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Facts
The assessee, a jeweler, filed his return declaring income. His case was picked for limited scrutiny due to an increase in proprietor capital and a mismatch in the audit report. The case was later converted to complete scrutiny. During the year, the proprietary business was taken over by a private limited company, and the assessee valued the goodwill at Rs. 2,00,00,000/-.
Held
The Tribunal found that the impugned order was passed in the name of a deceased person. While acknowledging this, the Tribunal did not comment on the merits of the case but considered it fit to remand the matter back to the CIT(A) for a fresh decision.
Key Issues
Whether the conversion of a proprietorship concern into a private limited company, including the valuation of goodwill, constitutes a transfer taxable as capital gains, and if the proceedings were validly conducted in the name of the legal heir.
Sections Cited
143(3), 250, 143(2), 40A(2)(b), 47(xiv), 48, 55(2), 234A, 234B, 234C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘A’: NEW DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI AVDHESH KUMAR MISHRA
A.Y.2014-15 Nitin Verma Income Tax Officer, (Legal Heir of Late Sh. Ashok Ward-1, Rohtak Kumar Varma) Vs. 7-L, M/s. S. S. Jewellers, Model Town, Rohtak- 124001 PAN: AALPV2751L (Appellant) (Respondent) Appellant by Sh. Ankit Kumar, Adv. Respondent by Sh. Ajay Kumar Arora, Sr. DR Date of Hearing 01/07/2025 Date of Pronouncement 01/07/2025 ORDER
PER AVDHESH KUMAR MISHRA, AM
This appeal of the assessee for the Assessment Year (‘AY’) 2014-15 is directed against the order dated 05.06.2024 of the Commissioner of Income Tax (appeal), NFAC, New Delhi [‘CIT(A)’].
The assessee has raised following grounds: “1. That the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi has erred both in law and, on facts in upholding the determination of income made by the learned Income Tax Officer, Ward-1, Rohtak of the appellant at Rs. 2,08,67,340/- as against declared income of Rs. 8,41,240/- by the appellant in an order of assessment dated 23.12.2016 u/s 143(3) of the Act.
Nitin Verma 2. That impugned order dated 5.6.2024 u/s 250 of the Act passed by the learned Commissioner of Income Tax (Appeals), NFAC, Delhi on a dead person is illegal, invalid and void-ab-initio and therefore, nullity.
That the both learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) and the learned Assessing Officer have failed to appreciate that since notice under section 143(2) of the Act had been issued for selecting scrutiny through CASS, the scope of assessment had to be confined to the issues raised in the reasons for selection of limited scrutiny and therefore, addition made beyond the scope of said reasons are perse without jurisdiction and untenable.
That without prejudice to the above, the learned Commissioner of Income Tax (Appeals) National Faceless Appeal Centre (NFAC) has failed to appreciate that learned Income Tax Officer has converted assessment proceedings into full scrutiny without granting any opportunity to the appellant and therefore, the conversion of limited scrutiny into full scrutiny without any adequate notice is perse illegal and invalid. 4.1 That furthermore, the action of conversion of limited scrutiny into complete scrutiny vide alleged proposal dated 18.11.2016 by the learned Income Tax Officer, Ward-1, Rohtak and approval on 29.11.2016 by the learned Principal Commissioner of Income Tax, Rohtak was also not in accordance with law and mechanically granted without due application of mind and without granting any opportunity to the appellant and hence on this ground, the conversion of case into full scrutiny is illegal, invalid and untenable and consequently, additions so made in excess of scope of assessment i.e. issues as raised in the limited scrutiny are in excess of jurisdiction. 4.2 That both the learned lower authorities have failed to appreciate that the reasons stated for selection of case into full scrutiny were otherwise too incorrect, invalid and untenable and therefore, order of assessment so made and sustained assuming case to be full scrutiny case is illegal and addition so made in excess of scope of assessment of limited scrutiny is without jurisdiction.
5. That the Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding an addition of Rs. 2,00,00,000/- representing the alleged capital gain accrued to the appellant on conversion of registration of the proprietorship concern M/s. SS Nitin Verma Jewellers into a private limited company as M/s. SS Ornaments & Jewels (P) Ltd. under the Companies Act 1956. 5.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that in absence of any transfer of shares held by the appellant in M/s. SS Ornaments & Jewels (P) Ltd. by the appellant in the instant year, invocation of section 45 read with section 48 of the Act to bring to tax capital gain in the hands of the appellant is based on misconstruction of statutory provisions contained in the Act and therefore, wholly unsustainable. 5.2 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that conversion of a proprietorship concern into private limited company does not result into any transfer of shares held by the appellant and therefore, there was no justification much less valid justification to bring to tax any long term capital gain in the hands of the appellant for the instant assessment year.
6. That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that alleged and purported transfer was exempt under section 47(xiv) of the Act. 6.1 That the finding that there is violation of clause (c) of section 47(xiv) of the Act in respect of conversion of M/s. SS Jewellers is factually incorrect, misconceived and untenable. 6.2 That various adverse findings and conclusions recorded by the learned Commissioner of Income Tax (Appeals) are factually incorrect and contrary to record, legally misconceived and untenable.
That the learned Commissioner of Income Tax (Appeals)has erred both in law and on facts in upholding adhoc disallowance of Rs. 26,096/- being 1/6th of the following expenses incurred and claimed by the appellant company in the instant year:
Sr. Head of Expenses Amount (Rs.) i) Car insurance expenses 14,289 ii) Car running expenses 65,749 iii) Depreciation on car 76,542 Total disallowance 1,56,580 8. That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in upholding the levy of interest u/s Prayer: It is therefore, prayed that, addition/disallowance made and sustained by the learned Commissioner of Income Tax (Appeals) alongwith interest levied be deleted and appeal of the appellant be allowed.”
3. The relevant facts giving rise to this appeal are that the assessee (Late Shri Ashok Kumar Verma through legal heir Shri Nitin Verma), a jeweler, filed his Income Tax Return (‘ITR’) on 08.09.2014 declaring income of Rs.8,41,240/-. He was the proprietor of M/s. S. S. Jewellers. The case was picked up for limited scrutiny on the reasoning that there was a substantial increase in the proprietor capital in the relevant year and there was a mismatch in the amount paid to related person under section 40A(2)(b) of the Income Tax Act, 1961 (‘Act’) mentioned in the Audit report and the ITR. Later on, the case was converted into complete scrutiny after taking approval of the PCIT, Rohtak. During the relevant year, the business of assessee’s proprietary concern; namely, M/s. S. S. Jewellers was taken over by a private limited company (the assessee as promoter director), on 01.10.2013, along with all assets and liabilities of the proprietary concern existing as on 30.09.2013. The assessee had valued the goodwill of his proprietary concern; M/s. S. S. jewelers at Rs.2,00,00,000/- as on 30.09.2013 and disclosed the same as an asset in the balance sheet of his proprietary concern. Prior to this, the proprietary Nitin Verma concern had never shown the value of goodwill in its balance sheet. The opening capital of the proprietary concern as on 01.04.2013 was Rs.27,25,400/-, which was increased to Rs.2,27,25,400/- by taking corresponding contra entry of goodwill as on 30.09.2013. The assessee, at the time of conversion of proprietary business concern into the private limited company, got shares of the said company worth Rs.2,04,50,000/- in lieu of the value of the goodwill and closing capital balance of the proprietor as on 30.09.2013. The assessee withdrew the capital of Rs.25,28,732/- from his proprietary concern just before 01.04.2013 (withdrawal of entire capital except Rs.4,50,000/-). The Assessing Officer (‘AO’) was not satisfied with the assessee’s explanation and justification of valuation of goodwill. Therefore, he concluded that not only the assessee had violated the provisions under section 47(xiv) of the Act but also overvalued the goodwill. Tus, the AO taxed the entire goodwill as income. Further, he made a disallowance of Rs.26,096/- out of Car running & maintenance expenses.
3.1 Aggrieved with the assessment order, the assessee filed appeal before the Ld. CIT(A) who dismissed the appeal holding as under: - “7.1 Vide ground no. 1 and 2 of appeal, the appellant has claimed that the order passed by A.O is against law and facts and has challenged the addition of Rs. 2,00,00,000/- made by AO by not allowing the benefit as prescribed under provisions of section 47(xiv) of the Act. In this regard, it is observed that the AD had noticed Nitin Verma violation of the provisions of section 47(xiv) of the Act in the conversion of appellant's proprietorship firm into company and therefore the AO treated this conversion as transfer on account of abnormal sale consideration in the shape of goodwill. The AO further noticed that the appellant had received consideration by converting the capital account in the shape of unsecured loan and part consideration was received in the shape of the FDR withdrawals.
The appellant in his submission had submitted that normally in proprietorship business, proprietor also shows his personal assets and investments in the balance sheet of the firm. In this case also, appellant was showing his personal FDR of Rs. 3,41,332/-in the balance sheet of the firm, which he withdraw from the balance sheet by debiting the capital account. The appellant has further submitted that as far as debiting his own capital of Rs. 22,23,901/- is concerned, appellant debit this amount to his capital account and shown as unsecured loan in the balance sheet of proprietorship concern. These entries were passed by the appellant in his books of accounts before 30.9.2013 i.e. before the conversion of proprietorship concern into company. Later on this amount was transferred as unsecured loan in the balance sheet of the company. The appellant in his submission has submitted that he has not violated any condition of section 47(xiv) of the Act. The appellant has also cited various case laws in support of his claims.
The submission made by the appellant and the case laws cited by him hap been considered. The provisions of section 47(xiv) of the Act are as under: “………….. …………..”
Nitin Verma The appellant's explanation with regard to the FDR being personal in nature can't be accepted as the FDR was part of the opening balance of capital account in the proprietorship firm as on 01.04.2013 and not as personal asset of the proprietor The appellant action by debiting Rs. 22,23,901/- from capital account and reflecting it as a unsecured loan in balance sheet of the proprietorship firm before the conversion of proprietorship concern into company on 30.09.2013 cannot be considered as legal because the appellant had introduced goodwill of Rs. 2,00,00,000/- before conversion of his proprietorship firm into company on the same date 1.0.30.09.2013 The sequence of transactions carried out by the appellant on 30.09.2013 clearly indicates that this method was carried out to escape the provisions of section 47(xiv) of the Act and to provide extra benefit to the proprietor indirectly other than by way of allotment of shares in the company. This extra benefit could be withdrawn by the appellant (Proprietor) from the company at any time. Further, the goodwill valuation of the proprietorship firm will be severely impacted if the capital account in the books of the proprietorship concern is debited and transferred as unsecured loan. It clearly shows that debiting proprietor's capital account and creating liability in the balance sheet on the same day i.e. 30.09.2013 before conversion of proprietorship concern into company is nothing but a colorful device to give undue benefit to the appellant indirectly other than by way of allotment of shares in the company. Therefore, there was violation of the provision contained in clause (c) of the proviso to Section 47(xiv) of the Act. In view of the above facts, I do not find any infirmity in the findings of the AO. Therefore, the addition made by the AO amounting to Rs. 2,00,00,000/- under the head short term capital gain treating conversion as transfer and taking the cost of acquisition of self-
4. At the outset, the Ld. Counsel submitted that the Ld. CIT(A) had passed the order in the name of the deceased person though the assessment of the assessee was completed through the Legal Heir of Late Sh. Ashok Kumar Varma. Hence the Ld. Counsel submitted that the impugned order was not valid; therefore, he prayed for remanding the matter back to the Ld. CIT(A) after setting aside the impugned order.
On the other hand, the Ld. Senior Departmental Representative (‘Sr. DR’) drew our attention to the Form-35, where in the name of the name of the appellant assessee and person verifying the appeal was mentioned as Ashok Kumar Varma, submitted that there was no prima-facie mistake in the impugned order. It was contended that the appeal itself was not maintainable before the Ld. CIT(A). The Ld. CIT(A) has decided the appeal based on the written submission furnished before him during the ‘Faceless Appellate Proceedings’. The Sr. DR thus, prayed for dismissal of the appeal.
We have heard both parties and have perused the material available on the record. We have given thoughtful consideration to the entire facts of the case. Undisputedly, the impugned order is the name of the deceased person. However, we do not see any mistake committed by the Ld. CIT(A)
Nitin Verma in disposing the appeal filed & verified in the name of the deceased person after considering written submission during the ‘Faceless Appellate Proceedings’. But in the interest of justice and without offering any comment on merit of the case, we are of the considered view that this case is fit to remanding back to the file of the Ld. CIT(A), after setting aside the impugned order, to decide this case a fresh after treating the Form-35 as a valid appeal duly filed by the legal heir. Hence, we order accordingly.