9-01 ASSESSEE BECAME THE OWNER UPON THE DEATH OF BW AND THE PROPE RTIES FULLY VESTED IN THE ASSESSEE IN HIS INDIVIDUAL CAPACITY. 31. SHRI DASTUR FURTHER ARGUED THAT SOMEWHERE IN 19 95 ADMINISTRATOR HAD ENTERED INTO A DEVELOPMENT AGREEM ENT WITH SOME DEVELOPERS THROUGH WHICH THE DEVELOPERS WERE TO DEV ELOP THE PROPERTIES AFTER REMOVING ENCROACHMENTS AND SETTLIN G VARIOUS LEGAL DISPUTES. THESE AGREEMENTS WERE SIGNED BY BW ALSO A S CONFIRMING PARTY. AS PER THESE AGREEMENTS THE ESTATE WAS TO RE CEIVE 12% OF THE GROSS REALISATION AND BALANCE 88% WAS TO GO TO THE DEVELOPERS. THE ESTATE HAD RECEIVED CERTAIN ADVANCES ALSO WHICH WER E REFLECTED AS LIABILITY IN THE BOOKS OF ESTATE. WHENEVER A CONVEY ANCE WAS EXECUTED ITA NOS.4573 & 4424/MUM/08 24 BY THE ADMINISTRATOR ON BEHALF OF THE ESTATE OF EF D IN FAVOUR OF A PURCHASER, CORRESPONDING INCOME WAS RECOGNIZED AND WAS DULY REFLECTED AS CAPITAL GAIN AND WAS ALSO OFFERED FOR TAXATION. IT WAS ONLY THE INCOME AVAILABLE WITH THE ADMINISTRATOR AFTER T HE PAYMENT OF TAXES OR ANY OTHER DUES IN TERMS OF THE WILL OF THE EFD W HICH COULD BE APPLIED. IN FACT, A SPECIFIC PROVISION WAS MADE EVE N IN THE INDENTURE TO THIS EFFECT WHICH IS PLACED AT PAGES 31 TO 40 OF TH E PAPER BOOK AND HE INVITED OUR ATTENTION TO CLAUSE 4[A] OF THIS INDENT URE WHEREBY ADMINISTRATOR COULD MAKE DISTRIBUTION OF THE SALE P ROCEEDS OR ADVANCES RECEIVED ONLY AFTER MEETING THE COST OF ADMINISTRAT ION AS WELL AS PAYMENT OF TAXES. THEREFORE, INCOME ARISING TO AN E STATE AFTER PAYMENT OF TAXES COULD NOT BE SUBJECTED TO TAX AGAI N ON ITS DISTRIBUTION. HE ALSO POINTED OUT THAT AS FAR AS AD VANCES ARE CONCERNED, THEY WERE IN THE NATURE OF LIABILITY AND WOULD BE C ONVERTED INTO INCOME ONLY WHEN A CONVEYANCE WAS EXECUTED IN FAVOUR OF TH E PURCHASERS AND, THEREFORE, SUCH ADVANCES COULD NOT BE TERMED A S INCOME IN THE HANDS OF THE RECIPIENT. THEREFORE, MERELY BECAUSE T HE ASSESSEE ALONG WITH HIS FOUR ASSOCIATE COMPANIES RECEIVED CERTAIN AMOUNTS BY WAY OF DISTRIBUTION, WOULD NOT BECOME CHARGEABLE IN THE HA NDS OF ASSESSEE AND AS FAR AS THE ADVANCES ARE CONCERNED THE NATURE WOULD NOT CHANGE EVEN IN THE HANDS OF THE RECIPIENT. HE SUBMITTED TH AT THE AMOUNT COULD BEAR THE CHARACTER OF INCOME AND BROUGHT TO TAX ONL Y ONCE. SINCE UNDER THE LAW INCOME COULD BE TAXED ONLY IN THE HAN DS OF ESTATE OF EFD WHO WAS THE OWNER OF THE PROPERTIES, THE SAME C OULD NOT BE TAXED AGAIN AT THE TIME OF DISTRIBUTION. IN THIS REGARD, HE ALSO POINTED OUT ITA NOS.4573 & 4424/MUM/08 25 THAT IN CASE OF SEVAKUNJ INVESTMENT AND TRADING CO. PVT. LTD.(LATER RENAMED AS GO INVESTMENTS PVT. LTD.) THIS APPEAL W AS ALSO HEARD ALONG WITH THE ASSESSEES APPEAL) THE ASSESSING AUT HORITY IN THE ASSESSMENT ORDER ITSELF HAD ACCEPTED THAT LEGALLY I NCOME WOULD SUFFER TAX ONLY ONCE IN THE HANDS OF THE ESTATE AND COULD NOT AGAIN SUFFER THE TAX ON DISTRIBUTION BEING MADE BY THE ADMINISTRATOR . AO IN THIS CASE WHILE ASSESSING THE SIMILAR RECEIPTS AS CAPITAL GAI NS GAVE CREDIT TO THE EXTENT THE SAME HAD ALREADY BEEN TAXED IN THE HANDS OF THE EFDS ESTATE. THE LD. SR. ADVOCATE EMPHASIZED THAT THE AD MINISTRATOR MADE THE DISTRIBUTION OF FUNDS EITHER OUT OF TAX PAID IN COME ON SALE PROCEEDS OF THE PROPERTIES OR ADVANCES RECEIVED FROM THE PUR CHASERS, INCOME FROM WHICH COULD BE ASSESSED ONLY WHEN A CONVEYANCE DEED WAS FINALLY EXECUTED BY THE ADMINISTRATOR. THUS, PAYMEN T FROM EITHER OF THESE SOURCES COULD NOT BE ASSESSED AS ASSESSEES I NCOME AGAIN BECAUSE THE RECEIPTS DID NOT BEAR THE CHARACTER OF INCOME AND WAS NOT CHARGEABLE TO TAX ACCORDINGLY. SHRI DASTUR FURTHER SUBMITTED THAT DURING BWS LIFE SHE WAS ENTITLED ONLY TO RECEIVE F ROM THE ADMINISTRATOR INCOME DERIVED FROM THE ESTATES OF EFD I.E. IMMOVAB LE PROPERTIES. HOWEVER, THE LIABILITY TO PAY THE TAX ON INCOME ON DISPOSAL OF SUCH PROPERTIES WAS THAT OF ADMINISTRATOR AND NOT OF BW. IN THIS REGARD, HE REFERRED TO THE PROVISIONS OF SEC.168 OF THE I.T.AC T WHERE IT IS CLEARLY PROVIDED THAT LIABILITY TO PAY TAX ON INCOME ACCRUI NG TO THE ESTATE WAS TO BE DISCHARGED ONLY BY THE ADMINISTRATOR OR THE E XECUTOR AND NOT THE LEGATEE AS THE ASSESSEE CONTINUED TO FUNCTION AS AD MINISTRATOR VIDE HIGH COURTS ORDER DATED 20-11-03 AND HIS LIABILITY TO PAY TAXES U/S.168 ITA NOS.4573 & 4424/MUM/08 26 CONTINUED TO BE THERE. THUS, LIABILITY TO PAY TAXES ON THE ASSESSEE WAS IN THE CAPACITY OF THE ADMINISTRATOR. THEREFORE, IF THE AMOUNTS RECEIVED FROM THE ADMINISTRATOR WERE NOT TAXABLE IN THE HAND S OF BW WHEN SHE WAS ALIVE THEN ON THE SAME PRINCIPLE THE AMOUNT REC EIVED BY THE ASSESSEE IN THE CAPACITY OF AN INDIVIDUAL AND HIS F OUR ASSOCIATE COMPANIES COULD NOT BE TAXED IN THEIR INDIVIDUAL AS SESSMENTS BECAUSE OF THE INDENTURE DATED 26-9-01 AS THEY HAD STEPPED IN THE SHOES OF BW. 32. SHRI DASTUR FURTHER SUPPORTED THE IMPUGNED ORDE R PASSED BY THE CIT(A) HOLDING THAT TRANSACTION IN QUESTION DID NOT CONSTITUTE AN ADVENTURE IN THE NATURE OF TRADE AS HELD BY THE AO. HE ARGUED THAT IT IS WELL SETTLED THAT THE TERM BUSINESS REFERS TO SOM E SYSTEMATIC AND ORGANIZED COURSE OF ACTIVITY WITH AN OBJECT OF DERI VING PROFITS. SIMPLE PURCHASE OF RIGHTS TO DISTRIBUTION BY THE ASSESSEE VIDE INDENTURE DATED 26-9-01 COULD NOT BE TERMED AS AN ADVENTURE IN THE NATURE OF TRADE. WHILE REFERRING TO CLAUSE [L] OF THE INDENTURE, HE POINTED OUT THAT BW HAD ENTERED INTO THE SAID INDENTURE IN VIEW OF HER ADVANCED AGE AND SHE WAS DESIROUS OF SETTLING HER AFFAIRS IN HER LIF E TIME. LD. SR. ADVOCATE FURTHER SUBMITTED THAT ASSESSEE HAD FAITHFULLY DISC HARGED HIS OBLIGATIONS AS ADMINISTRATOR AND THAT IS WHY THE BO MBAY HIGH COURT PERMITTED HIM TO CONTINUE TO FUNCTION AS AN ADMINIS TRATOR EVEN AFTER THE BWS DEATH AS THE COURT WAS SATISFIED THAT ADMI NISTRATION OF ESTATE WAS NOT COMPLETE. THE LD. SR. ADVOCATE THEN INVITED OUR ATTENTION TO THE LAST WILL OF BW COPY OF WHICH IS PLACED AT PAGE S 41 TO 54 OF THE PAPER BOOK WHICH WAS EXECUTED ON 17-10-2001. IN THI S WILL, HE POINTED ITA NOS.4573 & 4424/MUM/08 27 OUT THAT ASSESSEE WAS APPOINTED AS THE SOLE EXECUTO R. FURTHER, ALL THE IMMOVABLE PROPERTIES BELONGING TO BW INCLUDING THE SHARE IN THE PROPERTIES WITH HER LATE BROTHER WAS BEQUEATHED TO THE TWO SONS OF THE ASSESSEE AS RESIDUARY LEGATEE, CLEARLY SHOWS THAT A CLOSE RELATIONSHIP HAD DEVELOPED BETWEEN THE ASSESSEE AND BW OVER THE YEARS. IN FACT THAT BW CHOSE ASSESSEE AS ADMINISTRATOR RIGHT FROM 1972 AND ALSO APPOINTED HIM AS THE SOLE EXECUTOR OF HER OWN WILL AS WELL AS THE FACT THAT ALL IMMOVABLE PROPERTIES WERE BEQUEATHED TO TH E TWO SONS OF THE ASSESSEE, CLEARLY SHOWS THAT ASSESSEE ENJOYED FULL TRUST AND COMPLETE FAITH OF BW. THUS, IT IS CLEAR THAT THE RELATIONSH IP WAS NOT BASED ON COMMERCIAL CONSIDERATION AND, THEREFORE, THE ARRANG EMENT ARRIVED AT IN THE INDENTURE DATED 26-9-01 COULD NOT BE VIEWED AS AN ADVENTURE IN THE NATURE OF TRADE. HE EMPHASIZED THAT IN VIEW OF THE FACT THAT ASSESSEES OWN SONS WERE LEGATEES OF BWS WILL, T HERE WAS NO NEED FOR THE ASSESSEE TO EMBARK UPON ANY ADVENTURE IN TH E NATURE OF TRADE TO REALISE GAINS FROM EFD PROPERTIES. 33. THE LD. SR. COUNSEL FOR THE ASSESSEE FURTHER S UBMITTED THAT THE ASSESSEE IS AN INDUSTRIALIST AND IS SITTING IN THE BOARDS ON VARIOUS COMPANIES. THE ASSESSEE HAS RETURNED HIS INCOME FR OM MAINLY UNDER THE HEAD SALARIES AND IS NOT DOING ANY BUSINESS A CTIVITY. IN ANY CASE, THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF MAKI NG INVESTMENTS IN RESIDUARY INTEREST OR ACQUISITION OF INTEREST UNDER THE WILLS. THIS WAS A SOLITARY TRANSACTION INDULGED BY THE ASSESSEE. ON A QUESTION FROM THE BENCH THAT WHETHER A SINGLE TRANSACTION CAN NEVER B E CONSTRUED AS ITA NOS.4573 & 4424/MUM/08 28 BUSINESS IN THE NATURE OF ADVENTURE IN TRADE, HE AG REED THAT IN SOME CASES EVEN A SINGLE TRANSACTION MAY CONSTITUTE ADVE NTURE IN THE NATURE OF TRADE BUT IN THAT CASE SUCH TRANSACTION MUST HAV E SOME ELEMENTS OR FEATURES OF THE BUSINESS. IN THE PRESENT CASE, THE ASSESSEE HAD NOT INDULGED ANY TRANSACTION ON COMMERCIAL CONSIDERATIO NS FOR EARNING A HUGE FORTUNE BY MAKING A SMALL INVESTMENT. THE TRA NSACTION WAS ENTERED INTO BETWEEN THE PARTIES WHO HAD LONG PERSO NAL RELATIONSHIP AND AT THE INSTANCE OF BW AND THE ASSESSEE WAS APPO INTED ADMINISTRATOR OF THE ESTATE OF EFD RIGHT FROM 1972 ONWARDS. AS POINTED OUT EARLIER, THE ASSESSEES SONS WERE TO IN HERIT THE PROPERTIES OF BW AND, THEREFORE, EVEN IN THE ABSENCE OF THIS T RANSACTION ASSESSEES FAMILY WOULD HAVE BEEN IN ANY CASE INHER ITED BWS INTEREST IN THE ESTATE OF EFD. THEREFORE, UNDER THESE CIRCU MSTANCES, THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE UNDER THE INDENTURE DATED 26.9.2001 COULD NOT BE CONSTRUED AS BUSINESS TRANSA CTION FOR THE PURPOSE OF SECTION 28 OF THE ACT. FOR THIS PROPOSI TION, SHRI S.E. DASTUR STRONGLY RELIED ON THE DECISION OF THE HONBLE MAD RAS HIGH COURT IN THE CASE OF MOTHAY GANGARAYA VS. CIT ( 3 ITR 58). HE A RGUED THAT IN THAT CASE, THE FACTS WERE ALMOST IDENTICAL. THE ASSESS EE WAS LAND OWNER AND MONEY LENDER AND ALSO HAD INTEREST IN SOME COTT ON MILLS. THE ASSESSEE PURCHASED IN AN AUCTION THE RIGHT, TITLE A ND INTEREST OF A PERSON WHO WAS ONE OF HIS DEBTORS IN CERTAIN LEGACI ES FOR A SUM OF RS.39,800/-. THERE WAS PROLONGED LITIGATION AND THE ASSESSEE HAD TO INCUR CERTAIN EXPENSES ON SUCH LITIGATION. ULTIMATE LY, THE ASSESSEE WAS ABLE TO RECOVER A SUM OF RS.1,97,025/- WHICH RESULT ED INTO A SURPLUS OF ITA NOS.4573 & 4424/MUM/08 29 RS.1,50,399/-. THE SAME WAS SUBJECTED TO TAX BY TA X AUTHORITIES ON THE GROUND THAT THIS TRANSACTION WAS AN ADVENTURE I N THE NATURE OF TRADE. WHEN THE MATTER TRAVELED TO THE HIGH COURT, IT WAS HELD THAT THE TRANSACTION WAS NOT AN ADVENTURE IN THE NATURE OF T RADE BECAUSE SAME HAD NO CONNECTION BETWEEN THE MONEY LENDING BUSINES S OR OTHER BUSINESS OF THE ASSESSEE. THE INCOME WAS ULTIMATELY HELD TO BE NOT ASSESSABLE. . HE EMPHASIZED THAT FACT OF THE ASSESS EES CASE ARE ALMOST IDENTICAL AND, THEREFORE, RATIO OF THIS DECISION SH OULD BE APPLIED IN THIS CASE. SINCE IN THE CASE BEFORE US, THE ASSESSEE HAD ENTERED INTO ONLY A SOLITARY TRANSACTION AND THE SAME IS NOT CONNECTED WITH ANY OF THE BUSINESSES OF THE ASSESSEE AND THEREFORE SAME CANNO T BE TREATED A TRANSACTION RESULTING IN AN ADVENTURE IN THE NATURE OF TRADE. THEREFORE, THE CIT(A) WAS CORRECT IN HOLDING THAT THE IMPUGNED RECEIPTS WOULD NOT BE CONSTRUED AS A BUSINESS BEING ADVENTURE IN THE N ATURE OF TRADE FOR THE PURPOSE OF SECTION 28 OF THE ACT. 34. COMING TO THE ALTERNATIVE FINDING AND CONTENTIO NS OF THE REVENUE THAT THE SAID RECEIPT COULD BE ASSESSED AS A SHORT TERM CAPITAL GAIN, HE SUBMITTED THAT THIS IS TOTALLY MISCONCEIVE D BECAUSE NO TRANSFER HAS TAKEN PLACE FOR ATTRACTING THE PROVISIONS OF SE CTION 45, THERE HAS TO BE AN ASSET AND THE SAME MUST HAVE BEEN TRANSFERRED ONLY THEN THE RESULTANT GAIN OR LOSS CAN BE ASSESSED AS CAPITAL G AINS OR CAPITAL LOSS. HE ADMITTED THAT THE ASSESSEE ALONG WITH FOUR ASSOC IATE COMPANIES HAD PURCHASED THE RIGHTS TO RECEIVE THE SALE PROCEE DS ON THE DISPOSAL ITA NOS.4573 & 4424/MUM/08 30 OF THE PROPERTIES WHICH BELONGED TO THE ESTATE OF E FD BUT SUCH RIGHTS WOULD VEST IN THE TRANSFEREES I.E. ASSESSEE AND HIS FOUR ASSOCIATE COMPANIES ONLY AFTER THE DEATH OF BW. DURING THE L IFE TIME OF BW, SHE COULD ENJOY HER LIFE INTEREST IN THE PROPERTIES. H E SUBMITTED THAT THERE WAS NO INTENTION TO TRANSFER THE PROPERTIES TO THE TRANSFEREES IN TERMS OF THE INDENTURE AND IN THIS REGARD SPECIFICALLY RE FERRED TO CLAUSE 4(B) IN THE INDENTURE. FURTHER BW HERSELF WAS NEVER THE FULL OWNER OF THE EFD PROPERTIES IN INDIA. THEREFORE, THERE WAS NO Q UESTION OF TRANSFEREES RECEIVING FULL OWNERSHIP OF THE PROPERT IES. HE ADMITTED THAT DESPITE OF ALL THESE CONTENTIONS AS OBSERVED B Y THE LEARNED CIT(A), THIS RIGHT TO RECEIVE THE SALE PROCEEDS CAN BE CONSTRUED AS CAPITAL ASSET BUT THEN BRINGING THE SAME UNDER THE TAX NET, THERE HAS TO BE A TRANSFER OF SUCH RIGHT. THE ASSESSING OFFIC ER HAS ALLEGED THAT THE TRANSFER HAS TAKEN PLACE IN TERMS OF EXTINGUISH MENT OF THESE RIGHTS. HE ARGUED THAT NO EXTINGUISHMENT HAS TAKEN PLACE. T HE RIGHTS ACQUIRED UNDER THE INDENTURE CONTINUED TO REMAIN THERE EVEN AFTER RECEIVING SOME SALE PROCEEDS. AGAINST THESE RIGHTS CERTAIN PA YMENTS HAVE BEEN MADE BY THE ADMINISTRATOR OUT OF THE ESTATE OF EF D, HOWEVER, THESE PAYMENTS DID NOT RESULT IN EXTINGUISHMENT OF ANY OF THE ASSESSEES RIGHTS ACQUIRED UNDER THE INDENTURE. THIS IS SO, BE CAUSE PRIOR TO THE RECEIPTS OF IMPUGNED RECEIPTS THE RIGHT TO RECEIVE CONTINUED AGAINST THE ADMINISTRATOR. THEREFORE, THERE WAS NO EXTINGUISHME NT OF ANY RIGHT WHICH THE ASSESSEE HAD ACQUIRED UNDER THE INDENTURE . SINCE THERE WAS NO EXTINGUISHMENT OF ANY OF THE ASSESSEES RIGHTS, THE AMOUNTS RECEIVED COULD NOT BE CHARGED UNDER THE HEAD CAPITA L GAINS AS SEC.45 ITA NOS.4573 & 4424/MUM/08 31 COMES INTO PICTURE ONLY AFTER THE TRANSFER OF ASSET S. IN THE PRESENT CASE, SINCE NO TRANSFER HAD TAKEN PLACE WITHIN THE MEANING OF SEC.2[47] OF THE I.T.ACT, THERE COULD NOT BE ANY AS SESSMENT OF THE IMPUGNED SUMS UNDER THE HEAD CAPITAL GAINS. HE EM PHASIZED THAT IN THE PRESENT FACTS OF THE CASE THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF KARTIKEYA V. SARABHAI [SUPRA] WAS NOT APPLICABLE. IN THAT CASE, ASSESSEE HAD RECEIVED CONSIDERATION U PON PART REDEMPTION OF PREFERENCE SHARES CONSEQUENT TO WHICH THE ASSESSEES RIGHTS AS SHARE HOLDER VIS--VIS THE COMPANY AND OT HER SHARE-HOLDERS SUFFERED PART EXTINGUISHMENT AND THAT IS WHY THE CO URT HELD THAT THERE WAS A TRANSFER OF CAPITAL ASSET WHICH WAS HELD TO B E ASSESSABLE UNDER THE HEAD CAPITAL GAINS. HOWEVER IN THE CASE BEFOR E US, THE ASSESSEES RIGHTS ACQUIRED UNDER THE INDENTURE CONTINUED AND R EMAINED UNAFFECTED EVEN AFTER THE RECEIPTS OF IMPUGNED SUMS . UNDER THE INDENTURE ASSESSEE WAS TO RECEIVE 60% OF THE SALE P ROCEEDS ON DISPOSAL OF THE PROPERTIES OF THE ESTATES OF EFD AN D THESE RIGHTS REMAINED UNCHANGED AND, THEREFORE, THERE WAS NO EXT INGUISHMENT OF ANY OF THE ASSESSEES RIGHTS AND, ACCORDINGLY, NO T RANSFER HAS TAKEN PLACE DURING THE YEAR. 35. ACCORDING TO THE LD. SR. ADVOCATE, IN FACT, THE RECEIPTS OF VARIOUS AMOUNTS OF SUMS BY THE ASSESSEE AND HIS FOUR ASSOCI ATE COMPANIES FROM THE ADMINISTRATOR BASICALLY AMOUNTED TO DISTRI BUTION OF SUMS ON TAKING OUT OR WORKING OUT OF RIGHTS. IN THIS REGA RD, HE REFERRED TO THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. MOHANBHAI PAMABHAI [91 ITR 393]. IN THAT CASE A QUE STION AROSE ITA NOS.4573 & 4424/MUM/08 32 WHETHER RELINQUISHMENT OF INTEREST IN A PARTNERSHIP AMOUNTS TO TRANSFER OF CAPITAL ASSETS, AND THE HON'BLE HIGH COURT AFTER DETAILED DISCUSSION, HELD THAT SUCH RELINQUISHMENT WOULD NOT AMOUNT TO T RANSFER BUT IS BASICALLY WORKING OUT OF THE RIGHTS. FOLLOWING THIS ANALOGY, ACCORDING TO LD. SR. ADVOCATE, RECEIPTS OF CERTAIN SUMS FROM THE ADMINISTRATOR IN REALISATION OF PRE EXISTING RIGHTS DID NOT AMOUNT T O TRANSFER OF ANY CAPITAL ASSET FOR THE REASON THAT BEFORE THE PAYMEN T WAS ACTUALLY REALISED EACH PARTYS RESPECTIVE ENTITLEMENT THEREI N WAS THE SAME. ON RECEIPTS OF PAYMENTS FROM ADMINISTRATOR NEITHER ANY NEW RIGHTS WERE ACQUIRED, NOR EXISTING RIGHTS OF THE PARTIES WERE E XTINGUISHED AND, THEREFORE, THIS WOULD AMOUNT TO WORKING OUT OF THE RIGHTS. 36. THE LD. SR. ADVOCATE FURTHER ARGUED THAT OWNERS HIP OF THE PROPERTIES OF EFD NEVER BELONGED TO BW BECAUSE SHE HAD ONLY LIFE TIME INTEREST. EVEN AFTER THE WILL BEING HELD TO BE INVA LID BY THE BOMBAY HIGH COURT TO THE EXTENT THAT BEQUEATHAL OF THE PRO PERTIES TO TWO AMERICAN CHARITIES, THE PROPERTIES REMAINED VESTED IN THE ADMINISTRATOR AND THE ESTATE OF EFD CONTINUED TO FI LE INCOME TAX AS WELL AS WEALTH TAX RETURNS OF THE PROPERTIES AND TH E DEPARTMENT HAVE ACCEPTED THESE RETURNS AS INCOME OF THE YEAR AND EV EN ASSESSMENT ORDERS HAVE BEEN PASSED IN SOME YEARS AFTER SCRUTIN IZING THE SAME U/S.143[3]. THIS MEANS THE EXISTENCE AND CONTINUANC E OF ESTATE HAVE BEEN RECOGNIZED BY THE DEPARTMENT. THEREFORE, THE E STATE CONTINUED TO BE IN EXISTENCE EVEN AFTER THE DEATH OF BW WHICH IN TURN MEANS THAT THE PROPERTIES WERE NEVER TRANSFERRED TO THE ASSESS EE AND, THEREFORE, THERE WAS NO QUESTION OF MAKING ANY TRANSFER BY THE ASSESSEE. ITA NOS.4573 & 4424/MUM/08 33 37. THE LD. SR. ADVOCATE AGAIN EMPHASIZED THAT THE AMOUNTS DISTRIBUTED BY THE ADMINISTRATOR INCLUDED EVEN CERT AIN ADVANCES RECEIVED BY THE ADMINISTRATOR FROM THE PROSPECTIVE BUYERS OF THE PROPERTIES OF THE ESTATE. SUCH ADVANCES WERE REFLEC TED AS LIABILITY AND OBVIOUSLY THE ESTATE WAS NOT LIABLE TO PAY ANY CAPI TAL GAINS TAX ON SUCH ADVANCES. SINCE THE ADMINISTRATOR WAS REQUIRED TO M AKE PAYMENT OF TAXES U/S.168 ONLY ON THE INCOME ARISING FROM THE T RANSFER OF IMMOVABLE PROPERTIES, THE ADVANCES COULD NOT BE SUB JECTED TO CAPITAL GAINS TAX IN THE HANDS OF THE ASSESSEE WHO DID NOT TRANSFER ANY RIGHTS AND IT WAS ONLY A RECEIPT OF SALE PROCEEDS FROM THE ADMINISTRATOR. THEREFORE, SUBJECTING THE SALE RECEIPTS IN THE HAND S OF THE ASSESSEE AGAIN ON DISTRIBUTION WOULD AMOUNT TO DOUBLE TAXATI ON OF THE SAME AMOUNT WHICH IS NOT PERMISSIBLE UNDER THE LAW. 38. THE LD. SR. ADVOCATE STRONGLY SUPPORTED THE ORD ER OF THE CIT(A) FOR HOLDING THAT ASSESSEE WAS IN ANY CASE ENTITLED TO CLAIM EXEMPTION U/S.47[III] OF THE ACT. HE ARGUED THAT BW HAD THE R IGHT TO RECEIVE AND ENJOY THE SALE PROCEEDS OF PROPERTIES BELONGING TO THE DECEASED. THIS RIGHT WAS PROVIDED TO HER UNDER THE WILL OF EFD. B W HAD THE RIGHT TO CLAIM AND DEMAND SUCH RECEIPTS FROM THE ADMINISTRAT OR DURING HER LIFE TIME. SUCH RIGHT BECAME ABSOLUTE ONCE BEQUEATHAL TO TWO AMERICAN CHARITIES WAS SET ASIDE BY THE BOMBAY HIGH COURT. A S THE BW HAD ACQUIRED THE RIGHTS IN TERMS OF THE WILL OF EFD, THESE RIGHTS WERE CAPABLE OF BEING TRANSFERRED BY HER FOR A CONSIDERA TION OR EVEN WITHOUT A CONSIDERATION. IN CASE OF SUCH TRANSFER, SUCH TRA NSFEREE BY HER RIGHT HAD THE SAME RIGHT TO DEMAND PERFORMANCE OF THE RIG HT FROM THE ITA NOS.4573 & 4424/MUM/08 34 ADMINISTRATOR. THEREFORE, MERELY BECAUSE ASSESSEE A CQUIRED THE RIGHTS FROM BW UNDER INDENTURE DATED 26-9-01, IT WOULD NOT MEAN THAT THE PAYMENTS MADE BY THE ADMINISTRATOR CEASED TO BE PAY MENTS UNDER THE WILL. HE SUBMITTED THAT THE PROVISIONS OF SEC.47[II I] NEEDS TO BE EXAMINED FROM THE POINT OF VIEW OF A TRANSFEROR I.E . ADMINISTRATOR OF THE ESTATE IN THE CASE BEFORE US AND SINCE THE ADMI NISTRATOR WAS LEGALLY OBLIGED AND LIABLE TO MAKE PAYMENTS TO BW UNDER TH E WILL AND FAILING HER, THE PAYMENTS WERE TO BE MADE TO THE PERSONS NO MINATED OR APPOINTED BY HER. THUS, THE NATURE AND CHARACTER OF THE PAYMENTS IN THE HANDS OF THE PAYER CONTINUED TO BE THE SAME, I. E., PAYMENTS UNDER THE WILL. HE FURTHER SUBMITTED THAT AS THESE AMOUNT S WERE RECEIVED BY BW FROM THE ESTATE, NATURALLY, SAME WOULD HAVE QUAL IFIED FOR EXEMPTION U/S.47[III] OF THE ACT, THEN BY EQUAL FOR CE AND ON THE SAME FOOTING, SAME EXEMPTION SHOULD BE AVAILABLE TO THE ASSESSEE IN TERMS OF THE INDENTURE. ACCORDING TO HIM, IT WAS NOT NECE SSARY TO PROVE THAT THE AMOUNTS HAVE BEEN RECEIVED ONLY BY A PERSON SPE CIFIED IN THE WILL AND WHAT IS REQUIRED TO BE PROVED IS THAT THE AMOUN TS HAVE BEEN RECEIVED UNDER THE WILL. AS IN THE PRESENT CASE, TH E ADMINISTRATOR WAS UNDER THE OBLIGATION TO PAY THE INCOME ARISING FROM THE PROPERTIES OF THE ESTATES TO BW OR HER NOMINEES, THE PAYMENTS MA DE BY THE ADMINISTRATOR EVEN TO THE NOMINEES WERE IN TERMS OF THE SAID WILL AND, ACCORDINGLY, SEC.47[III] OF THE I.T.ACT WAS NOT APP LICABLE. 39. THE LD. SR. ADVOCATE WHILE DEALING WITH THE ISS UE REGARDING TRANSFER OF GOVERNMENT BONDS REFERRED TO VARIOUS DO CUMENTS PLACED IN ITA NOS.4573 & 4424/MUM/08 35 THE PAPER BOOK AT PAGES 97 TO 169 IN RESPECT OF TRA NSFER OF THE GOVERNMENT OF INDIA BONDS. HE POINTED OUT THAT AS P ER NOTIFICATION OF THE MINISTRY OF FINANCE AND COMPANY AFFAIRS, DATED 13-3-2003, BONDS COULD BE HELD IN THE NAME OF INDIVIDUAL AND SINCE E STATE WAS NOT A SEPARATE JURISTIC ENTITY, THE BONDS WERE APPLIED IN THE PERSONAL NAME OF THE ADMINISTRATOR. HE PARTICULARLY REFERRED TO PAGE S 121 TO 125 OF THE PAPER BOOK, WHICH IS A COPY OF THE APPLICATION AND POINTED OUT THAT P.A.N. OF THE ESTATE WAS PROVIDED IN THE APPLICATIO N WHICH CLEARLY SHOWS THAT THE BONDS WERE ACQUIRED BY THE ESTATE AN D ASSESSEE PURCHASED THEM BEFORE THE DEATH OF BW. HE SUBMITTED THAT THESE BONDS WERE ACCOUNTED FOR IN THE BOOKS OF ESTATE AS AN ASSET AND THE BONDS WERE NOT TRANSFERABLE IN TERMS OF THE ISSUE T ILL MATURITY AND AS SUCH THE ESTATE COULD NOT HAVE LEGALLY TRANSFERRED THESE BONDS TO THE ASSESSEE. HOWEVER, UNDER MISCONCEPTION OF LAW THE T RANSFER OF BONDS WAS RECORDED IN THE BOOKS OF THE ASSESSEE AS WELL A S THE ESTATE BY PASSING ACCOUNTING ENTRIES IN THEIR RESPECTIVE BOOK S. THE LD. SR. ADVOCATE ARGUED THAT WHEN SUCH TRANSFER WAS NOT POS SIBLE UNDER THE LAW, THEN ON MERELY PASSING THE ACCOUNTING ENTRIES THE INCOME CANNOT BE SAID TO HAVE BEEN ACCRUED TO THE ASSESSEE BECAUS E SUCH TRANSFER WAS INVALID. IN ANY CASE, THESE ENTRIES WERE RECTIF IED BY REVERSING THE ENTRIES IN THE BOOKS OF THE ASSESSEE AS WELL AS THE ESTATE IN F.Y 2006- 07 AND, THEREFORE, NO INCOME CAN BE SAID TO HAVE AC CRUED TO THE ASSESSEE ON ACCOUNT OF TRANSFER OF THESE BONDS. 40. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY IN THE LIGHT OF THE RELEVANT MATERIAL ON RECORD AS WELL AS THE D ECISIONS CITED BY THE ITA NOS.4573 & 4424/MUM/08 36 PARTIES. BOTH THE COUNSELS HAVE FILED WRITTEN SUBMI SSIONS ALSO SUMMARIZING THE ORAL ARGUMENTS BY THEM AND THESE SU BMISSIONS HAVE ALSO BEEN CONSIDERED. WE FIND THAT THERE IS NO DISP UTE IN RESPECT OF THE FACTS OF THE CASE WHICH HAVE BEEN NOTED BY US AT TH E BEGINNING OF THIS ORDER. THE DISPUTES ARE BASICALLY ON ACCOUNT OF INF ERENCES OR INTERPRETATIONS TO BE MADE ON THOSE FACTS. THE REVE NUE HAS CHALLENGED THE IMPUGNED ORDER BY RAISING TWO GROUNDS. THE FIRS T GROUND READS AS UNDER: 1. THE LEARNED CIT(A) ERRED IN TREATING THE RECEIPT OF RS.71,63,36,000/- RECEIVED ON TRANSFER OF LAND AS N ON TAXABLE WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS NOT THE RESIDUARY LEGATEE OF LATE SHRI E.F.DINSHAW AND TH E CONTROL, MANAGEMENT AND OWNERSHIP OF THE PROPERTIES CONSISTI NG OF THE ESTATE OF SHRI E. F. DINSHAW VESTS TOTALLY WITH THE ASSESSEE. THUS, IN THIS BACKGROUND REVENUE HAS RAISED TWO DIS PUTES, [I] THAT THE LD. CIT(A) ERRED IN HOLDING THAT RECEIPT OF RS.71.6 3 CRORES ON TRANSFER OF LAND IS NOT TAXABLE AND [II] THE ASSESSEE IS NOT THE RESIDUARY LEGATEE OF EFD, AS CONTROL, MANAGEMENT AND OWNERSHIP OF T HE PROPERTIES OF EFD VESTED TOTALLY WITH THE ASSESSEE. WE ARE OF THE VIEW THAT FIRST PART OF THE GROUND IS TOTALLY MISCONCEIVED BECAUSE REVEN UE IS GOING ON THE ASSUMPTION THAT ASSESSEE HAS TRANSFERRED SOME LAND. THE FACTS SHOW OTHERWISE. EFD EXECUTED A WILL IN 1970 BY WHICH HI S SISTER BW BECAME BENEFICIARY OF THE INCOME FROM THE ESTATES OF EFD AND UPON HER DEATH THE PROPERTIES WERE TO GO TO THE TWO AMERICAN CHARI TIES. THE BEQUEATHAL OF THE PROPERTIES TWO AMERICAN CHARITIES WAS HELD TO BE INVALID BY THE BOMBAY HIGH COURT. IN THE MEANTIME, BW SOLD HER RIGHTS TO RECEIVE THE DISTRIBUTION OF SALE PROCEEDS AFTER HER DEATH TO THE ASSESSEE. IN FACT, ASSESSEE HAS RECEIVED THE MONEY OUT OF SUCH ITA NOS.4573 & 4424/MUM/08 37 DISTRIBUTION. THE ESTATE HAD RECEIVED MONIES EITHER BY WAY OF ADVANCES OR BY SALE PROCEEDS AGAINST SALE OF PROPERTIES. HER E AGAIN, WE HAVE TO REMEMBER THAT THE PROPERTIES HAVE ALREADY BEEN GIVE N FOR DEVELOPMENT TO CERTAIN DEVELOPERS AND ESTATE WAS EN TITLED ONLY TO 12% OF THE SALE PROCEEDS AND THE BALANCE OF 88% WAS TO GO TO DEVELOPERS BECAUSE THEY WERE NOT ONLY REQUIRED TO DEVELOP THE PROPERTIES, BUT WERE ALSO REQUIRED TO REMOVE THE ENCROACHMENTS AND OTHER LEGAL IMPEDIMENTS. WHENEVER ANY ADVANCE WAS RECEIVED THE SAME WAS TREATED AS LIABILITY IN THE HANDS OF THE ESTATE AND WHENEVER A CONVEYANCE WAS EXECUTED THE SAME WAS TREATED AS REC EIPTS OF SALE CONSIDERATION AND EVEN PROPER TAXES ARISING OUT OF TRANSFER WERE PAID BY THE ESTATE. SUCH SALE PROCEEDS AND ADVANCES WERE ACCUMULATED OVER THE YEARS AND DURING THE RELEVANT YEAR ASSESSE E RECEIVED CERTAIN SUMS OUT OF DISTRIBUTION OF SUCH SALE PROCEEDS AS W ELL AS ADVANCES. THE ASSESSEE HAD NOT SOLD ANY PARTICULAR PIECE OF LAND DURING THE YEAR AND, THEREFORE, LD. CIT(A) HAS CORRECTLY HELD THAT THE R ECEIPTS WOULD NOT BE CHARGEABLE TO INCOME TAX. IN THE ABSENCE OF SALE OF A PARTICULAR ASSET, REVENUE CANNOT ASSUME THAT THE SUMS ARE TAXABLE ON TRANSFER OF LAND. THE SECOND PART OF THE GROUND RAISES AN OBJECTION A GAINST THE FINDING OF THE LD. CIT(A) THAT ASSESSEE WAS NOT A RESIDUARY LEGATEE OF THE EFD BECAUSE THE CONTROL, MANAGEMENT AND OWNERSHIP OF TH E PROPERTIES BELONGING TO THE ESTATE WERE TOTALLY VESTED IN THE ASSESSEE. AS NOTED EARLIER, BW HAD ONLY THE BENEFICIARY INTEREST FROM THE PROPERTIES WHICH WERE VESTED IN THE TRUST AND WAS ALSO THE SOLE EXEC UTRIX OF THE WILL. THE ASSESSEE, I.E. MR. NUSLI N. WADIA WAS APPOINTED AS AN ADMINISTRATOR IN ITA NOS.4573 & 4424/MUM/08 38 PLACE OF MR. JEHANGIR BEHRAM DUBASH WHO HAD SHOWN H IS INABILITY TO CONTINUE AS ADMINISTRATOR BY THE ORDER OF THE HIGH COURT DATED 21-12- 1972. THEREFORE, THE PROPERTIES WERE VESTED IN THE ADMINISTRATOR I.E. MR. NUSLI N. WADIA IN HIS CAPACITY AS ADMINISTRATO R. THE ADMINISTRATOR WAS REQUIRED TO PAY INCOME OF THE PROPERTIES TO BW BUT BEFORE DOING THAT ASSESSEE UNDER THE LAW I.E. SEC.168 OF THE I.T .ACT WAS REQUIRED TO PAY TAXES ON BEHALF OF THE ESTATE. EVEN AFTER THE D EATH OF BW ASSESSEE MADE AN APPLICATION BEFORE THE HON'BLE HIGH COURT F OR CONTINUING AS ADMINISTRATOR. A COPY OF THE ORDER OF THE HIGH COUR T IS AVAILABLE AT PAGES 79 TO 96 OF THE PAPER BOOK. THE REASONS FOR C ONTINUANCE OF MR. NUSLI N. WADIA AS AN ADMINISTRATOR HAVE BEEN GIVEN AT PARA-16 OF THE PETITION WHICH ARE AS UNDER: 16. THE PETITIONER SUBMITS THAT HE, BEING APPOINTE D AS ADMINISTRATOR OF THE DECEASEDS ESTATE IN INDIA BY THE AFORESAID ORDER DATED 21 ST DECEMBER 1972, IS ENTITLED TO CONTINUE WITH SUCH ADMINISTRATION. HOWEVER, SINCE THE SAID BACHOOBAI W AS THE SOLE EXECUTRIX OF THE DECEASEDS WILL DATED 4 TH FEBRUARY 1970 OF WHICH PROBATE WAS GRANTED TO HER UNDER THE SEAL OF THE SU RROGATES COURT OF THE COUNTY OF NEW YORK, NEW YORK, U.S.A. AS AFORESA ID, THE PETITION HAS BEEN ADVISED TO APPROACH THIS HON'BLE COURT BY THIS PETITION FOR ORDERS AUTHORIZING AND PERMITTING HIM TO CONTINUE W ITH THE ADMINISTRATION OF THE DECEASEDS ESTATE IN INDIA FO R THE FOLLOWING REASONS WHICH ARE STATED WITHOUT PREJUDICE TO ONE A NOTHER. (A) AS STATED ABOVE THE TRANSFEREES ARE ENTITLED TO THE PROCEEDS OF THE SALE AND/OR DISPOSAL OF THE CORPUS OF THE DECEA SEDS ESTATE IN INDIA TO THE EXTENT TO WHICH THE SAME CONSISTED OF IMMOVEABLE PROPERTIES FORMING PART THEREOF INCLUDING MONIES RE CEIVED IN ADVANCE AND THEN INVESTED IN BONDS, SECURITIES, DEP OSITS AND BANK BALANCES SUBJECT O AND RESERVING A CHARITABLE DONATION OF RS.100,000,000/- AND ARE BOUND BY ALL ACTIONS OF TH E PETITIONER IN REGARD TO THE ADMINISTRATION OF THE DECEASEDS ESTATE IN INDIA AS AFORESAID. THE PETITIONER AS A TRANSFEREE IS ENT ITLED TO SIXTY PER CENT OF THE DECEASEDS SAID ESTATE IN INDIA. TH E PETITIONER IS THEREFORE THE MOST APPROPRIATE PERSON TO CONTINUE W ITH THE ADMINISTRATION OF THE DECEASEDS ESTATE IN INDIA. T HE REMAINING TRANSFEREES HAVE, BY THE WRITING HERETO ANNEXED AND MARKED EXHIBIT A EXPRESSED THEIR UNQUALIFIED AGREEMENT T O THE ITA NOS.4573 & 4424/MUM/08 39 PETITIONER CONTINUING WITH THE ADMINISTRATION OF TH E DECEASEDS ESTATE IN INDIA, HAVE EXPRESSED FULL CONFIDENCE IN THE PETITIONER AND HAVE REAFFIRMED THAT THEY [THE TRANSFEREES] ARE NOT ENTITLED TO CALL UPON THE PETITIONER TO TRANSFER TO THEM THE IMMOVEABLE PROPERTIES LOCATED IN INDIA AND FORMING PART OF THE DECEASEDS ESTATE. (B) THE IMMOVABLE PROPERTIES LOCATED IN INDIA AND FORMI NG PART OF THE DECEASEDS ESTATE CONSIST OF LANDS SUSCEPTIBLE TO ENCROACHMENTS, TRESPASSERS AND FALSE CLAIMS BY RESI DENTS OF THE LOCALITY. DURING THE THREE DECADES FOR WHICH THE PE TITIONER HAS HANDLED THE ADMINISTRATION OF THE DECEASEDS ESTATE IN INDIA, HE HAS CONSTRUCTED BOUNDARY WALLS/FENCING TO KEEP OF T HE ENCROACHERS/TRESPASSERS, HAS ENGAGED SECURITY GUARD S, HAS INSTITUTED AND DEFENDED SUITS AND OTHER LEGAL PROCE EDINGS AND HAS TAKEN ALL APPROPRIATE MEASURES TO PROTECT AND P RESERVE THE SAID LANDS. PARTS OF THE SAID LANDS HAVE BEEN ACQUI RED UNDER THE LAND ACQUISITION ACT, 1894 AND THE PETITIONER HAS T AKEN STEPS TO RECOVER PROPER COMPENSATION IN LAND ACQUISITION PROCEEDINGS, INCLUDING CONTESTING NAMES UNDER SAC.1 8 OF THE LAND ACQUISITION ACT. 1894. THE PETITIONER HAS RECO VERED BENEFITS FROM SURRENDER OF PARTS OF THE SAID LANDS TO THE MUNICIPAL AND OTHER AUTHORITIES IN ACCORDANCE WITH RESERVATIONS RELATING THERETO UNDER THE DEVELOPMENT PLAN OF GREA TER MUMBAI. THERE ARE INERT THAN 30 SUITS AND OTHER LEG AL PROCEEDINGS PENDING BY AND AGAINST THE PETITIONER I N RESPECT OF THE SAID - LANDS VARIOUS COURTS INMUMB NO LESS THAN HALF OF THEM IN THIS HONBLE COURT. THE PETITIONER AND UNDE R HIS GUIDANCE, THE STAFF ENGAGED BY HIM DEAL WITH THESE LEGAL PROCEEDINGS. THE PETITIONER IS A PARTY TO AND S IN THE KNOW OF ALL THESE LEGAL PROCEEDINGS ANAL IF THE PETITIONER IS NOT ALLOWED TO CONTINUE WITH THE ADMINISTRATION WITHOUT ANY DE LAY, THE INTERESTS OF THE DECEASEDS ESTATE AND OF THE PETIT IONER HIMSELF AND THE REMAINING TRANSFEREES WILL BE ADVERSELY AFF ECTED. (C) WITH A VIEW TO MAXIMIZE RETURNS FROM THE IMMOVEABLE PROPERTIES LOCATED IN INDIA AND FORMING PART OF THE DECEASEDS ESTATE, THE PETITIONER (WITH THE CONCURRENCE OF THE SAID BACHOOBAI WHEN SHE WAS ALIVE)HAS ENTERED INTO ARRAN GEMENTS WITH DEVELOPERS OF REAL ESATE TO DEVELOP SAID LANDS ON THE BASIS THAT THE SAID DEVELOPERS WILL, AT THEIR OWN COSTS, TAKE ALL NECESSARY STEPS FOR DEVELOPMENT (LIKE LAYING OUT TH E SAID LANDS INTO PLOTS CONSTRUCTING ROADS, DRAINS, SEWN, ARRANG ING POWER SUPPLY. PROVIDING INFRASTRUCTURE. GETTING APPROVALS FOR CONSTRUCTION WORK, ETC.).CARRY OUT CONSTRICTION WOR K AND SELL PREMISES IN THE DEVELOPMENT. IN THE COURSE OF SUCH DEVELOPMENT AND SALE, THE PETITIONER WILL RECEIVE T HE VALUE OF THE LAND WHICH WILL BE TRANSFERRED TO THE BUYERS OF PREMISES. TO ENABLE THE DEVELOPMENT TO PROCEED SMOOTHLY AND SPEE DILY THE PETITIONER IS - REQUIRED TO EXECUTE VARIOUS PAPERS AND DOCUMENTS AND SUCH EXECUTION CANNOT BROOK DELAY, WH ICH MAKES IT ALL THE MORE NECESSARY FOR THE PETITIONER TO CONTINUE WITH THE ADMINISTRATION. ITA NOS.4573 & 4424/MUM/08 40 (D) THE PETITIONER HAS BEEN MOST DILIGENT IN ADMINISTER ING THE DECEASEDS ESTATE IN INDIA, HAS MAINTAINED FULL AND TRUE ACCOUNTS OF HIS DEALINGS AND HAS CAUSED THE SAID ACCOUNTS TO BE AUDITED BY INDEPENDENT PRACTICING CHARTERED ACCOUNTANTS. (E) THE SAID BACHOOBAI HAD TOTAL CONFIDENCE IN THE PETI TIONER AND REGARDED HIM AS HER OWN SON. THE SAID BACHOOBAI HAS MADE A WILL IN RESPECT OF HER PERSONAL PROPERTIES OF WHATS OEVER NATURE OR SORT SITUATED IN INDIA AND HAS APPOINTED THE PET ITIONER AS SOLE EXECUTOR THEREOF. THE PETITIONER IS TAKING STEPS TO OBTAIN PROBATE OF THE SAID WILL. THE TWO SONS OF THE PETIT IONER ARE THE BENEFICIARIES UNDER THE SAID WILL. THUS, FROM THE ABOVE, IT IS CLEAR THAT THERE WERE V ARIOUS REASONS FOR THE CONTINUANCE FOR THE EXISTENCE OF THE ESTATE, PA RTICULARLY, THE REASON THAT A SUM OF RS.10 CRORES WAS RESERVED FOR CHARITY . IN FACT, THE FACT THAT THE SUM OF RS.10 CRORES WAS REQUIRED TO BE PAI D TO CHARITY WAS MADE CLEAR EVEN IN THE INDENTURE DATED 26-9-2001 VI DE CLAUSE 3[A] WHICH READS AS UNDER: CLAUSE 3[A]: THE TRANSFEREES SHALL NOT DO OR OMIT T O DO ANYTHING TOUCHING THE SAID PREMISES WHICH AFFECTS OR IS LIKE LY TO AFFECT IN ANY MANNER THE TRANSFERORS RIGHT TO RECEIVE THE INCOME OF THE SAID PREMISES DURING HER LIFETIME AND DOWN TO HER DEATH AND/OR THE DONATION OF A SUM OF RS.100,000,000/- [RUPEES ONE H UNDRED MILLION] WHICH THE TRANSFEROR SHALL INSTRUCT THE ADMINISTRAT OR TO MAKE, AT ANY TIME AFTER THE DATE OF THE TRANSFERORS DEATH, TO T HE TRUSTEES OF THE F. E. DINSHAW TRUST CONSTITUTED UNDER THE INDENTURE OF SETTLEMENT DATED 28 TH DECEMBER, 1973 AS AFORESAID. FROM THE ABOVE, IT IS CLEAR THAT THE ESTATE WAS REQ UIRED TO CONTINUE BECAUSE OF VARIOUS REASONS LIKE PENDENCY OF VARIOUS LITIGATIONS AND THE REQUIREMENT TO DONATE CERTAIN MONEY TO THE CHARITY. SINCE THE ESTATE WAS CONTINUING, THEREFORE, THERE WAS NO POSSIBILITY OF THE ASSESSEE ACQUIRING OF THE RIGHTS OF THE PROPERTIES OF THE ES TATE OF EFD. THE ASSESSEE ONLY ACQUIRED THE RIGHTS TO SALE PROCEEDS AND THE ESTATE STILL CONTINUED BECAUSE THE HON'BLE HIGH COURT IN ITS ORD ER DATED 20-11- 2003 ALLOWED THE ASSESSEE TO CONTINUE AS ADMINISTRA TOR. THEREAFTER, ASSESSEE KEPT ON ADMINISTERING THE ESTATE AND ALSO FILED INCOME TAX AS ITA NOS.4573 & 4424/MUM/08 41 WELL AS WEALTH TAX RETURNS IN THE CAPACITY OF ADMIN ISTRATOR. COPIES OF THE INCOME TAX AND WEALTH TAX RETURNS WERE NOT MADE PART OF THE ORIGINAL PAPER BOOK AND ON THE DIRECTION OF THE BEN CH SAME HAVE BEEN FILED VIDE LETTER DATED 16-6-2011. A PERUSAL OF THE SE DOCUMENTS CLEARLY SHOWS THAT THE ASSESSEE IN THE CAPACITY OF ADMINIST RATOR HAS FILED INCOME TAX AND WEALTH TAX RETURNS ON BEHALF OF THE ESTATE OF EFD FOR A.YRS. 2004-05 TO 2010-2011. FOR A.YRS. 2005-06, 20 06-07 AND 2008- 09 THE ASSESSMENT ORDERS HAVE BEEN PASSED U/S.143[3 ] IN THE NAME OF THE ADMINISTRATOR OF THE ESTATE OF LATE MR. E. F. D INSHAW. THIS CLEARLY SHOWS THAT THE EXISTENCE OF THE ESTATE OF EFD WAS A CCEPTED EVEN BY THE DEPARTMENT. WE FURTHER FIND THAT THE LD. CIT(A) HAS DEALT WITH THIS ASPECT AT PARAS 45 TO 59 BY REFERRING TO VARIOUS PROVISIONS OF INDIAN SUCCESSION ACT, 1925 AND VARIOUS CASE LAWS AS TO HO W THE ESTATE WAS REQUIRED TO BE ADMINISTERED AND IN WHOM SUCH PROPER TIES WOULD VEST. WE ARE OF THE VIEW THAT THERE IS NO NEED TO DEAL WI TH SUCH PROVISIONS IN DETAIL AGAIN, BUT ALL THESE FACTS CLEARLY SHOW THAT ESTATE OF EFD WAS IN EXISTENCE UNDER THE ADMINISTRATION OF THE ASSESSEE IN THE CAPACITY OF ADMINISTRATOR. THE LD. SR. STANDING COUNSEL OF THE REVENUE HAS NOT MADE ANY SUBMISSION OR BROUGHT ANY MATERIAL ON RECO RD TO PROVE THAT THE FINDING OF THE CIT(A) IN THIS RESPECT ARE WRONG . FURTHER, IT IS ALSO NOTED THAT EVEN AS PER CLAUSE 4[B] OF THE INDENTURE TRANSFEREES DID NOT HAVE ANY RIGHT TO GET THE PROPERTIES TRANSFERRED IN THEIR NAME. THE RELEVANT CLAUSE READS AS UNDER: CLAUSE 4[B]: NONE OF THE TRANSFEREES SHALL CALL UP ON THE ADMINISTRATOR TO TRANSFER TO HIM, HER THEM OR IT TH E IMMOVABLE PROPERTIES LOCATED IN INDIA AND FORMING PART OF THE DECEASEDS ESTATE IN INDIA. ITA NOS.4573 & 4424/MUM/08 42 IN VIEW OF THESE FACTS AND DISCUSSION, WE ARE OF TH E VIEW, THAT EVEN SECOND PART OF THE FIRST GROUND RAISED BY THE REVEN UE IS NOT MAINTAINABLE AND, THEREFORE, WE REJECT GROUND NO.1 OF THE APPEAL OF THE REVENUE. 41. GROUND NO.2 RAISED BY THE REVENUE IS AS UNDER: THE LEARNED CIT(A) OUGHT TO HAVE TREATED THE RECEIP TS EITHER AS SHORT TERM CAPITAL GAIN OR ADVENTURE IN THE NATURE OF TRADE. 42. FOR DECIDING THIS GROUND LET US RECAPITULATE TH E FACTS AGAIN WHICH WOULD CLEARLY SHOW THE NATURE OF RECEIPTS. THE RECE IPT OF SUM OF RS.71.63 CRORES CONSISTED OF FOLLOWING: 1. PAYMENTS MADE RS.27,13,36,000/- 2. 7% GOVERNMENT OF INDIA BONDS-2003 RS.36,00,00,00 0/- 3. 6.5% GOVERNMENT OF INDIA BONDS-2003 RS. 8,50,00, 000/- EFD WHO WAS RESIDENT OF U.S. WAS THE OWNER OF VARI OUS IMMOVABLE PROPERTIES IN INDIA. HE EXECUTED A WILL IN 1970 THR OUGH WHICH A TRUST WAS CREATED AND BW WAS APPOINTED AS SOLE EXECUTRIX. BW WAS THE SISTER OF EFD AND WAS ALSO MADE SOLE BENEFICIARY OF THE INCOMES OF THE TRUST PROPERTIES. ON THE DEATH OF BW THE PROPERTIES WERE TO GO TO TWO AMERICAN CHARITIES AS PER THE WILL. SINCE BW WAS LI VING IN USA SHE APPOINTED MR. JEHANGIR B. DUBASH AS ADMINISTRATOR O F THE PROPERTIES, HOWEVER, HE SHOWED A RELUCTANCE TO CONTINUE AS ADMI NISTRATOR OF THE ESTATES, THEREFORE, ASSESSEE I.E. MR. NUSLI N. WADI A WAS APPOINTED AS ADMINISTRATOR AT THE REQUEST OF BW AND HIS APPOINTM ENT WAS CONFIRMED BY THE BOMBAY HIGH COURT VIDE ITS ORDER DATED 21-12 -1972. IN AND AROUND 1995 THE ADMINISTRATOR OF THE ESTATE ENTERED INTO VARIOUS ITA NOS.4573 & 4424/MUM/08 43 DEVELOPMENT AGREEMENTS WITH CERTAIN DEVELOPERS FOR DEVELOPMENT OF THE IMMOVABLE PROPERTIES. THE DEVELOPERS WERE REQUI RED TO REMOVE ALL ENCROACHMENTS AS WELL AS OTHER LEGAL IMPEDIMENTS. B W WHO HAD LIFE INTEREST IN THE PROPERTIES WAS CONFIRMING PARTY TO THESE AGREEMENTS. IN CONSIDERATION, ESTATE OF EFD WAS TO RECEIVE 12% OF THE SALE PROCEEDS RECEIVED FROM THE CUSTOMERS FOR THE BUILT UP AREA A ND 88% OF THE SALE PROCEEDS WERE TO GO TO THE DEVELOPERS AS THEIR SHAR E. CONSEQUENT TO THESE DEVELOPMENT AGREEMENTS, THE ESTATE STARTED RE CEIVING CERTAIN ADVANCES AS WELL AS SALE CONSIDERATION. NOW BEFORE THESE AMOUNTS COULD BE DISTRIBUTED THE ESTATE WAS REQUIRED TO FIL E SEPARATE INCOME TAX RETURNS IN TERMS OF SEC.168 OF THE I.T.ACT. FROM TH E COPIES OF THE RETURNS MADE AVAILABLE BEFORE US, IT BECOMES CLEAR THAT ESTATE OF EFD HAD REGULARLY FILED INCOME TAX RETURNS UPTO A.Y 201 0-2011, SOME OF WHICH HAVE BEEN SCRUTINIZED AND ASSESSMENT ORDERS H AVE BEEN PASSED U/S.143[3]. THE RETURNS HAVE BEEN FILED IN THE NAME OF THE ADMINISTRATOR OF ESTATE OF LATE EFD AND ASSESSMENT ORDERS HAVE ALSO BEEN MADE IN THAT NAME. INITIALLY THE INCOME RECEIV ED BY THE ESTATE WERE ASSESSED AS BUSINESS INCOME IN THE HANDS OF TH E ESTATE, BUT THE LD. SR. ADVOCATE OF THE ASSESSEE POINTED OUT THAT T HE ESTATE CHALLENGED THESE ASSESSMENTS AND THE TRIBUNAL HELD THAT INCOME OF THE ESTATE FROM SALE PROCEEDS OF THE PROPERTIES SHOULD BE ASSE SSED UNDER THE HEAD CAPITAL GAINS AND ACCORDINGLY REVENUE HAS AS SESSED THE SAME UNDER THE HEAD CAPITAL GAINS. WHENEVER A SALE WAS EXECUTED SUCH RECEIPTS WERE TREATED AS SALE PROCEEDS AND OFFERED TO TAX UNDER THE HEAD CAPITAL GAINS. BUT WHENEVER ONLY ADVANCES WE RE RECEIVED BY THE ITA NOS.4573 & 4424/MUM/08 44 ESTATE, SAME WERE TREATED AS LIABILITIES IN THE BOO KS OF ESTATE AND WHEN ACTUAL CONVEYANCE WAS EXECUTED IN FAVOUR OF THE CUS TOMERS WHO HAD PAID THE ADVANCES, THEN SUCH RECEIPTS WERE TRANSFER RED TO SALE RECEIPTS AND THE SAME WERE OFFERED FOR TAXATION AT THE TIME OF EXECUTION OF CONVEYANCE. BEFORE MAKING ANY DISTRIBUTION OF INCOM E AS PER THE PROVISIONS OF SEC.168 OF THE I.T.ACT, THE ADMINISTR ATOR WAS LIABLE TO PAY TAXES AND ONLY THEREAFTER ANY DISTRIBUTION COULD HA VE BEEN MADE IN FAVOUR OF THE BENEFICIARY OF THE WILL. THEREFORE, O NCE THE TAXES ARE PAID BY THE ESTATE, NATURALLY, THE BENEFICIARY RECEIVING ANY DISTRIBUTION OF SUCH SALE RECEIPTS COULD NOT HAVE BEEN TAXED AGAIN BY THE REVENUE. 43. DURING THE COURSE OF HEARING, LD. SR. ADVOCATE OF THE ASSESSEE FURTHER POINTED OUT THAT OUT OF THE TOTAL SUM OF RS .27,13,36,000/- BY BANK TRANSFERS, ONLY A SUM OF RS.13.47 CRORES WAS D ISTRIBUTED BY THE ADMINISTRATOR OUT OF THE INCOME WHICH WAS ACCUMULAT ED OVER THE PERIOD OF YEARS BY THE ESTATE OF EFD. HE HAD ALSO A RGUED THAT ONCE THE ESTATE HAD SUFFERED THE TAX, THEN THE SAME AMOUNT C OULD NOT BE TAXED AGAIN IN THE HANDS OF THE TRANSFEREES. WE FIND MERI T IN THIS ARGUMENT THAT SAME ITEM OF INCOME CANNOT BE TAXED TWICE BECA USE THIS RECEIPT COULD NOT HAVE BEEN TREATED AS TAXABLE ITEM IN THE HANDS OF BW. MERELY BECAUSE ASSESSEE HAS ENTERED INTO AN INDENTU RE DATED 26-9- 2001 BY WHICH ASSESSEE BECAME ENTITLED TO RECEIPT O F DISTRIBUTION OF SALE PROCEEDS FROM THE ADMINISTRATOR IN PLACE OF BW , WOULD NOT CHANGE THE BASIC PRINCIPAL THAT NO ITEM OF INCOME CAN BE T AXED TWICE. IN FACT, SAME VIEW HAS BEEN TAKEN BY THE DEPARTMENT ITSELF I N THE CASE OF M/S SEVAKUNJ INVESTMENTS & CO. PVT. LTD. [WHICH HAS NOW BEEN RENAMED ITA NOS.4573 & 4424/MUM/08 45 AS GO INVESTMENTS & TRADING PVT. LTD]. THIS FACT BE CAME CLEAR BECAUSE APPEALS OF FOUR ASSOCIATE COMPANIES WERE ALSO HEARD TOGETHER AND IN I.T.A.NO.1646/M/09 PERTAINING TO M/S SEVAKUNJ INVES TMENTS & CO. PVT. ALSO SIMILAR ISSUES RAISED IN THE REVENUES APPEAL ALSO ARISE AS RAISED IN THE CASE OF THE ASSESSEE. IN CASE OF THIS COMPANY T HE ASSESSMENT WAS REOPENED ON THE BASIS THAT INCOME HAS ESCAPED ASSES SMENT ON ACCOUNT OF THE SUM OF RS.11,93,88,000/- WHICH WAS C REDITED TO THE CAPITAL RESERVE ACCOUNT, BUT NOT OFFERED FOR TAXATI ON. AS OBSERVED RIGHT AT THE BEGINNING OF THIS ORDER THAT ASSESSEE HAD EN TERED INTO THE INDENTURE DATED 26-9-01 ALONG WITH FOUR ASSOCIATE C OMPANIES AND ASSESSEE ALONG WITH THESE FOUR COMPANIES HAD PAID A CONSIDERATION OF RS.20 LAKHS TO BW FOR GETTING THE RIGHT TO RECEIVE THE SALE PROCEEDS FROM THE ADMINISTRATOR OF THE ESTATE. 60% OF THE RI GHTS WERE TO GO TO THE ASSESSEE AND 10% EACH OF THE RIGHTS WERE TO GO TO EACH OF THESE ASSOCIATE COMPANIES. THEREFORE, M/S SEVAKUNJ INVEST MENTS & CO. PVT. ALSO BECAME ENTITLED TO RECEIVE 10% OF THE SALE PRO CEEDS BY WAY OF DISTRIBUTION. IN THE CASE OF THE ASSESSEE THE ARGUM ENT THAT THIS INCOME HAD SUFFERED TAX IN THE HANDS OF THE ESTATE WAS REJ ECTED BY THE AO BECAUSE DETAILS WERE NOT AVAILABLE. HOWEVER, LD. CI T(A) HAS ACCEPTED THIS POSITION WHO AFTER DETAILED DISCUSSION HELD TH AT SAME ITEM OF INCOME CANNOT BE TAXED TWICE. WHILE DEALING WITH TH IS ARGUMENT AT PAGE 10 CLAUSE [VII] OF THE ASSESSMENT ORDER IN THE CASE OF M/S SEVAKUNJ INVESTMENTS & CO. PVT. IT HAS BEEN OBSERVE D AS UNDER: (VII) THE SUBMISSION OF THE ASSESSEE, WITHOUT PREJ UDICE TO HIS STAND THAT NO TAX LIABILITY ARISES IN HIS HAND, THAT IN A NY CASE SUM OF RS.13.47 CRORES, BEING THE CONSIDERATION ON WHICH E STATE HAS ALREADY PAID APPROPRIATE CAPITAL GAINS TAX IN THE RELEVANT YEARS NOT BEING THE ITA NOS.4573 & 4424/MUM/08 46 CURRENT YEAR HAS BEEN CONSIDERED. IT HAS BEEN BROUG HT OUT BY THE ASSESSEE THAT SIMILAR REQUEST WAS MADE IN THE ASSES SMENT OF MR. NUSLI. WADIA BUT THE SAME WAS NOT CONSIDERED BY THE ASSESSING OFFICER FOR WANT OF DETAILS. NOW THE ASSESSEE HAS PRODUCED THE NECESSARY DETAILS IN THIS REGARD. ACCORDINGLY SINCE THERE ARE FOUR COMPANIES AS BENEFICIARIES EACH HAVING A DISTINCT AND IDENTIFIED SHARE, 10% OF RS.13.47 CRS WHICH WORKS OUT TO RS.1.35 CRS IS EXCL UDED FROM THE TAXABLE INCOME. AFTER THIS OBSERVATION, THE INCOME WAS FINALLY COMP UTED AS UNDER: TOTAL RECEIPTS ON ACCOUNT OF SALE OF PROPERTIES RS. 11,93,88,000 LESS: COST ATTRIBUTABLE TO ASSESSEES SHARE AS DISCUSSED RS. 19,000 LESS: PORTION OF CAPITAL GAINS WHICH HAD ALREADY R S. 1,37,00,000 BEEN SUBJECT TO CAPITAL GAINS TA X IN THE HANDS OF THE ESTATE --------------------- SHORT TERM CAPITAL GAINS RS.10,56,78,000 =========== THUS, FROM THE ABOVE, IT IS CLEAR THAT SALE RECEIPT AGAINST WHICH CONVEYANCE DEED WAS ALREADY EXECUTED AND WHICH WERE ASSESSED IN THE HANDS OF ESTATE OF EFD, WERE NOT SUBJECTED TO T AX AGAIN. 44. NOW LET US EXAMINE THE OTHER PORTION OF THE REC EIPTS. IT WAS POINTED OUT THAT IN THE CASE OF THE ASSESSEE ALSO O UT OF THE TOTAL RECEIPTS OF RS.71.63 CRORES, A SUM OF RS.63.5 CRORE S DISTRIBUTED BY THE ADMINISTRATOR WAS OUT OF THE ADVANCES RECEIVED FROM THE PURCHASERS AND DEVELOPERS. SUCH ADVANCES WERE PAID BY THE PROS PECTIVE CUSTOMERS AGAINST THE PURCHASES. IT IS NOT DENIED B Y THE REVENUE THAT THESE AMOUNTS REPRESENTED ADVANCES BECAUSE AS AND W HEN SAME WERE CONVERTED INTO SALE, SAME WERE OFFERED TO TAX IN TH E HANDS OF ESTATE OF EFD. NOW, IF THE RECEIPTS ON WHICH TAXES HAVE BEEN PAID WERE NOT TAXED BY THE REVENUE IN THE CASE OF M/S SEVAKUNJ IN VESTMENTS & CO. PVT., THEN THE RECEIPTS WHICH NEVER HAD THE CHARACT ER OF INCOME, CAN ITA NOS.4573 & 4424/MUM/08 47 ALSO NOT BE TAXED, BECAUSE, SUCH ADVANCES WOULD REP RESENT ONLY LIABILITY AS AND WHEN THEY WOULD BE CONVERTED INTO SALE PROCEEDS AND TAXES WOULD BE PAYABLE BY THE ESTATE AND, IN FACT, HAS ALREADY BEEN OFFERED FOR TAXATION IN THE HANDS OF ESTATE OF EFD. EVEN IF SUCH ADVANCES HAVE BEEN DISTRIBUTED BY THE ADMINISTRATOR TO THE TRANSFEREES WHICH INCLUDED THE ASSESSEE ALSO, WOULD NOT CHANGE THE BASIC CHARACTER OF THE RECEIPTS. AS POINTED OUT EARLIER, THE ESTATE OF EFD CONTINUED TO BE THE OWNER OF THE PROPERTIES IN QUES TION AT LEAST FOR INCOME TAX PURPOSES BECAUSE AS PER SEC.168 OF THE I .T.ACT IT IS THE ADMINISTRATOR WHO HAS TO PAY TAXES ON THE INCOME OF SUCH ESTATE. 45. SECTION 168 READS AS UNDER: 168. (1) SUBJECT AS HEREINAFTER PROVIDED, THE INCOME O F THE ESTATE OF A DECEASED PERSON SHALL BE CHARGEABLE TO TAX IN THE HANDS OF THE EXECUTOR, ( A ) IF THERE IS ONLY ONE EXECUTOR, THEN, AS IF THE EX ECUTOR WERE AN INDIVIDUAL; OR ( B ) IF THERE ARE MORE EXECUTORS THAN ONE, THEN, AS IF THE EXECUTORS WERE AN ASSOCIATION OF PERSONS; AND FOR THE PURPOSES OF THIS ACT, THE EXECUTOR SHAL L BE DEEMED TO BE RESIDENT OR NON-RESIDENT ACCORDING AS THE DECEASED PERSON WAS A RESIDENT OR NON-RESIDENT DURING THE PREVIOUS YEAR IN WHICH HIS DEATH TOOK PLACE. (2) THE ASSESSMENT OF AN EXECUTOR UNDER THIS SECTIO N SHALL BE MADE SEPARATELY FROM ANY ASSESSMENT THAT MAY BE MADE ON HIM IN RESPECT OF HIS OWN INCOME. (3) SEPARATE ASSESSMENTS SHALL BE MADE UNDER THIS S ECTION ON THE TOTAL INCOME OF EACH COMPLETED PREVIOUS YEAR OR PART THER EOF AS IS INCLUDED IN THE PERIOD FROM THE DATE OF THE DEATH TO THE DATE O F COMPLETE DISTRIBUTION TO THE BENEFICIARIES OF THE ESTATE ACCORDING TO THEIR SEVERAL INTERESTS. (4) IN COMPUTING THE TOTAL INCOME OF ANY PREVIOUS Y EAR UNDER THIS SECTION, ANY INCOME OF THE ESTATE OF THAT PREVIOUS YEAR DIST RIBUTED TO, OR APPLIED TO THE BENEFIT OF, ANY SPECIFIC LEGATEE OF THE ESTATE DURING THAT PREVIOUS YEAR SHALL BE EXCLUDED; BUT THE INCOME SO EXCLUDED SHALL BE INCLUDED IN THE TOTAL INCOME OF THE PREVIOUS YEAR OF SUCH SPECIFIC LEGATE E. EXPLANATION .IN THIS SECTION, EXECUTOR INCLUDES AN ADMINISTR ATOR OR OTHER PERSON ADMINISTERING THE ESTATE OF A DECEASED PERSON. ITA NOS.4573 & 4424/MUM/08 48 EXPLANATION TO ABOVE SECTION VERY CLEARLY PROVIDES THAT EXECUTOR WOULD INCLUDE THE ADMINISTRATOR. FURTHER, AS OBSERVED BY THE LD. CIT(A) THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MR S. USHA D. SHAH [SUPRA] HAS CLEARLY HELD THAT IN THE CASE OF ESTATE THE TAXES HAVE TO BE PAID BY THE EXECUTOR. IN THIS CASE ASSESSEE WAS A W IDOW OF OTHER DECEASED MEMBER OF AN HUF. FOR A.YRS. 1961-62 TO 19 63-64, THE AO INCLUDED THE INCOME OF THE ASSESSEES 1/6 TH SHARE OF INCOME ARISING FROM THE HUF PROPERTY, REJECTING THE ASSESSEES CON TENTIONS THAT AS THE INCOME FROM THE ESTATE OF THE PROPERTY IN QUESTION HAS REMAINED UNDISTRIBUTED, SHE HAD NOT RECEIVED ANY PORTION OF THE INCOME AND THE WHOLE OF WHICH HAD BEEN RECEIVED BY HER MOTHER-IN-L AW WHO ADMINISTERED THE ESTATE. ON APPEAL, AAC UPHELD THE ASSESSEES CLAIM WHICH WAS FURTHER CONFIRMED BY THE APPELLATE TRIBUN AL. ON A REFERENCE, THE HON'BLE HIGH COURT HELD AS UNDER: HELD, THAT THOUGH THE DECEASED NOT LEFT ANY WILL, THERE WAS NO EXECUTOR IN THAT SENSE NOR WERE ANY LETTERS OF ADMI NISTRATION OBTAINED, THE MOTHER OF DECEASED WAS IN FACT IN MANAGEMENT OF THE ESTATE AFTER HIS DEATH. IN VIEW OF THE WIDE DEFINITION OF 'EXECU TOR' IN THE EXPLN. TO S. 168[1] OF THE ACT, SHE WOULD BE COVERED BY THE D EFINITION AND, SINCE THERE WAS NO DISCRETION LEFT WITH THE TAX AUTHORITI ES, THE INCOME FROM THE ESTATE OF THE DECEASED COULD BE CHARGED TO TAX ONLY IN THE HANDS OF HIS MOTHER OF THE DECEASED. THE ASSESSEE WAS NOT , THEREFORE, LIABLE TO BE TAXED ON THE INCOME FROM THE UNDISTRIBUTED PE RSONAL ESTATE OF THE DECEASED OR THE INCOME FROM THE UNDISTRIBUTED S HARE OF THE INTEREST OF THE DECEASED IN THE HUF. THUS, IT IS CLEAR FROM THE ABOVE THAT WHENEVER AN E STATE IS IN EXISTENCE, WHICH IN THE CASE BEFORE US IS DEFINITEL Y THERE, THEN TAXES ON THE INCOME OF THE ESTATE ARE REQUIRED TO BE PAID ON LY BY THE EXECUTOR WHICH WOULD INCLUDE ADMINISTRATOR ALSO AND IN THE C ASE BEFORE US THE ADMINISTRATOR HAD ALREADY FILED INCOME TAX RETURNS WHICH HAD BEEN ITA NOS.4573 & 4424/MUM/08 49 ASSESSED ALSO, WHICH MEANS, REVENUE HAS ACCEPTED TH AT INCOME ARISING FROM THE ESTATE BELONGED TO THE ESTATE. IN THESE CI RCUMSTANCES, ADVANCES RECEIVED BY THE ESTATE CANNOT BE TREATED A S INCOME UNLESS THE SAME HAVE BEEN CONVERTED INTO THE SALE PROCEEDS BY EXECUTION OF THE CONVEYANCE DEED. IN FACT, SUCH ADVANCES HAVE BE EN TREATED AS LIABILITIES AND WHENEVER SALES HAVE BEEN AFFECTED, THEY HAVE BEEN TRANSFERRED TO THE SALES ACCOUNT AND OFFERED FOR TA X ACCORDINGLY BY THE ESTATE. THEREFORE, SUCH ADVANCES IF CANNOT BE TREAT ED AS INCOME IN THE HANDS OF THE ESTATE, THEN IN TURN, THE SAME CANNOT BE TREATED AS INCOME IN THE HANDS OF THE BENEFICIARY, PARTICULARL Y BECAUSE THE LIABILITY OF THE ESTATE EXISTED TO PAY THE TAXES WHENEVER SUC H ADVANCES WERE CONVERTED INTO SALE. THUS, IF THE DISTRIBUTION MADE BY THE ADMINISTRATOR COULD NOT BE TREATED AS INCOME IN THE HANDS OF BW, THEN SIMILARLY SAME CANNOT BE TREATED AS INCOME IN THE HANDS OF THE ASS ESSEE ALSO. IN OUR OPINION, THE SUM OF RS.71.63 CRORES COUNT NOT HAVE BEEN TREATED AS INCOME IN THE HANDS OF THE ASSESSEE. 46. WE WOULD ALSO LIKE TO OBSERVE THAT THE SUM OF R S.71.63 CRORES RECEIVED BY THE ASSESSEE INCLUDED A SUM OF RS.44.50 CRORES BEING THE VALUE OF TAX FREE GOVERNMENT OF INDIA BONDS WAS ALS O TRANSFERRED ONLY BY WAY OF MERE ACCOUNTING ENTRY. AS POINTED OUT BY THE LD. SR. ADVOCATE OF THE ASSESSEE AS PER THE NOTIFICATION OF GOVERNMENT OF INDIA, MINISTRY OF FINANCE & COMPANY AFFAIRS DATED 13 TH MARCH, 2003 [COPIES OF THE RELEVANT DOCUMENTS ARE PLACED AT PAG ES 97 TO 159 OF THE PAPER BOOK] THE BONDS COULD HAVE BEEN APPLIED ONLY IN THE NAME OF AN INDIVIDUAL AND THERE WAS NO PROVISION FOR MAKING AN APPLICATION IN THE ITA NOS.4573 & 4424/MUM/08 50 NAME OF THE ESTATE. THE BONDS WERE APPLIED IN THE N AME OF ADMINISTRATOR IN HIS INDIVIDUAL NAME AND EVEN P.A.N O. OF ESTATE WAS GIVEN WHICH BECOMES CLEAR FROM THE COPY OF THE APPL ICATION, PARTICULARLY PAGE 122 WHERE THE P.A.NO. HAS BEEN GI VEN AS AAEPD8394A WHICH WE HAVE VERIFIED FROM THE ASSESSME NT ORDER OF THE ESTATE AND SAME BELONGS TO THE ESTATE OF EFD. FURTH ER, THESE BONDS WERE NOT TRANSFERABLE AND ASSESSEE MIGHT HAVE TRANS FERRED THE BONDS BY WAY OF DISTRIBUTION UNDER A WRONG NOTION. IT WAS STATED THAT EVEN SUCH ENTRIES HAVE BEEN REVERSED. MOREOVER, THESE BO NDS HAVE BEEN DISTRIBUTED OUT OF THE ADVANCE RECEIPTS AND, THEREF ORE, COULD NOT HAVE BEEN INCLUDED IN THE INCOME OF THE ASSESSEE AS OBSE RVED IN THE ABOVE PARA. 47. COMING SPECIFICALLY TO THE TWO ISSUES RAISED BY THE REVENUE IN THE SECOND GROUND, LET US FIRST DEAL WITH THE ISSUE WHETHER THE RECEIPTS CONSTITUTE INCOME FROM AN ADVENTURE IN THE NATURE O F TRADE OR NOT. THE AO HAS ORIGINALLY MADE THE WHOLE DISCUSSION AS IF T HE RECEIPTS WERE TO BE TAXED AS SHORT TERM CAPITAL GAINS, BUT LATER ON, AS AN ALTERNATIVE HE ALSO OBSERVED THAT ALTERNATIVELY THESE RECEIPTS CAN BE TREATED AS BUSINESS RECEIPTS OUT OF THE ADVENTURE IN THE NATUR E OF TRADE. THE MAIN REASON AO HAS GIVEN FOR THIS IS THAT SINCE ASSESSEE WAS ACTING AS THE ADMINISTRATOR FOR ALMOST 30 YEARS AND HE KNEW THAT BEQUEATHAL OF THE PROPERTIES TO TWO AMERICAN CHARITIES MAY BE HELD IN VALID IN VIEW OF SEC.118 OF INDIAN SUCCESSION ACT, 1925 THEREFORE, BY INVESTING A SMALL SUM ASSESSEE COULD MAKE A BIG FORTUNE IF ULTIMATELY THE BEQUEATHAL TO THE TWO AMERICAN CHARITIES WAS HELD TO BE INVALID. THE LD. SR. STANDING ITA NOS.4573 & 4424/MUM/08 51 COUNSEL HAS ALSO LAID LOT OF STRESS ON THIS FACT AN D POINTED OUT THAT ASSESSEE WOULD NOT HAVE RECEIVED ANYTHING BUT FOR T HE INDENTURE DATED 26-9-2001 ENTERED INTO BY THE ASSESSEE WITH BW. HE HAD ALSO LAID EMPHASIS ON THE FACT THAT THE INDENTURE WAS SUBJECT TO THE ORDER OF THE BOMBAY HIGH COURT WHEREIN BEQUEATHAL OF THE PROPERT IES TO TWO AMERICAN CHARITIES WAS CHALLENGED AND, THEREFORE, T HIS CLEARLY SHOWS THAT ASSESSEE HAD PROTECTED HIMSELF BY MAKING THE I NDENTURE SUBJECT TO THE OUT COME OF THE ORDER OF THE HIGH COURT. THU S, BY TAKING PRACTICALLY NO RISK ASSESSEE HAD INVESTED THE TOTAL SUM OF RS.20 LACS ALONG WITH FOUR ASSOCIATE COMPANIES AND HAS OBTAINE D 60% RIGHTS FOR RECEIVING THE SALE PROCEEDS FROM THE IMMOVABLE PROP ERTIES FOR HIS PERSONAL CONSIDERATION OF RS.12 LACS. BUT AFTER EXA MINING ALL THE FACTS, WE ARE OF THE OPINION THAT FACTS DO NOT SUPPORT THE CASE OF REVENUE. IT CANNOT BE SAID THAT THE ASSESSEE HAD ENTERED INTO T RANSACTIONS WHICH CAN BE CALLED AS ADVENTURE IN THE NATURE OF TRADE. FIRST OF ALL, THERE WAS A CLOSE RELATIONSHIP BETWEEN THE ASSESSEE AND BW AN D THIS FACT IS BORNE OUT FROM THE FACT THAT ASSESSEE WAS APPOINTED AS ADMINISTRATOR WAY BACK IN 1972. THERE IS NO ALLEGATION BY THE REV ENUE THAT TILL THE DATE OF ENTERING INTO AN INDENTURE, ASSESSEE HAD RE CEIVED ANY BENEFIT OUT OF THE ESTATE OF EFD. IT SEEMS THAT BW HAD DEVE LOPED A CLOSE RELATIONSHIP WITH THE ASSESSEE. FURTHER, AS MENTION ED CLAUSE [L] OF THE INDENTURE DATED 26-9-01 BW HAD ENTERED INTO THE IND ENTURE IN VIEW OF HER ADVANCED AGE AND WAS DESIROUS OF SETTLING HER A FFAIRS IN HER OWN LIFE TIME. IT WAS ALSO MENTIONED IN PARA-16 IN PETI TION BEFORE THE HIGH COURT FOR CONTINUING THE APPOINTMENT OF THE ASSESSE E AS ADMINISTRATOR ITA NOS.4573 & 4424/MUM/08 52 THAT BW HAD TOTAL CONFIDENCE IN THE ASSESSEE AND TR EATED HIM LIKE HER SON. THIS ASSERTION IS SUPPORTED BY BWS PERSONAL W ILL WHICH WAS EXECUTED ON 21-10-2001 I.E. ALMOST WITHIN A MONTHS TIME FROM THE DATE OF INDENTURE [COPY OF THE SAID WILL HAS BEEN P LACED IN THE PAPER BOOK AT PAGES 41 TO 54]. THROUGH THIS WILL BW HAD B EQUEATHED HER MOVABLE PROPERTIES TO HER TWO COUSINS, NAMELY, MS. RUTTY C.P.WADIA AND MS. MARY C.P.WADIA AND ALL THE IMMOVABLE PROPER TIES HAVE BEEN BEQUEATHED TO MR. NESS N. WADIA AND MR. JEH N. WADI A, WHO WERE THE SONS OF THE ASSESSEE. THIS CLEARLY SHOWS THAT BW HA D A VERY CLOSE RELATIONSHIP WITH THE ASSESSEE AND HIS SONS. NATURA LLY, BEFORE WRITING THE WILL SHE MUST HAVE EXPRESSED HER DESIRE TO GIVE THE PROPERTIES TO ASSESSEES SONS AND IF THAT IS SO THERE WAS NO NEED FOR THE ASSESSEE TO DO ANY BUSINESS WITH BW BECAUSE IN ANY CASE ASSESSE ES FAMILY WOULD HAVE GOT THOSE ASSETS THROUGH THE WILL OF BW. 48. WE ALSO FIND THAT FOR CONSTITUTING THE TRANSACT ION AS ADVENTURE IN THE NATURE OF TRADE THERE HAS TO BE SOME BUSINESS R ELATIONSHIP OR SOME COMMERCIAL FEATURES IN THE TRANSACTIONS, BUT, APART FROM TRANSACTION NOTHING HAS BEEN BROUGHT FORWARD BY THE AO OR LD. S R. STANDING COUNSEL EVEN BEFORE US. CLEARLY ASSESSEE WAS HAVING A CLOSE RELATIONSHIP AND BW WAS IN ADVANCED AGE AND WITH A DESIRE TO SETTLE HER AFFAIRS SHE MADE THESE ARRANGEMENTS. HOWEVER, I F ASSESSEE WAS AWARE OF THE HUGE GAIN TO BE MADE OUT OF THIS INDEN TURE, THEN IT CANNOT BE SAID THAT BW WAS NOT AWARE OF THIS FACT B ECAUSE AFTER ALL SHE WAS ALSO THE OWNER OF THE OTHER HALF SHARE OF THE P ROPERTIES WHICH HAD BEEN INHERITED BY HER AS WELL AS EFD FROM THEIR LAT E FATHER. MOREOVER, ITA NOS.4573 & 4424/MUM/08 53 THE RIGHT TO RECEIVE SALE CONSIDERATION WAS TO COMM ENCE AS PER THE INDENTURE DATED 26-9-2001 ONLY AFTER THE DEATH OF B W. THESE FACTS DO NOT INDICATE ANY COMMERCIAL RELATIONSHIP. 49. IN ANY CASE, THE ISSUE ALSO STANDS COVERED BY T HE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF MOTHAY GAN GA RAJU VS. CIT [SUPRA]. IN THAT CASE ASSESSEE WAS A LAND OWNER AND MONEY LENDER AND ALSO HAD INTEREST IN CERTAIN COTTON MILLS. THE ASSE SSEE PURCHASED ON 22- 3-1926 RIGHT, TITLE AND INTEREST OF ONE SHRI PARTHA SARTHY APPA RAO IN THE LEGACY LEFT BY ONE SHRI VENKAYAMMA THROUGH THE COURT AUCTION. THE PURCHASE PRICE WAS RS.39,800/-. THERE WAS SOME PROTRACTED LITIGATIONS BETWEEN THE DATE OF PURCHASE AND THE DA TE OF REALISATION OF MONEY ALONG WITH THE PURCHASE COST THE TOTAL EXPEND ITURE CAME TO RS.46625-15-0. THE ASSESSEE ULTIMATELY REALISED A S UM OF RS.1,97,025/- FROM THE REVERSIONS OF THE ESTATE IN QUESTION TOWARDS THE AMOUNT DUE TO HIM UNDER THE DECREE. THUS, ASSESSEE REALISED A SURPLUS OF RS.1,50,399/-. THE ITO HELD THIS EXCESS RECEIPT AS ASSESSABLE TO INCOME TAX AND THE MATTER TRAVELED UPTO THE HON'BLE HIGH COURT. THE HON'BLE HIGH COURT OBSERVED AS UNDER: IN OUR VIEW, THIS CANNOT BE DESCRIBED AS AN ADVENT URE OR CONCERN IN THE NATURE OF TRADE. THE TRADING ACTIVIT IES OF THE ASSESSEE WERE LIMITED TO LENDING MONEY, OWNING LAND , IF THAT CAN BE CALLED A TRADE, AND HAVING AN INTEREST IN CO TTON MILLS AND THIS IS IN NO SENSE A TRANSACTION RELATED TO ANY OF THOSE ACTIVITIES. IN THIS CASE, THE INTEREST IN THE LEGAC IES WAS NOT EVEN PURCHASED FROM ANYBODY WHO WAS INDEBTED TO THE ASSE SSEE IN HIS MONEY LENDING BUSINESS. IT WAS AN ISOLATED TRAN SACTION, ALTHOUGH PROBABLY ENTERED INTO BY HIM AS A SPECULAT ION, AS HE HAPPENED TO MAKE A GOOD PROFIT OUT OF IT. WE ARE QU ITE UNABLE TO SEE THAT IT HAS ANY CONNECTION WHATEVER WITH ANY OTHER TRADES OR BUSINESSES CARRIED ON BY THE ASSESSEE. BY ITSELF , THE PURCHASE OF AN INTEREST IN LEGACIES, THE SUBJECT OF LITIGATI ON, CANNOT ITA NOS.4573 & 4424/MUM/08 54 CERTAINLY BE DESCRIBED AS A TRADE OR BUSINESS. REFE RENCE HAS BEEN MADE TO THE CASE OF RUTLEDGE VS. IRC (1929) 14 TAX CASES 490 (C. SESS.) : TC12R.572 BY MR. PATANJALI SASTRI IN SUPPORT OF HIS ARGUMENT. IN THAT CASE, THE APPELLANT WAS A MON EY LENDER WHO WAS ALSO IN 1920 INTERESTED IN A CINEMA COMPANY . HE HAD SINCE THAT TIME BEEN INTERESTED IN VARIOUS BUSINESS ES. BEING IN BERLIN IN 1920 ON BUSINESS CONNECTED WITH THE CINEM A COMPANY HE WAS OFFERED AN OPPORTUNITY OF PURCHASING VERY CH EAPLY A LARGE QUANTITY OF PAPER. HE EFFECTED THE PURCHASE A ND, WITHIN A SHORT TIME AFTER HIS RETURN TO ENGLAND, SOLD THE WH OLE CONSIGNMENT TO ONE PERSON AT A CONSIDERABLE PROFIT AND IT WAS HELD THAT THE PROFITS IN QUESTION WERE LIABLE TO AS SESSMENT TO INCOME-TAX AND TO EXCESS PROFITS DUTY AS BEING PROF ITS OF AN ADVENTURE IN THE NATURE OF TRADE. THE FACTS OF THAT CASE ARE QUITE DISSIMILAR TO THOSE HERE. THERE, WHAT WAS PUR CHASED WAS A QUANTITY OF TOILET PAPER AND IT WAS A VERY LARGE QU ANTITY, NOT A QUANTITY WHICH AN ORDINARY PERSON WOULD BUY FOR PRI VATE USE. IT WAS OF SUCH A LARGE QUANTITY AS CLEARLY TO MAKE IT A BUSINESS TRANSACTION; AND, OBVIOUSLY, THE INTENTION WITH WHI CH THIS LARGE QUANTITY WAS BOUGHT AT AN EXCEEDINGLY LOW PRICE WAS WITH THE OBJECT OF SELLING IT LATER ON AT A FAVOURABLE OPPOR TUNITY AT AN ENHANCED PRICE AND GETTING THE BENEFIT OF THE PROFI T THEREFROM. THIS IS QUITE CLEAR, I THINK, FROM THE JUDGMENT OF LORD SANDS WHO SAYS AT P. 497 : 'THE NATURE AND QUANTITY OF THE SUBJECT DEALT WITH EXCLUDE THE SUGGESTION THAT IT WOULD HAVE BEEN DISPOSED OF OTHE RWISE THAN AS A TRADE TRANSACTION. NEITHER THE PURCHASER NOR A NY PURCHASER FROM HIM WAS LIKELY TO REQUIRE SUCH A QUANTITY FOR HIS PRIVATE USE.' THE VIEW WE TAKE OF THE MATTER IS THAT THAT CASE IS CERTAINLY OF NO ASSISTANCE TO US, AND THAT, WITH REGARD TO THIS CASE, THIS WAS AN ISOLATED TRANSACTION IN NO WAY CONNECTED WITH AN Y OTHER TRADE OR BUSINESS ACTIVITIES OF THE ASSESSEE. THAT BEING SO, WE ARE UNABLE TO HOLD THAT IT WAS AN ADVENTURE IN THE NATURE OF TRADE AND, IF THAT IS SO, THEN THE SUM IN QUESTION WAS NOT CLEARLY ASSESSABLE TO INCOME-TAX. IN THE CASE BEFORE US ALSO ASSESSEE IS AN INDUSTRIA LIST BUT HIS MAIN SOURCE OF INCOME IS ONLY SALARY. HE IS NOT DOING AN Y BUSINESS DIRECTLY. IN NO OTHER CASE HE HAS ENTERED INTO ANY OTHER TRAN SACTION OF PURCHASING RESIDUARY LEGACY. THEREFORE, IN VIEW OF THE ABOVE DECISION, THE TRANSACTION ENTERED INTO BY THE ASSESSEE FOR PU RCHASING THE RIGHT TO RECEIVE THE SALE PROCEEDS CANNOT BE CONSTRUED AS A TRANSACTION WHICH ITA NOS.4573 & 4424/MUM/08 55 CAN BE CALLED AN ADVENTURE IN THE NATURE OF TRADE. HERE WE WOULD LIKE TO MENTION THAT SOMETIMES IF FACTS SO WARRANT EVEN A SINGLE TRANSACTION CAN CONSTITUTE THE BUSINESS TRANSACTION WHICH MAY B E CALLED AN ADVENTURE IN THE NATURE OF TRADE BUT THEN SAME MUST HAVE SOME COMMERCIAL FEATURES. AS POINTED OUT ABOVE, IN THIS TRANSACTION THE RELATIONSHIP THE ASSESSEE HAD WITH BW WAS OF CLOSE PROXIMITY BASED ON MUTUAL FAITH AND TRUST, BUT DID NOT INVOLVE ANY ELE MENT OF COMMERCIALITY. THE OTHER CIRCUMSTANCE LIKE BW BEQUE ATHING HER PERSONAL PROPERTIES TO THE SONS OF THE ASSESSEE ALS O SHOWS THAT NO COMMERCIAL ANGLE WAS INVOLVED. THEREFORE, IN VIEW O F THIS TRANSACTION, IT CANNOT BE TREATED AS AN ADVENTURE IN THE NATURE OF TRADE. 50. COMING TO THE SECOND ASPECT REGARDING TAXABILIT Y OF THE RECEIPT AS CAPITAL GAINS, THE LD. SR. STANDING COUNSEL IN T HE ALTERNATIVE HAD ARGUED THAT, IN ANY CASE, AFTER THE ORDER OF THE HI GH COURT DATED 22- 10-2001 DECLARING BW AS HAVING ABSOLUTE RIGHT OVER THE PROPERTIES AFTER DECLARING BEQUEATHAL IN FAVOUR OF THE TWO AME RICAN CHARITIES AS INVALID, THEREFORE, IN TERMS OF AN INDENTURE DATED 26-9-01 ASSESSEE GOT THE RIGHTS OVER THE PROPERTIES WHICH HAVE BEEN TRAN SFERRED AND THE AMOUNTS RECEIVED BY THE ASSESSEE ARE CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAINS. IN ANY CASE, THE RIGHT TO REC EIVE SALE PROCEEDS WOULD DEFINITELY CONSTITUTE A CAPITAL ASSET AND EVE N THE LD. CIT(A) HAS ALSO HELD THAT RIGHT TO RECEIVE THE PROCEEDS WOULD DEFINITELY CONSTITUTE A CAPITAL ASSET AND THIS FACT WAS NOT DISPUTED BY T HE ASSESSEE, THEREFORE, ATLEAST TRANSFER OF THESE RIGHTS IN TERM S OF EXTINGUISHMENT WOULD CONSTITUTE TRANSFER AND SAME IS TAXABLE UNDER THE HEAD CAPITAL ITA NOS.4573 & 4424/MUM/08 56 GAINS. IN THIS REGARD HE HAD STRONGLY RELIED ON TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF KARTIKEYA V. S ARABHAI [SUPRA]. HOWEVER, THESE SUBMISSIONS SEEM QUITE ATTRACTIVE ON THE FACE OF IT BUT A CLOSURE SCRUTINY OF THE FACTS WOULD SHOW THINGS O THERWISE. FIRST OF ALL, THROUGH AN INDENTURE DATED 26-9-2001 ONLY RIGHT TO RECEIVE THE SALE PROCEEDS WAS GIVEN TO THE ASSESSEE ALONG WITH HIS F OUR ASSOCIATE COMPANIES WHO WERE DESCRIBED AS TRANSFEREES. IN FAC T, THERE WAS NO TRANSFER OF THE PROPERTIES THROUGH THE INDENTURE DA TED 26-9-01. CLAUSE 4[B] OF THE INDENTURE SPECIFICALLY MADE IT CLEAR TH AT TRANSFEREES SHOULD NOT DEMAND FROM THE ADMINISTRATOR FOR TRANSFER OF I MMOVABLE PROPERTIES. CLAUSE 4[B] READS AS UNDER: NONE OF THE TRANSFEREES SHALL CALL UPON THE ADMINIS TRATOR TO TRANSFER TO HIM, HER THEM OR IT THE IMMOVABLE PROPERTIES LOC ATED IN INDIA AND FORMING PART OF THE DECEASEDS ESTATE IN INDIA. THIS CLEARLY SHOWS THAT ESTATE OF EFD CONTINUED TO BE THE OWNER OF THE PROPERTIES AND THAT FACT HAS BEEN ACCEPTED BY THE R EVENUE BY ASSESSING THE ESTATE IN THE HANDS OF THE ADMINISTRA TOR BECAUSE INCOME TAX AS WELL AS WEALTH TAX RETURNS HAVE BEEN ACCEPTE D BY THE REVENUE. IN FACT, ASSESSEES RIGHT WAS RESTRICTED ONLY FOR R ECEIVING OF SALE PROCEEDS FROM THE PROPERTIES. SINCE ASSESSEE WAS NO T OWNER OF THE PROPERTIES, THERE IS NO QUESTION OF TRANSFERRING AN Y RIGHTS IN SUCH PROPERTIES. FURTHER, THE ADMINISTRATOR COULD NOT DI STRIBUTE THE PROCEEDS FROM SALE OF THE PROPERTIES UNLESS THE ADMINISTRATI ON WAS COMPLETE I.E. EXPENSES AND TAXES OF THE ESTATE WERE PAID. THEN TH ERE WAS A FURTHER CONDITION FOR PAYMENT OF DONATION OF RS.10 CRORES T O A TRUST. AFTER PAYMENT OF SUCH TAXES ETC., SOME SALE PROCEEDS AND ADVANCES WERE ITA NOS.4573 & 4424/MUM/08 57 DISTRIBUTED BY THE ADMINISTRATOR ON WHICH TAXES WER E PAID BY THE ESTATE, THEREFORE, THERE WAS NO QUESTION OF ASSESSM ENT OF CAPITAL GAINS IN THE HANDS OF THE ASSESSEE AS NO CAPITAL ASSET WA S TRANSFERRED. EVEN THE HIGH COURTS ORDER DATED 22-10-01 DECLARING BW AS HAVING ABSOLUTE RIGHTS OF THE PROPERTIES WOULD NOT RESULT IN GIVING ANY FURTHER RIGHTS TO THE ASSESSEE, BECAUSE ASSESSEES RIGHTS WERE LIMITE D TO THE RIGHTS PROVIDED IN THE INDENTURE DATED 26-9-01. 51. HOWEVER, AS FAR AS THE CONTENTIONS OF THE LD. S R. STANDING COUNSEL THAT ATLEAST THE RIGHT TO RECEIVE THE SALE PROCEEDS WOULD CONSTITUTE A CAPITAL ASSET IS ACCEPTABLE TO US. FIR STLY, BECAUSE THIS SUBMISSION WAS NOT SERIOUSLY CHALLENGED BY THE LD. SR. ADVOCATE OF THE ASSESSEE. SECONDLY, EVEN ANY RIGHT IN A PROPERTY HA S TO BE CONSTRUED AS A CAPITAL ASSET. HOWEVER, FOR CHARGING ANY AMOUN T UNDER THE HEAD CAPITAL GAINS, THE SAME HAS TO BE COVERED BY SEC. 45 OF THE I.T.ACT. SECTION 45 READS AS UNDER: 45. [(1)] ANY PROFITS OR GAINS ARISING FROM THE TRANSFE R OF A CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR SHALL, SAVE AS OTHERW ISE PROVIDED IN SECTIONS [***] [54, 54B, [***] [54D, [54E, [54EA, 54EB,] 54 F [, 54G AND 54H]]]]], BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD CAPITAL GAINS, AND SHALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHI CH THE TRANSFER TOOK PLACE. THE ABOVE CLEARLY SHOWS THAT FOR ANY CAPITAL RECEIP T WHICH CAN BE BROUGHT UNDER THE PROVISIONS OF SEC.45 THERE HAS TO BE DISPOSAL OF AN ASSET BY ANY OF THE MODE REFERRED TO THE DEFINITION OF TRANSFER U/S.2[47]. UNLESS AND UNTIL THERE IS A TRANSFER OF AN ASSET AS ENVISAGED IN SEC.2[47], NO CAPITAL GAIN OR LOSS CAN BE COMPUT ED UNDER THESE PROVISIONS, WHICH MEAN THAT IF THERE IS ANY GAIN OR LOSS ON ACCOUNT OF ITA NOS.4573 & 4424/MUM/08 58 ANY RECEIPT BUT TRANSFER OF ASSET IS NOT INVOLVED T HEN PROVISIONS OF SEC.45 CANNOT BE APPLIED. THUS, IT IS CLEAR FROM TH E PROVISION ITSELF THAT TRANSFER OF AN ASSET IS THE PRIMARY CONDITION WHICH MUST BE SATISFIED BEFORE A RECEIPT CAN BE CALLED AS CAPITAL GAIN AND/ OR CAPITAL LOSS U/S.45. THE SINE QUA NON OF THE CAPITAL GAIN OR LOSS IS THAT RECEIPT OR ACC RUAL THEREOF MUST HAVE ORIGINATED IN THE TRANSFER OF THE CAPITAL ASSET WITHIN THE MEANING OF SEC.45[1] R.W.S. 2[47]. SECTION 2[47 ] READS AS UNDER: SEC.2 ( 47 ) [TRANSFER, IN RELATION TO A CAPITAL ASSET, INCL UDES, ( I ) THE SALE , EXCHANGE OR RELINQUISHMENT OF THE AS SET ; OR ( II ) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN ; OR ( III ) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW ; OR ( IV ) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWN ER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN-TRADE OF A BUSINE SS CARRIED ON BY HIM, SUCH CONVERSION OR TREATMENT ;] [OR] [( IVA ) THE MATURITY OR REDEMPTION OF A ZERO COUPON BOND; OR] [( V ) ANY TRANSACTION INVOLVING THE ALLOWING OF THE POS SESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED IN PART PERFORMANCE OF A CONTRACT OF THE NATURE REFERRED TO IN SECTION 53A OF THE TRANSFER OF PROPERTY ACT, 1882 (4 OF 1882) ; OR ( VI ) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEM BER OF, OR ACQUIRING SHARES IN, A CO-OPERATIVE SOCIETY, COMPAN Y OR OTHER ASSOCIATION OF PERSONS OR BY WAY OF ANY AGREEMENT O R ANY ARRANGEMENT OR IN ANY OTHER MANNER WHATSOEVER) WHIC H HAS THE EFFECT OF TRANSFERRING, OR ENABLING THE ENJOYMENT O F, ANY IMMOV- ABLE PROPERTY. EXPLANATION. FOR THE PURPOSES OF SUB-CLAUSES ( V ) AND ( VI ), IMMOVABLE PROPERTY SHALL HAVE THE SAME MEANING AS IN CLAUSE ( D ) OF SECTION 269UA ;] FROM THE ABOVE IT IS CLEAR THAT ONE OF THE MODES PR ESCRIBED FOR DISPOSAL OF AN ASSET WHICH CAN BE COVERED BY THE DEFINITION OF TRANSFER IS EXTINGUISHMENT. NOW IN THE CASE BEFORE US, ASSESSEE OBTAINED THE RIGHT TO RECEIVE SALE PROCEEDS ALONG WITH FOUR COMPANIES THROUGH INDENTURE DATED 26-9-01 WHICH WE HAVE ALREADY OBSERVED WOULD CONSTITUTE A CAPITAL ASSET. NOW WHETHER THE RECEIPT OF PROCEEDS WHICH CONSISTED OF ITA NOS.4573 & 4424/MUM/08 59 SALE PROCEEDS AS WELL AS ADVANCES WOULD CONSTITUTE EXTIGUISHMENT. THESE RIGHTS WERE PURCHASED BY THE ASSESSEE ALONG W ITH THE FOUR ASSOCIATE COMPANIES AND ASSESSEE BECAME ENTITLED TO RECEIVE 60% OF SALE PROCEEDS OF THE IMMOVABLE PROPERTIES FROM THE ADMINISTRATOR. THESE RIGHTS WERE ACQUIRED BY THE ASSESSEE IN F.Y 0 1-02 AND RIGHTS WERE TO COME INTO EFFECT ONLY AFTER THE DEATH OF BW WHO EXPIRED IN AUGUST, 2003. IN THE MEANTIME, AFTER TAKING UP THE ACCOUNTS ADMINISTRATOR CHOSE TO MAKE DISTRIBUTION OF CERTAIN MONEY AND IN THAT PROCESS ASSESSEE RECEIVED THE IMPUGNED SUM IN F.Y 0 3-04 I.E. A.Y 04- 05 WHICH WE ARE ADJUDICATING. NOW, EVEN AFTER SUCH DISTRIBUTION THE RIGHT TO RECEIVE THE SALE PROCEEDS CONTINUED, THERE FORE, THIS RIGHT HAS NOT EXTINGUISHED. THE LD. SR. ADVOCATE HAD ARGUED T HAT AT BEST THIS CAN BE TERMED AS WORKING OUT OF RIGHTS AS HELD BY T HE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. MOHANBHAI PAMAHAI [SUPRA] WHICH HAS BEEN CONFIRMED IN TURN BY THE HON'BLE SUPREME C OURT IN THE CASE OF ADDL. CIT VS. MOHANBHAI PAMABHA [165 ITR 163]. T HOUGH THIS CASE PERTAINED TO A PARTNER AND THE ISSUE INVOLVED WAS W HETHER RELINQUISHMENT OF INTEREST IN PARTNERSHIP UPON RETI REMENT WOULD AMOUNT TO TRANSFER OR NOT AND THE RATIO OF THIS DEC ISION MAY NOT BE STRICTLY APPLICABLE TO THE CASE OF THE ASSESSEE, BU T THE CONCEPT OF WORKING OUT OF THE RIGHTS IN OUR VIEW, CAN BE APP LIED TO THE FACTS OF THE CASE, BECAUSE, ASSESSEE HAD ACQUIRED THE RIGHTS TO RECEIVE THE SALE PROCEEDS IN TERMS OF INDENTURE DATED 29-6-01 WHICH WOULD COME INTO OPERATION AFTER THE DEATH OF BW. BUT THIS RIGHT WIL L NOT VANISH JUST BECAUSE SOME PAYMENT HAS BEEN RECEIVED. ASSESSEES RIGHT ON RECEIPT ITA NOS.4573 & 4424/MUM/08 60 OF SUCH PAYMENT DOES NOT SUFFER ANY DIMINUTION CONS EQUENT TO THE RECEIPT OF THE IMPUGNED SUM. THE AO AS WELL AS THE LD. SR. STANDING COUNSEL HAVE STRONGLY RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF KARTIKEYA V. SARABHAI [SUPRA]. IN THAT CASE ASSESSEE HAD PURCHASED CERTAIN NON CUMULATIVE PREFE RENCE SHARES AND SOME MONEY WAS PAID TO THE ASSESSEE BY REDUCING THE FACE VALUE OF THE PREFERENCE SHARES. THE REVENUE WAS OF THE VIEW THAT RECEIPT OF THIS MONEY WAS TAXABLE UNDER THE HEAD CAPITAL GAINS. T HE HON'BLE APEX COURT HELD THAT SINCE UPON PART REDEMPTION AND REDU CTION IN THE PAID UP VALUE OF PREFERENCE SHARES, THE RIGHT OF THE ASS ESSEE AS A SHAREHOLDER AGAINST THE COMPANY AS WELL AS OTHER SH AREHOLDERS WAS PARTLY EXTINGUISHED AND, THEREFORE, TRANSFER TOOK P LACE WITHIN THE MEANING OF SEC.2[47] OF THE I.T.ACT AND ASSESSEE WA S LIABLE TO PAY CAPITAL GAINS TAX. THE HEAD NOTE READS AS UNDER: SECTION 2[47] OF THE INCOME-TAX ACT, 1961, DEFINES TRANSFER IN RELATION TO A CAPITAL ASSET. IT IS AN INCLUSIVE DEF INITION WHICH, INTER ALIA, PROVIDES THAT RELINQUISHMENT OF AN ASSET OR EXTINGU ISHMENT OF ANY RIGHT THEREIN AMOUNTS TO A TRANSFER OF A CAPITAL ASSET. I T IS NOT NECESSARY FOR A CAPITAL GAIN TO ARISE, THAT THERE MUST BE A SALE OF CAPITAL ASSET. SALE IS ONLY ONE OF THE MODES OF TRANSFER ENVISAGED BY S. 2 (47) OF THE ACT. RELINQUISHMENT OF THE ASSET OR THE EXTINGUISHMENT O F ANY RIGHT IN IT, WHICH MAY NOT AMOUNT TO SALE, CAN ALSO BE CONSIDERE D AS A TRANSFER AND ANY PROFIT OR GAIN WHICH ARISES FROM THE TRANSFER O F A CAPITAL ASSET IS LIABLE TO BE TAXED UNDER S. 45. A COMPANY UNDER S. 100(1)(C) OF THE COMPANIES ACT HAS A RIGHT TO REDUCE THE SHARE CAPIT AL AND ONE OF THE MODES, WHICH CAN BE ADOPTED, IS TO REDUCE THE FACE VALUE OF THE PREFERENCE SHARES. SECTION 87(2)(C) OF THE COMPANI ES ACT, INTER ALIA, PROVIDES THAT 'WHERE THE HOLDER OF ANY PREFERENCE SHARE HAS A RIGHT TO VOTE ON ANY RESOLUTION IN ACCORDANCE WITH THE PROVI SIONS OF THIS SUB- SECTION, HIS VOTING RIGHT ON A POLL, AS THE HOLDER OF SUCH SHARE, SHALL, SUBJECT TO THE PROVISIONS OF S. 89 AND SUB-S. (2) O F S. 92, BE IN THE SAME PROPORTION AS THE CAPITAL PAID UP IN RESPECT OF THE PREFERENCE SHARE BEARS TO THE TOTAL PAID-UP EQUITY CAPITAL OF THE CO MPANY'. HENCE WHEN AS A RESULT OF THE REDUCING OF THE FACE VALUE OF TH E SHARE, THE SHARE CAPITAL IS REDUCED, THE RIGHT OF THE PREFERENCE SHA RE HOLDER TO THE DIVIDEND OR HIS SHARE CAPITAL AND THE RIGHT TO SHAR E IN THE DISTRIBUTION OF ITA NOS.4573 & 4424/MUM/08 61 THE NET ASSETS UPON LIQUIDATION IS EXTINGUISHED PRO PORTIONATELY TO THE EXTENT OF REDUCTION IN THE CAPITAL. SUCH REDUCTION OF THE RIGHT IN THE CAPITAL ASSET WOULD CLEARLY AMOUNT TO A TRANSFER WI THIN THE MEANING OF THAT EXPRESSION IN S. 2(47) OF THE INCOME-TAX ACT, 1961. THUS, FROM THE ABOVE, IT IS CLEAR THAT REDUCTION IN THE FACE VALUE OF THE PREFERENCE SHARES WAS HELD TO BE AN EXTINGUISHMENT BECAUSE CERTAIN RIGHTS IN TERMS OF CERTAIN PROVISIONS OF COMPANIES ACT, 1956 ALSO STOOD REDUCED. HOWEVER, IN THE CASE BEFORE US, THE RIGHT OF THE ASSESSEE TO RECEIVE THE SALE CONSIDERATION HAS CONTINUED. THE L D. SR. STANDING COUNSEL DID NOT ELABORATE AS TO HOW THE ASSESSEES RIGHT ACQUIRED UNDER THE INDENTURE DATED 26-9-01 GOT EXTINGUISHED OR DIMINISHED. IN FACT, AS OBSERVED ABOVE SUCH RIGHTS WHICH WERE ACQU IRED IN THE F.Y 01- 02 AND BECAME ENFORCEABLE ONLY ON THE DEATH OF BW A ND ADMINISTRATOR PAID THE AMOUNTS ON THE PRE EXISTING RIGHTS IN THE PROPORTION IN WHICH THE RIGHTS WERE ACQUIRED BY THE ASSESSEE AND HIS FO UR ASSOCIATE COMPANIES, THE PAYMENT OF MONEY BY THE ADMINISTRATO R IN PART SATISFACTION OR IN SETTLEMENT OF THE PRE EXISTING R IGHTS CANNOT BE CONSIDERED AS EXTINGUISHMENT OF ANY RIGHTS. THIS SI TUATION CAN BE EASILY UNDERSTOOD BY WAY OF A SIMPLE EXAMPLE. LET US SAY O NE MR. A ACQUIRED RIGHTS TO TAKE OUT WATER FROM A WELL BELON GING TO X. NOW WHENEVER SOME WATER IS EXTRACTED, CAN WE SAY THAT R IGHT TO TAKE OUT WATER IS EXTINGUISHED? IN OUR OPINION, IT CANNOT BE SAID THAT RIGHT TO EXTRACT THE WATER COMES TO AN END THE MOMENT FEW BU CKETS OF WATER ARE TAKEN OUT. THIS RIGHT MAY COME TO AN EXTINGUISH MENT WHEN MR.A GIVES FURTHER RIGHTS TO SAY MR.B TO TAKE OUT THE WATER FROM 5 P.M. TO 8 P.M. OR ANY OTHER HOUR, THEN IT CAN BE SAID THAT RI GHT OF MR. A IS ITA NOS.4573 & 4424/MUM/08 62 CURTAILED OR PARTLY EXTINGUISHED TO THAT EXTENT. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW, THAT SINCE THERE WAS NO TRANSFE R OF ANY CAPITAL ASSET DURING THE PREVIOUS YEAR, THEREFORE, NO CAPIT AL GAIN TAX CAN BE CHARGED ON THE IMPUGNED SUM. 52. BOTH THE PARTIES HAVE ALSO MADE SUBMISSIONS ON THE APPLICABILITY OF SEC.47(III) AND ACCORDING TO THE LD. SR. STANDIN G COUNSEL THESE PROVISIONS COULD NOT APPLY IN THE ASSESSEES CASE B ECAUSE ASSESSEE IS NOT A BENEFICIARY UNDER THE WILL. ON THE OTHER HAND , LD. SR. ADVOCATE FOR THE ASSESSEE HAD ARGUED MAINLY THAT THIS PROVIS ION CAN BE APPLIED IN EVERY CASE WHERE AN ASSET WAS TRANSFERRED UNDER A WILL WHETHER DISTRIBUTION IS MADE TO A BENEFICIARY OR TO ANY OTH ER PERSON. HOWEVER, AFTER CONSIDERING THE SUBMISSIONS, WE ARE OF THE VI EW THAT RELEVANT PORTION OF SEC.47[III] READS AS UNDER: 47. NOTHING CONTAINED IN SECTION 45 SHALL APPLY TO THE FOLLOWING TRANSFERS : [ I] . [II] . ( III ) ANY TRANSFER OF A CAPITAL ASSET UNDER A GIFT OR W ILL OR AN IRREVOCABLE TRUST : [ PROVIDED THAT THIS CLAUSE SHALL NOT APPLY TO TRANSFER UNDER A GIFT OR AN IRREVOCABLE TRUST OF A CAPITAL ASSET BEING SHARE S, DEBENTURES OR WARRANTS ALLOTTED BY A COMPANY DIRECTLY OR INDIRECT LY TO ITS EMPLOYEES UNDER [ANY EMPLOYEES STOCK OPTION PLAN O R SCHEME OF THE COMPANY OFFERED TO SUCH EMPLOYEES IN ACCORDANCE WITH THE GUIDELINES ISSUED BY THE CENTRAL GOVERNMENT IN THIS BEHALF];] THUS, IT IS CLEAR THAT THE ABOVE PROVISION BASICALL Y RELATES TO A SITUATION WHERE SOME TRANSFERS SHALL NOT BE CONSIDERED AS TRA NSFER. AS OBSERVED BY US EARLIER THE TRANSFER IS SINE QUA NON FOR ATTRACTING THE PROVISIONS RELATING TO CAPITAL GAINS. SINCE IN ABOVE DETAILED DISCUSSION WE HAVE ALREADY HELD THAT MERE RECEIPT OF SALE PROCEEDS BY THE ASSESSEE FROM ITA NOS.4573 & 4424/MUM/08 63 THE ESTATE OF EFD WOULD NOT AMOUNT TO ANY EXTINGUIS HMENT OF HIS RIGHTS AND, ACCORDINGLY, THE RECEIPT OF THE SUM CAN NOT BE TAXED UNDER THE HEAD CAPITAL GAINS. THEREFORE THE ISSUE REGAR DING APPLICABILITY OF SEC.47[III] IS ONLY OF AN ACADEMIC IMPORTANCE AND, ACCORDINGLY, WE DECLINE TO GO IN FURTHER DISCUSSION AND INTERPRETAT ION OF THIS PROVISION. IN VIEW OF THE ABOVE DETAILED DISCUSSION, WE ARE OF THE OPINION, THAT THERE IS NO NEED TO INTERFERE IN THE ORDER OF THE L D. CIT(A) AND ACCORDINGLY WE CONFIRM THE ORDER OF THE LD. CIT(A) AND HOLD THAT RECEIPT OF RS.71.63 CRORES IS NOT TAXABLE AS BUSINE SS PROFITS OR SHORT TERM CAPITAL GAINS IN THE HANDS OF THE ASSESSEE. 53. I.T.A.NO.4424/M/08 [ASSESSEES APPEAL] : IN THIS APPEAL ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ER RED IN NOT ADJUDICATING THE ALTERNATIVE PLEA OF THE APPELL ANT THAT AS THE AMOUNTS RECEIVED BY THE APPELLANT COULD NOT HAV E BEEN DISTRIBUTED BY THE ESTATE OF MR. E. F. DINSHAW, THE QUESTION OF ANY AMOUNT BEING TAXED IN THE HANDS OF THE APPELLAN T DOES NOT ARISE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ER RED IN NOT GIVING A SPECIFIC FINDING THAT THE AMOUNTS RECE IVED WERE ADVANCES AND NOT PROCEEDS OF SALE AND/OR DISPOSAL OF THE CORPUS OF THE ESTATE OF MR. E. F. DINSHAW IN INDIA TO THE EXTENT TO WHICH THE SAME CONSISTS OF IMMOVABLE PROPERTIES AND ACCORDINGLY TO THAT EXTENT, THE SAME OUGHT TO BE EX CLUDED IN COMPUTING THE QUANTUM RECEIVED BY THE APPELLANT IN TERMS OF THE INDENTURE. 3. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER. 54. LD. SR. ADVOCATE HAD SUBMITTED THAT THESE ISSUE S HAVE NOT BEEN ADJUDICATED BY THE LD. CIT(A) DESPITE SUBMISSIONS M ADE. ULTIMATELY ASSESSEE HAD RETURNED THE FUNDS RECEIVED FROM THE E STATE OF EFD BECAUSE OF VARIOUS LEGAL ISSUES. HE SUBMITTED THAT IN CASE THE ORDER OF THE LD. CIT(A) IS REVERSED, THEN ASSESSEES APPEAL WOULD REQUIRE TO BE ITA NOS.4573 & 4424/MUM/08 64 REMANDED TO THE FILE OF THE CIT(A) FOR CONSIDERATIO N OF THOSE SUBMISSIONS. 55. THE LD. SR. STANDING COUNSEL HAD AGREED WITH TH IS PROPOSITION. 56. AS WE HAVE ALREADY UPHELD THE ORDER OF THE LD. CIT(A), THEREFORE, THE ISSUES RAISED IN THE ASSESSEES APPE AL ARE ONLY OF ACADEMIC NATURE AND WE DECLINE TO ADJUDICATE THE SA ME. 57. IN THE RESULT, THE APPEAL OF THE REVENUE AS WEL L AS ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 15/7/2011. SD/- SD/- (D.K.AGARWAL) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 15/7/2011. P/-*
Other Referred Cases
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Laws Referred To
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1:1 Consultation on Tax Litigation
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1:1 Consultation on Startup Fundraising
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Tax Holiday Secrets for Startups
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Research Collaboration Agreement
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Declaration of Gift
Mehul₹500
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