DCIT 25(2), MUMBAI V. P.M. ENTERPRISES, MUMBAI

ITA 3736/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49147 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 06-06-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 10-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALEXANDRA CHANDY
• Assessee Lawyers: SANJUKTA CHOW DHURY; P K PARIDA
• Keywords: Date of conversion

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C,MUMBAI BEFORE SHRI R.S. SYAL (AM) & SHRI VIJAY PAL RAO ( AM) I.T.A. NO.3736/MUM/2010 (A.Y. 2007-08) DY. COMMR. OF INCOME-TAX-25(2), C-11, 1 ST FLOOR, PRATYAKSHKAR BHAVAN, BANDRA (E), MUMBAI-400 051. VS. M/S. P.M. ENTERPRISES, 1802, KRISHNA HERITAGE, OPP. DON BOSCO SCHOOL, BORIVLI (.W), MUMBAI. PAN: AAAFP1105D APPELLANT RESPONDENT APPELLANT BY SHRI ALEXANDRA CHANDY. RESPONDENT BY SHRI P .K. PARIDA & MS.SANJUKTA CHOWDHURY. O R D E R PER R.S. SYAL, AM : THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDE R PASSED BY THE CIT(A) ON 25-02-2010 IN RELATION TO THE ASSTT. YEAR 2007-0 8. 2. THE ONLY ISSUE RAISED IN THIS APPEAL THROUGH VA RIOUS GROUNDS IS AGAINST THE DIRECTION OF THE LD. CIT(A) FOR NOT CHARGING CAPITA L GAIN U/S.45(4) OF THE ACT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE FIRM WAS FORMED VIDE PARTNERSHIP DEED DATED 12-10-2005. DURING THE YEAR CONSIDERATION, THE PARTNERSHIP FIRM WAS SUCCEEDED BY A PRIVATE LIMITED COMPANY KNOWN AS M/S. P.M. ELECTRO AUTO PVT. LTD. FROM 01-06-2006. THUS, THE E RSTWHILE FIRM FILED ITS RETURN OF INCOME FOR THE PERIOD 01-04-2006 TO 31-05-2006. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THE PROVISIONS OF SEC.45(4) BE NO T APPLIED AND THE RESULTANT ITA NO.3736/M/2010 P.M. ENTERPRISES 2 CAPITAL GAIN NOT COMPUTED, THE ASSESSEE STATED THAT THE BUSINESS OF THE PARTNERSHIP FIRM I.E. M/S. P.M. ENTERPRISES, WAS SU CCEEDED BY M/S. P.M. ELECTRO AUTO PVT. LTD. FROM 01-06-2006. THE COMPANY TOOK OV ER ALL BUSINESS ASSETS AND LIABILITIES OF THE FIRM AS ON 31-05-2006; ALL THE P ARTNERS OF THE FIRM IMMEDIATELY BEFORE THE CONVERSION BECAME THE SHAREHOLDERS OF TH E COMPANY IN SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNT STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF CONVERSION; AGGREGATE OF THE SHAREHOLDING I N THE COMPANY OF THE PARTNERS OF THE FIRM WAS NOT LESS THAN 50% OF THE T OTAL VOTING POWER IN THE COMPANY AND THIS SHAREHOLDING CONTINUED TO BE AS SU CH FOR A PERIOD OF 5 YEARS FROM THE DATE OF SUCCESSION; NO PARTNER HAD TAKEN O R RECEIVED ANY CONSIDERATION OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN M/S. P. M. P.M. ELECTRO AUTO PVT. LTD.; AND ALL THE PARTNERS OF THE FIRM BECAME SHAREHOLDER S OF THE COMPANY ON 01-06- 2006 I.E. THE DATE OF CONVERSION. IN THE LIGHT OF THESE FACTS, IT WAS CLAIMED THAT THE PROVISIONS OF SEC.47(XIII) WERE APPLICABLE AND HENCE NO CAPITAL GAIN WAS EXIGIBLE. THE AO NOTED IN PARA 5.2.1 OF THE ORDER THAT THE CAPITAL OF THE PARTNERS OF THE FIRM CONSISTED OF FIXED CAPITAL AT RS.10 LAK HS AND CURRENT CAPITAL AT RS.1.05 CRORES, THEREBY MAKING TOTAL CAPITAL AT RS.1.15 CRO RES. HE FURTHER NOTED THAT THE TOTAL SHARE CAPITAL OF THE NEWLY FORMED PRIVATE LIM ITED COMPANY WAS ALLOCATED AMONGST THE PARTNERS OF THE FIRM IN THE RATIO OF TH EIR SHARE CAPITAL ONLY TO THE TUNE OF RS.10 LAKHS I.E. FIXED CAPITAL. HE, THEREFO RE, HELD THAT PROVISO (B) TO SEC. 47(XIII) WAS VIOLATED INASMUCH AS THE ASSESSEE HAD IGNORED THE BALANCE OF CAPITAL LYING IN THE CURRENT ACCOUNTS OF THE PARTNERS OF TH E ASSESSEE FIRM. HE FURTHER NOTED THAT UNDER PROVISO (C) TO SEC. 47(XIII), THER E IS REQUIREMENT THAT THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CONSIDERATI ON OR BENEFIT DIRECTLY OR INDIRECTLY IN ANY FORM OR MANNER OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY. HE NOTICED THAT THE BALANCE IN THE CURRENT ACCOUNT OF THE PARTNERS AT RS.1.05 CRORES, OUT OF WHICH A SUM TO THE TUNE OF R S.27.29 LAKHS WAS PAID TO THE ITA NO.3736/M/2010 P.M. ENTERPRISES 3 PARTNERS, WHICH WAS A CASE OF PARTNERS RECEIVING CO NSIDERATION OVER AND ABOVE THE ALLOTMENT OF SHARES OF THE COMPANY. IN THE LIGH T OF THESE FACTS, HE HELD THAT THE PROVISIONS OF SEC. 47(XIII) WERE NOT APPLICABLE . THEREAFTER, HE COMPUTED CAPITAL GAINS U/S.45(4) AT RS.1.15 CRORES BY CONSID ERING THE WRITTEN DOWN VALUE OF THE ASSETS VIS-A-VIS THE MARKET VALUE OF SUCH ASSET S. THE ADDITION OF RS.1.15 CRORES MADE BY THE AO U/S. 45(4) CAME TO BE DELETED IN THE FIRST APPEAL. 4. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE ASSESSEE MADE OUT A CASE BEFORE THE AO THAT NO CAPITAL GAIN WAS CHARGEABLE U/S.45(4) ON THE GROUND THAT THE TRANSFER OF ASSETS FROM FIRM TO COMPANY ON ITS CONVERSION COULD NOT TO BE CONSIDERED AS TRANSFER AS PER SEC. 47(XIII). THE AO OPINED THAT THE PROVISION S OF THIS SECTION HAVE NOT BEEN FULLY SATISFIED. IN THIS REGARD, HE FIRSTLY CONSIDE RED THE PRESCRIPTION OF PROVISO (B) TO SEC. 47(XIII), WHICH IN HIS OPINION WAS VIOLATE D ON THE GROUND THAT THE SHARES IN THE COMPANY WERE ALLOTTED TO THE PARTNERS ON THE BASIS OF THEIR FIXED CAPITAL ALONE, THEREBY LEAVING THE AMOUNT OF CURRENT ACCOUN TS AS SUCH. WE ARE NOT INCLINED TO ACCEPT THE VIEWPOINT OF THE AO FOR THE REASON THAT THE REQUIREMENT OF PROVISO (B) IS THAT ALL THE PARTNERS OF THE FIRM IM MEDIATELY BEFORE THE SUCCESSION BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNT STOOD IN THE BOOKS OF THE FIRM ON T HE DATE OF SUCCESSION. REFERENCE IN THE PROVISION IS MADE TO THE CAPITAL AND NOT TO THE CURRENT ACCOUNTS OF THE PARTNERS. THE PROVISO CANNOT BE EXTENDED BE YOND ITS SCOPE FOR THE REASON THAT THE BALANCE IN THE CURRENT ACCOUNT OF THE PART NERS KEEP ON FLUCTUATING AND EVEN IN CERTAIN CIRCUMSTANCES IT MAY BE NEGATIVE AL SO. IF THIS PROVISION IS INTERPRETED TO INCLUDE THE BALANCE IN THE CURRENT A CCOUNTS OF THE PARTNERS ALSO AND SUCH BALANCE TURNS OUT TO BE DEBIT, THE SECTION WILL BECOME UNWORKABLE. AS CAN BE SEEN FROM THE STATEMENT OF THE CURRENT CAPIT AL ACCOUNT AS ON 31-03-2006, ITA NO.3736/M/2010 P.M. ENTERPRISES 4 THE CAPITAL ACCOUNT OF S/SHRI SAMEER P.SANGHVI, SAN DIP N. SANGHVI AND VISHAL N. SANGHVI SHOWED DEBIT BALANCES TO THE TUNE OF RS.12. 34 LAKHS, 12.11 LAKHS AND 14.90 LAKHS RESPECTIVELY. IF THE BALANCES OF THE CU RRENT ACCOUNT ARE ALSO CONSIDERED AS PART OF THE CAPITAL ACCOUNT, THEN THE OVERALL BALANCE IN THE CAPITAL/CURRENT ACCOUNTS WOULD REQUIRE CONSIDERATIO N, WHICH MAY IN CERTAIN CIRCUMSTANCES - AS IS THE PRESENT CASE ALSO - BE N EGATIVE. IN VIEW OF THESE REASONS, WE HOLD THAT ONLY THE BALANCE IN THE CAPIT AL ACCOUNTS OF THE PARTNERS IS REQUIRED TO BE CONSIDERED FOR ALLOTMENT OF SHARES I N THE COMPANY. THE NATURAL COROLLARY WHICH FOLLOWS IS THAT THE PROVISIONS OF P ROVISO (B) TO SEC. 47(XIII) HAVE NOT BEEN VIOLATED BY THE ASSESSEE. 5. COMING TO THE OTHER OBJECTION OF THE AO ABOUT TH E NON-FULFILMENT OF THE REQUIREMENTS OF PROVISO (C) TO SEC. 47(XIII), WE FI ND THAT HERE AGAIN THE AO WAS NOT CORRECT IN HOLDING THAT THE PARTNERS OF THE ASS ESSEE FIRM RECEIVED ANY CONSIDERATION OR BENEFIT DIRECTLY OR INDIRECTLY OTH ER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY BY REASON OF THEIR RECEIVING A SUM OF RS.27.29 LAKHS AGAINST THEIR CAPITAL ACCOUNT. THE OBVIOUS REASON F OR THE PAYMENT TO THE PARTNERS AMOUNTING TO RS.27.29 LAKHS WAS THE PAYMENT TOWARDS PART OF THE CURRENT ACCOUNT BALANCE OF THESE PARTNERS TO THAT EXTENT. T HE REMAINING AMOUNT CONTINUED WITH THE COMPANY AS UNSECURED LOANS. THE PAYMENT TO THE ERSTWHILE PARTNERS OUT OF THEIR CURRENT ACCOUNTS CANNOT BE CO NSIDERED AS RECEIVING ANY CONSIDERATION OR BENEFIT OTHER THAN BY WAY OF ALLOT MENT OF SHARES. IF THE PAYMENT IS MADE AND SIMULTANEOUSLY THE BALANCE IN THE LOAN ACCOUNT IS REDUCED, SUCH PAYMENT IS THE DISCHARGE OF THE LIABILITY OF THE CO MPANY PRO TANTO AND NOT GRANTING OF ANY BENEFIT OR CONSIDERATION BY THE COM PANY. ITA NO.3736/M/2010 P.M. ENTERPRISES 5 6. APART FROM THESE TWO MAJOR OBJECTIONS RAI SED BY THE AO, HE HAD NOT FOUND FAULT IN ANY OTHER SUBMISSION ADVANCED ON BEH ALF OF THE ASSESSEE IN SUPPORT OF THE APPLICABILITY OF SEC. 47(XIII). WE H AVE ALSO PERUSED COPY OF THE MEMORANDUM & ARTICLES OF ASSOCIATION OF THE COMPANY WHICH IS PLACED AT PAGE 146 ONWARDS OF THE PAPER BOOK. THE MAIN OBJECT OF T HE COMPANY HAS BEEN DECLARED AS : TO ACQUIRE AND TAKE OVER AS A GOING PARTNERSHIP FI RM CARRIED ON BUSINESS IN THE NAME AND STYLE OF M/S. P .M. ENTERPRISES TOGETHER WITH GOODWILL, ASSETS AND LIAB ILITIES AND AS SUCH, THE SAID CONCERN MAY STAND DISSOLVED. 7. THE ABOVE DISCUSSION BOILS DOWN THAT THE CONVERSION OF THE FIRM INTO A PRIVATE LIMITED COMPANY BY TRANSFERRING ALL THE ASS ETS AND LIABILITIES TOGETHER WITH FULFILLMENT OF OTHER REQUISITE CONDITIONS OF SECTIO N 47(XIII) DID NOT ATTRACT THE PROVISIONS OF SEC. 45(4) OF THE ACT. OUR VIEW IS FO RTIFIED BY VARIOUS ORDERS OF THE TRIBUNAL TAKEN NOTE OF BY THE LD. CIT(A) IN THE IMP UGNED ORDER. UNDER THESE CIRCUMSTANCES, WE UPHOLD THE IMPUGNED ORDER. 8. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED ON THE 10TH DAY OF JUNE, 2011 . SD/- SD/- (VIJAY PAL RAO) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 10TH JUNE , 2011. NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. ITA NO.3736/M/2010 P.M. ENTERPRISES 6 3 CIT(A)-35,MUMBAI. 4 CIT-25,MUMBAI. 5.DR,C BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. ITA NO.3736/M/2010 P.M. ENTERPRISES 7 DETAILS DATE INITIALS DESIGN ATION 1. DRAFT DICTATED ON 07-06-11 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 08-06-11 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER *