C I T KOTA vs. M/S BHATIA AND COMPANY KOTA

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 109 / 2012 Commissioner of Income Tax, Kota ----Appellant Versus M/s Bhatia & Company (MD) 16-c, Vallabh Nagar, Kota ----Respondent _____________________________________________________ For Appellant(s) : Ms. Parinitoo Jain with Ms. Shiva Goyal For Respondent(s) : Mr. Gunjan Pathak with Ms. Ishita Rawat _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 11/09/2017 1. By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee setting aside the order passed by the CIT(A) in exercise of powers under Section 263. 2. This Court while admitting the matter framed the following questions of law:- “Whether the Tribunal was legally justified in cancelling the order passed u/s 263 by the CIT and holding that the order of the Assessing Officer was not erroneous specifically when the CIT has given a detailed finding that the order of the AO was erroneous and prejudicial to the revenue.?” 3. The brief facts of the case are that the assessee respondent is engaged in the business of trading of vehicles and spare parts as an authorized dealer for M/s Maruti Udyog Ltd. at Kota and Chitorgarh as well as a Maruti Service Station. The return of the

(2 of 10) [ITA-109/2012] income was filed on 31.10.2007 at an income of Rs. 6290/- which was processed u/s 143(1). The case was selected for scrutiny and notice was issued u/s 143(2) on 15.9.2008 which was duly served on 17.9.2008. the assessing officer accepted the return of the assessee and passed an order on 16.3.2009. The CIT held that after dissolution of the firm and conversion of it into a company the AO did not examine the issue of taxation of capital gains on dissolution of firm and conversion of it into company. The CIT was of the view that it would fall within the ambit of capital gain and it was would be transferred u/s 2(47) so the provisions of section 45(4) would come into play. Further, on other issues also the CIT held that the order of the AO was erroneous and prejudicial to the interest of the revenue. 4. Counsel for the appellant contended that while considering the matter the CIT has given notice at Annexure-2 and after considering the reply filed by the assessee, the finding given reads as under:- “I have heard the counsel and considered the written submissions and my observations are as under:- On point number I regarding taxability of capital gains on termination/dissolution of the firm & distribution of its’ assets & formation of a company by the name Bhatia Corporation Pvt. Ltd., an enhancement notice was issued to the assesee vide letter NO. 2415 dated 13.12.2010 and it was asked to show cause as to why the capital gains arising on this transfer may not be taxed u/s 45(4) r.w.s. 48 of the I.T. Act. As per this show cause notice; The first point in consideration is in regard to termination/dissolution of the firm by the name M/s Bhatia & Company on 09.04.2006 and formation of a company by the name Bhatia Corporation Pvt. Ltd. on 10.04.2006. the Assessing Officer while making the assessment

(3 of 10) [ITA-109/2012] order did not examine the issue of taxation of capital gains on termination/dissolution of the firm. Neither the copy of termination/dissolution deed of thye firm was taken on record nor was the balance sheet of the newly formed company taken on the reocrd. It was also not examined as to whether the firm revalued its assets on its termination/dissolution & formation of a company. The firm had immovable properties of substantial value and their prevailing market rates were much higher than their book value. It has been submitted before me during the course of hearing that the firm M/s Bhatia & Company was convered into a company on 10.04.2006 under the provisions of Part-9 of the Companies Act, 1956. According to section 575 of the Companies Act, 1956 on such a conversion there shall be statutory vesting of the title of the property of the erstwhile firm into the newly incorporated company without any separate conveyance deed. On this point it is to be mentioned that the AO did not apply mind at the time of framing the original assessment order, on it. First of all it is to be mentioned that when the firm was terminated/dissolved on 09.04.2006 & the company was formed on 10.04.2006, there is no question of conversion of the dissolved firm into a company formed a day later on. Even otherwise the contention of the assessee that such a conversion of firm into a company does not require any separate point of view. It may be a case of a transaction deemed to have been registered under the Registration of Propoerties Act but still it is not taking it out from the ambit of the taxation of capital gain on it because it is still a ‘transfer’ within the meaning of section 2(47) of the Income Tax Act. The definition of the term transfer in the Income Tax Act is inclusive and even the conversion of ‘personal assets’ by a proprietor into the ‘stock in trade’ of his business is a transfer under this definition. Not only this even the part performance of a contract which has the effect of only enabling the enjoyment of an immovable property is held as a transfer. Therefore, I do not agree with this contentionof the assessee. Once such a conversion of a firm into a company is not excluded from the definition of transfer u/s 2(47) of the I.T. Act 1961, the provisions of section 45 of the I.T. Act comes into play, as on every transfer of immovable property capital gains arise, and they are required to be taxed according to the provisions of this section. Under section 45(4) of

(4 of 10) [ITA-109/2012] the I.T. Act the profits and gains arising from the transfer of a capital assets by way of distrution of them on the dissolution of a firm/AOP/BOI or otherwise, shall be chargeable to tax as their income 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. IN this case admittedly the firm M/s Bhatia &

Company has existed till 09.04.2006 and then a company was formed on 10.04.2006. The assets of the firm on its termination/ dissolution on 09.04.2006 have been distributed, in the proportion of the share of the partners of the firm as per the partnership deed. This distribution has been done and the value was ascertained in monetary terms and on the next day in the newly incorporated company the shares of equivalent value were allotted to each partner. Therefore, the mischief of section 45(4) of the I.T. Act is attracted and the fair market value of the assets of the firm on the date of its termination/dissolution will be deemed to be the ‘full value of the consideration’ received as a result of transfer. The term ‘full value of consideration’ used in section 48 of the I.T. Act 1961 does not mean only from the ‘fair market value’ of the capital assets but the Income Tax Officer while determining the ‘full value of consideration’ has the express powers to take the ‘fair market value’ of the capital assets transferred as the ‘full value of consideration’ in specified circumstances. The ‘fair market value’ of a capital assets has been defined in section 2(22B) of the I.T. Act 1961 and the definition is worth mentioning here. 2[(22B) “fair market value’, in relation to a capital assets, means- i the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and ii) where the price referred to in sub-clause (I) is not ascertainable, such price as may be determined in accordance with the rules made under this Act. (Rule 11UA of the I.T. Rules for reference)” 5. It is contended that the CIT(A) has rightly decided the matter under Section 263 and directed to reconsider the case.

(5 of 10) [ITA-109/2012] The Tribunal has seriously committed an error in setting aside the order and she has relied upon the decision of Supreme Court in case of Toyota Motor Corporation vs. Commissioner of Income Tax reported in [2008] 306 ITR 0052 wherein it has been held as under:- “We are not inclined to interfere with the impugned order of the High Court. The High Court has held that the Assessing Officer had disposed the proceedings stating the penalty proceedings initiated in this case Under Section 271C read with. Section 274 of the Income Tax Act, 1961 are hereby dropped. According to the High Court, there was no basic indicated for dropping the proceedings. The Tribunal referred to certain aspects and held that the initiation of proceedings under Section 263 of the Income Tax Act, 1961 (in short, the I.T. Act) was impermissible when considered in the background of the materials purportedly placed by the assessee before the Assessing Officer. What the High Court has done is to require the Assessing Officer to pass a reasoned order. The High Court was of the view that Tribunal could not have substituted its own reasonings which were required to be recorded by the Assessing Officer. According to the assesses all relevant aspects were placed for consideration and if the officer did not record reasons, assessee can not be

faulted. 5. We do not think it necessary to interfere at this stage. It goes without saying that when the matter be taken up by the Assessing Officer on remand, it shall be his duty to take into account all the relevant aspects including the materials, if any, already placed by the assessee, and pass a

reasoned

order. 6. The appeal is dismissed with the aforesaid observations.” 6. Counsel for the respondent has taken us the order of the Tribunal wherein it has been observed as under:- “2.12. The assessee has intimated the AO regarding the fact that business of the firm has been carried on by the company vide letter dt. 24.02.09 addressed to the AO. It was explained that existing firm existed upto 9th April, 2006 and

(6 of 10) [ITA-109/2012] thereafter w.e.f. 10.04.06, it was registered as a company on 16.03.09. In the assessment order, the AO has mentioned as under:- “The assesssee firm has existed upto 09.04.2006, therefore, w.e.f. 10.04.2006, registered as a company under part IX of the Company Act, 1956 and the firm has shown its income and expenditure upto 09.04.2006 only” Thus, the AO was fully aware of the factual position and it cannot be said that AO has not made any enquiry. The assessment order of the AO cannot be presumed as erroneous on the ground that the AO has not charged capital gain because the firm has been succeeded by the company. The main objection of the ld. CIT is that the company was incorporated on 10.04.2006. Page 11 of the Memorandum of Association contains the names and address of the 07 existing partners and is mentioned that equity shares of 80.00 lacs have been divided to the partners of the firm and the date mentioned is 08.04.2006. Thus the company was incorporated to carry over the business of the firm and the company is covered under part IX of the Companies Act. Hence, we cannot hold that the assets were distributed to the partners and then they transferred the assets to the company. There has been no formal dissolution of the firm. The assets and liabilities of the firm has been taken over by the company. Thus findings of the ld. CIT on point no. 1 and 3 are vacated and it is held that the order is not erroneous. Since the ld. CIT has recorded the finding and directed the AO to charge capital gain and therefore, we feel that no purpose will be served on setting aside such issue on the file of the AO. 2.13.The ld. CIT has set aside the issue on point no. 2. the comparative chart of point no. 2 considered by the ld. CIT and the reply given to the ld. CIT is as under:- Huge claims have been allowed by AO without application of any mind & without obtaining the necessary details in respect of following:- Assessee filed detailed reply vide letter dt. 09.11.2010 AO raised query vide letter dated 03.02.2009 which is replied by assessee

(7 of 10) [ITA-109/2012] Para 2(ii) Para 2(iii) Para 2(iv) -In the absence of details of freight & cartage included in purchases, its genuiness remains unverified & applicability of provisions of sec. 40(a)(ia) is also not ascertainable. -No evidence of depositing TDS in April 07 on payment of interest of Rs.57,834/- to Maruti Co. Is available. -No quantitative details in respect of vehicles as well as spare parts have been obtained & kept on record - No interest has been charged on amt. Advanced to various concerns whereas Point No.2 Purchase do not include freight & Cartage & therefore TDS on freight payment does not arise. Point No.3 TDS was deposited on 07.04.2006 & copy of challan filed. Point No.4 Quantitative details of vehicles filed. However, quantitative details of spare parts maintained in software but could not be furnished due its large quantum. Separate trading account for spare parts for 9 days filed. Point No.5 Ledger accounts of advance filed. Interest charged on advance given to Bhatia Real Estate. Point No.6 Details of income form other sources vide letter dated 24.02.2009. Books of accounts were examined by him & returned income accepted after giving a finding that assessee has maintained proper records showing full particulars of income & expenditure

(8 of 10) [ITA-109/2012] Para 2(v) Para 2(vi) Para 2(vii) interest has been paid to banks. Further, advance to M/s Bhatia Real Estate is given who is not having any business connection with assessee - No details have been obtained & kept on record in regard to income shown from various sources & the same has been accepted without verification. - AO failed to call the details of fixed assets, Capital WIP & balance sheet of new company. filed. Same was verified by AO from books of accounts produced before him Point No.7 Details of fixed assets filed. Most fixed assets coming as opening balance from last year except for addition of Rs.1,08,876/- made during the relevant period, details of which were produced before AO. Point No. 8 All unsecured loan are old. Details of loan submitted before AO. Confirmation of loan as on 31.03.06 submitted to AO in assessment proceedings of A.Y. 06-07 AO raised query regarding unsecured loans in point no.23 which is replied by assessee in Point No 13, It was also informed vide letter dt.13.03.200 9 to ITO that confirmation of accounts of unsecured loans have

(9 of 10) [ITA-109/2012] Para 2(viii) Para 2(x) - No confirmation of unsecured loans & Sundry creditors have been called for & put on record - Copy of partnership deed not obtained All creditors are old except in case of Maruti Udhoy Ltd. From whom purchases of Rs.1,53,38,025/- made during period under consideration. Point No. 10 Partnership deed filed. already been filed. AO raised query regarding sundry creditors in point No. 10, 13 & 22 which is replied by assessee in Point No.9. Para 2(ix) Assessee firm failed to explain the amount of Rs.28,990/- in the suspense account & therefore it is to be The amount of Rs.28,990/- in suspense account (Sundry creditors at Chittorgarh – is AO raised query regarding sundry creditors

(10 of 10) [ITA-109/2012] treated as income of the assessee firm for the year under consideration coming from last 2-3 years for the reason that some parties have directly deposited the amount in the firm's bank account & in the absence of their particulars, necessary entries could not be made in the books of firm. The same was explained to CIT vide latter dt. 09.11.2010 & 30.12.2010 in response to show cause notice dt. 07.10.10 & 13.12.2010 respectively. Copy of ledger of suspense account also given vide letter dt. 09.11.2010. vide letter dated 03.02.2009 in point no. 10 & 13 which is replied by assessee vide letter dated 24.02.2009 in point no.9 7. Taking into consideration the partnership firm was taken over by the company and taking into account the provisions of law, the ITAT has rightly observed as stated hereinabove. 8. In view of the observations in 2014, we are in complete agreement with the view taken by the Tribunal, the notice under 263 was not properly issued therefore, the issue is required to be answered in favour of the assessee against the department. 9. The appeal stands dismissed. (VIJAY KUMAR VYAS)J. (K.S. JHAVERI),J. A.Sharma/47