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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI PRAMOD KUMAR&
PER Ms. MADHUMITA ROY - JM:
The first appeal and Cross Objection filed by the Revenue and assessee are directed against order dated 13.05.2014 passed by the Commissioner of Income Tax (Appeals)-XI, Ahmedabad under section 143(3)of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2011-12.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 2 - The other two appeals filed by the assessee and Revenue are directed against the order dated 24.08.2015 passed by the Learned CIT(A)-3, Ahmedabad under section 143(3) r.w.s. 263 of the Act for A.Y. 2008-09.
Since all the appeals relate to the same assessee, the same are heard analogously and are being disposed of by a common order.
ITA No.2316/Ahd/2014 for A.Y. 2011-12 2. The instant appeal has been filed by the Revenue with the following grounds: “i. The CIT(A) has erred in law and on facts in deleting the disallowance of Rs.25,46,06,987/- on account of Long Term Capital Gain & Short Term Capital Gain of Rs.3,26,02,919/-. ii. On the facts and circumstances of the case, the Learned CIT(A) ought to have upheld the order of the AO. iii. It is, therefore, prayed that the order of the Learned CIT(A) may be set-aside and that of the AO be restored.”
Ground No.1relates to deletion of disallowance of Rs.25,46,06,987/- on account of Long Term Capital Gain (LTCG) and Rs.3,26,02,919/- on account of Short Term Capital Gain (STCG).
The brief facts leading to this case is this that the assessee engaged in the business of Manufacturing of Transmission Towers and Job work of Engineering Fabrication and Galvanizing, filed its return of income through Electronic Media on 02.09.2011 declaring total income at Rs.38,82,630/- for A.Y. 2011-12, which was processed u/s 143(1) of the Act on 21.03.2013. It was further mentioned in the E-return that the accounts of the assessee were audited by a CA firm vide report dated 28.05.2011, as required u/s 44AB of the
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 3 - Act. A hard copy of the said report was also furnished during the assessment proceeding.
During the course of assessment proceeding, it was observed by the Learned AO that the appellant firm had revalued one of its asset being the land value of Rs.50,83,617/- as on 01.04.2010 to Rs.29,40,31,218/- on the basis of valuation report made by the Government Registered Valuer whereby and whereunder the said property was valued at Rs.29,38,68,000/- on 05.01.2011. Therefore, there was an increase in the value of land to the tune of Rs.28,87,84,000/- due to its revaluation credited to the partners capital account in the profit sharing ratio. The appellant firm got converted into Private Limited Co. as also found by the Learned AR upon perusal of the record before him. The succeeding company, thereafter allotted shares worth Rs.28,87,84,000/- on account of distribution of capital assets as per Section 45(5) of the Act. The assessee thereafter submitted the following before the Learned AO: “8.4 In reply to the above show cause, the assessee has filed a written submission on 11/02/2014, contents of which are reproduced, as it is, as under:-
“8. Vide para 8 of letter dated 29/01/2014, it is the observation of Your Goodself that the Appellant firm is converted into Private Limited Company under Part-IX of the Companies Act, 1956. It is further observation of Your Goodself that before conversion into Part - IX company, the land has been revalued in the hands of the Assessee-firm, and on conversion of firm into Part - IX Company, the shares have been allotted to the partners. Accordingly, it was the observation of Your Goodself that it is nothing but the distribution of assets to the partner, and therefore, why capital gain should not be levied on the capital arises on account of distribution of assets of the firm in view of provisions of S.45(4) of the Act.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 4 -
8.1 In this connection, the assessee would like to reproduce relevant provisions of S.45(4) of the Act as under :
"45.—Capital gains... 45(4). The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer."
8.2 The above quoted provision would show that u/s 45(4), profits arising from transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm is chargeable to tax as income of the firm in a previous year in which the transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 48 deals with mode of computation. It, inter alia, lays down that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset.
8.3 Therefore, under section 45(4), two conditions are required to be satisfied viz. transfer by way ofdistribution of capital assets and secondly, such transfer should be on dissolution of the firm or otherwise. Once these two conditions are satisfied then, in that event, for the purposes of computation of capital gains under section 48, the market value on the date of the transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer.
8.4 Now Your Goodselfs observation is that on conversion of firm to Part - IX Company and on allotment of shares to partners, the assets of
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 5 - the firm are distributed to partners so as to attract provisions of S.45(4) of the Act.
8.5 In the present case before Your goodself, it is not in dispute that that the assessee-firm is converted into Company under Part IX of the Companies Act. Now, section 45(4) clearly stipulates that there should be transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a Partnership Firm is treated as a Company, the properties of the erstwhile firm vests in the Company. The question is whether such vesting stands covered by the expression "transfer by way ofdistribution" section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the Company and distribution of the property. On vesting in the Company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution presupposes division, realisation, encashment of assets and appropriation of the realised amount as per the priority like payment of taxes of the Government, BMC etc., payment to unsecured creditors etc. This difference is very important. This difference is amply brought out conceptually in the judgment of the Supreme Court in the case ofMalabar Fisheries Co. v. CIT [1979]120 ITR 49. Therefore, it is most respectfully submitted that section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the latter part of section 45(4), which refers to computation of capital gains under section 48 by treating fair market value of the asset on the date of transfer, does not arise at all.
8.6 The assessee relies upon the following authorities, wherein it has been held that that section 45(4) of the Act is not attracted in a situation where the firm is converted into company under Chapter IX of the 1956 Act, and consequently, no capital gain arises on the said transaction :
• CIT vs. Texspin Engg. & Mfg. Works 263 ITR 345
In this matter, we are concerned with assessment year 1996-97. Section 45(1) is a charging section as far as capital gains is concerned. Under section 45(4), profits arising from transfer of a capital asset by way of distributionof capital assets on the dissolution of a firm is chargeable to tax as income of the firm in a previous year in which the
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 6 - transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 48 deals with mode of computation. It, Inter alia, lays down that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset. Therefore, under section 45(4), two conditions are required to be satisfied viz. transfer by way of distribution of capital assets and secondly, such transfer should be on dissolution of the firm or otherwise. Once these two conditions are satisfied then, in that event, for the -purposes of computation of capital gains under section 48, the market value on the date of the transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer.
Now, according to the Assessing Officer, in this case, on vesting of the properties of the firm in the Limited Company, there was a transfer by way of distribution of capital assets. Further, according to the Assessing Officer, on vesting of the properties of the firm in the company, there was a resultant dissolution of the firm. Therefore, according to the Assessing Officer, both the conditions under section 45(4) stood satisfied and, therefore, he was entitled to take the fair market value of the asset on the date of the transfer to be the full value of the consideration received as a result of the transfer. It is for this reason that the Assessing Officer has computed the capital gains under section 48 by referring to the comparative figures of the book value and the market value. As stated above, in this connection, the Assessing Officer has computed capital gains arising to the assessee-firm at Rs. 9 lakhs on the basis of the difference between the market value and the written down value. The Assessing Officer has taken the written down value as on 1st April, 1995 and he has taken the market value as on 8th November, 1995 (alleged date of transfer) and on that basis, he has computed the capital gains. However, as stated, computation under section 45(4) read with section 48 would arise only if the aforestated two conditions are satisfied to attract section 45(4).
In this case, the erstwhile firm has been treated as a Limited Company by virtue of became a Limited Company under Part IX of the Companies Act. Now, section 45(4) clearly stipulates that there should
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 7 - be transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a Partnership Firm is treated as a Limited Company, the properties of the erstwhile firm vests in the Limited Company. The question is whether such vesting stands covered by the expression "transfer by way of distribution" in section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the Limited Company and distribution of the property. On vesting in the Limited Company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution presupposes division, realisation, encashment of assets and appropriation of the realized amount as per .the priority like payment of taxes to the Government, BMC etc., payment to unsecured creditors etc. This difference is very important. This difference is amply brought out conceptually in the judgment of the Supreme Court in the case ofMalabar Fisheries Co. v. CIT[1979] 120 ITR 49. In the present case, therefore, we are of the view that section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the latter part of section 45(4), which refers to computation of capital gains under section 48 by treating fair market value of the asset on the date of transfer, does not arise.
• CIT vs. Rita Mechanical Works 344 ITR 544 (P&H)
Section 45(4) of the Act which is relevant reads thus :
"The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body of individuals, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer."
According to the aforesaid provision, the profits or gains arising from transfer of capital assets by way of distribution of those assets on dissolution of a firm or other association of persons or body of
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 8 - individuals (not being a company or a co-operative society) or otherwise shall be liable to tax as income of the firm, etc., of the previous year when such transfer takes place. Under section 48, the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.
For applicability of section 45(4) of the Act, the following two conditions need to be fulfilled, namely:- (a) there must be a transfer of capital asset by way of distribution of capital assets, and (b) there must be a dissolution of a firm, association of persons or body of individuals, etc., or otherwise.
The Bombay High Court in Texspin Engineering and Manufacturing Works [2003] 263 ITR 345, under similar circumstances interpreting section 45(4) of the Act recorded thus (page 351):
“Under section 45(4), profits arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm are chargeable to tax as the income of the firm in a previous year in which the transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 48 deals with mode of computation. It, inter alia, lays down that the income chargeable under the head 'Capital gains1 shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset. Therefore, under section 45(4), two conditions are required to be satisfied, viz., transfer by way of distribution of capital assets, and, secondly, such transfer should be on dissolution of the firm or otherwise. Once these two conditions are satisfied then, in that event, for the purpose of computation of capital gains under section 48, the market value on the date of the transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer."
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 9 - 16. The court had concluded that section 45(4) of the Act was not attracted in a situation where the firm was converted into company under Chapter IX of the 1956 Act. The relevant observations are as follows (page 352):
"In this case, the erstwhile firm has been treated as a limited company by virtue of section 575 of the Companies Act. It is not in dispute that in this case, the erstwhile firm became a limited under Part IX of the Companies Act. Now, section 45(4) clearly stipulates that there should be a transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a partnership firm is treated as a limited company, the properties of the erstwhile firm vests in the limited company. The question is whether such vesting stands covered by the expression 'transfer by way of distribution' in section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the limited company and distribution of the property. On vesting in the limited company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution pre-supposes division, realisation, encashment of assets and appropriation of the realised amount as per the priority like payment of taxes to the Government, BMC, etc., payment to unsecured creditors, etc. This difference is very important. This difference is amply brought out conceptually in the judgment of the Supreme Court in the case ofMalabar Fisheries Co. v. CIT [1979] 120 ITR 49. In the present case, therefore, we are of the view that section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the latter part of section 45(4), which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not arise."
The plea of applicability of section 45(1) read with section 2(47)(ii) of the Act was also negated with the following conclusion (page 354):
"In the present case, we are concerned with a partnership firm being treated as a company under the statutory provisions of Part IX of the Companies Act. In such cases, the company succeeds the firm. Generally, in the case of a transfer of a capital asset, two important
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 10 - ingredients are existence of a party and a counter-party and, secondly, incoming consideration qua the transferor. In our view, when a firm is treated as a company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the limited company. It is no doubt true that all properties of the firm vest in the limited company on the firm being treated as a company under Part IX of the Companies Act, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of properties in the company as the firm Is treated as a limited company. On the vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm now treated as a company, after a given date. In the circumstances, in our view, there s no transfer of a capital asset as contemplated by section 45(1) of the Act. Even assuming for the sake of argument that there is a transfer of a capital asset under section 45(1) because of the definition of the word 'transfer1 in section 2(47)(ii), even then we are of the view that the liability to pay capital gains tax would not arise because section 45(1) is required to be read with section 48, which provides for mode of computation. These two sections are required to be read together as the charging section and the computation section constitute one package. Now, under section 48 it is laid down, inter alia, that the income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accrued as a result of the transfer, the cost of acquisition of the asset and the expenditure incurred in connection with the transfer. Section 45(4) is mutually exclusive to section 45(1). Section 45(4) categorically states that where there is a transfer by way of distribution of capital assets and where such transfer is due to dissolution or otherwise of the firm, the Assessing Officer was entitled to treat the market value of the asset on the date of the transfer as full value of the consideration received. This latter part of section 45(4) is not there in section 45(1). Therefore, one has to read the expression 'full value of the consideration received/accruing' under section 48 de hors section 45(4) and if one reads section 48 with section 45(1) de hors section 45(4) then the expression 'full value of consideration' in section 48 cannot be the market value of the capital asset on the date of transfer."
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 11 - 18. The aforesaid view has the acceptance of the legislative intent as the Finance (No. 2)Act, 1998, effective from April 1, 1999, has incorporated clause (xiii) to section 47 tothe following effect:
"Nothing contained in section 45 shall apply to the following transfers.-
(xiii) where a firm is succeeded by a company in the business carried on by it as a resultof which the firm sells or otherwise transfers any capital asset or intangible asset to thecompany."
Now, the stage is set to analyse the case law relied upon by the counsel for the Revenue.
In Artex Manufacturing Go's case (supra), the Gujarat High Court was seized of the matter where the entire assets and liabilities of the partnership were not transferred to the limited company. The business of the firm as a whole was not transferred for a lump sum price to the limited company but only the machinery used in manufacturing of the business of the firm was transferred to the newly formed limited company and the consideration was received by the partners of the firm in the shape of shares of the company and the shares were allotted to the partners on the same basis as their shares in the profits of the partnership firm. It was in those facts that the provisions of capital gains were held to be exigible. The Karnataka High Court in Suvardhan's case (supra) was adjudicating the matter where the partners had derived share on the dissolution of the partnership firm.
The factual matrix in A. N. Naik Associates' case (supra) before the Bombay High Court was that a new partner was inducted before outgoing partners had been relieved and the business also continued. The gain in the hands of the retiring partners was held to be amenable to capital gains tax.
These judgments are, thus, not applicable and are clearly distinguishable.
In view of the above, the irresistible conclusion is that no capital gain under section 45(4) of the Act would be attracted in the present
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 12 - case. Accordingly, questions Nos. 1 and 2 are answered against the Revenue.
8.7 In view of above made submission, it is most respectfully submitted that revisions of S.45(4) of the Act cannot be invoked in the present case, an no addition on 'account of capital gain can be made." However, such plea of the assessee that the assessee firm converted into Private Limited Company under Part-IX of the Companies Act, 1956 whereupon the property of the erstwhile firm vested in the company thus the same is not covered by the expression of transfer by way of distribution u/s 45(4) of the Act was not found tenable by the Learned AO. He, therefore finalized the assessment by making an addition of Rs.3,26,02,919/- as STCG and Rs.25,46,06,987/- as LTCG which was, in turn, deleted by the Learned CIT(A). Hence, the instant appeal before us.
At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that in order to invoke section 45(4) of the Act conditions have to be fulfilled. The Learned Counsel for the assessee further submitted that there was no transfer of assets by way of distribution of Capital assets, neither there was a dissolution of firm. The revaluation of the land held by the assessee firm increased the value but the same has been credited to capital account of partners when the assessee firm was converted into Private Limited Company under Part–IX of the Companies Act, 1956. The assets and liabilities of such firm became the assets and liabilities of the Company. Further that shares in Company have been allotted to partners of erstwhile firm in their profit sharing ratio in the firm. It was further pointed out by the Learned AR that the partners of the firm have never received any consideration or benefit other than by way of allotment of shares
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 13 - in Company due to such conversion of the assessee firm into Private Limited Company. The Learned Counsel also relied upon the judgment passed in the matter of Alta Interchem Industries reported 20 ITR(T) 103 (Ahd), in the matter of Gulabdas Printers reported in 4 ITR(T) 264 (Ahd), Well Pack Packaging reported in 130 Taxman 215 (Ahd). All these judgments laid down the ratio in favour of the assessee on the point of law as discussed above as also been placed by the Learned AR. He, therefore, relied upon the order passed by the Learned CIT(A). On the other hand, Learned DR failed to controvert the same. However, he relies upon the order passed by the Assessing Officer.
We have heard the respective parties, perused the relevant materials available on record. It appears from the records that the Learned AO while holding the assessment against the assessee mainly observed as follows: “8.17 In view of the above discussions it is to sum up that- (i) Assets belonging to the assessee firm got revalued, (ii) Revalued amount distributed to the partners by crediting their Capital accounts, (iii) There were only 4 partners when the land in question was purchased and at the time of revaluation of this land, partners were increased to 7 and enhanced value of land was distributed to all the partners in their profit sharing ratio, (iv) Decisions relied by the assessee are distinguishable on facts and law, (v) The value of the asset (land in the case) stood enhanced and the increase value got distributed by the assessee firm to the partners thus increasing their Capital accounts, (vi) Shares of enhanced value allotted to the erstwhile partners worth increase value and thus increasing the value of capital in the hands of thepartners, (vii) Thus the capital gain arose on distribution of assets i.e. land to the partners by the assessee firm, due to revaluation and thereby
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 14 - subsequentallotment shares is sought to be evaded against the provisions and intent of the law.”
On the basis of such finding of the Learned AO, capital gain on the amount transferred/credited to the capital account of partners as per said provision of Section 45(4) of the Act was brought to tax against the assessee to the tune of Rs.25,46,06,987/- as LTCG and capital gain out of the transfer of part of land has been treated to be STCG which was worked out at Rs.3,26,02,919/- and added to the total income of the assessee. However, the Learned CIT(A) Rs.25,46,06,987/- has been treated as LTCG while deleting such addition made against the assessee relied upon the judgments and observed as follows: “5.3 Decision:
I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The facts in brief related to the issue are that the appellant had re-valued the land owned by it and credited the increase in value of the land due to revaluation to the partners capital account in their profit-sharing ratio. Subsequently the appellant firm got converted into a Private Limited Company and accordingly the shares equivalent to the capital of the partner were allotted to them. That AO held that the appellant firm had distributed capital assets to its partner and made the addition of capital gain on account of distribution of capital assets by applying the provisions of section 45(4) of the Act. He held that the assets belonging to the firm got revalued, the revalued amount got distributed to *he partners by crediting the capital account and the value of the asset stood and hence the increase in value got distributed by the assessee form to the partner thus increasing the capital accounts. He further held that sharesof the enhanced value allotted to the erstwhile partners worth increased value and thus increasing the value of capital in the hands of the partners and accordingly it was held by him that the capital gain arose on distribution of assets that is land to the partners by the assessee firm, due to revaluation and subsequent allotment of-share's. He made the
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 15 - addition by splitting the revaluation gain in short-term capital gain and long term capital gain.
The appellant on the other hand has submitted that provisions of section 45(4) are not applicable as there was no transfer of assets by way of distribution of capital assets and there was no dissolution of the firm. The AO was not justified in observing that on conversion of the appellant from to the company under Part-IX of the Companies Act and on allotment of shares to partners, the assets of the firm were distributed to partner so as to attract the provisions of section 45 (4) of the Act. It has been submitted by the appellant that under Part-IX of the Companies Act when a partnership firm is treated as a Company, the properties of the erstwhile firm are vested in the Company. The appellant has accordingly submitted that since there is a difference between vesting of the property and distribution of the property the provisions of section 45 (4) were not attracted as there is no distribution of the capital asset. The appellant has further submitted that the issue is fully and squarely covered by the decision of Ahmedabad ITAT in several cases. It has placed reliance on the following judgements of Ahmedabad ITAT: -
Alta Interchem Industries - 20 ITR(T) 103 2. Gulabdas Printers – 4 ITR(T) 264 3. Well Pack Packaging 130 Taxman 215
I have carefully gone through the facts of the issue it is noted that the facts which are relevant for the present our that the land has been revalued the enhanced value on account of revaluation has been credited to the partners capital account; the appellant firm has been converted into a Private Limited Company under Part-IX of the Companies Act 1956; all assets and liabilities of the appellant firm have become assets and liability of the new Private Limited Company on Part -IX conversion; the shares in the Private Company have been allotted to the partners in their profit-sharing ratio in the appellant firm; and the partners of the appellant firm have not received any consideration or benefit, directly or indirectly in any form or manner, other than by way of allotment of shares in the Private Limited Company. It is noted that in similar circumstances honorable ITAT Ahmedabad has decided the issue in favour of the appellant by holding that there was no transfer. In
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 16 - the case of Well Pack Packaging (supra), the honorable ITAT has held, after analysing several other cases decided by the other Tribunals and High Courts on the issue, that when a firm becomes a Limited Company under Part -IX of the Companies Act 1956, section 45 (4) is not attracted as the very first condition of transfer by way of distribution of assets was not satisfied. For the sake of clarity the facts of the case, in brief, are reproduced as under: -
“The assessee-firm was consisted of sixteen partners. The assets of the assessee were revalued on 31-7-1994 and thereafter on 1-8-1994, the assessee was converted info joint stock company. The effect of revaluation was given in the books of assessee by crediting partners' account in their profit-sharing ratio. On conversion of the firm the shares were issued to sixteen partners of the assessee in the same proportion of partners' capital account. Originally the assessment was completed under section 143(1)(a). However, later on, the Assessing Officer found that the partnership firm was converted into a company under Part IX of the Companies Act, and the firm had revalued the depreciable assets and enhanced their value. The Assessing Officer took the view that on conversion there was extinguishment of rights of the firm over the assets transferred to the company and the firm was liable to capital gains tax. The reassessment proceedings were initiated against the assessee. The Assessing Officer held that whatever might be the position under the Companies Act regarding registration, the moment the firm ceased to exist in the eye of law under the Partnership Act, as well as under the Income-tax Act and the business was run and managed by 3 distinct and separate legal entity, the legal position was that the firm got dissolved and as such provisions of section 45(4) stood immediately attracted. Accordingly, the Assessing Officer held, that the income earned on such transfer at the agreed price to the firm over and above the book value was liable to be taxed. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer on the ground that there was a transfer within the meaning of section 2(47), read with section 45."
On the basis of these facts the honourable Tribunal held as under: -
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 17 - "Simple revaluation of assets does not lead to incidence of capital gain inasmuch as the revaluation is made in the hands of the assessee by writing up the value of the assets in the books. Accordingly, it could be said that mere revaluation of assets of the firm would not result into any liability under the Act.
Under both sections 567 and 568 of the Companies Act, there is specific mention of deed of partnership as a document to be submitted before the Registrar. Section 574 provides that on compliance with the requirement of Part IX with respect to registration formality, the Registrar will certify that the assessee is a company incorporated under the Companies Act. Section 576 makes it clear that the registration of a company under Part IX shall not affect its rights and liabilities in respect of any deed or obligation incurred before registration and section 577 provides for continuation of the pending suits and legal proceedings taken by or against the company.
As per section 575, all properties including actionable claim belonging to or vested in a company at the date of its registration shall, on such registration, pass to and vest in the company as incorporated. Thus, in view of the relevant provisions of the Companies Act discussed above, it can be said that there is no 'transfer' involved when the company gets itself registered under Part IX.
Thus, since there is no transfer on conversion of the firm into company under Part IX of the Companies Act, there does not arise any question of applicability of section 50 or 45 or any other provision of the Act.
In the instant case, there was no sale or conveyance from the firm to the company and the firm had neither been dissolved nor came to an end on account of conversion into a joint stock company under Part IX of the Companies Act. It was also important to note that the erstwhile partners of the firm had not been allotted shares of the company in question of the value revalued but only of Rs. 1crore so that it clearly indicated that the assets were of taken over at the revalued price and it had not referred to the value allotted o different assets. As such, it could not be said that the firm through their partnersreceived price equal to the revaluation on conversion.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 18 - Further, a business undertaking as a going concern includes all rights, assets contingent or definite and all interest in the present or future. It also includes the management, executive employees and anything which goes as part of organisation including the potentiality of the organisation to grow. It contains a variety of elements both tangible and intengible. A going concern is a dynamic concept characterised by perennial change influenced by socio-economic ecology. A going concern is essentially a functioning living organisation possessing attributes of vitality, growth and evolution and it would not be possible to conceptualise the cost of acquisition of such a going concern as well as date of acquisition thereof. Thus, the cost of acquisition and/or the date of acquisition of the assets of the partnership which was converted into a joint stock company could not be determined and as such it could not be brought within the purview of section 45 for levy of computation of capital gain.
In the circumstances, it was to be held that the assessee was not liable to any capital gain fax either under section 45(1] or under section 45(4)."
The above judgement has subsequently been followed in the case of Alta Interchem (Supra), whose facts are also similar.
The facts of the case are exactly identical to the cases decided by honourable ITAT Ahmedabad and relied by the appellant. In the present case there is no dissolution of the firm and the partnership capital has not been increased on account of sale' of the capital asset but it is only on account of revaluation of the asset the capital has been increased. The properties of the partnership firm have been vested with the company. The company has taken over all the assets and liability of the erstwhile Firm. The appellant has also suitably distinguished the judgement relied by the AO in the written submission which has been reproduced in the preceding discussion.
In view of the above discussion, I am of the considered opinion that there is no transfer of assets and accordingly there is no liability of capital gain on the appellant firm. The addition made by the AO on account of long-term capital gain and short term capital gain on revaluation of the land is directed to be deleted.”
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 19 - We have also carefully considered the judgment passed by the Co- ordinate Bench in the matter of Alta Inter-chem Industries. While dealing with the issue in favour of the assessee the Hon’ble Court observed as follows: “9. We have carefully considered the rival submissions, diligently perused the relevant case records and also the case law quoted by either party. It was the stand of the Assessing Officer that if the full contributions of the partners are taken, it was noticed that the shares in the company have not been allotted in the same proportion as the capital accounts of the partners as they stood in the books of the firm on the date of succession. Therefore, it was the case of the Assessing Officer, that proviso (b) to section 47(xiii) is squarely applicable to the assessee's case which made the transfer of the assets and liabilities of the firm liable to capital gains tax. He had also further stated that if it were to be held at the appellate stage that the two capital accounts were indeed separate, even then the conditions prescribed in the proviso (c) to section 47(xiii) was not met. The said proviso says that the partners of the firm will not receive any consideration or benefit directly or indirectly, in any form or manner from the company except by way of allotment of shares. However, in the present case all the eight partners' current capital account has been taken by the company as loan and so reflected in the balance-sheet. Therefore, it was observed by the Assessing Officer, the erstwhile partners have received consideration in the form of interest as well as benefit from the company. Therefore, the succession is hit by proviso (c) to section 47(xiii) also. 10. However, the Commissioner of Income-tax (Appeals) took a divergent view, by taking shelter on the findings of various judiciary, that in the process of conversion from the firm to company, transfer was not involved and, therefore, appreciation of assets in the process of conversion was not liable to be taxed under the head "Capital gains". 11. At this juncture, we shall proceed to analyse the judicial views on a similar issue as under : (1) Well Pack Packaging (supra). It was held by the hon'ble earlier Bench of this Tribunal that since there was no transfer on conversion of the firm into a company under Part IX of the Companies Act, there does not arise any question of applicability of section 50 or 45 or any other provisions of the Act.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 20 - 12. Aggrieved, the Revenue took up the issue before the hon'ble jurisdictional High Court through a reference application. The Tax Appeal No. 368 of 2001 of the Revenue was, however, dismissed by the hon'ble court with an observation that no question of law, much less substantial question of law arose out of the order of the Tribunal. The Revenue preferred a SLP before the hon'ble Supreme Court against the ruling of the hon'ble High Court (supra). The hon'ble Supreme Court in CIT v. Well Pack Packaging[2009] 309 ITR 338/174 Taxman 102 had ruled as under (page 340) : "We do not agree with the view taken by the High Court. In our opinion, the questions of law raised by the Revenue before the High Court are substantial questions of law which arise from the order of the Tribunal. The High Court should have decided these questions by recording its findings thereon. Accordingly, the impugned order is set aside. Tax Appeal No. 368 of 2001 is admitted on the aforementioned four questions of law. We request the High Court to record its findings on these questions. The matter is remitted to the High Court for a fresh decision on the aforesaid questions in accordance with law." As per the Revenue's version, the appeal is still pending before the hon'ble jurisdictional High Court for disposal [source : Assessing Officer's letter dated June 18, 2012 to the Departmental representative]. (2) The hon'ble Income-tax Appellate Tribunal, Bangalore Bench in the case of Unity Care and Health Services (supra) had observed as under (page 130) : "When a conversion of a firm into company takes place under the provisions of the companies law, such conversion can be construed only as occasioned by operation of law. Hence, no controversy could arise on the application of this principle even for purposes of capital gains under section 45(4). By insertion of section 47(xiii), it cannot be said that the conversion of a firm into a company under Part IX is to be first treated as dissolution of firm within the meaning of section 45(4) and only if the condition as contained in section 47(xiii) are complied with, the exemption will be available. Section 47(xiii) applies only to a case of transfer by sale, but there is no authority for capital gain at all in the absence of a transfer
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 21 - under Part IX of the Companies Act inasmuch as such conversions do not fall within the definition of 'transfer' under section 2(47)." While disposing of the Revenue's reference application against the Tribunal's order, the hon'ble Karnataka High Court had, in I.T.A. No. 3170 of 2005 dated July 5, 2010, ruled as under : "(On page 6) 5. In the instant case, it is not in dispute that the assets of the partnership firm have become the assets of the company. All the partners of the firm have become the shareholders of the company. In proportion to their shares in the partnership firm, they have been allotted shares in the company. Admittedly, no amount is paid in any manner and in any form to the partners. In that view of the matter, the impugned transaction is not a transfer so as to attract capital gains under section 45. Therefore, the Tribunal was justified in setting aside the order passed by the first appellate authority as well as the assessing authority and in holding that the transaction in question does not constitute a transfer under the Act. In that view of the matter, we answer the first substantial question of law framed, against the Revenue and in favour of the assessee." (3) In the case of Gulabdas Printers (supra), the hon'ble earlier Bench of this Tribunal had recorded its findings as under (headnote) : "Where a firm becomes a limited company under Part IX of the Companies Act, 1956, section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital asset is not satisfied. In the circumstances, latter part of section 45(4) which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not apply." Aggrieved, the Revenue had preferred a reference application before the hon'ble jurisdictional High Court in Tax Appeal No. 1559 of 2010 which, according to the Assessing Officer, is still pending for disposal before the hon'ble court (Refer : The Assessing Officer's letter dated June 18, 2012 to the Departmental representative) 13. Let us now analyse the case laws relied on by the Revenue as under : (1) Om NamahShivay Builders & Developers (supra) :
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 22 - After analysing the issue in detail, the hon'ble Mumbai Tribunal ([2011] 43 SOT 397) had concluded its findings as under : "(On page 2) When upon retirement of a partner from partnership of two partners, the assets were taken over by one partner who continued the business as a proprietor, there was a dissolution of the firm and therefore, the difference between the fair market value of the assets and the book value in the books of the firm was assessable as capital gains in the hands of the firm in terms of section 45(4)." We have, with due respects, perused the findings of the hon'ble Bench and of the considered view that it has no relevance to the issue under consideration. In that case, consequent on the retirement of a partner from the partnership of two partners, the assets were taken over by another partner who continued the business as a sole proprietor and, thus, there was a dissolution of the erstwhile firm whereas in the case under consideration, there was no dissolution of the firm, but, conversion of the firm into a company. Thus, we are of the considered view that the case law relied on by the Revenue cannot come to its rescue. (2) Goel Udyog (supra) : The finding of the hon'ble Tribunal of Delhi "C" Bench is not applicable to the issue under consideration in the sense that in that case, on dissolution of firm and distribution of assets to partner excess of market value over book value with regard to land and building and plant and machinery has to be assessed as capital gain as per section 45(4). However, the issue before us, as already mentioned, is on a different footing and, thus, the case law quoted by the learned Departmental representative is clearly distinguishable. 14. Taking into account all the facts and circumstances of the issue as deliberated upon in the foregoing paragraphs, we are of the considered view that the Commissioner of Income-tax (Appeals) was justified in deleting the addition of Rs. 92,07,817 made by the Assessing Officer under the head "Capital gains". It is ordered accordingly. 15. In the result, the appeal of the Revenue is dismissed.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 23 - It was further held in the matter of Gulabdas Printers by the Co-ordinate Bench that where the firm becomes Limited Company under Part – IX of the Companies Act, 1956, Section 45(4) is not attracted as very first condition of transfer by way of distribution of capital assets is not satisfied.
We have further considered the judgment passed by the Co-ordinate Bench in the matter of Well Pack Packaging where again the same ratio has been laid down. In the said judgment, it was held that when transfer took place from the firm to the Company the assets were transferred for which consideration was paid by the Company by allotment of shares to the erstwhile partners of the firm. Therefore, the revenue could tax only the erstwhile transfer as the AOP or BOI and not the firm.
Taking into consideration the entire aspect of the matter, the observation made by the Learned AO and the Learned CIT(A), the submission made by the Learned AR and the case made out by the Revenue and particularly upon considering the judgments cited by the Learned AR appearing for the assessee, We find that the only event took place during the year under consideration i.e. January 2011 is “revaluation of land” and on 01.04.2011 “conversion of firm into company” took place i.e. A.Y. 2012-13, the subsequent year. The Learned AO treated the “revaluation of assets” and brought to tax but such “revaluation of assets” cannot be treated as “transfer” within the meaning of section 2(47) of the Act. In that view of the matter, the very footing of the Learned AO is incorrect since “conversion from firm to company” took place in A.Y. 2012-13 and not in A.Y. 2011-12. Charging of capital gain, therefore, is thus totally unjustified. The further contention of the Learned AO that the capital gain
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 24 - arose on distribution of assets i.e. land to the partners by the assessee’s firm due to revaluation of assets and thereby subsequent allotment of shares to the erstwhile partners is sought to be evaded against the provision and intent of the law is not correct. We would like to mention that when a firm is converted into company under Part – XI, properties of the erstwhile firm vest in the company. The difference between “vesting of property” and “distributions of property” as discussed above does not permit section 45(4) of the Act to be invoked. In the instant case, since there was no sale or conveyance from the firm to the company, the partner’s capital has not increased on account of sale on capital asset but it is only on account of revaluation of asset. The capital has been increased because of such conversion. The properties of the partnership firm have been vested with the company where all the assets and liability of the erstwhile firm also vested with the present company. We find no justification to hold that there was any transfer of asset and thus question of liability to pay tax on capital gain on the appellant firm does not and cannot arise at all. We find no infirmity in the order passed by the Learned CIT(A) which is in consequence with the ratio laid down by the Co-ordinate Bench in the judgment as discussed above so as to warrant interference. The question is thus answered in the affirmative i.e. in favour of the assessee and against the Revenue. Consequently, the appeal fails and is accordingly dismissed.
Ground No.2 and 3 The issues raised by the revenue in ground Nos. 2 & 3 are either general or consequential in nature. Therefore no separate adjudication is required. Therefore, the grounds raised by the Revenue are dismissed.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 25 - Cross Objection No.271/Ahd/2014 for A.Y. 2011-12 8. The assessee has filed this Cross Objection with the following ground: “1. The learned CIT(A) has erred in law and on facts of the case in confirming the disallowance of Rs.4,01,147/- made u/s 14A of the Act by invoking provisions of Rule 8D of the Income-tax Rules without appreciating the fact that appellant has not made investment out of interest bearing funds. 2. The learned CIT(A) has erred in law and on facts of the case in confirming the ad hoc disallowance of Rs.2,24,276/- being 1/5th of total expenses o: telephone, mobile, insurance, petrol/diesel, vehicle repair and maintenance, interest on car loan and depreciation on account of personal usage. 3. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 5. The learned CIT(A) has erred in law and on facts of the case in confirming action of ld. AO in initiating penalty proceedings u/s 271(1)(c) of the Act.
The appellant craves leave to add, amend, edit, delete, change or modify all or any of the ground before or at the time of hearing.”
Ground No.1 The assessee in the instant Cross Objection challenged the confirmation of disallowance of Rs.4,01,147/- made by the Learned CIT(A) u/s 14A r.w.r 8D of the Income Tax Rules which, according to the assessee has been ordered without appreciating the fact that the appellant has not made investment out of the interest bearing funds.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 26 -
During the assessment proceeding, upon verification of the books and accounts and the details filed by the assessee, it was found by the Assessing Officer that the assessee has invested Rs.2,60,00,000/- in Reliance Liquid Fund and also earned dividend income of Rs.2,09,251/-. The Learned AO took a view that borrowed funds were utilized for making such investment yielding exempt income and therefore disallowance of Rs.4,01,147/- as worked out u/s 14A r.w.r. 8D of the Act was made, which was, in turn, confirmed by the Learned CIT(A). Hence, the instant appeal.
It is the case of the assessee that such investment in question was made out of the credit balance available with the assessee in the cash credit account details whereof has been annexed with the Paper Book, available at Page 13 to 16 of the same. Since no interest was charged by the Bank in case of such credit balance in cash credit accounts, such funds cannot be treated as “borrowed funds”. Further that, since there is no “opening balance” or “closing balance” of investment, disallowance under Rule 8D(ii) & 8D(iii) is not permissible as the case made out by the assessee both before the authorities below and before us as well. Apart from that, there is no direct expenditure incurred for such earning exempt income which can at all call for disallowance in terms of Rule 8D. The Learned assessee’s Counsel also made an alternative arguments to this effect that disallowance, if any, under Rule 8D is to be made, the same cannot exceed exempt income i.e. Rs.2,09,251/- as the admitted dividend income of the assessee. He relied upon the judgment passed in the matter of Madhusudan Industries Ltd.-vs-ITO reported in ITA No.1715/Ahd/2011 for A.Y. 2007-08; copy whereof has also been submitted
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 27 - before us. On the other hand, the Learned DR relied upon the order passed by the authorities below.
Heard the respective parties, perused the relevant materials available on record and the submissions rendered by the Learned AR in support of his case. It is a settled principle of law that when there is no expenditure incurred for earning exempt income Rule 8D is generally not permissible. However, we accept the alternative arguments advanced by the Learned Counsel. We have also taken into consideration the judgment passed by the Co-ordinate Bench where disallowance has been made on interest expenditure and on administrative expenses but the same is restricted to the dividend income of Rs.33,445/-. The relevant portion of the said judgment is as follows:
“5. As regards the disallowance made out of administrative expenses of Rs.76,566/-, the CIT(A) held it to be fair and reasonable and confirmed the same. 6. Before us, the only arguments of the AR of the assessee was that the disallowance under section 14A of the Act should not exceed the exempt income. On the other hand, DR supported the orders of the lower authorities. 7. We have heard rival submissions and perused the orders of lower authorities, and material available on record. The undisputed facts of the case are that the assessee earned exempt dividend income of Rs.33,445/-. The AO observed that the assessee must have made expenditure for earning the exempt income, and made disallowance of Rs.2,27,328/- out of total interest expenditure claimed by the assessee, and also made disallowance of administrative expenses of Rs.76,566/- thereby making a total disallowance of Rs.3,03,894/- under section 14A of the Act. This was confirmed in appeal by the CIT(A). 8. Only contention of the assessee is that the disallowance made should not exceed the exempt dividend income of Rs.33,445/-.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 28 - 9. We find force in the contention of the assessee. Recently, Mumbai Bench of the Tribunal in the case of Daga Global Chemicals P. Ltd. Vs. DCIT vide its order dated 1.1.2015 passed in ITA No.5592/Mum/2012 held that disallowance under section 14A read with Rule. 8D cannot exceed the exempt income. Respectfully following the same, we direct the AO to restrict the disallowance on account of interest and administrative expenses to Rs.33,446/-. Thus, the grounds of the appeal of the assessee are partly allowed. 10. In the result, the appeal of the assessee is partly allowed.” Respectfully relying upon the judgment, we restrict the disallowance to the tune of Rs.2,09,251/- i.e. dividend income earned by the assessee before us which is exempted from tax. Thus this ground of appeal filed by the assessee is allowed.
Ground No.2 The assessee has challenged ad hoc disallowance of Rs.2,24,276/- being 1/5th of total expenses of telephone, mobile, insurance, vehicle, repair and maintenance, interest on car loan and depreciation on account of personal use.
Such addition was confirmed by the Learned CIT(A). It was the case of the assessee before the Learned Assessing Officer that such expenditure was incurred wholly and exclusively for the business purpose of the assessee. There was no element of personal use.
At the time of hearing of the instant appeal, the Learned AR also submitted before us that such addition has been made merely on the basis of surmise or conjecture that such expenses must have been incurred for personal use. Hence, the addition deserves to be deleted. In the alternate, he has also
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 29 - prays for some token disallowance if the Hon’ble Tribunal thinks it fit and proper for the ends of justice. On the contrary, the Learned DR relied upon the order passed by the authorities below.
We have heard the respective parties, we have also perused the relevant materials available on record. It appears from the records that the insurance expenses and medi-claim expenses of Rs.13,779/- was agreed to be disallowed by the assessee since the same were personal in nature but rest of the expenses could not be ascertained whether those were personal or business purposes. In that view of the matter, the Learned AO 1/5th out of the mixed expenses of Rs.10,52,487/- being personal and business expenses, disallowed Rs.2,10,497/- which was again confirmed by the Learned CIT(A). It appears from the records that various expenses such as mobile and telephone expenses, car loan, vehicle repair and maintenance has been claimed as expenses in the Profit and Loss account. Details of the entire expenses were also placed before the authorities below. The agreement of the assessee with the expenses of insurance includes the medical expenses of Rs.13,779/- to be disallowed reveals the good conduct of the assessee. Apart from that, the expenses which has been discussed above for running a company are necessary expenses which sometimes difficult to be ascertained whether any personal expenses element is available or not. However, taking into consideration the entire gamut of the matter it seems that the assessee’s pleas are genuine taking into consideration the details submitted by the assessee before the authorities below and before us as well. We are thus restrict such disallowance to 20% of the disallowance made by the authorities below which is calculated at Rs.44,854/-. The assessee’sCross Objection is thus partly allowed.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 30 -
Ground No.3 to 5The issues raised by the Assessee in ground Nos. 3 to 5 are either general or consequential in nature. Therefore no separate adjudication is required. Therefore, the grounds raised by the assessee in his cross objection are dismissed.
ITA No.2945/Ahd/2015 for A.Y. 2008-09 16. The instant appeal has been filed by the assessee with the following grounds: “1. The ld. CIT(A) has erred in law and on the facts of the case in disallowing Rs.20,08,977/- on the account of commission byholding that activities done by the agent on 'behalf of the appellant do not fall within the ambit of "services" so as to make the claim of commission eligible for deduction u/s 37 of the Act.
Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
The Ld. CIT(A) has erred in law and in facts of the case in confirming action of Ld. AO in levying interest u/s 234A/B/C/D of the Act. 4. The Ld. CIT(A) has erred in law and on the facts in confirming the action of Ld. AO in initiating penalty u/s 271(1)(c) of the Act.
The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 31 - Ground No.1 The order confirming addition of Rs.20,08,977/- made on 17. account of commission has been challenged by the assessee before us.
During the course of assessment proceeding under section 263, it was noticed that the assessee made commission payment to two parties namely Basic Wing Energy Pvt. Ltd. and Shri Upendrasingh D. Darbar. In terms of the direction passed by the Learned CIT(A) to examine the genuineness of such commission a notice dated 11.04.2013 was issued by the Learned AO requesting the assessee to justify the payment of commission along with details of services received with supporting evidence. However, the assessee has not been able to submit the copy of the agreement with the commission agent and ultimately the Learned AO in the absence of any reply received from the said two parties disallowed the claim of commission payment made by the assessee to the tune of Rs.20,08,977/-. In appeal before the Learned CIT(A) the assessee submitted as follows: “8.1 During the course of the assessment proceedings, it was observed by the ld. AO that the Appellant has claimed commission expenditure to two parties viz., Basic Wind Energy Pvt. Ltd. and Shri Upendrasingh D Darbar. The Id. AO asked the Appellant to prove the genuineness of the said expenditure. The Appellant vide reply dated 25/04/2013 submitted ledger account alongwith debit notes issued by the recipient of commission. The Appellant also furnished the details of the parties to whom sale have been made through these commission agents. The ld. AO rejected the submission of the Appellant on the ground that no agreement with commission agent has been submitted by the Appellant. The ld. AO further observed that letters to commission agents were issued, however, no response have been received by him. Accordingly, the ld. AO held that commission of Rs.14,33,731/- and Rs.5,75,246/- totaling to Rs.20,08,977/- paid to both the parties to be non-genuine and hence he disallowed the same.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 32 - 8.2 The Appellant has placed on record following details / information regarding the commission paid to the commission agents :
(a) Debit Note -cum- Confirmation of Basic Wind Energy Pvt. Ltd. including details of PA No., name and confirmation -cum - ledger account of parties to whom sales have been made through it (pl. refer pg. nos. 42-49 of P/B);.and (b) Debit Note -cum- Confirmation of Shri Upendrasingh D. Darbar including details of PA No., name and confirmation - cum - ledger account of party to whom sales have been made through it (pl. refer pg. nos. 50-52 P/B).
8.3 The Appellant would like to submit that the Appellant has placed on record various evidences as mentioned above to establish that in consideration to the services provided by the commission agents for procuring orders from various customers, the Appellant has paid commission. It is submitted that the as per the mutual terms and conditions of the Appellant and the commission agents, they were to provide the information of potential customers as well as to solicit the order. The commission agents were also required to provide any other information, report or statement of account of the customers as desired by the Appellant from time to time. Thus, in view of aforesaid discussions, .it can be safely concluded that the commission agents have rendered services within its scope as per arrangement with the Appellant. In real business situations the businessmen can get the business by advertisement and publicity, through reference of specific customers or through professional liaison agencies. In the present case, the Appellant has adopted the policy of furthering its business interests by getting business through reference or introduction also and paying incentives for this purpose then there is nothing wrong in this approach because such practice is prevalent in all trade/industrial and commercial activities. A satisfied customer or social contact can bring business more effectively as compared to own marketing efforts. It is also a fact that a person may help other person once or twice without any monetary consideration but when some interest is created then more focused efforts are made, however, generally no direct evidence can be produced and the "relationship of the services rendered and
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 33 - business purpose has to be established only by circumstantial evidence and growth in business in such cases. It is also in the common knowledge that even medical professionals get referral commission from the hospitals for referring clients to such hospitals without having formal agreement with such institutions. Be that as it may, this much is clear that the Commission Agents have introduced the Appellant to the customers in connection with the sale of products of the appellant. That itself would be a service rendered by Agency for the purposes of the Appellant's business. It is further submitted that it is not necessary that the Appellant should have entered into written agreement only, mutual understanding is a/so sufficient. For the above propositions, reliance is placed on following authorities:
• Pennzol Investment & Trading Co. (P.) Ltd, vs. ACIT 49 ITD 534 (Hyd.) XXX... • JCITVs Concept Communication Ltd. 9 SOT 75 (Mum.) XXX... • Swastic Textile Co.(P) Ltd, vs CIT 150 ITR 155 (Guj.) XXX... • CIT Vs Hewitt Robins (New York) 141 ITR 278 (Cal.) XXX... • ITO Vs Shakti Cables 50 Taxman 329 (Del.) XXX... • Ciba Dyes Ltd, vs CIT 25 ITR 102 (Bom.) • CITVs Ishwarprakash& Bros. 159 ITR 843
8.4 In view of above made factual and legal submissions, it is submitted that the Appellant has placed each and every evidences to establish that the commission agents has provided services to the Appellant and therefore, the commission expenditure is genuine and not fictitious as alleged by the Id. AO. The Appellant has also placed reliance on various authorities, who have taken a view that even introduction of the customers to the assesses is itself the provisions of services and therefore the consideration paid thereto cannot be negated or disallowed merely on the ground that there was no written agreement or reply wasnot received from the said commission agents. Insofar as the observation of the ld. AO that the said commission agents have not replied to the notices issued by him is concerned, it is most respectfully submitted that merely because they could not reply to the notice issued by the ld. AO the expenditure claimed by the Appellant would not become non-genuine. It is further submitted that the Appellant was never informed that the said commission agents have not replied to the notice issued to them by the ld. AO. Had it been the case, the appellant
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 34 - was informed about the same, the Appellant could have made attempt to ask them to furnish reply to the ld AO. Therefore, the Appellant submits that the disallowance made by the ld. AO is required to be deleted and accordingly the commission expenditure claimed should be allowed to the Appellant.
8.5 In view of above made submission, it is submitted to your honour to delete the disallowance made by the ld AO and allow the commission expenditure as claimed by the Appellant.”
In appeal, we find that the Learned CIT(A) has not found the order passed by the Learned AO justified. According to the Learned CIT(A) merely because the agreement was not submitted by the assessee or no reply has been rendered by the Commission agent the Assessing Officer should not held against the assessee. But the Learned CIT(A) confirmed the impugned disallowance on the count that the only service rendered by commission agents was that of introducing potential customers to the appellant which does not fall within the ambit of “service” so as to make claim of commission eligible for deduction u/s 37. The Learned AR at the time of hearing of the instant appeal relied upon number of judgments including Suzlon Energy Ltd.-vs-DCIT reported in 20 ITR(T) 391 (Ahd) and Gujarat High Court Swastic Textile Co. (P.) Ltd.-vs-CIT reported in (1984) 150 ITR 155 (Guj) which speaks otherwise.
We have carefully considered the judgment as cited above. It is a settled principle of law that commission paid to persons for referring names of customers is allowable u/s 37 of the Act for introducing potential customers to the assessee falls within the ambit of service. We thus find the order passed by the Learned CIT(A) not incoherence with ratio laid down by the judgment as
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 35 - cited above. We thus delete the addition. In the result, assessee’s appeal is allowed.
Ground No.2 to 4 The issues raised by the assessee in ground Nos. 2 to 4 are either general or consequential in nature. Therefore, no separate adjudication is required. Thus, the grounds raised by the assessee are dismissed.
ITA No.3055/Ahd/2015 for A.Y. 2008-09 20. The revenue has challenged the order impugned with the following grounds: “1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,11,26,463/- made on account of difference in job work. 2. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.62,93,378/- made on account of under valuation of closing stock. The addition was made on account of clear provisions of Section 145A for including tax, duty, cess, etc. 3. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,25,530/- made u/s.40a(2)(B) of the Act and not consider that the assessee has not prove the nexus between interest free and interest bearing funds. 4. On the facts and circumstances of the case, the Ld. Commissioner of Income Tax(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. Commissioner of Income Tax(A) may be set-aside and that of the Assessing Officer be restored.”
Ground No.1 relates to the deletion of addition of Rs.2,11,26,463/- made on account of difference in job work receipts.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 36 - 22. The assessee filed its return of income on 05.09.2008 declaring total income at Rs.1,10,63,150/- followed by revised return on 23.01.2009 without changing the amount of income. Under scrutiny such income was accepted by the Learned AO u/s 143(3) of the Act. Subsequently, a notice u/s 263(3) of the Act was issued by the Learned CIT-III, Ahmedabad which upon examination of 8 issues culminated into a final order dated 15.03.2013 forming an opinion that the Assessing Officer did not examine and applied his mind resulting into an erroneous assessment order, prejudicial to the interest of Revenue. The Assessing Officer, therefore, was directed to examine all the 8 issues afresh after giving opportunity of being heard to the assessee. During such course of proceeding u/s 263 of the Act, it was found that the assessee disclosed job work receipt of Rs.3,54,04,388/- whereas, the total job work receipts as per Form No.26AS were of Rs.5,65,30,851/-. Since there was difference of Rs.2,11,26,463/- in the job work income found by the Assessing Officer, the assessee was requested to submit the reconciliation and explain the reason for such difference. The assessee clarified that as per chart enclosed to the letter dated 25.09.2013 the total receipts as per the TDS certificate were Rs.5,70,47,656/-. Certain parties to whom sales have been made by the assessee TDS whereon was deducted on sales by them. The ledger account of those parties to whom sales have been made and the details of TDS deducted thereon by the parties were also furnished before the Learned AO by the assessee. The job work receipts was shown at Rs.3,54,04,388/- in P&L Account while Rs.2,16,43,268/- have been account for in sales during the year under consideration. It was further contended by the assessee that the basis of valuation of closing stock was at cost of the books of accounts. The Excise and VAT have been deducted in the valuation of closing stock because the firm has
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 37 - taken Cenvat credit of excise and VAT and therefore the cost value of the goods Rs.6,66,004/- have been considered while valuing the closing stock. However, such plea of the assessee was not accepted by the Learned AO and finally an amount of Rs.2,11,26,463/- was disallowed being the different account treating the same as undisclosed income of the assessee.
At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that merely the payees have deducted tax at source on the amount due towards sales consideration would not change from character of the transaction. When the assessee has no control over the payees addition ought not to have been done on that count by the Learned AO. Taking into consideration this particular aspect of the matter, Learned CIT(A) rightly deleted the impugned addition as also submitted by the Learned AR before us. On the contrary the Learned Representative of the Department relied upon the order passed by the Assessing Officer.
We have heard the rival submissions; we have also perused the relevant materials available on records. It appears from the records that while dealing with the issue and finalizing the same in favour of the assessee, the Learned CIT(A) observed as follows: 3.3 Decision: I have considered the facts of the case and the submissions of the appellant.The Assessing Officer has made the impugned addition of Rs.2,11,26,463/-on the count that appellant had disclosed job-work receipts at Rs.3,54,04,388/- whereas total receipts from job-work as per Form 26AS were Rs.5,65,30,851/-. The appellant had furnished reconciliation statement during the course of hearing completely reconciling the aforesaid difference of Rs.2,11,26,463/-. From the said reconciliation statement, it is apparent that such differential sum of
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 38 - Rs.2,11,26,463/- has been credited in the Profit & Loss a/c under the head "Sales". However, the concerned parties, while releasing payments, treated such sum as job-work charges and deducted tax thereon which is duly reflected in Form 26AS. Owing to that, job-work receipts as per Form 25AS exceeds job-work receipts as per P&L a/c by such differential sum.Itisnota case of where such differential sum of Rs.2,11,26,453;- has not been reflected in books of accounts at all. The fact is that the appellant has disclosed sum of Rs.3,54,04,388/- as job-work receipts and the balance sum of Rs.2,11,26,463/- has been disclosed as a part of sales. The mere fact that the concerned parties erroneously deducted tax at source on such differential sum cannot change the very nomenclature of such receipts from sales to job-work receipts. Since the said sum has been duly credited to Profit & Loss a/c as a part of sales, the accounting treatment becomes revenue neutral and hence, question of making addition in respect of the same doesn't hold any water. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC) has held that, "what is necessary is to be considered is the true nature of income." Therefore, the department has to assess the true income emanating from real character of the transaction involved. In any case, if the impugned addition is sustained, then equivalent amount needs to be reduced from sales so as to avoid double taxation of such sum of Rs.2,11,26,463/- which, in my opinion, shall be an exercise in futility. In light of the above, the impugned addition is hereby deleted. This ground of appeal is, therefore, allowed.”
It appears that the Learned CIT(A) was of the opinion that the balance sum of Rs.2,11,26,463/- has been disclosed as the part of the sales which has been credited to P&L Account, the account has become revenue neutral and thus, the question of making addition does not arise. He also relied upon the ratio laid down by the Hon’ble Apex Court in the matter of Kedarnath Jute Mfg. Co. Ltd.-vs-CIT reported in 82 ITR 363 (SC) where it was held that what is necessary is to be considered as the true nature of income. In that view of the matter, the true income emanating from real character of the transaction is to be looked into. On that basis, the Learned CIT(A) also clarifies the position
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 39 - that in the event the addition is to be sustained same amount requires to be reduced from sales so as to avoid double taxation he thus deleted the addition. The clarification so given by the CIT(A) is according to us just and proper and without any infirmity the same is confirmed. The revenue’s appeal is dismissed.
Ground No.2 relates to deletion of addition of Rs.62,93,378/- made on 25. account of under valuation of closing stock u/s 145A of the Act.
During the course of assessment proceeding, the Learned AO found that the assessee company is following exclusive method of accounting for valuing inventory of goods. It was the observation of the Learned AO that the assessee had added the said amount of Rs.6,66,004/- to the closing stock for an invoice amounting to Rs.8,01,763/- undervalued the closing stock. In response thereof it was submitted that the valuation of closing stock has been taken at cost in the books of accounts. The appellant has not added VAT or Cenvat to closing stock as it is not any income or expenses and that the assets and liabilities are shown in the balance sheet and have not been considered in opening stock, purchase sales and closing stock. An amount of Rs.1,35,759/- towards VAT and excise duty was deducted from the total value of goods of Rs.8,01,763/- and Rs.6,66,004/- has been added to the closing stock. According to the Learned AO as per the provision of section 145A of the Act amount of excise duty and VAT is to be added to the closing stock. Finally Rs.62,93,378/- has been calculated as the amount of VAT and excise duty by the Learned AO thereby holding the closing stock undervalued; the same was added to the
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 40 - income of the assessee. In appeal, the Learned CIT(A) disallowed the same. Hence, the instant appeal before us.
At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that the Learned AO failed to appreciate the very basic fact. It is mandatory for an assessee to follow “exclusive method” of accounting for valuation of inventories in the light of AS-2 on “Valuation of Inventories” issued by ICAI. But in terms of Section 145A, and assessee is to follow “inclusive method” of accounting. Since there is no impact of profitability whether an assessee follows “exclusive method” or “inclusive method” no addition is called for u/s 145A of the Act. The Learned ARalso relied upon the judgment passed by the Co-ordinate Bench in the matter of PCIT-vs-Mamta Brampton Engg. P. Ltd. reported in ITA No.2387/Ahd/2013 as also in the matter of DCIT-vs-AIA Engineering Ltd. in ITA No.1122/Ahd/2015 which were passed in favour of the assessee in identical issue. A copy of each of the judgments has been submitted before us. He, thus prayed for confirmation of the order passed by the Learned CIT(A). The Learned DR, on the other hand, relied upon the order passed by the Learned AO.
Heard the respective parties, perused the relevant materials available on record. We have also perused the relevant judgments in the matter of DCIT-vs- AIA Engineering Ltd. reported in ITA No.1122/Ahd/2015; the relevant portion whereof is as follows: “3. At the time of hearing before us, learned representatives fairly agree that the above grievance is covered, in favour of the assessee, by the decision dated 31.08.2016 of the Co-ordinate Bench of this Tribunal
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 41 - in the case of ITO vs. Mamata Brampton Engg. Pvt. Ltd. in ITA No.2387/Ahd/2013 for assessment year 2008-09 wherein the Tribunal has, inter alia, observed as follows:-
“5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to the addition of unutilised CENVAT credit to the closing stock. We find that the ld.CIT(A) while deciding the issue in favour of ITA No. 1122/Ahd/2015 DCIT vs. AIA Engineering Ltd Assessment year: 2006-07 Page 2 of 2 assessee has given a finding that assessee is following exclusive method of accounting whereby the excise duty is not included in the valuation of stock and raw-materials as the excise duty paid and collected is not made part and parcel of the Profit & Loss A/c. He has further given a finding that assessee has complied with the provisions of section 145A of the Act and the effect of including excise duty in valuation of closing stock does not affect the profit and is Revenue neutral. He has further relied on the decision of Hon'ble Gujarat High Court in the case of Narmada Chematur Petrochemicals Ltd.(supra). Before us, Revenue has neither controverted the finding of ld.CIT(A) nor has placed any contrary binding decision in its support. We further find that the Hon'ble Apex Court in the case of Indo Nippo Chemicals (2003) 261 ITR 375 has held that unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. In view of the aforesaid facts, we find no reason to interfere with the order of the ld.CIT(A). Thus, this ground of Revenue is dismissed.”
We see no reason to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we see no reasons to interfere in the conclusions arrived at by the ld. CIT(A). Accordingly, we confirm the order of the learned CIT(A) and dismiss the appeal of the Revenue.
In the result, appeal of the Revenue is dismissed. Pronounced in the open court today on the 26th day of September, 2017.”
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 42 - We have further considered the judgment passed in the matter of ITO- vs-Mamata Brampton Engg. Pvt. Ltd. reported in ITA No.2387/Ahd/2013. The relevant portion whereof is as follows: “4.1. Before us, ld.Sr.DR supported the order of A.O. Ld.AR on the other hand reiterated the submissions made before the AO and ld.CIT(A) ITA No.2387/Ahd/2013 ITO vs. Mamata Brampton Engg.Pvt.Ltd. Asst.Year – 2008-09 - 7 - and further submitted that the ld.CIT(A) while deleting the addition has relied on the decision of Hon’ble Gujarat High Court in the case of Narmada Chematur Petrochemicals Ltd. (327 ITR 369). He further submitted that there are various decisions of similar issues where the Coordinate Bench of Tribunal (ITAT “D” Bench Ahmedabad) has decided the issue in favour of assessee. He placed on record the copy of the decision in the case of M/s.GH Industries vs. ACIT passed in ITA No.2613/Ahd/2011 for AY 2008-09, dated 12/02/2016. He thus supported the order of ld.CIT(A).
We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The issue in the present case is with respect to the addition of unutilised CENVAT credit to the closing stock. We find that the ld.CIT(A) while deciding the issue in favour of assessee has given a finding that assessee is following exclusive method of accounting whereby the excise duty is not included in the valuation of stock and raw-materials as the excise duty paid and collected is not made part and parcel of the Profit & Loss A/c. He has further given a finding that assessee has complied with the provisions of section 145A of the Act and the effect of including excise duty in valuation of closing stock does not affect the profit and is Revenue neutral. He has further relied on the decision of Hon’ble Gujarat High Court in the case of Narmada Chematur Petrochemicals ITA No.2387/Ahd/2013 ITO vs. Mamata Brampton Engg.Pvt.Ltd. Asst.Year – 2008-09 - 8 - Ltd.(supra). Before us, Revenue has neither controverted the finding of ld.CIT(A) nor has placed any contrary binding decision in its support. We further find that the Hon’ble Apex Court in the case of Indo Nippo Chemicals (2003) 261 ITR 375 has held that unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. In view of the aforesaid facts, we find no reason to interfere with the order of the ld.CIT(A). Thus, this ground of Revenue is dismissed.
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 43 -
In the result, appeal of the Revenue is dismissed.”
Since the issue is found to be consequently covered by the two judgments, we find no reason to interfere with the order passed by the Learned CIT(A) which is in coherence with the ratio laid down by the judgment passed by the Co-ordinate Bench as discussed above. The revenue’s appeal is thus found to be devoid of any merit and hence dismissed.
Ground No.3 relates to the deletion of disallowance of Rs.2,25,530/- u/s 40A(2) of the Act.
During the course of assessment proceeding u/s 263 of the Act, the Learned AO observed that the assessee paid interest @ 15% - 18% to the persons who are covered u/s 40A(2)(b) of the Act, which according to him is excessive. The assessee clarified that the fund obtained from relatives and that from others cannot be compared as the loans from Banks/others since they require security and personal guarantee from the partners. Further that, higher interest was also paid by the assessee to the other parties too. However, this submission made by the assessee was disregarded by the Learned AO holding it the rate of interest @ 12% as reasonable. The Learned AO disallowed the sum of Rs.2,25,530/- u/s 40A(2)(b) of the Act. The Learned CIT(A) deleted such addition following the order passed in assessee’s own case for A.Y. 2011- 12. On such basis, the Learned AR contended before us that since the order passed by the Learned CIT(A) in assessee’s case for A.Y. 2011-12 has not been challenged before us following the principle of consistency, the department ought not to have challenged the issue in the instant appeal. The
ITA No. 2316/Ahd/2014 & CO No.271/Ahd/2014 and ITA Nos.2954 & 3055/Ahd/2015 Vishal Engineerings And Galvanizers Asst.Years–2011-12 & 2008-09 - 44 - Learned DR failed to controvert such submission made by the Learned AR. We find substances in such submission made by the Learned AR. Taking into consideration the order passed by the Learned CIT(A) and the conduct of the Revenue in not preferring appeal in the previous A.Y.2011-12, we find no reason to interfere with the order passed by the Learned CIT(A). Hence, revenue’s appeal found to be devoid of merit and thus dismissed.
Ground No.4 & 5 The issues raised by the revenue in ground Nos. 4& 5 are either general or consequential in nature. Therefore no separate adjudication is required. Therefore, the grounds raised by the Revenue are dismissed.
In the combined result – Revenue’s appeal in ITA No.2316/Ahd/2014 is dismissed. Revenue’s appeal in ITA No.3055/Ahd/2015 is dismissed. Assessee’s Cross Objection No.271/Ahd/2014 is partly allowed. Assessee’s appeal in ITA No.2945/Ahd/2015 is partly allowed. This Order pronounced in Open Court on 25/06/2019
Sd/- Sd/- ( PRAMOD KUMAR) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 25/06/2019 PritiYadav, Sr.PS
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आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-XI & 3 Ahmedabad. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 14.06.2019 (dictation pages 25) 2. Date on which the typed draft is placed before the Dictating Member 18.06.2019 3. Other Member………………… 4. Date on which the approved draft comes to the Sr.P.S./P.S 25.06.2019 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S……. 7. Date on which the file goes to the Bench Clerk………………… 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………………………………