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Before: Shri H.S. Sindhu & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order dated 13.10.2015 of ld. CIT(A)-17, New Delhi on the following solitary grounds :
“1. On the facts and in the circumstances of the case ad in law the order passed by Ld. CIT(A) is erroneous and the learned CIT(A) has erred in deleting the additions of Rs.3,08,88,548 made by A.O. on account of long term capital gain since, clause (b) of the provision of section 47 (xiii) of IT Act was not fulfilled as on verification it was found that all the partner of the firm immediately before the succession did not become share holders of the company in the same proportion in which there capital accounts stood in the books of the firm on date of succession.”
The brief facts of the case are that the return of income declaring income of Rs. 81610/- was filed on 30.09.2010 . However, the assessee paid tax u/s 115JB of IT Act, 1961 on Book Profit of Rs. 2436528/-. The return was processed and subsequently selected for scrutiny and statutory notices were issued to the assessee. In the assessment proceedings, the Assessing Officer noticed that the assessee company was incorporated on 07.07.2008 and this return is the first return of the assessee. The assessee took over the business of the Firm known by the name of M/s Weld India Products w.e.f. o1.04.2009, having three partners, namely, Shri J.K, Kapoor, Smt. Simmi Kapoor W/o Shri Rajiv Kapoor and Smt. Simmi Kapoor W/o Sh. Sandeep Kapoor having their balances in capital account as on the date of taking over the business on 01.04.2009 of Rs.51,82,462.48, 41,26,585.85 and 52,86,330.69 respectively. The Assessing Officer noticed that while taking over the above business on 01.04.2009, the assets were revalued and the difference between the value as on 31.03.2009 and opening balance as on 01.04.2009 was taken to rserve & surplus account amounting to Rs.2,34,56,628/-. On being asked the assessee submitted that the capital gains arising from conversion of the firm by a company are not treated as transfer as per clause (xiii) of section 47 of the I T Act, 1961. The Assessing Officer, though agreed to the proposition explained by the assessee, but observed that it does not apply to facts of the case of the assessee, as the assessee has failed to fulfill certain conditions which have go to be satisfied to avail the benefit bestowed by this clause of section 47 of the Act for the reason the share holding allotted to each partner was not in the same proportion as it was when the transfer took place. As a matter of fact, the ratio of capital of the three partners was 35.50%, 28.28% and 36.22%, whereas 1,60,000 shares were allotted to all the three partners of the face value of Rs.10 per share in the ratio of 32% each. The Assessing Officer, therefore observed that since the basic condition is not satisfied the case of the assessee is not covered u/s 47(xiii) of I T Act, 1961 and hence any difference between the value as on 31.03.2009 and the value at which the company took these over as on 1.04.2009 is taxable in the hands of the company as given in Sub Section 3 of 47A of IT Act, 1961. He accordingly, treated the difference between the value of immovable assets, shown on 31.03.2009 and 01.04.09, amounting to Rs.3,08,88,548/- as capital gain taxable in the hands of assessee company and accordingly added the same to the income of assessee.
The assessee challenged the assessment order in appeal before the first appellate authority, who vide impugned order deleted the addition after making detailed discussion on the issue and considering various Authorities on the issue under consideration. Aggrieved, the Revenue is in appeal before us.
4. The ld. DR reiterating the ground of appeal relied on the order of the Assessing Officer and submitted that the ld. CIT(A) was not justified in deleting the addition without considering the relevant provisions of law in right perspective. He has also filed a written synopsis, which is placed on record. He, therefore, urged for sustenance of the assessment order.
5. On the other hand, the ld. AR relied on the decisions of the ld. CIT(A) and submitted that the issue under consideration is squarely covered in favour of the assessee by the decision of Co-ordinate Bench in the case of DCIT vs. M/s. P.M. Enterprises, Mumbai (ITA No.3736/Mum/2010 for A.Y. 2007-08) whereby such addition in the identical facts and circumstances have been deleted.
We have heard the submissions of both the parties and have gone through the entire material available on record and we find that the issue under consideration is squarely covered by the decision of ITAT Mumbai in the case of DCIT vs. M/s. P.M. Enterprises (supra), whereby in the identical set of facts & circumstances, the Tribunal has decided the issue in favour of the assessee and against the revenue observing as under :
After considering the rival submissions and perusing the relevant material on record, it is noticed that the assessee made out a case before the AO that no capital gain was chargeable u/s.45(4) on the ground that the transfer of assets from firm to company on its conversion could not to be considered as transfer as per sec. 47(xiii). The AO opined that the provisions of this section have not been fully satisfied. In this regard, he firstly considered the prescription of proviso (b) to sec. 47(xiii), which in his opinion was violated on the ground that the shares in the company were allotted to the partners on the basis of their fixed capital alone, thereby leaving the amount of current accounts as such. We are not inclined to accept the viewpoint of the AO for the reason that the requirement of proviso (b) is that all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital account stood in the books of the firm on the date of succession. Reference in the provision is made to the capital and not to the current accounts of the partners. The proviso cannot be extended beyond its scope for the reason that the balance in the current account of the partners keep on fluctuating and even in certain circumstances it may be negative also. If this provision is interpreted to include the balance in the current accounts of the partners also and such balance turns out to be debit, the section will become unworkable. As can be seen from the statement of the current capital account as on 31-03- 2006, the capital account of S/Shri Sameer P.Sanghvi, Sandip IM. Sanghvi and Vishal N. Sanghvi showed debit balances to the tune of Rs.12.34 lakhs, 12.11 lakhs and 14.90 lakhs respectively. If the balances of the current account are also considered as part of the capital account, then the overall balance in the capital/current accounts would require consideration, which may in certain circumstances - as is the present case also - be negative. In view of these reasons, we hold that only the balance in the capital accounts of the partners is required to be considered for allotment of shares in the company. The natural corollary which follows is that the provisions of proviso (b) to sec. 47(xiii) have not been violated by the assessee.
Coming to the other objection of the AO about the non-fulfilment of the requirements of proviso (c) to sec. 47(xiii), we find that here again the AO was not correct in holding that the partners of the assessee firm received any consideration or benefit directly or indirectly other than by way of allotment of shares in the company by reason of their receiving a sum of Rs.27.29 lakhs against their capital account. The obvious reason for the payment to the partners amounting to Rs.27.29 lakhs was the payment towards part of the current account balance of these partners to that extent. The remaining amount continued with the company as unsecured loans. The payment to the erstwhile partners out of their current accounts cannot be considered as receiving any consideration or benefit other than by way of allotment of shares. If the payment is made and simultaneously the balance in the loan account is reduced, such payment is the discharge of the liability of the company pro tanto and not granting of any benefit or consideration by the company.
6. Apart from these two major objections raised by the AO, he had not found fault in any other submission advanced on behalf of the assessee in support of the applicability of sec. 47(xiii). We have also perused copy of the Memorandum & Articles of Association of the company which is placed at page 146 onwards of the paper book. The main object of the company has been declared as :
"To acquire and take over as a going partnership firm carried on business in the name and style of M/s. P.M. ENTERPRISES together with Goodwill, Assets and Liabilities and as such, the said concern may stand dissolved".
7. The above discussion boils down that the conversion of the firm into a private limited company by transferring all the assets and liabilities together with fulfillment of other requisite conditions of section 47(xiii) did not attract the provisions of sec. 45(4) of the Act. Our view is fortified by various orders of the Tribunal taken note of by the Id. CIT(A) in the impugned order. Under these circumstances, we uphold the impugned order.
Similar issue has been decided by ITAT Ahmedabad Bench in the case of ITO vs. Alta Inter-Chem Industries, 32 Taxman.com 138 (Ahd. Trib).
Respectfully following the above decisions, we do not find any merit in the appeal of the Revenue. Accordingly, the same deserves to be dismissed.