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2009 Supreme(HP) 722
HIMACHAL PRADESH HIGH COURT
HON’BLE MR. JUSTICE DEEPAK GUPTA, J. & HON’BLE MR. JUSTICE V.K. AHUJA, JJ.
COMMISSIONER OF INCOME TAX, SHIMLA
Appellant
VERSUS
M/S.PANCHRATAN HOTELS PVT. LTD. MANALI
Respondent
I.T.A No. 13 of 2004
Decided on 26-8-2009
For the appellant:Mr. Vinay Kuthiala, Advocate For the respondent:M/s. K.D. Sood and Sanjeev Sood, Advocates.
The legal identity of a company as a separate entity from its shareholders and the distinction between the transfer of shares and the transfer of business were central to the judgment.
Headnote:
Transfer of Shareholding - Income Tax - Section 2(47), Section 170 - The court discussed the interpretation of Section 2(47) of the Income Tax Act, 1961 regarding the definition of 'transfer' and its applicability to the transfer of shareholding. It also considered the provisions of Section 170 in relation to the succession of business and the transfer of ownership. The court highlighted the distinction between the transfer of shares and the transfer of business, emphasizing the legal identity of a company as a separate entity from its shareholders. The judgment referenced legal provisions and their interpretations to conclude that Section 170 did not apply to the transfer of shareholding in the case.
Fact of the Case:
The assessee, M/s. Hotel Panchrattan, sold 100% shareholding to M/s. General Sales Limited, leading to a dispute over the applicability of Section 170 of the Income Tax Act, 1961.
Finding of the Court:
The court found that the transfer of shareholding did not amount to a transfer of business under Section 170 of the Income Tax Act, as the legal identity of the company remained separate from its shareholders.
Issues: The main issues revolved around the interpretation of Section 170 in the context of the transfer of shareholding and the applicability of the definition of 'transfer' under Section 2(47) of the Income Tax Act.
Ratio Decidendi: The court's decision was based on the interpretation of legal provisions, emphasizing the legal identity of a company as distinct from its shareholders and the distinction between the transfer of shares and the transfer of business.
Final Decision: The appeal was dismissed, and the court ruled in favor of the assessee, concluding that Section 170 did not apply to the transfer of shareholding.
Deepak Gupta, J.(Oral):- This appeal has been admitted on the following substantial questions of law:-
“(i) Whether the sale of 100% share-holding of the Respondent Company to the New Management constitutes a ‘transfer’ as envisaged by Section 2(47) of the Income Tax Act, 1961 and would amount to succession of business.
(ii) Whether in the facts and circumstances of the case, the Ld. ITAT misconstrued and misinterpreted the material on record while coming to the conclusion that the expenditure incurred by the respondent on repairs and renovations was revenue expenditure and not capital expenditure.”
2. The facts of the case are that the assessee-M/s. Hotel Panchrattan is a Private Limited Company engaged in the business of running of a hotel at Manali. All the shares of this company belonged to the Kapoor family. The management of the company also vested with members of the Kapoor family. During the assessment year 1993-94, i.e., accounting year 1992-93, 100% shareholding of the company was sold by the Kapoor family to M/s.General Sales Limited on 31.7.1992.
3. The assessee filed a return of income declaring a loss. The Assessing Officer after computing the assessment under Section 144 of the Income Tax Act,1961 determined the loss at Rs.41,45,590/-. After the Assessing Officer finalized the return, the Commissioner of Income Tax exercising his powers under Section 263 came to the conclusion that the order passed by the Assessing Officer was erroneous. According to the C.I.T, there was 100 per cent transfer of shares from the Kapoor family to M/s. General Sales Limited on 31.7.1992. Therefore, it was a case of succession of business covered under Section 170 of the Income Tax Act. It further held that the assessment for the year 1.4.1992 t0 30.7.1992 was required to be made in the hands of the old company and subsequent assessment from the period 31.7.1992 to 31.3.1993 in the hands of the new company.
4. The moot question which arises for consideration is whether the transfer of the share-holding would amount to transfer of business in terms of Section 170(1) of the Income Tax Act which read as follows:-
“170 (1) Where a person carrying on any business or profession (such person hereinafter in this Section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession-
(a) the predecessor shall be assesseed in respect of the income of the previous year in which the succession took place up to the date of succession.
(b) The successor shall be assesseed in respect of the income of the previous year after the date of succession.”
5. The Apex Court in Commissioner of Income Tax, Madras v. K.H. Chambers, ITR, Volume 55, 1965 considered the import of Section 25(4) of the Income Tax Act, 1922 which corresponds to the provisions of Section 170 of the Income Tax Act, 1961. It held as follows:-
“Succession involves change of ownership; that is, the transfer goes out and the transferee comes in; it connotes that the whole business is transferred; it also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any other appropriate collateral purpose cannot detract from the locality of the succession.
6. The expression “succession” has acquired a somewhat artificial meaning. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person “succeeded” to the business of another.”
7. It is apparent that to fall under the ambit of Section 170, there must be a transfer of ownershi
