Rp/107/2021 Of The Deputy Commissioner Of Income Tax v. M/S.k.t.c. Automobiles

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI TUESDAY, THE 22 DAY OF FEBRUARY 2022 / 3RD PHALGUNA, 1943 RP NO. 107 OF 2021 AGAINST THE JUDGMENT IN ITA 18/2014 OF HIGH COURT OF KERALA REVIEW PETITIONER/S: THE DEPUTY COMMISSIONER OF INCOME TAXCIRCLE 2(1), CALICUT - 673 001. BY ADVS.P.K.RAVINDRANATHA MENON (SR.)SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: M/S.K.T.C. AUTOMOBILESY.M.C.A. ROAD, CALICUT - 673001, PAN - . OTHER PRESENT: SR ADV JOSEPH MARKOS THIS REVIEW PETITION HAVING COME UP FOR ADMISSION ON 22.02.2022,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: O R D E R S.V. Bhatti, J. Deputy Commissioner of Income Tax (Revenue)/ respondent in I.T.A. No.18/2014, is the petitioner. M/s. K.T.C.Automobiles (assessee)/ respondent herein is the appellant inI.T.A. No.18/2014. 2.The assessee being aggrieved by the order dated27.09.2013 in ITA No.446/Coch/2013 of Income Tax Appellate Tribunal (for short 'the Tribunal'), Cochin Bench filed I.T.A.No.18/2014 in this Court. The controversy in the appeal relatesto the Assessment Year 2005-06. 2.1 At the first instance, the assessee was a partnership firm and the firm was converted into a Private LimitedCompany. The assessee before such conversion as Private R.P. No. 107/2021 in ITA 18/2014 Limited Company revalued the land belonging to the firm andthe enhanced value of the land was credited to the currentaccount of the partners of the firm. Upon conversion as aPrivate Limited Company, the enhanced value of land asreflected in the current account of the partners was shown asloan from the partners at the hands of Private LimitedCompany. The Assessing Officer treated the enhanced value ofland as capital gains of the firm and brought it to capital gaintax. The Tribunal confirmed the said levy and demand ofcapital gain on appeal filed by the assessee, this Court framedthe following questions of law: “i) Whether revaluation of a capital asset of the assessee firmbefore its conversion as a company and crediting the enhancedvalue of the asset to the current account of the partners andtreating it as loan from the partners in the account of thecompany amounts to violation of clause (c) of the proviso toSection 47(xiii) of the Income Tax Act, 1961 (hereinafterreferred to as 'the Act') and if so, whether the transaction amounts to transfer of a capital asset within the purview ofSection 45 of the Act? ii) Whether, on the facts and circumstances of the case,revaluation of a capital asset of the assessee firm before itsconversion as a company and crediting the enhanced value ofthe asset to the current account of the partners, therebycreating a liability on the firm and transferring such liability tothe company amounts to violation of clause (a) of the proviso toSection 47(xiii) of the Act and if so, whether the transactionamounts to transfer of a capital asset within the purview ofSection 45 of the Act? iii)Whether the enhanced value of the capital asset creditedto the current account of the partners of the firm, if treated ascapital gains, can be brought to tax payable by the erstwhilefirm? Answering the question, particularly question no.3, held that the enhanced value of land held by the firm credited to thecurrent account of partners does not attract capital gain.Hence, the review petition at the instance of Revenue. 3.Learned Standing Counsel Mr Jose Joseph argues that the findings recorded by the judgment under review, on R.P. No. 107/2021 in ITA 18/2014 iii)Whether the enhanced value of the capital asset creditedto the current account of the partners of the firm, if treated ascapital gains, can be brought to tax payable by the erstwhilefirm? Answering the question, particularly question no.3, held that the enhanced value of land held by the firm credited to thecurrent account of partners does not attract capital gain.Hence, the review petition at the instance of Revenue. 3.Learned Standing Counsel Mr Jose Joseph argues that the findings recorded by the judgment under review, on R.P. No. 107/2021 in ITA 18/2014 question nos 1 and 2, have bearing on question no.3 and anindependent finding recorded in favour of assessee suffers frompatent error on the face of the record. The question of law is,whether crediting the enhanced value to the current account ofpartners is correct or it should have been credited to capitalaccount? Unless and until all the ingredients of Section 47 arecomplied with the assessee is liable to the levy and the demandon capital gain tax on revalued capital asset. Standing Counselinvited our attention to the findings in the judgment underreview and urged that the errors now pointed out, in the formof grounds, attract the jurisdiction of review and the reviewmay be allowed. 4.Learned Senior Advocate Mr Joseph Markos arguesthat the grounds stated in the review petition do not comewithin the purview or jurisdiction of review. To appreciatewhether, what is pointed out now by the review petitioner R.P. No. 107/2021 in ITA 18/2014 constitutes an error or patent error, this Court in suchexamination would be retracing the very circumstances whichwere considered by the Division Bench in the judgment underreview and recording a fresh finding on such consideration. Itis argued such an effort could be undertaken only by a courtsitting in appeal but not by the review court. The very fact thata detailed reasoning process is introduced to point out the errorapparent on the record would be sufficient to hold that thegrounds of review do not come within the purview of reviewjurisdiction of this Court. The counsel specifically invites ourattention to the following findings recorded by the DivisionBench in paragraph 17 of the judgment. “17. Learned Standing Counsel for the department wouldcontend that, applicability of Section 47A(3) of the Act wouldarise only at a stage subsequent to the assessment of tax, whenit is later discovered that there was violation of the provisionscontained in the proviso to Section 47(xiii) of the Act. We arenot impressed with this contention. It is true that exemption already granted can be withdrawn by virtue of the provisioncontained in Section 47A(3) of the Act on discovery ofviolations of the conditions provided in the proviso to Section47(xiii) of the Act. But, if the assessing authority finds at thetime of assessment, that there is violation of the provisionscontained in the proviso to Section 47 (xiii) of the Act, thentransfer of capital assets made in that manner, comes withinthe ambit of Section 45 of the Act and assessment has to bedone accordingly. In making such assessment, the authorityconcerned is obliged to take note of the provisions contained inSection 47A(3) of the Act and then the liability to pay tax has tobe imposed not on the erstwhile firm but on the successorcompany.” 5.The law does not stipulate reflection of enhanced value of a capital asset through the capital account of the firm.There is no requirement in law that the enhanced value shall bereflected in capital account and the reflection in book ofaccounts is in the discretion of the assessee. The enhancedvalue when apportioned to the current account of the partners,by itself does not amount to a transfer which attracts the claim of capital gains. These important considerations are examined in the judgment under review and there is no scope for review. 6.We have perused the record and appreciated thecontentions urged on behalf of both the parties. 5.The law does not stipulate reflection of enhanced value of a capital asset through the capital account of the firm.There is no requirement in law that the enhanced value shall bereflected in capital account and the reflection in book ofaccounts is in the discretion of the assessee. The enhancedvalue when apportioned to the current account of the partners,by itself does not amount to a transfer which attracts the claim of capital gains. These important considerations are examined in the judgment under review and there is no scope for review. 6.We have perused the record and appreciated thecontentions urged on behalf of both the parties. 6.1To state briefly, the objection as pointed out insist forcrediting enhanced value to the current account of thepartners, and not to capital account on the enhanced value. Webear in mind that the judgment of the Tribunal was the subjectmatter of I.T.A. No.18/2014. The scope of appeal is governed bySection 260A of the Income Tax Act, 1963. The instant review isfiled under Order XLVII Rule 1 read with Sections 114 and 151 ofthe Code of Civil Procedure. The jurisdiction of the reviewcourt is fairly well established and one of the principleobjections against the review of judgment is that the error if isto be arrived at upon consideration of grounds of review, itaccounts to re-appreciation of the core or totality of circumstances considered by the Division Bench. Such exerciseis not termed as correcting the error apparent on the face ofrecord or review jurisdiction exercised. The re-appreciation ofcircumstance for finding out the error apparent on record isavoided by this Court. The review petitioner failed to bring thegrounds for review within the jurisdiction of applicableprovision of law. The learned Standing Counsel though made astrenuous effort to decast the circumstances considered by thisCourt in the judgment under review, we are afraid we may betreading into the path of re-appreciation and would amount toexceeding the review jurisdiction of this Court. The grounds forreview raised are not held as coming within the scope of OrderXLVII Rule 1 of Code of Civil Procedure and we are satisfied thatby examining these grounds, the judgment under review neednot be recalled. Hence, the Review Petition fails, and is dismissed. No order as to costs. jjj Sd/- S.V.BHATTIJUDGESd/- BASANT BALAJIJUDGE