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CTR LIBRARY OF TAX CASES


CAUVERY SPINNING & WEAVING MILLS LTD. (IN LIQUIDATION) vs. DEPUTY COMMISSIONER OF INCOME TAX & ORS.
HIGH COURT OF MADRAS S. Nagamuthu, J. Writ Petn. No. 7978 of 2001 30th July, 2010 (2011) 238 CTR (Mad) 55 : (2012) 340 ITR 550 : (2011) 50 DTR 218 Legislation referred to Section 2(28A), 2(47), 45(1), 48, Case pertains to Asst. Year 1995-96 Decision in favour of Assessee Capital gainsVis-a-vis income from other sourcesInterest received from purchaser of mill for payment of bid amount in instalmentsMill belonging to petitioner, a company in liquidation, sold in public auctionCompany Court permitted the bidder to pay part sale consideration within six months without interest and to pay the remaining amount in 80 monthly instalments along with interest on reducing balanceSale certificate was issued in favour of the purchaser after the entire sale consideration was paidThough the amount paid by the bidder besides the bid amount was called interest, it cannot be said to be interest in the legal sense in which it is referred to in the IT ActThis amount only represents the amount accruing on account of transfer of capital assetAny amount received, whatever name it may bear, prior to the transfer is only part of sale consideration and the same can never be considered as income from other sourcesIn the instant case, the possession of the mill was initially transferred to the bidder as per the order of the Company Court only by way of lease and not in terms of s. 53A of Transfer of Property ActThus, there was neither actual transfer nor artificial transfer of title on account of transfer of possessionTransfer of title took place only on payment of entire amount by the bidder and after issuance of sale certificate by the Company CourtFurther, the amount which was agreed to be paid by way of interest by the bidder as per the order of the Company Court is not on account of any money borrowed or debt incurred Thus, it cannot be treated as interest as defined in s. 2(28A)Therefore, the said amount received by the Official Liquidator, though referred to as interest, was a part of sale consideration and cannot be treated as income from other sources under s. 56It is to be added to the bid amount for computing the capital gains Held : A glance through the provision of s. 45(1) would show that what is to be taken into consideration is the full value of the consideration received or accruing as a result of transfer of the capital asset. It clearly indicates that any amount which accrues on account of the transfer of capital asset is also a capital asset and after deducting the expenditure incurred and cost of

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acquisition and the cost of improvement, if any, the gain is calculated. The amount so accrues on account of transfer may be called in any name without attaching any legal sense to the same by the parties to the transaction. Though the amount paid by the bidder apart from the bid amount is called as interest, it cannot be given the meaning of the term 'interest' in the legal sense in which it is referred to in IT Act. This amount only represents the amount accrued on account of transfer of the capital asset. To put it otherwise, the bid amount and the amount received by the liquidator in the name of interest are to be added and then the expenditure incurred and the cost of acquisition and the cost of improvement are to be deducted to calculate the capital gain for the purpose of charging the same for income-tax. (Para 10) Sec. 2(47)(v) creates a notional or artificial transfer on the day when possession is transferred in terms of s. 53A of the Transfer of Property Act. It is common knowledge that transfer of title by way of sale takes place only on the execution of the sale deed as provided in s. 54 of the Transfer of Property Act. But, for the purposes of the IT Act notional/artificial transfer is effected on the date when transfer of possession is made under s. 53A of the Transfer of Property Act. The object of introduction of s. 2(47)(v) is easily discernible. It was only to make any amount which is received by transfer from the date of such notional/artificial transfer as income, this provision has been made. Before introduction of this provision by Finance Act, 1988 w.e.f. 1st April, 1988, there was no such provision anywhere in the Act. Therefore, prior to 1st April, 1988, the legal position was that the transfer will take place only as per the provisions of the Transfer of Property Act. Therefore, any amount received prior to such transfer would be only part of sale consideration, though it might have been received under any name like interest. Only to prevent such kind of evasion, probably, the Parliament had thought it fit to introduce the said provision w.e.f. 1st April, 1988. This would only go to indicate the correctness of the argument advanced by the counsel for the petitioner that any amount received, whatever name it may bear, prior to the transfer will be only part of sale consideration and the same can never be considered as income from other sources. In the instant case, such notional transfer was not effected on account of the transfer of possession to the bidder by the Official Liquidator. As per the order of the Company Court, the possession of the mill was transferred to the bidder only by way of lease and not in terms of s. 53A of the Transfer of Property Act. Therefore, there was neither actual transfer nor artificial transfer of title on account of the transfer of possession. Such transfer of title took place only on payment of the entire amount by the bidder and only after the sale certificate was issued by the Company Court. (Paras 12 & 13) A close reading of s. 2(28A) would make it clearly understandable that to call an amount received as interest, at least one of the conditions should be satisfied, namely, the same should have been received as a due on account of any money either borrowed or debt incurred. Here, in this case, the amount which was agreed to be paid, though by way of interest by the bidder as per the order of the Company Court, is not on account of any money either borrowed or debt incurred. Therefore, the amount in question cannot be treated as interest at all as defined in the above provision. In view of the foregoing discussion the amount in question received by the Official Liquidator as per the orders of the Company Court, though repeatedly referred to as interest, for the purpose of assessment of income-tax, it is part of sale consideration and therefore, the same cannot be treated as income from other sources as defined in s. 56. The said amount should be treated only as capital gain under s. 45 for the purpose of assessment. Mount Stuart Tea Estate & Amar Coffee Plantation vs. CIT (1998) 149 CTR (Mad) 516 : (1999) 239 ITR 489 (Mad) distinguished. (Paras 14 & 17) Conclusion : Additional amount received by the Official Liquidator of the petitioner company as per the orders of the Company Court for allowing payment of sale consideration by the purchaser of

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companys mill in instalments, though referred to as interest, was a part of sale consideration and cannot be treated as income from other sources under s. 56; it is to be added to the bid amount for computing the capital gains. In favour of : Assessee Case referred to CIT vs. Kar Valves Ltd. (1992) 197 ITR 95 (Ker) Counsel appeared : V. Ramachandran for Ms. Anitha Sumanth, for the Petitioner : K. Subramaniam, for the Respondents : V. Ramachandran with S.R. Sundar, for the Official Liquidator Order S. Nagamuthu, J. : The petitioner is a company under liquidation. The same is now represented by the Official Liquidator of this Court. A mill belonging to the petitioner company was ordered to be sold by the Company Court in public auction. Accordingly, it was sold in public auction for a sum of Rs. 4.49 crores. The bidder in whose favour the sale was confirmed filed two applications before the Company Court in Civil Appeal Nos. 979 of 1991 and 980 of 1991 praying the Company Court to permit him to pay a part of consideration of Rs. 2.23 crores in 80 instalments and further praying to grant lease of the mill namely, Cauvery Spinning & Weaving Mills Ltd. He further submitted that he was ready to pay a sum Rs. 2.26 crores towards part sale consideration. The Company Court by order dt. 12th Aug., 1991 accordingly granted permission to the bidder to pay Rs. 2.26 crores within six months without interest and to pay the balance of Rs. 2.23 crores in 80 monthly instalments regularly commencing from 1st Dec., 1991. He was further directed that for the said amount, the bidder shall pay flat rate of interest of 18 per cent per annum on reducing balance from 1st Jan., 1991. It was only in pursuance of this order, the bidder paid Rs. 2.23 crores within six months which carried no interest. The balance of amount, as per the order of the Court, he started paying in instalments and that also he could not carry out promptly. He filed another application in Civil Company Appln. No. 1762 of 1993 before the Company Court to pay the balance of Rs. 1.39 crores and to relieve him from payment of interest. In the said application, this Court by order dt. 2nd Nov., 1993 reduced the interest from 18 per cent to 15 per cent. Similarly in respect of the payment of the balance of consideration, some concession was shown in the matter of time. Subsequently, there were few more such applications in respect of the payment. Ultimately, the entire sale consideration was paid and accordingly, a sale certificate was issued in favour of the purchaser. 2. In this regard, a sum of Rs. 57.89 lakhs was paid by the purchaser in the name of "interest" as directed by the Company Court. The 1st respondent proposed to assess the said amount as income under the head of "Income from other sources" for the purpose of payment of incometax. The petitioner/liquidator opposed the same on the ground that the said amount has been received by the Official Liquidator only as part of sale consideration and therefore, it will fall under the head of "Capital gains" for the purpose of income-tax and not under the head of "Income from other sources". The same was not accepted by the 1st respondent. The 1st respondent assessed the same as "income from other sources" and accordingly computed the amount of income-tax for the same. Against the said order of the 1st respondent, an appeal was preferred by the Official Liquidator to the 2nd respondent which was also rejected. Challenging the same, the petitioner/Official Liquidator filed a company application before this Court in Company Appln. No. 2012 of 1997 praying the Company Court to direct the IT Department to treat the interest amount paid by the purchaser of the mill as forming part of sale consideration. In the said company application, notice was issued to the 1st respondent by

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the Company Court. When the matter was taken up on 14th Dec., 2000 for hearing, a preliminary objection was raised by the 1st respondent in respect of the maintainability of the company application. It was contended that when there was an alternative efficacious remedy available to the petitioner/liquidator, the company application was not maintainable. Having considered the same, the Company Court by order dt. 14th Dec., 2000 dismissed the said petition as not maintainable, however, with a direction to the Official Liquidator to challenge the order of assessment by filing a writ petition before this Court. It was also directed that in fairness, the IT Department should not raise the plea of availability of alternative remedy or the delay in challenging the order of assessment. It is in pursuance of the said direction issued, the petitioner/Official Liquidator has come forward with this writ petition. 3. The foremost question involved in this writ petition is as to whether the amount in question received by the Official Liquidator forms part of the sale consideration so as to fall within the head of "Capital gain" or the same is interest, pure and simple, so as to fall within the head of "Income from other sources" for the purpose of assessment for payment of income-tax. 4. The contention of the learned senior counsel for the petitioner is that though in the orders of the Company Court, it has been mentioned that the amount represents the interest, as a matter of fact, in legal sense, it is not interest, but it is only a part of sale consideration. In this regard, the learned senior counsel would submit that though the Company Court directed the bidder to pay a part of the bid amount in instalments, since there was no transfer effected immediately and since the possession was not also transferred in terms of s. 53A of the Transfer of Property Act, whatever was received by the Official Liquidator until the transfer of title was effected, would only be a part of capital and the same will not fall within the ambit of income from other sources. The learned senior counsel would further point out that indisputably, when the bidder was permitted to pay the part of the bid amount in instalments, the Company Court by order dt. 2nd Nov., 1993 in Company Appln. No. 980 of 1991 directed the Official Liquidator to lease out the mill to the bidder for a reasonable lease rent which was also fixed by the Company Court. Relying on this, the learned senior counsel would submit that though possession was taken by the bidder even before the sale was effected, the same will not amount to transfer since the possession was not transferred by way of part performance under s. 53A of the Transfer of Property Act. In this regard, the learned senior counsel would rely on s. 48 of the IT Act and the definition of the term interest as found in s. 2(28A) of the said Act. 5. To substantiate his contention, the learned senior counsel would also take me through various orders passed by the Company Court including the tender notification wherein it has been stated that the interest amount to be collected from the bidder will be treated as part of sale consideration. Therefore, the learned senior counsel would submit that it was the intention even of the Company Court, which had full control over the property, to have the amount collected by way of interest as part of sale consideration. Therefore, he would submit that it cannot be contended that the amount in question was received by the Official Liquidator in the name of interest in legal sense. For the purpose of IT Act, it is not at all interest, but it forms part of the sale consideration falling under the head of 'Capital gain'. The learned senior counsel has relied on the judgment of Kerala High Court in CIT vs. Kar Valves Ltd. (1992) 197 ITR 95 (Ker), wherein the Court had occasion to consider as to whether the amount paid as solatium on account of the lands acquired under the Land Acquisition Act would form part of the sale consideration or the income from other sources. The learned senior counsel would submit that the various High Courts have taken the consistent view that the solatium forms part of only the sale consideration and therefore, it is not an income from other sources for the purpose of income-tax. To put it in nutshell, the learned senior counsel would submit that the order of assessment made by the 1st respondent which was later on confirmed by the 2nd respondent wherein they have assessed the said amount, treating the same as income from other sources is not at all sustainable and therefore, the same requires interference at the hands of this Court. 6. The learned counsel for the respondent would have a different stand. He would also take me through various proceedings of the Company Court wherein two different expressions viz., consideration and interest have been employed. According to him, the intention of the Company Court itself was to treat the bid amount as consideration and any amount received from the

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bidder for the delayed payment towards interest is only as an income from other sources. In this regard, the learned counsel would also submit that even in the sale certificate issued by the Company Court, it has been treated separately as consideration and interest, thereby denoting that the bid amount is the consideration and the amount in question is only interest. The learned counsel would further submit that in a catena of decisions, it has been held that any amount accrued as interest on the capital amount is only income from other sources as defined in the IT Act. In this case, according to the learned counsel for the respondent, the amount in question was received by the Official Liquidator from the bidder only by way of interest on the capital amount, namely, the consideration and therefore, the assessment order is sustainable under law. The learned counsel would further submit that though it is true that the transfer of title to the property was effected only on the issuance of the sale certificate, it is immaterial. He would further point out that the moment the sale is confirmed and the part payment is made, there is notional transfer of the property in favour of the bidder and therefore, any excess amount received subsequently because of the deferred payment in instalments would be only income on the bid amount. He would further submit that such interest is paid only as an obligation on the part of the bidder arising out of some arrangement. Therefore, the said amount is the amount due from the bidder which in turn will fall within the definition of interest as defined in the IT Act. 7. The learned counsel for the respondents relies on a judgment of this Court in Mount Stuart Tea Estate & Amar Coffee Plantation vs. CIT (1998) 149 CTR (Mad) 516 : (1999) 239 ITR 489 (Mad), wherein this Court has held that the interest received from the purchaser on the sale consideration is only income from other sources for the purpose of the IT Act. The learned counsel would submit that in that case also, possession was not transferred under s. 53A of the Transfer of Property Act. De hors the said fact, this Court has taken the view that when a part payment is made, then whatever is received by way of interest on the balance amount will be only income from other sources. Relying on this judgment, the learned counsel would submit that in the instant case though it is true that possession was transferred in favour of the bidder by way of lease, that is immaterial. He would point out that from the date on which the tender was confirmed in favour of the bidder, what was paid on account of the deferred payment is interest which is an income on the capital amount. The learned counsel would take me through various provisions of IT Act about which I will make appropriate reference during the course of this order. 8. Let me now examine the rival contentions. Indisputably, the amount in question was received by the Official Liquidator in the name of interest only. Regarding this, there is no doubt. A perusal of various proceedings of the Company Court would clear all possible doubts in this regard. However, as pointed out by the learned senior counsel for the petitioner, the Company Court in more than one place in the orders passed on various dates has directed that the interest received from the bidder shall be part of the sale consideration. This direction issued by the Company Court also cannot be lost sight of. With these undisputed facts, let me now look into the provisions of the Act. 9. At the outset, I may refer to s. 45(1) of the IT Act dealing with capital gains which reads as follows : "45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall save as otherwise provided in ss. 54, 54B, 54D, 54E, 54EA, 54F, 54G and 54H be chargeable to income of the previous year in which the transfer took place." A close reading of s. 45(1) of the IT Act would make one to clearly understand that any profit or gain arising out of the transfer of a capital asset shall be chargeable only as "capital gain". 10. Now turning to s. 48 of the Act, it speaks of the mode of computation of capital gains as follows : "48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts namely :

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(i) Expenditure incurred wholly and exclusively in connection with such transfer, (ii) The cost of acquisition of the asset and the cost of any improvement thereto. (Provisos are omitted)." A glance through the said provision would show that what is to be taken into consideration is the full value of the consideration received or accruing as a result of transfer of the capital asset. It clearly indicates that any amount which accrues on account of the transfer of capital asset is also a capital asset and after deducting the expenditure incurred and cost of acquisition and the cost of improvement, if any, the gain is calculated. The amount so accrues on account of transfer may be called in any name without attaching any legal sense to the same by the parties to the transaction. In the case on hand, though the amount paid by the bidder apart from the bid amount is called as interest, it cannot be given the meaning of the term 'interest' in the legal sense in which it is referred to in IT Act. This amount only represents the amount accrued on account of transfer of the capital asset. To put it otherwise, the bid amount and the amount received by the liquidator in the name of interest are to be added and then the expenditure incurred and the cost of acquisition and the cost of improvement are to be deducted to calculate the capital gain for the purpose of charging the same for income-tax. 11. Now coming to the definition of the term transfer as employed in s. 48, reference is to be made to s. 2(47) of the Act which reads as follows : "2(47) transfer in relation to a capital asset includes : (i) the sale, exchange or relinquishment of the asset; 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 owner thereof into or is treated by him as, stock-in-trade of a business 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 possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in s. 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. ExplanationFor the purposes of sub-cls. (v) and (vi) 'immovable property' shall have the same meaning as in cl. (d) of s. 269UA." 12. Here s. 2(47)(v) needs to be underscored. This provision creates a notional or artificial transfer on the day when possession is transferred in terms of s. 53A of the Transfer of Property Act. It is common knowledge that transfer of title by way of sale takes place only on the execution of the sale deed as provided in s. 54 of the Transfer of Property Act. But, for the purposes of the IT Act notional/artificial transfer is effected on the date when transfer of possession is made under s. 53A of the Transfer of Property Act. The object of introduction of s. 2(47)(v) in this Act is easily discernible. In my considered opinion, it was only to make any amount which is received by transfer from the date of such notional/artificial transfer as income, this provision has been made. Before introduction of this provision by Finance Act of 1988 w.e.f. 1st April, 1988, there was no such provision anywhere in the Act. Therefore, prior to 1st April, 1988, the legal position was that the transfer will take place only as per the

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provisions of the Transfer of Property Act. Therefore, any amount received prior to such transfer would be only part of sale consideration, though it might have been received under any name like interest. Only to prevent such kind of evasion, probably, the Parliament had thought it fit to introduce the said provision w.e.f. 1st April, 1988. This would only go to indicate the correctness of the argument advanced by the learned senior counsel for the petitioner that any amount received, whatever name it may bear, prior to the transfer will be only part of sale consideration and the same can never be considered as income from other sources. 13. In the instant case, such notional transfer was not effected on account of the transfer of possession to the bidder by the Official Liquidator. As I have narrated earlier, as per the order of the Company Court, the possession of the mill was transferred to the bidder only by way of lease and not in terms of s. 53A of the Transfer of Property Act. Therefore, there was neither actual transfer nor artificial transfer of title on account of the transfer of possession. Such transfer of title took place only on payment of the entire amount by the bidder and only after the sale certificate was issued by the Company Court. 14. Now coming to the contention of the learned senior counsel as to what the term interest means. Sec. 2(28A) of the Act defines the same as follows : "Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised." A close reading of the above provision would make it clearly understandable that to call an amount received as interest, at least one of the conditions should be satisfied, namely, the same should have been received as a due on account of any money either borrowed or debt incurred. Here, in this case, the amount which was agreed to be paid, though by way of interest by the bidder as per the order of the Company Court, is not on account of any money either borrowed or debt incurred. Therefore, the amount in question cannot be treated as interest at all as defined in the above provision. 15. Now coming to the judgment relied on by the learned senior counsel for the petitioner in the judgment of Kerala High Court in CIT vs. Kar Valves Ltd. (supra), the question, as I have already referred to, was as to whether the solatium paid as per the provisions of the Land Acquisition Act would be income through other sources or the same would form part of the consideration. The Courts have consistently held that it is only towards consideration and not towards any income through other sources. But at the same time, in these judgments, the interest paid by the Government as per the provisions of the Land Acquisition Act has been treated as income through other sources only for the purpose of income-tax assessment. This position is explained by the learned senior counsel to say that in those cases by operation of law, the property vests with the Government as soon as the declaration is made under s. 6 of the Act. Thus, according to him, the transfer of title takes place on the date of declaration. Therefore, the consideration for the said land becomes due from the Government to the erstwhile landowners and for that fixed consideration, interest is thereafter paid for that amount due and thus whatever paid, is surely interest. That is the reason why the Kerala High Court has held that the solatium is part of consideration whereas the interest accrued is not part of consideration. Even there, there are two parts. The interest is paid not only from the date of the declaration made under s. 6 of the Act, but from the date on which the s. 4(1) notice under the Land Acquisition Act is issued. Therefore, in my considered opinion, the interest paid for the period from the date of s. 4(1) notice till the title vests with the Government by issuance of declaration under s. 6 of the Act, the amount so received by the erstwhile owner will be only a part of sale consideration for the purposes of income-tax. It is only the interest received by the erstwhile owners from the date of s. 6 declaration, the same would be income through other sources. This question is not very relevant for this case so as to have more discussion on this. From these judgments, one thing is clear, that is, after the transfer of title, whatever is received apart, the sale consideration fixed at the time of transfer, is income through other sources. 16. Now coming to the judgment relied on by the learned counsel for the respondents i.e. in

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Mount Stuart Tea Estate & Amar Coffee Plantation vs. CIT (supra) that is a case where this Court has held that though possession was not transferred on account of agreement for sale, still the amount received by way of interest for the sale consideration mentioned in the sale agreement will be only income through other sources. But the facts are distinguishable. In that case, the Court had to consider as to whether the amount received by the seller forms part of the sale consideration or it was under a different transaction where interest for a fixed amount was calculated and received by him. In the given set of facts and circumstances of that case, it has been held that the amount received by way of interest was not on account of transfer of capital asset, but on account of a different transaction under which interest was received. Therefore, the principles stated in the said case do not come to the rescue of the respondents. 17. In view of the foregoing discussion I hold that the amount in question, in this writ petition received by the Official Liquidator as per the orders of the Company Court, though repeatedly referred to as interest, for the purpose of assessment of income-tax, it is part of sale consideration and therefore, the same cannot be treated as income from other sources as defined in s. 56 of the IT Act. The said amount should be treated only as capital gain under s. 45 of the IT Act for the purpose of assessment. 18. In the result, the writ petition is allowed, the impugned order passed by the 1st respondent and confirmed by the 2nd respondent is set aside and the matter is remitted to the 1st respondent for issuance of appropriate assessment order treating the amount in question as capital gain. No costs. *******

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