DCIT, CHENNAI V. Paduvamani Mohanraj, CHENNAI

ITA 2021/CHNY/2015

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6252 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 24-09-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JOTHILAKSHMI LD
• Keywords: Capital asset; Additional evidence; Cost of acquisition; Set aside; Capital Gains
• Section: 143(3); 142(1)

Judgement Text

आयकर अपीलीय अिधकरण ‘ए’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI माननीय +ी महावीर िसंह, उपा12 एवं माननीय +ी मनोज कु मार अ6वाल ,लेखा सद9 के सम2। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.2021/Chny/2015 (िनधाBरण वषB / Assessment Year: 2010-11) DCIT, Corporate Circle-1(1), Chennai. बनाम/ V s. Shri Puduvamani Mohanraj No.10, Majestic Apartments, 48, Arcot Road, Saligramam, Chennai – 600 093. थायी लेखा सं./जीआइ आर सं./P AN /GI R No . AAN P M-0 9 9 9 -H (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे/ Assessee by : Shri S. Sridhar (Advocate) – Ld. AR थ की ओरसे/Revenue by : Shri Jothilakshmi (CIT) –Ld. DR सुनवाई की तारीख/Date of Hearing : 08-06-2022 घोषणा की तारीख /Date of Pronouncement : 17-08-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by Revenue for Assessment Year (AY) 2010-11 arises out of the order of learned Commissioner of Income Tax (Appeals)-II, Chennai [CIT(A)] dated 14-11-2014 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 30-03-2013. The grounds raised by the Revenue read as under: ITA No.2021/Chny/2015 - 2 - 1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case. 2.1 The learned CIT(A) erred in allowing the appeal of assessee by deleting the addition of Rs.19,78,85,596/- made by the Assessing Officer. 2.2 The learned CIT(A) failed to remand the issue of applicability of Section 50B along with Form 3CEA For examination of the Assessing Officer. 2.3 It is submitted that the said transaction had come to light only during the course of scrutiny proceedings, hence Form 3CEA and applicability of Section 50B was not a subject matter at the time of assessment proceedings. 2.4 The learned CIT(A) ought to have remanded the AO as to whether all the 3 proprietorship concerns and partnership firms had existed for more than 3 years for treating the same as Long Term Capital Asset. 2.5 The learned CIT(A) ought to have provided an opportunity the AO to examine the above issues. 3.1 The learned CIT(A) erred in holding that the transfer is not a transfer as per Section 47(xiii)/(xiv) of the Act. 3.2 It is submitted that as per Sec.47(xiii)/(xiv) of the Act any proprietorship concern/firm has to be succeeded by a company. But in the instant case 3 proprietorship concerns and a partnership firm have merged into an already existing company. Hence, the said transaction cannot be excluded as per the provisions of Sec.47(xiii)/(xiv) of the I.T. Act but it constitutes a 'transfer' which is to be subjected to the Capital Gains. 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored. As is evident, the revenue is aggrieved by relief provided by Ld. CIT(A) in the impugned order by considering the material which was not considered by Ld. AO since the assessee did not furnish the same during assessment proceedings. 2. Drawing attention to grounds of appeal, Ld. CIT-DR pleaded that the documents / explanation which led to adjudication in the impugned order was never confronted to Ld. AO and therefore, the same was in violation of Rule 46A of Income Tax Rules, 1962. These rules empower CIT(A) to accept additional evidence in certain specified ITA No.2021/Chny/2015 - 3 - circumstances. The rules further provide that in such cases, a copy of such additional evidence will be sent to concerned AO who can examine the evidence or documents or cross examine the witness produced by the appellant. The AO may also produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. After cross-examination of additional evidence by the assessing officer, such assessing officer produce a report before the CIT(A) containing the observations made by them. The CIT(A) after considering both additional evidence application by the appellant and assessing officer report on such additional evidence, decide as to whether to accept or reject the additional evidence. The Ld. AR, on the other hand, supported the impugned order. The Ld. AR submitted that issue was decided on merits which were in accordance with law. Having heard rival submissions and after perusal of case record, the appeal is disposed-off as under. Assessment Proceedings 3.1 During assessment proceedings, it transpired that the assessee was a partner in a firm namely Emerald Engineering Unit-I and proprietor in three concerns viz. Emerald Engineering Unit-II, Topaz Engineering and Ruby Engineering. During the beginning of the year, all the concerns were taken over by a limited company by the name of Diamond Engineering (Chennai) Private Ltd. (DECPL) in which the assessee was substantially interested. 3.2 The Ld. AO held on opinion that profitable concerns of the assessee merged with a corporate entity and it was not shown as to how the goodwill of the business was settled. Further, the land and building owned by these concerns were transferred to a corporate ITA No.2021/Chny/2015 - 4 - entity without valuing the same. Therefore, the resultant gains arising on merger should have been offered to tax as capital gains. 3.3 Accordingly, notice u/s 142(1) was issued to the assessee to file requisite documents and information. However, the assessee merely stated that these concerns merged with corporate entity. However, no memorandum of understanding, Valuation Report of assets and liabilities, goodwill, trademark, basis of valuation of proprietor concerns was furnished. This was despite the fact that the assessee’s investment in firm and proprietorship concerns as on 31.03.2009 stood at Rs.328.71 Lacs. The assessee did not receive any sum from corporate entity. The differential value of shares issued by corporate entity to the assessee was chargeable to tax. 3.4 After examining the contract of sale leading to transfer of these entities, certain queries were put to the assessee which are given in para 2.10 of the assessment order. As per assessee’s statement, no shares were allotted against the transfer and therefore, the conditions of the agreement were not fulfilled since the agreement envisaged allotment of shares to the assessee which was not done. 3.5 Proceeding further, it was noted that transfer include transfer of immoveable assets (Land & Building) for Rs.826.22 Lacs. It was noted that after the purchase of these concerns, DECPL issued shares of face value of Rs.10/- each at Rs.100/- and fetched premium. Thus, the businesses were transferred at throw away prices without allotment of any shares to the assessee. 3.6 Finally the modus operandi was held to be colorable devices adopted by assessee to avoid paying due taxes on the sale of ITA No.2021/Chny/2015 - 5 - immoveable properties. The properties were transferred without any valuation and without considering market value of property. 3.7 Furthermore, the partnership’s assets were also transferred which would give rise to Short-Term Capital Gains. But since the firm was dissolved during the year, the assets were individually sold by the partners of the firm i.e., the assessee holding 90% of shares and K.R. Meenkashi holding 10% share in the firm. The firm had Land and Building having book value of Rs.209.41 Lacs. 3.8 The assessee was asked to furnish copies of registered deed of properties for reference to valuation cell for obtaining the market value but the same was not furnished. 3.9 In the aforesaid background, Ld. AO proceeded to estimate the gains earned by the assessee. The Book Value of Land and Building as held by the proprietorship concerns as well as the firm was determined as Rs.989.42 Lacs. The market value was determined at three times and accordingly, the differential of Rs.1978.85 Lacs was held to be short-term capital gain as accrued to the assessee on transfer of these entities. Finally, the same was added to the income of the assessee. Appellate Proceedings 4.1 During appellate proceedings, the assessee pleaded that the concerns were transferred on going concern basis at book value. Therefore, the provisions of Sec.50B would apply. The assessee also submitted that the provisions of Sec.47(xiii) & (xiv) would also apply. 4.2 The Ld. CIT(A) noted the contents of the merger agreement dated 31.03.2009 and concurred with assessee’ submissions that the businesses were transferred on going concern basis and the entire ITA No.2021/Chny/2015 - 6 - consideration was received by way of allotment of shares. In such a case, the provision of Sec.50B would apply. Since the businesses were in existence for more than 3 years, the gains were to be treated as Long Term Capital Gains u/s 50B. 4.3 The computation of gain was to be computed as per Sec.48 which provides that capital gains are to be computed after deducting from the full value of consideration as reduced by cost of acquisition / improvement & expenses on transfer. Therefore, the actual sale consideration as received by the assessee would be accepted as full value of consideration. The fair market value or any other value for estimation of value had no relevance to determine the capital gains. In the present case, the consideration as accruing to the assessee would mean amounts lying in the assessee’s capital accounts in these concerns. The net balance in these concerns as on 31.03.2009 was Rs.264.37 Lacs which were also stated in Form No.3CEA. As per Sec.50B(2), the net worth of the concerns under transfer would be deemed cost of acquisition / improvement which would be nothing but amounts lying in capital accounts. Hence, the taxable gains would be zero since there was no revaluation of the assets. Accordingly, the additions made by Ld. AO were held to be not in accordance with law. 4.4 The assessee made another submission that the transactions would be covered by Sec.47(xiii) and (xiv) of the Act. Concurring with the same, it was held that all the concerned were transferred on going concern basis with all the assets and liabilities and therefore the transactions was not to be recognized as transfer. After the transfer, the assessee continues to hold more than 50% equity shares in ITA No.2021/Chny/2015 - 7 - DECPL. The entire consideration was settled by allotment of shares and therefore, the conditions of these provisions were fulfilled. 4.5 However, upon perusal of Balance Sheet of DECPL as on 31.03.2010, it was observed that the amount payable to the assessee was group under unsecured loans which would explain non-allotment of shares. It was also stated by the assessee that actual allotment of shares could not be done due to unavoidable problems and the shares were finally issued during April 2014. It was also argued that the provision does not mandate date by which the allotment of shares was to be completed. The assessee did not derive any other benefit. The consideration as payable to the assessee was not withdrawn in any form. The Ld. CIT(A) concurred with these submissions. Regarding presentation of amount payable as unsecured loans, it was held that though the same was classified as unsecured loans, however, the fact that the same were on account of transfer of business was clearly mentioned in the financial statements. Finally, the impugned additions were deleted against which the revenue is in further appeal before us. The primary argument of revenue is violation of Rule 46A. Our findings and Adjudication 5. Upon due consideration of material facts, it could be gathered that the case of Ld. AO was that Land & Building was transferred at throw away values and nothing was shown as to how the goodwill was computed / settled. Another observation by Ld. AO was that the shares were never allotted to the assessee as per the agreement. Further, the assets of the partnership firm were sold individually by the partners of the firm. The sale deeds of properties under consideration were never furnished. In the above circumstances, Ld. AO was left with no choice ITA No.2021/Chny/2015 - 8 - but the compute the gains on estimated basis and accordingly, the impugned additions were made. 6. However, during appellate proceedings the assessee pleaded applicability of Sec.50B and furnished documents in support of its case. Another argument was that the provisions of Sec.47 (xii) / (xiv) were applicable to the case of the assessee. Considering the same, Ld. CIT(A) allowed the claim of the assessee and rendered findings that the shares were allotted to the assessee and the case was covered u/s 50B. This is contrary to the findings given by Ld. AO. Further finding was also rendered that the firms were in existence for more than 3 years. The Ld. CIT (A) also upheld the applicability of provisions of Sec. 47(xii) / (xiv) whereas Ld. AO had no occasion to consider the same. In such a case, the arguments of the revenue are to be accepted that there was violation of Rule 46A. 7. Considering the facts and circumstances of the case, we set- aside the impugned order and restore the matter back to the file of Ld. AO keeping all the issues open. The assessee is directed to substantiate its case. 8. The appeal stands allowed for statistical purposes. Order pronounced on 17 th August, 2022. Sd/- (MAHAVIR SINGH) उपा12 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद9 / ACCOUNTANT MEMBER चे,ई / Chennai; िदनांक / Dated : 17-08-2022 EDN/- आदेश की Xितिलिप अ 6ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF