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1/9 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23rd DAY OF JULY , 2018 PRESENT THE HON’BLE Dr. JUSTICE VINEET KOTHARI AND
THE HON’BLE MRS JUSTICE S SUJATHA
WRIT PETITION NO.6627/2008 [T-IT]
BETWEEN:
M/s Prakash Electric Company Private Limited Opp: Post Office, Ambalpady Udupi – 576 103. (Represented by its Managing Director Surya Prakash s/o Sri Bola Poojary Aged about 54 years).
.. Petitioner
(By Mr. Chythanya K K, Advocate)
And:
The Deputy Commissioner of Income Tax Circle – 1, Udupi.
..Respondent
(By Mr Aravind K A, Advocate)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 & 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH AS FAR AS THE PETITOINER IS CONCERNED BY AN APPROPRIATE WRIT OR ORDER IN THE NATURE OF CERTIORARI OR OTHERWISE THE IMPUGNED NOTICE ISSUED UNDER SECTION
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140 ISSUED BY THE RESPONDENT TO THE PETITIONER VIDE DT.19.12.2007 ENCLOSED IN ANNEXURE ‘A’.
THIS WRIT PETITION COMING ON FOR FINAL HEARING THIS DAY, Dr. VINEET KOTHARI J., MADE THE FOLLOWING:
ORDER
Mr.Chythanya K K, Adv. for Petitioner. Mr. K V Aravind, Adv. for Respondent.
We have disposed of the connected appeals filed by the Assessee and the Revenue by our Judgment rendered today in ITA No.884/2007 c/w ITA No.60/2015 interpreting the provisions of Section 47 (xiii) Proviso (b) read with Section 47A of the Income Tax Act (For short ‘The Act’).
The relevant extract of the said Judgment dated 23.07.2018 in ITA No.884/2007 c/w ITA No.60/2015 is quoted below for ready reference:- “16. We have heard the learned counsel for both sides and given our earnest consideration to the rival submissions.
We are of the opinion that the provisions of Section 47(xiii)(b) of the Act, does
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not envisage the immediate allotment of shares in exchange of capital accounts balances of the partners of the partnership firm on or before the date of succession of business of partnership firm by the limited company. It is true that Clause (b) requires all the partners of the firm immediately before the succession to be allotted the shares in the company in the same proportion in which their capital accounts stood in the books of the firm as on the date of succession but the law does not provide for any specific time limit for such allotment of shares in favour of the erstwhile partners. The process of determining their exact balances in the capital accounts in the books of accounts of the partnership firm upon the finalization of the books of accounts of the partnership firm may take sometime and therefore, the allotment of shares at the face value or at a premium as the company may decide by passing appropriate resolutions may also take time and therefore, the condition imposed in clause (b) aforesaid has advisedly not prescribed the fixed time limit for the allotment of equity shares in favour of the partners of the erstwhile firm, whose business is succeeded by the Company.
It is not disputed before us that all the other conditions, five in number, in the said Proviso to Clause (xiii) of Section 47 except the issue raised with regard to the point of time for allotment of shares, stood satisfied in the present case, and not only all the 5 partners were allotted shares in the new company, which succeeded to the
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business of the partnership firm but their shareholding also never fell below 50% and the minimum holding period of 5 years was also maintained from the date of succession on 01.05.1999 and no other consideration except in the form of allotment of shares in the company was paid by the company to the erstwhile partners of the partnership firm. The condition of all the assets and liabilities of the firm upon succession becoming the assets and liabilities of the company was also satisfied.
Therefore, the only point raised before us is about the purported non- compliance with the condition stipulated in clause (b) of Clause (xiii) of Section 47 and effect thereof on the capital gains tax liability of the erstwhile firm or the successor- company.
We are of the opinion that the reasonable period of such process of allotment of shares by way of consideration to the partners in proportion to their capital account balance in the partnership firm has to be completed during the relevant previous year itself viz., on or before the end of the previous year of 31st March of the year, in which the succession of business by the company of erstwhile partnership firm takes place.
Providing for some period for completing the said process of allotment of shares is also reasonable and necessary because the process of allotment of shares subject to the limits of Authorized Share Capital being increased by the company and
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issue of the shares by passing necessary Resolutions and allotment of shares by the Board of Directors etc. as required under the provisions of the Companies Act may also be completed within a reasonable period.
However, the words ‘reasonable period’ cannot be stretched to cover a large period like 3 to 4 years, as it happened in the present case and the apparent reason assigned by the Assessee in the present case was that the Authorized Share Capital of the company was not increased suitably to make the allotment of these shares to the partners and the consideration for their intended allotment of shares in proportion to their share capital was credited in the ‘Shareholders Fund Account’ in the Books of Accounts maintained by the Company.
This in our opinion was not a sufficient reason or excuse to delay the process of allotment of shares of the Company in favour of the erstwhile partners to an unreasonably long period of about 3½ years. By such delay of 3 to 4 years, not only the partners were deprived of their right to receive the Dividends for this period of delay because had they been allotted these shares at the time of succession of the business or immediately thereafter, before the end of previous year on 31.03.2000 as against the succession of business on 01.05.1999, they would have become entitled to receive the Dividends for the financial year ending on 31.03.2000, but since in the present case last allotment of shares to larger extent was made
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by the Company only on 11.03.2003, they were deprived of such an opportunity for 3 years in a row.
Had it been a case of other shareholders or outside shareholders also joining the said company and the allotment process of shares could have been legally delayed for 3 years for such other persons also, in a hypothetical case, even such other shareholders would have been deprived of such Dividends from the company, if the reasons assigned by the Company that Authorized Share Capital of the company was not suitably increased was to be taken as a valid excuse, for that purpose.
Therefore, we are satisfied that on a reasonable and harmonious construction of the relevant provisions of the Act quoted above, the Company in the present case was rightly held liable for the capital gains tax liability by virtue of Section 47(A)(3) of the Act read with Section 47(xiii)(b) of the Act. We are of the opinion therefore that the learned Tribunal was justified in holding that the Assessee-company was liable to pay such capital gains tax liability instead of the partnership firm and to that extent the Assessing Authority as well as the First Appellate Authority viz., CIT(A) fell in error in affixing such liability on the partnership firm.
The provisions of Section 47A(3) of the Act are very clear in this regard and if any of the conditions laid down in Clause (a) or clause (e) of Proviso to Clause (xiii) of
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Section 47, are not complied with including the non-compliance with the conditions of clause (b) aforesaid involved in the present case, Sub-section (3) of Section 47A clearly provides for such capital gains tax liability to be fixed in the hands of successor company for the previous year in which the requirements or conditions of Clause (b) of Proviso to Clause(xiii) of Section 47 are not complied with vide Section 47A(3) of the Act, which in our view, the petitioner with the aforesaid interpretation, were not so complied with during the previous year 1999-2000 relevant to Assessment Year 2000-2001.
Therefore, we answer the aforesaid substantial question of law in favour of the Revenue and against the Assessee, by holding that the allotment of shares of the company which succeeds to the business of the partnership firm has to be complied before the end of relevant previous year in which such succession of business takes place.
Both the appeals are accordingly disposed of with no order as to costs.”
In the present Writ Petition, the reassessment proceedings were initiated against the petitioner- company for Assessment Year 2000-01 under Sections 147/148 of the Act by issuance of Notice vide Annexure
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‘A’ dated 19.12.2007 to which the Assessee filed its objections on 23.01.2008 vide Annexure ‘D’ which objections were however rejected by the Assessing Authority vide Annexure ‘B’ on 19.02.2008 and aggrieved by the same, the Assessee preferred this writ petition.
A Co-ordinate Bench of this Court had stayed the further proceedings vide order dated 28.07.2008, which interim order was extended from time to time and is still continuing.
In view of our aforesaid judgment rendered in connected ITAs as quoted above, the present writ petition is disposed of with a liberty to the assessing authority to undertake the said reassessment proceedings now and leaving it free for the Assessee to raise the objections within the parameters of interpretation given by us vide aforesaid Judgment
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quoted above before the said Assessing Authority in accordance with law. No costs.
. Sd/- JUDGE
Sd/- JUDGE
brn