INCOME TAX OFFICER 10(3)(2), MUMBAI vs. KANTILAL G. KOTECHA, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2009-10 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-17 in appeal No.CIT(A)-17/IT-124/14-15 dated 17/10/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/11/2011 by the ld. Income Tax Officer-8(2)(4), Mumbai (hereinafter referred to as ld. AO).

3.1. On reading the provisions of section 47(xiv) of the Act, it would be seen that the aforesaid section provides an exemption on transfer on succession of a proprietary concern into a company on fulfillment of the following conditions:-

1) All the assets and liabilities of the sole proprietary concern relating to business immediately before the succession becomes the assets and liabilities of the company.

2) The shareholding of the sole proprietor be not less than fifty percent of voting power for a period of five years from the date of succession.

3) For the said transfer, the sole proprietor receives only allotment of shares in the company as consideration.

3.2. However, the ld AO denied the exemption under section 47(xiv) of the Act on the following grounds:- a) The assessee has transferred self-generated goodwill of Rs. 2,29,84,701/- to the company. However, the said goodwill was never mentioned in the books of the proprietary concern. b) That section 47(xiv) of the Act only exempts transfer of assets and liabilities of the proprietary concern to the company subject to the conditions stipulated therein. That goodwill which is transferred from the assessee to the company is not covered by the exemption under section 47(xiv) of the Act. c ) The assessee got allotment of shares of Rs. 2,29,84,701/- without actually subscribing to it in any form, money or otherwise except for transferring self generated goodwill. d) The shares have to be allotted only to the extent of amount lying to the credit of the proprietor.

3.3. This action of the ld AO was upheld upto the level of tribunal on merits. Accordingly, the ld AO levied penalty u/s 271(1)( c) of the Act for filing inaccurate particulars of income read with Explanation 1 thereon.

3.4. The ld CITA observed that the proprietory concern of the assessee was carried on for the past 30 years and considerable Goodwill has been earned thereon. The ld CITA observed that merely because there was no balance mentioned towards the ‘Goodwill’ in the balance sheet of the proprietory concern, it cannot be brushed aside that there was no Goodwill at all in the said business which was in existence for 30 years. The ld CITA also appreciated the contention of the assessee that once the value of a particular item (Goodwill in the instant case) is Nil as there was no cost associated with it and is only an intangible asset , then the assessee was justified in not reflecting the same in his balance sheet. The ld CITA also observed that it is not the case of the ld AO that the valuation of Goodwill was either high or low or the method of calculation thereon was right or wrong. He observed that the ld AO had granted exemption u/s 47(xiv) of the Act to the tune of Rs 1,16,05,939/- and denied the said exemption only in respect of Goodwill portion. The ld CITA observed that the explanation given by the assessee was bonafide. The ld CITA further observed that all the information of Goodwill was provided by the assessee in the return of income and part of the Goodwill was also allowed by the ld AO. Hence it is not the case of furnishing any incorrect information in the return of income. The case of assessee is not that the valuation of Goodwill was incorrect and there is no malafide intention of the assessee in making the claim of exemption u/s 47(xiv) of the Act. The assessee was under the bonafide belief that the claim of exemption u/s 47(xiv) of the Act was allowable and part of the claim has been allowed also and all the particulars have been included in the return of income. Accordingly he deleted the penalty levied u/s 271(1)(c ) of the Act. Aggrieved, the revenue is in appeal before us.

3.5. We have heard the rival submissions and perused the materials available on record. The ld DR vehemently relied on the order of the ld AO and argued that the ld CITA had deleted the penalty on the basis of mercy ignoring the fact that the assessee had indeed furnished inaccurate particulars of income. He also placed reliance on the decision of the Hon’ble Supreme Court in the case of Mak Data reported in 358 ITR 593 (SC). Per Contra, the ld AR submitted that the tribunal had sustained the addition made towards quantum by denying the exemption u/s 47(xiv) of the Act partially to the extent of self-generated Goodwill. The assessee’s further appeal to Hon’ble Bombay High Court was dismissed at the admission stage itself and hence no substantial questions of law were even framed by the Hon’ble High Court u/s 260A(3) of the Act. The assessee’s SLP was dismissed by the Hon’ble Supreme Court. It is not in dispute that the ld AO had levied penalty on the ground that the assessee had furnished inaccurate particulars of income with regard to his claim of exemption u/s 47(xiv) of the Act. In this background, it has to be seen whether the denial of exemption u/s 47(xiv) of the Act to the extent of Goodwill which was self generated in the books of the proprietory concern, would amount to furnishing of inaccurate particulars of income. We find that the assessee had given reasonable explanation as to why there was no value reflected in his balance sheet of proprietory concern in respect of self-generated Goodwill. It is not in dispute that the assessee was in business for the past 30 years which had earned substantial Goodwill to the assessee. Even the ld AO had accepted this fact and had partially granted exemption in respect of the same u/s 47(xiv) of the Act in the assessment. The assessee also had a bonafide belief that since there was no value for the self-generated Goodwill in terms of section 55(2) of the Act, the allotment of shares for the same pursuant to conversion of proprietory concern into public limited company would also not be considered as transfer within the meaning of section 2(47) of the Act, as the computation mechanism fails in the absence of cost of the asset. Infact the ld AO had accepted the value of self-generated Goodwill to be Rs Nil. This goes to prove that there was existence of self- generated Goodwill in the hands of the proprietory concern. Hence apparently the claim of exemption u/s 47(xiv) of the Act by the assessee for the transfer of self-generated Goodwill together with the other assets and liabilities cannot be considered as wrong per se. We find from the materials available on record that all these facts were duly reflected in the return of income itself by the assessee and subsequently during the course of assessment proceedings. Ultimately it is only disallowance of claim of exemption u/s 47(xiv) of the Act made by the ld AO. All the details necessary for assessment were very much available in the return of income itself and the entire facts of proprietory concern getting converted into public limited company were made known to the department. There was no detection as such by the ld AO in this regard. We also find from the assessment order in quantum proceedings that Goodwill was indeed generated by the proprietory concern. But despite this fact, the claim of exemption u/s 47(xiv) of the Act was denied by the ld AO.

3.5.1. We find that the assessee’s case falls under Explanation 1 of section 271(1)(c ) of the Act wherein he had offered bonafide explanation narrating the entire facts before the ld AO. Moreover, it is well settled that the discharge of consideration by way of issue of shares is a valid consideration and hence for the Goodwill Portion, the assessee was allotted shares in the public limited company should have to be treated as valid consideration for the transfer of Goodwill together with other assets and liabilities. Reliance in this regard is placed on the decision of Hon’ble Kerala High Court in the case of the Commonwealth Trust India Ltd., vs. CIT reported in 306 ITR 356 (Ker).

We find from the materials available on record that the entire facts relating to the said issue and which are material to the computation of total income were duly disclosed by the assessee before the ld AO. No explanation furnished by the assessee was found to be false by the ld AO. It was only a genuine difference of opinion between assessee and the ld AO in not allowing the claim of exemption u/s 47(xiv) of the Act.

3.5.2. We find that the ld CITA had also given the finding that the explanation given by the assessee was bonafide and in that regard had observed as under which are crucial for determining the penalty dispute before us. These findings are not controverted by the revenue. The observations of the ld CITA in this regard are as under:-

“A claim of deduction can be said to be bonafide if a legally sustainable view on its allowability exists in the given facts. Such a view need not be necessarily cent percent foolproof. If chances are there that a person, properly instructed in law, can form an opinion about his deduction, then it will be considered as bonafide. A claim shall lack bonafide if the facts are manufactured to give a colour of genuineness to the deduction, or if there is not even a far flung possibility of forming a legally sustainable opinion about the deduction, either because of the facts prevailing in a particular case or because no judicial precedent in favour of allowability of such deduction or if an issue is still virgin and had not received attention of the Courts so far, then simple and plain interpretation of the provision leaves no chance to a reasonably prudent person to form an opinion that such a deduction is allowable. In simple words, the term „bonafide‟ means : in good faith or without fraud or deception and honestly as distinguished from bad faith”.

3.5.3. We find that the reliance placed by the ld DR on the decision of Hon’ble Supreme Court in the case of Mak Data reported in 358 ITR 593 (SC) is not applicable to the facts of the case as in that case, there was a survey conducted in the premises of that assessee and there was undisclosed income found and statement was recorded from the assessee wherein he had accepted to offer the same. Subsequently while filing the return, the assessee did not offer such income found during survey. Later during the assessment proceedings, when the assessee had no other option but to offer the income found during survey, he came forward before the ld AO to offer such income. In that factual matrix, the Hon’ble Supreme Court held that department is not in the business of selling peace and that assessee had to be invited with the levy of penalty. This decision is factually distinguishable with that of the assessee. In the instant case, there was absolutely no malafide on the part of the assessee in making the claim of exemption u/s 47(xiv) of the Act as could be seen from the findings rendered hereinabove. We find that the decision that would be applicable to the facts of the instant case would be the decision of Hon’ble Supreme Court in the case of Reliance Petroproducts Ltd reported in 322 ITR 158(SC) wherein it was held that when no information given in the return was found to be incorrect or inaccurate or the details supplied by the assessee was found to be factually incorrect, then primafacie, the assessee cannot be held guilty of furnishing inaccurate particulars. It may at best result in making incorrect claim in law. The Hon’ble Apex Court further observed that by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. It held that merely because a claim made by the assessee is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Accordingly, by placing reliance on the said decision of Hon’ble Supreme Court in 322 ITR 158 (SC) supra, we hold that the ld CITA had rightly deleted the penalty in respect of denial of exemption u/s 47(xiv) of the Act on self –generated Goodwill portion partially. Accordingly, we do not find any infirmity in the order of the ld CITA.

4.1. The brief facts as narrated in the order of the ld CITA are that the assessee sold a house property for a sum of Rs 2,40,00,000/- and claiming long term capital gains of Rs 2,32,12,393/- after reducing cost of acquisition. The assessee claimed deduction u/s 54 of the Act to the tune of Rs 92,80,083/-. The ld AO observed from the details filed, that purchase of new property was entered into on 26.5.2006 while original property was sold vide agreement dated 11.9.2008. Thus it was clear that purchase was outside the period stipulated in section 54 of the Act and further perusal of new property shows that it was jointly held by assessee and his wife. The ld AO relied on judicial pronouncements and CBDT Circular No. 471 dated 15.10.1986 and rejected the claim of deduction u/s 54 of the Act. The ld AO levied penalty u/s 271(1)(c ) of the Act on the same on the ground that the assessee had furnished inaccurate particulars of income.

4.2. The ld CITA deleted the penalty on both the grounds. Aggrieved, the revenue is in appeal before us.

4.3. We have heard the rival submissions. We find that with regard to claim of deduction u/s 54 of the Act, this tribunal in quantum proceedings had granted deduction u/s 54 of the Act to the extent of payments made within the prescribed limitation period i.e payments made within one year prior to the date of transfer of original property. The ld AR argued that it was a bonafide belief on the part of the assessee that since the last payment for purchase of new house was made within the prescribed limitation period by the assessee i.e within one year prior to the date of transfer , he was entitled to claim deduction u/s 54 of the Act. However, this claim was partially negated by the order of this tribunal in quantum proceedings. But this does not mean, that the assessee had furnished inaccurate particulars. It is a genuine difference of opinion on the facts already available on record between the assessee and the ld AO. There was no detection by the ld AO on any fresh facts in this regard. All the details were already available with him on record. The assessee did not have any malafide intention to furnish any inaccurate particulars thereon. Infact, the ld AO was able to justify his rejection of claim of deduction u/s 54 of the Act only from the details filed by the assessee with regard to the agreement entered for new house on 26.5.2006 and payments made thereon on various dates. Hence it is only a simple disallowance of claim of deduction u/s 54 of the Act by the ld AO. The findings given by us in respect of penalty on self-generated Goodwill hereinabove would hold good for this issue also and the same are not reiterated for the sake of brevity herein. Accordingly, we hold that the ld CITA had rightly deleted the penalty in respect of this issue.

Order pronounced in the open court on this 05/07/2019