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TMI Blog1994 (11) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment years 1973-74 and 1975-76. Income-tax References Nos. 7 to 9 of 1993 are at the instance of the Revenue for the assessment years 1973-74 to 1975-76 and are under section 256(2) of the Income-tax Act. We shall refer to the gift-tax matters later. The facts leading to all these cases may be summarised as follows. The assessee is a private limited company which owns a coffee estate purchased by it in the year 1958. The estate contained a large number of rosewood trees which were being disposed of by the assessee since the date of its purchase. The capital gains arising on such sales had also been brought to assessment during the years right up to the assessment years in question. The shareholders of the assessee are members of three families. Their descendants and wives are the beneficiaries of a private trust known as K and K Trust which was doing business in timber. There is also another firm by name Mysore Farms and Enterprises, which is also a sister concern of the assessee and of the K and K Trust. During the accounting years relevant to the assessment years 1973-74 to 1975-76, the assessee had sold certain rosewood trees to the K and K Trust. Thus, 50 rosewood t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond appeal and the Tribunal entered a finding in the first instance that the reopening of the assessment under section 147 was not valid in law. The Tribunal did not accept the Income-tax Officer's conclusion that the transaction between the assessee and the K and K Trust was sham. The Tribunal held it was a real transaction. Thirdly, the Tribunal held that the provisions of section 52(2) clearly applied to the facts of this case, a conclusion which it based on the decision of this court in ITO v. Varghese (K. P.) [1973] 91 ITR 49 [FB]. Fourthly, the Tribunal held that the cost of acquisition of the trees has to be taken as Rs. 2,000 as fixed by it in the earlier appeal from the original assessment. The appeal for 1973-74 was thus allowed. Income-tax Reference No. 109 of 1983 arises out of this order and the question referred is: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in its construction of section 52(2) of the Income-tax Act, 1961, and in holding on the basis of that construction that the Income-tax Officer was justified in computing the capital gains in this case and the assessee is liable to pay the impugned capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot successful in getting certain questions of law referred to this court for opinion and, therefore, it filed applications under section 256(2) of the Income-tax Act for all the three years. Consequent on the directions of this court in those applications, the following questions have been referred for the opinion of this court under section 256(2) for the years 1973-74 to 1975-76, namely: "1. Whether, on the facts and in the circumstances of the case, the sales to the trust are sham ? 2. Whether, on the facts and in the circumstances of the case, the refixation of the cost of acquisition by the Income-tax Officer was valid and with jurisdiction?" We shall deal with these matters before we take up the other matters arising under the Gift-tax Act. The question referred in Income-tax References Nos. 109 and 110 of 1983 has to be answered in favour of the assessee, in view of the fact that the decision of the Tribunal justifying the invocation of section 52(2) of the Income-tax Act was based on the decision of this court in ITO v. K. P. Varghese [1973] 91 ITR 49 [FB], which was subsequently reversed by the Supreme Court in K. P. Varghese v. ITO [1981] 131 ITR 597. The Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was nothing to show that the title to the rosewood trees continued to be with the assessee-company till they were cut by Mysore Farms after it purchased them from the trust. It is noteworthy that there is no case for the Revenue that the trust was not a real entity but a make believe. There is also no evidence to show that the assessee did actually receive the amount of consideration paid by Mysore Farms to the trust and not merely the amount mentioned as the sale price to the trust. It may be that the assessee has undersold the trees to the trust, but that by itself is not a ground for holding that the transaction between the two was a sham transaction. The conclusion of the Tribunal on this essential question of fact is binding on us and we do not find any particular infirmity in the said finding of the Tribunal. We have, therefore, to hold that the finding about the alleged sham nature of the transaction, rendered by the Tribunal is correct and that the sale by the assessee to the trust was a real genuine transaction. The other question referred at the instance of the Revenue is about the refixation of the cost of acquisition by the Income-tax Officer at Rs. 900 as against Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iss the appeal of the assessee as meritless. Thereby it confirmed the directions given by the Appellate Assistant Commissioner which, therefore, continued to be operative. It is not as if by dismissing the appeal without stating anything more the directions given by the Appellate Assistant Commissioner ceased to be valid. On the other hand, by dismissing the appeal, the Tribunal put its seal of approval to the directions contained in the Appellate Assistant Commissioner's order and affirmed it. In other words, the direction to redo the assessment and to fix the cost of acquisition afresh with reference to the year 1958 continued to be operative and had to be implemented by the Income-tax Officer. This was what was done by the Income-tax Officer in making the fresh assessment. The remand was an open one and it was therefore open to the Income-tax Officer to redo the assessment in all its aspects in accordance with law. But as noted above, the question of applying section 52(2) does not survive in view of the subsequent decision of the Supreme Court disapproving the decision of this court and in the absence of any case for the Department that anything more than the amount of consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had not filed any returns under the Gift-tax Act. In the view that a taxable gift had escaped assessment, the Income-tax Officer functioning as the Gift-tax Officer as well sent notices on July 25, 1978, under section 16(1)(a) of the Gift-tax Act calling upon the assessee to file returns of the gifts for the years 1973-74 to 1975-76. The Gift-tax Officer evidently attempted to invoke section 4(1)(a) as the sale of the trees to the trust was for inadequate consideration. This was resisted by the assessee, inter alia, with the contention that the Income-tax Officer had, on July 24, 1978, entered a finding for the year 1973-74 that the transaction between the assessee and the K and K Trust was sham. Thereafter and on the next day the Income-tax Officer functioning as the Gift-tax Officer cannot have reason to believe that any gift had escaped assessment. The proceedings under section 16(1)(a) were, therefore, without jurisdiction. This contention did not find favour with any of the authorities including the Tribunal. The Tribunal dealt with the assessment for 1973-74 by one order and the assessments for the other two years by another order. So far as the first order is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration. The Tribunal has come to the conclusion that having regard to the facts relating to the assessments under the Income-tax Act for these two years, the plea of the assessee is not capable of acceptance and that the invocation of sections 4(1)(a) and 16(1)(a) was valid. We are in agreement with the Tribunal. We do not find any referable question of law arising out of the Tribunal's order. Original Petitions Nos. 860 and 861 of 1985 are only liable to be dismissed. So far as Income-tax Reference No. 189 of 1988 is concerned, the plea as stated above is that the Gift-tax Officer could not have entertained a reasonable belief about any gift having escaped assessment. It is true that the very foundation for the reopening of an assessment under section 16(1)(a) is the existence of reasons to believe that a gift had escaped assessment by reason of the failure of an assessee either to make a return or otherwise. It is also true that the belief must be that of an honest and reasonable person based upon reasonable grounds. As reiterated by the Supreme Court recently in Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456, while the sufficiency of the reasons for forming the belief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pretence, but one which could be entertained on the facts disclosed. The fact that he preferred one view in the income-tax proceedings need not necessarily brand the opposite view as held not bona fide or contrary to material. We are, therefore, of the opinion that the issue of the notice under section 16(1)(a) is not vitiated in any manner. The question referred to us should be answered in favour of the Revenue. We dispose of the various cases as follows : Original Petitions Nos. 860 and 861 of 1985 are dismissed. The question referred in Income-tax References Nos. 109 and 110 of 1983 and the first question referred in Income-tax References Nos. 7 to 9 of 1993 are answered against the Revenue and in favour of the assessee. The second question referred in Incometax References Nos. 7 to 9 of 1993 and the sole question referred in Income-tax Reference No. 189 of 1988 are answered in favour of the Revenue and against the assessee, except for 1973-74 for which the answer will be in favour of the assessee. There will be no order as to costs. Communicate a copy of this judgment under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Coc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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