Commissioner Of Income Tax, Kota v. M/S Bhatia & Company (Md) 16-C, Vallabh Nagar, Kota

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 109 / 2012 Commissioner of Income Tax, Kota ----Appellant Versus M/s Bhatia & Company (MD) 16-c, Vallabh Nagar, Kota ----Respondent _____________________________________________________ For Appellant(s) : Ms. Parinitoo Jain with Ms. Shiva GoyalFor Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 11/09/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the assessee setting aside the order passedby the CIT(A) in exercise of powers under Section 263. 2.This Court while admitting the matter framed the followingquestions of law:- “Whether the Tribunal was legally justified incancelling the order passed u/s 263 by the CITand holding that the order of the Assessing Officerwas not erroneous specifically when the CIT hasgiven a detailed finding that the order of the AOwas erroneous and prejudicial to the revenue.?” 3.The brief facts of the case are that the assessee respondentis engaged in the business of trading of vehicles and spare partsas an authorized dealer for M/s Maruti Udyog Ltd. at Kota andChitorgarh as well as a Maruti Service Station. The return of the income was filed on 31.10.2007 at an income of Rs. 6290/- whichwas processed u/s 143(1). The case was selected for scrutiny andnotice was issued u/s 143(2) on 15.9.2008 which was duly servedon 17.9.2008. the assessing officer accepted the return of theassessee and passed an order on 16.3.2009. The CIT held thatafter dissolution of the firm and conversion of it into a companythe AO did not examine the issue of taxation of capital gains ondissolution of firm and conversion of it into company. The CIT wasof the view that it would fall within the ambit of capital gain and itwas would be transferred u/s 2(47) so the provisions of section45(4) would come into play. Further, on other issues also the CITheld that the order of the AO was erroneous and prejudicial to theinterest of the revenue. 4.Counsel for the appellant contended that while consideringthe matter the CIT has given notice at Annexure-2 and afterconsidering the reply filed by the assessee, the finding given readsas under:- “I have heard the counsel and considered thewritten submissions and my observations are asunder:- On point number I regarding taxability of capitalgains on termination/dissolution of the firm &distribution of its’ assets & formation of acompany by the name Bhatia Corporation Pvt.Ltd., an enhancement notice was issued to theassesee vide letter NO. 2415 dated 13.12.2010and it was asked to show cause as to why thecapital gains arising on this transfer may not betaxed u/s 45(4) r.w.s. 48 of the I.T. Act. As perthis show cause notice; The first point in consideration is in regard totermination/dissolution of the firm by the nameM/s Bhatia & Company on 09.04.2006 andformation of a company by the name BhatiaCorporation Pvt. Ltd. on 10.04.2006. theAssessing Officer while making the assessment On point number I regarding taxability of capitalgains on termination/dissolution of the firm &distribution of its’ assets & formation of acompany by the name Bhatia Corporation Pvt.Ltd., an enhancement notice was issued to theassesee vide letter NO. 2415 dated 13.12.2010and it was asked to show cause as to why thecapital gains arising on this transfer may not betaxed u/s 45(4) r.w.s. 48 of the I.T. Act. As perthis show cause notice; The first point in consideration is in regard totermination/dissolution of the firm by the nameM/s Bhatia & Company on 09.04.2006 andformation of a company by the name BhatiaCorporation Pvt. Ltd. on 10.04.2006. theAssessing Officer while making the assessment order did not examine the issue of taxation ofcapital gains on termination/dissolution of thefirm. Neither the copy of termination/dissolutiondeed of thye firm was taken on record nor wasthe balance sheet of the newly formed companytaken on the reocrd. It was also not examined asto whether the firm revalued its assets on itstermination/dissolution & formation of acompany. The firm had immovable properties ofsubstantial value and their prevailing marketrates were much higher than their book value. Ithas been submitted before me during the courseof hearing that the firm M/s Bhatia & Companywas convered into a company on 10.04.2006under the provisions of Part-9 of the CompaniesAct, 1956. According to section 575 of theCompanies Act, 1956 on such a conversion thereshall be statutory vesting of the title of theproperty of the erstwhile firm into the newlyincorporated company without any separateconveyance deed. On this point it is to be mentioned that the AOdid not apply mind at the time of framing theoriginal assessment order, on it. First of all it is tobe mentioned that when the firm wasterminated/dissolved on 09.04.2006 & thecompany was formed on 10.04.2006, there is noquestion of conversion of the dissolved firm intoa company formed a day later on. Evenotherwise the contention of the assessee thatsuch a conversion of firm into a company doesnot require any separate point of view. It may bea case of a transaction deemed to have beenregistered under the Registration of PropoertiesAct but still it is not taking it out from the ambitof the taxation of capital gain on it because it isstill a ‘transfer’ within the meaning of section2(47) of the Income Tax Act. The definition of theterm transfer in the Income Tax Act is inclusiveand even the conversion of ‘personal assets’ by aproprietor into the ‘stock in trade’ of his businessis a transfer under this definition. Not only thiseven the part performance of a contract whichhas the effect of only enabling the enjoyment ofan immovable property is held as a transfer.Therefore, I do not agree with this contentionofthe assessee. Once such a conversion of a firminto a company is not excluded from thedefinition of transfer u/s 2(47) of the I.T. Act1961, the provisions of section 45 of the I.T. Actcomes into play, as on every transfer ofimmovable property capital gains arise, and theyare required to be taxed according to theprovisions of this section. Under section 45(4) of the I.T. Act the profits and gains arising from thetransfer of a capital assets by way of distrution ofthem on the dissolution of a firm/AOP/BOI orotherwise, shall be chargeable to tax as theirincome of the previous year in which the saidtransfer takes place and for the purposes ofsection 48, the ‘fair market value’ of the asset onthe date of such transfer shall be deemed to bethe ‘full value of the consideration’ received oraccruing as a result of the transfer. IN this caseadmittedly the firm M/s Bhatia &Company has existed till 09.04.2006 and then acompany was formed on 10.04.2006. The assetsof the firm on its termination/ dissolution on09.04.2006 have been distributed, in theproportion of the share of the partners of thefirm as per the partnership deed. Thisdistribution has been done and the value wasascertained in monetary terms and on the nextday in the newly incorporated company theshares of equivalent value were allotted to eachpartner. Therefore, the mischief of section 45(4)of the I.T. Act is attracted and the fair marketvalue of the assets of the firm on the date of itstermination/dissolution will be deemed to be the‘full value of the consideration’ received as aresult of transfer. The term ‘full value ofconsideration’ used in section 48 of the I.T. Act1961 does not mean only from the ‘fair marketvalue’ of the capital assets but the Income TaxOfficer while determining the ‘full value ofconsideration’ has the express powers to take the‘fair market value’ of the capital assetstransferred as the ‘full value of consideration’ inspecified circumstances. The ‘fair market value’of a capital assets has been defined in section2(22B) of the I.T. Act 1961 and the definition isworth mentioning here. 2[(22B) “fair market value’, in relation to acapital assets, means- i the price that the capital asset would ordinarilyfetch on sale in the open market on the relevantdate; and ii) where the price referred to in sub-clause (I) isnot ascertainable, such price as may bedetermined in accordance with the rules madeunder this Act. (Rule 11UA of the I.T. Rules for reference)” 5.It is contended that the CIT(A) has rightly decided thematter under Section 263 and directed to reconsider the case. The Tribunal has seriously committed an error in setting asidethe order and she has relied upon the decision of Supreme Courtin case of Toyota Motor Corporation vs. Commissioner of IncomeTax reported in [2008] 306 ITR 0052 wherein it has been held as under:- “We are not inclined to interfere with theimpugned order of the High Court. The HighCourt has held that the Assessing Officer haddisposed the proceedings stating the penaltyproceedings initiated in this case Under Section271C read with. Section 274 of the Income TaxAct, 1961 are hereby dropped. According to theHigh Court, there was no basic indicated fordropping the proceedings. The Tribunal referredto certain aspects and held that the initiation ofproceedings under Section 263 of the IncomeTax Act, 1961 (in short, the I.T. Act) wasimpermissible when considered in thebackground of the materials purportedly placedby the assessee before the Assessing Officer.What the High Court has done is to require theAssessing Officer to pass a reasoned order. TheHigh Court was of the view that Tribunal couldnot have substituted its own reasonings whichwere required to be recorded by the AssessingOfficer. According to the assesses all relevantaspects were placed for consideration and if theofficer did not record reasons, assessee can notbefaulted. 5. We do not think it necessary to interfere atthis stage. It goes without saying that when thematter be taken up by the Assessing Officer onremand, it shall be his duty to take into accountall the relevant aspects including the materials,if any, already placed by the assessee, and passareasonedorder.6. The appeal is dismissed with the aforesaidobservations.” 5. We do not think it necessary to interfere atthis stage. It goes without saying that when thematter be taken up by the Assessing Officer onremand, it shall be his duty to take into accountall the relevant aspects including the materials,if any, already placed by the assessee, and passareasonedorder.6. The appeal is dismissed with the aforesaidobservations.” 6.Counsel for the respondent has taken us the order of the Tribunal wherein it has been observed as under:- “2.12. The assessee has intimated the AOregarding the fact that business of the firm hasbeen carried on by the company vide letter dt.24.02.09 addressed to the AO. It was explainedthat existing firm existed upto 9[th] April, 2006 and thereafter w.e.f. 10.04.06, it was registered as acompany on 16.03.09. In the assessment order,the AO has mentioned as under:- “The assesssee firm has existed upto 09.04.2006,therefore, w.e.f. 10.04.2006, registered as acompany under part IX of the Company Act, 1956and the firm has shown its income andexpenditure upto 09.04.2006 only” Thus, the AO was fully aware of the factualposition and it cannot be said that AO has notmade any enquiry. The assessment order of theAO cannot be presumed as erroneous on theground that the AO has not charged capital gainbecause the firm has been succeeded by thecompany. The main objection of the ld. CIT is thatthe company was incorporated on 10.04.2006.Page 11 of the Memorandum of Associationcontains the names and address of the 07 existingpartners and is mentioned that equity shares of80.00 lacs have been divided to the partners ofthe firm and the date mentioned is 08.04.2006.Thus the company was incorporated to carry overthe business of the firm and the company iscovered under part IX of the Companies Act.Hence, we cannot hold that the assets weredistributed to the partners and then theytransferred the assets to the company. There hasbeen no formal dissolution of the firm. The assetsand liabilities of the firm has been taken over bythe company. Thus findings of the ld. CIT on pointno. 1 and 3 are vacated and it is held that theorder is not erroneous. Since the ld. CIT hasrecorded the finding and directed the AO to chargecapital gain and therefore, we feel that no purposewill be served on setting aside such issue on thefile of the AO. 2.13.The ld. CIT has set aside the issue on pointno. 2. the comparative chart of point no. 2considered by the ld. CIT and the reply given tothe ld. CIT is as under:- Huge claims have Assessee filed AO raised been allowed by AO detailed reply vide query vide without application of letter dt. 09.11.2010letter dated any mind & without 03.02.2009 obtaining the which is necessary details in replied by respect of following:-assessee 2.13.The ld. CIT has set aside the issue on pointno. 2. the comparative chart of point no. 2considered by the ld. CIT and the reply given tothe ld. CIT is as under:- Huge claims have Assessee filed AO raised been allowed by AO detailed reply vide query vide without application of letter dt. 09.11.2010letter dated any mind & without 03.02.2009 obtaining the which is necessary details in replied by respect of following:-assessee vide letter dated -In the absence of 24.02.2009. details of freight & Point No.2Books of cartage included in accounts Parapurchases, its Purchase do not were genuiness remains include freight & examined by2(ii)unverified & Cartage & therefore him & applicability of TDS on freight returned provisions of sec. payment does not income 40(a)(ia) is also not arise.accepted ascertainable.after giving aPoint No.3finding that assessee has-No evidence of TDS was deposited maintained depositing TDS in Aprilon 07.04.2006 & proper 07 on payment of copy of challan filed.records interest of Rs.57,834/-Para showing full to Maruti Co. Is particulars of2(iii)available.Point No.4income & expenditureQuantitative details of vehicles filed. However, -No quantitative quantitative details details in respect of of spare parts vehicles as well as maintained in spare parts have been software but could obtained & kept on not be furnished due recordits large quantum. ParaSeparate trading account for spare 2(iv)parts for 9 days filed.Point No.5Ledger accounts of advance filed. Interest charged on advance given to Bhatia Real Estate.- No interest has been charged on amt. Point No.6Advanced to various Details of income concerns whereas form other sources interest has been paid filed. Same was to banks. Further, verified by AO from advance to M/s Bhatia books of accounts Real Estate is given produced before himwho is not having any Parabusiness connection 2(v)with assesseePoint No.7Details of fixed assets filed. Most - No details have beenfixed assets coming obtained & kept on as opening balance record in regard to from last year exceptincome shown from for addition of various sources & the Rs.1,08,876/- made same has been during the relevant accepted without period, details of verification.which were producedbefore AO.Point No. 8ParaAll unsecured loan 2(vi)are old. Details of - AO failed to call the loan submitted details of fixed assets, before AO. Capital WIP & balance Confirmation of loan sheet of new as on 31.03.06 company.AO raised submitted to AO in query assessment regarding proceedings of A.Y. unsecured 06-07loans in point no.23 which is replied by assessee in Point No 13, It was also Para informed vide letter 2(vii)dt.13.03.2009 to ITO thatconfirmation of accounts of unsecuredloans have All creditors are old already beenexcept in case of filed.Maruti Udhoy Ltd. From whom purchases of AO raised Rs.1,53,38,025/- query - No confirmation of made during period regarding under consideration.unsecured loans & sundry Sundry creditors have creditors in been called for & put point No. 10,on recordPoint No. 1013 & 22 which is Partnership deed replied by filed.assessee in Point No.9.- Copy of partnership Paradeed not obtained2(viii)Para 2(x)ParaAssessee firm failed toThe amount of AO raised explain the amount of Rs.28,990/- in query 2(ix)Rs.28,990/- in the suspense account regarding suspense account & (Sundry creditors at sundry therefore it is to be Chittorgarh – is creditors treated as income of coming from last 2-3vide letter the assessee firm for years for the reason dated the year under that some parties 03.02.2009 considerationhave directly in point no. deposited the 10 & 13 amount in the firm's which is bank account & in replied by the absence of their assessee particulars, vide letter necessary entries dated could not be made in24.02.2009 the books of firm. in point no.9The same was explained to CIT videlatter dt. 09.11.2010& 30.12.2010 in response to show cause notice dt. 07.10.10 & 13.12.2010 respectively. Copy of ledger of suspense account also given vide letter dt. 09.11.2010. treated as income of coming from last 2-3vide letter the assessee firm for years for the reason dated the year under that some parties 03.02.2009 considerationhave directly in point no. deposited the 10 & 13 amount in the firm's which is bank account & in replied by the absence of their assessee particulars, vide letter necessary entries dated could not be made in24.02.2009 the books of firm. in point no.9The same was explained to CIT videlatter dt. 09.11.2010& 30.12.2010 in response to show cause notice dt. 07.10.10 & 13.12.2010 respectively. Copy of ledger of suspense account also given vide letter dt. 09.11.2010. 7.Taking into consideration the partnership firm was takenover by the company and taking into account the provisions oflaw, the ITAT has rightly observed as stated hereinabove. 8.In view of the observations in 2014, we are in completeagreement with the view taken by the Tribunal, the notice under263 was not properly issued therefore, the issue is required tobe answered in favour of the assessee against the department. 9.The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S. JHAVERI),J. A.Sharma/47