PRAKASH P.D'SOUZA, MUMBAI V. ITO WD 21(3)(4), MUMBAI

ITA 5728/MUM/2014

• Counselvise Citation: 572819914 RSA 2014
• Duration Of Justice: 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 11-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURINDER JIT SINGH
• Keywords: Reopening of assessment; Capital asset; Date of conversion; Fair market value; Reassessment proceedings
• Section: 143(3); 148

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & SHRI SANJAY GARG , J M ITA NO. 5728 / MUM /20 1 4 ( ASSESSMENT YEAR : 2008 - 09 ) SHRI PRAKASH P. DSOUZA, 402, SAMOA PACIFIC ENCLAVE, G.L.COMPOUND, IIT MAIN GATE, POWAI, MUMBAI - 400 076 VS. ITO WARD - 21(3)(4), MUMBAI PAN/GIR NO. : A A HPD 5494 Q ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI VIJAY MEHTA /REVENUE BY : SHRI SURINDERJIT SINGH DATE OF HEARING : 1 5 TH DECEMBER , 201 4 DATE OF PRONOUNCEME NT 1 5 TH DECEMBER , 201 4 O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) FOR THE ASSESSMENT YEAR 2008 - 09 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) R.W.S 147 OF THE ACT . 2 . IN TH E GROUNDS OF APPEAL, THE ASSESSEE IS BASICALLY AGGRIEVED FOR REOPENING OF ASSESSMENT BY ISSUE OF NOTICE U/S. 148 OF THE ACT AND ALSO FOR MAKING ADDITION IN RESPECT OF ASSESSEES SHARE IN REVALUATION RESERVE ON REVALUATION OF ASSETS CREDITED IN ASSESSEES CA PITAL ACCOUNT AS CHARGEABLE TO TAX U/S. 45(1)OF THE IT ACT. 3 . AT THE OUTSET, LEARNED AR PLACED ON RECORD ORDER OF THE TRIBUNAL IN CASE OF MR. RAVISHANKAR R. SINGH, PASSED IN ITA NO. 5948/MUM/2013 , ITA NO. 5728 / 1 4 2 DATED 4 - 4 - 2012 , WHO IS ALSO A PARTNER IN THE SAME FIRM IN W HICH ASSESSEE IS A PARTNER, ADDITION MADE ON THE VERY SAME GROUND WAS DELETED BY THE TRIBUNAL . 4. ON THE OTHER HAND, THE CONTENTION OF LEARNED DR WAS THAT ORDER OF THE TRIBUNAL IN CASE OF MR. RAVINSHANKAR R. SINGH WAS PLACED BEFORE THE CIT(A), WHO OBSERVED THAT THE TRIBUNAL HAS NOT CONSIDERED THE PROVISIONS OF SECTION 47( XIII ) OF THE ACT, WHILE DECIDING THE ISSUE. ACCORDINGLY, APPEAL OF THE ASSESSEE IS NOT COVERED BY THE SAID ORDER OF THE TRIBUNAL. 5. WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE TH ROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT THE ASSESSEE IS A PARTNER IN CABLE TV ADVERTISING NETWORK BUSINESS, NAMELY M/S SATELLITE TV NETWORK. D URING THE A . Y.2008 - 09 THE AO OBSERVED TH A T THE PARTNERSHIP FIRM HAS REVALUED NETW ORK RIGHTS AND CORRESPONDING CREDIT IN RESPECT OF NETWORK RIGHTS WAS GIVEN TO THREE PARTNERS INCLUDING ASSESSEE THEREBY MAKING ASSESSEE THE OWNER OF THE NETWORK RIGHTS TO THE TUNE OF RS 10.5 CRORES. THE AO FURTHER OBSERVED THAT IN THE ITR FILED THE ASSESSE E ON THE LI A BILITY S I DE OF ITR INCREASED BY RS 10 . 5 CRORE INST EA D OF DIS C LOSING THE SAID AMOUNT UNDER 'REVALUATION RESERVE' AND ON ASSET SIDE INSTEAD OF DISCLOSING THE SAID RIGHTS UNDER ' INVES T MENT IN SHARES OF M/S WIRE & W IRELESS SATELLITE N E TW O RK PVT L TD ' DISCLOSED IT AS ' L OANS AND ADVANCES RECOVERABLE'. AS PER AO CLEARLY THE SAID RIGHTS H A S BE E N TRANSFERRED/RELINQUISHED BY THE ASSESSEE IN FAVOUR OF PERSON ITA NO. 5728 / 1 4 3 FROM WHOM THE S A ID ' LOANS & ADVANCES ' ARE RECOVERABLE, C A LLING FOR COMPLIANCE UND E R SECTION 45 BY T H E ASSESSEE. 6 . WE FOUND THAT SIMILAR ADDITION WAS MADE IN THE CASE OF MR. RAVISHANKAR R. SINGH, WHO APPROACHED TO THE TRIBUNAL AGAINST THE ORDER OF CIT(A) AND THE TRIBUNAL AFTER DISCUSSING THE RELEVANT PROVISIONS OF LAW, HELD AS UNDER : - 9. WE HAVE CONSID ERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT THE ASSESSEE IS ONE OF THE PARTNER OF PARTNERSHIP FIRM M/S SATELLITE CABLE TV NETWORK. DURING THE YEAR UNDER CONSIDERATION, THE PARTNERSHIP FI RM HAS REVALUED ITS CAPITAL NETWORK RIGHTS ON 1 - 5 - 2007. AFTER REVALUATION OF NETWORK RIGHT, REVALUATION RESERVE WAS CREDITED TO PARTNERS CAPITAL ACCOUNT AND THE ASSETS ACCOUNT WAS DEBITED IN THE BOOKS OF THE PARTNERSHIP FIRM. ASSESSMENT OF PARTNER WAS REO PENED BY ISSUE OF NOTICE UNDER SECTION 147 ON THE PLEA THAT ASSESSEE HAS NOT OFFERED ANY CAPITAL GAIN ON DISTRIBUTION OF RESERVE ON THE REVALUATION OF THE ASSETS OF THE PARTNERSHIP FIRM. THERE IS NO DISPUTE TO THE FACT THAT ORIGINAL ASSESSMENT WAS NOT FRAM ED U/S.143(3), THERE WAS MERELY PROCESSING OF RETURN U/S.143(1). AFTER RECORDING REASONS AS DISCUSSED AT PARA 6 HEREINABOVE, THE AO HAS ISSUED NOTICE U/S.148. IN VIEW OF THESE REASONS AND CONSIDERING THE FACT THAT RETURN OF ASSESSEE WAS JUST PROCESSED U/S. 143(1), THERE IS NOTHING WRONG IN THE INITIATION OF REASSESSMENT PROCEEDINGS. ACCORDINGLY, GROUND TAKEN BY THE ASSESSEE CHALLENGING THE VALIDITY OF REOPENING U/S.147 IS DISMISSED. 9.1 ON MERITS OF THE ADDITION, WE FOUND THAT MERELY ON THE BASIS OF CREDIT ING OF REVALUATION RESERVE TO PARTNERS CAPITAL ACCOUNT WAS TREATED BY THE AO AS CAPITAL GAINS IN THE HANDS OF THE ASSESSEE, WHO IS A PARTNER IN M/S SATELLITE CABLE TV NETWORK. IN THE PRESENT CASE, THERE IS NEITHER DIVISION OF ASSETS NOR ANY REALSIATION OF ASSETS. SINCE THERE IS NO OFFICIAL DISSOLUTION OF THE FIRM AND DISTRIBUTION ON ASSETS OF THE FIRM AMONG THE PARTNERS, EVEN THE PROVISIONS OF SECTION 45(4) WILL NOT BE APPLICABLE TO THE FIRM OR TO THE PARTNER. FURTHERMORE, SINCE THERE IS ABSENCE OF WORD T RANSFER AS ENVISAGED UNDER SECTION 2(47), THE CHARGING PROVISIONS OF SECTION 45(1) WILL NOT BE APPLICABLE, SINCE THE VESTING OF PROPERTY IN THE COMPANY FROM THE FIRM IS NOT CONSEQUENT TO A TRANSFER, HOWEVER, IT IS STATUTORY VESTING OF PROPERTIES IN THE CO MPANY AS THE FIRM IS TREATED AS PRIVATE LIMITED COMPANY BY OPERATION OF LAW WHICH RESULTS IN CHANGE IN A STATUS OF FIRM TO COMPANY AND NO TRANSFER OF PROPERTY IS INVOLVED IN THE PROCESS. AS PER OUR CONSIDERED VIEW, CREDITING THE AMOUNT OF REVALUATION RESER VE TO PARTNERS CAPITAL ACCOUNT DOES NOT AMOUNT TO TRANSFER OF PARTNERSHIP FIRMS ASSETS TO THE INDIVIDUAL PARTNER. AS PER SETTLED PRINCIPLE OF LAW OF PARTNERSHIP, DURING CONTINUATION OF PARTNERSHIP, PARTNERS DO NOT HAVE SEPARATE RIGHTS ITA NO. 5728 / 1 4 4 OVER THE ASSETS OF F IRM IN ADDITION TO INTEREST IN THE SHARE OF PROFITS. ON 31 - 5 - 2007, THE SAID REVALUATION RESERVE WAS DISTRIBUTED AMONGST THE PARTNERS IN THEIR PROFIT SHARE RATIO. THEREAFTER ON 7 - 1 - 2008, THE PARTNERSHIP FIRM WAS CONVERTED INTO PRIVATE LIMITED COMPANY BY OPE RATION OF LAW UNDER PART IX OF THE COMPANIES ACT. BY NOTING THESE FACTS, THE AO CONCLUDED THAT ASSESSEE HAS EARNED CAPITAL GAIN OF RS.10.50 CRORES BY REVALUING THE ASSETS OF THE PARTNERSHIP FIRM ON WHICH HE IS LIABLE TO PAY TAX. WE DO NOT FIND ANY MERIT IN THE CONCLUSION OF THE AO INSOFAR AS THERE WAS NO TRANSFER OF ASSETS OF PARTNERSHIP FIRM TO THE PARTNER WITHIN THE MEANING OF SECTION 2(47), THERE WAS ONLY REVALUATION OF THE ASSET OF THE PARTNERSHIP FIRM WHICH WAS IN THE FORM OF CABLE TV NETWORK RIGHTS. T HE REVALUATION OF THE ASSETS BY THE PARTNERSHIP FIRM DOES NOT ATTRACT ANY CAPITAL GAIN. THE REVALUATION OF THE ASSETS OF THE PARTNERSHIP FIRM AND CREDIT OF REVALUED AMOUNT TO THE CAPITAL ACCOUNT OF THE PARTNERS IN THEIR RESPECTIVE PROFIT SHARING RATIO DOES NOT ENTAIL ANY TRANSFER AS DEFINED UNDER SECTION 2(47) AS LAID DOWN BY THE COORDINATE BENCH IN THE CASE OF PARU D. DAVE (SUPRA). IT IS NOT IN DISPUTE THAT ASSESSEE IN HIS INDIVIDUAL CAPACITY WAS NOT THE OWNER OF THE CABLE TV NETWORK RIGHTS WHICH WAS OWNE D BY THE PARTNERSHIP FIRM. FURTHERMORE, RIGHTS WERE OF SUCH NATURE THAT IT COULD NOT BE OWNED BY THE DIFFERENT INDIVIDUALS IN A PIECEMEAL MANNER. THE CABLE TV NETWORK RIGHTS WAS THE RIGHTS ARISING OUT OF VARIOUS AGREEMENTS ENTERED INTO BY THE PARTNERSHIP F IRM WITH THE OUTSIDE PARTIES IN THE COURSE OF BUSINESS FOR DISTRIBUTION OF CABLE TV SIGNALS. HAD THE PARTNERSHIP FIRM SOLD THESE ASSETS TO ANY THIRD PARTY, THE DEPARTMENT COULD HAVE LEVIED TAX ON SUCH SALE CONSIDERATION. THESE RIGHTS WERE PROPERTY OF PARTN ERSHIP FIRM TILL THE DATE OF CONVERSION INTO THE COMPANY BY OPERATION OF LAW AS PER PART IX OF THE COMPANIES ACT. AFTER CONVERSION OF THE PARTNERSHIP FIRM INTO THE PRIVATE LIMITED COMPANY BY OPERATION OF LAW, THE TV CABLE NETWORK RIGHTS BECAME THE PROPERTY OF THE COMPANY AS PER PROVISIONS OF SECTION 575 OF THE COMPANIES ACT, WHICH PRESCRIBES THE PROVISIONS CONCERNING THE CONVERSION OF PARTNERSHIP FIRM INTO COMPANY. THIS ISSUE OF TAXING SUCH GAIN U/S.45(4) HAS BEEN DECIDED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TEXSPIN ENGINEERING AND MANUFACTURING WORKS, 263 ITR 345. THE PRECISE OBSERVATION OF THE HONBLE HIGH COURT WAS AS UNDER : - IN THIS CASE, THE ERSTWHILE FIRM HAS BEEN TREATED AS A LIMITED COMPANY BY VIRTUE OF SECTION 575 OF TH E COMPANIES ACT. IT IS NOT IN DISPUTE THAT IN THIS CASE, THE ERSTWHILE FIRM BECAME A LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT. NOW, SECTION 45(4) CLEARLY STIPULATES THAT THERE SHOULD BE TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS. UNDER PAR T IX OF THE COMPANIES ACT, WHEN A PARTNERSHIP FIRM IS TREATED AS A LIMITED COMPANY, THE PROPERTIES OF THE ERSTWHILE FIRM VESTS IN THE LIMITED COMPANY. THE QUESTION IS WHETHER SUCH VESTING STANDS COVERED BY THE EXPRESSION 'TRANSFER BY WAY OF DISTRIBUTION' I N SECTION 45(4) OF THE ACT. THERE IS A DIFFERENCE BETWEEN VESTING OF THE PROPERTY, IN THIS CASE, IN THE LIMITED COMPANY AND DISTRIBUTION OF THE PROPERTY. ON VESTING IN THE LIMITED COMPANY UNDER PART IX OF THE COMPANIES ACT, THE PROPERTIES VEST IN THE COMPA NY AS THEY EXIST. ON THE OTHER ITA NO. 5728 / 1 4 5 HAND, DISTRIBUTION ON DISSOLUTION PRESUPPOSES DIVISION, REALISATION, ENCASHMENT OF ASSETS AND APPROPRIATION OF THE REALISED AMOUNT AS PER THE PRIORITY LIKE PAYMENT OF TAXES TO THE GOVERNMENT, BMC ETC., PAYMENT TO UNSECURED CR EDITORS ETC. THIS DIFFERENCE IS VERY IMPORTANT. THIS DIFFERENCE IS AMPLY BROUGHT OUT CONCEPTUALLY IN THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF MALABAR FISHERIES CO. V. CIT[1979] 120 ITR 49 2 TAXMAN 409. IN THE PRESENT CASE, THEREFORE, WE ARE OF THE VIEW THAT SECTION 45(4) IS NOT ATTRACTED AS THE VERY FIRST CONDITION OF TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS IS NOT SATISFIED. IN THE CIRCUMSTANCES, THE LATTER PART OF SECTION 45(4), WHICH REFERS TO COMPUTATION OF CAPITAL GAINS UNDER SECTION 4 8 BY TREATING FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER, DOES NOT ARISE. 10. IN VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, AS DISCUSSED ABOVE, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE LOWER AUTHORITIES FOR BRINING GA INS ON REVALUATION UNDER THE TAX NET ON REVALUATION OF ASSETS OF PARTNERSHIP FIRM, WHICH WAS DISTRIBUTED TO THE PARTNER AND THEREAFTER PARTNERSHIP FIRM WAS CONVERTED INTO COMPANY BY OPERATION OF LAW UNDER PART IX OF THE COMPANIES ACT. 11. IN THE RESULT, A PPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART. 7 . THUS, IT IS CLEAR FROM THE ABOVE THAT ISSUE WITH REGARD TO REOPENING OF ASSESSMENT WAS UPHELD BY THE TRIBUNAL, HOWEVER, ON MERITS, THE TRIBUNAL HAS DELETED THE ADDITION AFTER FOLLOWING THE DECISION OF JU RISDICTIONAL HIGH COURT IN THE CASE OF TEXSPIN ENGINEERING AND MANUFACTURING WORKS, 263 ITR 345 . THE ASSESSEE IN THE PRESENT CASE IS ALSO A PARTNER IN THE VERY SAME FIRM I.E. M/S SATELLITE CABLE TV NETWORK AND HAD GOT EQUAL CREDIT IN HIS CAPITAL ACCOUNT ON REVALUATION OF ASSETS. AFTER CONSIDERING THE RELEVANT PROVISIONS OF LAW I.E. SECTION 2 ( 47 ) , SECTION S 45, 45(1) & 45(4) , THE TRIBUNAL HAS DELETED THE ADDITION SO MADE. FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION ARE EXACTLY SAME, RESPECTFUL LY FOLLOWING THE ORDER OF THE TRIBUNAL, WE DIRECT THE AO TO DELETE THE ADDITION MADE IN THE HANDS OF THE ASSESSEE. ITA NO. 5728 / 1 4 6 8 . NOW, COMING TO THE ORDER OF THE CIT(A) , WHO OBSERVED THAT THE TRIBUNAL WHILE DECIDING THE CASE OF MR. RAVISHANKAR R. SINGH HAS NOT CONSIDE RED THE PROVISIONS OF SECTION 47(XIII) OF THE ACT, THEREFORE, THE CASE OF THE ASSESSEE IS DISTINGUISHABLE ON FACTS. WE HAVE CAREFULLY CONSIDERED THE OBSERVATION OF THE CIT(A) . IN THIS CASE, WE FOUND THAT MERELY ON THE BASIS OF CREDITING OF REVALUATION RESE RVE TO PARTNERS CAPITAL ACCOUNT WAS TREATED BY THE AO AS CAPITAL GAINS IN THE HANDS OF THE ASSESSEE, WHO IS A PARTNER IN M/S SATELLITE CABLE TV NETWORK , THUS, THERE WAS NEITHER DIVISION OF ASSETS NOR ANY REALIZATION OF ASSETS. SINCE THERE WAS NO OFFICIAL DIS SOLUTION OF THE FIRM AND DISTRIBUTION OF THE ASSETS OF THE FIRM AMONG THE PARTNERS, THERE WAS NO MERIT IN THE ORDER OF CIT(A) FOR CONFIRMING THE ADDITION. THE PROVISIONS OF SECTION 47(XIII) PERTAIN TO TRANSFER OF CAPITAL ASSETS BY A FIRM TO A COMPANY. H OWEVER, IN THE INSTANT CASE, ASSESSEE MERELY CREDIT ED THE REVALUATION RESERVE TO PARTNERS CAPITAL ACCOUNT AND, THERE WAS NO TRANSFER OF SUCH CAPITAL ASSETS BY THE ASSESSEE PARTNER. ACCORDINGLY, THE PROVISION OF SECTION 47(XIII) HAS NO APPLICATION TO THE F ACTS AND CIRCUMSTANCES OF THE PRESENT CASE. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE ORDER OF CIT(A). 9 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 1 5 /12 / 201 4 . 1 5 /12 / 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUN TANT MEMBER MUMBAI ; DATED 1 5 /12 /2014 /PKM , PS ITA NO. 5728 / 1 4 7 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//