 |
|
For business information, annual reports, laws, ordinances, regulations and articles. |
|
|
74.2-2 Lease and sale - In sale there
is absolute transfer of all rights in the property sold, but in a lease there is a partial
transfer or divesting of the rights left in the transferor which are called reversion.
74.3 Exchange- The expression 'exchange' has been defined in
section 118 of the Transfer of Property Act. It says that when two persons mutually
transfer the ownership of one thing for the ownership of another, the transaction is
called an exchange. Exchange is confined to transactions involving no cash or an
incidental amount of cash. It is being used in the sense of barter. But except for such
use or where specifically qualified, the term extends to any transaction where something
is parted with and as compensation therefor something is received. That something may be
anything having value, but not the money.
74.4 Allowing possession in part performance of contract, whether
alienation - The act of allowing possession of immovable property to be taken or
retained in part performance of a contract of the nature referred to in section 53A of the
Transfer of Property Act is deemed to be transfer for the purpose of this Act:
The transferor has contracted to transfer for consideration an immovable property.
The transferee has in part performance of the contract taken possession of the property or
any part thereof, or the transferee being already in possession continues in possession in
part performance of the contract.
The contract mentioned in this provision should be of the nature as referred to in section
53A of the said Act. It may be akin to but not quite the same contract as referred to in
that section. There should be vested in the contract certain elements which could invest
it with the character of a contract as resembling the one entered into in terms of section
53A of that Act. The expression 'of the nature' appears to have been deliberately
employed. This expression is of much wide connotation inasmuch as it would take within its
ambit not merely a contract strict sensuo falling within the meaning of section 53A, but
also all others of allied nature partaking of some, if not all, of the characteristics of
section 53A. The phrase has indeed a wide amplitude and its use leaves little doubt that
the intention of the Legislature, especially when it enacted provision for curbing tax
evasion, in employing it was to cast the net sufficiently wide so as to bring within its
field all types of contract where under possession of the property or its retention is
allowed in part Performance of the contract for transfer of the property.
Section 53A of the Transfer of Property Act creates certain rights which were not in
existence before the enactment was passed. These rights to retain possession rest upon the
express provisions of the statute. One of the rights conferred is a right to the person to
protect his possession. The transferor or his successors-in-interest are debarred from
enforcing any right or interest expressly provided by the agreement to sell under .which
the transferee is put in possession. The right
is restricted to two aspects, namely, (a) there must be a written contract; and (b) it is
only available as a defence. The other aspect that the right under section 53A of the
Transfer of Property Act does not create any title or award any interest in the property
to the transferee and is limited to protect his possession, is not relevant so long as the
transferee has been allowed possession of the property in part Performance of the contract
of transfer.
74.4-1 Allowing possession - The condition necessary for the.
application of this clause is that the possession is allowed in part performance of the
contract of transfer, i.e, the possession should be referable to such contract. Absence of
the nexus between the act of possessing the property and the contract .of transfer would
militate against the concept of transfer.
74.4-2 Part performance - An act of part performance must be
an act done in the performance of the contract, i.e, it should conform to the provisions
of the contract and aim at furtherance towards its completion or implementation.'
Conditions necessary for making out the defence of part performance to an action are as
follows:
- The transferor has contracted a transfer for consideration any immovable property by an
agreement executed by him or on his behalf from which the terms necessary to constitute
the transfer can be ascertained with reasonable certainty.
- The transferee has in part performance of the contract taken possession of the property
or any part thereof or the transferee being already in possession continues in possession
in part performance of the contract.
- The transferee has done some act in furtherance of the contract.
- The transferee has performed or is willing to perform his part of the
contract.
74.5 Agreement or arrangement which has the effect of transferring
or enabling enjoyment of property is deemed transfer - While defining the expression
'transfer' in section 27(2)(b) of the Ordinance the Legislature covers every possible mode
of transfer resorted to by persons to exchange properties or rights therein' for a
consideration. A person may become owner of a capital asset as defined in section 2(12) in
various ways. He may have inherited the capital asset from his parents and some other
persons. He may have purchased the land and then constructed the building thereon. He may
have taken the land on lease and constructed the building thereon. Or he may have acquired
the land as well as the building from somebody else. In the four set of circumstances
outlined above, there is a transfer of ownership from one person to another in respect of
building. This transfer may be by way of sale, gift or exchange and, if so, under the
Transfer of Property Act, 1882, the transfer of ownership can be effected only by means of
a registered document [vide sections 54, 118 and 123]. However, in recent times various
other devices are sought to be employed for transferring one's ownership in property.
This is due to various reasons. In the first place, the drawing up of a sale deed and its
registration involve considerable expenses by way of stamp duty and registration charges.
Allowing a person to possess, occupy and enjoy a property for a consideration, in
pursuance of agreement, in terms of section 53A of the Transfer of Property Act, is such
an instance. Secondly, in some places there are restrictions on the transfer of property
and parties desire to circumvent these restrictions. Thirdly, due to shortage of space in
big cities, house property takes the shape of fiats, a large number of them constitute one
building, the ownership of which is more conveniently held through membership of companies
or co-operative societies where there is a dichotomy between share or interest in the
capital and the interest in the property of the company/society. Though the building/flat
is owned by the company/society the shareholder/member has a right or interest to occupy
the fiat. This specie of property, namely, the right to occupy a flat requires a
significant importance and acquires under the law a stamp of transferability in
furtherance of the interest of commerce.
There is a distinction between the right of a member of the society to hold shares and the
right to occupy the flat. The right to occupy the fiat is treated as distinct right,
though it is inextricably connected with the right to hold a share. The right to occupy
naturally flows from the right to hold share, though the former is a distinct and a
separate right recognised in law. Such a right is clearly alienable and heritable. That
right is clearly a right arising out of the fiat which is nothing but a. building. Prima
facie therefore, the right to occupy is a right in land and building which can be
subject-matter of transfer. It may be that when such a right is transferred, it would be
necessary to have the shares also transferred by applying to the society. Even when share
is only transferred what is in substance transferred is the right to occupy. Transfer of
shares in the context of housing co-operative society is only a matter involving a
procedural formality while the substance of the transaction is that of a transfer of a
right to occupy the flat.
In CITv. Prernanand Industrial Co-operative Service Society Ltd. the Gujarat High Court. held that in a tenant co-partnership housing
society a member has an interest in the property,. namely, 'the flat which is allotted to
him or the superstructure which is allotted to him and any such interest is transferable
and will be attachable in execution of a decree against a member. Though both the land on
which house is constructed and the house itself vest in the society in the eye of law, the
transfer of a share in such society is not merely a transfer of share as such but also a
right to occupy the house which right necessarily flows from the allotment of the houses
by the society to its members. In a tenant co-operative society, share in a society which
a member holds is inseverable from his interest in the immovable property which has been
allotted to him for his occupation and enjoyment.
'Transfer' in section 27(2)(b), therefore, covers every possible mode of 'transfer' where
some consideration is involved, viz., sale, exchange, long-term lease, allowing possession
of property to be taken or retained in part performance of a contract of the nature
referred to in section 53A of the Transfer of Property Act, transfer of shares in a
company, society or association of persons where holding of such shares is inextricably
associated with allotment of flats/houses or any arrangement or agreement which has the
effect of transferring, or enabling the enjoyment of such property. Transfer in a normal
sense and as understood with reference to the Transfer of Property Act connotes a movement
of property or interest or right therein or thereto from one person to another in
praesenti. But the language of section 27(2)(b) seems to go further. It, inter alia, deems
doing an act which has the effect of transferring or enabling the enjoyment of any rights
in or with respect to any moveable assets. It is pertinent-to mention that section
27(2)(a)(ii) specifically says that gain on transfer of immovable property is not
chargeable to tax under the Income Tax Ordinance, 1979. The Constitution of Pakistan
confers this right to provincial governments and not the Federal Government. Therefore, it
must be remembered that there is a constitutional bar to tax gain(s) arising out of
immovable property under the Income Tax Ordinance. Although Article 13 does speak about
chargeability of gain arising out of immovable property but section 27(2)(a)(ii) is
explicitly provides that "immovable property" is totally excluded from the
purview of section 27. This conflicting situation between section 27 and Article 13 has
serious tax rempifications. However, if the Income Tax Ordinance, 1979 provides
"exemption" or "exclusion" to a particular income, it cannot be taxed
on the grounds that a particular Article of Double Taxation Agreement speaks otherwise.
74.5-1 Contribution by a partner of his individual property as
his capital in the firm, whether; transfer - When a partner hands over his property to
partnership firm as his contribution to its capital, he cannot be said to have effected a
sale or transfer.
But by virtue of definition of 'transfer' in section 27(2)(b) the act of a partner
bringing into the stock of the firm property as a part of his contribution towards the
capital of the firm, is deemed to be transfer. The act of the partner results in reduction
of the exclusive interest in the totality of rights of the original owner into a joint or
shared interest with other persons. An exclusive interest in property is a larger interest
than a share in that property. To the extent to which the exclusive interest is reduced to
a shared interest there is a transfer of interest. Therefore, when a partner brings in his
personal asset into the capital of the partnership firm as his contribution to its
capital, he reduces his exclusive rights in the asset to share rights in it with the other
partners of the firm. While he does not lose his rights in the asset altogether, what he
enjoys now is an abridged right which cannot be identified with the fullness of the right
which he enjoyed in the asset before it entered the partnership capital.
During subsistence of partnership, no partner can deal with any portion of the property of
the firm as his own. Nor can he assign his interest in a specific item of the partnership
property to any one. Once a partner has brought in capital money or even property
including immovable property, he would cease to be its exclusive owner. The property would
be the trading asset of the partnership in which all the partners would have interest in
proportion to their share in the joint venture of the business of partnership.
Therefore, what is the exclusive interest of a partner in his personal asset is upon its
introduction into the partnership firm as his share to the partnership capital,
transformed into an interest shared with the other partners in that asset. Qua that asset,
there is a shared interest. During the subsistence of partnership, the value of the
interest of each partner qua that asset cannot be isolated or carved out from the value of
the partner's interest in the totality of the partnership asset. The act of the partner has the effect of enabling the other person to
enjoy the property which he has brought in as his contribution towards the capital. Such
an act, therefore, falls within the meaning of the expression 'transfer.
74.5-2 Partner's receiving property on dissolution of firm -
Whether transfer - When a partner receives property on the dissolution or on his
retirement from the firm, he does so not because of sale or transfer but because of mutual
adjustment of rights. It is because when a partner retires or a partnership is dissolved,
what a partner receives is his share in the partnership. What happens here is that a
shared interest in all the assets of the firm is replaced by an exclusive interest in the
assets of equal value. That is why as per section 27(2)(b)(iv) of the Income Tax
Ordinance, 1979 and as held by the higher court
that there is no transfer. It is the realisation of the pre-existing right.
What is contemplated in dissolution is a share of the partner qua the net assets of the
partnership firm. What happens is that a shared interest in all the assets of the firm is
replaced by an exclusive interest in an asset of equal value. The position is different
where a partner brings his personal asset into the partnership firm as his contribution to
its capital. In this case an individual asset is the sole subject of consideration and an
exclusive interest in it before it enters in the stock of partnership, is reduced on such
entry into a shared interest. The partner by his act enables other partners to enjoy the
property which the latter could not have done but for the partnership agreement and the
former bringing in his property to the stock of the firm. In case of dissolution, the
arrangement amongst the partners does not have the effect of enabling a partner to enjoy
the property which he has not been doing just before the dissolution.
74.5-3 Coparcener throwing property in botchpot of family -
Whether transfer - A Hindu undivided family is not a creation of contract. The
doctrine of throwing into the common stock of the family inevitably postulates that the
owner of a separate property is the coparcener who has interest in the coparcenary
property and desires to blend it with the coparcenary property. It is well settled law
that when a coparcener throws his individual property into the common stock or common
hotchpot of the Hindu undivided family that property of a member is said to be impressed
with the character of the joint family property and thereafter he cannot make a separate
claim over the said. property. There is no
transfer of that property from the coparcener to the coparcenary. It becomes joint family
property because the coparcener who owned it up till then as his separate property has, by
the exercise of his volition, impressed it with the character of. joint family property,
to be held by him thereafter along with other members of the family. It is by this
unilateral act that the property becomes the joint family property. The transaction by
which the property ceases to be the property of a coparcener and becomes impressed with
the character of the coparcenary property, does not itself amount to
transfer.
But transfer, inter alia, means doing anything which has the effect of transferring or
enabling the enjoyment of such property by other persons. The various modes through which
such acts could be done as mentioned in section 27(2)(b) are illustrative and not
exhaustive. The act of throwing the property into the family botchpot may not be transfer
but surely could enable other members of the family to enjoy the property thus blended.
The whole emphasis is upon the act of a person done with the requisite intent as a result
whereof there is a transfer of value from any property of that person to a property of
another person or to enable that another person to enjoy it as a matter of right. In order
to involve hypothetical situation, the two facts should exist, namely, (i) the existence
of property or a fight therein; and (ii) the act on the part of the owner to enable others
to enjoy such property or interest therein as a matter of fight. When these two facts
concur, the hypothesis goes into action, and the hypothesis is that these facts are,
equivalent to transfer made by the coparcener in favour of the persons who are enabled to
enjoy the property. Thus, when a person throws his private property into the joint family
hotchpot, the property becomes the property of the family with the following incidents:
- The lineal male descendants up to third generation acquire an independent right of
ownership.
- The members of the coparcenary have the right to work out their rights by demanding
partition.
- Until partition each member has got ownership extending over the entire property
conjointly with the rest.
- As a result of such co-ownership the possession and enjoyment of the property is common.
Thus, an act of throwing property into the hotchpot of the family will be
"transferred" within the meaning of section 27(2)(b).
74.5-4 Unequal partition of properties of Hindu undivided family
amounts to transfer - Partition of the Hindu undivided family properties is merely a
process in and by which joint enjoyment is transferred into an enjoyment in severalty.
Since in such case each one of the coparceners has an antecedent title which extends to
the whole of the joint family properties and has, therefore, full interest in the specific
property which ultimately goes to his share, no creation of fight or interest in such
specific property takes place in his favour nor does any extinguishment of any right or
interest in the other property take place to his detriment. The mere fact that on
partition a coparcener takes a lesser share than he could have demanded does not mean that
there is a transfer in the strict sense. In
partition, Whether equal or unequal, there is no transfer by a coparcener in favour of
another. Unequal divisions of property knowingly made may not spell invalidity and
mathematical equality may not be maintained always in a partition. But the question is
whether a willing, albeit bona fide, arrangement whereby a substantially reduced share is
taken by a coparcener vesting a proportionately larger share in the recipient is an
arrangement falling within the ambit of section 27(2)(b). The answer to this questions in
the negative as section 27(2)(b)(iv) specifically says that it does not amount to
"transfer".
74.5-5 Family arrangement, whether transfer - A family
arrangement or compromise is not a transfer of property as it does not convey any new
distinct title to any or the parties. Each party takes a share in the property by virtue
of independent title which is admitted to that extent by the other parties. It is not
necessary that every party taking benefit under - a family settlement must necessarily be
shown to have, under the law, a claim to a share in the property. All that is necessary is
that the parties must be related to one another in some way and have a possible claim to
the property or a claim or even a semblance of a claim on some other ground as say at
fection. The Indian Supreme Court in
Sahu Madho Das v. Mukand Ram held that a family
arrangement is based on the assumption that there is an antecedent title for some sort in
the parties and that the arrangement acknowledges and defines what the title is, each
party relinquishing all claims to that property other than that falling to his share and
recognising the right 0f others to the portions allotted to them. Such an arrangement is
intended to avoid future dispute and bring about harmony among the
parties. The family arrangement tantamounts to partition of the
Hindu undivided family. The concept of transfer
within the meaning of section 2(27)(b)(iv) has therefore been clear that such a situation
is not "transfer" for the purpose of sections 27, 28 and 29.
74.6 Release - Release can be usefully employed as a form of
conveyance by. one person having some right or interest to another having a limited
estate, e.g, by a remainderman to a tenant for life, and the release then operates as an
enlargement of the limited estate. Thus, the act of release is transfer. Extinguishment of
a right may also cover the release of his interest by one joint tenant in favor of
another.
74.7 Disclaimer - A disclaimer is an extinguishment of a right.
Although in the event of a person disclaiming may not have any right in the property, he
may have the right to detain it. This inchoate right is also a right. The word 'right' is
a word of widest import. The words 'which has the effect of transferring or enabling the
enjoyment of such property' in substance do not necessitate a conscious intention to
benefit some person. It is sufficient that some person in fact is benefited, The motive or
the purpose of the person is immaterial, provided the transaction does in fact benefit the
other person.
74.8 Alienation of shares of a company in liquidation - When a
shareholder receives assets in specie or cash representing his share on distribution of
the net assets of the company in liquidation, there is no transfer inasmuch as he receives
asset in satisfaction of the right which belongs to him by virtue of his holding shares
and not by operation of any transaction which amounts to transfer. Section 27(2)(b)(iii) of the Income Tax Ordinance, 1979 excludes this
situation from the expression "transfer as used in section 27, 28 and 29. This
Article, however, does not prevent the State of which the company is resident, to tax the
difference between the amount received by the shareholder and the par value of the shares,
as an income representing distribution of accumulated profits, by virtue of Article 10.
The Income Tax Ordinance, 1979 as per section 2(20) deems such distribution as dividend.
74.9 Redemption of bonds - Redemption of bonds or debentures is
not' taxable as capital gains, and if on such redemption the amount obtained exceeds the
par value of bond or debenture the excess represents interest as it is referable to
indebtedness.
The excess amount, therefore, be subjected to tax in the source State as interest, in
accordance with Article 11.
74.10 Amalgamation of companies - A question may arise whether
on amalgamation of companies transfer of asset is involved, so that capital gains could be
charged.
Amalgamation is a blending of two or more existing undertakings into one undertaking, the
shareholders of each blending company becoming substantially shareholders in the company
which is to carry on the blended undertakings. There may be amalgamation either by the
transfer of two or more undertakings to a new company or by the transfer of one or more
undertakings to an existing company. Strictly amalgamation does not, it seems, cover the
mere requisition by a company of the share capital of other companies which remain in
existence and continue their undertakings but the context in which the term is used may
show that it is intended to include such acquisition.
74.11 Dissolution of the firm -- The distribution of assets on
dissolution of the firm is not transfer of capital assets as per section 27(2)(b)(iv) of
the Income Tax Ordinance, 1979. This corresponds to para 4 of Article 22 of the UN Model.
Thus the gains arising on account of alienation of shares in a company or of the
alienation of interest in a firm or trust, the property of which does not constitute
principally of immovable property or the gains on the alienation of securities, bonds,
debentures and the like, are taxable in the State of which the alienator is a resident.
75. Property
The word 'property' is term of widest import and includes every specie of an estate, real
or personal and everything which one person can own and transfer to another. It extends to
every specie of right and interest capable of being enjoyed as such. It includes not
merely tangible property but also intangible rights.
It signifies every possible interest which a person can clearly hold and enjoy.
75.1. Movable property-- Thus, the term 'movable property'
means all property other than 'immovable property' dealt with in paragraph (1) of Article
13 of the OECD or UN Model. It includes also incorporeal property, such as goodwill,
licences, etc. Gains from the alienation of such asset may be taxed in the State in which
permanent establishment or fixed base is situated which corresponds to the rules for
business profits and for income from independent personal services
(Articles 7 and 14).
75.1-1 Personal effect -- Agreements with many countries
refer to capital gains arising from sale, exchange or transfer of capital asset. The
capital asset has been defined to mean any property excluding only movable property in the
form of personal effects (e.g, wearing apparel, jewellery and furniture) held for personal
use by the taxpayer of any member of his family dependent upon him. The capital asset has
not been confined alone to immovable property or the movable property under certain
circumstances such as shares in a company the assets of which principally consist of
immovable properties. It means property of every description. The effects can legitimately
be said personal which pertain to the assessee's person. In other words, an intimate
connection between the effects and the person of the assessee must be shown to exist to
render them personal effects. The enumeration of articles like wearing apparel, jewellery
and furniture mentioned by way of illustration also shows that the Contracting States
intended only those articles to mean personal effects which are intimately and commonly
used by the assessee.
The dictionary meaning of 'personal effects' shows that the expression is used for things
having intimate relation with person of the possessor. Silver bars or bullion cannot,
therefore, be personal effects. Even the sovereigns and silver coins which are customarily
brought out on special occasions for puja or worship cannot be designated as effects for
personal use.
75.2 immovable property - Immovable property includes land,
benefits to arise out of land, and things attached to the earth or Permanently fastened to
anything attached to the earth. It includes
land, buildings, hereditary allowances, rights to ways, lights, ferries fisheries or any
other benefit to arise out of land, and things attached to the earth or permanently
fastened to anything which is attached to the earth, but not standing timber, growing
crops, nor grass.
75.2-1 Movable property is immovable property if embedded to the
earth - Thus, a building constitutes immovable property and so machinery does if
attached to the building for the beneficial enjoyment thereof. If the machinery is
embedded in the building for the beneficial use thereof, it must be deemed to be a part of
the building and the land on which the building is situate.
For the purpose of determination whether a movable attached to an immovable property is an
immovable property, the enquiry should be made not whether the attachment is direct or
indirect but what is the nature of attachment and what its object and purpose are? That
the degree and the nature of attachment is no doubt a consideration, the more important
consideration is the object of the annexation which is a question of fact to be determined
by the circumstances in each case and if a thing is embedded in the earth or attached to
what is embedded for the permanent beneficial enjoyment of that to which it is attached,
then it is a part of the immovable property and if the attachment is merely for the
beneficial enjoyment of the chattel itself, then it remains a chattel, even though fixed
for the time being so that it may be enjoyed. Therefore, the question in each case must
depend upon the intention of the annexation and such intention must be either express or
implied from the circumstances and that in the absence of proof one way or the other the
intention to be attributed is that of a person acting from motives of self-interest. If an owner of machinery has embedded the same in the earth for the
purpose of working his unit, it is taken to come within the definition of the immovable property. An engine attached to the
earth but removable is not an immovable property.
The following tests have been laid for finding out as to when a property fixed to earth
becomes an immovable property
- Intention of the parties.
- Mode of affixation and whether the affixation is intended to be permanent.
- Onus of proof' that even after annexation the Article continues to be movable is on the
person who alleges it.
The expression 'immovable property' includes land or any building or part of a building to
be transferred together with any machinery, plant, furniture, fittings or other things.
The expression uses the words together with' and not 'attached' or 'permanently fastened
to anything attached to the earth'. Thus, machinery, plant, furniture or fittings which
are permanently attached, or fastened or embedded with the immovable property and no definition or deeming provision is required for treating them thus.
The expression 'together with', therefore, does not refer to such items. The obvious
reference is to those which are not so attached, fastened or embedded. The dictionary
meaning of the words 'together with' is in combination with, as well as, 'also'. If
transaction relating to building and the machinery, plant, etc., is a composite whole and
the deed indicates that these assets are intended to be enjoyed together or that the
transfer of the building would not have been effected without the transfer of machinery,
plant, etc.., a transfer of immovable property could be said to have been effected.
If a person chooses to have two transfer deeds, one for machinery, plant, etc., and the
other for building, such a choice would not be determinative of whether or not transfer of
building is made along with the machinery, plant etc., as indicating the intention of the
parties. If the intention is to effect the transfer of the two together or the transfer of
one would not have been accepted without the other or both are to be enjoyed together,
then building could be said to have been transferred together with machinery or plant. Thus, if two transfers form part and parcel
of the same transaction or the two transfers are inseparable, then machinery, plant,
furniture, fittings and other things are taken to be immovable property.
It may be noted that the emphasis is on the transfer of building, and in case machinery,
plant, etc., are also transferred along with the building, such machinery or plant, etc.,
is deemed to be immovable property. But where the dominant intention of the transaction is
the transfer of a machinery, plant, etc., and the building is also transferred along with
them because such building provides a premises or setting for the business to be carried
on or where the building is itself a plant in the sense it acts as 'means' of carrying on
business or if it could be established that it is impossible for the equipment to function
without particular type of structure or building, the machinery and plant, etc., cannot be
regarded as immovable property, for the building itself is treated as plant.
75.2-2 Sale of business as a whole for slump price, whether
transfer of immovable property - Where business is sold as a whole as a going concern
together with all assets for a slump price a question may arise whether any part of the
price could be attributed to land, building and other individual assets. The mere fact
that land is separately stated in the schedule would not lead to the conclusion that the
price for slump price is attributable to the land sold. If there is a transfer of a whole concern and no part of the agreed price
is indicated against different and definite items having regard to their valuation on the
date of sale, the agreed price cannot be apportioned in capital assets in specie. What is
sold in such a case is not individual item of property forming .part of the aggregate, but
the capital asset consisting of business of the whole concern or undertaking.
In such cases attempt should not be directed to attribute any
amount of the slump price to land or building or machinery or plant with a view to holding
that the transfer of building together width machinery and plant has taken place. Going
business is a capital asset distinct from its constituents such as building, land,
machinery, plant, goodwill, other tangible and intangible assets as also the liabilities.
In the guise of the transfer of the business as going concern, a person may intend
transferring land, building, or building together -- with machinery, plant, etc., and the
doctrine of slump price is used as merely a device or excuse for evasion of tax and
avoidance of the application of the acquisition process or for any matter. It will be open
to the income-tax authorities to go behind the transaction and examine whether the
transaction relating to the transfer of business as a whole is nothing but such excuse or
device. The authorities may consider all relevant indicia in this regard: Whether the
transferee in fact carries the business/activity in the same manner as the transferor has
been doing, or whether business is dispensed with and transferred, or whether transferee
uses building, machinery, plant as capital assets or investments, or there has been no
substantial or real business, or the record shows there is no real need for transfer of
the business as a whole. For the purpose of determining whether the transaction is a sham
or illusory or a device or a ruse, the authorities are entitled to penetrate the veil
covering it and ascertain the truth.
75.2-3 Rights in land, building, part of building, machinery
whether immovable property - Any right in land, building, part of the building,
machinery, plant, furniture, fittings and other things, also constitutes an immovable
property. ‘Interest’ in its normal acceptation means one or more of those rights
which go to make up 'ownership’. It will include, for example, mortgage, lease,
charge, easement and the like. Any possible
interest which a person can acquire, hold and enjoy is a property, including the interest
in a property terminable after a specific period whether with the efflux of time or by
notice. Property means the highest right a man
can have to anything, being that right which one has to lands or tenements, goods,
chattels, which does not depend on another's courtesy and it includes ownership, estate or
interest in corporeal things, and signifies a beneficial right thereto or thing having
money value.
A spes successionis is a bare or naked possibility such as the chance of a relation
obtaining a legacy on the death of a kinsman or any other possibility of a like nature
which must be distinguished from a possibility coupled with interest. Two rules should be
kept in mind in finding out whether a person granted an interest in the property is vested
or contingent rights. First, interest should be held vested unless a condition precedent
to the vesting is expressed with reasonable clearness. The rule is that the court must
always lean in favour of vesting. The other rule which is equally cogent is that the
intention of the author of the instrument must be gathered from the comprehensive view of
all the terms of the instrument. The instrument must be construed as a whole; no part of
it should be considered in isolation.
It is indisputable law that no one can have any estate or interest, in law or in equity,
contingent or other, in the property of a living person. During the life of such person,
no one can have more than a spes successionis, an expectation or hope of succeeding to his
property.
76. Alienation of business enterprise as a whole of permanent
establishment or fixed base
Paragraph (2) deals with taxability of the capital gains arising from the alienation
of business property of the permanent establishment or fixed base, by the State in which
that permanent establishment or fixed base is situated.
If a sale is made of a whole concern and no part of the agreed price is indicated against
different and definite items having regard to their valuation on the date of sale, the
agreed price cannot be apportioned to capital asset in specie. What is sold in such a case
is not individual items of property forming part of the aggregate, but the capital asset
consisting of business of the whole concern or undertaking. Thus, when a business
undertaking as a whole is transferred with all its assets, what arises for consideration
from the point of view' of taxation is only the gain in respect of transaction and nothing
else. The business undertaking itself
is a capital asset.
When the subject-matter of transfer is the permanent establishment or the enterprise as a
whole, of which the permanent establishment is a constituent in another State, a fixed
base belonging to the person performing independent personal service, the capital gain in
respect of that permanent establishment or fixed base is taxable by the State where these
are situated.
76.1 'Force of attraction' is not applicable - Unlike Article 7
which supports the doctrine of 'force of attraction of the permanent establishment' in
relation to business profits, Article 13, para; 2, does not favor this doctrine in
relation to all capital gains, if the alienator has a permanent establishment in a State
which applies its domestic laws for taxing the capital gains. The paragraph merely
provides that gains from the alienation of movable property forming part of the business
property pertaining to a permanent establishment or a fixed base used for performing
independent personal services may be taxed in the State where the permanent establishment
or the fixed base is situated. Capital gains in respect of property which is not a part of
the business property of the permanent establishment or of a fixed base as aforesaid is
taxable in the residence country.
77. Alienation of ships or aircraft
Paragraph (3) is a sort of proviso to paragraph (2), carving out an exception to it.
It overrides para 2, to the extent that the right to tax capital gains in relation to
ships and aircraft which an enterprise operates in international traffic and in relation
to any movable property pertaining to the operation of such ships or aircraft, has been
given to the State in which the place of effective management of that enterprise is
situated. It may be noted that the location of effective management is the determinative
factor for the right of State to tax income arising from the operation of ships, aircraft,
whether such income represent profit (Article 8), a capital gain (Article 13), or whether
taxation is on capital (Article 22).
78. Alienation of shares of a company
Paragraph (4) is designed to forestall the prevention of the taxability of the gains
by the source country, arising from the alienation of immovable property of a company
through the incorporation of that company in other State or otherwise. It, therefore,
provides that gains on sale of shares of a company, the property of which consists
principally of immovable property situated in a Contracting State be taxed by the State in
which such property is situated. This para becomes applicable regardless of whether the
company or the shareholder is a resident of the Contracting State in which the immovable
property is situated or a resident of another State; such a share is deemed to be
immovable property. Shares of only those companies the property of which principally
constitutes immovable property situated in a Contracting State, are the subject-matter of
this Article. If the immovable property in that State is only one of various other
properties of the company; and not the sole or the principal property, the alienation of
its shares will not attract this Article.
79. Alienation of interest in partnership
Similarly interest of a partner in a partnership firm or of a beneficiary in a trust,
the property of which consists principally of immovable property situated in a State is
deemed to be immovable property and its alienation giving rise to capital gain is subject
to tax of the State which is the situs of the property, regardless of whether the firm or
its partners, or the trust or its beneficiaries are residents of another State.
80. Alienation of shares representing substantial Participation in a
company
Besides gains from alienation of shares of corporations whose assets are principally
immovable property being taxed by the country in which such property is situated, the
gains from the alienation of shares of other companies be taxed by the country of which
the company is resident if the transaction involves a sale of substantial participation in
the company. What percentage would mean substantial participation has been left to the
bilateral negotiations.
