IN THE HIGH COURT OF MADRAS
|KUMAR RAJARAM Vs ITO [ITAT]|
Tax Case Appeal No.415 of 2019
THE INCOME TAX OFFICER
T S Sivagnanam & V Bhavani Subbaroyan, JJ
Dated: August 5, 2019
Appellant Rep by: Mr T N Seetharaman & Mr R Kumar
Respondent Rep by: Mr Karthick Ranganathan Sr. Standing Counsel & Mr S Rajesh, Standing Counsel
Income Tax – Sections 143(2) & (3) & 263
Keywords – LTCG – Revision – Roving enquiry – Testamentary succession
The assessee, a non-resident individual derived income from LTCG and income from other sources. The LTCG was accrued from testamentary sale of property bestowed upon the assessee. Out of the total consideration received, a portion of was devolved into charity. After holding the scrutiny assessment, the return was accepted considering the sale consideration and deductions on expenditure incurred in connection with the sale. This assessment order was subjected to revision by the CIT which directed the AO to disallow the portion of capital gains paid to numbers of charitable trusts and expenditure incurred that was earlier allowed. The Tribunal affirmed the order of the CIT.
Having heard the parties, the High Court held that,
Whether the CIT is vested with the powers to hold a roving enquiry by virtue of sec. 263 in order to substitute the view of AO reached during the scrutiny assessment – NO: HC
++ the assessment was u/s 143(3). The AO accepted the stand taken by the assessee towards expenses. After perusal of the same, the AO has taken a stand and passed the order. Therefore, it cannot be stated that the AO did not apply his mind to the issue, after all the AO cannot be expected to write a judgment. Admittedly there was an inquiry conducted by the AO and it is not the case of the CIT that there was a lack of inquiry or inadequate inquiry. The CIT while issuing the show cause notice did not rely upon any independent material nor on any interpretation of law but on perusal of the records was of the view that the expenditure cannot be allowed as deduction;
Whether invocation of section 263 on the mere ground that Commissioner’s interpretation of Will by which a property has been devolved upon the assessee generating LTCG in return, is different than the interpretation reached by the AO is perversity in law – YES: HC
++ section 263 does not visualize a case of substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order unless the decision is held to be erroneous. Merely because the Commissioner is not fully satisfied with the conclusion of the Income Tax Officer, the order cannot be turned to be erroneous. On a reading of the order passed u/s 263, one can easily form an opinion that the order is based upon the interpretation which the CIT has given to the terms and conditions of the last will and testament of the assessee’s father. Thus, it is evident that the CIT has made a roving enquiry and substituted his view to that of the view taken by the AO who had done so after conducting an enquiry into the matter and after calling for all documents from the assessee, one of which is the last will and testament executed by the assessee’s father. Therefore, this is not a case where the Commissioner could have invoked the power u/s 263. For all the above reasons, the substantial questions are answered in favour of the assessee.
Assessee’s appeal allowed
Commissioner of Income Tax vs. Gabriel India Ltd. – 2003-TIOL-446-HC-MUM-IT
Commissioner of Income vs. Sunbeam Auto Ltd. – 2009-TIOL-552-HC-DEL-IT
Per: T S Sivagnanam:
This appeal filed by the assessee under Section 260A of the Income Tax Act, 1961 (‘the Act’ for brevity) is directed against the order dated 10.02.2016 passed by the Income Tax Appellant Tribunal, ‘B’ Bench, Chennai (hereinafter referred to as ‘the Tribunal’) in I.T.A.No.1876/Mds/2015 for the assessment year 2012-13 = 2016-TIOL-550-ITAT-MAD.
2.The assessee has raised the following substantial questions of law for our consideration:
1. Whether, on the facts and in the circumstances of the case, the order of the Appellate Tribunal confirming the order u/s 263 of the Act passed by the Commissioner of Income Tax is sustainable in law?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the exclusion of payment to charities by applying the principle of diversion of income by overriding title cannot be allowed?
3. Whether, the Appellate Tribunal is right in law in not allowing the sum of Rs.8,02,500/- being expenditure incurred in connection with the sale alleging that there is no evidence when the evidence in support was on record and the expenditure is allowable u/s 48(i) of the Act?
4. Whether, the order of the Appellate Tribunal upholding the order of the Commissioner u/s 263 passed on incorrect appreciation of facts and understanding of law is perverse and deserves to be quashed?
3.The assessee is a non-resident individual and during the assessment year under consideration (2012-13) derived income from capital gains and interest income assessed under the head ‘other sources’. The assessee’s father owned land and residential house at Bangalore and died on 11.06.2011 leaving his last will and testament dated 30.10.2008. The assessee’s father appointed an executor to execute the directions contained in the will. In terms of the recitals in the will, the property at Bangalore was sold on 10.11.2011 for a gross sale price of Rs.8,80,00,000/-. In the will executed by the assessee’s father, there was a direction to the executor of the will, upon sale of the property to pay a sum of Rs.10,00,000/- to Sri Sai Spiritual Center Trust, a sum of Rs.25,00,000/- to Helpage India, Bangalore, a sum of Rs.15,00,000/- to CRYChild Rights and You, Bangalore and a sum of Rs.10,00,000/- to Sri Ramana Ashram, Thrivannamalai. Apart from these payments, there was a direction that the executor will be entitled to a sum of Rs.50,000/-. The balance amount was to be paid to the assessee and accordingly, the assessee received a sum of Rs.8,19,50,000/-. The assessee filed his return of income on 13.07.2012 admitting total income of Rs.6,22,63,973/- comprising of Long Term Capital Gains computed as Rs.5,99,21,346/- arising on sale of the Bangalore property by adopting the sale consideration as Rs.8,19,50,000/- and claiming a sum of Rs.7,52,500/- as expenditure incurred in connection with the sale. The Assessing Officer completed the assessment by order dated 25.09.2014 under Section 143(3) of the Act considering the sale consideration as mentioned by the assessee in his return of income, namely, Rs.8,11,97500/- (Rs.8,19,50,000 – Rs.7,52,500/-). The Commissioner of Income tax (CIT), International Taxation, Chennai issued a show cause notice under Section 263 of the Act proposing to disallow the sum of Rs.68,02,500/-, being the payment made to charitable institutions and the claim of the expenditure of Rs.8,02,500/-. The assessee submitted their objections dated 18.03.2015, firstly on the ground that the power under Section 263 of the Act could not have been invoked as well as on merits. The CIT by order dated 02.07.2015 disallowed the exclusion of Rs.68,02,500/- and directed the Assessing Officer to recompute the total income and tax thereon. The assessee carried the matter by way of appeal to the Tribunal which affirmed the order of the CIT holding that the exclusion of the payment made by the assessee by applying the diversion of income by overriding title cannot be allowed and there is no evidence for professional fee, commission paid, etc. Aggrieved by the same, the assessee is before us by way of this appeal raising the aforementioned substantial questions of law.
4. We have heard Mr.T.N.Seetharaman, learned counsel appearing for the appellant/assessee assisted by Mr.R.Kumar, learned counsel and Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for the respondent/revenue.
5. Substantial Questions of law 1 and 4 can be bunched together as it pertains to the jurisdiction of the CIT to invoke Section 263 of the Act. For deciding the Substantial Question of law No.2, certain factual aspects need to be looked into, more particularly, the intention of the testator in his will and testament dated 30.10.2008. The Substantial Question of law No.3 is with regard to the expenses claimed by the assessee which was disallowed by the Tribunal on the ground of lack of proof. As noticed above, the assessment was completed by the Assessing Officer by order dated 25.09.2014. The order was passed under Section 143(3) of the Act after the assessee’s case was selected for scrutiny and notice under Section 143(2) of the Act was issued on 23.08.2013. The Assessing Officer issued notice to the assessee under Section 142(1) of the Act along with questionnaire dated 12.05.2014. In response to the said notice, the assessee submitted the details including the last will and testament executed by his father dated 30.10.2008, a copy of the sale deed dated 10.11.2011, legal opinion obtained from his counsel regarding eligibility for exclusion of payments to charitable institutions and remuneration to the executor in computing the long term capital gains on sale of Bangalore property. All these documents were forwarded to the Assessing Officer through the assessee’s Chartered Accountant along with their letters dated 28.05.2014 and 14.06.2016. After perusal of all the records placed by the assessee and after noting the submissions of the Chartered Accountant/authorized representative of the assessee, the assessment was completed and the stand taken by the assessee was accepted by the Assessing Officer. However, the plea raised by the assessee with regard to the cost of indexation benefit was not accepted and the Assessing Officer held that the assessee is allowed cost of indexation benefit only from the financial year 2011-12 as per Explanation (iii) in Section 48 of the Act. The Commissioner had issued show cause notice dated 12.03.2015 under Section 263 of the Act. In the show cause notice, the Commissioner states that the figures mentioned by the assessee were culled out from the records, thus there was no other independent material which formed the basis of the show cause notice. The CIT opined that the expenses claimed by the assessee towards payment to the charitable institutions and others were not incurred wholly and exclusively in connection with the transfer of Bangalore property and the same is not allowable. According to the CIT, the order passed by the Assessing Officer under Section 143(3) of the Act is erroneous and prejudicial to the interest of revenue and therefore, he proposed to revise the assessment under Section 263 of the Act. The power under Section 263 of the Act can be invoked in cases where the twin conditions stipulated therein are combinedly satisfied, namely, the order of the Assessing Officer should be erroneous and prejudicial to the interest of revenue. Every erroneous order may not be prejudicial to the interest of revenue and every order prejudicial to the interest of revenue may not be erroneous. The CIT while issuing show cause notice points out that the expenses claimed by the assessee were not incurred wholly and exclusively in connection with the transfer of the Bangalore property. In the preceding paragraphs, we have noted the manner in which the Assessing Officer proceeded with the assessment. To be noted the assessment was under Section 143(3) of the Act. The Assessing Officer issued notice under Section 142(1) of the Act along with the questionnaire which had been complied with by the assessee by submitting necessary particulars along with documents which includes the last will and testament of his father dated 30.10.2008. After examining the same, the Assessing Officer accepted the stand taken by the assessee towards expenses. The CIT while issuing the show cause notice did not rely upon any independent material nor on any interpretation of law but on perusal of the records was of the view that the expenditure cannot be allowed as deduction. Along with the filled in questionnaire, the assessee had filed the copy of the last will and testament of his father, sale deed of the Bangalore property and the legal opinion given by the learned counsel for the assessee. After perusal of the same, the Assessing Officer has taken a stand and passed the order. Therefore, it cannot be stated that the Assessing Officer did not apply his mind to the issue, after all the Assessing Officer cannot be expected to write a judgment. Admittedly there was an inquiry conducted by the Assessing Officer and it is not the case of the CIT that there was a lack of inquiry or inadequate inquiry.
6. In the case of Commissioner of Income Tax vs. Gabriel India Ltd. [(1993) 203 ITR 108 (Bom)] = 2003-TIOL-446-HC-MUM-IT, it was held that suo motu revision under Section 263 of the Act can be exercised only if on examination of the records of any proceedings under the Act, the Commissioner considers that an order passed by the Income Tax Officer is erroneous in so far as it is prejudicial to the interest of revenue. It was further held that this power is not arbitrary or uncharted power, it can be exercised only on fulfilment of the requirements laid down in Sub-section (1), that an order is erroneous in so far as it is prejudicial to the interests of the revenue, must be based on materials on the record of the proceedings called for by the Commissioner and if there are no materials on record, the basis on which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings will be illegal and without jurisdiction. It was further held that the Commissioner cannot initiate proceedings with a view to start fishing and roving enquiries into the matters or orders which are already concluded as such an action will be against the well accepted policy of law that there must be a point of finality in all illegal proceedings, stale issues should not be reactivated beyond a particular stage. Section 263 of the Act does not visualize a case of substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order unless the decision is held to be erroneous. Merely because the Commissioner is not fully satisfied with the conclusion of the Income Tax Officer, the order cannot be turned to be erroneous. On a reading of the order dated 01.07.2015/22.07.2015 passed under Section 263 of the Act one can easily form an opinion that the order is based upon the interpretation which the CIT has given to the terms and conditions of the last will and testament of the assessee’s father dated 30.10.2008. Thus, it is evident that the CIT has made a roving enquiry and substituted his view to that of the view taken by the Assessing Officer who had done so after conducting an enquiry into the matter and after calling for all documents from the assessee, one of which is the last will and testament executed by the assessee’s father. Therefore, we are of the clear view that this is not a case where the Commissioner could have invoked the power under Section 263 of the Act. For all the above reasons, the Substantial Questions of Law 1 and 4 are answered in favour of the assessee.
7. It is the argument of Mr.Karthik Ranganathan, learned Senior Standing Counsel for the revenue that the will dated 30.10.2008 clearly states that the assessee’s father has bequeathed the entire sale consideration received from the sale of the Bangalore property to the assessee, the second son born to his first wife. It is the submission that the sale consideration has been received by the assessee from and out of which payments were effected to the charitable institutions, etc and therefore the payments can neither to be considered as diversion by overriding title nor expenditure incurred wholly and exclusively in connection with the transfer. In this regard, the learned counsel has drawn the attention of this Court to the findings of the Tribunal, wherein the Tribunal referred to the decision of the Hon’ble Apex Court in the case ofCommissioner of Income Tax, Bombay City II vs. Sitaldas Tirathdas [(1961) 41 ITR 367 (SC)] = 2002-TIOL-985-SC-IT-LB.
8.We have gone through the last will and testament of the assessee’s father dated 30.10.2008. He had appointed Mr.M.S.Narayan, Advocate as the executor to give effect to the terms and conditions of the will and dispose of his properties as stated by him in the will. The executor was entitled to a sum of Rs.50,000/- as professional fee and all expenses for the due execution of the will from and out of the estate of the deceased testator. After setting out the details of his family and the property possessed by him, the testator states that he bequeaths the sale consideration received from the sale of the immovable property absolutely to the assessee, his second son. Then the testator proceeds to state that the executor of the will shall arrange to sell the property after a period of one year from the date of his demise so as to accommodate his wife for her stay and after she vacates the property, the executor shall sell the property as already mentioned and distribute the sale proceeds by effecting payments in favour of the four charitable institutions specifying the amount to be paid to each of them and defray the necessary expenses towards stamp duty, etc., fees to the executor and the remaining sale consideration be paid to the assessee who shall repatriate the said amount so received for the education of his children as per RBI rules. To gather the intention of the testator the will has to be read in its entirety and not in bits and pieces as done by the revenue. The word ‘absolutely’ in the second line of paragraph 7 of the will is heavily relied on by Mr.Karthik Ranganathan to state that the entire sale consideration has been bequeathed to the assessee absolutely and the payments to the charitable institutions is from and out of the said amount and therefore it is only the application of the said sale consideration and not diversion of income by creating overriding title. What has been lost sight of by the revenue is that the usage of the expression ‘absolutely’ occurring in the second line in paragraph 7 of the will dated 30.10.2008 is to disinherit the testator’s third wife from being entitled to any portion of the funds and all that the testator stated was not to sell the property for one year till his wife vacates the same. The Tribunal found fault with the assessee for having sold the property much earlier. The sale deed dated 10.11.2011 clearly records that the step mother of the assessee had in unequivocal terms agreed for the sale and she vacated from the property and also granted No objection for transfer of “Katha” of the Bangalore property. Therefore, the interpretation given by the Tribunal is wholly erroneous. In paragraph 21 of the impugned order passed by the Tribunal, it has been stated that “the entire sale consideration received from the sale of immovable property absolutely to his second son i.e. Kumar Rajaram and thereafter he said he has to distribute the sale proceeds after paying property taxes if found due and shall make payment out of the sale consideration and also said how to distribute the sale consideration”. We find that the word ‘thereafter’ used in paragraph 21 of the order of the Tribunal nowhere occurs in paragraph 7 of the will dated 30.10.2008. However, the testator’s direction to sell the property was to the executor of the will and there was a specific direction to the executor to pay specific sums of money to the charitable institutions, clear the property tax arrears, claim his professional fee, meet the stamp duty expenses and the remaining amount shall be paid to the assesee. Therefore, the misinterpretation of the intention of the testator in his will dated 30.10.2008 has resulted in an erroneous order passed by the CIT dated 01.07.2015 which order was erroneously confirmed by the Tribunal by the impugned order.
9. Mr.Karthik Rangathan, learned Senior Standing Counsel placed reliance on the decision of the Hon’ble Supreme Court in the case of R.M.Arunachalam vs. Commissioner of Income Tax [(1997) 93 Taxman 423 (SC)] = 2002-TIOL-2582-SC-IT. In the said case, the question was whether the estate duty paid in respect of the estate of one ‘R’ and the estate of one ‘V’ to the extent of such duty related to the assets in question, could be claimed as a deduction as cost of acquisition or as cost of improvement. The question was answered against the assessee as the capital asset became the properties of the assessee under the will executed by ‘U’ i.e. under clause (ii) of sub-section (1) of Section 49; the capital assets became the property of ‘U’ under sub-clause (a) of clause (iii) of sub-section (1) of section 49 by succession after the death of her husband ‘R’ and by virtue of the explanation in sub-section (1) of Section 49 ‘R’ had been treated as the previous owner of the assets by the ITO. On facts, it was found that the assessee admittedly became the full owner of the assets even before the payment of estate duty and on payment of the same, he had not acquired a new right, tangible or intangible, in the assets and therefore the amount proportionate to the estate duty paid by the assessee on the properties that were transferred should be treated as cost of acquisition of the assets under Sections 48 and 49 read with section 55(2) cannot be accepted since the title of the assessee to the immovable properties acquired was not incomplete and imperfect in any way and as a result of payment of estate duty by the assessee there was an improvement in the title of the assessee and the said payment could be regarded as cost of improvement under Section 55(1)(b) of the Act.
10. In our considered view the said decision can have no application to the facts of the present case as at no point of time the assessee raised any dispute with regard to the cost of acquisition of the asset. That apart, the case on hand requires to be interpreted based on the intention of the testator for which purpose we have read the will dated 30.10.2008 as a whole to gather the intention of the testator which is clear and lucid. The testator bequeathed only portion of the sale consideration left over after effecting payments directed to be made by him. If the executor failed to honour the commitments then the sale itself would be invalid. Furthermore, in the recitals in the sale deed dated 10.11.2011, it has been clearly mentioned about the payments effected to all the charitable organisations which are all through bankers cheques drawn in the name of the concerned organisations by the purchaser.
11.The Hon’ble Supreme in the case of Provat Kumar Mitter vs. Commissioner of Income Tax [(1961) 41 ITR 624(SC)] = 2002-TIOL-1128-SC-IT-LB held that the fundamental principle is that an application of income is allocation of one’s own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches the assessee, and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title. This position was explained by the Hon’ble Supreme Court in the case of Motilal Chhadami Lal Jain vs. Commissioner of Income Tax [(1991) 190 ITR 1 (SC)] = 2002-TIOL-1932-SC-IT-LB stating that what has to be seen is the nature of obligation by reason of which the income becomes payable to a person other than the one receiving it; where the obligation flows out of an antecedent and independent title it effectively slices away a part of the corpus of the right to receive the entire income and thus it would be a case of diversion. In the case of Commissioner of Income Tax vs. Imperial Chemical Industries (India) (P.) LTd. [(1969) 74 ITR 17] = 2002-TIOL-1165-SC-IT-LB, it was held that where there is an obligation to apply an income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee, it is a case of diversion of the income. In the case of Sitaldas Tirathdas which decision was referred to by the Tribunal, it was held that where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow.
12.In the preceding paragraphs, we have set down the factual position which clearly shows that the amounts were specifically earmarked by the testator to the charitable institutions and other expenses. The sum of monies so allocated were to reach the respective charitable institutions/entity before the reminder of sale consideration reaches the assessee. In other words, the assessee at no point of time was entitled to receive the entire sale consideration. The sale was to be executed by the executor of the will who was directed to distribute the money to the respective organisations, defray the expenses, pay the property tax, deduct his professional fee and the remaining amount was directed to be paid to the assessee. Therefore, to interpret the will in any other fashion would be doing injustice to the intention of the testator and the interpretation given by the CIT is wholly erroneous as the CIT appears to have done the same “cherry picking” in the last will and testament which is not the manner in which a will needs to be interpreted. The intention of the testator was very clear as the assessee was not entitled to the entire sale consideration. In fact if the interpretation of the CIT and the Tribunal were to be accepted, we would be rewriting the last will and testament. The testator did not bequeath the Bangalore property but bequeathed part of the sale consideration which was left behind after meeting the commitments mentioned in the will to be truly and faithfully performed by the executor of the will. Thus, we can safely conclude that the major portion of the sale consideration on being received from the purchase of the property stood diverted before it reached the assessee and under the will there was no obligation cast upon the assessee to receive the sale consideration and distribute the same in the manner desired by the testator. For the above reasons, we answer the Substantial Question of law No.2 in favour of the assessee.
13. The Substantial Question of law No.3 is with regard to the expenditure claimed by the assessee. The assessee had produced documents before the Assessing Officer who had scrutinized the same and accepted the genuinity of the claim and granted the benefit. The CIT disallowed the expenses on the ground that the Assessing Officer did not make an indepth inquiry. A similar finding was tested for its correctness by the High Court of Delhi in the case of Commissioner of Income vs. Sunbeam Auto Ltd. [(2011) 332 ITR 167 (Delhi)] = 2009-TIOL-552-HC-DEL-IT and it was held that one has to keep in mind the distinction between “lack of inquiry” and “inadequate inquiry”. If there was an inquiry, even adequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act merely because he has a different opinion in the matter and it is only in cases of lack of inquiry that such a course of action would be open. As mentioned by us in the preceding paragraphs, the assessee has responded to the notice issued under Section 142 of the Act and produced documents and records including their statement of total income wherein they had given the entire details including the receipts issued by the respective persons to whom payments were effected, all of which were through banking channels. Therefore, in our considered view the finding rendered by the CIT was perverse which ought not to have been affirmed by the Tribunal more so for the reason that there was no evidence with regard to the expenses like professional fee, etc. The Tribunal failed to note that the assessee had produced the copies of the receipts signed by the respective party before the Assessing Officer who was satisfied with the same and in the absence of any fraud being alleged with regard to the authenticity of those documents, the CIT could not have revised the assessment by invoking Section 263 of the Act. For the above reasons, the Substantial Question of law No.3 is answered in favour of the assessee.
14. In the result, the appeal filed by the assessee is allowed and the Substantial Questions of law are answered in favour of the assessee. No costs.