Vishal Engineering & Galvanizers, Ahmedabad V. The Dy.CIT, Circle-6, Ahmedabad

CO 271/AHD/2014

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2158 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 17 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 25-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 08-10-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: GALVANIZERS
• Keywords: Capital asset; Depreciation; Business expenditure; Opportunity of being heard; Principle of natural justice; Earning of tax free income; Question of law; Cost of acquisition; Fair market value; Corroborative evidences; Valuation report; Reassessment proceedings; TDS; Rule 8D; Set aside
• Section: 271(1)(c); 143(3); 45(5); 14A; 143(1); 145; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT& MS. MADHUMITA ROY, JUDICIAL MEMBER SL. NO(S) ITA NO(S) ASSESSM ENT YEAR(S) APPEAL(S) BY APPELLANT VS. RESPONDENT APPELLANT RESPONDENT 1. ITA NO.2316/AHD/2014 2011-12 DCIT, CIRCLE 6, AHMEDABAD. VISHAL ENGINEERING AND GALVANIZERS, 73, BLOCK NO.404/428/429, AHWAMEGH INDUSTRIAL ESTATE, CHANGODAR, TAL: SANAND, AHMEDABAD 382 213. (PAN NO. AAEFV 9722 A) 2. CO NO.271/AHD/2014 (IN ITA NO.2316/AHD/2014) 2011-12 VISHAL ENGINEERING & GALVANIZERS. DCIT, CIRCLE 6, AHMEDABAD. 3. ITA NO.2945/AHD/2015 2008-09 --DO-- --DO-- 4. ITA NO.3055/AHD/2015 2008-09 THE ACIT CIRCLE 3(2), AHMEDABAD. VISHAL ENGINEERING & GALVANIZERS, ` APPELLANT BY : SHRI N. R. SONI, CIT-D.R. R ESPONDENTBY : SHRI TUSHAR HEMANI, A.R. DATE OF HEARING 1 2 .0 6 .2019 DATE OF PRONOUNCEMENT 25.06.2019 O R D E R 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) FO R 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.YEARS2011-12 & 2008-09 - 2 - THE OTHER TWO APPEALS FILED BY THE ASSESSEE AND REV ENUE ARE DIRECTED AGAINST THE ORDER DATED 24.08.2015 PASSED BY THE LEARNED CI T(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 O RDER. 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 DEL ETING THE DISALLOWANCE OF RS.25,46,06,987/- ON ACCOUNT OF LON G TERM CAPITAL GAIN & SHORT TERM CAPITAL GAIN OF RS.3,26,0 2,919/-. 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. 3. GROUND NO.1 RELATES TO DELETION OF DISALLOWANCE OF RS.25,46,06, 987/- ON ACCOUNT OF LONG TERM CAPITAL GAIN (LTCG) AND RS.3,2 6,02,919/- ON ACCOUNT OF SHORT TERM CAPITAL GAIN (STCG). 4. THE BRIEF FACTS LEADING TO THIS CASE IS THIS THA T THE ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURING OF TRANSMISSION TOWER S AND JOB WORK OF ENGINEERING FABRICATION AND GALVANIZING, FILED ITS RETURN OF INCOME THROUGH ELECTRONIC MEDIA ON 02.09.2011 DECLARING TOTAL INCO ME 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 ACCO UNTS 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.YEARS2011-12 & 2008-09 - 3 - ACT. A HARD COPY OF THE SAID REPORT WAS ALSO FURNIS HED 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.29,4 0,31,218/- 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 LA ND TO THE TUNE OF RS.28,87,84,000/- DUE TO ITS REVALUATION CREDITED T O 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 PE RUSAL OF THE RECORD BEFORE HIM. THE SUCCEEDING COMPANY, THEREAFTER ALLOTTED SH ARES WORTH RS.28,87,84,000/- ON ACCOUNT OF DISTRIBUTION OF CAP ITAL 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 ASSE SSEE HAS FILED A WRITTEN SUBMISSION ON 11/02/2014, CONTENTS OF WHICH ARE REP RODUCED, AS IT IS, AS UNDER:- 8. VIDE PARA 8 OF LETTER DATED 29/01/2014, IT IS T HE OBSERVATION OF YOUR GOODSELF THAT THE APPELLANT FIRM IS CONVERTED INTO PRIVATE LIMITED COMPANY UNDER PART-IX OF THE COMPANIES ACT, 1956. I T 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, T HE SHARES HAVE BEEN ALLOTTED TO THE PARTNERS. ACCORDINGLY, IT WAS THE O BSERVATION OF YOUR GOODSELF THAT IT IS NOTHING BUT THE DISTRIBUTION OF ASSETS TO THE PARTNER, AND THEREFORE, WHY CAPITAL GAIN SHOULD NOT BE LEVIE D 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.YEARS2011-12 & 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 TRANSF ER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DIS SOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE, SH ALL 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 T O 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 TH E 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. S ECTION 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 CO ST 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 CA PITAL 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 UN DER SECTION 48, THE MARKET VALUE ON THE DATE OF THE TRANSFER SHALL BE D EEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RE SULT OF THE TRANSFER. 8.4 NOW YOUR GOODSELFS OBSERVATION IS THAT ON CONV ERSION OF FIRM TO PART - IX COMPANY AND ON ALLOTMENT OF SHARES TO PAR TNERS, 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.YEARS2011-12 & 2008-09 - 5 - THE FIRM ARE DISTRIBUTED TO PARTNERS SO AS TO ATTRA CT PROVISIONS OF S.45(4) OF THE ACT. 8.5 IN THE PRESENT CASE BEFORE YOUR GOODSELF, IT I S NOT IN DISPUTE THAT THAT THE ASSESSEE-FIRM IS CONVERTED INTO COMPANY UN DER PART IX OF THE COMPANIES ACT. NOW, SECTION 45(4) CLEARLY STIPULATE S THAT THERE SHOULD BE TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSET S. UNDER PART IX OF THE COMPANIES ACT, WHEN A PARTNERSHIP FIRM IS TREATED A S A COMPANY, THE PROPERTIES OF THE ERSTWHILE FIRM VESTS IN THE COMPA NY. THE QUESTION IS WHETHER SUCH VESTING STANDS COVERED BY THE EXPRESSI ON 'TRANSFER BY WAY OFDISTRIBUTION' SECTION 45(4) OF THE ACT. THERE IS A DIFFERENCE BETWEEN VESTING OF THE PROPERTY, IN THIS CASE, IN THE COMPA NY AND DISTRIBUTION OF THE PROPERTY. ON VESTING IN THE COMPANY UNDER PART IX OF THE COMPANIES ACT, THE PROPERTIES VEST IN THE COMPANY A S 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 CON CEPTUALLY IN THE JUDGMENT OF THE SUPREME COURT IN THE CASE OFMALABAR FISHERIES CO. V. CIT [1979]120 ITR 49. THEREFORE, IT IS MOST RESPECT FULLY SUBMITTED THAT SECTION 45(4) IS NOT ATTRACTED AS THE VERY FIRST CO NDITION OF TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS IS NOT SATISF IED. IN THE CIRCUMSTANCES, THE LATTER PART OF SECTION 45(4), WH ICH REFERS TO COMPUTATION OF CAPITAL GAINS UNDER SECTION 48 BY TR EATING FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER, DOES NO T ARISE AT ALL. 8.6 THE ASSESSEE RELIES UPON THE FOLLOWING AUTHORI TIES, 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 CHAP TER IX OF THE 1956 ACT, AND CONSEQUENTLY, NO CAPITAL GAIN ARISES ON TH E SAID TRANSACTION : CIT VS. TEXSPIN ENGG. & MFG. WORKS 263 ITR 345 5. IN THIS MATTER, WE ARE CONCERNED WITH ASSESSMEN T YEAR 1996-97. SECTION 45(1) IS A CHARGING SECTION AS FAR AS CAPIT AL GAINS IS CONCERNED. UNDER SECTION 45(4), PROFITS ARISING FROM TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTIONOF CAPITAL ASSETS ON THE DISSOLU TION OF A FIRM IS CHARGEABLE TO TAX AS INCOME OF THE FIRM IN A PREVIO US 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.YEARS2011-12 & 2008-09 - 6 - TRANSFER TAKES PLACE AND FOR THE PURPOSES OF SECTIO N 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 'CAP ITAL GAINS' SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION, THE EXPENDITURE INCURRED IN CONNECTION WITH THE TRANSFE R AND THE COST OF ACQUISITION OF THE ASSET. THEREFORE, UNDER SECTION 45(4), TWO CONDITIONS ARE REQUIRED TO BE SATISFIED VIZ. TRANSFER BY WAY O F DISTRIBUTION OF CAPITAL ASSETS AND SECONDLY, SUCH TRANSFER SHOULD BE ON DIS SOLUTION OF THE FIRM OR OTHERWISE. ONCE THESE TWO CONDITIONS ARE SATISFI ED THEN, IN THAT EVENT, FOR THE -PURPOSES OF COMPUTATION OF CAPITAL GAINS U NDER SECTION 48, THE MARKET VALUE ON THE DATE OF THE TRANSFER SHALL BE D EEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RE SULT OF THE TRANSFER. NOW, ACCORDING TO THE ASSESSING OFFICER, IN THIS CA SE, ON VESTING OF THE PROPERTIES OF THE FIRM IN THE LIMITED COMPANY, THER E WAS A TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS. FURTHER, ACC ORDING TO THE ASSESSING OFFICER, ON VESTING OF THE PROPERTIES OF THE FIRM IN THE COMPANY, THERE WAS A RESULTANT DISSOLUTION OF THE F IRM. THEREFORE, ACCORDING TO THE ASSESSING OFFICER, BOTH THE CONDIT IONS UNDER SECTION 45(4) STOOD SATISFIED AND, THEREFORE, HE WAS ENTITL ED TO TAKE THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF THE TRANSF ER TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED AS A RESULT OF THE TR ANSFER. 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 CONNECTI ON, THE ASSESSING OFFICER HAS COMPUTED CAPITAL GAINS ARISING TO THE A SSESSEE-FIRM AT RS. 9 LAKHS ON THE BASIS OF THE DIFFERENCE BETWEEN THE MA RKET 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 MA RKET VALUE AS ON 8TH NOVEMBER, 1995 (ALLEGED DATE OF TRANSFER) AND ON TH AT BASIS, HE HAS COMPUTED THE CAPITAL GAINS. HOWEVER, AS STATED, COM PUTATION 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 A S A LIMITED COMPANY BY VIRTUE OF BECAME A LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT. NOW, SECTION 45(4) CLEARLY STIPULATE S 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.YEARS2011-12 & 2008-09 - 7 - BE TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSET S. UNDER PART IX OF THE COMPANIES ACT, WHEN A PARTNERSHIP FIRM IS TREATED A S A LIMITED COMPANY, THE PROPERTIES OF THE ERSTWHILE FIRM VESTS IN THE LIMITED COMPANY. THE QUESTION IS WHETHER SUCH VESTING STAND S COVERED BY THE EXPRESSION 'TRANSFER BY WAY OF DISTRIBUTION' IN SEC TION 45(4) OF THE ACT. THERE IS A DIFFERENCE BETWEEN VESTING OF THE PROPER TY, IN THIS CASE, IN THE LIMITED COMPANY AND DISTRIBUTION OF THE PROPERTY. O N VESTING IN THE LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT, THE PROPERTIES VEST IN THE COMPANY AS THEY EXIST. ON THE OTHER HAN D, DISTRIBUTION ON DISSOLUTION PRESUPPOSES DIVISION, REALISATION, ENCA SHMENT OF ASSETS AND APPROPRIATION OF THE REALIZED AMOUNT AS PER .THE PR IORITY LIKE PAYMENT OF TAXES TO THE GOVERNMENT, BMC ETC., PAYMENT TO UNSEC URED CREDITORS ETC. THIS DIFFERENCE IS VERY IMPORTANT. THIS DIFFERENCE IS AMPLY BROUGHT OUT CONCEPTUALLY IN THE JUDGMENT OF THE SUPREME COURT I N 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 DISTRIBU TION OF CAPITAL ASSETS IS NOT SATISFIED. IN THE CIRCUMSTANCES, THE LATTER PAR T 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) 12. SECTION 45(4) OF THE ACT WHICH IS RELEVANT READ S THUS : 'THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTIO N 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 CHARGE ABLE TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY OF INDIVIDU ALS, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FO R THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON T HE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDE RATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER.' 13. ACCORDING TO THE AFORESAID PROVISION, THE PROF ITS OR GAINS ARISING FROM TRANSFER OF CAPITAL ASSETS BY WAY OF DISTRIBUT ION OF THOSE ASSETS ON DISSOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSO NS 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.YEARS2011-12 & 2008-09 - 8 - INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE SHALL BE LIABLE TO TAX AS INCOME OF THE F IRM, 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 S HALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACC RUING AS A RESULT OF THE TRANSFER. 14. 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. 15. THE BOMBAY HIGH COURT IN TEXSPIN ENGINEERING AN D MANUFACTURING WORKS [2003] 263 ITR 345, UNDER SIMIL AR CIRCUMSTANCES INTERPRETING SECTION 45(4) OF THE ACT RECORDED THUS (PAGE 351): UNDER SECTION 45(4), PROFITS ARISING FROM THE TRAN SFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DIS SOLUTION OF A FIRM ARE CHARGEABLE TO TAX AS THE INCOME OF THE FIRM IN A PR EVIOUS YEAR IN WHICH THE TRANSFER TAKES PLACE AND FOR THE PURPOSES OF SE CTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANS FER IS DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACC RUING 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 'CAP ITAL GAINS 1 SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION, THE EXPENDITURE INCURRED IN CONNECTION WITH THE TRANSFE R 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 AR E SATISFIED THEN, IN THAT EVENT, FOR THE PURPOSE OF COMPUTATION OF CAPIT AL GAINS UNDER SECTION 48, THE MARKET VALUE ON THE DATE OF THE TRANSFER SH ALL BE DEEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUIN G 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.YEARS2011-12 & 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 CONVERT ED INTO COMPANY UNDER CHAPTER IX OF THE 1956 ACT. THE RELEVANT OBSE RVATIONS 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 I S NOT IN DISPUTE THAT IN THIS CASE, THE ERSTWHILE FIRM BECAME A LIMITED UNDE R PART IX OF THE COMPANIES ACT. NOW, SECTION 45(4) CLEARLY STIPULATE S THAT THERE SHOULD BE A TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASS ETS. UNDER PART IX OF THE COMPANIES ACT, WHEN A PARTNERSHIP FIRM IS TREAT ED AS A LIMITED COMPANY, THE PROPERTIES OF THE ERSTWHILE FIRM VESTS IN THE LIMITED COMPANY. THE QUESTION IS WHETHER SUCH VESTING STAND S COVERED BY THE EXPRESSION 'TRANSFER BY WAY OF DISTRIBUTION' IN SEC TION 45(4) OF THE ACT. THERE IS A DIFFERENCE BETWEEN VESTING OF THE PROPER TY, IN THIS CASE, IN THE LIMITED COMPANY AND DISTRIBUTION OF THE PROPERTY. O N VESTING IN THE LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT, THE PROPERTIES VEST IN THE COMPANY AS THEY EXIST. ON THE OTHER HAN D, DISTRIBUTION ON DISSOLUTION PRE-SUPPOSES DIVISION, REALISATION, ENC ASHMENT OF ASSETS AND APPROPRIATION OF THE REALISED AMOUNT AS PER THE PRI ORITY LIKE PAYMENT OF TAXES TO THE GOVERNMENT, BMC, ETC., PAYMENT TO UNSE CURED CREDITORS, ETC. THIS DIFFERENCE IS VERY IMPORTANT. THIS DIFFER ENCE IS AMPLY BROUGHT OUT CONCEPTUALLY IN THE JUDGMENT OF THE SUPREME COU RT IN THE CASE OFMALABAR FISHERIES CO. V. CIT [1979] 120 ITR 49. I N 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 DISTRIBU TION OF CAPITAL ASSETS IS NOT SATISFIED. IN THE CIRCUMSTANCES, THE LATTER PAR T 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.' 17. THE PLEA OF APPLICABILITY OF SECTION 45(1) REA D WITH SECTION 2(47)(II) OF THE ACT WAS ALSO NEGATED WITH THE FOLL OWING CONCLUSION (PAGE 354): 'IN THE PRESENT CASE, WE ARE CONCERNED WITH A PARTN ERSHIP 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 A SSET, TWO IMPORTANT ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 10 - INGREDIENTS ARE EXISTENCE OF A PARTY AND A COUNTER- PARTY AND, SECONDLY, INCOMING CONSIDERATION QUA THE TRANSFEROR. IN OUR V IEW, WHEN A FIRM IS TREATED AS A COMPANY, THE SAID TWO CONDITIONS ARE N OT ATTRACTED. THERE IS NO CONVEYANCE OF THE PROPERTY EXECUTABLE IN FAVO UR 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 COMP ANY UNDER PART IX OF THE COMPANIES ACT, BUT THAT VESTING IS NOT CONSE QUENT 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 VESTIN G 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, THER E S NO TRANSFER OF A CAPITAL ASSET AS CONTEMPLATED BY SECTION 45(1) OF T HE ACT. EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT THERE IS A T RANSFER OF A CAPITAL ASSET UNDER SECTION 45(1) BECAUSE OF THE DEFINITION OF THE WORD 'TRANSFER 1 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 4 5(1) IS REQUIRED TO BE READ WITH SECTION 48, WHICH PROVIDES FOR MODE OF CO MPUTATION. THESE TWO SECTIONS ARE REQUIRED TO BE READ TOGETHER AS TH E CHARGING SECTION AND THE COMPUTATION SECTION CONSTITUTE ONE PACKAGE. NOW, UNDER SECTION 48 IT IS LAID DOWN, INTER ALIA, THAT THE INCOME CHA RGEABLE UNDER THE HEAD 'CAPITAL GAINS' SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT OF TH E TRANSFER, THE COST OF ACQUISITION OF THE ASSET AND THE EXPENDITURE INCURR ED IN CONNECTION WITH THE TRANSFER. SECTION 45(4) IS MUTUALLY EXCLUSIVE T O SECTION 45(1). SECTION 45(4) CATEGORICALLY STATES THAT WHERE THERE IS A TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS AND WHERE SUCH TR ANSFER 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 PA RT OF SECTION 45(4) IS NOT THERE IN SECTION 45(1). THEREFORE, ONE HAS TO R EAD 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 CO NSIDERATION' 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.YEARS2011-12 & 2008-09 - 11 - 18. THE AFORESAID VIEW HAS THE ACCEPTANCE OF THE L EGISLATIVE INTENT AS THE FINANCE (NO. 2)ACT, 1998, EFFECTIVE FROM APRIL 1, 1999, HAS INCORPORATED CLAUSE (XIII) TO SECTION 47 TOTHE FOLL OWING EFFECT: 'NOTHING CONTAINED IN SECTION 45 SHALL APPLY TO THE FOLLOWING TRANSFERS.- (XIII) WHERE A FIRM IS SUCCEEDED BY A COMPANY IN T HE BUSINESS CARRIED ON BY IT AS A RESULTOF WHICH THE FIRM SELLS OR OTHE RWISE TRANSFERS ANY CAPITAL ASSET OR INTANGIBLE ASSET TO THECOMPANY.' 19. NOW, THE STAGE IS SET TO ANALYSE THE CASE LAW RELIED UPON BY THE COUNSEL FOR THE REVENUE. 20. IN ARTEX MANUFACTURING GO'S CASE (SUPRA), THE GUJARAT HIGH COURT WAS SEIZED OF THE MATTER WHERE THE ENTIRE ASS ETS 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 NEW LY FORMED LIMITED COMPANY AND THE CONSIDERATION WAS RECEIVED BY THE P ARTNERS OF THE FIRM IN THE SHAPE OF SHARES OF THE COMPANY AND THE SHARE S WERE ALLOTTED TO THE PARTNERS ON THE SAME BASIS AS THEIR SHARES IN T HE PROFITS OF THE PARTNERSHIP FIRM. IT WAS IN THOSE FACTS THAT THE PR OVISIONS OF CAPITAL GAINS WERE HELD TO BE EXIGIBLE. THE KARNATAKA HIGH COURT IN SUVARDHAN'S CASE (SUPRA) WAS ADJUDICATING THE MATTE R WHERE THE PARTNERS HAD DERIVED SHARE ON THE DISSOLUTION OF TH E PARTNERSHIP FIRM. 21. THE FACTUAL MATRIX IN A. N. NAIK ASSOCIATES' CA SE (SUPRA) BEFORE THE BOMBAY HIGH COURT WAS THAT A NEW PARTNER WAS INDUCT ED BEFORE OUTGOING PARTNERS HAD BEEN RELIEVED AND THE BUSINES S ALSO CONTINUED. THE GAIN IN THE HANDS OF THE RETIRING PARTNERS WAS HELD TO BE AMENABLE TO CAPITAL GAINS TAX. 22. THESE JUDGMENTS ARE, THUS, NOT APPLICABLE AND A RE CLEARLY DISTINGUISHABLE. 23. IN VIEW OF THE ABOVE, THE IRRESISTIBLE CONCLUSI ON IS THAT NO CAPITAL GAIN UNDER SECTION 45(4) OF THE ACT WOULD BE ATTRAC TED 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.YEARS2011-12 & 2008-09 - 12 - CASE. ACCORDINGLY, QUESTIONS NOS. 1 AND 2 ARE ANSWE RED AGAINST THE REVENUE. 8.7 IN VIEW OF ABOVE MADE SUBMISSION, IT IS MOST R ESPECTFULLY SUBMITTED THAT REVISIONS OF S.45(4) OF THE ACT CANNOT BE INVO KED IN THE PRESENT CASE, AN NO ADDITION ON 'ACCOUNT OF CAPITAL GAIN CA N BE MADE.' HOWEVER, SUCH PLEA OF THE ASSESSEE THAT THE ASSESSE E FIRM CONVERTED INTO PRIVATE LIMITED COMPANY UNDER PART-IX OF THE COMPAN IES ACT, 1956 WHEREUPON THE PROPERTY OF THE ERSTWHILE FIRM VESTED IN THE COMPANY THUS THE SAME IS NOT COVERED BY THE EXPRESSION OF TRANSFER B Y WAY OF DISTRIBUTION U/S 45(4) OF THE ACT WAS NOT FOUND TENABLE BY THE LEARN ED AO. HE, THEREFORE FINALIZED THE ASSESSMENT BY MAKING AN ADDITION OF R S.3,26,02,919/- AS STCG AND RS.25,46,06,987/- AS LTCG WHICH WAS, IN TURN, D ELETED BY THE LEARNED CIT(A). HENCE, THE INSTANT APPEAL BEFORE US. 5. AT THE TIME OF HEARING OF THE INSTANT APPEAL, TH E 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. T HE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THERE WAS NO TRANSF ER 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 I NCREASED THE VALUE BUT THE SAME HAS BEEN CREDITED TO CAPITAL ACCOUNT OF PARTNE RS WHEN THE ASSESSEE FIRM WAS CONVERTED INTO PRIVATE LIMITED COMPANY UNDER PA RTIX 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 SHARI NG RATIO IN THE FIRM. IT WAS FURTHER POINTED OUT BY THE LEARNED AR THAT THE PART NERS 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.YEARS2011-12 & 2008-09 - 13 - IN COMPANY DUE TO SUCH CONVERSION OF THE ASSESSEE F IRM INTO PRIVATE LIMITED COMPANY. THE LEARNED COUNSEL ALSO RELIED UPON THE J UDGMENT 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) 26 4 (AHD), WELL PACK PACKAGING REPORTED IN 130 TAXMAN 215 (AHD). ALL THE SE 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, LE ARNED DR FAILED TO CONTROVERT THE SAME. HOWEVER, HE RELIES UPON THE OR DER PASSED BY THE ASSESSING OFFICER. 6. WE HAVE HEARD THE RESPECTIVE PARTIES, PERUSED TH E RELEVANT MATERIALS AVAILABLE ON RECORD. IT APPEARS FROM THE RECORDS TH AT 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 LA ND, 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 DISTINGUI SHABLE ON FACTS AND LAW, (V) THE VALUE OF THE ASSET (LAND IN THE CASE) ST OOD 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 E RSTWHILE PARTNERS WORTH INCREASE VALUE AND THUS INCREASING THE VALUE OF CAP ITAL 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 REVALUATI ON AND THEREBY ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 14 - SUBSEQUENTALLOTMENT SHARES IS SOUGHT TO BE EVADED A GAINST THE PROVISIONS AND INTENT OF THE LAW. ON THE BASIS OF SUCH FINDING OF THE LEARNED AO, CAP ITAL 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 T O TAX AGAINST THE ASSESSEE TO THE TUNE OF RS.25,46,06,987/- AS LTCG AND CAPITAL G AIN 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 T HE ASSESSEE. HOWEVER, THE LEARNED CIT(A) RS.25,46,06,987/- HAS BEEN TREATED A S 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 LAN D DUE TO REVALUATION TO THE PARTNERS CAPITAL ACCOUNT IN THEIR PROFIT-SHARIN G RATIO. SUBSEQUENTLY THE APPELLANT FIRM GOT CONVERTED INTO A PRIVATE LIM ITED COMPANY AND ACCORDINGLY THE SHARES EQUIVALENT TO THE CAPITAL OF THE PARTNER WERE ALLOTTED TO THEM. THAT AO HELD THAT THE APPELLANT F IRM HAD DISTRIBUTED CAPITAL ASSETS TO ITS PARTNER AND MADE THE ADDITION OF CAPITAL GAIN ON ACCOUNT OF DISTRIBUTION OF CAPITAL ASSETS BY APPLYI NG THE PROVISIONS OF SECTION 45(4) OF THE ACT. HE HELD THAT THE ASSETS B ELONGING TO THE FIRM GOT REVALUED, THE REVALUED AMOUNT GOT DISTRIBUTED T O *HE PARTNERS BY CREDITING THE CAPITAL ACCOUNT AND THE VALUE OF THE ASSET STOOD AND HENCE THE INCREASE IN VALUE GOT DISTRIBUTED BY THE ASSESS EE FORM TO THE PARTNER THUS INCREASING THE CAPITAL ACCOUNTS. HE FURTHER HE LD THAT SHARESOF THE ENHANCED VALUE ALLOTTED TO THE ERSTWHILE PARTNERS W ORTH INCREASED VALUE AND THUS INCREASING THE VALUE OF CAPITAL IN THE HAN DS OF THE PARTNERS AND ACCORDINGLY IT WAS HELD BY HIM THAT THE CAPITAL GAI N AROSE ON DISTRIBUTION OF ASSETS THAT IS LAND TO THE PARTNERS BY THE ASSESSEE FIRM, DUE TO REVALUATION AND SUBSEQUENT ALLOTMENT OF-SHAR E'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.YEARS2011-12 & 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 TR ANSFER 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 T HE FIRM WERE DISTRIBUTED TO PARTNER SO AS TO ATTRACT THE PROVISI ONS OF SECTION 45 (4) OF THE ACT. IT HAS BEEN SUBMITTED BY THE APPELLANT THA T 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 THER E 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 HA S FURTHER SUBMITTED THAT THE ISSUE IS FULLY AND SQUARELY COVERED BY THE DECISION OF AHMEDABAD ITAT IN SEVERAL CASES. IT HAS PLACED RELI ANCE ON THE FOLLOWING JUDGEMENTS OF AHMEDABAD ITAT: - 1. 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 ISSU E IT IS NOTED THAT THE FACTS WHICH ARE RELEVANT FOR THE PRESENT OUR TH AT THE LAND HAS BEEN REVALUED THE ENHANCED VALUE ON ACCOUNT OF REVALUATI ON HAS BEEN CREDITED TO THE PARTNERS CAPITAL ACCOUNT; THE APPEL LANT FIRM HAS BEEN CONVERTED INTO A PRIVATE LIMITED COMPANY UNDER PART -IX OF THE COMPANIES ACT 1956; ALL ASSETS AND LIABILITIES OF T HE APPELLANT FIRM HAVE BECOME ASSETS AND LIABILITY OF THE NEW PRIVATE LIMI TED COMPANY ON PART -IX CONVERSION; THE SHARES IN THE PRIVATE COMPANY H AVE BEEN ALLOTTED TO THE PARTNERS IN THEIR PROFIT-SHARING RATIO IN THE A PPELLANT FIRM; AND THE PARTNERS OF THE APPELLANT FIRM HAVE NOT RECEIVED AN Y CONSIDERATION OR BENEFIT, DIRECTLY OR INDIRECTLY IN ANY FORM OR MANN ER, OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE PRIVATE LIMITED COMPA NY. IT IS NOTED THAT IN SIMILAR CIRCUMSTANCES HONORABLE ITAT AHMEDABAD H AS DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT BY HOLDING THAT TH ERE 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.YEARS2011-12 & 2008-09 - 16 - THE CASE OF WELL PACK PACKAGING (SUPRA), THE HONORA BLE 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 4 5 (4) IS NOT ATTRACTED AS THE VERY FIRST CONDITION OF TRANSFER B Y WAY OF DISTRIBUTION OF ASSETS WAS NOT SATISFIED. FOR THE SAKE OF CLARITY T HE FACTS OF THE CASE, IN BRIEF, ARE REPRODUCED AS UNDER: - THE ASSESSEE-FIRM WAS CONSISTED OF SIXTEEN PARTNER S. 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. TH E EFFECT OF REVALUATION WAS GIVEN IN THE BOOKS OF ASSESSEE BY C REDITING PARTNERS' ACCOUNT IN THEIR PROFIT-SHARING RATIO. ON CONVERSIO N OF THE FIRM THE SHARES WERE ISSUED TO SIXTEEN PARTNERS OF THE ASSES SEE IN THE SAME PROPORTION OF PARTNERS' CAPITAL ACCOUNT. ORIGINALLY THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(1)(A). HOWEVER, LATER O N, THE ASSESSING OFFICER FOUND THAT THE PARTNERSHIP FIRM WAS CONVERT ED INTO A COMPANY UNDER PART IX OF THE COMPANIES ACT, AND THE FIRM HA D REVALUED THE DEPRECIABLE ASSETS AND ENHANCED THEIR VALUE. THE AS SESSING OFFICER TOOK THE VIEW THAT ON CONVERSION THERE WAS EXTINGUISHMEN T 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 TH AT WHATEVER MIGHT BE THE POSITION UNDER THE COMPANIES ACT REGARDING REGI STRATION, THE MOMENT THE FIRM CEASED TO EXIST IN THE EYE OF LAW U NDER THE PARTNERSHIP ACT, AS WELL AS UNDER THE INCOME-TAX ACT AND THE BU SINESS WAS RUN AND MANAGED BY 3 DISTINCT AND SEPARATE LEGAL ENTITY, TH E LEGAL POSITION WAS THAT THE FIRM GOT DISSOLVED AND AS SUCH PROVISIONS OF SECTION 45(4) STOOD IMMEDIATELY ATTRACTED. ACCORDINGLY, THE ASSESSING O FFICER 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 APP EAL, THE COMMISSIONER (APPEALS) CONFIRMED THE ORDER OF THE A SSESSING 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.YEARS2011-12 & 2008-09 - 17 - 'SIMPLE REVALUATION OF ASSETS DOES NOT LEAD TO INCI DENCE 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. AC CORDINGLY, IT COULD BE SAID THAT MERE REVALUATION OF ASSETS OF THE FIRM WO ULD NOT RESULT INTO ANY LIABILITY UNDER THE ACT. UNDER BOTH SECTIONS 567 AND 568 OF THE COMPANIES AC T, 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 COMPA NY INCORPORATED UNDER THE COMPANIES ACT. SECTION 576 MAKES IT CLEAR THAT THE REGISTRATION OF A COMPANY UNDER PART IX SHALL NOT AFFECT ITS RIGHTS A ND LIABILITIES IN RESPECT OF ANY DEED OR OBLIGATION INCURRED BEFORE R EGISTRATION AND SECTION 577 PROVIDES FOR CONTINUATION OF THE PENDIN G SUITS AND LEGAL PROCEEDINGS TAKEN BY OR AGAINST THE COMPANY. AS PER SECTION 575, ALL PROPERTIES INCLUDING ACTION ABLE CLAIM BELONGING TO OR VESTED IN A COMPANY AT THE DATE OF ITS REGIST RATION SHALL, ON SUCH REGISTRATION, PASS TO AND VEST IN THE COMPANY AS IN CORPORATED. THUS, IN VIEW OF THE RELEVANT PROVISIONS OF THE COMPANIES AC T DISCUSSED ABOVE, IT CAN BE SAID THAT THERE IS NO 'TRANSFER' INVOLVED WH EN THE COMPANY GETS ITSELF REGISTERED UNDER PART IX. THUS, SINCE THERE IS NO TRANSFER ON CONVERSION OF T HE 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 P ROVISION OF THE ACT. IN THE INSTANT CASE, THERE WAS NO SALE OR CONVEYANC E 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 UN DER PART IX OF THE COMPANIES ACT. IT WAS ALSO IMPORTANT TO NOTE THAT T HE ERSTWHILE PARTNERS OF THE FIRM HAD NOT BEEN ALLOTTED SHARES OF THE COM PANY IN QUESTION OF THE VALUE REVALUED BUT ONLY OF RS. 1CRORE SO THAT I T 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 P RICE 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.YEARS2011-12 & 2008-09 - 18 - FURTHER, A BUSINESS UNDERTAKING AS A GOING CONCERN INCLUDES ALL RIGHTS, ASSETS CONTINGENT OR DEFINITE AND ALL INTEREST IN T HE PRESENT OR FUTURE. IT ALSO INCLUDES THE MANAGEMENT, EXECUTIVE EMPLOYEES A ND ANYTHING WHICH GOES AS PART OF ORGANISATION INCLUDING THE POTENTIA LITY OF THE ORGANISATION TO GROW. IT CONTAINS A VARIETY OF ELEM ENTS BOTH TANGIBLE AND INTENGIBLE. A GOING CONCERN IS A DYNAMIC CONCEP T CHARACTERISED BY PERENNIAL CHANGE INFLUENCED BY SOCIO-ECONOMIC ECOLO GY. A GOING CONCERN IS ESSENTIALLY A FUNCTIONING LIVING ORGANIS ATION 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 A CQUISITION AND/OR THE DATE OF ACQUISITION OF THE ASSETS OF THE PARTNERSHI P 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 AS SESSEE 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 APPELLA NT. IN THE PRESENT CASE THERE IS NO DISSOLUTION OF THE FIRM AND THE PA RTNERSHIP CAPITAL HAS NOT BEEN INCREASED ON ACCOUNT OF SALE' OF THE CAPIT AL 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 VE STED WITH THE COMPANY. THE COMPANY HAS TAKEN OVER ALL THE ASSETS AND LIABILITY OF THE ERSTWHILE FIRM. THE APPELLANT HAS ALSO SUITABLY DIS TINGUISHED THE JUDGEMENT RELIED BY THE AO IN THE WRITTEN SUBMISSIO N WHICH HAS BEEN REPRODUCED IN THE PRECEDING DISCUSSION. IN VIEW OF THE ABOVE DISCUSSION, I AM OF THE CONSID ERED OPINION THAT THERE IS NO TRANSFER OF ASSETS AND ACCORDINGLY THERE IS NO LIABILITY OF CAPITAL GAIN ON THE APPELLANT FIRM. THE ADDITION MA DE BY THE AO ON ACCOUNT OF LONG-TERM CAPITAL GAIN AND SHORT TERM CA PITAL 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.YEARS2011-12 & 2008-09 - 19 - WE HAVE ALSO CAREFULLY CONSIDERED THE JUDGMENT PASS ED BY THE CO- ORDINATE BENCH IN THE MATTER OF ALTA INTER-CHEM IND USTRIES. WHILE DEALING WITH THE ISSUE IN FAVOUR OF THE ASSESSEE THE HONBLE COU RT OBSERVED AS FOLLOWS: 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S, DILIGENTLY PERUSED THE RELEVANT CASE RECORDS AND ALSO THE CASE LAW QUOTED BY EITHER PARTY. IT WAS THE STAND OF THE ASSESSING OFF ICER THAT IF THE FULL CONTRIBUTIONS OF THE PARTNERS ARE TAKEN, IT WAS NOT ICED THAT THE SHARES IN THE COMPANY HAVE NOT BEEN ALLOTTED IN THE SAME PROP ORTION AS THE CAPITAL ACCOUNTS OF THE PARTNERS AS THEY STOOD IN T HE 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 SQ UARELY APPLICABLE TO THE ASSESSEE'S CASE WHICH MADE THE TRANSFER OF THE ASSE TS AND LIABILITIES OF THE FIRM LIABLE TO CAPITAL GAINS TAX. HE HAD ALSO F URTHER STATED THAT IF IT WERE TO BE HELD AT THE APPELLATE STAGE THAT THE TWO CAPITAL ACCOUNTS WERE INDEED SEPARATE, EVEN THEN THE CONDITIONS PRESCRIBE D IN THE PROVISO (C) TO SECTION 47(XIII) WAS NOT MET. THE SAID PROVISO S AYS THAT THE PARTNERS OF THE FIRM WILL NOT RECEIVE ANY CONSIDERATION OR B ENEFIT DIRECTLY OR INDIRECTLY, IN ANY FORM OR MANNER FROM THE COMPANY EXCEPT BY WAY OF ALLOTMENT OF SHARES. HOWEVER, IN THE PRESENT CASE A LL THE EIGHT PARTNERS' CURRENT CAPITAL ACCOUNT HAS BEEN TAKEN BY THE COMPA NY AS LOAN AND SO REFLECTED IN THE BALANCE-SHEET. THEREFORE, IT WAS O BSERVED BY THE ASSESSING OFFICER, THE ERSTWHILE PARTNERS HAVE RECE IVED CONSIDERATION IN THE FORM OF INTEREST AS WELL AS BENEFIT FROM THE CO MPANY. 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 O F 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 HEA D '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 TR IBUNAL THAT SINCE THERE WAS NO TRANSFER ON CONVERSION OF THE FIRM INTO A CO MPANY UNDER PART IX OF THE COMPANIES ACT, THERE DOES NOT ARISE ANY QUES TION 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.YEARS2011-12 & 2008-09 - 20 - 12. AGGRIEVED, THE REVENUE TOOK UP THE ISSUE BEFORE TH E HON'BLE JURISDICTIONAL HIGH COURT THROUGH A REFERENCE APPLI CATION. 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'B LE 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 CO URT. 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. ACCORD INGLY, THE IMPUGNED ORDER IS SET ASIDE. TAX APPEAL NO. 368 OF 2001 IS ADMITTED ON THE AFOREMENTIONED FOUR QUESTIONS OF LA W. WE REQUEST THE HIGH COURT TO RECORD ITS FINDINGS ON THESE QUES TIONS. 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 P ENDING BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT FOR DISPOSAL [SOU RCE : ASSESSING OFFICER'S LETTER DATED JUNE 18, 2012 TO THE DEPARTM ENTAL REPRESENTATIVE]. (2) THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL, BANG ALORE 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 PLA CE UNDER THE PROVISIONS OF THE COMPANIES LAW, SUCH CONVERSION CA N BE CONSTRUED ONLY AS OCCASIONED BY OPERATION OF LAW. HENCE, NO C ONTROVERSY COULD ARISE ON THE APPLICATION OF THIS PRINCIPLE EV EN 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 FI RM WITHIN THE MEANING OF SECTION 45(4) AND ONLY IF THE CONDITION AS CONTAINED IN SECTION 47(XIII) ARE COMPLIED WITH, THE EXEMPTION W ILL 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 ABSE NCE 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.YEARS2011-12 & 2008-09 - 21 - UNDER PART IX OF THE COMPANIES ACT INASMUCH AS SUCH CONVERSIONS DO NOT FALL WITHIN THE DEFINITION OF 'TRANSFER' UND ER SECTION 2(47).' WHILE DISPOSING OF THE REVENUE'S REFERENCE APPLICAT ION 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 D ISPUTE THAT THE ASSETS OF THE PARTNERSHIP FIRM HAVE BECOME THE ASSE TS OF THE COMPANY. ALL THE PARTNERS OF THE FIRM HAVE BECOME T HE SHAREHOLDERS OF THE COMPANY. IN PROPORTION TO THEIR SHARES IN TH E 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 I S NOT A TRANSFER SO AS TO ATTRACT CAPITAL GAINS UNDER SECTION 45. TH EREFORE, THE TRIBUNAL WAS JUSTIFIED IN SETTING ASIDE THE ORDER P ASSED BY THE FIRST APPELLATE AUTHORITY AS WELL AS THE ASSESSING AUTHOR ITY AND IN HOLDING THAT THE TRANSACTION IN QUESTION DOES NOT C ONSTITUTE A TRANSFER UNDER THE ACT. IN THAT VIEW OF THE MATTER, WE ANSWER THE FIRST SUBSTANTIAL QUESTION OF LAW FRAMED, AGAINST T HE REVENUE AND IN FAVOUR OF THE ASSESSEE.' (3) IN THE CASE OF GULABDAS PRINTERS (SUPRA), THE H ON'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 CAP ITAL ASSET IS NOT SATISFIED. IN THE CIRCUMSTANCES, LATTER PART OF SEC TION 45(4) WHICH REFERS TO COMPUTATION OF CAPITAL GAINS UNDER SECTIO N 48 BY TREATING THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF T RANSFER, DOES NOT APPLY.' AGGRIEVED, THE REVENUE HAD PREFERRED A REFERENCE AP PLICATION 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 OFF ICER'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.YEARS2011-12 & 2008-09 - 22 - AFTER ANALYSING THE ISSUE IN DETAIL, THE HON'BLE MU MBAI 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 TH E FIRM WAS ASSESSABLE AS CAPITAL GAINS IN THE HANDS OF THE FIR M 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 RETI REMENT OF A PARTNER FROM THE PARTNERSHIP OF TWO PARTNERS, THE ASSETS WE RE TAKEN OVER BY ANOTHER PARTNER WHO CONTINUED THE BUSINESS AS A SOL E PROPRIETOR AND, THUS, THERE WAS A DISSOLUTION OF THE ERSTWHILE FIRM WHEREAS IN THE CASE UNDER CONSIDERATION, THERE WAS NO DISSOLUTION OF TH E FIRM, BUT, CONVERSION OF THE FIRM INTO A COMPANY. THUS, WE ARE OF THE CONSIDERED VIEW THAT THE CASE L AW RELIED ON BY THE REVENUE CANNOT COME TO ITS RESCUE. (2) GOEL UDYOG (SUPRA) : THE FINDING OF THE HON'BLE TRIBUNAL OF DELHI 'C' BE NCH IS NOT APPLICABLE TO THE ISSUE UNDER CONSIDERATION IN THE SENSE THAT IN THAT CASE, ON DISSOLUTION OF FIRM AND DISTRIBUTION OF ASSETS TO P ARTNER EXCESS OF MARKET VALUE OVER BOOK VALUE WITH REGARD TO LAND AND BUILD ING 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 LEARN ED DEPARTMENTAL REPRESENTATIVE IS CLEARLY DISTINGUISHABLE. 14. TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMSTANCE S OF THE ISSUE AS DELIBERATED UPON IN THE FOREGOING PARAGRAPHS, WE AR E 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 ACCOR DINGLY. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMIS SED. ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 23 - IT WAS FURTHER HELD IN THE MATTER OF GULABDAS PRINT ERS BY THE CO-ORDINATE BENCH THAT WHERE THE FIRM BECOMES LIMITED COMPANY U NDER 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 I S NOT SATISFIED. WE HAVE FURTHER CONSIDERED THE JUDGMENT PASSED BY T HE CO-ORDINATE BENCH IN THE MATTER OF WELL PACK PACKAGING WHERE AG AIN THE SAME RATIO HAS BEEN LAID DOWN. IN THE SAID JUDGMENT, IT WAS HELD T HAT WHEN TRANSFER TOOK PLACE FROM THE FIRM TO THE COMPANY THE ASSETS WERE TRANSF ERRED 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 A PPEARING FOR THE ASSESSEE, WE FIND THAT THE ONLY EVENT TOOK PLACE DURING THE Y EAR 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 SUB SEQUENT YEAR. THE LEARNED AO TREATED THE REVALUATION OF ASSETS AND BROUGHT TO TAX BUT SUCH REVALUATION OF ASSETS CANNOT BE TREATED AS TRANSFER WITHIN T HE MEANING OF SECTION 2(47) OF THE ACT. IN THAT VIEW OF THE MATTER, THE VERY FO OTING OF THE LEARNED AO IS INCORRECT SINCE CONVERSION FROM FIRM TO COMPANY T OOK 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.YEARS2011-12 & 2008-09 - 24 - AROSE ON DISTRIBUTION OF ASSETS I.E. LAND TO THE PA RTNERS BY THE ASSESSEES FIRM DUE TO REVALUATION OF ASSETS AND THEREBY SUBSEQUENT ALLOTMENT OF SHARES TO THE ERSTWHILE PARTNERS IS SOUGHT TO BE EVADED AGAINST T HE PROVISION AND INTENT OF THE LAW IS NOT CORRECT. WE WOULD LIKE TO MENTION THAT W HEN A FIRM IS CONVERTED INTO COMPANY UNDER PART XI, PROPERTIES OF THE ERSTWHIL E FIRM VEST IN THE COMPANY. THE DIFFERENCE BETWEEN VESTING OF PROPERTY AND D ISTRIBUTIONS 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 CONVEY ANCE FROM THE FIRM TO THE COMPANY, THE PARTNERS CAPITAL HAS NOT INCREASED ON ACCOUNT OF SALE ON CAPITAL ASSET BUT IT IS ONLY ON ACCOUNT OF REVALUATION OF A SSET. THE CAPITAL HAS BEEN INCREASED BECAUSE OF SUCH CONVERSION. THE PROPERTIE S OF THE PARTNERSHIP FIRM HAVE BEEN VESTED WITH THE COMPANY WHERE ALL THE ASS ETS 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 TH US 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 LEARNE D CIT(A) WHICH IS IN CONSEQUENCE WITH THE RATIO LAID DOWN BY THE CO-ORDI NATE BENCH IN THE JUDGMENT AS DISCUSSED ABOVE SO AS TO WARRANT INTERF ERENCE. THE QUESTION IS THUS ANSWERED IN THE AFFIRMATIVE I.E. IN FAVOUR OF THE A SSESSEE AND AGAINST THE REVENUE. CONSEQUENTLY, THE APPEAL FAILS AND IS ACCO RDINGLY DISMISSED. 7. 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 RA ISED 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.YEARS2011-12 & 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 FAC TS 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 NO T MADE INVESTMENT OUT OF INTEREST BEARING FUNDS. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS OF THE CASE IN CONFIRMING THE AD HOC DISALLOWANCE OF RS.2,24,276/- BEING 1/5 TH OF TOTAL EXPENSES O: TELEPHONE, MOBILE, INSURANCE, PETROL/DIESEL, VEHICLE REPAIR AND MAINTENANCE, INTEREST ON CAR LOA N AND DEPRECIATION ON ACCOUNT OF PERSONAL USAGE. 3. BOTH THE LOWER AUTHORITIES HAVE PASSED THE O RDERS WITHOUT PROPERLY APPRECIATING THE FACT AND THAT THEY FURTHE R 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 IM PUGNED ORDER. THIS ACTION OF THE LOWER AUTHORITIES IS IN C LEAR 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 P ROCEEDINGS U/S 271(1)(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, EDIT, DEL ETE, CHANGE OR MODIFY ALL OR ANY OF THE GROUND BEFORE OR AT THE TI ME OF HEARING. 9. GROUND NO.1 THE ASSESSEE IN THE INSTANT CROSS OBJECTION CHALLEN GED THE CONFIRMATION OF DISALLOWANCE OF RS.4,01,147/- M ADE BY THE LEARNED CIT(A) U/S 14A R.W.R 8D OF THE INCOME TAX RULES WHI CH, ACCORDING TO THE ASSESSEE HAS BEEN ORDERED WITHOUT APPRECIATING THE FACT THAT THE APPELLANT HAS NOT MADE INVESTMENT OUT OF THE INTEREST BEARING FUN DS. ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 26 - DURING THE ASSESSMENT PROCEEDING, UPON VERIFICATIO N 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.2,60,00,0 00/- IN RELIANCE LIQUID FUND AND ALSO EARNED DIVIDEND INCOME OF RS.2,09,251/-. T HE LEARNED AO TOOK A VIEW THAT BORROWED FUNDS WERE UTILIZED FOR MAKING S UCH 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 TU RN, CONFIRMED BY THE LEARNED CIT(A). HENCE, THE INSTANT APPEAL. 10. IT IS THE CASE OF THE ASSESSEE THAT SUCH INVEST MENT IN QUESTION WAS MADE OUT OF THE CREDIT BALANCE AVAILABLE WITH THE ASSESS EE IN THE CASH CREDIT ACCOUNT DETAILS WHEREOF HAS BEEN ANNEXED WITH THE PAPER BOO K, AVAILABLE AT PAGE 13 TO 16 OF THE SAME. SINCE NO INTEREST WAS CHARGED BY TH E 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 BO TH 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 A T ALL CALL FOR DISALLOWANCE IN TERMS OF RULE 8D. THE LEARNED ASSESSEES 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.2,09,2 51/- AS THE ADMITTED DIVIDEND INCOME OF THE ASSESSEE. HE RELIED UPON THE JUDGMENT PASSED IN THE MATTER OF MADHUSUDAN INDUSTRIES LTD.-VS-ITO REPORTE D 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.YEARS2011-12 & 2008-09 - 27 - BEFORE US. ON THE OTHER HAND, THE LEARNED DR RELIED UPON THE ORDER PASSED BY THE AUTHORITIES BELOW. 11. HEARD THE RESPECTIVE PARTIES, PERUSED THE RELEV ANT 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 PERM ISSIBLE. HOWEVER, WE ACCEPT THE ALTERNATIVE ARGUMENTS ADVANCED BY THE LE ARNED COUNSEL. WE HAVE ALSO TAKEN INTO CONSIDERATION THE JUDGMENT PASSED B Y THE CO-ORDINATE BENCH WHERE DISALLOWANCE HAS BEEN MADE ON INTEREST EXPEND ITURE AND ON ADMINISTRATIVE EXPENSES BUT THE SAME IS RESTRICTED TO THE DIVIDEND INCOME OF RS.33,445/-. THE RELEVANT PORTION OF THE SAID JUDGM ENT IS AS FOLLOWS: 5. AS REGARDS THE DISALLOWANCE MADE OUT OF ADMINIS TRATIVE EXPENSES OF RS.76,566/-, THE CIT(A) HELD IT TO BE FAIR AND REAS ONABLE AND CONFIRMED THE SAME. 6. BEFORE US, THE ONLY ARGUMENTS OF THE AR OF THE A SSESSEE WAS THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NO T 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 DIVIDE ND 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 CLA IMED BY THE ASSESSEE, AND ALSO MADE DISALLOWANCE OF ADMINISTRATIVE EXPENS ES 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 DISA LLOWANCE 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.YEARS2011-12 & 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 CH EMICALS 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 TH E SAME, WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE ON ACCOUNT OF I NTEREST AND ADMINISTRATIVE EXPENSES TO RS.33,446/-. THUS, THE G ROUNDS OF THE APPEAL OF THE ASSESSEE ARE PARTLY ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. RESPECTFULLY RELYING UPON THE JUDGMENT, WE RESTRICT THE DISALLOWANCE TO THE TUNE OF RS.2,09,251/- I.E. DIVIDEND INCOME EARN ED BY THE ASSESSEE BEFORE US WHICH IS EXEMPTED FROM TAX. THUS THIS GROUND OF APP EAL FILED BY THE ASSESSEE IS ALLOWED. 12. GROUND NO.2 THE ASSESSEE HAS CHALLENGED AD HOC DISALLOWANCE OF RS.2,24,276/- BEING 1/5 TH OF TOTAL EXPENSES OF TELEPHONE, MOBILE, INSURANCE, VEHICLE, REPAIR AND MAINTENANCE, INTEREST ON CAR LO AN 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 T HAT SUCH EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PU RPOSE OF THE ASSESSEE. THERE WAS NO ELEMENT OF PERSONAL USE. 13. AT THE TIME OF HEARING OF THE INSTANT APPEAL, T HE LEARNED AR ALSO SUBMITTED BEFORE US THAT SUCH ADDITION HAS BEEN MAD E 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.YEARS2011-12 & 2008-09 - 29 - PRAYS FOR SOME TOKEN DISALLOWANCE IF THE HONBLE TR IBUNAL THINKS IT FIT AND PROPER FOR THE ENDS OF JUSTICE. ON THE CONTRARY, TH E LEARNED DR RELIED UPON THE ORDER PASSED BY THE AUTHORITIES BELOW. 14. WE HAVE HEARD THE RESPECTIVE PARTIES, WE HAVE A LSO 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 NAT URE BUT REST OF THE EXPENSES COULD NOT BE ASCERTAINED WHETHER THOSE WERE PERSONA L OR BUSINESS PURPOSES. IN THAT VIEW OF THE MATTER, THE LEARNED AO 1/5 TH 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 P LACED BEFORE THE AUTHORITIES BELOW. THE AGREEMENT OF THE ASSESSEE WITH THE EXPEN SES OF INSURANCE INCLUDES THE MEDICAL EXPENSES OF RS.13,779/- TO BE DISALLOWE D REVEALS THE GOOD CONDUCT OF THE ASSESSEE. APART FROM THAT, THE EXPENSES WHIC H HAS BEEN DISCUSSED ABOVE FOR RUNNING A COMPANY ARE NECESSARY EXPENSES WHICH SOMETIMES DIFFICULT TO BE ASCERTAINED WHETHER ANY PERSONAL EXPENSES ELEMENT I S AVAILABLE OR NOT. HOWEVER, TAKING INTO CONSIDERATION THE ENTIRE GAMUT OF THE MATTER IT SEEMS THAT THE ASSESSEES PLEAS ARE GENUINE TAKING INTO CONSID ERATION THE DETAILS SUBMITTED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND BE FORE US AS WELL. WE ARE THUS RESTRICT SUCH DISALLOWANCE TO 20% OF THE DISALLOWAN CE MADE BY THE AUTHORITIES BELOW WHICH IS CALCULATED AT RS.44,854/-. THE ASSES SEESCROSS 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.YEARS2011-12 & 2008-09 - 30 - 15. GROUND NO.3 TO 5 THE ISSUES RAISED BY THE ASSESSEE IN GROUND NOS. 3 TO 5 ARE EITHER GENERAL OR CONSEQUENTIAL IN NATURE. TH EREFORE NO SEPARATE ADJUDICATION IS REQUIRED. THEREFORE, THE GROUNDS RA ISED 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 ASSESS EE WITH THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S OF THE CASE IN DISALLOWING RS.20,08,977/- ON THE ACCOUNT OF COMMIS SION BYHOLDING THAT ACTIVITIES DONE BY THE AGENT ON 'BEH ALF 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. 2. BOTH THE LOWER AUTHORITIES HAVE PASSED THE ORDER S WITHOUT PROPERLY APPRECIATING THE FACT AND THAT THEY FURTHE R 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 IM PUGNED ORDER. THIS ACTION OF THE LOWER AUTHORITIES IS IN C LEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JUSTICE AND THEREFORE DESERVES TO BE QUASHED. 3. 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 F ACTS 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, ED IT, DELETE, MODIFY OR CHANGE ALL OR ANY OF THE GROUNDS OF APPEA L 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.YEARS2011-12 & 2008-09 - 31 - 17. GROUND NO.1 THE ORDER CONFIRMING ADDITION OF RS.20,08,977/- MAD E ON ACCOUNT OF COMMISSION HAS BEEN CHALLENGED BY THE AS SESSEE BEFORE US. 18. DURING THE COURSE OF ASSESSMENT PROCEEDING UNDE R SECTION 263, IT WAS NOTICED THAT THE ASSESSEE MADE COMMISSION PAYMENT T O 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 T HE GENUINENESS OF SUCH COMMISSION A NOTICE DATED 11.04.2013 WAS ISSUED BY THE LEARNED AO REQUESTING THE ASSESSEE TO JUSTIFY THE PAYMENT OF C OMMISSION ALONG WITH DETAILS OF SERVICES RECEIVED WITH SUPPORTING EVIDENCE. HOWE VER, 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 REP LY RECEIVED FROM THE SAID TWO PARTIES DISALLOWED THE CLAIM OF COMMISSION PAYM ENT 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 PROCEEDIN GS, IT WAS OBSERVED BY THE LD. AO THAT THE APPELLANT HAS CLAIM ED COMMISSION EXPENDITURE TO TWO PARTIES VIZ., BASIC WIND ENERGY PVT. LTD. AND SHRI UPENDRASINGH D DARBAR. THE ID. AO ASKED THE APPELLA NT 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 FUR NISHED THE DETAILS OF THE PARTIES TO WHOM SALE HAVE BEEN MADE THROUGH THE SE COMMISSION AGENTS. THE LD. AO REJECTED THE SUBMISSION OF THE A PPELLANT ON THE GROUND THAT NO AGREEMENT WITH COMMISSION AGENT HAS BEEN SUBMITTED BY THE APPELLANT. THE LD. AO FURTHER OBSERVED THAT LET TERS 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 BO TH 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.YEARS2011-12 & 2008-09 - 32 - 8.2 THE APPELLANT HAS PLACED ON RECORD FOLLOWING D ETAILS / INFORMATION REGARDING THE COMMISSION PAID TO THE CO MMISSION 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 M ADE 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 MAD E 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 E STABLISH THAT IN CONSIDERATION TO THE SERVICES PROVIDED BY THE COMMI SSION AGENTS FOR PROCURING ORDERS FROM VARIOUS CUSTOMERS, THE APPELL ANT HAS PAID COMMISSION. IT IS SUBMITTED THAT THE AS PER THE MUT UAL TERMS AND CONDITIONS OF THE APPELLANT AND THE COMMISSION AGEN TS, THEY WERE TO PROVIDE THE INFORMATION OF POTENTIAL CUSTOMERS AS W ELL 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 O F AFORESAID DISCUSSIONS, .IT CAN BE SAFELY CONCLUDED THAT THE C OMMISSION AGENTS HAVE RENDERED SERVICES WITHIN ITS SCOPE AS PER ARRANGEME NT WITH THE APPELLANT. IN REAL BUSINESS SITUATIONS THE BUSINESS MEN CAN GET THE BUSINESS BY ADVERTISEMENT AND PUBLICITY, THROUGH RE FERENCE 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 INTRODUCTI ON ALSO AND PAYING INCENTIVES FOR THIS PURPOSE THEN THERE IS NOTHING W RONG IN THIS APPROACH BECAUSE SUCH PRACTICE IS PREVALENT IN ALL TRADE/IND USTRIAL AND COMMERCIAL ACTIVITIES. A SATISFIED CUSTOMER OR SOCI AL CONTACT CAN BRING BUSINESS MORE EFFECTIVELY AS COMPARED TO OWN MARKET ING EFFORTS. IT IS ALSO A FACT THAT A PERSON MAY HELP OTHER PERSON ONC E OR TWICE WITHOUT ANY MONETARY CONSIDERATION BUT WHEN SOME INTEREST I S CREATED THEN MORE FOCUSED EFFORTS ARE MADE, HOWEVER, GENERALLY N O DIRECT EVIDENCE CAN BE PRODUCED AND THE 'RELATIONSHIP OF THE SERVIC ES RENDERED AND ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 33 - BUSINESS PURPOSE HAS TO BE ESTABLISHED ONLY BY CIRC UMSTANTIAL EVIDENCE AND GROWTH IN BUSINESS IN SUCH CASES. IT IS ALSO IN THE COMMON KNOWLEDGE THAT EVEN MEDICAL PROFESSIONALS GET REFER RAL COMMISSION FROM THE HOSPITALS FOR REFERRING CLIENTS TO SUCH HO SPITALS WITHOUT HAVING FORMAL AGREEMENT WITH SUCH INSTITUTIONS. BE THAT AS IT MAY, THIS MUCH IS CLEAR THAT THE COMMISSION AGENTS HAVE INTRODUCED TH E APPELLANT TO THE CUSTOMERS IN CONNECTION WITH THE SALE OF PRODUCTS O F THE APPELLANT. THAT ITSELF WOULD BE A SERVICE RENDERED BY AGENCY FOR TH E PURPOSES OF THE APPELLANT'S BUSINESS. IT IS FURTHER SUBMITTED THAT IT IS NOT NECESSARY THAT THE APPELLANT SHOULD HAVE ENTERED INTO WRITTEN AGRE EMENT ONLY, MUTUAL UNDERSTANDING IS A/SO SUFFICIENT. FOR THE ABOVE PRO POSITIONS, 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 (C AL.) 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 SUBMISS IONS, IT IS SUBMITTED THAT THE APPELLANT HAS PLACED EACH AND EV ERY EVIDENCES TO ESTABLISH THAT THE COMMISSION AGENTS HAS PROVIDED S ERVICES 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 V IEW THAT EVEN INTRODUCTION OF THE CUSTOMERS TO THE ASSESSES IS IT SELF THE PROVISIONS OF SERVICES AND THEREFORE THE CONSIDERATION PAID THERE TO CANNOT BE NEGATED OR DISALLOWED MERELY ON THE GROUND THAT THERE WAS N O WRITTEN AGREEMENT OR REPLY WASNOT RECEIVED FROM THE SAID COMMISSION A GENTS. INSOFAR AS THE OBSERVATION OF THE LD. AO THAT THE SAID COMMISS ION 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 APPELL ANT WOULD NOT BECOME NON-GENUINE. IT IS FURTHER SUBMITTED THAT TH E 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 TH E 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.YEARS2011-12 & 2008-09 - 34 - WAS INFORMED ABOUT THE SAME, THE APPELLANT COULD HA VE 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 REQUIRE D TO BE DELETED AND ACCORDINGLY THE COMMISSION EXPENDITURE CLAIMED SHOU LD BE ALLOWED TO THE APPELLANT. 8.5 IN VIEW OF ABOVE MADE SUBMISSION, IT IS SUBMITT ED TO YOUR HONOUR TO DELETE THE DISALLOWANCE MADE BY THE LD AO AND AL LOW 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 TH E LEARNED CIT(A) MERELY BECAUSE THE AGREEMENT WAS NOT SUBMITTED BY THE ASSE SSEE OR NO REPLY HAS BEEN RENDERED BY THE COMMISSION AGENT THE ASSESSING OFFI CER SHOULD NOT HELD AGAINST THE ASSESSEE. BUT THE LEARNED CIT(A) CONFIR MED THE IMPUGNED DISALLOWANCE ON THE COUNT THAT THE ONLY SERVICE REN DERED 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 O F COMMISSION ELIGIBLE FOR DEDUCTION U/S 37. THE LEARNED AR AT THE TIME OF HEA RING OF THE INSTANT APPEAL RELIED UPON NUMBER OF JUDGMENTS INCLUDING SUZLON EN ERGY LTD.-VS-DCIT REPORTED IN 20 ITR(T) 391 (AHD) AND GUJARAT HIGH CO URT SWASTIC TEXTILE CO. (P.) LTD.-VS-CIT REPORTED IN (1984) 150 ITR 155 (GU J) WHICH SPEAKS OTHERWISE. WE HAVE CAREFULLY CONSIDERED THE JUDGMENT AS CITED ABOVE. IT IS A SETTLED PRINCIPLE OF LAW THAT COMMISSION PAID TO PERSONS FO R REFERRING NAMES OF CUSTOMERS IS ALLOWABLE U/S 37 OF THE ACT FOR INTROD UCING 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.YEARS2011-12 & 2008-09 - 35 - CITED ABOVE. WE THUS DELETE THE ADDITION. IN THE RE SULT, ASSESSEES APPEAL IS ALLOWED. 19. GROUND NO.2 TO 4 THE ISSUES RAISED BY THE ASSESSEE IN GROUND NOS. 2 TO 4 ARE EITHER GENERAL OR CONSEQUENTIAL IN NATURE. TH EREFORE, 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 W ITH THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N DELETING THE ADDITION OF RS.2,11,26,463/- MADE ON ACCOUNT OF DIF FERENCE IN JOB WORK. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N 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 ASSE SSING OFFICER BE RESTORED. 21. 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.YEARS2011-12 & 2008-09 - 36 - 22. THE ASSESSEE FILED ITS RETURN OF INCOME ON 05.0 9.2008 DECLARING TOTAL INCOME AT RS.1,10,63,150/- FOLLOWED BY REVISED RETU RN 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 WH ICH 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 APPL IED HIS MIND RESULTING INTO AN ERRONEOUS ASSESSMENT ORDER, PREJUDICIAL TO THE I NTEREST OF REVENUE. THE ASSESSING OFFICER, THEREFORE, WAS DIRECTED TO EXAMI NE ALL THE 8 ISSUES AFRESH AFTER GIVING OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. DURING SUCH COURSE OF PROCEEDING U/S 263 OF THE ACT, IT WAS FOUND THAT TH E 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 TH E 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 HAV E 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 T HE LEARNED AO BY THE ASSESSEE. THE JOB WORK RECEIPTS WAS SHOWN AT RS.3,5 4,04,388/- IN P&L ACCOUNT WHILE RS.2,16,43,268/- HAVE BEEN ACCOUNT FO R IN SALES DURING THE YEAR UNDER CONSIDERATION. IT WAS FURTHER CONTENDED BY TH E 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.YEARS2011-12 & 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 VALU ING 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 DISALLOWE D BEING THE DIFFERENT ACCOUNT TREATING THE SAME AS UNDISCLOSED INCOME OF THE ASSESSEE. 23. AT THE TIME OF HEARING OF THE INSTANT APPEAL, T HE LEARNED COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED BEFORE US THAT MERELY THE PAYEES HAVE DEDUCTED TAX AT SOURCE ON THE AMOUNT DUE TOWARDS SA LES CONSIDERATION WOULD NOT CHANGE FROM CHARACTER OF THE TRANSACTION. WHEN THE ASSESSEE HAS NO CONTROL OVER THE PAYEES ADDITION OUGHT NOT TO HAVE BEEN DON E ON THAT COUNT BY THE LEARNED AO. TAKING INTO CONSIDERATION THIS PARTICUL AR ASPECT OF THE MATTER, LEARNED CIT(A) RIGHTLY DELETED THE IMPUGNED ADDITIO N AS ALSO SUBMITTED BY THE LEARNED AR BEFORE US. ON THE CONTRARY THE LEARNED R EPRESENTATIVE OF THE DEPARTMENT RELIED UPON THE ORDER PASSED BY THE ASSE SSING OFFICER. 24. WE HAVE HEARD THE RIVAL SUBMISSIONS; WE HAVE AL SO 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 SUB MISSIONS OF THE APPELLANT.THE ASSESSING OFFICER HAS MADE THE IMPUGN ED ADDITION OF RS.2,11,26,463/-ON THE COUNT THAT APPELLANT HAD DIS CLOSED 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 HEARI NG 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.YEARS2011-12 & 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 SUC H 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 TH E CONCERNED PARTIES ERRONEOUSLY DEDUCTED TAX AT SOURCE ON SUCH DIFFEREN TIAL 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 BECOME S REVENUE NEUTRAL AND HENCE, QUESTION OF MAKING ADDITION IN RESPECT O F THE SAME DOESN'T HOLD ANY WATER. THE HON'BLE SUPREME COURT IN THE CA SE 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.' THE REFORE, 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 FUTIL ITY. 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 OPINI ON THAT THE BALANCE SUM OF RS.2,11,26,463/- HAS BEEN DISCLOSED AS THE P ART OF THE SALES WHICH HAS BEEN CREDITED TO P&L ACCOUNT, THE ACCOUNT HAS BECOM E REVENUE NEUTRAL AND THUS, THE QUESTION OF MAKING ADDITION DOES NOT ARIS E. HE ALSO RELIED UPON THE RATIO LAID DOWN BY THE HONBLE APEX COURT IN THE MA TTER OF KEDARNATH JUTE MFG. CO. LTD.-VS-CIT REPORTED IN 82 ITR 363 (SC) WH ERE 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 CHARACT ER OF THE TRANSACTION IS TO BE LOOKED INTO. ON THAT BASIS, THE LEARNED CIT(A) A LSO 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.YEARS2011-12 & 2008-09 - 39 - THAT IN THE EVENT THE ADDITION IS TO BE SUSTAINED S AME AMOUNT REQUIRES TO BE REDUCED FROM SALES SO AS TO AVOID DOUBLE TAXATION H E THUS DELETED THE ADDITION. THE CLARIFICATION SO GIVEN BY THE CIT(A) IS ACCORDI NG TO US JUST AND PROPER AND WITHOUT ANY INFIRMITY THE SAME IS CONFIRMED. THE RE VENUES APPEAL IS DISMISSED. 25. GROUND NO.2 RELATES TO DELETION OF ADDITION OF RS.62,93,378/- MADE ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK U/S 145 A OF THE ACT. 26. 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 L EARNED AO THAT THE ASSESSEE HAD ADDED THE SAID AMOUNT OF RS.6,66,004/- TO THE C LOSING 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 STOC K 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 CONSID ERED 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 O F GOODS OF RS.8,01,763/- AND RS.6,66,004/- HAS BEEN ADDED TO THE CLOSING STO CK. 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. F INALLY RS.62,93,378/- HAS BEEN CALCULATED AS THE AMOUNT OF VAT AND EXCISE DUT Y 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.YEARS2011-12 & 2008-09 - 40 - INCOME OF THE ASSESSEE. IN APPEAL, THE LEARNED CIT( A) DISALLOWED THE SAME. HENCE, THE INSTANT APPEAL BEFORE US. 27. AT THE TIME OF HEARING OF THE INSTANT APPEAL, T HE 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 I NVENTORIES 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 F OLLOWS EXCLUSIVE METHOD OR INCLUSIVE METHOD NO ADDITION IS CALLED FOR U/S 14 5A OF THE ACT. THE LEARNED ARALSO RELIED UPON THE JUDGMENT PASSED BY THE CO-OR DINATE BENCH IN THE MATTER OF PCIT-VS-MAMTA BRAMPTON ENGG. P. LTD. REPO RTED IN ITA NO.2387/AHD/2013 AS ALSO IN THE MATTER OF DCIT-VS-A IA 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 HA S BEEN SUBMITTED BEFORE US. HE, THUS PRAYED FOR CONFIRMATION OF THE ORDER PASSE D BY THE LEARNED CIT(A). THE LEARNED DR, ON THE OTHER HAND, RELIED UPON THE ORDER PASSED BY THE LEARNED AO. 28. HEARD THE RESPECTIVE PARTIES, PERUSED THE RELEV ANT 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/20 15; THE RELEVANT PORTION WHEREOF IS AS FOLLOWS: 3. AT THE TIME OF HEARING BEFORE US, LEARNED REPR ESENTATIVES FAIRLY AGREE THAT THE ABOVE GRIEVANCE IS COVERED, IN FAVOU R OF THE ASSESSEE, BY THE DECISION DATED 31.08.2016 OF THE CO-ORDINATE BE NCH 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.YEARS2011-12 & 2008-09 - 41 - IN THE CASE OF ITO VS. MAMATA BRAMPTON ENGG. PVT. L TD. IN ITA NO.2387/AHD/2013 FOR ASSESSMENT YEAR 2008-09 WHEREI N THE TRIBUNAL HAS, INTER ALIA, OBSERVED AS FOLLOWS:- 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E 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 CLO SING 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 G IVEN A FINDING THAT ASSESSEE IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING WHEREBY THE EXCISE DUTY IS NOT INCLUDED IN THE VALU ATION OF STOCK AND RAW-MATERIALS AS THE EXCISE DUTY PAID AND COLLE CTED IS NOT MADE PART AND PARCEL OF THE PROFIT & LOSS A/C. HE H AS 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 PROF IT AND IS REVENUE NEUTRAL. HE HAS FURTHER RELIED ON THE DECIS ION 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 PLACE D ANY CONTRARY BINDING DECISION IN ITS SUPPORT. WE FURTHE R FIND THAT THE HON'BLE APEX COURT IN THE CASE OF INDO NIPPO CHEMIC ALS (2003) 261 ITR 375 HAS HELD THAT UNAVAILED MODVAT CREDIT C ANNOT BE CONSTRUED AS INCOME AND THERE IS NO LIABILITY TO PA Y TAX ON SUCH UNAVAILED MODVAT CREDIT. IN VIEW OF THE AFORESAID F ACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF THE L D.CIT(A). THUS, THIS GROUND OF REVENUE IS DISMISSED. 4. WE SEE NO REASON TO TAKE ANY OTHER VIEW OF THE M ATTER THAN THE VIEW SO TAKEN BY THE CO-ORDINATE BENCH. RESPECTFULLY FOL LOWING THE SAME, WE SEE NO REASONS TO INTERFERE IN THE CONCLUSIONS ARRI VED AT BY THE LD. CIT(A). ACCORDINGLY, WE CONFIRM THE ORDER OF THE LE ARNED CIT(A) AND DISMISS THE APPEAL OF THE REVENUE. 5. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. 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.YEARS2011-12 & 2008-09 - 42 - WE HAVE FURTHER CONSIDERED THE JUDGMENT PASSED IN T HE 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 T HE AO AND LD.CIT(A) ITA NO.2387/AHD/2013 ITO VS. MAMATA BRAMP TON 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 HONBLE GUJARAT HIGH COURT IN THE CASE OF NARMADA C HEMATUR PETROCHEMICALS LTD. (327 ITR 369). HE FURTHER SUBMI TTED THAT THERE ARE VARIOUS DECISIONS OF SIMILAR ISSUES WHERE THE COORD INATE BENCH OF TRIBUNAL (ITAT D BENCH AHMEDABAD) HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. HE PLACED ON RECORD THE COPY OF THE DE CISION IN THE CASE OF M/S.GH INDUSTRIES VS. ACIT PASSED IN ITA NO.2613/AH D/2011 FOR AY 2008-09, DATED 12/02/2016. HE THUS SUPPORTED THE OR DER OF LD.CIT(A). 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO THE AD DITION OF UNUTILISED CENVAT CREDIT TO THE CLOSING STOCK. WE FIND THAT TH E LD.CIT(A) WHILE DECIDING THE ISSUE IN FAVOUR OF ASSESSEE HAS GIVEN A FINDING THAT ASSESSEE IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTIN G 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 ASS ESSEE 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 DECIS ION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF NARMADA CHEMATUR PETROCHEMICALS ITA NO.2387/AHD/2013 ITO VS. MAMATA BRAMPTON ENGG.P VT.LTD. ASST.YEAR 2008-09 - 8 - LTD.(SUPRA). BEFORE US, R EVENUE HAS NEITHER CONTROVERTED THE FINDING OF LD.CIT(A) NOR HAS PLACE D ANY CONTRARY BINDING DECISION IN ITS SUPPORT. WE FURTHER FIND TH AT THE HONBLE APEX COURT IN THE CASE OF INDO NIPPO CHEMICALS (2003) 26 1 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 I NTERFERE WITH THE ORDER OF THE LD.CIT(A). THUS, THIS GROUND OF REVENUE IS D ISMISSED. ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 43 - 6. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. 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 DO WN BY THE JUDGMENT PASSED BY THE CO-ORDINATE BENCH AS DISCUSSED ABOVE. THE RE VENUES APPEAL IS THUS FOUND TO BE DEVOID OF ANY MERIT AND HENCE DISMISSED . 29. GROUND NO.3 RELATES TO THE DELETION OF DISALLOWANCE OF RS.2,25 ,530/- U/S 40A(2) OF THE ACT. 30. 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, W HICH ACCORDING TO HIM IS EXCESSIVE. THE ASSESSEE CLARIFIED THAT THE FUND OBT AINED FROM RELATIVES AND THAT FROM OTHERS CANNOT BE COMPARED AS THE LOANS FROM BA NKS/OTHERS SINCE THEY REQUIRE SECURITY AND PERSONAL GUARANTEE FROM THE PA RTNERS. 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 LE ARNED 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 ASSESSE ES 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 ASSESSEES CASE FOR A.Y. 2011-12 HAS NOT BEEN CHALLENGED BEFORE US FOLLOWING THE PRINCIPLE O F CONSISTENCY, THE DEPARTMENT OUGHT NOT TO HAVE CHALLENGED THE ISSUE I N 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.YEARS2011-12 & 2008-09 - 44 - LEARNED DR FAILED TO CONTROVERT SUCH SUBMISSION MAD E BY THE LEARNED AR. WE FIND SUBSTANCES IN SUCH SUBMISSION MADE BY THE L EARNED 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 LE ARNED CIT(A). HENCE, REVENUES APPEAL FOUND TO BE DEVOID OF MERIT AND TH US DISMISSED. 31. GROUND NO.4 & 5 THE ISSUES RAISED BY THE REVENUE IN GROUND NOS. 4& 5 ARE EITHER GENERAL OR CONSEQUENTIAL IN NATURE. TH EREFORE NO SEPARATE ADJUDICATION IS REQUIRED. THEREFORE, THE GROUNDS RA ISED BY THE REVENUE ARE DISMISSED. 32. IN THE COMBINED RESULT REVENUES APPEAL IN ITA NO.2316/AHD/2014 IS DISMISS ED. REVENUES APPEAL IN ITA NO.3055/AHD/2015 IS DISMISS ED. ASSESSEES CROSS OBJECTION NO.271/AHD/2014 IS PARTL Y ALLOWED. ASSESSEES 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 ITA NO. 2316/AHD/2014 & CO NO.271/AHD/2014 AND ITA NOS.2954 & 3055/AHD/2015 VISHAL ENGINEERINGS AND GALVANIZERS ASST.YEARS2011-12 & 2008-09 - 45 - / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. () / THE CIT(A)-XI & 3 AHMEDABAD. 5. , ! ', #$%% / DR, ITAT, AHMEDABAD 6. &' () / GUARD FILE. / BY ORDER , //TRUE COPY// / (DY./ASSTT.REGISTRAR) !, #$ / 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 D ICTATING 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 RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER