ITO, New Delhi V. M/s. Weld Alloys Products Ltd., New Delhi

ITA 6902/DEL/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6901 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 31-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAY KUMAR JIWANI
• Section: 115JB; 2

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH B, NEW DELHI BEFORE : SHRI H.S. SINDHU, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 6902/DEL/2015 ASSESSMENT YEAR: 2010-11 INCOME - TAX OFFICER, WARD 27(3), NEW DELHI (APPELLANT) VS. WELD ALLOYS PRODUCTS LTD., 18/78, PUNJABI BAGH WEST, NEW DELHI (PAN: AAACW8282H) (RESPONDENT) A PPELLANT BY SH. VIJAY KUMAR JIWANI, SR. DR RE SPONDENT BY SH. SALIL AGARWAL & SHRI SHAILESH GUPTA, ADVOCATE ORDER PER L.P. SAHU, A.M.: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 13.10.2015 OF LD. CIT(A)-17, NEW DELHI ON THE FOLLO WING SOLITARY GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AD IN LAW THE ORDER PASSED BY LD. CIT(A) IS ERRONEOUS AND THE LEARNED CI T(A) HAS ERRED IN DELETING THE ADDITIONS OF RS.3,08,88,548 MADE BY A. O. ON ACCOUNT OF LONG TERM CAPITAL GAIN SINCE, CLAUSE (B) OF THE PROVISIO N OF SECTION 47 (XIII) OF IT ACT WAS NOT FULFILLED AS ON VERIFICATION IT WAS FOU ND THAT ALL THE PARTNER OF THE FIRM IMMEDIATELY BEFORE THE SUCCESSION DID NOT BECOME SHARE HOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THER E CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON DATE OF SUCCESSIO N. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE RETURN OF INCOME DECLARING INCOME OF RS. 81610/- WAS FILED ON 30.09.2010 . HOW EVER, THE ASSESSEE PAID DATE OF HEARING 10.07.20 18 DATE OF PRONOUNCEMENT 20 .07.2018 ITA NO. 6902/DEL/2015 2 TAX U/S 115JB OF IT ACT, 1961 ON BOOK PROFIT OF RS. 2436528/-. THE RETURN WAS PROCESSED AND SUBSEQUENTLY SELECTED FOR SCRUTINY AN D STATUTORY NOTICES WERE ISSUED TO THE ASSESSEE. IN THE ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 07.07.2008 AND THIS RETURN IS THE FIRST RETURN OF THE ASSESSEE. THE ASS ESSEE TOOK OVER THE BUSINESS OF THE FIRM KNOWN BY THE NAME OF M/S WELD INDIA PRO DUCTS W.E.F. O1.04.2009, HAVING THREE PARTNERS, NAMELY, SHRI J.K, KAPOOR, SM T. SIMMI KAPOOR W/O SHRI RAJIV KAPOOR AND SMT. SIMMI KAPOOR W/O SH. SANDEEP KAPOOR HAVING THEIR BALANCES IN CAPITAL ACCOUNT AS ON THE DATE OF TAKIN G OVER THE BUSINESS ON 01.04.2009 OF RS.51,82,462.48, 41,26,585.85 AND 52, 86,330.69 RESPECTIVELY. THE ASSESSING OFFICER NOTICED THAT WHILE TAKING OVE R THE ABOVE BUSINESS ON 01.04.2009, THE ASSETS WERE REVALUED AND THE DIFFER ENCE BETWEEN THE VALUE AS ON 31.03.2009 AND OPENING BALANCE AS ON 01.04.2009 WAS TAKEN TO RSERVE & SURPLUS ACCOUNT AMOUNTING TO RS.2,34,56,628/-. ON B EING ASKED THE ASSESSEE SUBMITTED THAT THE CAPITAL GAINS ARISING FROM CONVE RSION OF THE FIRM BY A COMPANY ARE NOT TREATED AS TRANSFER AS PER CLAUSE ( XIII) OF SECTION 47 OF THE I T ACT, 1961. THE ASSESSING OFFICER, THOUGH AGREED T O THE PROPOSITION EXPLAINED BY THE ASSESSEE, BUT OBSERVED THAT IT DOES NOT APPL Y TO FACTS OF THE CASE OF THE ASSESSEE, AS THE ASSESSEE HAS FAILED TO FULFILL CER TAIN CONDITIONS WHICH HAVE GO TO BE SATISFIED TO AVAIL THE BENEFIT BESTOWED BY TH IS CLAUSE OF SECTION 47 OF THE ACT FOR THE REASON THE SHARE HOLDING ALLOTTED TO EA CH PARTNER WAS NOT IN THE SAME PROPORTION AS IT WAS WHEN THE TRANSFER TOOK PL ACE. AS A MATTER OF FACT, THE RATIO OF CAPITAL OF THE THREE PARTNERS WAS 35.5 0%, 28.28% AND 36.22%, WHEREAS 1,60,000 SHARES WERE ALLOTTED TO ALL THE TH REE PARTNERS OF THE FACE VALUE OF RS.10 PER SHARE IN THE RATIO OF 32% EACH. THE ASSESSING OFFICER, THEREFORE OBSERVED THAT SINCE THE BASIC CONDITION I S NOT SATISFIED THE CASE OF THE ASSESSEE IS NOT COVERED U/S 47(XIII) OF I T ACT , 1961 AND HENCE ANY ITA NO. 6902/DEL/2015 3 DIFFERENCE BETWEEN THE VALUE AS ON 31.03.2009 AND T HE VALUE AT WHICH THE COMPANY TOOK THESE OVER AS ON 1.04.2009 IS TAXABLE IN THE HANDS OF THE COMPANY AS GIVEN IN SUB SECTION 3 OF 47A OF IT ACT, 1961. HE ACCORDINGLY, TREATED THE DIFFERENCE BETWEEN THE VALUE OF IMMOVAB LE ASSETS, SHOWN ON 31.03.2009 AND 01.04.09, AMOUNTING TO RS.3,08,88,54 8/- AS CAPITAL GAIN TAXABLE IN THE HANDS OF ASSESSEE COMPANY AND ACCORD INGLY ADDED THE SAME TO THE INCOME OF ASSESSEE. 3. THE ASSESSEE CHALLENGED THE ASSESSMENT ORDER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY, WHO VIDE IMPUGNED ORDER DELETE D THE ADDITION AFTER MAKING DETAILED DISCUSSION ON THE ISSUE AND CONSIDE RING VARIOUS AUTHORITIES ON THE ISSUE UNDER CONSIDERATION. AGGRIEVED, THE RE VENUE IS IN APPEAL BEFORE US. 4. THE LD. DR REITERATING THE GROUND OF APPEAL RELI ED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION WITHOUT CONSIDERING THE RELEV ANT PROVISIONS OF LAW IN RIGHT PERSPECTIVE. HE HAS ALSO FILED A WRITTEN SYNO PSIS, WHICH IS PLACED ON RECORD. HE, THEREFORE, URGED FOR SUSTENANCE OF TH E ASSESSMENT ORDER. 5. ON THE OTHER HAND, THE LD. AR RELIED ON THE DECI SIONS OF THE LD. CIT(A) AND SUBMITTED THAT THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF CO-ORDINA TE BENCH IN THE CASE OF DCIT VS. M/S. P.M. ENTERPRISES, MUMBAI (ITA NO.3736/MUM/ 2010 FOR A.Y. 2007-08) WHEREBY SUCH ADDITION IN THE IDENTICAL FACTS AND CI RCUMSTANCES HAVE BEEN DELETED. ITA NO. 6902/DEL/2015 4 6. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTIE S AND HAVE GONE THROUGH THE ENTIRE MATERIAL AVAILABLE ON RECORD AND WE FIND THAT THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE DECI SION OF ITAT MUMBAI IN THE CASE OF DCIT VS. M/S. P.M. ENTERPRISES (SUPRA), WHEREBY IN THE IDENTICAL SET OF FACTS & CIRCUMSTANCES, THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE OBSERVING AS UNDER : 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 PROVISIONS OF THIS SECTION HAVE NOT BEEN FULLY SATI SFIED. IN THIS REGARD, HE FIRSTLY CONSIDERED THE PRESCRIPTION OF PROVISO (B) TO SEC. 47(XIII), WHICH IN HIS OPINION WAS VIOLATED ON THE GROUND THAT THE SHA RES IN THE COMPANY WERE ALLOTTED TO THE PARTNERS ON THE BASIS OF THEIR FIXED CAPITAL ALONE, THEREBY LEAVING THE AMOUNT OF CURRENT ACCOUNTS AS S UCH. 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 IMMEDIATELY BEFORE THE SUCCESSION BECOME THE SHAREHOLDERS OF TH E COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNT STOOD IN THE BOOKS OF THE FIRM ON THE 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 BEYOND ITS SCOPE FOR THE REASON THAT THE B ALANCE IN THE CURRENT ACCOUNT OF THE PARTNERS KEEP ON FLUCTUATING AND EVE N IN CERTAIN CIRCUMSTANCES IT MAY BE NEGATIVE ALSO. IF THIS PROV ISION IS INTERPRETED TO INCLUDE THE BALANCE IN THE CURRENT ACCOUNTS OF THE PARTNERS ALSO AND SUCH BALANCE TURNS OUT TO BE DEBIT, THE SECTION WILL BEC OME UNWORKABLE. AS CAN BE SEEN FROM THE STATEMENT OF THE CURRENT CAPITAL A CCOUNT AS ON 31-03- 2006, THE CAPITAL ACCOUNT OF S/SHRI SAMEER P.SANGHV I, SANDIP IM. 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 BA LANCES OF THE CURRENT ACCOUNT ARE ALSO CONSIDERED AS PART OF THE CAPITAL ACCOUNT, THEN THE OVERALL BALANCE IN THE CAPITAL/CURRENT ACCOUNTS WOU LD REQUIRE CONSIDERATION, WHICH MAY IN CERTAIN CIRCUMSTANCES - AS IS THE PRESENT CASE ALSO - BE NEGATIVE. IN VIEW OF THESE REASONS, WE HO LD THAT ONLY THE BALANCE IN THE CAPITAL ACCOUNTS OF THE PARTNERS IS REQUIRED TO BE CONSIDERED FOR ITA NO. 6902/DEL/2015 5 ALLOTMENT OF SHARES IN THE COMPANY. THE NATURAL CORO LLARY WHICH FOLLOWS IS THAT THE PROVISIONS OF PROVISO (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 ASSESSEE FIRM RECEIVED ANY CONSIDERATION OR BENEFIT DIRECTLY OR INDIRECTLY OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY BY REASON OF THE IR RECEIVING A SUM OF RS.27.29 LAKHS AGAINST THEIR CAPITAL ACCOUNT. THE OB VIOUS REASON FOR THE PAYMENT TO THE PARTNERS AMOUNTING TO RS.27.29 LAKHS WAS THE PAYMENT TOWARDS PART OF THE CURRENT ACCOUNT BALANCE OF THES E PARTNERS TO THAT EXTENT. THE REMAINING AMOUNT CONTINUED WITH THE COMP ANY AS UNSECURED LOANS. THE PAYMENT TO THE ERSTWHILE PARTNERS OUT OF THEIR CURRENT ACCOUNTS CANNOT BE CONSIDERED AS RECEIVING ANY CONSIDERATION OR BENEFIT OTHER THAN BY WAY OF ALLOTMENT OF SHARES. IF THE PAYMENT IS MA DE AND SIMULTANEOUSLY THE BALANCE IN THE LOAN ACCOUNT IS REDUCED, SUCH PA YMENT IS THE DISCHARGE OF THE LIABILITY OF THE COMPANY PRO TANTO AND NOT G RANTING OF ANY BENEFIT OR CONSIDERATION BY THE COMPANY. 6. APART FROM THESE TWO MAJOR OBJECTIONS RAISED 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 COM PANY WHICH IS PLACED AT PAGE 146 ONWARDS OF THE PAPER BOOK. THE MAIN OBJE CT OF THE COMPANY HAS BEEN DECLARED AS : 'TO ACQUIRE AND TAKE OVER AS A GOING PARTNERSHIP FIR M CARRIED ON BUSINESS IN THE NAME AND STYLE OF M/S. P.M. ENTERPRI SES TOGETHER WITH GOODWILL, ASSETS AND LIABILITIES AND AS SUCH, THE SAID CONCERN MAY STAND DISSOLVED'. 7. THE ABOVE DISCUSSION BOILS DOWN THAT THE CONVERSI ON OF THE FIRM INTO A PRIVATE LIMITED COMPANY BY TRANSFERRING ALL THE ASS ETS AND LIABILITIES TOGETHER WITH FULFILLMENT OF OTHER REQUISITE CONDIT IONS OF SECTION 47(XIII) DID NOT ATTRACT THE PROVISIONS OF SEC. 45(4) OF THE ACT. OUR VIEW IS FORTIFIED BY VARIOUS ORDERS OF THE TRIBUNAL TAKEN NOTE OF BY T HE ID. CIT(A) IN THE IMPUGNED ORDER. UNDER THESE CIRCUMSTANCES, WE UPHOL D THE IMPUGNED ORDER. ITA NO. 6902/DEL/2015 6 SIMILAR ISSUE HAS BEEN DECIDED BY ITAT AHMEDABAD BE NCH IN THE CASE OF ITO VS. ALTA INTER-CHEM INDUSTRIES, 32 TAXMAN.COM 138 ( AHD. TRIB). 7. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, WE D O NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. ACCORDINGLY, THE SAME DE SERVES TO BE DISMISSED. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH JULY, 2018 SD/- SD/- (H.S. SIDHU) (L.P . SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 20 TH JULY, 2018 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI