ITO WD 21(1)(4), MUMBAI V. PATON, MUMBAI

ITA 3880/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84544 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 24-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 01-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Date of conversion; Fair market value
• Section: 143(3); 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, AM AND SHRI VIJAY PAL RA O, JM ./ I.T.A. NO. 3880/MUM/2012 ( / ASSESSMENT YEAR: 2007-08) I.T.O. WARD-21(1)(4), ROOM NO. 606, 6 TH FLOOR, C-10, PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI / VS. PATON 10, SAGAR COMPLEX, OPP. ELECTRICAL HOUSE, VILE PARLE (E), MUMBAI-400 057 ./ ./PAN/GIR NO. AAAFP 6455 C ( ! /APPELLANT ) : ( '#! / RESPONDENT ) & '# ./ CROSS OBJECTION NO. 35/MUM/2014 (ARISING OUT OF ITA NO. 3880/MUM/2012) ( / ASSESSMENT YEAR: 2007-08) PATON 10, SAGAR COMPLEX, OPP. ELECTRICAL HOUSE, VILE PARLE (E), MUMBAI-400 057 / VS. I.T.O. WARD-21(1)(4), ROOM NO. 606, 6 TH FLOOR, C-10, PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI ./ ./PAN/GIR NO. AAAFP 6455 C ( '# / CROSS OBJECTOR ) : ( '#! / RESPONDENT ) % & / REVENUE BY : SHRI NEIL PHILIP '( )*+ % & / ASSESSEE BY : SHRI VIJAY KOTHARI , ' - % + . / DATE OF HEARING : 08.10.2014 /01 % + . / DATE OF PRONOUNCEMENT : 18.12.2014 2 ITA NO.3880/M/12 & CO NO.35/M/14 (A.Y. 2007-08) PATON 2 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE REVENUE AND CROSS OBJECTIO N (C.O.) BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF I NCOME TAX (APPEALS)-32, MUMBAI (CIT(A) FOR SHORT) DATED 05.03.2012, PARTLY ALLOW ING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT U/S.147 R/W S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 2007-08 VIDE ORDER DATED 28.12.2010. 2. AT THE OUTSET, WE OBSERVE THE C.O. TO BE DELAYED BY 236 DAYS; HAVING BEEN FILED ON 18.02.2014 , AS AGAINST THE DUE DATE OF 26.06.2013 (PROOF OF RECEIPT OF MEMORANDUM OF APPEAL IN FORM 36 BEING SERVED ON THE ASSESSEE ON 2 7.05.2013 ON RECORD). THE CONDONATION PETITION, SINCE FILED, STATES THE DEMIS E OF SHRI PRASHANT DAVE, CHARTERED ACCOUNTANT, HANDLING THE AFFAIRS OF THE FIRM, AND S HRI PREMJI VIRAM SATRA, PARTNER, AS A REASON FOR THE DELAY IN FILING THE CROSS OBJECTION, RAISING A LEGAL ISSUE, WHICH STOOD ALSO RAISED BEFORE THE FIRST APPELLATE AUTHORITY. AFTER PRELIMINARY HEARING, WE FIND THE DELAY AS ON ACCOUNT OF GENUINE AND SUFFICIENT REASONS AND, H ENCE, FIT FOR CONDONATION. THE HEARING OF THE APPEAL AND THE C.O. WERE ACCORDINGLY PROCEED ED WITH. 3. THE ASSESSMENT IN THIS CASE WAS FRAMED U/S.147 R /W S. 143(3) OF THE ACT, ASSESSING THE TOTAL INCOME AT RS.93,30,260/-, BY BRINGING THE TRANSFER VALUE OF THE GOODWILL, I.E., BY THE ASSESSEE-FIRM TO ITS PARTNERS ON ITS DISSOLU TION ON 01.04.2006 TO TAX, AS AGAINST THE RETURNED INCOME OF NIL. THOUGH THE FIRM HAD BEEN SU CCEEDED TO IN ITS BUSINESS BY A COMPANY, BY THE NAME PATON FASHIONS PVT. LTD., IN WHICH ALL THE ERSTWHILE PARTNERS WERE SHAREHOLDERS, AS A GOING CONCERN, THEIR SHAREH OLDING THEREIN IS, AS PER THE TERMS OF THE CONVERSION DEED DATED 01.04.2006 (PB PGS. 77-80 ), IN THEIR PROFIT SHARING RATIO IN THE FIRM. THE CONDITION OF SECTION 47 (XIII) OF THE ACT WAS THUS NOT SATISFIED, WHICH REQUIRES SUCH SHAREHOLDING TO BE IN THE RATIO OF THE RESPECT IVE CAPITALS OF THE PARTNERS, I.E., IN THE TOTAL CAPITAL OF THE FIRM, AS ON THE DATE OF CONVER SION. CONSEQUENTLY, THE TRANSFER, BEING NOT EXCEPTED FROM S. 45, THE PROVISION OF SECTION 2 (47) R/W S. 45 WOULD STAND ATTRACTED. SECTION 45(4) PROVIDES FOR THE FAIR MARKET VALUE OF A CAPITAL ASSET TO BE DEEMED AS THE FULL 3 ITA NO.3880/M/12 & CO NO.35/M/14 (A.Y. 2007-08) PATON VALUE OF THE CONSIDERATION ARISING ON ITS TRANSFER TO THE PARTNER/S, ON THE DISSOLUTION OF THE FIRM OR OTHERWISE. HENCE, THE SHORT TERM CAPITAL GA IN (STCG) ON THE TRANSFER OF THE GOODWILL WITH REFERENCE TO THE VALUE AT WHICH THE A CCOUNTS OF THE PARTNERS STOOD ALLOWED CREDIT IN ITS RESPECT ON THE CONVERSION OF THE PART NERSHIP INTO A COMPANY. IN APPEAL, THE ASSESSEE FOUND FAVOUR WITH THE LD. C IT(A). THE SHARES IN THE SUCCESSOR-COMPANY HAD BEEN ISSUED TO THE ERSTWHILE PARTNERS IN THE RATIO OF THEIR CAPITAL BALANCES AS AT THE CLOSE OF 31.03.2006. THE ASSESSI NG OFFICER (A.O.) HAD WRONGLY COMPARED THE SAME WITH THE CAPITAL BALANCES AS ON 3 1.03.2007, WHICH IS NOT RELEVANT; THE RELEVANT DATE BEING THAT IMMEDIATELY PRIOR TO SUCCE SSION ON 01.04.2006, I.E., 31.03.2006. IN FACT, EVEN THOUGH FURTHER SHARES WERE SUBSEQUENT LY ISSUED TO THE PARTNERS, MAKING THE SHAREHOLDING OF EACH OF THE THREE GROUPS (OF PARTNE RS) EQUAL, AT 10 LAC SHARES EACH, THE AGGREGATE HOLDING OF THE PARTNERS IS 100% OF THE SH AREHOLDING IN THE COMPANY, WHILE THE LEGAL REQUIREMENT IS FOR THEM TO CONTINUE TO HOLD 5 1% SHAREHOLDING IN THE COMPANY FOR A PERIOD OF FIVE (5) YEARS AFTER THE SUCCESSION/TAKEO VER. THE ASSESSEES CASE WAS THUS TO BE ALLOWED. THE ASSESSEES LEGAL PLEA OF THE REOPENING (OF ASSE SSMENT) BEING NOT VALID WAS, HOWEVER, DISCOUNTENANCED BY HIM, REJECTING ITS FIR ST GROUND. NO RETURN WAS FILED BY THE ASSESSEE BY THE DUE DATE OF FILING THE RETURN OF IN COME U/S. 139(1) OR EVEN THE BELATED RETURN U/S.139(4). THE A.O. ISSUED NOTICES U/S. 142 (1)(I) ON 07.01.2009, 15.06.2009 AND 03.11.2009, ALL OF WHICH REMAINED UN-RESPONDED, PRO MPTING THE A.O. TO ISSUE NOTICE U/S.144 ON 16.11.2009. THOUGH A NOTICE U/S. 142(1)( I) COULD AFTER 01/4/2006 BE SERVED ON THE ASSESSEE EVEN AFTER THE END OF THE RELEVANT ASS ESSMENT YEAR, A NOTICE THERE-UNDER COULD NOT BE ISSUED WITHOUT ANY RESTRICTION AS TO TIME. T HE PROPER, AND IN FACT THE ONLY MANNER OF CONSTRUING THE SAID PROVISION WAS THAT A NOTICE THERE-UNDER COULD BE ISSUED NOT LATER THAN THE EXPIRY OF ONE YEAR FROM THE END OF THE REL EVANT ASSESSMENT YEAR, I.E., THE TIME LIMIT U/S.139(5). NOT SO READING THE PROVISION WOUL D LEAD TO AN INCONGRUITY IN-AS-MUCH AS IT WOULD RENDER SECTION 139(4)/(5) INFRUCTUOUS, ALS O REMOVING ANY TIME LIMIT FOR FURNISHING THE RETURN EXCEPT OF COURSE THAT OF CO MPLETION OF ASSESSMENT (I.E., TWO YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR), AND WHICH CANNOT BE. NO NOTICE U/S. 4 ITA NO.3880/M/12 & CO NO.35/M/14 (A.Y. 2007-08) PATON 142(1)(I) COULD THEREFORE BE ISSUED FOR THE RELEVAN T YEAR AFTER 31.03.2009. ACCORDINGLY, THE NOTICES U/S. 142(1)(I) DATED 15.06.2009 AND 03. 11.2009 WERE NOT VALID IN LAW. THE ASSESSEES RETURN OF INCOME FILED ON 20.11.2009 COU LD NOT BE CONSIDERED TO BE IN RESPONSE TO NOTICE U/S. 142(1) DATED 07.01.2009 AND, IN ANY CASE, AS A VALID RETURN IN LAW. THE ISSUE OF NOTICE U/S. 143(2) ON 20.11.2009, I.E., IN PURSU ANCE TO THE SAID RETURN, WAS CONSEQUENTLY INVALID. ACCORDINGLY, THE A.O.S ACTION IN ISSUING NOTICE U/S.148 ON 14.12.2009, IN THE WAKE OF THE ASSESSEE FAILING TO FILE THE RETURN OF INCOME EVEN BY THE EXTENDED PERIOD ALLOWED U/S.139(4), WAS THUS A VALID NOTICE IN LAW. THE ASSESSEES CLAIM THAT THE ENSUING PROCEEDINGS WERE NOT VALID IN-AS-MUCH AS THE A.O. W AS BOUND TO FRAME THE ASSESSMENT U/S.143(3), TAKING THE PROCEEDINGS INITIATED BY ISS UE OF NOTICE U/S.143(2) TO THEIR LOGICAL CONCLUSION, WAS THUS NOT VALID. (REFER PARAS 3.1 TO 3.3 OF THE IMPUGNED ORDER) ON MERITS, HOWEVER, THE ASSESSEE FOUND FAVOUR WITH THE LD. CIT(A), WHO FOUND THAT THE SHARES HAD IN FACT BEEN ISSUED TO THE ERST WHILE PARTNERS ON THE BASIS OF THEIR CAPITAL BALANCES AS ON THE DATE OF CONVERSION, I.E. , 01.04.2006. IN THIS VIEW OF THE MATTER, THE CONDITION OF SECTION 47(XIII) WAS SATISFIED, SO THAT IT WOULD NOT BE A TRANSFER LIABLE FOR CHARGE OF CAPITAL GAINS U/S.45 OF THE ACT. AGGRIEVE D, THE REVENUE IS IN APPEAL. 4. WE SHALL PROCEED WITH THE REVENUES APPEAL, AGIT ATING THE ASSESSMENT ON MERITS, FIRST, I.E., IN THE SAME SEQUENCE IN WHICH THE SAME STOOD HEARD. THE LD. AR, ON BEING QUESTIONED BY THE BENCH DURING HEARING IN THE MATTE R, WOULD SUBMIT THAT, TRUE, THE CONVERSION DEED STATES SO, BUT THE ALLOTMENT WAS AC TUALLY MADE AS PER THE CAPITAL BALANCES AS ON 31.03.2006, THE RELEVANT DATE, AS FOUND BY TH E LD. CIT(A). THE A.O., WHILE CORRECTLY OBSERVING THE SAME, HAD FAILED TO VERIFY THIS ASPEC T OF THE MATTER, EVEN AS ALL THE FIGURES WERE BEFORE HIM, COMPARING THE ALLOCATION WITH THE CAPITAL BALANCES AS ON 31.03.2007 INSTEAD, AND WHICH IS CLEARLY INCORRECT. FURTHER, T HE ALLOCATION AS MADE HAD ATTAINED FINALITY IN-AS-MUCH AS IT STANDS DULY COMMUNICATED TO THE REGISTRAR OF COMPANIES. NO OBJECTION TO THE SAID ALLOTMENT HAS BEEN RAISED BY ANY OF THE EX-PARTNERS. THE MENTION IN THE CONVERSION DEED OF THE ALLOCATION IN THE PROFIT SHARING RATIO, WHICH DID NOT MATERIALIZE, 5 ITA NO.3880/M/12 & CO NO.35/M/14 (A.Y. 2007-08) PATON COULD NOT THEREFORE BE TAKEN COGNIZANCE OF, SO AS I NFER THE ALLOCATION AS BEING NOT IN TERMS OF SECTION 47(XIII) OF THE ACT. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE REVENUES PRINCIPAL OBJECTION, RAISED PER ITS GD. # 1, IS THAT THE LD. CIT(A) HAD, IN ALLOWING RELIEF TO THE ASSESSEE, ADMITTED A DDITIONAL EVIDENCE, IN CONTRAVENTION OF RULE 46A OF THE INCOME TAX RULES, 1962 (THE RULES ). THE SAID RULE, PROCEDURAL IN CHARACTER, IS YET MANDATORY. HOWEVER, WE CONSIDER T HE REVENUES CHARGE AS NOT VALID. THIS IS FOR THE SIMPLE REASON THAT WHILE THE A.O.S OBJECTION, WITH REFERENCE TO THE TERMS OF THE CONVERSION DEED DATED 01.04.2006, WAS THAT T HE SHARES IN THE SUCCESSOR COMPANY STOOD ALLOWED TO THE ERSTWHILE PARTNERS IN THEIR PR OFIT SHARING RATIO IN THE FIRM, THE LD. CIT(A) FOUND IT AS NOT SO; THE SHARES BEING ALLOCAT ED IN THE RATIO OF THEIR CAPITAL BALANCES AS ON THE DATE OF THE CONVERSION, I.E., IN TERMS OF SECTION 47(XIII). BOTH THE CONVERSION DEED AND THE ALLOCATION OF SHARES, AS WELL AS THE F IRMS BALANCE-SHEET, BOTH AS ON 31.03.2006 AND 01.4.2006, WERE BEFORE THE A.O., WHO SE OBJECTION WAS ON MERITS. QUA MERITS, THE CONVERSION DEED (PB PGS. 77-80) CLEARLY STATES THAT THE PARTNERS SHALL BE ALLOTTED SHARES AS PER THE PROFIT SHARING RATIO AS ON THE DATE OF CONVERSION (I.E., 01.04.2006) (REFER CLAUSE 2). WITH REGARD TO THE AL LOTMENT, IN OUR VIEW, THE ACTUAL ALLOTMENT WOULD PREVAIL OVER THAT SPECIFIED IN THE CONVERSION DEED, RECORDING AGREEMENT QUA SHARE ALLOCATION IN THE PROFIT SHARING RATIO. A CON TRACT CAN, BESIDES BEING REDUCED IN WRITING, ALSO BE ORAL AND, THEREFORE, TO THE EXTENT THE SUBSEQUENT ALLOTMENT, BEING UNDISPUTED, IS AT VARIANCE WITH THAT AGREED TO, COU LD ONLY BE CONSIDERED AS A NOVATION OR IN MODIFICATION OF THE WRITTEN AGREEMENT TO THAT EX TENT. WE HAVE, TOWARD THIS, ACCORDED DUE WEIGHT TO THE FACTS AND CIRCUMSTANCES AS WELL. THIS IS AS THE ALLOTMENT WOULD ONLY HAVE BEEN RETURNED, AS STATED BEFORE US, TO THE REG ISTRAR OF COMPANIES, SO THAT ALL THE LEGAL FORMALITIES OF REGISTRATION OF THE SAID ALLOT MENT STAND COMPLETED, FINALIZING THE ALLOTMENT PROCESS. WE ARE THEREFORE, IN PRINCIPLE, IN AGREEMENT WITH THE ASSESSEE THAT THE MENTION OF A DIFFERENT RATIO IN THE CONVERSION DEED WOULD NOT BE BY ITSELF FATAL TO ITS CASE; WHAT BEING RELEVANT IS THE ACTUAL SATISFACTION, OR NOT SO, OF THE CONDITIONS OF SECTION 6 ITA NO.3880/M/12 & CO NO.35/M/14 (A.Y. 2007-08) PATON 47(XIII). GROUNDS # 2 AND 3 OF THE REVENUES APPEAL , WOULD ALSO THEREFORE STAND TO BE DISMISSED. WE DECIDE ACCORDINGLY. 6. WE HAVING DISMISSED THE REVENUES APPEAL ON MERI TS, DO NOT CONSIDER IT NECESSARY TO ADJUDICATE THE ASSESSEES C.O., RAISING A LEGAL ISSUE WITH REGARD TO THE MAINTAINABILITY OF THE ASSESSMENT IN LAW; THE SAME BEING RENDERED I NFRUCTUOUS. 7. IN THE RESULT, BOTH THE REVENUES APPEAL AND THE ASSESSEES C.O. ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON DECEMBER 18, 2014 SD/- SD/- (VIJAY PAL RAO) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER , 3- MUMBAI; 4' DATED : 18.12.2014 .'../ ROSHANI , SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '#! / THE RESPONDENT 3. , 5+ ( ) / THE CIT(A) 4. , 5+ / CIT - CONCERNED 5. 7 8 '+'9( , . 9(1 , , 3- / DR, ITAT, MUMBAI 6. 8 :) ; - / GUARD FILE !' / BY ORDER, )/* + (DY./ASSTT. REGISTRAR) , , 3- / ITAT, MUMBAI