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(a) | Whether in the facts and circumstances of the case and in law the Tribunal was right in holding that the transaction of transfer of shares by the assessee company in pursuance of family arrangement amounted to transfer and was exigible to capital gains tax ? | |
(b) | Whether in the facts and circumstances of the case and in law the Tribunal was right in not accepting the fact that the transfer of shares by the assessee company being only incidental and in consequence of allotment and control of management of companies in pursuance of family arrangement, took the transaction out of purview of Section 2 (47) of I.T. Act, 1961 ? | |
(c) | Whether in the facts and circumstances of the case and in law merely because the assessee/company has a corporate veil, will it make the transfer of shares by it assessable to capital gains tax even though such transaction is in pursuance of family arrangement ? |
(a) | The appellant is a Private Limited Company. Over 80 % of it’s share capital is held by the family members of Mr.Girdhardas Mohota, Mr.Gwaldas Mohota and Mr.Ranchhoddas Mohota referred to by the Tribunal as Groups ‘A’, ‘B’ and ‘C’ respectively. The Mohota family, besides holding a majority stake in the appellant/Company, had joint interest in various other Limited Companies and Partnership Firms, besides the family also owned immovable properties jointly. | |
(b) | Disputes and differences arose between three groups of Mohota family i.e. Groups A, B and C. Consequently, with a view to settle the differences between them and restore family peace and harmony, it was decided by the three groups to refer their dispute by an agreement dt.15.1.1994 to the sole arbitration of Mr. Justice S.W.Puranik. The scope of reference to the Arbitration were as under : |
(a) | Allotment and/or division of properties mentioned in schedule ‘B’ and related matters; | |
(b) | Allotment, management and control of partnership firms and limited companies mentioned in schedule ‘A’ and related matters; | |
(c) | All matters connected with or related to or ancillary to the above referred matters; and | |
(d) | To give suitable orders and directions for implementation thereof . |
(c) | On 30.4.1994, Justice Puranik rendered his Arbitration Award by way of family settlement. The Arbitration Award thereafter became decree of the Court dt.7.11.1994 under the erstwhile Arbitration Act, 1940. The above Award distributed the properties belonging to Mohota family amongst it’s three groups. The Appellant/assessee was allotted to Group ‘B’. M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. were allotted to Groups ‘A’ and “C’ collectively. | |
(d) | Thus, the settlement inter alia required members of Group ‘B’ (Mr.Gwaldas Mohta group), who were in control of appellant/assessee, to transfer the shares held by the appellant/assessee in M/s.R.S.Rekhchand Mohta Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Mills Ltd. in favour of members of Groups ‘A’ and ‘C’ collectively i.e. Mr.Girdhardas Mohota and Mr.Ranchhoddas Mohota. The Award directed the transfer of shares at a consideration of Rs.225/- per share of M/s.R.S.Rekchand Mohota Spinning and Weaving Mills Ltd. and at a consideration of Rs.10/- per share of M/s. Vaibhav Textiles Mills Ltd. | |
(e) | Therefore, the appellant/assessee in terms of the Award transferred 25,650 shares held by it in M/s.Rekhchand Mohta Spinning and Weaving Mills Ltd. and 1,22,000 shares held by it in M/s. Vaibhav Textiles Pvt. Ltd. to the members of the family of Group ‘A’ and Group ‘C’. | |
(f) | On 30.11.1995, the appellant/assessee filed return of income for the Assessment Year 1995-96 declaring an income of Rs.58.35 Lakhs. During the Assessment proceedings, the appellant/assessee contended that transfer of shares in M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Group ‘A’ and ‘C’ was done in pursuance of family arrangement/settlement as reflected in the Arbitration Award dt.30.4.1995. Therefore, it was contended that no Capital gains would be attracted as there was no transfer as it was working out of family settlement/arrangement. However, the Assessing Officer, by order dt.7.4.1997, negatived the same and inter alia held that the Company being a separate legal entity distinct from it’s share holders, cannot be as part of family settlement/arrangement. Thus, transfer of shares done by independent entity such as the Appellant/assessee would not be covered by the ‘Family Settlement’ and consequently, brought the transfer of 25,650 shares for consideration of Rs.225/- per share of M/s.Rekhchand Mohota Spinning and Weaving Mills Ltd. and 1,22,000 shares for consideration of Rs.10/- per share of M/s.Vaibhav Textiles Pvt. Ltd. to Capital Gains Tax. Resultantly, it determined the total income of the appellant for the Assessment Year 1995-96 at Rs.66.80 Lakhs. | |
(g) | Being aggrieved, the appellant carried the issue in appeal to the Commissioner of Income Tax (Appeals) {CIT(A)}. By an order dt.17.6.1998, the CIT accepted the position in law that family settlement cannot amount to transfer or create any interest and it is binding upon all the members of the family. However, the same can only be applied to members of the family who are parties to the settlement. In this case, the appellant/assessee was a Company incorporated under the Companies Act having a distinct and independent entity from it’s share holders. Thus, while holding that the Award dt.30.4.1994 is a family settlement, the same can only be applied to members of Mohota family, who were party to the proceedings before the Arbitrator and not to a Limited Company such as Appellant/Company. Therefore, notwithstanding the fact that the Appellant/assessee was under control and management of the members of Mohota family, who were part of family settlement, yet the transfer of shares by the Company would be covered within the meaning of Section 2(47) of the Act so as to be assessable to Capital Gains Tax. Thus, the appeal of Appellant/assessee was dismissed by the order dated 17.6.1998 of the CIT (A). | |
(h) | Being aggrieved with the order dated 17.6.1998 of the CIT(A), the Appellant/assessee preferred an appeal to the Tribunal. The impugned order dtd. 23 April, 2003 upheld the view of the lower Authorities by holding that a family settlement would not amount to transfer as it only recognizes pre-existing rights. However, it held that the Appellant/assessee (even if controlled by members of a family), on incorporation as a Limited Company becomes a separate legal entity and the members who own shares in the Company and the Company are in law different persons. It held that there exists a veil between the members of the Company and the Company. Thus, the family settlement arrived at between the members of a family will not inure to the benefit of the Appellant/assessee as it is not a member of the family. Consequently, the impugned order dated 23.4.2002 of Tribunal dismissed the appellant/assessee’s appeal. |
(a) | It is undisputed position as settled by the Apex Court that a family settlement/arrangement would not give rise to any transfer. The transfer of shares by the Appellant/assessee was in pursuance of and to give effect to the family arrangement as reflected in the Award dt.30.4.1994. There was no choice with the Appellant/assessee not to transfer the shares and such transfer of shares cannot be seen de hors the family arrangement. Thus, it is submitted that the entire transaction has to be looked at wholistically. | |
(b) | The corporate veil can be lifted to ascertain the real nature of the transaction and the person behind the transfer. In support, reliance is placed upon the decision of the Calcutta High Court in the case of Shaw Wallace and Company Ltd. v. Commissioner of Income Tax reported in 119 ITR 399. | |
(c) | The transfer of shares was mere adjustment of rights between the parties and no consideration has been received by the appellant/assessee The fair market value attributed to the shares by the Arbitrator was only for ascertaining and adjusting the rights of the parties to reach a family settlement. |
(a) | The appellant/assessee is a Company incorporated under the Companies Act having a separate and independent existence, different from that of it’s share holders/members. Thus, the distinction between the incorporated Company and it’s members cannot be ignored. | |
(b) | It is undisputed that the appellant/assessee who has transferred the shares of M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. are not members of Mohota family and therefore, they were not part of family settlement. Consequently, the Arbitration Award dt.30.4.1994 arrived at as a family settlement cannot, in any manner, have any impact on the appellant/assessee’s liability to tax under the Act. | |
(c) | Transfer done by the appellant/assessee of it’s shares in M/s.R.S.Rekhchand Mohota Spinning and Weaving Mills Ltd. and M/s. Vaibhav Textiles Pvt. Ltd. to members of Groups ‘A’ and ‘C’ is a transfer within the meaning of Section 2(47) of the Act. It does not fall under any of the exclusions provided in Section 47 of the Act. Thus, the impugned order dated 23 April, 2002 calls for no interference. |
apuryamanam acala-pratistham
samudram apah pravisanti yadvat
tadvat kama yam pravisanti sarve
sa santim apnoti na kama-kami
(Text 70, Contents of the Gita Summarized)
Meaning: A person who is not disturbed flow of desires–that enter like rivers into the ocean, which is ever being filled but is always still–can alone achieve peace, and not the man who strives to satisfy such desires.
Ya nisa sarva-bhutanam tasyam jagarti samyami
yasyam jagrati bhutani sa nisa pasyato muneh
(Text 69, Contents of the Gita Summarized)
Meaning: What is night for all beings is the time of awakening for the Self controlled; and the time of awakening for all beings is night for the Introspective sage.
**
There are two classes of intelligent men.One is intelligent in material activities for sense gratification, and the other is Introspective and awake to the cultivation of self realization. Activities of the Introspective sage, or thoughtful man, are night for persons materially absorbed. The sage feels transcendental pleasure in the gradual advancement of spirtual culture, whereas the man in materialistic activities, being asleep to Self-realization, dreams of varieties of sense pleasure, feeling sometimes happy and sometimes distress in his sleeping condition.The Introspective man is always indifferent to materialistic happiness and distress.He goes on with his self realization activities undisturbed by material reactions.
Indriyanam hi caratam yan mano nuvidhiyate
tad asya harati prajnam vayur navam ivambhasi (Text 67)
Tasmad yasya maha baho nigrhitani sarvasah
indriyanindriyarthebhyas tasya prajna pratisthita (Text 68)
Meaning: As a strong wind sweeps away a boat on the water, even one of the roaming senses on which the mind focuses can carry away a man’s intelligence.
Therefore, O mighty armed, one whose senses are restrained from their objects is certainly of steady intelligence.
Nasti buddhir ayuktasya na cayuktasya bhavana
na cabhavayatah santir asantasya kutah sukham
(Text 66, Contents of the Gita Summarized)
Meaning: One who is not connected with Supreme (in Supreme consciousness) can have neither transcendental intelligence nor a steady mind, without which there is no possibility of peace. And how can there be any happiness without peace?
* When one understands that Supreme (God) is the only enjoyer of all the good results of sacrifice and penance, that he is the proprietor of all universal manifestations, and that he is the real friend of all living entities, then only can one have real peace.