Ram Krishan Kulwant Rai, CHENNAI V. ACIT Central Circle 2(3), CHENNAI

ITA 1047/CHNY/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4283 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S BHARATH
• Assessee Lawyers: D ANAND
• Keywords: Capital asset; Validity of assessment
• Section: 143(3); 153A; 147; 148; 132; 15

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , , ' # BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ ITA NO.1047/CHNY/2018 & '& / ASSESSMENT YEAR : 2009-10 M/S RAM KRISHAN KULWANT RAI HOLDINGS PVT. LTD., NO.6/13, NORTH AVENUE, KESAVAPERUMAL PURAM, CHENNAI - 600 028. PAN : AAECR 2215 B V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(3), CHENNAI. ()*/ APPELLANT) (+,)*/ RESPONDENT) )* - . / APPELLANT BY : SHRI D. ANAND, ADVOCATE +,)* - . / RESPONDENT BY : SHRI S. BHARATH, CIT / - 0' / DATE OF HEARING : 29.08.2018 12' - 0' / DATE OF PRONOUNCEMENT : 29.10.2018 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) -18, CHENN AI, DATED 11.01.2018 AND PERTAINS TO ASSESSMENT YEAR 2009-10. 2. SHRI D. ANAND, THE LD.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSIN ESS OF 2 I.T.A. NO.1047/CHNY/18 HOSPITALITY SERVICES, MORE PARTICULARLY, PROMOTION OF HOTELS AND SERVICE APARTMENTS. DURING THE YEAR UNDER CONSIDER ATION, ACCORDING TO THE LD. COUNSEL, THERE WAS A SEARCH UNDER SECTIO N 132 OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') IN RKKR S BQ GROUP OF COMPANIES ON 26.09.2012. DURING THE COURSE OF SEAR CH OPERATION, ACCORDING TO THE LD. COUNSEL, THE DOCUMENTS RELATIN G TO REGISTRATION OF ASSESSEE-COMPANY WAS SAID TO BE FOUND. ACCORDIN GLY, A NOTICE UNDER SECTION 153C OF THE ACT WAS ISSUED BY THE ASS ESSING OFFICER TO THE ERSTWHILE PARTNERSHIP FIRM ON 26.09.2014. A CCORDING TO THE LD. COUNSEL, BEFORE THE ASSESSEE-COMPANY WAS INCORP ORATED AS A COMPANY UNDER THE COMPANIES ACT, IT WAS A PARTNERSH IP FIRM. THE PARTNERSHIP FIRM HAD REVALUED ITS ASSETS ON 03.11.2 008. ON ACCOUNT OF REVALUATION, THE VALUE OF THE ASSET WAS INCREASE D TO THE EXTENT OF 117,24,04,974/- AND THE BOOK VALUE OF THE ASSET ON THE DATE OF REVALUATION WAS 52,16,526/-. ACCORDING TO THE LD. COUNSEL, THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE ASSET AND THE REVALUATION WAS GIVEN CREDIT AS LOAN FROM THE PARTNERS CAPITAL ACCOUNT IN THE SAME PROPORTION AS THEIR RESPECTIVE CAPITAL IN THE PARTNERSHIP FIRM. ON CONVERSION OF PARTNERSHIP FIRM INTO A PRIVATE LI MITED COMPANY, THE PRESENT ASSESSEE BEFORE THIS TRIBUNAL, THE BALA NCE IN THE CAPITAL ACCOUNT OF ALL THE SHAREHOLDERS / PARTNERS WAS 117,32,87,070/-. 3 I.T.A. NO.1047/CHNY/18 CONSEQUENTLY, ACCORDING TO THE LD. COUNSEL, SHARES WERE ALLOTTED TO THE PARTNERS OF THE FIRM FOR A TOTAL AMOUNT OF 10 LAKHS EACH AND THE BALANCE AMOUNT OF 117,22,87,070/- WAS GIVEN CREDIT TO THE PARTNERS OF ERSTWHILE FIRM IN THE SAME PROPORTION A S THEIR CAPITAL IN THE FIRM. THEREFORE, ACCORDING TO THE LD. COUNSEL, AFTER THE PARTNERSHIP FIRM WAS CONVERTED INTO PRIVATE LIMITED COMPANY, THE SHARES AND THE VALUE OF THE REVALUATION OF ASSET WA S GIVEN CREDIT ON THE SAME PROPORTION AS THEIR CAPITAL IN THE PARTNER SHIP FIRM. 3. SHRI D. ANAND, THE LD.COUNSEL FOR THE ASSESSEE, FURTHER SUBMITTED THAT EVEN THOUGH NOTICE UNDER SECTION 153 C OF THE ACT WAS ISSUED ON 26.09.2014 TO THE ERSTWHILE PARTNERSH IP FIRM, NO ASSESSMENT WAS FRAMED UNDER SECTION 153C OF THE ACT . REFERRING TO THE COMMUNICATION SAID TO BE RECEIVED BY THE ERS TWHILE PARTNERSHIP FIRM ON 05.12.2014 FROM THE ASSESSING O FFICER, THE LD.COUNSEL SUBMITTED THAT AFTER ISSUING NOTICE UNDE R SECTION 153C OF THE ACT, THE PROCEEDING INITIATED UNDER SECTION 153C OF THE ACT WAS DROPPED BY THE ASSESSING OFFICER. REFERRING TO SECTION 153A OF THE ACT, THE LD.COUNSEL SUBMITTED THAT WHEN THERE W AS A SEARCH, AND INCRIMINATING MATERIALS WERE CLAIMED TO BE FOUN D BY THE ASSESSING OFFICER, THE PROCEEDING HAS TO BE INITIAT ED UNDER SECTION 4 I.T.A. NO.1047/CHNY/18 153C OF THE ACT SINCE THE ASSESSEE BEING A PERSON O THER THAN THE SEARCHED PERSON. ACCORDING TO THE LD. COUNSEL, IN FACT, THE ASSESSING OFFICER INITIATED PROCEEDING BY ISSUING N OTICE UNDER SECTION 153C OF THE ACT. HOWEVER, HE DROPPED THE P ROCEEDING FOR THE REASON WELL KNOWN TO HIM. ACCORDING TO THE LD. COUNSEL, SECTION 153A AND 153C OF THE ACT COMMENCE WITH NON OBSTANTE CLAUSE NOTWITHSTANDING ANYTHING, THEREFORE, NOTWI THSTANDING ANYTHING CONTAINED IN SECTION 147, 148 AND 139 OF T HE ACT, THE ASSESSING OFFICER IS BOUND TO INITIATE PROCEEDING U NDER SECTION 153C OF THE ACT. HAVING DROPPED THE PROCEEDING UND ER SECTION 153C OF THE ACT, ACCORDING TO THE LD. COUNSEL, THE ASSESSING OFFICER CANNOT INITIATE ANY PROCEEDING FOR REOPENING OF ASS ESSMENT UNDER SECTION 147 OF THE ACT. THE LD.COUNSEL PLACED HIS RELIANCE ON THE DECISION OF AMRITSAR BENCH OF THIS TRIBUNAL IN ITO V. ARUN KUMAR KAPOOR IN I.T.A. NO.147(ASR)/2010 DATED 21.06.2011 AND SUBMITTED THAT THE TRIBUNAL FOUND THAT WHEREVER THE RE WAS SEARCH OPERATION, THE PROVISIONS OF SECTION 153C OF THE AC T COME INTO OPERATION AND SECTIONS 147 AND 148 OF THE ACT STAND OUSTED. THE PROCEEDING INITIATED UNDER SECTION 153C OF THE ACT WAS DROPPED, ACCORDING TO THE LD. COUNSEL, THE ASSESSMENT FRAMED UNDER SECTION 143(3) READ WITH SECTION 147 OF THE ACT IS INVALID. FOR THE SAME 5 I.T.A. NO.1047/CHNY/18 PROPOSITION, THE LD.COUNSEL ALSO PLACED HIS RELIANC E ON THE JUDGMENT OF DELHI HIGH COURT IN CIT V. ANIL KUMAR BHATIA (20 12) 82 CCH 113. 4. REFERRING TO THE COPY OF THE NOTICE DATED 26.09. 2014 ISSUED BY THE ASSESSING OFFICER TO THE ERSTWHILE PARTNERSH IP FIRM, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSE SSING OFFICER ADMITTED THAT THERE WAS SEARCH OPERATION IN THE CAS E OF SBQ STEELS LTD. ON EXAMINATION OF SEIZED MATERIAL, THE ASSESS ING OFFICER FOUND THAT PART OF THE SEIZED MATERIAL BELONGS TO ERSTWHI LE PARTNERSHIP FIRM. THEREFORE, HE INITIATED PROCEEDING UNDER SECTION 15 3C OF THE ACT. HAVING INITIATED THE PROCEEDING UNDER SECTION 153C OF THE ACT, ACCORDING TO THE LD. COUNSEL, THE ASSESSING OFFICER IS EXPECTED TO TAKE THE SAME TO THE LOGICAL CONCLUSION. HOWEVER, THE ASSESSING OFFICER DROPPED THE PROCEEDING INITIATED UNDER SECT ION 153C OF THE ACT, THEREFORE, ACCORDING TO THE LD. COUNSEL, THE A SSESSMENT FRAMED BY THE ASSESSING OFFICER UNDER SECTION 143(3) READ WITH SECTION 147 OF THE ACT CANNOT STAND IN THE EYE OF LAW. AC CORDING TO THE LD. COUNSEL FOR THE ASSESSEE, ADMITTEDLY THERE WAS A SE ARCH AND PROCEEDINGS WERE INITIATED UNDER SECTION 153C OF TH E ACT, THEREFORE, THE PROVISIONS OF SECTION 143(3) AND 147 ARE OUSTED , IN VIEW OF 6 I.T.A. NO.1047/CHNY/18 EXPRESS LANGUAGE EMPLOYED BY PARLIAMENT IN SECTION 153A AND 153C OF THE ACT. 5. COMING TO THE MERIT OF THE APPEAL, THE LD.COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER FOUND THAT THERE WAS A TRANSFER OF PROPERTY ON CONVERSION OF PARTNERSHIP FIRM INTO A PRIVATE LIMITED COMPANY. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE PRIVATE LIMITED COMPANY WAS A SUCCESSOR TO THE ERST WHILE PARTNERSHIP FIRM. THE SHARES OF THE ASSESSEE-COMPA NY WERE ALLOTTED TO THE PARTNERS IN THE SAME PROPORTION AS THEIR RESPECTIVE CAPITAL IN THE PARTNERSHIP FIRM. ACCORDING TO THE LD. COUNSEL, THE PRIVATE LIMITED COMPANY SUCCEEDED TO ALL THE ASSETS AND LIABILITIES OF THE FIRM, THEREFORE, IT CANNOT BE CONSTRUED AS TRAN SFER OF CAPITAL ASSET. REFERRING TO SECTION 47(XIII) OF THE ACT, T HE LD.COUNSEL SUBMITTED THAT ANY TRANSFER OF CAPITAL ASSET OR INT ANGIBLE ASSET BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM, CANNOT BE CONS TRUED AS TRANSFER. HENCE, NO TAX COULD BE LEVIED. 6. REFERRING TO THE ASSESSMENT ORDER, THE LD.COUNSE L SUBMITTED THAT THE ASSESSING OFFICER REJECTED THE CLAIM OF TH E ASSESSEE ON THE GROUND THAT THE CONDITION STIPULATED IN SECTION 47( XIII) (C) OF THE ACT 7 I.T.A. NO.1047/CHNY/18 WAS VIOLATED. ACCORDING TO THE LD. COUNSEL, THERE WAS NO VIOLATION OF SECTION 47(XIII) (C) OF THE ACT AT ALL. REFERRI NG TO THE CONDITIONS REFERRED IN SECTION 47(XIII) OF THE ACT, THE LD.COU NSEL SUBMITTED THAT THE FIRST CONDITION IS THAT ALL THE ASSETS AND LIAB ILITIES OF THE FIRM RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUC CESSION SHALL BECOME THE ASSETS AND LIABILITIES OF THE COMPANY. IN THIS CASE, ACCORDING TO THE LD. COUNSEL, ALL THE ASSETS AND LI ABILITIES OF THE ERSTWHILE PARTNERSHIP FIRM BECAME ASSETS AND LIABIL ITIES OF THE ASSESSEE-COMPANY. THEREFORE, THE FIRST CONDITION I S FULFILLED. THE SECOND CONDITION UNDER SECTION 47(XIII) OF THE ACT IS THAT ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE THE SUCCESS ION BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. HERE ALSO, THE PARTNERS OF ERSTWHILE P ARTNERSHIP FIRM BECAME SHAREHOLDERS OF THE ASSESSEE-COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. HENCE, THE SECOND CONDITION IS ALSO FULFILLED. REFERRING TO THE THIRD CONDITION, THE L D.COUNSEL SUBMITTED THAT THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CO NSIDERATION OR BENEFIT DIRECTLY OR INDIRECTLY IN ANY MANNER OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY. ACCORDING TO T HE LD. COUNSEL, 8 I.T.A. NO.1047/CHNY/18 THIS CONDITION WAS SAID TO BE VIOLATED SINCE AFTER REVALUATION, THE REVALUED AMOUNT WAS CREDITED IN THE CAPITAL ACCOUNT S OF THE PARTNERS AS A LOAN IN THE SAME PROPORTION AS THEIR CAPITAL ACCOUNTS STOOD ON THE DATE OF REVALUATION. ACCORDING TO THE LD. COUNSEL, THE SAME CREDIT ON THE DATE OF REVALUATION CONTINUED EV EN AFTER THE SUCCESSION TO THE ASSESSEE-COMPANY IN THE SAME PROP ORTION. THEREFORE, ACCORDING TO THE LD. COUNSEL FOR THE ASS ESSEE, THE THIRD CONDITION OF SECTION 47(XIII) OF THE ACT ARE NOT VI OLATED. IN OTHER WORDS, ACCORDING TO THE LD. COUNSEL, SECTION 47(XII I) IS NOT VIOLATED. ACCORDING TO THE LD. COUNSEL, THERE WAS NO BENEFIT RECEIVED BY THE SHAREHOLDERS OR THE ERSTWHILE PARTNERS EITHER DIREC TLY OR INDIRECTLY. 7. PLACING RELIANCE ON THE JUDGMENT OF MADRAS HIGH COURT IN CADD CENTRE V. ACIT (2016) 383 ITR 258, THE LD.COUN SEL SUBMITTED THAT IN THE CASE BEFORE THE MADRAS HIGH C OURT AS IN THE CASE BEFORE US, THE PRIVATE LIMITED COMPANY SUCCEED ED TO THE ASSETS AND LIABILITIES OF THE PARTNERSHIP FIRM. AL L THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE THE SUCCESSION BECAME THE S HAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR C APITAL STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. A S IN THE CASE BEFORE US, ACCORDING TO THE LD. COUNSEL, THE ASSETS OF THE 9 I.T.A. NO.1047/CHNY/18 PARTNERSHIP FIRM WERE REVALUED AND THE PARTNERSHIP FIRM BUSINESS ALONG WITH ASSETS AND LIABILITIES WAS TAKEN OVER BY THE PRIVATE LIMITED COMPANY AS A GOING CONCERN. IN THOSE FACTS AND CIR CUMSTANCES OF THE CASE, THE MADRAS HIGH COURT, AFTER CONSIDERING VARIOUS JUDGMENTS OF THE OTHER HIGH COURTS AND SUPREME COUR T ON THE SUBJECT, CAME TO A CONCLUSION THAT THERE WAS NO TRA NSFER OF ASSETS SINCE NO CONSIDERATION WAS RECEIVED OR ACCRUED ON T RANSFER OF ASSETS FROM PARTNERSHIP FIRM TO THE COMPANY. THE P ARTNERSHIP FIRM HAS ONLY REVALUED ITS ASSETS WHICH WILL NOT AMOUNT TO TRANSFER. ACCORDING TO THE LD. COUNSEL, THE HIGH COURT HAS AL SO FOUND THAT PROVISIONS OF SECTION 45(4) OF THE ACT IS APPLICABL E ONLY WHEN THE PARTNERSHIP FIRM WAS DISSOLVED. SINCE THE PROPERTY OF THE PARTNERSHIP FIRM VESTED IN THE PRIVATE LIMITED COMP ANY NOT CONSEQUENT TO TRANSFER, AS CONTEMPLATED UNDER SECTI ON 45(4) OF THE ACT, THE HIGH COURT FOUND THAT THERE CANNOT BE ANY CAPITAL GAIN ARISING OUT OF CONVERSION OF PARTNERSHIP FIRM INTO A PRIVATE LIMITED COMPANY. THIS JUDGMENT OF MADRAS HIGH COURT, ACCOR DING TO THE LD. COUNSEL, IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE. 8. THE LD.COUNSEL FOR THE ASSESSEE HAS ALSO PLACED HIS RELIANCE ON THE JUDGMENT OF APEX COURT IN MALABAR FISHERIES CO. V. CIT 10 I.T.A. NO.1047/CHNY/18 (1979) 120 ITR 49. THE LD.COUNSEL HAS ALSO INVITED OUR ATTENTION TO SECTION 45(4) OF THE ACT AND SUBMITTED THAT IN CASE OF DISSOLUTION AND DISTRIBUTION OF CAPITAL ASSET, THE GAIN ARISING MAY BE CHARGEABLE TO CAPITAL GAIN. IN THIS CASE, ACCORDING TO THE LD . COUNSEL, IT IS A CASE OF SUCCESSION AND NOT A CASE OF DISSOLUTION AN D DISTRIBUTION. THEREFORE, IN VIEW OF JUDGMENT OF MADRAS HIGH COURT IN CADD CENTRE (SUPRA) AND JUDGMENT OF APEX COURT IN MALABA R FISHERIES CO. (SUPRA), ACCORDING TO THE LD. COUNSEL, IT CANNO T BE CONSTRUED AS TRANSFER OF CAPITAL ASSET BY WAY OF DISTRIBUTION ON DISSOLUTION, HENCE, NO CAPITAL GAIN TAX IS CHARGEABLE IN THE CASE OF SU CCESSION OF THE CAPITAL ASSET BY A COMPANY FROM THE ERSTWHILE PARTN ERSHIP FIRM. THE LD.COUNSEL HAS ALSO INVITED OUR ATTENTION TO SUB-SE CTION (3) OF SECTION 45 OF THE ACT AND SUBMITTED THAT EVEN IN WO RST CASE, IF THE SUCCESSION OF THE COMPANY TO THE PARTNERSHIP FIRM I S CONSTRUED AS TRANSFER OF CAPITAL ASSET, THEN THE CAPITAL GAIN MA Y, AT THE BEST, BE LEVIED EITHER IN THE HANDS OF ERSTWHILE PARTNERSHIP FIRM OR IN THE HANDS OF ERSTWHILE PARTNERS. IN THE CASE BEFORE US , ACCORDING TO THE LD. COUNSEL, THE PRIVATE LIMITED COMPANY, WHICH SUC CEEDED TO THE ASSETS AND LIABILITIES OF THE PARTNERSHIP FIRM IS T HE ASSESSEE. THEREFORE, ACCORDING TO THE LD. COUNSEL, THE ASSESS EE-COMPANY IS NOT LIABLE TO CAPITAL GAIN TAX EVEN IF IT IS CONSTR UED AS TRANSFER OF 11 I.T.A. NO.1047/CHNY/18 CAPITAL ASSET. THEREFORE, ACCORDING TO THE LD. COU NSEL, THE CIT(APPEALS) IS NOT JUSTIFIED IN CONFIRMING THE ORD ER OF THE ASSESSING OFFICER. 9. ON THE CONTRARY, SHRI S. BHARATH, THE LD. DEPART MENTAL REPRESENTATIVE, SUBMITTED THAT ADMITTEDLY THERE WAS A SEARCH OPERATION IN THE CASE OF SBQ STEELS LTD. ON 26.09.2 012 AND DOCUMENT RELATING TO FORMATION OF ASSESSEE-COMPANY CONVERTING THE PARTNERSHIP FIRM WAS FOUND AND THE ASSESSING OFFICE R ISSUED NOTICE ON 26.09.2014 UNDER SECTION 153C OF THE ACT CALLING UPON THE ASSESSEE TO FILE RETURN OF INCOME WITHIN FIFTEEN DA YS. ON VERIFICATION OF THE RETURN FILED BY THE ASSESSEE BEFORE THE DATE OF SEARCH, ACCORDING TO THE LD. D.R., IT WAS FOUND THAT THE AS SESSEE HAS DISCLOSED THE REVALUATION OF ASSET AND FORMATION OF THE COMPANY IN THE RETURN OF INCOME. THEREFORE, ACCORDING TO THE LD. D.R., ALL THE INFORMATION WERE AVAILABLE BEFORE THE ASSESSING OFF ICER BEFORE THE DATE OF SEARCH. HENCE, THE ASSESSING OFFICER HAD T O INITIATE PROCEEDING ONLY UNDER SECTION 148 AND 147 OF THE AC T AND NOT UNDER SECTION 153C OF THE ACT. EVEN THOUGH INITIAL LY A NOTICE UNDER SECTION 153C OF THE ACT WAS ISSUED TO THE ASSESSEE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER SUBSEQUENTLY FO UND THAT THE 12 I.T.A. NO.1047/CHNY/18 PROCEEDING HAS TO BE INITIATED ONLY UNDER SECTION 1 48 OF THE ACT FOR REASSESSMENT OF ESCAPED INCOME. THEREFORE, ACCORDI NG TO THE LD. D.R., THE ASSESSING OFFICER HAS RIGHTLY DROPPED THE PROCEEDING INITIATED UNDER SECTION 153C OF THE ACT AND PASSED THE ORDER UNDER SECTION 143(3) READ WITH SECTION 147 OF THE ACT. 10. COMING TO THE MERIT OF THE APPEAL, SHRI S. BHAR ATH, THE LD. D.R. SUBMITTED THAT ON REVALUATION OF THE ASSET OF THE PARTNERSHIP FIRM, A SUM OF 117,22,87,069/- WAS CREDITED IN THE CAPITAL ACCOUNT OF THE PARTNERS IN EQUAL PROPORTION AS THAT OF THE CAPITAL AS A LOAN. ACCORDING TO THE LD. D.R., THIS IS AN INDIRECT TRAN SFER OF PROPERTY BY THE PARTNERS / PARTNERSHIP FIRM TO THE COMPANY. ON CE THE REVALUATION AMOUNT WAS CREDITED AS LOAN IN THE CAPI TAL ACCOUNT OF THE PARTNERS, ACCORDING TO THE LD. D.R., THE COMPAN Y IS BOUND TO REPAY THE AMOUNT WHENEVER THE PARTNERS DEMAND THE S AME, THEREFORE, IT IS AN INDIRECT WAY OF GETTING BENEFIT AS PROVIDED IN SECTION 47(XIII) (C) OF THE ACT. HENCE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER HAS RIGHTLY FOUND THAT THERE WAS VIOLATION OF CONDITION STIPULATED IN SECTION 47(XIII) (C) OF THE ACT. THEREFORE, THE ASSESSEE IS LIABLE TO PAY TAX ON THE CAPITAL GAIN. REFERRING TO SECTION 2(47) OF THE ACT, THE LD. D.R. SUBMITTED TH AT EXTINGUISHMENT 13 I.T.A. NO.1047/CHNY/18 OF RIGHT IS ALSO CONSIDERED TO BE A TRANSFER. ON A QUERY FROM THE BENCH, WHEN THE COMPANY SUCCEEDED TO THE ASSETS AND LIABILITIES OF THE PARTNERSHIP FIRM, EVEN FOR ARGUMENT SAKE, IT WA S CONSTRUED AS TRANSFER, WHETHER THE ASSESSEE-COMPANY IS LIABLE TO PAY CAPITAL GAIN TAX OR THE PARTNERS OF THE ERSTWHILE PARTNERSHIP FI RM IS LIABLE TO PAY THE TAX? THE LD. D.R. COULD NOT CLARIFY WHO IS LIA BLE TO PAY TAX ON THE CAPITAL GAIN IN CASE IT WAS CONSTRUED AS TRANSFER. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE ASSESSEE-COMPANY WAS CONSTITUTED BY CONVERTING A PA RTNERSHIP FIRM INTO A PRIVATE LIMITED COMPANY. THE ASSESSEE-COMPA NY SUCCEEDED TO ALL THE ASSETS, LIABILITIES AND BUSINESS AS A GO ING CONCERN OF THE ERSTWHILE PARTNERSHIP FIRM. THIS IS NOT IN DISPUTE . MOREOVER, THE ERSTWHILE PARTNERS OF THE PARTNERSHIP FIRM WERE ALS O ALLOTTED SHARES IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOU NTS STOOD ON THE DATE OF SUCCESSION. THE ONLY DISPUTE IS WITH REGAR D TO CREDIT OF DIFFERENCE BETWEEN THE REVALUATION VALUE AND BOOK V ALUE OF THE ASSET AS LOAN IN THE CAPITAL ACCOUNT OF THE PARTNER S. THIS CREDIT OF DIFFERENCE IN THE REVALUATION OF ASSET IN THE CAPIT AL ACCOUNT OF THE PARTNERS IS CLAIMED BY THE REVENUE AS INDIRECT FORM OF GETTING 14 I.T.A. NO.1047/CHNY/18 BENEFIT BY THE PARTNERS OTHER THAN BY WAY OF ALLOTM ENT OF SHARES IN THE COMPANY. IT IS NOT IN DISPUTE THAT ASSET OF TH E PARTNERSHIP FIRM WAS REVALUED AND THE DIFFERENCE IN REVALUATION AND THE BOOK VALUE WAS CREDITED IN THE BOOKS OF THE PARTNERSHIP FIRM A S LOAN IN THE CAPITAL ACCOUNT OF THE PARTNERS IN THE SAME PROPORT ION IN WHICH THEIR CAPITAL ACCOUNT STOOD ON THE DATE OF REVALUATION. THE QUESTION ARISES FOR CONSIDERATION IS WHETHER THERE WAS ANY T RANSFER OF ASSET WITHIN THE MEANING OF SECTION 2(47) AND 45(4) OF TH E ACT? 12. THIS ISSUE WAS EXAMINED BY THE MADRAS HIGH COUR T IN THE CASE OF CADD CENTRE (SUPRA). IN THE CASE BEFORE MA DRAS HIGH COURT, A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS O F TRAINING AND TRADING OF SOFTWARE WAS CONVERTED INTO A PRIVATE LI MITED COMPANY. AFTER INCORPORATION OF PRIVATE LIMITED COMPANY, THE ASSETS AND LIABILITIES AND BUSINESS AS GOING CONCERN WERE SUCC EEDED BY THE PRIVATE LIMITED COMPANY, NAMELY, CADD CENTRE INDIA PVT. LTD. ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE SUCCESS ION BECAME SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION AS THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. THE ERSTWHILE PARTNERSHIP FIRM REVALUED THE ASSETS AND THE PARTNERSHIP BUSINESS WAS CONVERTED INTO BUSINESS OF PRIVATE LIMITED 15 I.T.A. NO.1047/CHNY/18 COMPANY AS GOING CONCERN. THE ASSESSING OFFICER FO UND THAT TRANSFER OF BUSINESS ASSET OF THE PARTNERSHIP FIRM TO THE PRIVATE LIMITED COMPANY WOULD CONSTITUTE DISTRIBUTION OF AS SETS AND ATTRACT CAPITAL GAIN AS CONTEMPLATED UNDER SECTION 45(4) OF THE ACT. THE MADRAS HIGH COURT AFTER CONSIDERING THE PROVISIONS OF SECTION 47(XIII) AND 45(4) OF THE ACT, EXAMINED VARIOUS JUD GMENTS OF THE OTHER HIGH COURTS AND APEX COURT INCLUDING THE JUDG MENT IN MALABAR FISHERIES CO. (SUPRA) AND FOUND THAT WHEN T HE PARTNERSHIP FIRM IS TRANSFORMED INTO A PRIVATE LIMITED COMPANY, THERE IS NO DISTRIBUTION OF ASSETS AS SUCH AND HENCE, THERE IS NO TRANSFER. THEREFORE, THE ERSTWHILE PARTNERSHIP FIRM IS NOT LI ABLE TO PAY TAX ON CAPITAL GAIN. IN FACT, THE MADRAS HIGH COURT HAS O BSERVED AS FOLLOWS:- 16. IT IS NOT IN DISPUTE THAT THE PARTNERSHIP FIRM T RANSFORMED INTO A PRIVATE LIMITED COMPANY. THE PARTNERSHIP FIRM AND A PRIVATE LIMITED COMPANY ARE TWO DIFFERENT LEGAL ENTITIES, WITH DIFF ERENT LEGAL LIABILITY. IN OTHER WORDS, THE LIABILITY OF A PARTNER IS DIFFEREN T FROM THAT OF THE LIABILITY OF A DIRECTOR OF A COMPANY. THE COMPANY H AS AN INDEPENDENT LEGAL ENTITY, DE HORS ITS SHARE- HOLDERS, WHEREAS THE PAR TNERSHIP FIRM HAS NO SUCH INDEPENDENT EXISTENCE, DE HORS THE PARTNERS. TH EREFORE, WHEN A PARTNERSHIP FIRM IS TRANSFORMED INTO A LIMITED COMP ANY WITH NO CHANGE IN THE NUMBER OF PARTNERS AND THE EXTENT OF PROPERTY, T HERE IS NO TRANSFER OF ASSETS INVOLVED AND HENCE, THERE IS NO LIABILITY TO PAY TAX ON CAPITAL GAINS. 17. IT IS STRENUOUSLY CONTENDED THAT EARLIER, DISTRI BUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM WAS NOT CONSIDERED AS TRANSF ER, BUT, ON THE FINANCE 16 I.T.A. NO.1047/CHNY/18 ACT, 1987 (W.E.F. APRIL 1, 1988), AMENDING THE SAID CLAUS E, THE DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF FIRM WILL B E A TRANSFER. THIS PROPOSITION IS NOT IN DISPUTE. THE QUESTION HERE IS , WHEN THERE IS NO DISSOLUTION AT ALL OF THE PARTNERSHIP FIRM, WHETHER THERE IS TRANSFER OF CAPITAL ASSETS AND CONSEQUENTLY, WHETHER THERE IS A LIABILITY TO PAY TAX ON CAPITAL GAINS. ON FACTS, THE FINDING IS THAT THERE IS NO DISSOLUTION OF PARTNERSHIP FIRM. IT IS NOT IN DOUBT THAT, IN CASE OF DISSOLUTION OF PARTNERSHIP FIRM, THERE IS TRANSFER OF ASSETS AND C ONSEQUENTLY, THE ASSESSEE IS LIABLE TO PAY TAX ON CAPITAL GAINS. 18. IT WOULD BE APPROPRIATE TO QUOTE THE DECISION IN ASST. CIT V. UNITY CARE AND HEALTH SERVICES [2006] 286 ITR (AT) 121 (BANG) ; [2006] 106 TTJ 1086 (BANG.), WHEREUNDER, IN A SIMILAR FACT SITUATION, I T HAS BEEN HELD THAT WHEN A PARTNERSHIP FIRM IS TRANSFORMED INTO A COMPA NY, THERE IS NO TRANSFER OF CAPITAL ASSET, AS THE TRANSFER IS BY OP ERATION OF LAW AND THE RELEVANT OBSERVATION READS AS UNDER (PAGE 130 OF 286 ITR (AT)) : 'WHEN A CONVERSION OF A FIRM INTO COMPANY TAKES PLA CE UNDER THE PROVISIONS OF THE COMPANY LAW, SUCH CONVERSION CAN BE CONSTRUED ONLY AS OCCASIONED BY OPERATION OF LAW. HENCE, NO C ONTROVERSY CAN ARISE ON THE APPLICATION OF THIS PRINCIPLE EVEN FOR PURPOSES OF CAPITAL GAINS UNDER SECTION 45(4) OF THE ACT. BY INSERTION OF SECTION 47(XIII) IN THE ACT, IT CANNOT BE SAID THAT THE CONVERSION O F A FIRM INTO A COMPANY UNDER PART IX IS TO BE FIRST TREATED AS DIS SOLUTION OF FIRM WITHIN THE MEANING OF SECTION 45(4) AND ONLY IF CON DITION AS CONTAINED IN SECTION 47(XIII) ARE COMPLIED, THE EXE MPTION WILL BE AVAILABLE. SECTION 47(XIII) APPLIES ONLY TO A CASE OF TRANSFER BY SALE, BUT THERE IS NO AUTHORITY FOR CAPITAL GAIN AT ALL I N THE ABSENCE OF A TRANSFER UNDER PART IX OF THE COMPANIES ACT IN AS M UCH AS SUCH CONVERSIONS DO NOT FALL WITHIN THE DEFINITION OF TR ANSFER UNDER SECTION 2(47) OF THE ACT. SECTION 45(4) WOULD HAVE APPLICAT ION ONLY WHEN THERE IS DISTRIBUTION OF ASSETS TO THE PARTNERS SO THAT ITS APPLICATION CANNOT BE JUSTIFIED, FIRSTLY BECAUSE IT CAN APPLY O NLY, WHEN THERE IS TRANSFER AND SECONDLY ONLY WHEN THERE IS DISTRIBUTI ON OF ASSETS TO THE PARTNERS. THIS IS NEITHER IN THE CONVERSION OF A FI RM INTO A COMPANY. IT IS SEEN THAT SECTION 47(XIII) IS ALSO COMPLIED W ITH IF IT IS HELD THAT THERE IS TRANSFER OF CAPITAL ASSET TO A COMPANY, TH E CLAUSES OF SECTION 47(XIII) ARE FULFILLED AND THUS EVEN IF IT IS HELD THAT THERE IS A TRANSFER OF CAPITAL ASSET BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION, THE SAME IS NOT CHARGEABLE, AS THE CONDITION PRESCRIBED THEREIN ARE COMPLIED WITH. THUS, LOOKING AT EITHER ANGLE, THE C APITAL GAIN IS NOT CHARGEABLE TO TAX.' 17 I.T.A. NO.1047/CHNY/18 19. SO FAR AS THIS CASE IS CONCERNED, THERE IS NO TR ANSFER OF ASSET AS (A) NO CONSIDERATION WAS RECEIVED OR ACCRUED ON TRANSFER O F ASSETS FROM THE FIRM TO THE COMPANY ; (B) THE FIRM HAS ONLY REVALUED ITS ASSETS WHICH WILL NOT AMOUNT TO TRANSFER ; (C) THE PROVISION OF SECTION 45( 4) OF THE ACT IS APPLICABLE ONLY WHEN THE FIRM IS DISSOLVED. IN THE INSTANT CASE, THERE IS NO DISTRIBUTION OF ASSET, BUT ONLY TAKING OVER OF THE ASSETS FROM THE FIRM TO THE COMPANY. 20. THEREFORE, IT IS CLEAR THAT THE VESTING OF THE PR OPERTY IN THE PRIVATE LIMITED COMPANY IS NOT CONSEQUENT OR INCIDENTAL TO A TRANSFER. THERE IS NO TRANSFER OF CAPITAL ASSETS AS CONTEMPLATED BY SECTI ON 45 (1) OF THE INCOME- TAX ACT. 13. IN VIEW OF THE ABOVE JUDGMENT OF MADRAS HIGH CO URT, WHICH IS BINDING ON THIS TRIBUNAL, WHEN THE ASSETS AND LI ABILITIES AND BUSINESS OF THE PARTNERSHIP FIRM AS A GOING CONCERN WERE TAKEN OVER BY A PRIVATE LIMITED COMPANY INCORPORATED AND THE P ARTNERS OF THE ERSTWHILE PARTNERSHIP FIRM WERE ALLOTTED SHARES IN THE SAME PROPORTION OF THE CAPITAL AS IT STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION, THERE WAS NO TRANSFER AT ALL. HENCE, THERE IS NO QUESTION OF LEVY OF TAX ON CAPITAL GAIN WOULD ARISE FOR CONSIDERATION AT ALL. 14. THE MAIN CONTENTION OF THE REVENUE IS THAT ON R EVALUATION OF THE ASSET OF THE ERSTWHILE PARTNERSHIP FIRM, THE DI FFERENCE BETWEEN REVALUATION AND BOOK VALUE WAS CREDITED IN THE CAPI TAL ACCOUNT OF THE RESPECTIVE PARTNERS IN THE SAME PROPORTION OF T HEIR CAPITAL AS 18 I.T.A. NO.1047/CHNY/18 LOAN, THEREFORE, THERE WAS INDIRECT BENEFIT TO THE SHAREHOLDERS AND ERSTWHILE PARTNERS. THE QUESTION ARISES FOR CONSID ERATION IS WHETHER THERE WAS ANY TRANSFER ON REVALUATION? REVALUATION OF EXISTING ASSET OF THE PARTNERSHIP FIRM BY ITSELF DOES NOT AM OUNT TO ANY TRANSFER AS HELD BY THE MADRAS HIGH COURT IN CADD C ENTRE (SUPRA). THE MADRAS HIGH COURT, AFTER CONSIDERING THE PROVIS IONS OF SECTION 47(XIII) OF THE ACT, HELD THAT SECTION 47(XIII) APP LIES ONLY TO A CASE OF TRANSFER BY SALE. MOREOVER, SECTION 45(4) WOULD A PPLY ONLY WHEN THERE IS DISTRIBUTION OF ASSET TO THE PARTNERS. IN VIEW OF THIS JUDGMENT OF MADRAS HIGH COURT, THERE IS NO VIOLATIONS OF THE CONDITIONS STIPULATED IN SECTION 47(XIII) OF THE ACT. 15. FOR ARGUMENT SAKE, IF WE ACCEPT THAT THE DIFFER ENCE BETWEEN THE REVALUATION AND BOOK VALUE CREDITED IN THE CAPI TAL ACCOUNT OF THE ERSTWHILE PARTNERS IN THE SAME PROPORTION AS THEIR CAPITAL AS A LOAN AMOUNTS TO INDIRECT BENEFIT TO THE ERSTWHILE PARTNE RS, UNDER THE SCHEME OF INCOME-TAX ACT, CAPITAL GAIN TAX CANNOT B E LEVIED ON THE ASSESSEE-COMPANY. UNDER THE SCHEME OF INCOME-TAX A CT, ONLY TRANSFEROR IS LIABLE TO PAY TAX ON CAPITAL GAIN. I N THE CASE BEFORE US, THE ASSESSEE-COMPANY SUCCEEDED TO ASSETS AND LIABIL ITIES OF THE PARTNERSHIP FIRM. THEREFORE, THE ASSESSEE-COMPANY MAY AT THE BEST 19 I.T.A. NO.1047/CHNY/18 BE CONSIDERED AS TRANSFEREE AND CERTAINLY NOT TRANS FEROR. THEREFORE, CONSIDERING THE FACTS OF THE CASE IN ALL RESPECTS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT CAPITAL GAIN TAX CANNOT BE LEVIED IN THE HANDS OF THE ASSESSEE-COMPANY WHICH SUCCEEDED TO TH E ASSETS AND LIABILITIES OF THE PARTNERSHIP FIRM. HENCE, WE ARE UNABLE TO UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. 16. IN VIEW OF THE ABOVE FINDINGS, IT MAY NOT BE NE CESSARY FOR THIS TRIBUNAL TO GO INTO THE CONTENTION OF THE ASSESSEE REGARDING VALIDITY OF ASSESSMENT ORDER PASSED UNDER SECTION 143(3) REA D WITH SECTION 147 OF THE ACT, WHEN THERE WAS SEARCH OPERATION AND PROCEEDINGS WERE INITIATED UNDER SECTION 153C OF THE ACT. 17. IN VIEW OF THE ABOVE DISCUSSION, WE ARE UNABLE TO UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, ORDE RS OF BOTH THE AUTHORITIES BELOW ARE SET ASIDE AND THE ADDITION MA DE BY THE ASSESSING OFFICER AS CAPITAL GAIN IS DELETED. 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 20 I.T.A. NO.1047/CHNY/18 ORDER PRONOUNCED IN THE COURT ON 29 TH OCTOBER, 2018 AT CHENNAI. SD/- SD/- ( ) ( . . . ) (S. JAYARAMAN) (N.R.S. GANESAN) ' / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 4 /DATED, THE 29 TH OCTOBER, 2018. KRI. - +056 76'0 /COPY TO: 1. )*/ APPELLANT 2. +,)*/ RESPONDENT 3. / 80 () /CIT(A)-18, CHENNAI-34 4. PRINCIPAL CIT, CENTRAL-2, CHENNAI 5. 69 +0 /DR 6. :& ; /GF.