The ITO, Ward-2(3), Baroda. V. M/s. Jay Murlidhar Developers Pvt. Ltd., Baroda.

ITA 282/AHD/2004

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0428 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 27-10-2009
• Assessment Year: 1995-1996
• Appeal Filed On: 03-02-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA
• Assessee Lawyers: S N SOPARKARSR
• Keywords: Capital asset; Cost of acquisition; Fair market value; Capital Gains

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI N.S.SAINI, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.282/AHD/2004 ASSESSMENT YEAR:1995-96 DATE OF HEARING:27.10.09 DRAFTED:17.11.09 INCOME TAX OFFICER, WARD-2(3), AAYAKAR BHAVAN, RACE COURSE CIRCLE, BARODA V/S . M/S. JAY MURLIDHAR DEVELOPERS PVT. LTD., 14- A, SAHIL, BHATGWATI PARTK, OLD PADRA ROAD, BARODA PAN NO. NOT FOUND (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI C.K. MISHRA, SR DR RESPONDENT BY:- SHRI S.N.SOPARKAR, SR.AR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-VI, BARODA IN APPEAL NO.CAB/VI -244/2003-04 DATED 28-11- 2008. THE ASSESSMENT WAS FRAMED BY THE ITO, WARD-2( 3) BARODA U/S.143(3) R.W.S. 148 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERR ED TO AS THE ACT) VIDE HIS ORDER DATED 31-03-2003 FOR THE ASSESSMENT YEAR 1995-96. 2. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF SHORT-TERM CAPITAL GAINS. THE RELEVANT GROUND READS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-VI, BARODA HAS ERRED IN ITA NO.282/AHD/2004 A.Y.1995 -96 ITO WD-2(3) BARODA V. M/S. JAY MURLIDHAR DEVELOPERS PVT. LTD. PAGE 2 I) DELETING AN ADDITION OF RS.1,60,18,624/- MADE ON ACCOUNT OF SHORT TERM CAPITAL GAIN DESPITE THE FACT THAT THERE WAS A TRAN SFER OF THE ASSETS OWNED BY FIRM TO COMPANY IN VIEW OF PROVISION OF SECTION 45( 4) OF THE ACT. 3. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE ALSO PERUSED THE CASE RECORDS INCLUDING THE ASSESSMENT ORDER AS WELL AS THE ORDER OF CIT(A). T HE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSEE-FIRM CAME INTO EX ISTENCE ON 05-05-1992 HAVING SEVEN PARTNERS. THE PARTNERS CONTRIBUTED CAPITAL I N FIRM IN THE FORM OF LAND AND THE TOTAL VALUE OF LAND WAS, IN THE BOOKS OF ACCOUNT, A T RS.19,91,696/-. SUBSEQUENTLY THE FIRM WAS INCORPORATED AT JOINT STOCK COMPANY IN THE NAME OF JAY MURLIDHAR DEVELOPERS PVT. LTD. UNDER CHAPTER-IX OF THE COMPAN IES ACT, 1956 ON 30-05-1994. CONSEQUENTLY, ALL THE ASSETS OF THE PARTNERSHIP-FIR M WAS VESTED IN JOINT-STOCK- COMPANY. IN VIEW OF THESE FACTS, THE ASSESSING OFF ICER HELD THAT THERE A TRANSFER OF ASSET, I.E. LAND OF THE FIRM TO THE COMPANY IN VIEW OF THE PROVISIONS OF SECTION 45(4) OF THE ACT AND LIABLE FOR CAPITAL GAINS. THE AO AS CERTAINED THE FAIR MARKET VALUE OF THE LAND FROM THE MUNICIPAL AUTHORITY AS ON 30-05-1 994 AT RS.1,80,10,320/- AND ACCORDINGLY HE TAXED THE SHORT-TERM CAPITAL GAINS A T RS.1,60,18,624/- BEING THE FAIR MARKET VALUE OF THE VALUE OF THE LAND AS PER THE BA LANCE-SHEET OF THE ASSESSEE-FIRM. 4. AGGRIEVED, AGAINST THE ACTION OF THE ASSESSING O FFICER, ASSESSEE PREFERRED APPEAL TO CIT(A). THE CIT(A) RELYING ON ITATS DEC ISION IN THE CASE OF WELL PACK PACKAGING V. DCIT IN ITA NO.235/AHD/2001 ALLOWED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDING IN PARA-2.2 OF HIS APPELLATE ORDER:- 2.2 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT AND THE FACTS OF THE CASE. THERE IS NO DISPUTE THAT THE APPELLANT-FIRM W AS INCORPORATED AS A COMPANY UNDER CHAPTER-IX OF THE COMPANIES ACT 1956 ON 30.05.1994. THE ASSESSING OFFICER WAS OF THE VIEW THAT UNDER SECTIO N 45(4), THE ASSETS OF THE FIRM NAMELY LAND STOOD TRANSFERRED TO THE COMPANY A ND THEREFORE, FIRM WAS LIABLE FOR SHORT TERM CAPITAL GAIN WHICH WAS WORKED OUT AT RS.1,60,18,624/- BEING THE DIFFERENCE OF THE FAIR MARKET VALUE AND T HE BOOK VALUE OF THE LAND. THE MUMBAI HIGH COURT DECISION RELIED UPON BY THE A PPELLANT IS CLEARLY APPLICABLE IN THIS CASE. IT HAS BEEN HELD BY THE HI GH COURT THAT WHEN A PARTNERSHIP FIRM BECOMES A LIMITED COMPANY UNDER CH APTER IX OF THE COMPANIES ACT, THE PROPERTIES OF THE ERSTWHILE FIRM VEST IN THE LIMITED COMPANY AND THE CONDITION OF TRANSFER BY WAY OF DISTRIBUTIO N OF CAPITAL ASSETS IS NOT ITA NO.282/AHD/2004 A.Y.1995 -96 ITO WD-2(3) BARODA V. M/S. JAY MURLIDHAR DEVELOPERS PVT. LTD. PAGE 3 SATISFIED IN SUCH A CASE BECAUSE THERE IS NO TRANSF ERER AND TRANSFREE. IN THE CIRCUMSTANCES, LATER PART OF THE SECTION 45(4) WHIC H DEAL WIDTH THEREFORE IN THE CASE OF PACK PACKAGING V/S. DCIT. THE ITATS DECISI ON WAS UPHELD BY THE JURISDICTIONAL GUJ. HIGH COURT, WHEREIN, IT WAS HEL D THAT WHERE THE FIRM IS INCORPORATED INTO A LIMITED COMPANY UNDER CHAPTER I X, THERE IS NO TRANSFER OF CAPITAL ASSETS. THEREFORE, I AM OF THE VIEW THAT TH E APPELLANTS CASE IS COVERED BY THE ABOVE TWO DECISIONS, WHEREIN, IT HAS BEEN HE LD THAT INN A CASE OF INCORPORATION UNDER CHAPTER IX OF THE COMPANIES ACT , THERE IS NO TRANSFER OF CAPITAL ASSETS AND HENCE CAPITAL GAIN IS NOT ATTRAC TED. FOLLOWING THE ABOVE TWO DECISIONS, I HOLD THAT THE ADDITION MADE BY THE ASS ESSING OFFICER ON ACCOUNT OF SHORT TERM CAPITAL GAIN OF RS.1,60,18,624/- CANN OT BE SUSTAINED. THIS ADDITION IS THEREFORE, DELETED. 5. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. TEXSPIN ENGINEERING AND MANUFACTURING WORKS (2003) 263 ITR 345 (BOM), WHEREIN THE HONBLE COURT HAS HELD IN PAGE-354 AND 355 AS UNDER:- NOW, IN THE PRESENT CASE, IT IS ARGUED ON BEHALF O F THE DEPARTMENT BEFORE THE TRIBUNAL, FOR THE FIRST TIME, THAT IN THIS CASE, ON THE VESTING OF THE PROPERTIES OF THE ERSTWHILE FIRM IN THE LIMITED COMPANY, THERE WA S A TRANSFER OF CAPITAL ASSETS AND, THEREFORE, IT WAS CHARGEABLE TO INCOME- TAX UNDER THE HEAD CAPITAL GAINS AS, ON SUCH VESTING, THERE WAS EXTI NGUISHMENT OF ALL RIGHT, TITLE AND INTEREST IN THE CAPITAL ASSETS QUA THE FIRM. WE DO NOT FIND ANY MERIT IN THIS ARGUMENT. IN THE PRESENT CASE, WE ARE CONCERNED WIT H A PARTNERSHIP FIRM BEING TREATED AS A COMPANY UNDER THE STATUTORY PROV ISIONS 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 ASSET, TWO IMPO RTANT INGREDIENTS ARE: EXISTENCE OF A PARTY AND A COUNTER-PARTY AND, SECON DLY, INCOMING CONSIDERATION QUA THE TRANSFEROR. IN OUR VIEW, WHEN A FIRM IS TREATED AS A COMPANY, THE SAID TWO CONDITION ARE NOT ATTRACTED. THERE IS NO CONVEYANCE OF THE PROPERTY EXECUTABLE IN FAVOUR OF THE LIMITED CO MPANY. IT IS NO DOUBT TRUE THAT ALL PROPERTIES OF THE FIRM VEST IN 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 COMPANY UNDER PART IX OF THE COMPANIES ACT, BUT THAT VESTING IS NOT CONSEQUENT 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 VESTING OF ALL THE PROPERTIES STATUTORILY IN THE COMPANY, THE CLOAK GIVEN TO THE FIRM IS REPLACED BY A DIFFERENT CLOAK AND THE SAME FIRM IS NOW TREATED AS A COMPANY, AFTER A GIVEN DATE. IN THE CIRCUMSTANCES, IN OUR VI EW, THERE IS 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 TRANSFER OF A CAPITAL ASSET UNDER SECTION 45(1) BECAUSE OF THE DEFINITION OF THE WORD TRANSF ER IN SECTION 2(47)(III), EVEN THEN WE ARE OF THE VIEW THAT THE LIABILITY TO PAY C APITAL GAINS TAX WOULD NOT ARISE BECAUSE SECTION 45(1) IS REQUIRED TO BE READ WITH SECTION 48, WHICH PROVIDES FOR MODE OF COMPUTATION. THESE TWO SECTION S ARE REQUIRED TO BE READ TOGETHER AS THE CHARGING SECTION AND THE COMPUTATIO N SECTION CONSTITUTE ONE PACKAGE. NOW, UNDER SECTION 48 IT IS LAID DOWN, INTER ALIA THAT THE INCOME ITA NO.282/AHD/2004 A.Y.1995 -96 ITO WD-2(3) BARODA V. M/S. JAY MURLIDHAR DEVELOPERS PVT. LTD. PAGE 4 CHARGEABLE UNDER THE HEAD CAPITAL GAINS SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED O R ACCRUED AS A RESULT OF THE TRANSFER, THE COST OF ACQUISITION OF THE ASSET AND THE EXPENDITURE INCURRED IN CONNECTION WITH THE TRANSFER. SECTION 45(4) IS MUTU ALLY EXCLUSIVE TO SECTION 45(1). SECTION 45(4) CATEGORICALLY STATES THAT WHER E 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 F ULL VALUE OF THE CONSIDERATION RECEIVED. THIS LATTER PART OF SECTION 45(4) IS NOT THERE IN SECTION 45(1). THEREFORE, ONE HAS TO READ THE EXPRESSION FULL VAL UE OF THE CONSIDERATION RECEIVED / ACCRUING UNDER SECTION 48 DE HORS SECTI ON 45(4) AND IF ONE READS SECTION 48 WITH SECTION 45(1) DE HORS SECTION 45(4) THEN THE EXPRESSION FULL VALUE OF CONSIDERATION IN SECTION 48 CANNOT BE THE MARKET VALUE OF THE CAPITAL ASSET ON THE DATE OF TRANSFER. IN SUCH A CASE, WE H AVE TO READ THE SAID EXPRESSION IN THE LIGHT OF THE TWO JUDGMENTS OF THE SUPREME COURT IN THE CASE OF CIT V. GEORGE HENDERSON AND CO. LTD. [1967] 66 ITR 622 AND IN THE CASE OF CIT V. GILLLANDERS ARBUTHNOT AND CO. [1973] 87 ITR 407 IN WHICH IT HAS BEEN HELD THAT THE EXPRESSION FULL VALUE OF THE CONSIDE RATION: DOES NOT MEAN THE MARKET VALUE OF THE ASSET TRANSFERRED, BUT IT SHALL MEAN THE PRICE BARGAINED FOR BY THE PARTIES TO THE TRANSACTION. IT HAS BEEN FURT HER HELD THAT THE CONSIDERATION FOR THE TRANSFER OF A CAPITAL ASSET I S WHAT THE TRANSFEROR RECEIVES IN LIEU OF THE ASSETS HE PARTS WITH, VIZ., MONEY OR MONEYS WORTH, AND, THEREFORE, THE VERY ASSESSEE TRANSFERRED OR PARTED WITH CANNOT BE THE CONSIDERATION FOR THE TRANSFER AND, THEREFORE, THE EXPRESSION FULL VALUE OF THE CONSIDERATION: CANNOT BE CONSTRUED AS HAVING A REFE RENCE TO THE MARKET VALUE OF THE ASSET TRANSFERRED AND THAT THE SAID EXPRESSI ON ONLY MEANS THE FULL VALUE OF THE THINGS RECEIVED BY THE TRANSFEROR IN EXCHANG E FOR THE CAPITAL ASSET TRANSFERRED BY HIM. IN THE CIRCUMSTANCES, EVEN IF WE WERE TO PROCEED ON THE BASIS THAT VESTING IN THE COMPANY UNDER PART IX CON STITUTED TRANSFER UNDER SECTION 45(1), STILL THE ASSESSEE OUGHT TO SUCCEED BECAUSE THE FIRM CAN BE ASSESSED ONLY IF THE FULL VALUE OF THE CONSIDERATIO N IS RECEIVED BY THE FIRM OR IF IT ACCRUES TO THE FIRM. IN THE PRESENT CASE, THE CO MPANY HAD ALLOTTED SHARES TO THE PARTNERS OF THE ERSTWHILE FIRM, BUT THAT WAS IN PROPORTION TO THE CAPITAL OF THE PARTNERS IN THE ERSTWHILE FIRM. THAT ALLOTMENT OF SHARES HAD NO CORRELATION WITH THE VESTING OF THE PROPERTIES IN THE LIMITED C OMPANY UNDER PART IX OF THE ACT. LASTLY, SECTION 45(1) AND SECTION 45(4) ARE MU TUALLY EXCLUSIVE. UNDER SECTION 45(4) IN CASES OF TRANSFER BY WAY OF DISTRI BUTION AND WHERE SUCH TRANSFER IS AS A RESULT OF DISSOLUTION, THE DEPARTM ENT IS CERTAINLY ENTITLED TO TAKE THE FULL MARKET VALUE OF THE ASSET AS FULL VAL UE OF CONSIDERATION PROVIDED THERE IS TRANSFER BY DISTRIBUTION OF ASSETS. IN TH IS CASE, WE HAVE HELD THAT THERE IS NO SUCH TRANSFER BY WAY OF DISTRIBUTION AND, THE REFORE, SECTION 45(4) IS NOT APPLICABLE. THIS DEEMING PROVISION, REGARDING FULL VALUE OF CONSIDERATION, IS NOT THERE IN SECTION 45(1) READ WITH SECTION 48. IF ONE READS SECTION 45(1) WITH SECTION 48, IT IS CLEAR THAT THE FORMER IS A CHARGI NG SECTION AND IF THAT SECTION IS APPLICABLE, THE COMPUTATION HAS TO BE DONE UNDER SE CTION 48, WHICH ONLY REFERS TO DEDUCTIONS FROM THE FULL VALUE OF CONSIDE RATION RECEIVED OR ACCRUING. SECTION 48 DOES NOT EMPOWER THE ASSESSING OFFICER T O TAKE THE MARKET VALUE AS THE FULL VALUE OF CONSIDERATION AS IN THE CASE O F SECTION 45(4). IN THE CIRCUMSTANCES, EVEN IF WE WERE TO HOLD THAT VESTING AMOUNTS TO TRANSFER, THE COMPUTATION IS NOT POSSIBLE BECAUSE IT HAS BEEN LAI D DOWN IN THE ABOVE ITA NO.282/AHD/2004 A.Y.1995 -96 ITO WD-2(3) BARODA V. M/S. JAY MURLIDHAR DEVELOPERS PVT. LTD. PAGE 5 JUDGMENT OF THE SUPREME COURT THAT FULL CONSIDERATI ON CANNOT BE CONSTRUED TO MEAN THE MARKET VALUE OF THE ASSET TRANSFERRED. THE LEGISLATURE, IN ITS WISDOM, HAS AMENDED ONLY SECTION 45(4) BY WHICH THE MARKET VALUE OF THE ASSET ON THE DATE OF THE TRANSFER IS DEEMED TO BE T HE FULL VALUE OF CONSIDERATION. HOWEVER, SUCH AMENDMENT IS NOT THERE IN SECTION 45(1). 6. WE FIND FROM THE ABOVE FACTS IN THE PRESENT CASE AND THE RATIO LAID DOWN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF TEXSPIN ENGINEERING AND MANUFACTURING WORKS (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE CI T(A) HAS RIGHTLY DELETED THE ADDITION. RESPECTFULLY FOLLOWING THE HONBLE BOMBA Y HIGH COURT IN THE CASE OF TEXSPIN ENGINEERING AND MANUFACTURING WORKS (SUPRA), WE DISMISS THE APPEAL OF THE REVENUE. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 20/11/2009 SD/- SD/- (N.S.SAINI) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 20/11/2009 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-VI, BARODA 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD