ACIT, New Delhi V. M/s. Escort Heart Institute & Research Centre, New Delhi

ITA 3710/DEL/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1671 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2001-2002
• Appeal Filed On: 08-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R L MEENA
• Assessee Lawyers: R M MEHTA
• Keywords: Capital asset; Depreciation; Charitable institution; Opportunity of being heard; Principle of natural justice; Fair market value; Scheme of amalgamation; Reason to believe; Set aside
• Section: 143(3); 12AA; 147; 148; 12; 15; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH BENCH BENCH BENCH C CC C : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE SHRI G. BEFORE SHRI G. BEFORE SHRI G. BEFORE SHRI G.D.AGRAWAL, D.AGRAWAL, D.AGRAWAL, D.AGRAWAL, VICE PRESIDENT AND VICE PRESIDENT AND VICE PRESIDENT AND VICE PRESIDENT AND MS. SUCHITRA KAMBLE MS. SUCHITRA KAMBLE MS. SUCHITRA KAMBLE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER , JUDICIAL MEMBER ITA NO. ITA NO. ITA NO. ITA NO. 3709/DEL/2015 3709/DEL/2015 3709/DEL/2015 3709/DEL/2015 ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR ASSESSMENT YEAR : : : : 2001 2001 2001 2001 - -- - 02 0202 02 ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -8(2), 8(2), 8(2), 8(2), NEW NEW NEW NEW DELHI. DELHI. DELHI. DELHI. VS. VS. VS. VS. M/S ESCORT M/S ESCORT M/S ESCORT M/S ESCORT S SS S HEART INSTITUTE AND HEART INSTITUTE AND HEART INSTITUTE AND HEART INSTITUTE AND RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, H.NO.3273, SECTOR 15 H.NO.3273, SECTOR 15 H.NO.3273, SECTOR 15 H.NO.3273, SECTOR 15- -- -D, D,D, D, CHANDIGARH. CHANDIGARH. CHANDIGARH. CHANDIGARH. PAN : AAATE0526D. PAN : AAATE0526D. PAN : AAATE0526D. PAN : AAATE0526D. (APPELLANT) (RESPONDENT) ITA NO.3710/DEL/2015 ITA NO.3710/DEL/2015 ITA NO.3710/DEL/2015 ITA NO.3710/DEL/2015 ASSESSMENT YEAR : 2001 ASSESSMENT YEAR : 2001 ASSESSMENT YEAR : 2001 ASSESSMENT YEAR : 2001 - -- - 02 0202 02 ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF ASSISTANT COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -8( 8(8( 8(2), 2), 2), 2), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. VS. VS. VS. VS. M/S ESCORT M/S ESCORT M/S ESCORT M/S ESCORT S SS S HEART INSTITUTE AND HEART INSTITUTE AND HEART INSTITUTE AND HEART INSTITUTE AND RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, OKHLA ROAD, OKHLA ROAD, OKHLA ROAD, OKHLA ROAD, OKHLA, OKHLA, OKHLA, OKHLA, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. PAN : AAAAE0047J. PAN : AAAAE0047J. PAN : AAAAE0047J. PAN : AAAAE0047J. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.L. MEENA, CIT - DR. RESPONDENT BY : SHRI R.M. MEHTA, CA. DATE OF HEARING : 30.05.2019 30.05.2019 30.05.2019 30.05.2019 DATE OF PRONOUNCEMENT : 11.06.2019 11.06.2019 11.06.2019 11.06.2019 ORDER ORDER ORDER ORDER PER G. PER G. PER G. PER G.D.AGRAWAL, D.AGRAWAL, D.AGRAWAL, D.AGRAWAL, VP VPVP VP : :: : THESE APPEALS BY THE REVENUE FOR THE ASSESSMENT YE AR 2001-02 ARE DIRECTED AGAINST THE ORDER OF LEARNED CIT(A)-3, NEW DELHI DATED 2 ND MARCH, 2015 AND 3 RD MARCH, 2015. ITA NO.3710/DEL/2015 ITA NO.3710/DEL/2015 ITA NO.3710/DEL/2015 ITA NO.3710/DEL/2015 - -- - M/S ESCORT M/S ESCORT M/S ESCORT M/S ESCORTS SS S HEART INSTITUTE AND RESEARCH CENTRE, HEART INSTITUTE AND RESEARCH CENTRE, HEART INSTITUTE AND RESEARCH CENTRE, HEART INSTITUTE AND RESEARCH CENTRE, NEW DELHI NEW DELHI NEW DELHI NEW DELHI : :: :- -- - ITA NOS.3709 & 3710/DEL/2015 2 2. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLLO WING GROUNDS :- 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, LD.CIT(A) HAS ERRED IN DELETING TH E ADDITION OF RS.156,44,47,193/- ON ACCOUNT OF TRANSF ER OF ACCUMULATED PROFIT. 2. WHETHER THE CIT(A) WAS CORRECT IN HOLDING THAT REFERENCE IN SECTION 11(3) OF THE ACT IS TO BE ACCU MULATION U/S 11(2) OF THE ACT ONLY AND OUT TO THE ACCUMULATI ON U/S 11(1) OF THE ACT. 3. WHETHER THE CIT(A) WAS CORRECT IN HOLDING THAT ADDITION OF RS.95,26,54,640/- ON ACCOUNT OF EXCESS OF ASSETS OVER LIABILITIES TANTAMOUNT TO RETROSPECTIVE WITHDRAWAL OF THE CHARITABLE STATUS. 4. WHETHER THE CIT(A) WAS CORRECT IN HOLDING THAT ADDITION IN RESPECT OF DONATION, KEYMAN INSURANCE, SOFTWARE EXPENSE AND DIFFERENCE IN THE VALUE OF LAN D COULDNT HAVE BEEN MADE U/S 11(3) OF THE ACT. 5. WHETHER THE CIT(A) WAS CORRECT IN HOLDING THAT T HE ASSESSEE HAD NO SURPLUS WHICH COULD HAVE BEEN CHARG ED TO INCOME UNDER THE PROVISION OF SECTION 11(3) OF THE ACT. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HE ARING. 3. THE FACTS OF THE CASE ARE THAT A SOCIETY BY THE NAME OF ESCORTS HEART INSTITUTE & RESEARCH CENTRE WAS FORMED AT DEL HI (EHIRC, DELHI) ON 21.10.1981 AND ITS OBJECTS WERE CHARITABLE IN NA TURE, ITS INCOME WAS EXEMPT UNDER SECTION 10(21) OF THE ACT. IT ALSO HA D THE APPROVAL OF THE CENTRAL GOVERNMENT UNDER SECTION 35(1)(II) OF T HE ACT WHICH WAS EFFECTIVE TILL 31 ST MARCH, 2001. ON 11 TH NOVEMBER, 1999, ANOTHER SOCIETY BY THE SAME NAME WAS FORMED AT CHANDIGARH ( EHIRC, CHANDIGARH) WITH OBJECTS IDENTICAL TO THAT OF EHIRC , DELHI. HOWEVER, EHIRC, CHANDIGARH WAS NOT A CHARITABLE SOCIETY AND IT DID NOT HAVE ANY OBJECT OF RELIEF TO THE POOR. ON 1 ST APRIL, 2000, EHIRC, DELHI MERGED WITH EHIRC, CHANDIGARH UNDER DUE PROCESS OF LAW AND ALL ITS ASSETS AND ITA NOS.3709 & 3710/DEL/2015 3 LIABILITIES VESTED WITH THE LATTER. THE CHANDIGARH SOCIETY REGISTERED ITSELF AS A COMPANY UNDER PART IX OF THE COMPANIES ACT, 1956 VIDE CERTIFICATE OF INCORPORATION DATED 31 ST MAY, 2000 GRANTED BY THE REGISTRAR OF COMPANIES, PUNJAB, H.P. AND CHANDIGARH . 4. FOR THE YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2001-02, THE ASSESSEE DID NOT FILE THE RETURN OF INCOME. TH E ASSESSING OFFICER ISSUED NOTICE UNDER SECTION 148, IN RESPONSE TO WHI CH, THE ASSESSEE FILED THE RETURN DECLARING NIL INCOME. THAT DUE TO AMALGAMATION OF ASSESSEE WITH EHIRC, CHANDIGARH, THE ASSESSING OFFI CER REOPENED THE ASSESSMENT FOR ASSESSMENT YEARS 1997-98, 1998-99, 1 999-2000 AND 2000-01. THE ASSESSEE FILED A WRIT PETITION CHALLE NGING THE REOPENING BEFORE THE HON'BLE DELHI HIGH COURT. THAT HON'BLE DELHI HIGH COURT, VIDE ORDER DATED 14 TH DECEMBER, 2012 IN W.P.(C) 11909/2005, HELD AS UNDER :- 5. ELABORATE ARGUMENTS WERE ADDRESSED BEFORE US O N THE QUESTION OF JURISDICTION OF THE ASSESSING OFFIC ER TO REOPEN THE ASSESSMENTS. THESE HAVE BEEN CONSIDERED. THE PRECISE QUESTION THAT ARISES FOR OUR CONSIDERATION HAS BEEN FORMULATED IN THE BEGINNING OF OUR ORDER. EVEN ASSU MING THAT THERE WAS BREACH OF ANY STATUTORY CONDITIONS U NDER WHICH THE EXEMPTION WAS GRANTED TO THE PETITIONER U NDER SECTION 10(21), THE ENTIRE ACCUMULATED INCOME OF TH E EARLIER YEARS CANNOT BE TAXED IN THOSE YEARS BY REO PENING THE ASSESSMENTS FOR THOSE YEARS. SECTION 11(3), WHI CH IS MADE APPLICABLE TO SECTION 10(21), ITSELF PROVIDES THAT THE ENTIRE ACCUMULATED INCOME SHALL BE DEEMED TO BE THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHIC H THE BREACH OF THE CONDITIONS OR THE CONTINGENCY OCCURS. THE STATUTE HAVING THUS FIXED THE ASSESSMENT YEAR IN WH ICH THE ENTIRE PAST ACCUMULATED INCOME FALLS TO BE TAXED, I T IS IMPERMISSIBLE IN LAW FOR THE ASSESSING OFFICER TO E NTERTAIN A REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX FOR THE ASSESSMENT YEARS 1998-99 TO 2000-01 HAD ESCAPED ASSESSMENT. THE STATUTE HAS IMPOSED A FETTER ON THE POWER OF THE ASSESSING OFFICER TO CONSIDER THE ACCUMULATE D INCOME, AS THE INCOME OF THE RESPECTIVE EARLIER YEA RS AND HAS MANDATED IT TO BE THE INCOME OF THE PREVIOUS YE AR I.E. ITA NOS.3709 & 3710/DEL/2015 4 THE PREVIOUS YEAR COMMENCING ON 01.04.2000 AND ENDI NG ON 31.03.2001 RELATING TO THE ASSESSMENT YEAR 2001- 02, WHICH IS THE YEAR IN WHICH THE PETITIONER WAS AMALG AMATED WITH ESCORTS HOSPITAL, CHANDIGARH AND TRANSFERRED A LL ITS ASSETS TO THE CHANDIGARH HOSPITAL WHICH IS LOOKED U PON AS A BREACH OF THE STATUTORY PROVISIONS SUBJECT TO WHI CH THE EXEMPTION UNDER SECTION 10(21) WAS ALLOWED. THE CONSEQUENCES OF THE BREACH HAVING BEEN PROVIDED BY THE STATUTE ITSELF, IT IS NOT OPEN TO THE ASSESSING OFF ICER TO CONSIDER THE ACCUMULATED INCOME AS HAVING ESCAPED ASSESSMENT IN THE PAST ASSESSMENT YEARS. HE HAS TO PERFORCE BRING TO TAX THE ACCUMULATED INCOME ONLY I N THE YEAR IN WHICH THE BREACH OCCURRED; THAT IS THE MAND ATE OF SECTION 11(3). 6. TWO IMPORTANT CONDITIONS FOR THE APPLICABILITY O F SECTION 147 ARE (A) INCOME CHARGEABLE TO TAX MUST HAVE ESCA PED ASSESSMENT AND (B) ASSESSING OFFICER MUST HAVE REAS ON TO BELIEVE SO. WHEN SECTION 11(3) TREATS THE ACCUMULAT ED INCOME OF THE PAST YEAR OF THE PETITIONER AS INCOME OF THE ASSESSMENT YEAR 2001-02, THERE CAN BE NO QUESTION O F ANY INCOME ESCAPING ASSESSMENT IN THE PAST ASSESSMENT Y EARS I.E. THE ASSESSMENT YEARS 1998-99 TO 2000-01. IT FO LLOWS THAT THE ASSESSING OFFICER CANNOT ENTERTAIN ANY REA SON TO BELIEVE THAT INCOME CHARGEABLE TO TAX FOR THOSE YEA RS HAD ESCAPED ASSESSMENT. FOR THESE REASONS WE QUASH THE NOTICE ISSUED UNDER SECTION 148 OF THE ACT FOR ALL THREE YEARS I.E. ASS ESSMENT YEARS 1998-99 TO 2000-01 AND ALLOW THE WRIT PETITIO N WITH NO ORDER AS TO COSTS. 5. THUS, HONBLE HIGH COURT, WHILE QUASHING THE NOT ICE UNDER SECTION 148 FOR ASSESSMENT YEARS 1998-99 TO 2000-01 , HELD THAT ANY ACCUMULATED PROFIT UNDER SECTION 11(3) OF THE INCOM E-TAX ACT IN THE HANDS OF THE ASSESSEE OF THE PAST YEARS IS LIABLE T O BE TAXED IN ASSESSMENT YEAR 2001-02. THUS, THE LIMITED QUESTIO N WHICH WE ARE REQUIRED TO ADJUDICATE IN THIS APPEAL IS WHETHER TH ERE WERE ANY ACCUMULATED PROFITS IN THE HANDS OF THE ASSESSEE WI THIN THE MEANING OF SECTION 11(3) OF THE ACT WHICH CAN BE TAXED ON ACCO UNT OF MERGER OF THE ASSESSEE WITH EHIRC, CHANDIGARH. WE FURTHER FI ND THAT LEARNED CIT(A) HAS GIVEN THE FINDING THAT THERE WAS NO ACCU MULATED PROFIT ITA NOS.3709 & 3710/DEL/2015 5 UNDER SECTION 11(2) OF THE ACT. ACCORDINGLY, HE DE LETED THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER IN THIS REGA RD. THE RELEVANT FINDING OF THE LEARNED CIT(A) READS AS UNDER :- A LOOK AT THE FIGURE OF TAXABLE INCOME AGGREGATING RS.1,56,44,47,193/- SHOWS THAT THE FIRST ITEM AMOUN TING TO RS.95,26,54,640/- REPRESENTS THE EXCESS OF ASSETS O VER LIABILITIES AS ON 31.03.2000 VIZ. THE ASSETS BOTH F IXED AND CURRENT ACQUIRED OUT OF THE INCOME DURING THE PRE- AMALGAMATION PERIOD WHEN THE APPELLANT ENJOYED THE EXEMPTION AS A CHARITABLE INSTITUTION UNDER SECTION 10(21) READ WITH SECTION 11 OF THE ACT. THIS ADDITION TANTAMOUNT TO SOME EXTENT TO A RETROS PECTIVE WITHDRAWAL OF THE CHARITABLE STATUS AND WHICH IS DISAPPROVED BY THE HON'BLE DELHI HIGH COURT IN THE ORDER DATED 14.12.2012 WHEN IT QUASHED THE NOTICES ISSUED U/S 148 OF THE ACT FOR THE ASSESSMENT YEARS 1998-99 TO 2000- 01 AS ALSO THE ORDER DATED 25.01.2012 WHEREBY THE N OTICE U/S 148 OF THE ACT FOR THE ASSESSMENT YEAR 1997-98 WAS QUASHED. THE ORDERS OF THE HON'BLE DELHI HIGH COUR T ARE STATED TO HAVE ATTAINED FINALITY. THREE OTHER ADDITIONS NEED TO BE REFERRED TO : (1) DONATIONS RECEIVED OVER THE YEARS RS.14,87,58,2 97. (2) ADDITIONS ON ACCOUNT OF KEYMAN INSURANCE. (3) SOFTWARE EXPENSES AGGREGATING RS.8,14,63,413/- MADE IN THE ASSESSMENT YEARS 1998-99 TO 2000-01. THESE BY NO STRETCH OF IMAGINATION CAN BE TREATED A S INCOME WITHIN THE MEANING OF SECTION 11(3) OF THE A CT AND IF DONE WOULD BE CONTRARY TO THE STATUTORY PROVISIO NS AND THE JUDGMENTS RELIED UPON INCLUDING THE APPELLANTS OWN CASE. COMING TO THE ADDITION OF RS.38,15,70,842/-, BEING THE DIFFERENCE IN THE VALUE OF LAND PURSUANT TO THE VAL UATION BY THE DVO, THIS AGAIN DOES NOT QUALIFY TO BE CONSIDER ED AND FOR THAT MATTER U/S 11(3) OF THE ACT. REVERTING BACK AT THIS STAGE TO THE ADDITION OF RS.95,26,54,460/- COMPRISING OF RS.25,87,72,888/- B EING ITA NOS.3709 & 3710/DEL/2015 6 THE EXCESS OF INCOME OVER EXPENDITURE FOR THE PERIO D ENDING 31.03.2000 PLUS THE BROUGHT FORWARD BALANCE UNDER THE SAME HEAD AMOUNTING TO RS.69,38,81,752/- THE SA ME STANDS REFLECTED IN THE FIXED ASSETS AS ALSO THE CU RRENT ASSETS. THE YEAR-WISE CHART FOR THE APPLICATION OF INCOME I S AS UNDER : ASSTT. YEAR GROSS RECEIPTS INCOME APPLIED U/S 11(1)(A) APPLICATION OF INCOME EXPENSES (EXCLUDING DEPN.) DEPRECIATION ON PURCHASE OF CAPITAL ASSETS ON REPAYMENT OF LOAN TOTAL APP. U/S 11(1)(A) ACCU MULATED U/S 11(1)(A) (UPTO 25% OF GROSS INCOME) TOTAL APPLICATION- ACCUMULATION U/S 11(1)(A) 1 2 3 4 5 6 7 (3+4+5+6) 8 (2 - 7) 7+8=2 1986 - 87 2396533 368712 0 11348032 11716744 - 9320211 2396533 1987 - 88 1526812 666389 0 23482506 24148895 - 22622083 1526812 1988 - 89 562980 2184996 409501 84724675 87319172 - 86756192 562980 1989 - 90 27638328 33745343 29354417 31185914 94285674 - 66647346 27638328 1990 - 91 98399991 73799993 33326044 49066295 156192332 - 57792341 98399991 1991 - 92 139892069 112150939 27678366 1 5822008 6700000 162351313 - 22459244 139892069 1992 - 93 208960485 148489174 45737929 23917938 14400000 232545041 - 23584556 208960485 1993 - 94 285459371 189594106 57947448 142720587 14400000 404662141 - 119202770 285459371 1994 - 95 361441841 242257442 5321464 8 43830919 15600000 354903009 6538832 361441841 1995 - 96 438536984 291986445 85042855 130562637 15600000 523191937 - 84654953 438536984 1996 - 97 539853589 376740562 82589981 85593387 7800000 552723930 - 12870341 539853589 1997 - 98 688144941 471709341 9973739 1 120475521 691922253 - 3777312 688144941 1998 - 99 839473870 586397887 98123830 84968700 769490417 69983453 839473870 1999 - 00 101559931 6 714376465 95890459 93056648 903323572 112275744 1015599316 2000 - 01 123729721 5 863814310 114709927 170508026 11490 3 223 88264952 1237297215 [TOTAL EXEMPTED ACCUMULATION U/S 11(1)(A)] -232624 368 THE ASSESSEE FILED THE CHART FOR THE APPLICATION OF INCOME BEFORE THE ASSESSING OFFICER DURING THE REASSESSMEN T PROCEEDINGS BUT THE ASSESSING OFFICER HAS NOT REBUT TED THE CONTENTION OF THE ASSESSEE THAT THE ACCUMULATED AMO UNT IN COLUMN 8 RESULTS IN THE NEGATIVE FIGURE OF RS.23,26 ,24,368 OVER THE GROSS RECEIPTS. DURING THE REMAND PROCEED INGS, THE ASSESSING OFFICER VIDE LETTER DATED 25.02.2013 AND SUBSEQUENT REMINDERS WAS DIRECTED TO COMMENT ON THE ITA NOS.3709 & 3710/DEL/2015 7 CONTENTIONS RAISED BY THE ASSESSEE BUT THE ASSESSIN G OFFICER HAS NOT OFFERED ANY COMMENTS ON THE SPECIFI C ISSUE. THE ASSESSEE HAS NEVER MADE ANY REQUEST TO THE ASSE SSING OFFICER FOR THE ACCUMULATION OF ITS INCOME UNDER SE CTION 11(2) OF THE ACT. THE YEAR WISE CHART SHOWS THAT T HERE IS NEGATIVE FIGURE OF RS.23,26,24,368 WHICH IS THE EXC ESS OF THE EXPENDITURE OVER THE RECEIPTS. THE ABOVE CHART ALSO CLEARLY ESTABLISHES THAT THE ASSESSEE NEVER HAD ANY SURPLUS WHICH COULD BE CHARGED TO INCOME UNDER THE PROVISIO NS OF SECTION 11(3) OF THE ACT. FURTHER, SECTION 11 OF T HE ACT CONTEMPLATES CHARGING OF INCOME GENERATED FROM THE ASSETS HELD IN TRUST BUT NOT APPLIED FOR THE CHARIT ABLE PURPOSES. THE ACT DOES NOT CONTEMPLATE CHARGING OF THE ASSET ITSELF TO THE TAX. IN VIEW OF THE AFORESAID OBSERVATIONS AND IN THE FINAL ANALYSIS, I DELETE TH E ENTIRE ADDITION OF RS.1,56,44,47,193. 6. THE REVENUE AGGRIEVED WITH THE ORDER OF THE CIT( A) IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D PERUSED THE MATERIAL PLACED BEFORE US. THE LEARNED DR HEAVILY RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND HE STATED THAT T HE ASSESSING OFFICER HAS RIGHTLY WORKED OUT THE ACCUMULATED PROFIT. LEA RNED CIT(A) WRONGLY RESTRICTED THE MEANING OF ACCUMULATED PROFIT AND HE CONSIDERED ONLY THE PROFIT ACCUMULATED UNDER SECTION 11(2) OF THE A CT IGNORING THE FACT THAT THE ASSESSEE HAD EXCESS OF ASSETS OVER LIABILI TIES AMOUNTING TO `95.26 CRORES WHICH CLEARLY INDICATED THE ACCUMULAT ION OF PROFIT. HE, THEREFORE, STATED THAT THE ORDER OF LEARNED CIT(A) SHOULD BE REVERSED AND THAT OF THE ASSESSING OFFICER SHOULD BE RESTORE D. 8. LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF THE LEARNED CIT(A). HE STATED THAT SECTION 11(3) REFER RED TO THE ACCUMULATION OF PROFIT UNDER SECTION 11(2) AND THER EFORE, IN VIEW OF THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT, ONLY THE ACCUMULATED PROFIT UNDER SECTION 11(2) CAN BE CONSIDERED. HE F URTHER SUBMITTED THAT THE ASSESSEE HAD NOT FILED ANY APPLICATION FOR ACCUMULATION OF ITA NOS.3709 & 3710/DEL/2015 8 PROFIT UNDER SECTION 11(2) IN ANY OF THE PRECEDING YEAR. SO, THERE WAS NO ACCUMULATION OF PROFIT UNDER SECTION 11(2) WHICH CAN BE TAXED UNDER SECTION 11(3) AND THEREFORE, LEARNED CIT(A) R IGHTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 9. WE HAVE CONSIDERED THE ARGUMENTS OF BOTH THE SID ES. SECTION 11(3) OF THE INCOME-TAX ACT, 1961 READS AS UNDER :- [(3) ANY INCOME REFERRED TO IN SUB-SECTION (2) WHI CH (A) IS APPLIED TO PURPOSES OTHER THAN CHARITABLE OR RELIGIOUS PURPOSES AS AFORESAID OR CEASES TO BE ACCUMULATED O R SET APART FOR APPLICATION THERETO, OR [(B) CEASES TO REMAIN INVESTED OR DEPOSITED IN ANY OF THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5), OR] (C) IS NOT UTILISED FOR THE PURPOSE FOR WHICH IT IS SO ACCUMULATED OR SET APART DURING THE PERIOD REFERRE D TO IN CLAUSE (A) OF THAT SUB-SECTION OR IN THE YEAR IMMED IATELY FOLLOWING THE EXPIRY THEREOF, [(D) IS CREDITED OR PAID TO ANY TRUST OR INSTITUTIO N REGISTERED UNDER SUBSECTION 12AA OR TO ANY FUND OR INSTITUTION OR TRUST OR ANY UNIVERSITY OR OTHER EDU CATIONAL INSTITUTION OR ANY HOSPITAL OR OTHER MEDICAL INSTIT UTION REFERRED TO IN SUB-CLAUSE (IV) OR SUB-CLAUSE (V) OR SUB-CLAUSE (VI) OR SUB-CLAUSE (VIA) OF CLAUSE (23C) OF SECTION 10,] SHALL BE DEEMED TO BE THE INCOME OF SUCH PERSON OF THE PREVIOUS YEAR IN WHICH IT IS SO APPLIED OR CEASES T O BE SO ACCUMULATED OR SET APART OR CEASES TO REMAIN SO INV ESTED OR DEPOSITED OR [CREDITED OR PAID OR], AS THE CASE MAY BE, OF THE PREVIOUS YEAR IMMEDIATELY FOLLOWING THE EXPI RY OF THE PERIOD AFORESAID.] 10. FROM A PLAIN READING OF THE ABOVE SECTION, IT I S EVIDENT THAT UNDER SECTION 11(3), ONLY THE INCOME AS REFERRED TO IN SECTION 11(2) IS TO BE CONSIDERED AND NO OTHER INCOME. SECTION 11(2 ) OF THE ACT READS AS UNDER :- ITA NOS.3709 & 3710/DEL/2015 9 [(2) [WHERE [EIGHTY-FIVE] PER CENT OF THE INCOME R EFERRED TO IN CLAUSE (A) OR CLAUSE (B) OF SUB-SECTION (1) R EAD WITH THE EXPLANATION TO THAT SUB-SECTION IS NOT APPLIED, OR IS NOT DEEMED TO HAVE BEEN APPLIED, TO CHARITABLE OR RELIG IOUS PURPOSES IN INDIA DURING THE PREVIOUS YEAR BUT IS ACCUMULATED OR SET APART, EITHER IN WHOLE OR IN PAR T, FOR APPLICATION TO SUCH PURPOSES IN INDIA, SUCH INCOME SO ACCUMULATED OR SET APART SHALL NOT BE INCLUDED IN T HE TOTAL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIP T OF THE INCOME, PROVIDED THE FOLLOWING CONDITIONS ARE COMPL IED WITH, NAMELY:-] [(A) SUCH PERSON FURNISHES A STATEMENT IN THE PRESC RIBED FORM AND IN THE PRESCRIBED MANNER TO THE ASSESSING OFFICER, STATING THE PURPOSE FOR WHICH THE INCOME I S BEING ACCUMULATED OR SET APART AND THE PERIOD FOR WHICH T HE INCOME IS TO BE ACCUMULATED OR SET APART, WHICH SHA LL IN NO CASE EXCEED FIVE YEARS; (B) THE MONEY SO ACCUMULATED OR SET APART IS INVEST ED OR DEPOSITED IN THE FORMS OR MODES SPECIFIED IN SUB-SE CTION (5); (C) THE STATEMENT REFERRED TO IN CLAUSE (A) IS FURN ISHED ON OR BEFORE THE DUE DATE SPECIFIED UNDER SUB-SECTION (1) OF SECTION 139 FOR FURNISHING THE RETURN OF INCOME FOR THE PREVIOUS YEAR: PROVIDED THAT IN COMPUTING THE PERIOD OF FIVE YEARS REFERRED TO IN CLAUSE (A), THE PERIOD DURING WHICH THE INCOM E COULD NOT BE APPLIED FOR THE PURPOSE FOR WHICH IT IS SO ACCUMULATED OR SET APART, DUE TO AN ORDER OR INJUNC TION OF ANY COURT, SHALL BE EXCLUDED.] 11. FROM THE PLAIN READING OF THE ABOVE SECTION, IT IS EVIDENT THAT WHERE THE ASSESSEE DID NOT APPLY 85% OF THE INCOME FOR THE CHARITABLE OR RELIGIOUS PURPOSES, HE IS GIVEN AN OPTION TO ACC UMULATE THE BALANCE INCOME PROVIDED HE FULFILLS THE CONDITIONS AS PRESC RIBED IN SUB-CLAUSE (A), (B) AND (C) ABOVE. FROM A COMBINED READING OF SECTION 11(2) AND 11(3), IT IS EVIDENT THAT UNDER SECTION 11(3), THE ACCUMULATED INCOME OF THE PAST YEARS UNDER SECTION 11(2) IS TO BE TAXE D IF THERE IS A BREACH OF ANY CONDITION PRESCRIBED UNDER SUB-CLAUSES (A) T O (D) OF SECTION ITA NOS.3709 & 3710/DEL/2015 10 11(3). HON'BLE JURISDICTIONAL HIGH COURT, AFTER CO NSIDERING THE FACTS OF THE CASE, HAS ARRIVED AT THE CONCLUSION THAT DURING THE ACCOUNTING YEAR RELEVANT TO ASSESSMENT YEAR 2001-02 I.E., THE YEAR UNDER APPEAL, THERE IS VIOLATION OF CONDITIONS PRESCRIBED UNDER SUB-CLA USES (A) TO (D) OF SECTION 11(3) AND THEREFORE, ACCUMULATED INCOME OF PAST YEARS OF THE ASSESSEE IS TO BE TAXED AS INCOME IN ASSESSMENT YEA R 2001-02. 12. NOW, THE QUESTION REMAINS WHETHER THERE WAS ANY ACCUMULATED INCOME WITHIN THE MEANING OF SECTION 11(2) OF THE I NCOME-TAX ACT. LEARNED CIT(A), AFTER CONSIDERING THE FACTS OF THE CASE IN DETAIL INCLUDING THE APPLICATION OF INCOME IN EACH ASSESSM ENT YEAR BEGINNING FROM ASSESSMENT YEAR 1986-87, HAS ARRIVED AT THE CO NCLUSION THAT THERE WAS NO ACCUMULATION OF INCOME IN ANY OF THE Y EARS. ON THE OTHER HAND, THE APPLICATION OF INCOME WAS MORE THAN THE P RESCRIBED LIMIT OF 85%. THE ABOVE FINDING OF FACT RECORDED BY THE CIT (A) HAS NOT BEEN CONTROVERTED BY THE REVENUE. THE ASSESSEE HAS STAT ED BEFORE THE LEARNED CIT(A) AS WELL AS BEFORE US THAT THE ASSESS EE HAS NOT ACCUMULATED ANY INCOME IN ANY OF THE PAST ASSESSMEN T YEAR BY FILING APPLICATION AS PRESCRIBED IN THAT SECTION. THE REV ENUE NEITHER IN THE ASSESSMENT ORDER NOR DURING APPELLATE PROCEEDINGS B EFORE THE CIT(A) INCLUDING THE REMAND REPORT BEFORE LEARNED CIT(A) H AS BEEN ABLE TO ESTABLISH THAT THERE WAS ANY ACCUMULATION OF INCOME AS PROVIDED IN SECTION 11(2) OF THE ACT. BEFORE US ALSO, NO EVIDE NCE IS BROUGHT ON RECORD BY THE REVENUE TO ESTABLISH ANY ACCUMULATION OF PROFIT UNDER SECTION 11(2) BY THE ASSESSEE SOCIETY. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LEARNED CIT(A) IN THIS REGARD. THE SAME IS SUSTAINED AND ALL THE GRO UNDS RAISED BY THE REVENUE IN THIS APPEAL ARE DISMISSED. ITA NO.3709 ITA NO.3709 ITA NO.3709 ITA NO.3709/DEL/2015 /DEL/2015 /DEL/2015 /DEL/2015 - -- - M/S ESCORT M/S ESCORT M/S ESCORT M/S ESCORTS SS S HEART INSTITUTE AND RESEARCH CENTRE, HEART INSTITUTE AND RESEARCH CENTRE, HEART INSTITUTE AND RESEARCH CENTRE, HEART INSTITUTE AND RESEARCH CENTRE, CHANDIGARH CHANDIGARH CHANDIGARH CHANDIGARH : :: :- -- - ITA NOS.3709 & 3710/DEL/2015 11 13. IN THIS APPEAL BY THE REVENUE, FOLLOWING GROUND S HAVE BEEN RAISED :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, LD.CIT(A) HAS ERRED IN DELETING THE ADD ITION OF RS.1,44,34,72,911/- ON ACCOUNT OF CAPITAL GAIN. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LD.CIT(A) HAS ERRED IN HOLDING THAT TRA NSFER OF ASSETS WITHIN THE MEANING OF SECTION 2(47) OF THE I .T. ACT AFTER CONVERSION OF A SOCIETY AS A COMPANY UNDER PA RT IX OF THE COMPANIES ACT, 1956 DO NOT ATTRACT CAPITAL GAIN S CHARGEABLE TO INCOME TAX U/S 45(1) OF THE I.T. ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LD.CIT(A) HAS ERRED IN DELETING THE ADD ITION OF RS.44,98,53,100/- ON ACCOUNT OF FAIR MARKET VALUE O F LAND. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HE ARING. 14. THE FACTS OF THE CASE ARE THAT THE ASSESSEE SOC IETY WAS FORMED AT CHANDIGARH ON 11 TH NOVEMBER, 1999. ON 1 ST APRIL, 2000, THE EHIRC, DELHI MERGED WITH THE ASSESSEE AND ALL THE ASSETS A ND LIABILITIES VESTED WITH THE ASSESSEE. ON 30 TH MAY, 2000, THE ASSESSEE SOCIETY WAS CONVERTED INTO A COMPANY LIMITED BY SHARES. THE IN ITIAL ASSESSMENT WAS REOPENED UNDER SECTION 147 OF THE ACT ON THE GR OUND THAT THE CONVERSION OF ASSESSEE AOP INTO A COMPANY TANTAMOUN T TO A TRANSFER AND CAPITAL GAIN AROSE IN THE HANDS OF THE ASSESSEE UNDER SECTION 45(4) OF THE ACT. THE ASSESSING OFFICER WORKED OUT THE SHORT TERM CAPITAL GAIN AT `149,08,97,151/- AND COMPLETED THE ASSESSMENT AT `154,34,28,751/- IN THE ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 147 DATED 28 TH MARCH, 2005. LEARNED CIT(A), BY ORDER DATED 10 TH FEBRUARY, 2006, SUSTAINED THE ORDER OF THE ASSESSI NG OFFICER. THE ASSESSEE, AGGRIEVED WITH THE ORDER OF THE LEARNED C IT(A), FILED APPEAL BEFORE THE ITAT AND, BEFORE THE ITAT, THE REVENUE, BY INVOKING THE ITA NOS.3709 & 3710/DEL/2015 12 PROVISION OF RULE 27 OF THE ITAT RULES, CONTENDED T HAT THE CAPITAL GAIN IS LEVIABLE UNDER SECTION 45(1) ALSO. THE ITAT HEL D AS UNDER :- 25.5 BY APPLYING THE RATIO LAID DOWN BY THE HONB LE GAUHATI HIGH COURT IT CAN BE SAID THAT IN THE PRESE NT CASE, THE ISSUE HAS BEEN DECIDED BY THE LD.CIT(A) IN FAVO UR OF THE DEPARTMENT, THEREFORE, THE DEPARTMENT OPTED NOT TO FILE ANY CROSS OBJECTION EVEN WHEN THE APPEAL HAS B EEN PREFERRED BY THE ASSESSEE. THE PROVISIONS OF RULE 27 ARE CLEAR AND UNAMBIGUOUS AND THE RIGHT GRANTED TO THE RESPONDENT BY THE SAID RULE CANNOT BE TAKEN AWAY. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE R EVENUE DEPARTMENT CAN DEFEND THE ORDER OF LD.CIT(A) AND CA N PLEAD THE ISSUE OF APPLICABILITY OF SECTION 45(1) O F THE INCOME TAX ACT, 1961. HOWEVER, IT IS NOT IN DISPUT E THAT NEITHER THE ASSESSING OFFICER NOR THE LD.CIT(A) INV OKED THE PROVISIONS OF SECTION 45(1) OF INCOME TAX ACT, 1961 WHICH CONTEMPLATES THE ACCRUAL OF PROFITS OR GAINS FROM T RANSFER OF CAPITAL ASSETS. IT IS WELL SETTLED THAT SECTION 45(1) IS A CHARGING SECTION AND WHEN READ WITH SECTION 48, IT FORMS ONE COMPOSITE SCHEME. IN OTHER WORDS, ONE DOES NOT WORK WITHOUT THE OTHER, BUT THIS ASPECT HAS NOT BEEN EXA MINED EITHER BY THE ASSESSING OFFICER OR BY THE LD.CIT(A) . SO THE PRINCIPLES OF NATURAL JUSTICE AND THE EQUITY DEMAND S THAT THE ISSUE AS REGARDS TO THE APPLICABILITY OF SECTIO N 45(1) BE DECIDED BY THE ASSESSING OFFICER AFTER PROVIDING DU E AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 15. AT THE END, THE ITAT SET ASIDE THE ISSUE OF LEV Y OF CAPITAL GAINS TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING O FFICER, IN PURSUANCE TO THE ORDER OF THE ITAT, COMPLETED THE ASSESSMENT VID E ORDER DATED 31 ST MARCH, 2010. IN THIS ORDER, IN PARAGRAPH 10.5, WHI CH READS AS UNDER, THE ASSESSING OFFICER ACCEPTED THAT SECTION 45(4) I S NOT APPLICABLE :- 10.5 THE GROUNDS RAISED BY THE ASSESSEE AOP DURIN G THE COURSE OF THE PROCEEDINGS AND ON THE POINT THAT THERE WAS NO DISTRIBUTION OF ASSETS TOOK PLACE IN ABOVE M ODE OF THE TRANSFER OF ASSETS OVER LIABILITIES FROM THE AS SESSEE AOP TO THE COMPANY WHATSOEVER CAPITAL GAIN WOULD NOT BE UNDER SECTION 45(4) OF IT ACT IS ACCEPTED. HOWEVER THE QUESTION OF CONSIDERING COST WITH REFERENCE TO CERT AIN ITA NOS.3709 & 3710/DEL/2015 13 MODES OF ACQUISITION SPECIFIED U/S 49(1) DOES NOT A RISE AND THE REQUEST OF THE ASSESSEE IN THIS REGARD IS REJEC TED. 16. IN PARAGRAPH 16, WHICH READS AS UNDER, THE ASSE SSING OFFICER CONCLUDED THAT THERE IS TRANSFER OF THE ASSETS OWNE D BY THE ASSESSEE AOP TO ANOTHER LEGAL ENTITY WITHIN THE MEANING OF S ECTION 2(47) WHICH WOULD ATTRACT CAPITAL GAIN UNDER SECTION 45(1) :- 16. IN THE LIGHT OF THE ABOVE FINDINGS IT IS CONCL UDED THAT THERE WAS TRANSFER OF ASSETS OWNED BY THE ASSESSEE AOP TO ANOTHER LEGAL ENTITY WITHIN THE MEANING OF SEC 2(47 ) WHICH WAS NOT EXPLICITLY NOT CONSIDERED AS TRANSFER BY CE RTAIN TRANSACTION AS MENTIONED IN SECTION 47 AND WOULD AT TRACT CAPITAL GAIN U/S 45(1) OF IT ACT 1961. IN ABSENCE OF ANY SALE, THERE CAN BE NO QUESTION OF TAKING SALE PRICE AS THE FULL VALUE OF CONSIDERATION SINCE NO PRICE HAS BE EN SETTLED AND NOR IS THE RELATIONSHIP BETWEEN THE TWO IS THAT OF VENDOR AND VENDEE. IN THE CONTEXT OF THIS CASE THE FULL VALUE OF THE CONSIDERATION IS THE FAIR MARKET VALUE OF THE ASSETS RECEIVED ON ACCOUNT OF EXTINGUISHMENTS RIGH TS OVER THE PROPERTY. 17. ON APPEAL, LEARNED CIT(A), VIDE ORDER DATED 2 ND MARCH, 2015, AGREED WITH THE ASSESSEES CONTENTION THAT THERE WA S NO TRANSFER WITHIN THE MEANING OF SECTION 45(1) BECAUSE THERE W ERE NO TWO PARTIES TRANSFEROR AND TRANSFEREE. THE RELEVANT FINDING OF THE CIT(A) READS AS UNDER :- THE CRUX OF THE MATTER IS THE ABSENCE OF TWO PARTI ES I.E. A TRANSFEROR AND A TRANSFEREE WHEN A CONVERSION TAKES PLACE UNDER PART IX OF THE COMPANIES ACT AND THIS BEING A SINE QUA NON FOR A TRANSFER TO TAKE PLACE WITHIN THE MEA NING OF SECTION 2(47) READ WITH SECTION 45(1) OF THE ACT. FURTHER THE CONCEPT OF FULL VALUE OF CONSIDERATION IS ALI EN TO THE SCHEME OF SECTION 45(1) WHICH STIPULATES A NEGOTIAT ED SALE PRICE/SALE CONSIDERATION. THE ASSESSING OFFICER IN SUCCESSIVE REMAND REPORTS FROM TIME TO TIME HAS NOT OFFERED ANY REBUTTAL ON THE SUBMISSIONS OF THE APPE LLANT EITHER ON FACTS OR IN LAW CHOOSING TO DEAL WITH ISS UES OUTSIDE THE SCOPE OF THE REMAND BY THE HONBLE ITAT . FOR ITA NOS.3709 & 3710/DEL/2015 14 THE FIRST TIME, THE QUESTION OF TAX AVOIDANCE HAS BEEN RAISED AND A DOUBT HAS BEEN CAST ON THE MERGER OF EHIRC, DELHI WITH EHIRC, CHANDIGARH AND THE CONVERSION OF THE LATTER INTO A LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT. IT NEEDS TO BE STATED THAT THE QUESTION OF MERGER O F EHIRC, DELHI WITH EHIRC, CHANDIGARH WAS CONSIDERED BY THE HONBLE ITAT DELHI BENCH IN THE CASE OF ESCORTS LIM ITED VS. ACIT REPORTED IN 104 ITD 427 AND HELD TO BE VALID I N LAW AS PER THE FOLLOWING OBSERVATIONS :- THE SCHEME OF AMALGAMATION OF THE DELHI SOCIETY WI TH THE CHANDIGARH SOCIETY IS PLACED AT PAGE 109-113 OF REVENUES PAPER BOOK-IV. AS PER THE SCHEME ALL THE ASSETS AND LIABILITIES OF THE DELHI SOCIETY WERE TO VEST W ITH THE CHANDIGARH SOCIETY ON OR AFTER THE EFFECTIVE DATE O F AMALGAMATION, WHICH IS THE 1 ST DAY OF APRIL, 2000. THIS IS THE SCHEME WHICH WAS APPROVED BY THE MEMBERS OF THE DELHI SOCIETY IN THE GENERAL MEETING. THE REGISTRA R OF SOCIETIES, DELHI BY ORDER DATED 6.6.01 RECOGNIZED T HE FACT THAT THE DELHI SOCIETY WAS DISSOLVED AND AMALGAMATE D WITH THE CHANDIGARH SOCIETY. COPY OF THIS ORDER IS AT PAGE 14 OF REVENUES PAPER BOOK NO.-II. IT THEREFORE FO LLOWS THAT THE ASSETS OF THE DELHI SOCIETY VESTED WITH THE CHA NDIGARH SOCIETY BY OPERATION OF LAW. FOLLOWING THE SAID DECISION, THE HONBLE ITAT, CHAN DIGARH BENCH IN ITS ORDER DATED 18.03.2008 IN ITA 144/CHANDI/2006 TOOK AN IDENTICAL VIEW. IT IS THE CASE OF THE APPELLANT THAT BOTH THESE ORDERS HAVE BECOME FI NAL IN AS MUCH AS IN THE CASE OF THE ORDER OF THE ITAT, CH ANDIGARH NO APPEAL WAS FILED U/S 260-A BY THE DEPARTMENT BEF ORE THE HONBLE HIGH COURT AND IN THE CASE OF ESCORTS L TD. ALTHOUGH AN APPEAL WAS FILED U/S 260-A OF THE ACT B UT NO QUESTION/GROUND WAS RAISED ON THE ASPECT OF MERGER OF THE TWO INSTITUTIONS. THE ASSESSING OFFICER HAS NOT RE BUTTED THESE FACTUAL SUBMISSIONS MADE ON BEHALF OF THE APP ELLANT. COMING TO THE QUESTION OF CONVERSION, THE MATTER HA S BECOME FINAL IN VIEW OF THE CERTIFICATE OF INCORPOR ATION ISSUED BY THE ROC WHICH AS PER SECTION 35 OF THE COMPANIES ACT IS CONCLUSIVE IN ALL RESPECTS AND REM AINS UNCHALLENGED TILL DATE. FURTHER, THE REVENUE CANNO T TAX CAPITAL GAINS AND CHALLENGE THE CONVERSION PROCESS AT THE SAME TIME. ITA NOS.3709 & 3710/DEL/2015 15 AS REGARDS THE TAX AVOIDANCE, THE QUESTION CANNOT BE RAISED AT THIS STAGE HAVING NOT EVEN BEEN ADVERTED TO IN THE ORDER IMPUGNED OR FOR THAT MATTER ANY FACTS REF ERRED TO FOR PROVING THE ALLEGATION. IT NEEDS TO BE NOTED A S A FACT THAT PURSUANT TO THE MERGER OF EHIRC, DELHI WITH EH IRC, CHANDIGARH AND THE CONVERSION OF THE LATTER INTO A LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT EACH OF THE RESULTING ENTITIES CAME TO BE ASSESSED ON THE SUBST ANTIVE BASIS AND THE COMPANY I.E. EHIRC LIMITED IS ASSESSE D TILL DATE WITH A SUBSTANTIAL CONTRIBUTION ON ACCOUNT OF TAXES TO BE EXCHEQUER AND CONTINUING TO RENDER SERVICES IN T HE FIELD OF THE HEALTHCARE. THE ASSESSING OFFICER HAS RELIED ON THE JUDGMENTS I N THE CASE OF A GASPER VS. CIT REPORTED IN 117 ITR 581 (C AL.) AND CIT VS. MRS. GRACE COLLIS REPORTED IN 248 ITR 323 ( SC) TO SUPPORT THE CASE OF THE REVENUE. ON A CLOSE READING, THESE JUDGMENTS ARE FOUND TO BE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. IN THE CASE OF A GASPER SUPRA, IT WAS THE TRANSFER OF A CAPITAL ASSET TO ANOTHER PARTY FOR A CONSIDERATION ACTUALLY RECEIVED RESULTING IN THE EXTINGUISHMENT OF THE ASSESSEES RIGHT IN THE CAPIT AL ASSETS. IN THE CASE OF THE ASSESSEE, NO TWO PARTIE S ARE INVOLVED AND NO CONSIDERATION HAS PASSED. IN THE CASE OF MRS. GRACE COLLIS AS WELL, THERE WER E TWO PARTIES VIZ. AN AMALGAMATING COMPANY AND AN AMALGAMATED COMPANY WHEREBY UNDER A SCHEME A SHAREHOLDER IN THE AMALGAMATING COMPANY IN LIEU OF HIS SHAREHOLDING WAS TO BE ISSUED SHARES IN THE AMALGAM ATED COMPANY. THE OBSERVATIONS PERTAINING TO THE EXTINGUISHMENT BY THE HONBLE COURT ARE IN RELATI ON TO A SCHEME OF AMALGAMATION AND THE ASSESSEE IS A SHAREHOLDER AND NOT THE AMALGAMATING COMPANY. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS . TEXSPIN ENGG. & MFG. WORKS REPORTED IN 263 ITR 345 (BOM.) AT PAGE 354 VERY SIGNIFICANTLY REJECTED THE ARGUMENT OF THE DEPARTMENT WHEN IT SOUGHT TO BRING THE CONVERSION UNDER PART IX UNDER THE TERM EXTINGUISH MENT BY OBSERVING 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 ITA NOS.3709 & 3710/DEL/2015 16 FIRM IN THE LIMITED COMPANY, THERE WAS A TRANSFER O F CAPITAL ASSETS AND, THEREFORE, IT WAS CHARGEABLE TO INCOME- TAX UNDER THE HEAD CAPITAL GAINS AS, ON SUCH VESTING, THERE WAS EXTINGUISHMENT OF ALL RIGHT, TITLE AND INTEREST IN THE CAPITAL ASSETS QUA THE FIRM. WE DO NOT FIND ANY ME RIT IN THIS ARGUMENT. IN THE FINAL ANALYSIS, IT IS HELD THAT THE PROVISIO NS OF SECTION 45(1) OF THE ACT WERE NOT APPLICABLE AND NO CAPITAL GAIN AROSE TO THE ASSESSEE ON ITS CONVERSION INTO A LTD. CO. UNDER PART IX OF THE COMPANIES ACT. THE CONSEQUENT IAL ADDITION OF RS.149,08,97,151 IS LIABLE TO BE DELETE D. 18. THE REVENUE, AGGRIEVED WITH THE ORDER OF THE LE ARNED CIT(A) IS IN APPEAL BEFORE US. 19. AT THE TIME OF HEARING BEFORE US, LEARNED DR HE AVILY RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND HE STATED TH AT DURING THE YEAR UNDER CONSIDERATION, ALL THE ASSETS AND LIABILITIES OF THE ASSESSEE AOP HAVE BEEN TRANSFERRED TO THE COMPANY ON THE AOP BEI NG CONVERTED INTO COMPANY AND THEREFORE, IT IS A CLEAR CASE OF T RANSFER OF ASSET BY THE AOP TO THE COMPANY AND SECTION 45(1) WAS RIGHTL Y INVOKED BY THE ASSESSING OFFICER FOR LEVYING THE CAPITAL GAIN ON S UCH TRANSFER OF ASSET FROM THE AOP TO THE COMPANY. THAT THE LEARNED CIT( A), WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE, DELETE D THE ADDITION MADE BY THE ASSESSING OFFICER. HE REQUESTED THAT THE OR DER OF LEARNED CIT(A) SHOULD BE REVERSED AND THAT OF THE ASSESSING OFFICE R MAY BE RESTORED. 20. LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LEARNED CIT(A) AND HE STATED THAT THERE WAS NO TRANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE ACT BECAUSE THE WORD TRANSFER PRESUPPOSES THE EXISTENCE OF TWO PA RTIES VIZ., TRANSFEROR AND TRANSFEREE WHEREAS IN THE CASE OF A CONVERSION UNDER PART IX OF THE COMPANIES ACT, WHEN AN ENTITY IS CONVERTED INTO A C OMPANY, NO TWO PARTIES REMAINED IN EXISTENCE AT ANY POINT OF TIME. HE, THEREFORE, ITA NOS.3709 & 3710/DEL/2015 17 SUBMITTED THAT NEITHER THERE WAS EXISTENCE OF TWO E NTITIES NOR THERE WAS PASSING OF CONSIDERATION FROM ONE ENTITY TO ANO THER AND THEREFORE, SECTION 45(1) IS NOT APPLICABLE. IN SUPPORT OF THI S CONTENTION, HE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN T HE CASE OF CIT VS. TEXSPIN ENGINEERING AND MANUFACTURING WORKS [2003 ] 263 ITR 345 (BOMBAY) WHICH IS RELIED UPON BY HON'BLE JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT VS. RITA MECHANICAL WORKS [2012] 344 ITR 544 (P&H). HE ALSO RELIED UPON THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CADD CENTRE VS. ACIT [2016] 383 ITR 258 ( MAD). 21. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF B OTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THE ISSUE TO BE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF TEXSPIN ENGINEERIN G AND MANUFACTURING WORKS (SUPRA), WHEREIN THEIR LORDSHIP S HELD AS UNDER :- B) ON SECTION 45(1) AS STATED ABOVE, IN THIS CASE WE ARE CONCERNED WITH THE ASSESSMENT YEAR 1996-97. THEREFORE, IN THIS CASE, W E ARE NOT CONCERNED WITH CLAUSE (XIII) INSERTED BY FINANC E (NO. 2) ACT, 1998 IN SECTION 47 UNDER WHICH IT IS PROVIDED THAT WHERE A FIRM IS SUCCEEDED BY A COMPANY IN THE BUSIN ESS CARRIED ON BY IT AS A RESULT OF SALE OR OTHERWISE, OF ANY CAPITAL ASSETS, THEN SUCH TRANSACTION SHALL NOT BE REGARDED AS TRANSFER. THIS CLAUSE WAS INSERTED WITH EFFECT F ROM 1ST APRIL, 1999. THEREFORE, WE ARE NOT CONCERNED WITH T HAT AMENDMENT. HOWEVER, IT PROVIDES A CLUE TO THE LEGIS LATIVE INTENT. IN OUR OPINION, THIS CLAUSE HAS BEEN INTROD UCED WITH EFFECT FROM 1ST APRIL, 1999 IN ORDER TO ENCOURAGE M ORE AND MORE FIRMS BECOMING LIMITED COMPANIES. IT ALSO INDI CATES THE DIFFERENCE BETWEEN TRANSFER AND TRANSMISSION. BASICALLY, WHEN A FIRM IS TREATED AS A COMPANY UNDE R PART IX, IT IS A CASE SIMILAR TO TRANSMISSION. THIS IS A MPLY MADE CLEAR BY CLAUSE (XIII) TO SECTION 47, WHICH STATES THAT WHERE A FIRM IS SUCCEEDED BY A COMPANY IN THE BUSINESS, T HE TRANSACTION SHALL NOT BE TREATED AS A TRANSFER. NOW , THIS AMENDMENT HAS BEEN MADE IN SECTION 47 IN VIEW OF TH E ITA NOS.3709 & 3710/DEL/2015 18 CONTROVERSY ARISING ON SECTION 45(1) READ WITH SECT ION 2(47)(II). AS STATED ABOVE, SECTION 45(1) IS A CHARGING SECTIO N. SECTION 45, READ WITH THE COMPUTATION SECTION VIZ. 48 ETC., FORM ONE COMPOSITE SCHEME. THIS POINT IS VERY IMPOR TANT. SECTION 45(1) PROVIDES THAT WHERE ANY PROFIT, ARISI NG FROM TRANSFER OF A CAPITAL ASSET IS EFFECTED IN THE PREV IOUS YEAR THEN SUCH PROFIT SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'CAPITAL GAINS'. THE EXPRESSION 'TRANSFER OF A CAPITAL ASSET' IN SECTION 45(1) IS REQUIRED TO BE R EAD WITH SECTION 2(47)(II) WHICH STATES THAT TRANSFER IN REL ATION TO A CAPITAL ASSET SHALL INCLUDE EXTINGUISHMENT OF ANY R IGHTS THEREIN. THE MOOT POINT WHICH AROSE ON INTERPRETATI ON OF SECTION 45(1) IN NUMEROUS MATTERS WAS THAT ON EXTINGUISHMENT OF THE RIGHTS IN THE CAPITAL ASSETS, THERE WAS A TRANSFER AND IN CERTAIN CASES OF RECONSTITUTI ON OF FIRMS AND INTRODUCTION OF NEW PARTNERS, THERE WAS A RESULTANT EXTINGUISHMENT OF THE RIGHTS IN THE CAPIT AL ASSETS PROPORTIONATELY. IN ORDER TO GET OVER THIS CONTROVE RSY, AND KEEPING IN MIND THE OBJECT OF ENCOURAGING FIRMS BEI NG TREATED AS COMPANIES, THE CONTROVERSY IS RESOLVED B Y THE LEGISLATURE BY INTRODUCING CLAUSE (XIII) IN SECTION 47 WITH EFFECT FROM 1ST APRIL, 1999. NOW, IN THE PRESENT CASE, IT IS ARGUED ON BEHALF OF THE DEPARTMENT BEFORE THE TRIBUNAL, FOR THE FIRST TIME, THAT IN THIS CASE, ON VESTING OF THE PROPERTIES OF THE ERST WHILE FIRM IN THE LIMITED COMPANY, THERE WAS A TRANSFER OF CAP ITAL ASSETS AND, THEREFORE, IT WAS CHARGEABLE TO INCOME- TAX UNDER THE HEAD 'CAPITAL GAINS' AS, ON SUCH VESTING, THERE WAS EXTINGUISHMENT OF ALL RIGHT, TITLE AND INTEREST IN THE CAPITAL ASSETS QUA THE FIRM. WE DO NOT FIND ANY MER IT IN THIS ARGUMENT. IN THE PRESENT CASE, WE ARE CONCERNE D WITH A PARTNERSHIP FIRM BEING TREATED AS A COMPANY UNDER THE STATUTORY PROVISIONS OF PART IX OF THE COMPANIES AC T. IN SUCH CASES, THE COMPANY SUCCEEDS THE FIRM. GENERALL Y, IN THE CASE OF A TRANSFER OF A CAPITAL ASSET, TWO IMPO RTANT INGREDIENTS ARE : EXISTENCE OF A PARTY AND A COUNTE RPARTY AND, SECONDLY, INCOMING CONSIDERATION QUA THE TRANS FEROR. IN OUR VIEW, WHEN A FIRM IS TREATED AS A COMPANY, T HE SAID TWO CONDITIONS ARE NOT ATTRACTED. THERE IS NO CONVE YANCE OF THE PROPERTY EXECUTABLE IN FAVOUR OF THE LIMITED CO MPANY. IT IS NO DOUBT TRUE THAT ALL PROPERTIES OF THE FIRM VESTS IN THE LIMITED COMPANY ON THE FIRM BEING TREATED AS A COMPANY UNDER PART IX OF THE COMPANIES ACT, BUT THA T VESTING IS NOT CONSEQUENT OR INCIDENTAL TO A TRANSF ER. IT IS A ITA NOS.3709 & 3710/DEL/2015 19 STATUTORY VESTING OF PROPERTIES IN THE COMPANY AS T HE FIRM IS TREATED AS A LIMITED COMPANY. ON VESTING OF ALL THE PROPERTIES STATUTORILY IN THE COMPANY, THE CLOAK GI VEN TO THE FIRM IS REPLACED BY A DIFFERENT CLOAK AND THE S AME FIRM IS NOW TREATED AS A COMPANY, AFTER A GIVEN DATE. IN THE CIRCUMSTANCES, IN OUR VIEW, THERE IS NO TRANSFER OF A CAPITAL ASSET AS CONTEMPLATED BY SECTION 45(1) OF THE ACT. 22. THAT THE ABOVE OBSERVATION OF THEIR LORDSHIPS W OULD BE SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE BECAUSE IN T HIS CASE ALSO, THE ASSESSEE AOP WAS CONVERTED INTO A COMPANY UNDER PAR T IX OF THE COMPANIES ACT. THUS, TILL THE TIME OF CONVERSION, THE AOP REMAINED IN EXISTENCE AND THE MOMENT CONVERSION TOOK PLACE, THE COMPANY CAME INTO EXISTENCE. HOWEVER, THE AOP AND COMPANY NEVER REMAINED IN EXISTENCE SIMULTANEOUSLY. SECTION 45(1) WOULD BE A PPLICABLE ON TRANSFER OF A CAPITAL ASSET. THE TRANSFER OF A CAP ITAL ASSET IS POSSIBLE ONLY WHEN THERE IS A TRANSFEROR AND THE TRANSFEREE. IN THE ABSENCE OF EXISTENCE OF THE TWO ENTITIES, THE TRANSFEROR AND T HE TRANSFEREE, THERE CANNOT BE ANY TRANSFER. SIMILARLY, IN THE ABSENCE OF TWO ENTITIES, THE CONSIDERATION CANNOT PASS FROM TRANSFEROR TO THE TR ANSFEREE. IN VIEW OF THE ABOVE, WE HOLD THAT THE ABOVE DECISION OF HONB LE BOMBAY HIGH COURT WOULD BE SQUARELY APPLICABLE TO THE CASE OF T HE ASSESSEE AND HAS RIGHTLY BEEN FOLLOWED BY THE LEARNED CIT(A). 23. WE ALSO FIND THAT HON'BLE JURISDICTIONAL HIGH C OURT IN THE CASE OF CIT VS. RITA MECHANICAL WORKS [2012] 344 ITR 544 (P&H) HAS ALSO RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF TEXSPIN ENGINEERING AND MANUFACTURING WORKS (SUPRA) FOR TAKING THE VIEW THAT TAKING OVER THE ASSETS OF THE FIRM BY A C OMPANY DOES NOT GIVE RISE TO PROFIT CHARGEABLE TO CAPITAL GAIN UNDE R SECTION 45(4) OF THE INCOME-TAX ACT. THOUGH IN THE ABOVE MENTIONED CASE THE ISSUE BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT WAS WITH REGA RD TO THE CAPITAL GAIN UNDER SECTION 45(4) OF THE ACT, BUT, THEIR LORDSHIP S, WHILE CONSIDERING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CA SE OF TEXSPIN ITA NOS.3709 & 3710/DEL/2015 20 ENGINEERING AND MANUFACTURING WORKS (SUPRA) HAS SPE CIFICALLY REFERRED AND DISCUSSED THE APPLICABILITY OF SECTION 45(1) RE AD WITH SECTION 247(2) OF THE ACT IN PARAGRAPH 17 OF THEIR ORDER. NO CONTRARY DECISION IS BROUGHT TO OUR KNOWLEDGE. IN VIEW OF THE ABOVE, WE, RESPECTFULLY FOLLOWING THE ABOVE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF TEXSPIN ENGINEERING AND MANUFACTURING WORKS (SUP RA), UPHOLD THE ORDER OF LEARNED CIT(A) AND DISMISS THE APPEAL FILE D BY THE REVENUE. 24. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 11 TH JUNE, 2019. SD/- SD/- ( (( ( SUCHITRA KAMBLE SUCHITRA KAMBLE SUCHITRA KAMBLE SUCHITRA KAMBLE ) )) ) (G.D.AGRAWAL) (G.D.AGRAWAL) (G.D.AGRAWAL) (G.D.AGRAWAL) JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEMBER MEMBER MEMBER MEMBER VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT DATED : 11.06.2019 VK. COPY FORWARDED TO: - 1. APPELLANT : ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, ASSISTANT COMMISSIONER OF INCOME TAX, CIR CIRCIR CIRCLE CLECLE CLE- -- -8(2), 8(2), 8(2), 8(2), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. 2. RESPONDENT : M/S ESCORT HEART INSTITUTE AND M/S ESCORT HEART INSTITUTE AND M/S ESCORT HEART INSTITUTE AND M/S ESCORT HEART INSTITUTE AND RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, H.NO.3273, SECTOR 15 H.NO.3273, SECTOR 15 H.NO.3273, SECTOR 15 H.NO.3273, SECTOR 15- -- -D, D,D, D, CHANDIGARH AND CHANDIGARH AND CHANDIGARH AND CHANDIGARH AND M/S ESCORT HEART INSTITUTE AND M/S ESCORT HEART INSTITUTE AND M/S ESCORT HEART INSTITUTE AND M/S ESCORT HEART INSTITUTE AND RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, RESEARCH CENTRE, OKHLA ROAD, OKHLA ROAD, OKHLA ROAD, OKHLA ROAD, OKHLA, OKHLA, OKHLA, OKHLA, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR