RAVISHANKAR R. SINGH, MUMBAI V. ITO 21(3)(4), MUMBAI

ITA 5948/MUM/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6661 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 07-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Keywords: Capital asset; Cost of acquisition; Date of conversion; Fair market value; Valuation report; Reassessment proceedings
• Section: 143(3); 147

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & DR.STM PAV A LAN , J M ITA NO. 5948 / MUM/20 1 3 ( ASSESSMENT YEAR : 200 8 - 09 ) MR. RAVINSHANKAR R. SINGH , B - 607, BLUE NILE PACIFIC ENCLAVES, OPP. IIT, MAIN GATE, POWAI , MUMBAI - 400 076 VS. ITO 21(3)(4), MUMBAI - 02 PAN/GIR NO. : A MRPS 6416 P ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : MR. VIJAY MEHTA /REVENUE BY : MR. A.C.TEJPAL DATE OF HEARING : 13 TH MARCH , 201 4 DATE OF PRONOUNCEMENT : 4 TH APRIL , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) DATED 18 - 9 - 2013 FOR THE ASSESSMENT YEAR 2008 - 09, IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) R.W.S.147 OF THE I.T. A CT. 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 3 . FACTS IN BRIEF ARE THAT 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 ITA NO. 5948 /20 1 3 2 FIRM HAS REVALUED NETWORK RIGHTS AND CORRESPONDING CREDIT IN RESPECT OF NETWORK RIGHTS WAS GIVEN TO THREE PARTNERS INCLUD I NG 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 FIL ED THE ASSESSEE 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 FROM WHOM THE S A ID ' LOANS & ADVANCES ' ARE RECOVERABLE, C A LLING FOR COMPLIANCE UND E R SE CTION 45 BY T HE ASSESSEE. 4 . ON ASSESSING OFFICERS QUERY TO TAX THE SAME AS SHORT TERM CAPITAL GAINS U/S.45 , THE RE PLY OF THE ASSESSEE WAS AS UNDER : - THE R E V A LUATION O F ASSET IS NOT CHARG E ABLE TO TAX AND SINC E NETWORK RIGHTS HAS BEEN RE VA LUED , THE S A M E I S NOT CHARGEABLE. V IDE SUB MIS SION DATED 09/01/2012 THE ASSESS EE STATE D AS , ' T H E ASSESSEE I S PARTN E R IN M / S S AT E LLIT E CABLE TV NETWORK WITH PROFIT SHA RI NG RATIO OF 33 . 3 3 % , TH E NA TU RE OF BUSINES S OF FIRM IS TO CARRY ON CABL E TV AND ADV E RTI S IN G N E T WO RK , OV E R A P E RIOD OF T I M E T HE BUSIN ESS OF THE FIRM WA S PICKED UP AND NUMB E R OF CABLE CONNECTIONS INCREASED . CABLE TV NETWORK CONNECTION IS A COMMER C IAL RIGHT OF TH E FIRM AND FORMS PART OF THE INTANGIBLE CAPITAL ASSET OF THE FIRM . THE FIRM DECIDED TO GO IN FOR REVALUATION OF ITS CABLE TV NETWORK RIGHTS BEFORE INDUCTION OF INVESTMENT BY ITA NO. 5948 /20 1 3 3 N E W PARTNERS . THE ASSIGNMENT OF REVALUATION WAS REFERRED TO M / S . S.N . SAMDANI & ASSOCIATES, MUMBAI , WHO ARE THE CHARTERED ENGINEERS AND APPROV E D GOVERNM E NT REGISTER E D VALU E R S . TH E Y HAVE SUBMITTED THE VALUATION REPORT , STATING THAT THE VALUATION OF THE CABLE TV N E TW O RK RIGHTS OF FINN IS ARRIVED AT RS.31.50 CRORE AS ON 1 S T MAY, 2007 BY USING DISCOUNTED CASH FLOW M E THOD . THEY HAVE FURNISH E D IN THEIR VALUATION REPORT THE VARIOUS FACTOR S WHICH ARE C ONSIDER E D BY TH E M, IN ARRIVING AT TH E ABOV E VALUATION . CO N SE QU E N T UP O N R ECEI VING TH E VALUATION REPORT FROM THE APPROVED VALUER , THE FIRM INCORPORATED THE R E VALUATION VALU E O F RS . 31.50 CRORE OF THE CABLE TV NETWORK RIGHTS , IN THE BOOKS OF ACCOU NTS O N 1 S T MAY , 2 00 7 D E BITING TH E CABL E TV NETWORK RIGHTS AND CREDITING THE REVALUATION R E S E RV E AC C OUNT . TH E R E VALUATION RESERVE ACCOUNT WAS TRANSFERR E D TO CAPITAL ACCOUNTS OF TH E PARTN E R S, BY CREDITING RS.1 0 . 50 CRORE EACH TO THEIR RESP E CTIV E C APITAL ACCOU NTS . FURTH E R , TH E PARTN E R S HI P FIRM WAS CONV E RTED INTO A PRIVATE LIMITED COMPANY, UNDER THE PROVISION S OF PART IX OF TH E C OMPANI E S ACT , 1956 W .E . F 7TH JANUARY, 200 8 VIDE THE CERTIFICAT E OF IN C ORPOR A T IO N ISSU E D BY TH E R E GI S TRAR OF COMPANIES . TH E PARTN E RS , B E CAM E TH E M E MB E R S OF TH E C OMPANY AS SUBS C RIB E R S TO TH E M E MORANDUM AND ARTI C LE S OF A SS O C IAT I ON OF TH E C OMPANY . TOTAL PAID UP CAPITAL OF THE COMPANY IS R S . 6 , 00, 000 / - WH I CH I S DIVID E D I NTO 6 0 , 0 0 0 EQ U I T Y SHARES OF RS . 1 0 / - EACH ALL TH E ASSETS AND LIABILITI E S OF TH E FIRM INCLUDING TH E R E VAL UE D C ABL E TV N E TWORK RIGHTS WERE TRANSFERRED TO TH E COMPANY . TH E CAPITAL A C COUNT POSITION OF THE ASSE SSEE IN TH E FI RM AS ON DAT E OF C ONV E R S I O N OF F I RM INTO COMPANY I . E . 06 . 01.2008 IS AS FOLLOW S : 1 FIXED CAPITAL ACCO UNT 1 ,98 ,000 / - 2 C URR E NT C APITAL ACCOUNT 10 , 4 5 , 49 , 620 / - SHARE ALLOTT E D BY THE CONVERTED COMP A NY TO THE PARTN E R AGAINST TH E FIX E D C APIT A L: F IX E D C APITAL A CC OUNT RS.1,98 , 0 0 0 / - COMPANY ALL O TT E D 1 9 ,800 S HAR ES OF RS.10/ - EACH C URRENT CAPITAL ACCOUNT RS . 1 0,45,49,620 / - SHOWN AS LIABILITY IN TH E BOOKS OF TH E COMPANY AS UNS E CURED LOAN LIKEWISE THE OTHER TWO PARTNERS WAS ALLOTT E D 1 9 , 800 SHARES EACH AND R E MAINING 6 00 SHARES WERE ALLOTTED TO OTHER FOUR PARTNERS OUT OF TOTAL 60,000 SHARES OF THE C ONV E RT E D COMPANY . THERE IS NO OFFICIAL DISSOLUTION OF TH E FIRM . TH E STATUS OF THE FIRM , IS C ONV E RT E D INT O COMPANY, BY OPERATION OF LAW, AND THE FIRM GOT TH E STATUS OF THE COMPANY, BY VIRTU E OF PART IX OF THE ITA NO. 5948 /20 1 3 4 COMPANIES A C T . UNDER PART IX OF TH E COMPANIES ACT , W H E N A PARTN E R S HIP F I RM I S T RE AT E D A S A LIMI T ED COMPANY, THE PROPERTIES OF THE ERSTWHILE FIRM V E ST IN THE LIMITED COMPANY . AS ESTABLISHED IN JUDICIAL RULINGS, THERE IS DIFF E RENCE BETWEEN VESTING OF TH E PROP E RTY A ND DISTRIBUTION OF THE PROPERTY . VESTING MEANS THE PROPERTIES OF ERSTWHIL E FIRM CONTINUES TO EXISTS AS TH E Y AR E, WITH TH E CO MPANY . WH E R E A S DISTRIBUTION O N DI SS OLUTION PR E - S U P P OSES D I V I S I O N , R E ALI Z ATI O N , E N CASHMENT OF ASSETS . IN THE PRES E NT C AS E, THERE I S N E ITH E R DIV I SION OF ASSETS NOR ANY RE ALI Z ATION OF THE ASS E T S. WHEN THERE IS NO OFFICIAL DISSOLUTION OF TH E FIRM AND DISTRIBUTION OF A SSE T S AMONG TH E PARTNERS, THE PROVISIONS OF S . 45(4) AR E NOT APPLI C ABL E TO THE FIRM OR TO THE PAR T N E R S. EVEN THE CHARGING PROVISIONS OF S . 45(1) ARE NOT APPL I C ABL E , SINC E TH E R E I S AB SE N CE OF W O R D TRANSFER' AS ENVISAGED IN S. 2(47) , AS VESTING OF THE PROPERTI E S IN TH E COMPANY FROM TH E FIRM IS NOT C ON S EQU E NT OR INCIDENTAL TO A TRANSF E R . IT IS TH E STATUTORY V ES TING OF PROP E RTI ES IN THE COMPANY AS THE FIRM IS TREA TED A LIMITED CO MPANY BY OP E RATION OF LAW, WHI C H R ES ULT S IN CHANGE IN STATUS OF FIRM TO COMPANY , AND NO TRANSF E R OF PROPERTI E S I S INVOLV E D IN TH E PROCESS . H E NC E , TH E RE IS NO QUESTION OF TRAN S F E R INVOLVED IN TH E PROC ESS . SO , WHEN TH E PROVISIONS OF S . 45(4) AN D S . 2 . (47) AR E NOT SP EC IFI C ALLY APPLI C ABL E IN TH E PR E S E NT CAS E, CAPITAL GAIN S CANNOT B E C HAR G ED UND E R S. 4 5 (4) . FURTH E R TH E PROVI S I O N S O F S . 4 5 (1) ALSO IS NOT APPLI C ABL E, SINC E TH E R E I S N O TRAN S F E R OF A SSE TS FR O M F IRM TO C OMPANY AND H E NC E TH E R E I S N O Q U E STION OF ANY C APIT A L G AIN S T O B E B R O UGHT UND E R T AX N E T , WITHIN TH E MEANING OF E ITHER S . 45(1) . 3 . 2 TH E A SSESSE E A LSO SUBMITT E D TH E J UD G MENT OF CIT V TEXSP I N EN GG . & MANUFACTURING WORKS (2003) 180 CTR (BORN) 4 9 7 : (200 3 ) 63 ITR 3 45 (BORN) : (2003) 129 TAXMA N 1 (BORN) PLACING R E LI A NCE ON THE CON C LUSION AS DRAWN B Y TH E A SS E SSEE FROM THE SAID JUDGMENT WHICH IS AS FOLLO W S : C ONVERSI O N OF PARTN E RSHIP FIRM INTO C O M PANY UND E R PART I X O F TH E CO MP A NI ES A C T , DID N OT A TTR A CT TH E PR O VI S IONS OF S . 4 5 (4) A S TH E R E W A S NO DISTRIBUTI O N O F C APITAL A SSETS ON DI SS OLUTION ; PR O VI S ION S OF S. 4 5 (1) AL SO CO UL D NO T B E APPLI E D A S TH E VES TIN G OF TH E P R OPERTIE S O F TH E FIRM IN TH E C OMPANY WA S N O T CO N SEQUE NT O R I NC I DEN T A L T O A TRANS F E R AS CO NT EMP L A T ED BY S . 45(1) '. 3 . 3 THE A SS E S SEE FURTH ER CONT E ND E D IN TH E SUB MIS SION M A D E O N 9. 1 . 2 01 2 WHICH I S MOR E OR LESS ON TH E SA M E G R OUN D S A S RE P RO DU CED A B O V E H OWEVE R F OR S A KE OF CL A RITY TH E GIST WHEREOF IS R E PRODU CE D : ' THERE I S N O TRAN S F E ROR AND TRAN SFE R EE A S IN TH E PR E S E NT C A SE, TH E R E I S N O E L E M EN T OF ' TRANSFER ' I N TH E TRANSACTION BETW EE N TH E ITA NO. 5948 /20 1 3 5 F I RM AND P ARTN E R S , A ND H E N CE T H E R E I S NO QUESTION O F EXISTENCE OF TERM S TRANSF E R EE AND TRANSF E R O R . TH E RE IS NO DI S TRIBUTION OR DIVISION O F ANY A SSE T OF FIRM , TH E F I RM IS NOT DI SS OLV E D A S SUCH O NLY TH E S TATU S OF TH E FIRM HAS B EE N C HANG E D INTO COMP A NY BY O P E R A TION OF LAW , TH E SAME ASSETS AND LIABILITIES HAVE BEEN CARRIED FORWARD IN THE BOOKS OF ACCOUNTS OF THE COMPANY, AND THE SAME BUSINESS HAS BEEN CONTINUED BY THE COMPANY. THERE IS NO SALE, EXCHANGE OR RELINQUI SHMENT OF THE ASSET OR AN EXTINGUISHMENT OF RIGHTS IN THE HANDS OF PARTNER. SECTION 48 OF THE ACT WHICH SPEAKS ABOUT THE MODE OF COMPUTATION OF CAPITAL GAINS ALSO DOES NOT OPERATE IN THE CASE OF ASSESSEE AS THE COST OF ACQUISITION IS NIL HENCE, THERE IS NO CAPITAL GAINS. THE ASSESSEE FURTHER SUBMITTED THE JUDGMENT OF DY.CIT VS. MAHESH M. CHHEDA (2009) 29 SOT 138 (MUM), DATED 29.01.2009 WHEREIN IT WAS HELD AS, SEC. 28(IV) - REVALUATION OF ASSETS BY FIRM BEFORE CONVERSION INTO A COMPANY - VALUE OF SHARES REC EIVED BY PARTNERS IN EXCESS OF THEIR CAPITAL WAS NOT TAXABLE. A SSES S EE FURTHER ELABORATELY CONTENDED VIDE SUB MIS SION DATED 24 . 3.2012 REGARDING NON APPLICABILITY OF PROVISIONS OF SECTION 45(1) , 45(3) AND 45(4) OF THE ACT AND HENCE NON TAXABILITY OF THE SA ME. THE SUB MIS SIONS WERE ON THE SAME LINES AS SUB MIS SION ON 9.1 . 2012 AND 23 . 2 . 2012 . FINALLY VIDE LETTER DATED 23.10.2012 THE ASSESSEE WAS ASKED TO FURNISH THE AUDITED BALANCE SHEET OF TH E COMPAN Y FORMED AFTER THE CONVERSION OF THE S A ID PARTNERSHIP FIRM ( M /S SATELLITE C A BL E NETWORK) FOR A.Y. 2008 - 09, 2009 - 10 A ND 2010 - 11 ALONG WITH A DETAILED JUSTIFICATION OF THE REVALUATION RESERVE CREATED. THE ASSESSEE DULY ATTENDED AND SUBMITTED THE DETAILS VIDE SUB MIS SION DATED 6 . 11.20 1 2 . 'THE ASSESSEE IS PARTNER IN M/S SATELLITE CABLE TV NETWORK WHICH TRANSMITS TV SIGNAL S THROUGH CABLE TO THE ULTIMATE VIEWERS . THE SUBSIDIARY ACTIVITY OF THE FIRM IS TO PROV I D E ADVERTISING SERVICE . THE FIRM DECIDED TO GO IN FOR REVALUATION OF ITS CABLE NETWORK RIGHT S BEFORE THE INDUCTI ON OF NEW PARTNERS IN THE BUSINESS . THE ASSIGNMENT OF REVALUATION WA S R E FERR E D T O M/S . S. N . SAMDANI & A SS O C IAT ES, MUMBAI , WHO AR E TH E CH A RT E R ED ENG I N EE R S AND APPROVED GOVERNMENT REGISTERED VALUERS . THEY HAV E SUBMITTED THE V ALUAT I ON R E P O RT , STATING THAT THE VALUATION OF THE CABLE TV NETWORK RIGHTS OF FIRM IS ARRIVED AT RS . 31. 5 0 CRORE AS ON 1 S T MAY, 2007 BY USING DISCOUNTED CASH FLOW METHOD. TH E Y HAVE FURNISH E D IN THEIR VALUATION REPORT THE VARIOUS FACTORS WHICH ARE CONSIDERED BY THEM , IN ARRIVING AT THE ABOV E VALUATION . CONSEQUENT UPON RECEIVING THE VALUATION REPORT FROM THE APPROVED VALU E R , TH E FIRM INCORPORATED THE REVALUATION VALUE OF RS.31 . S0 CRORE OF THE CABLE TV NETWORK RIGHT S, IN ITS BOOKS OF ACCOUNTS ON 1 S T MAY, 2007 BY DEBITING THE ' CABLE TV N E TWORK R I GHT S ACCOUNT' AND CREDITING 'REVALUATION RESERVE ACCOUNT '. ITA NO. 5948 /20 1 3 6 THE BALANCE OF RS . 31.50 CRORE IN 'REVALUATION RESERVE ACCOUNT ' I N TH E FIRM WA S CR E DIT E D TO THE CURRENT ACCOUNT OF THRE E PARTNERS OF THE FIRM EQUALLY I .E . RS.10.50 C R OR E E ACH O N 3 1 S T MAY , 2007 BY PAS S ING TH E FOLLOWING AC C OUNTING E NTRY : REVALUATION RESERVE ACCOUNT DR.31.5 CR. RAJEEV B GAVI CURRENT CAPITAL A/C. CR. 10.5 CR. RAVISHANKAR R SINGH CURRENT CAPITAL A/C. CR. 10.5 CR. PRAKASH PATRI CK DSOUZA CURRENT CAPITAL A/C. CR.10.5 CR. LATTER ON SATELLITE CABLE TV NETWORK WAS CONVERTED INTO COMPANY UNDER THE NAME AND STYLE OF WIRE & WIRELESS NETWORK PVT. LTD. HOWEVER, THE AO DID NOT AGREE WITH THE ASSESSEES CONTENTION AND HELD THAT ASSESSEE HAS EARNED SHORT TERM CAPITAL GAIN UNDER SECTION 45, ACCORDINGLY BROUGHT RS. 10.50 CRORES AS CHARGED TO TAX. 5 . BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE ACTION OF THE AO, AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 6 . AT THE OUTSET, LEARNED AR OPPOSED THE REOPENING OF THE ASSESSMENT U NDER SECTION 147 BY INVITING OUR ATTENTION TO THE REASONS RECORDED FOR REOPENING, WHICH READS AS UNDER : - (I) NO CAPITAL GAIN TAX WAS PAID ON DISTRIBUTION OF RESERVE ON REVALUATION OF ASSETS EITHER BY THE FIRM OR BY THE PARTNERS; (II) AS PER THE PROVISIONS OF THE INCOME - TAX ACT, AMOUNT DISTRIBUTED ON REVALUATION OF ASSETS AMONG PARTNERS IS LIABLE TO CAPITAL GAINS; AND (III) DURING THE PERIOD RELEVANT TO A.Y.2008 - 09, ASSESSEE HAS ALSO RECEIVED UNSECURED LOANS TO THE TUNE OF APPROXIMATELY RS. 7 LAKHS . 6 .1 AS PER THE LEARNED AR, THE AO HAS MENTIONED THAT NO CAPITAL GAIN TAX WAS PAID EITHER BY THE FIRM OR THE PARTNER, HOWEVER, THERE IS NO CLARITY WHATSOEVER AS TO WHERE HE WANTS TO TAX AND WHY. THE SAME AMOUNT CANNOT BE TAXED AT BOTH THE PLACES. ACCORDINGLY, AS PER LEARNED AR , THE REASON NO.1 RECORDED BY THE AO W AS VAGUE AND UNSUSTAINABLE IN THE LAW. ITA NO. 5948 /20 1 3 7 6 .2 WITH RESPECT TO THE SECOND REASON NOTED BY THE AO, THE LEARNED AR SUBMITTED THAT BELIEF OF AO WAS AGAINST THE WELL SETTLED LEGAL POSITION AS THE AMOUNT DISTRIBU TED ON THE REVALUATION OF ASSETS AMONGST THE PARTNERS IS NOT AT ALL LIABLE TO CAPITAL GAIN TAX AND FOR THIS PURPOSE, RELIANCE WAS PLACED ON DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF PRASHANT S. JOSHI & ANR. VS. ITO, 324 ITR 154 . 6 .3 WITH REFEREN CE TO THE THIRD REASON RECORDED BY THE AO, LEARNED AR CONTENDED THAT ASSESSEE HAD RECEIVED UNSECURED LOAN OF RS. 7 LAKHS IS FACTUALLY INCORRECT. INSOFAR AS THE BALANCE SHEET FOR THE LAST YEAR AND THE CURRENT YEAR IS CONCERNED, IT NO WHERE INDICATES SUCH LOA N WAS TAKEN BY THE ASSESSEE. IT WAS ALSO ARGUED BY THE LEARNED AR THAT THE ADDITION MADE BY THE AO WAS BEYOND SCOPE OF THE REASSESSMENT PROCEEDINGS. THE REASON FOR INITIATING PROCEEDINGS U/S.147 OF THE ACT WAS TO TAX THE RECEIPT ON ACCOUNT OF ALLEGED DISTR IBUTION ON REVALUATION OF ASSETS WHICH, HOWEVER, WAS NOT BROUGHT TO TAX ON BEING SATISFIED WITH THE SUBMISSIONS MADE BY THE ASSESSEE. HOWEVER, WHILE COMPUTING INCOME IN THE ORDER PASSED U/S.143(3), THE AO HAS BROUGHT TO TAX SHORT TERM CAPITAL GAIN ALLEGED TO HAVE RECEIVED ON 7 - 1 - 2008 UPON TRANSFER OF INDIVIDUAL ASSET TO THE LIMITED COMPANY. AS PER LEARNED AR, THE REOPENING WAS MADE BY THE AO TO BRING TO TAX A PARTICULAR INCOME, HOWEVER, IN THE REASSESSMENT ORDER ANOTHER INCOME WAS BROUGHT TO TAX, WHICH IS I MPERMISSIBLE IN LAW AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. JET AIRWAYS (I) LTD., 331 ITR 236 . ACCORDINGLY, IT WAS ARGUED THAT THE AO INGENUINELY WANTED TO ADD ITA NO. 5948 /20 1 3 8 SOME BASIS FOR REOPENING THE COMPLETED PROCEEDINGS. IN VIEW OF THE ABOVE , IT WAS SUBMITTED THAT REOPENING WAS BAD IN LAW ON MORE THAN ONE COUNT AND THE SAME WAS REQUESTED TO BE QUASHED. 6 . 4 WITH REGARD TO THE MERIT OF THE ADDITION, IT WAS CONTENDED BY THE LEARNED AR THAT REVALUATION OF ASSETS OF PARTNERSHIP FIRM IN THE FORM O F CABLE TV NETWORK RIGHTS WERE MADE AS PER THE VALUATION REPORT GIVEN BY A CHARTERED ENGINEER AND GOVERNMENT APPROVED VALUER. THE REVALUTION WAS CARRIED OUT BY PASSING NECESSARY GENERAL ENTRIES IN THE BOOKS OF THE FIRM. AFTER REVALUATION OF ASSETS OF FIRM, THE REVALUATION RESERVE CREDITED IN THE RESPECTIVE ACCOUNT OF THE PARTNERS IN THEIR INDIVIDUAL ACCOUNTS. IT WAS FURTHER PLEADED THAT THERE WAS NO TRANSFER OF ANY ASSET BY THE PARTNERSHIP FIRM TO THE PARTNERS AT ANY STAGE AND THE CABLE TV RIGHTS FOR THE PA RTNERSHIP FIRM WAS ALWAYS THE PROPERTY OF THE PARTNERSHIP FIRM. 7 . OUR ATTENTION WAS INVITED TO THE BALANCE SHEET OF THE PARTNERSHIP FIRM PREPARED ON THE PRECEDING DATA OF CONVERSION I.E. ON 6 - 1 - 2008. THE SAID ASSET WAS VERY MUCH PART OF THE BALANCE SHEET OF THE PARTNERSHIP FIRM ON THAT DAY. OUR ATTENTION WAS ALSO DRAWN TO THE TRIAL BALANCE OF THE PARTNERSHIP FIRM AS ON 7 - 1 - 2008, UPON CONVERSION OF THE PARTNERSHIP FIRM INTO COMPANY, THE BOOKS OF ACCOUNTS OF THE COMPANY WERE DRAWN UP, WHEREIN ASSETS OF PART NERSHIP FIRM WAS TAKEN BY THE COMPANY AS IT IS. IN SUPPORT OF THE PROPOSITION THAT NO CAPITAL GAIN AROSE IN FAVOUR OF THE PARTNERSHIP, RELIANCE WAS PLACED IN THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI, 156 ITR ITA NO. 5948 /20 1 3 9 509 (SC) . IN SUPPORT OF THE PROPOSITION THAT REVALUATION OF THE ASSET OF PARTNERSHIP AND THE CREDIT OF THE REVALUED AMOUNT TO THE CAPITAL ACCOUNTS OF THE PAR TNERS IN THEIR RESPECTIVE SHARING RATIO DOES NOT ENTAIL ANY TRANSFER AS DEFINED UNDER SECTION 2( 47) , RELIANCE WA S PLACED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF PARU D. DAVE, 110 ITD 410 ( M UM) AND IN THE CASE OF FINE DEVELOPERS, 55 SOT 122 (MUM) . 8 . ON THE OTHER HAND, LEARNED DR RELIED ON THE FINDINGS RECORDED BY THE LOWER AUTHORITIES AND CONCLUSIONS DRAWN BY THEM. 9 . WE HAVE CONSIDERED 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 FIRM 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 F IRM. A SSESSMENT OF PARTNER WAS REOPENED 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 THA T ORIGINAL ASSESSMENT WAS NOT FRAMED 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 O F ASSESSEE WAS JUST PROCESSED U/S.143(1) , THERE IS NOTHING WRONG IN THE INITIATION OF ITA NO. 5948 /20 1 3 10 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 CREDITING 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 DIVISIO N OF ASSETS NOR ANY REALSIATION OF ASSETS. SINCE THERE IS NO OFFICIAL DISSOLUTION OF THE FIRM AND DISTRIBUTION ON ASSETS OF THE FIRM AMO NG 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 TRANSFER AS ENVISAGED UNDER SECTION 2(47), THE CHARGING PROVISIONS OF SECTION 45(1) WILL NOT BE APPLICABLE, S INCE THE VESTING OF PROPERTY IN THE COMPANY FROM THE FIRM IS NOT CONSEQUENT TO A TRANSFER, HOWEVER, IT IS STATUTO RY VESTING OF PROPERTIES IN THE COMPANY 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, CREDITI NG THE AMOUNT OF REVALUATION RESERVE 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 SE PARATE RIGHTS OVER THE ASSETS OF FIRM 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 ITA NO. 5948 /20 1 3 11 PARTNERSHIP FIRM WAS CONVERTED I NTO PRIVATE LIMITED COMPANY BY OPERATION 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 PA Y 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 (4 7 ) , THERE WAS ONLY REVALUATION OF THE ASSET OF THE PARTNERSHIP FIRM WHICH WAS IN THE FORM OF CABLE TV NETWORK RIGHTS. THE REVALUATION OF THE ASSETS BY THE PARTNERSHIP FIRM DOES NOT ATTRACT ANY CAPITAL GAIN. THE REVALUATION OF THE ASSETS OF THE PARTNER SHIP FIRM AND CREDIT OF REVALUED AMOUNT TO THE CAPITAL ACCOUNT OF THE PARTNERS IN THEIR RE SPECTIVE 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 NO T THE OWNER OF THE CABL E TV NETWORK RIGHTS WHICH WAS OWNED 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 AGREEMENT S ENTERED INTO BY THE PARTNERSHIP FIRM 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. T HESE RIGHTS WERE PROPERTY OF PARTNERSHIP FIRM TILL THE DATE OF CONVERSION INTO THE COMPANY ITA NO. 5948 /20 1 3 12 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 B Y 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 COMPA NY BY VIRTUE OF SECTION 575 OF THE 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 DISTRIBU TION OF CAPITAL ASSETS. UNDER PART 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 'T RANSFER BY WAY OF DISTRIBUTION' IN 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 COMPANY AS THEY EXIST. ON THE OTHER 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 CREDITORS 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 PRESEN T 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 48 BY TREATING FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER, DOES NOT ARISE. 1 0 . IN VIEW OF THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT, AS DISCUSSED ABOVE, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE LOWER AUTHORITIES FOR BRINING GAINS ON REVALUATION UNDER THE TAX NET ON ITA NO. 5948 /20 1 3 13 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 COMP ANIES ACT. 1 1 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 4 TH APRIL . 201 4 . 4 TH APRIL ,2014 SD/ - SD/ - ( ) ( DR. S.T.M.PAV A LAN ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 04 / 0 4 /201 4 /PKM , PS 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//