BHATIA & CO. (M.D.), Jaipur V. CIT, Kota

ITA 130/JPR/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54202 (ITAT-JAIPUR)
• Duration Of Justice: 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 17-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Question of law; Unabsorbed depreciation
• Section: 143(3); 263

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH A JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO. 130/ JP/2011 ASSESSMENT YEAR 2007-08 PAN: AABFB 2966 K M/S. BHATIA & COMPANY (M.D.) VS. THE CIT 16-C, VALLABH NAGAR, KOTA KOTA (APPELLANT ) (RESPONDENT) ASSESSEE BY: SHRI P.C. PARWAL DEPARTMENT BY : SHRI SUNIL MATHUR DATE OF HEARING: 09-09-2011 DATE OF PRONOUNCEMENT: 07-10-2011 ORDER PER N.L. KALRA, AM:- THE ASSESSEE HAS FILED AN APPEAL AGAINST THE ORDE R OF THE LD. CIT, KOTA DATED 17-01-2011 FOR THE ASSESSMENT YEAR 2 007-08. 2.1 THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AR E AS UNDER:- 1. THE LD. CIT HAS ERRED ON FACTS & IN LAW IN DIRECTIN G TO ENHANCE & MODIFY THE ASSESSMENT ORDER MADE BY AO U/ S 143(3) DT. 16.03.2009 HOLDING IT AS ERRONEOUS & PRE JUDICIAL TO THE INTEREST OF REVENUE ON THE GROUND THAT ON CONVE RSION OF FIRM INTO COMPANY UNDER PART IX OF COMPANIES ACT, 1956 T HERE IS TRANSFER U/S 45(4) OF I.T. ACT R.W.S. 48. HE HAS FU RTHER ERRED IN GIVING SUCH DIRECTION EVEN WHEN THE SAME WAS EXAMIN ED & CONSIDERED BY THE AO IN COURSE OF ASSESSMENT PROCEE DINGS 2 2. THE LD. CIT HAS ERRED ON FACTS & IN LAW IN DIRECTIN G TO ENHANCE & MODIFY THE ASSESSMENT ORDER MADE BY AO U/ S 143(3) DT. 16.03.2009 HOLDING IT AS ERRONEOUS & PRE JUDICIAL TO THE INTEREST OF REVENUE ON THE GROUND THAT AMOUNT O F RS. 28,990/- IN THE SUSPENSE ACCOUNT IS TO BE TREATED A S INCOME OF ASSESSEE IGNORING THAT THE AMOUNT DOES NOT PERTAIN TO THE YEAR UNDER CONSIDERATION 3. THE LD. CIT HAS ERRED ON FACTS & IN LAW IN DIRECTIN G TO ENHANCE & MODIFY THE ASSESSMENT ORDER MADE BY AO U/ S 143(3) DT. 16.03.2009 HOLDING IT AS ERRONEOUS & PRE JUDICIAL TO THE INTEREST OF REVENUE ON THE GROUND THAT HUGE CLA IMS HAVE BEEN ALLOWED BY AO WITHOUT APPLICATION OF ANY MIND & WITHOUT OBTAINING THE NECESSARY DETAILS IN RESPECT OF UNSECURED LOANS (RS. 1,06,19,647/-) & SUNDRY CREDITORS (RS.2, 91,16,383/-) IGNORING THAT ALL SUCH DETAILS WERE CALLED & EXAMIN ED BY AO IN COURSE OF ASSESSMENT PROCEEDINGS & THEREBY DIRECTIN G TO MAKE THE ASSESSMENT DENOVO. 2.2 THE LD. CIT ISSUED NOTICE U/S 263 OF THE ACT DA TED 7 TH OCT. 2010. THE POINTS ON WHICH SHOW CAUSE NOTICE HAS BEEN ISSUED A RE AVAILABLE AT PAGES 1 AND 2 OF THE ORDER U/S 263 OF THE ACT. THE ASSESSEE FILED THE WRITTEN SUBMISSIONS BEFORE THE LD CIT AND THESE WRITTEN SUB MISSIONS HAVE BEEN REPRODUCED BY THE LD. CIT AT PAGE 2 OF HIS ORDER. T HE LD. CIT AT THE END OF HIS ORDER HAS ENHANCED THE ASSESSMENT ON POINT 1 A ND 3 OF THE SHOW CAUSE NOTICE AND ON POINT NO 2 ASSESSMENT WAS SET ASIDE. 2.3 POINT NO. 1 IS REGARDING TAXABILITY OF CAPITAL GAIN ON TERMINATION/ DISSOLUTION OF THE FIRM AND DISTRIBUTION OF ITS ASS ETS AND FORMATION OF A COMPANY BY THE NAME OF BHATIA CORPORATION PVT. LTD. . THE ASSESSEE FIRM 3 WAS ENGAGED IN THE BUSINESS OF DEALERSHIP OF MARUTI UDYOG LTD. , RUNNING AUTHORIZED SERVICE STATION OF VEHICLE AND TRADING I N AUTO PARTS AND ALLIED ACTIVITIES IN THE NAME AND STYLE OF M/S. BHATIA & C O.. THE SAID PARTNERSHIP FIRM WAS CONVERTED INTO A PRIVATE LIMITED COMPANY K NOWN AS BHATIA CORPORATION PVT. LTD. UNDER CHAPTER IX OF THE COMPA NIES ACT, 1956 W.E.F. 10-04-2006. 2.4 THE LD CIT VIDE ORDER U/S 263 HELD THAT THERE I S A TRANSFER U/S 45(4) OF THE ACT AND FIRM IS TO BE CONSIDERED AS DISSOLVED O N 9 TH APRIL, 2006. ACCORDING TO THE LD. CIT, THE AO HAS NOT APPLIED HI S MIND AT THE TIME OF FRAMING OF ORIGINAL ASSESSMENT. THE FIRM WAS TERMIN ATED / DISSOLVED ON 9 TH APRIL, 2006 AND THE COMPANY WAS FORMED ON 10 TH APRIL, 2006. THERE IS NO QUESTION OF CONVERSION OF DISSOLVED FIRM INTO A COM PANY FORMED A DAY LATER. ACCORDING TO THE LD. CIT, THE CONTENTION OF THE ASS ESSEE THAT SUCH A CONVERSION OF FIRM INTO A COMPANY DOES NOT REQUIRE ANY SEPARATE CONVEYANCE DEED FOR VESTING OF THE TITLES TO THE CO MPANY IS NOT CORRECT FROM TAXATION POINT OF VIEW. THE CONVERSION OF A FIRM IN TO A COMPANY IS NOT EXCLUDED FROM THE DEFINITION OF TRANSFER U/S 2 (47) OF THE ACT. THE FIRM HAS EXISTED TILL 09-04-2006. THE ASSETS OF THE FIRM ON ITS TERMINATION/ DISSOLUTION ON 9-04-06 ARE TO BE CONSIDERED AS DISTRIBUTED AND THE VALUE SO ASCERTAINED IN MONETARY TERMS IS CONSIDERED AS ASSETS IN THE H ANDS OF THE COMPANY AND 4 THE PARTNERS WERE GIVEN SHARES OF EQUIVALENT VALUE. THE LD. CIT FURTHER HELD THAT PROVISIONS OF SECTION 47(XIII) ARE NOT APPLICA BLE. THE PROVISIONS OF SECTION 47(XIII) ARE APPLICABLE ONLY ON TRANSFER OF CAPITAL ASSETS OR INTANGIBLE ASSETS BY A FIRM TO A COMPANY AS A RESULT OF SUCCES SION OF A FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM. THE SUCCESSION OF THE FIRM BY THE COMPANY CAN BE WHEN THE COMPANY STANDS INCOR PORATED BEFORE THE FIRM IS DISSOLVED. 2.5 BEFORE THE LD. CIT, IT WAS STATED THAT THE JOIN T STOCK COMPANY BY THE NAME OF BHATIA CORPORATION PVT. LTD. WAS PROPOSED T O BE FORMED AND FOR THAT AN INDENTURE WAS WITNESSED BY THE PARTIES CONC ERNED ON 08-04-06. THE LD CIT OBSERVED THAT IT IS NOT KNOWN AS TO WHETHER THE INDENTURE DATED 8-04- 06 WAS ACTUALLY ENTERED INTO OR NOT AND IT IS NOT C LEAR AS TO HOW IT WAS EXCECUTED. THE MAIN FINDINGS OF THE LD CIT IS THAT THE COMPANY HAS COME INTO BEING ON 10-04-06 WHILE THE FIRM WAS TERMINAT ED ON 9-04-06. HENCE, THERE IS NO QUESTION OF ANY SUCCESSION FROM THE FIR M TO THE COMPANY. 2.6 BEFORE US, THE LD. AR HAS FILED THE WRITTEN SUB MISSION ALONGWITH PAPER BOOK CONTAINING 52 PAGES. IT WAS SUBMITTED TH AT UNDER PART IX OF THE COMPANIES ACT, THE FIRM IS MERELY TREATED AS A COMP ANY STATUTORILY AND THEREFORE, THERE IS NO TRANSFER AS CONTEMPLATED BY SECTION 45(4) OF THE ACT. FOR THIS PROPOSITION, THE LD. AR HAS RELIED UPON TH E FOLLOWING DECISIONS:- 5 1. ACIT VS. UNITY CARE & HEALTH SERVICES, 103 ITD 53 (BANG.) 2. CIT VS. RITA MECHANICAL WORKS 46 DTR 133 (P&H) 3. CHETAK ENTERPRISES (P) LTD. VS. ACIT, 95 ITD 1 (JD. ) 4. BARODA REFRIGERATION INDUSTRIES VS. DCIT, 10 DTR (T RIBUNAL) 4 (AHD.) 5. CIT VS. TEXSPIN ENGG. & MFG. WORKS, 263 ITR 345 (BOM.) 2.7 ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORD ER OF THE LD. CIT. 2.8 WE HAVE HEARD BOTH THE PARTIES. SECTION 2 (31) OF THE INCOME TAX ACT, 1961 MENTIONS THAT PERSON INCLUDES A COMPANY , A FIRM AND OTHERS AS MENTIONED IN SUB-SECTION. IT MEANS THAT A FIRM AND COMPANY ARE SEPARATE ENTITY SO FAR AS INCOME TAX ACT IS CONCERNED. THE F IRM IS NOT RECOGNIZED A A PERSON IN CIVIL LAW. THE HON'BLE APEX COURT IN THE CASE OF MALBAR FISHERIES CO. 120 ITR 49 OBSERVED THAT IT SEEMS TO US CLEAR T HAT PARTNERSHIP FIRM UNDER THE INDIAN PARTNERSHIP ACT, 1932 IS NOT A DIS TINCT LEGAL ENTITY APART FROM THE PARTNERS CONSTITUTING IT AND EQUALLY IN LA W THE FIRM AS SUCH HAS NO SEPARATE RIGHTS OF ITS OWN IN THE PARTNERSHIP ASSET S AND WHEN ONE TALKS OF THE FIRMS PROPERTY OR THE FIRMS ASSETS ALL THAT IS ME ANT IS PROPERTY OR ASSETS IN WHICH ALL PARTNERS HAVE A JOINT OR COMMON INTEREST. THE FIRM HAS NO LEGAL EXISTENCE. THE PARTNERSHIP PROPERTY WILL VEST IN AL L THE PARTNERS AND IN THAT SENSE EVERY PARTNER HAS INTEREST IN THE PROPERTY OF THE PARTNERSHIP. DURING THE SUBSISTENCE OF THE PARTNERSHIP, HOWEVER, NO PAR TNER CAN DEAL WITH ANY PORTION OF THE PROPERTY AS HIS OWN. DEALING WITH TH E ISSUE OF CONTRIBUTION OF 6 ASSETS INTO PARTNERSHIP FIRM, THE HON'BLE APEX COUR T IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT, 156 ITR 509 HELD THAT IT IS CLEAR THAT BECAUSE OF EXCLUSIVE INTEREST IN THE ASSESSMENT BEFORE IT IS C ONTRIBUTED IN THE FIRM MEANS THAT THERE IS TRANSFER. 2.9 M/S. BHATIA CORPORATION PVT. LTD. HAS BEEN REGI STERED UNDER PART IX OF THE COMPANIES ACT, 1956. SECTION 566 OF THE COMP ANIES ACT DEFINES THE JOINT STOCK COMPANY. AS PER ORDER DATED 5-08-1999, ROC WERE TO REGISTER THE PARTNERSHIP FIRM UNDER PART IX OF THE COMPANIES ACT AS JOINT STOCK COMPANY PROVIDED THEY FULFILL THE CONDITIONS PRESCR IBED UNDER THE COMPANIES ACT, 1956. IT WAS CLARIFIED THAT PARTNERS HIP FIRM CANNOT BE PREVENTED FROM BEING REGISTERED AS COMPANY UNDER PA RT IX OF THE COMPANIES ACT PROVIDED IT FULFILLS ALL OTHER REQUIR EMENTS OF THE COMPANY LIABILITY. THE LD. CIT HAS HELD THAT SECTION 45(4) IS CLEARLY APPLICABLE. SECTION 45(4) WAS INSERTED BY THE FINANCE ACT 1987 W.E.F. 1-4-1988. SECTION 47(II) WAS OMITTED BY FINANCE ACT 1987 W.E. F. 01-04-1988. BEFORE AMENDMENT IN THE FINANCE ACT, 1987, IT WAS PROVIDED THAT AT THE TIME OF DISSOLUTION OF THE FIRM , THERE WILL BE NO TRANSFER AS THE PARTNERS ARE HAVING PRE-EXISTING RIGHTS ON THE ASSETS OF THE FIRM. AFTE R OMITTING SECTION 47(II), SECTION 45(4) WAS INTRODUCED SO AS TO TREAT DISTRIB UTION OF ASSETS ON THE DISSOLUTION OF THE FIRM TO THE PARTNERS AS TRANSFER . SECTION 47(XIII) SAYS THAT 7 ANY TRANSFER OF A CAPITAL ASSETS OR INTANGIBLE ASSE TS BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM IS NOT TO BE CONSIDERED AS TRANSFER PROVID ED CERTAIN CONDITIONS MENTIONED IN SECTION 47 (XIII) ARE SATISFIED. SECTI ON 47(XIII) WAS INTRODUCED BY THE FINANCE (NO.2) ACT, 1998. IN THE MEMO EXPLAI NING THE PROVISIONS OF FINANCE (NO.2) BILL, 1998 IN RESPECT OF SECTION 47( XIII), IT WAS STATED AS UNDER:- EXEMPTION FROM LEVY OF CAPITAL GAINS TAX AND ALLO WANCE OF CARRY FORWARD OF LOSSES AND UNABSORBED DEPRECIATION IN CERTAIN CASES OF BUSINESS REORGANIZATION. UNDER THE EXISTING PROVISION OF THE INCOME TAX ACT, BUSINESS REORGANIZATIONS HAVE DEFINITE TAX IMPLICATIONS. TRA NSFER OF ASSETS ATTRACTS LEVY OF CAPITAL GAIN TAX. SIMILARLY , CARRIED FORWARD LOSSES AND THAT OF UNABSORBED DEPRECIATION ARE NOT AVAILABLE TO SUCCESSOR BUSINESS ENTITIES. HOWEVER, IN CASES OF AMALGAMATION, CAPITAL GAIN TAX IS NOT LEVIED AND LO SSES AND UNABSORBED DEPRECIATION ARE ALLOWED TO BE CARRIED F ORWARD UNDER CERTAIN CONDITIONS. THE EXPERT GROUP, IN THE DRAFT INCOME-TAX BILL, HAS REORGANIZED THE NEED TO ENCOUR AGE BUSINESS REORGANIZATION WHEN THEY ARE IN CONSONANCE WITH THE OBJECTIVE OF ECONOMIC DEVELOPMENT AND ARE NOT MEREL Y DEVICES TO SECURE TAX ADVANTAGE. THE BILL PROPOSES TO ALLOW TAX BENEFITS IN CASES OF BUSINESS REORGANIZATION WHERE A FIRM IS SUCCEEDED BY COMPANY IN THE BUSINESS CARRIED BY IT AND A PROPRIETARY CONCERN IS SUCCEEDED BY A COMPANY. IT IS PROPOSED THAT THE TRANSFER OF ANY BUILDING, M ACHINERY, PLANT, FURNITURE OR INTANGIBLE ASSETS TO THE COMPAN Y SHALL NOT BE REGARDED AS TRANSFER TO ATTRACT LEVY OF CAPITAL GAI NS SUBJECT TO CERTAIN CONDITIONS. THE CONDITIONS ARE : ( I) ALL A SSETS AND 8 LIABILITIES OF THE FIRM BECOME THE ASSETS AND LIABI LITIES OF THE COMPANY; (II) THE PARTNERS OF THE FIRM BECOME THE S HAREHOLDERS OF COMPANY IN THE SAME PROPORTION IN WHICH THEY HOL D SHARE IN THE FIRM; (III) NO CONSIDERATION OTHER THAN SHARES ARISE TO PARTNERS; AND (IV) THE AGGREGATE SHAREHOLDING OF TH E PARTNERS IN THE COMPANY IS AT LEAST 50% FOR A PERIOD OF 5 YEARS FROM THE DATE OF SUCCESSION. SIMILAR CONDITIONS ARE ALSO STI PULATED IN THE CASE OF A SOLE PROPRIETARY CONCERN BEING SUCCEEDED BY A COMPANY. THE BILL ALSO PROVIDES CARRY FORWARD OF BUSINESS LO SS AND UNABSORBED DEPRECIATION TO SUCCESSOR COMPANIES FULF ILLING THE ABOVE MENTIONED CONDITIONS. THE BILL ALSO PROVIDES THAT IF THE CONDITIONS STIPU LATED AS ABOVE ARE NOT COMPLIED WITH THE BENEFIT AVAILED BY THE FI RM OR BY THE SOLE PROPRIETOR SHALL BE DEEMED TO BE THE PROFITS A ND GAINS CHARGEABLE TO TAX OF THE SUCCESSOR COMPANY FOR THE PREVIOUS YEAR OR YEARS WHERE THE REQUIREMENTS WERE NOT COMPL IED WITH. IT IS ALSO PROPOSED THAT THE AGGREGATE DEPRECIATION ALLOWABLE TO PREDECESSOR AND SUCCESSOR SHALL NOT EXCEED IN ANY P REVIOUS YEAR THE DEDUCTION CALCULATED AT THE PRESCRIBED RAT ES AS IF THE REORGANIZATION HAS NOT TAKEN PLACE. THIS AMENDMENT WILL TAKE EFFECT FROM IST APRIL, 199 9 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 1999- 2000 AND SUBSEQUENT YEARS. THE MAIN REQUIREMENT OF SECTION 47(XIII) IS THAT TH ERE IS A SUCCESSION OF THE FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM. THE CONDITIONS MENTIONED IN THE PROVISO TO SECTION 47(XIII) REQUIR ES THAT THE PARTNER BECOME THE SHAREHOLDER OF THE COMPANY IN THE SAME P ROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FI RM ON THE DATE OF THE SUCCESSION. ALL THE ASSETS LIABILITY OF THE FIRM BE COME THE ASSETS AND LIABILITY 9 OF THE COMPANY. FOR A PERIOD OF FIVE YEARS, THE VOT ING POWER OF THE PARTNERS OF THE FIRM SHOULD NOT BE LESS THAN 51% OF THE VOTI NG POWER. ONCE A COMPANY IS FORMED THEN THE ASSETS BELONG TO THE COM PANY AND IN CASE THE SHARES ARE TRANSFERRED THEN THE ASSETS WILL NOT STA ND TRANSFERRED BUT CONTROL OF THE COMPANY CAN BE TAKEN OVER BY THE PERSONS WHO RE CEIVES THE SHARES. IN ORDER TO BENEFIT FOR THE REORGANIZATION OF THE BUSI NESS, THE BENEFIT OF NOT CHARGING OF CAPITAL GAIN WAS PROVIDED ON THE CONDIT ION THAT SHARES OF THE EXISTING PARTNERS REMAINED TO THE EXTENT OF 51% OF THE VOTING POWER FOR FIVE YEARS. AS PER SECTION 575 OF THE COMPANIES ACT, ALL THE PROPERTIES MOVEABLE AND IMMOVABLE INCLUDING ACTIONABLE CLAIM BELONGING TO OR VESTED IN A COMPANY, ON THE DATE OF ITS REGISTRATION IN PURSUAN CE OF PART IX OF COMPANIES ACT, SHALL VEST IN THE COMPANY AS INCORPO RATED UNDER THE ACT. 2.10 IT IS TRUE THAT ITAT BANGALORE BENCH IN THE CA SE OF ACIT VS. UNITY CARE & HEALTH SERVICES (SUPRA) HAS HELD THAT IN CAS E OF CONVERSION OF FIRM INTO PRIVATE LIMITED COMPANY, THERE IS NEITHER DISS OLUTION OF THE FIRM NOR DISTRIBUTION OF THE CAPITAL ASSET TO PARTNERS. ITAT BANGALORE BENCH STATED THAT NO CAPITAL GAIN IS CHARGEABLE U/S 45(4) OF THE ACT. 2.11 THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. RITA MECHANICAL WORKS (SUPRA) HAD AN OCCASION TO CO NSIDER FOLLOWING QUESTION OF LAW. 10 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND ON PROPER INTERPRETATION OF THE PROVIS IONS OF SECTION 45(4) R.W.S. 2(47) OF THE ACT, THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT TAKING OVER OF THE ASS ETS OF THE FIRM BY A COMPANY AND ALLOTTING SHARES TO THE PARTNERS OF THE FIRM AS PER THEIR HOLDING IN THE FI RM DOES NOT GIVE RISE TO PROFIT CHARGEABLE TO CAPITAL GAIN U/S 45(4) OF THE ACT? 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT CA PITAL GAIN ARISEN RELATES TO ASSESSMENT YEAR 1996-97 INST EAD OF ASSESSMENT YEAR 1995-96 WHEREAS CO-PARTNER IN THE COMPANY AGREED TO RECEIVE SHARE ALLOTMENT IN THE ERSTWHILE COMPANY AS PER AGREEMENT DATED 29 TH MARCH, 1995, THOUGH THE COMPANY WAS INCORPORATED ON 3 RD APRIL, 1995 IN PAPERS ONLY. 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE TRIBUNAL WAS RIGHT IN ALLOWING DEPRECI ATION TO THE FIRM WHICH STOOD DISSOLVED ON 31 ST MARCH, 1995? THE HON'BLE PUNJAB & HARYANA HIGH COURT HAS REFERRE D TO THE DECISION OF HON'BLE BOMABY HIGH COURT IN THE CASE OF CIT VS. TEXSPIN ENGG. & MFG. WORKS, 263 ITR 345 (BOM.). WHEN A FIRM IS SUCCEEDED BY A COMPANY UNDER PART IX OF THE COMPANIES ACT, THE PROPERTY IS VESTE D IN THE COMPANY AS THEY EXIST. SECTION 45(4) IS NOT ATTRACTED AS VERY FIRST CONDITION OF TRANSFER BY WAY 11 OF DISTRIBUTION OF CAPITAL ASSET IS NOT SATISFIED. THE HON'BLE BOMBAY HIGH COURT HAS ALSO HELD THAT SECTION 45(1) READ WITH SE CTION 2 OF SECTION 47(II) IS ALSO NOT APPLICABLE BECAUSE THERE IS NO CONVEYAN CE OF THE PROPERTY EXECUTABLE IN FAVOUR OF THE LIMITED COMPANY. THE AB OVE VIEW OF THE HON'BLE BOMBAY HIGH COURT, ACCORDING TO THE HON'BLE PUNJAB & HARYANA HIGH COURT STANDS ACCEPTED IN VIEW OF INSERTION OF SECTI ON 47(III) OF THE ACT ITAT AHEMDABAD BENCH IN THE CASE OF BARODA REFRIGER ATION INDUSTRIES VS. DCIT (SUPRA) HAS HELD THAT SECTION 45(1) OR SECTION 45(4) ARE NOT APPLICABLE WHEN THE FIRM IS CONVERTED INTO A COMPANY FOR THE S UCCESSION OF THE BUSINESS. KEEPING IN VIEW THE ABOVE LEGAL POSITION, WE HOLD THAT THE LD. CIT WAS NOT JUSTIFIED IN HOLDING THAT ASSESSEE FIRM IS LIABLE TO CAPITAL GAIN. 2.12 THE ASSESSEE HAS INTIMATED THE AO REGARDING TH E FACT THAT BUSINESS OF THE FIRM HAS BEEN CARRIED ON BY THE COMPANY VIDE LE TTER DATED 24-02-09 ADDRESSED TO THE AO. IT WAS EXPLAINED THAT EXISTING FIRM EXISTED UPTO 9 TH APRIL, 2006 AND THEREAFTER W.E.F. 10-04-06, IT WAS REGISTERED AS A COMPANY UNDER PART IX OF THE COMPANIES ACT. THE ASSESSMENT ORDER HAS BEEN PASSED ON 16-03-09. IN THE ASSESSMENT ORDER, THE AO HAS ME NTIONED AS UNDER:- THE ASSESSEE FIRM HAS EXISTED UPOT 09-04-2006, THEREFORE, W.E.F. 10-04-2006, REGISTERED AS A COMPA NY UNDER PART IX OF THE COMPANY ACT, 1956 AND THE FIRM HAS S HOWN ITS INCOME AND EXPENDITURE UPTO 09-04-2006 ONLY 12 THUS THE AO WAS FULLY AWARE OF THE FACTUAL POSITION AND IT CANNOT BE SAID THAT AO HAS NOT MADE ANY ENQUIRY. THE ASSESSMENT OR DER OF THE AO CANNOT BE PRESUMED AS ERRONEOUS ON THE GROUND THAT THE AO HAS NOT CHARGED CAPITAL GAIN BECAUSE THE FIRM HAS BEEN SUCCEEDED BY THE COM PANY. THE MAIN OBJECTION OF THE LD. CIT IS THAT THE COMPANY WAS IN CORPORATED ON 10-04- 2006. PAGE 11 OF THE MEMORANDUM OF ASSOCIATION CONT AINS THE NAMES AND ADDRESS OF THE 07 EXISTING PARTNERS AND IS MENTIONE D THAT EQUITY SHARES OF 80.00 LACS HAVE BEEN DIVIDED TO THE PARTNERS OF THE FIRM AND THE DATE MENTIONED IS 08-04-2006. THUS THE COMPANY WAS INCOR PORATED TO CARRY OVER THE BUSINESS OF THE FIRM AND THE COMPANY IS COVERED UNDER PART IX OF THE COMPANIES ACT. HENCE, WE CANNOT HOLD THAT THE ASSET S WERE DISTRIBUTED TO THE PARTNERS AND THEN THEY TRANSFERRED THE ASSETS T O THE COMPANY. THERE HAS BEEN NO FORMAL DISSOLUTION OF THE FIRM. THE ASSETS AND LIABILITIES OF THE FIRM HAS BEEN TAKEN OVER BY THE COMPANY. THUS FINDINGS O F THE LD. CIT ON POINT NO. 1 AND 3 ARE VACATED AND IT IS HELD THAT THE ORD ER IS NOT ERRONEOUS. SINCE THE LD. CIT HAS RECORDED THE FINDING AND DIRECTED T HE AO TO CHARGE CAPITAL GAIN AND THEREFORE, WE FEET THAT NO PURPOSE WILL BE SERVED ON SETTING ASIDE SUCH ISSUE ON THE FILE OF THE AO. 13 2.13 THE LD. CIT HAS SET ASIDE THE ISSUE ON POINT NO. 2. THE COMPARATIVE CHART OF POINT NO. 2 CONSIDERED BY THE LD. CIT AND THE REPLY GIVEN TO THE LD. CIT IS AS UNDER:- PARA 2(II) PARA 2(III) PARA 2(IV) PARA 2(V) PARA 2(VI) HUGE CLAIMS HAVE BEEN ALLOWED BY AO WITHOUT APPLICATION OF ANY MIND & WITHOUT OBTAINING THE NECESSARY DETAILS IN RESPECT OF FOLLOWING:- - IN THE ABSENCE OF DETAILS OF FREIGHT & CARTAGE INCLUDED IN PURCHASES, ITS GENUINENESS REMAINS UNVERIFIED & APPLICABILITY OF PROVISIONS OF SEC. 40(A)(IA) IS ALSO NOT ASCERTAINABLE. - NO EVIDENCE OF DEPOSITING TDS IN APRIL 07 ON PAYMENT OF INTEREST OF RS. 57,834/- TO MARUTI CO. IS AVAILABLE. - NO QUANTITATIVE DETAILS IN RESPECT OF VEHICLES AS WELL AS SPARE PARTS HAVE BEEN OBTAINED & KEPT ON RECORD - NO INTEREST HAS BEEN CHARGED ON AMT. ADVANCED TO VARIOUS CONCERNS WHEREAS INTEREST HAS BEEN PAID TO BANKS. FURTHER, ADVANCE TO M/S BHATIA REAL ESTATE IS GIVEN WHO IS NOT HAVING ANY BUSINESS CONNECTION WITH ASSESSEE - NO DETAILS HAVE BEEN OBTAINED & KEPT ON RECORD IN REGARD TO INCOME SHOWN FROM VARIOUS SOURCES & THE SAME HAS BEEN ASSESSEE FILED DETAILED REPLY VIDE LETTER DT. 09.11.2010 POINT NO. 2 PURCHASES DO NOT INCLUDE FREIGHT & CARTAGE & THEREFORE TDS ON FREIGHT PAYMENT DOES NOT ARISE. POINT NO. 3 TDS WAS DEPOSITED ON 07.04.06 & COPY OF CHALLAN FILED. POINT NO. 4 QUANTITATIVE DETAILS OF VEHICLES FILED. HOWEVER, QUANTITATIVE DETAILS OF SPARE PARTS MAINTAINED IN SOFTWARE BUT COULD NOT BE FURNISHED DUE ITS LARGE QUANTUM. SEPARATE TRADING ACCOUNT FOR SPARE PARTS FOR 9 DAYS FILED POINT NO. 5 LEDGER ACCOUNTS OF ADVANCES FILED. INTEREST CHARGED ON ADVANCE GIVEN TO BHATIA REAL ESTATE. POINT NO. 6 DETAILS OF INCOME FORM OTHER SOURCES FILED. SAME WAS VERIFIED BY AO FROM BOOKS OF ACCOUNTS PRODUCED BEFORE HIM POINT NO. 7 DETAILS OF FIXED ASSETS FILED. MOST FIXED ASSETS COMING AS OPENING BALANCE FROM LAST YEAR EXCEPT FOR ADDITION OF RS. 1,08,876/- MADE DURING THE RELEVANT PERIOD, DETAILS OF WHICH WERE PRODUCED BEFORE AO RAISED QUERY VIDE LETTER DATED 03.02.2009 ) WHICH IS REPLIED BY ASSESSEE VIDE LETTER DATED 24.02.2009 . BOOKS OF ACCOUNTS WERE EXAMINED BY HIM & RETURNED INCOME ACCEPTED AFTER GIVING A FINDING THAT ASSESSEE HAS MAINTAINED PROPER RECORDS SHOWING FULL PARTICULARS OF INCOME & EXPENDITURE 14 PARA 2(VII) PARA 2(VIII) PARA 2(X) ACCEPTED WITHOUT VERIFICATION - AO FAILED TO CALL THE DETAILS OF FIXED ASSETS, CAPITAL WIP & BALANCE SHEET OF NEW COMPANY - NO CONFIRMATION OF UNSECURED LOANS & SUNDRY CREDITORS HAVE BEEN CALLED FOR & PUT ON RECORD - COPY OF PARTNERSHIP DEED NOT OBTAINED AO. POINT NO. 8 ALL UNSECURED LOAN ARE OLD. DETAILS OF LOAN SUBMITTED BEFORE AO. CONFIRMATION OF LOAN AS ON 31.03.06 SUBMITTED TO AO IN ASSESSMENT PROCEEDINGS OF A.Y. 06-07 ALL CREDITORS ARE OLD EXCEPT IN CASE OF MARUTI UDHOY LTD. FROM WHOM PURCHASES OF RS. 1,53,38,025/- MADE DURING PERIOD UNDER CONSIDERATION. POINT NO. 10 PARTNERSHIP DEED FILED AO RAISED QUERY REGARDING UNSECURED LOANS IN POINT NO. 23 WHICH IS REPLIED BY ASSESSEE IN POINT NO. 13 . IT WAS ALSO INFORMED VIDE LETTER DT. 13.03.2009 TO ITO THAT CONFIRMATION OF ACCOUNTS OF UNSECURED LOANS HAVE ALREADY BEEN FILED. AO RAISED QUERY REGARDING SUNDRY CREDITORS IN POINT NO. 10, 13 & 22 WHICH IS REPLIED BY ASSESSEE IN POINT NO. 9. PARA 2(IX) ASSESSEE FIRM FAILED TO EXPLAIN THE AMOUNT OF RS. 28,990/- IN THE SUSPENSE ACCOUNT & THEREFORE IT IS TO BE TREATED AS INCOME OF THE ASSESSEE FIRM FOR THE YEAR UNDER CONSIDERATION THE AMOUNT OF RS. 28,990/- IN SUSPENSE ACCOUNT (SUNDRY CREDITORS AT CHITTORGARH - IS COMING FROM LAST 2-3 YEARS FOR THE REASON THAT SOME PARTIES HAVE DIRECTLY DEPOSITED THE AMOUNT IN THE FIRMS BANK ACCOUNT & IN THE ABSENCE OF THEIR PARTICULARS, NECESSARY ENTRIES COULD NOT BE MADE IN THE BOOKS OF FIRM. THE SAME WAS EXPLAINED TO CIT VIDE LETTER DT. 09.11.2010 & 30.12.2010 IN RESPONSE TO SHOW CAUSE NOTICE DT. 07.10.10 & 13.12.2010 RESPECTIVELY. COPY OF LEDGER OF SUSPENSE ACCOUNT ALSO GIVEN VIDE LETTER DT. 09.11.2010 . AO RAISED QUERY REGARDING SUNDRY CREDITORS VIDE LETTER DATED 03.02.2009 IN POINT NO. 10 & 13 WHICH IS REPLIED BY ASSESSEE VIDE LETTER DATED 24.02.2009 IN POINT NO. 9 . 2.14 WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE T HROUGH THE EXPLANATION BEFORE THE LD. CIT(A) AND EXPLAINING TH AT THE ASSESSEE FILED NECESSARY DETAILS BEFORE THE AO. ONCE THE AO HAS MA DE QUERIES AND THE 15 ASSESSEE FILED THE REPLY TO THE SATISFACTION OF THE AO THEN THE ORDER CANNOT BE CONSIDERED AS ERRONEOUS UNLESS IT CAN BE NOTICED THAT THE FINDING OF THE AO IS INCORRECT IN FACT OR LAW. BEFORE US, IT WAS EXPLAINED THAT SUSPENSE ACCOUNT IS THE SAME AS IN THE PRECEDING YEAR AND TH EREFORE, THE ADDITION, IF ANY, ON ACCOUNT OF SUSPENSE ACCOUNT COULD NOT HAV E BEEN MADE IN THE YEAR UNDER CONSIDERATION, HENCE, NO ADDITION IS WARRANTE D FOR THE AMOUNT APPEARING IN THE CREDIT SIDE AS SUSPENSE ACCOUNT. H ENCE, WE HOLD THAT THE LD. CIT WAS NOT JUSTIFIED IN SETTING ASIDE THE ORDER ON POINT NO. 2. THUS THE ORDER OF THE LD. CIT U/S 263 IS CANCELLED AND THE A PPEAL OF THE ASSESSEE IS ALLOWED. 3. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 07-10 -2011 SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 07 /10/2011 *MISHRA COPY FORWARDED TO :- 1. M/S. BHATIA & COMPANY (M.D.) KOTA 2. THE LD. CIT, KOTA BY ORDER 3. THE LD. CIT(A) 4. THE LD.DR 5. THE GUARD FILE (ITA NO.130/JP /11) A.R, ITAT, JAIPUR 16