THE DEPUTY COMMISSIONER OF INCOME TAX V. M/S.K.T.C. AUTOMOBILES

RP/107/2021

AI Insights

The case involves the Deputy Commissioner of Income Tax as the petitioner and M/s. K.T.C. Automobiles as the respondent. The dispute originated from the Income Tax Appellate Tribunal's decision, which confirmed the levy and demand of capital gains tax on the revalued land of a partnership firm that was later converted into a private limited company. The enhanced value of the land was initially credited to the partners' current accounts and treated as a loan upon conversion. The main legal questions revolved around the treatment of this enhanced value under Sections 45 and 47(xiii) of the Income Tax Act, 1961. The review petition by the Revenue challenged the earlier judgment's findings, arguing that the crediting of enhanced value to the current accounts was incorrect and should have been reflected in the capital accounts.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 736141 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 22-02-2022
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: JOSEPH MARKOS
• Assessee Lawyers: P K MENON; JOSE JOSEPH
• Keywords: Capital Gains; Conversion of partnership to private limited; Revaluation of land; Crediting enhanced value; Current account of partners; Loan from partners
• Section: 260A; 45; 47(XIII); 47A(3)

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI TUESDAY, THE 22ND DAY OF FEBRUARY 2022 / 3RD PHALGUNA, 1943 RP NO. 107 OF 2021 AGAINST THE JUDGMENT IN ITA 18/2014 OF HIGH COURT OF KERALA REVIEW PETITIONER/S: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2(1), CALICUT - 673 001. BY ADVS. P.K.RAVINDRANATHA MENON (SR.) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: M/S.K.T.C. AUTOMOBILES Y.M.C.A. ROAD, CALICUT - 673001, PAN - AADFK4576C. OTHER PRESENT: SR ADV JOSEPH MARKOS THIS REVIEW PETITION HAVING COME UP FOR ADMISSION ON 22.02.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: R.P. No. 107/2021 in ITA 18/2014 -2- O R D E R S.V. Bhatti, J. Deputy Commissioner of Income Tax (Revenue)/ respondent in I.T.A. No.18/2014, is the petitioner. M/s. K.T.C. Automobiles (assessee)/ respondent herein is the appellant in I.T.A. No.18/2014. 2. The assessee being aggrieved by the order dated 27.09.2013 in ITA No.446/Coch/2013 of Income Tax Appellate Tribunal (for short 'the Tribunal'), Cochin Bench filed I.T.A. No.18/2014 in this Court. The controversy in the appeal relates to the Assessment Year 2005-06. 2.1 At the first instance, the assessee was a partnership firm and the firm was converted into a Private Limited Company. The assessee before such conversion as Private R.P. No. 107/2021 in ITA 18/2014 -3- Limited Company revalued the land belonging to the firm and the enhanced value of the land was credited to the current account of the partners of the firm. Upon conversion as a Private Limited Company, the enhanced value of land as reflected in the current account of the partners was shown as loan from the partners at the hands of Private Limited Company. The Assessing Officer treated the enhanced value of land as capital gains of the firm and brought it to capital gain tax. The Tribunal confirmed the said levy and demand of capital gain on appeal filed by the assessee, this Court framed the following questions of law: “i) Whether revaluation of a capital asset of the assessee firm before its conversion as a company and crediting the enhanced value of the asset to the current account of the partners and treating it as loan from the partners in the account of the company amounts to violation of clause (c) of the proviso to Section 47(xiii) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') and if so, whether the transaction R.P. No. 107/2021 in ITA 18/2014 -4- amounts to transfer of a capital asset within the purview of Section 45 of the Act? ii) Whether, on the facts and circumstances of the case, revaluation of a capital asset of the assessee firm before its conversion as a company and crediting the enhanced value of the asset to the current account of the partners, thereby creating a liability on the firm and transferring such liability to the company amounts to violation of clause (a) of the proviso to Section 47(xiii) of the Act and if so, whether the transaction amounts to transfer of a capital asset within the purview of Section 45 of the Act? iii) Whether the enhanced value of the capital asset credited to the current account of the partners of the firm, if treated as capital gains, can be brought to tax payable by the erstwhile firm? Answering the question, particularly question no.3, held that the enhanced value of land held by the firm credited to the current account of partners does not attract capital gain. Hence, the review petition at the instance of Revenue. 3. Learned Standing Counsel Mr Jose Joseph argues that the findings recorded by the judgment under review, on R.P. No. 107/2021 in ITA 18/2014 -5- question nos 1 and 2, have bearing on question no.3 and an independent finding recorded in favour of assessee suffers from patent error on the face of the record. The question of law is, whether crediting the enhanced value to the current account of partners is correct or it should have been credited to capital account? Unless and until all the ingredients of Section 47 are complied with the assessee is liable to the levy and the demand on capital gain tax on revalued capital asset. Standing Counsel invited our attention to the findings in the judgment under review and urged that the errors now pointed out, in the form of grounds, attract the jurisdiction of review and the review may be allowed. 4. Learned Senior Advocate Mr Joseph Markos argues that the grounds stated in the review petition do not come within the purview or jurisdiction of review. To appreciate whether, what is pointed out now by the review petitioner R.P. No. 107/2021 in ITA 18/2014 -6- constitutes an error or patent error, this Court in such examination would be retracing the very circumstances which were considered by the Division Bench in the judgment under review and recording a fresh finding on such consideration. It is argued such an effort could be undertaken only by a court sitting in appeal but not by the review court. The very fact that a detailed reasoning process is introduced to point out the error apparent on the record would be sufficient to hold that the grounds of review do not come within the purview of review jurisdiction of this Court. The counsel specifically invites our attention to the following findings recorded by the Division Bench in paragraph 17 of the judgment. “17. Learned Standing Counsel for the department would contend that, applicability of Section 47A(3) of the Act would arise only at a stage subsequent to the assessment of tax, when it is later discovered that there was violation of the provisions contained in the proviso to Section 47(xiii) of the Act. We are not impressed with this contention. It is true that exemption R.P. No. 107/2021 in ITA 18/2014 -7- already granted can be withdrawn by virtue of the provision contained in Section 47A(3) of the Act on discovery of violations of the conditions provided in the proviso to Section 47(xiii) of the Act. But, if the assessing authority finds at the time of assessment, that there is violation of the provisions contained in the proviso to Section 47 (xiii) of the Act, then transfer of capital assets made in that manner, comes within the ambit of Section 45 of the Act and assessment has to be done accordingly. In making such assessment, the authority concerned is obliged to take note of the provisions contained in Section 47A(3) of the Act and then the liability to pay tax has to be imposed not on the erstwhile firm but on the successor company.” 5. The law does not stipulate reflection of enhanced value of a capital asset through the capital account of the firm. There is no requirement in law that the enhanced value shall be reflected in capital account and the reflection in book of accounts is in the discretion of the assessee. The enhanced value when apportioned to the current account of the partners, by itself does not amount to a transfer which attracts the claim R.P. No. 107/2021 in ITA 18/2014 -8- of capital gains. These important considerations are examined in the judgment under review and there is no scope for review. 6. We have perused the record and appreciated the contentions urged on behalf of both the parties. 6.1 To state briefly, the objection as pointed out insist for crediting enhanced value to the current account of the partners, and not to capital account on the enhanced value. We bear in mind that the judgment of the Tribunal was the subject matter of I.T.A. No.18/2014. The scope of appeal is governed by Section 260A of the Income Tax Act, 1963. The instant review is filed under Order XLVII Rule 1 read with Sections 114 and 151 of the Code of Civil Procedure. The jurisdiction of the review court is fairly well established and one of the principle objections against the review of judgment is that the error if is to be arrived at upon consideration of grounds of review, it accounts to re-appreciation of the core or totality of R.P. No. 107/2021 in ITA 18/2014 -9- circumstances considered by the Division Bench. Such exercise is not termed as correcting the error apparent on the face of record or review jurisdiction exercised. The re-appreciation of circumstance for finding out the error apparent on record is avoided by this Court. The review petitioner failed to bring the grounds for review within the jurisdiction of applicable provision of law. The learned Standing Counsel though made a strenuous effort to decast the circumstances considered by this Court in the judgment under review, we are afraid we may be treading into the path of re-appreciation and would amount to exceeding the review jurisdiction of this Court. The grounds for review raised are not held as coming within the scope of Order XLVII Rule 1 of Code of Civil Procedure and we are satisfied that by examining these grounds, the judgment under review need not be recalled. R.P. No. 107/2021 in ITA 18/2014 -10- Hence, the Review Petition fails, and is dismissed. No order as to costs. Sd/- S.V.BHATTI JUDGE Sd/- BASANT BALAJI JUDGE jjj "