2007 (7) TMI 443 - AT - Income Tax

Tribunal Confirms Assessment Timeliness, Rules on Capital Gains Tax and Depreciation in Succession Case.

The Tribunal upheld the CIT(A)'s decisions, affirming that the assessment was within the limitation period under section 153(2) of the Income-tax Act, as ... Limitation period prescribed u/s 153(2) - Computation of Capital gains - Transactions not regarded as transfer - Income escaping assessment - Depreciation on actual cost of assets. Limitation period prescribed u/s 153(2) - assumption of jurisdiction - issue of notice u/s 148 - assessment/re-assessment reopened u/s 147 - HELD THAT:- Under the 1961 Act, notice u/s 148 can be issued within the period prescribed under the Act. It is not provided unlike the 1922 Act that it should be served within the period of limitation. It has been held in the following cases that if the notice has been issued within the limit prescribed under the Act then, the Assessing Officer will have jurisdiction to make re-assessment irrespective of the fact that the notice was served beyond the period of limitation. The attention is drawn towards section 282 of the Income-tax Act. This section provides the service of notice. In case the issue is to be equated with the service then, there was no need of providing section 282 in the Income-tax Act. One is required to make harmonious interpretation of the provisions of the Act and considering this aspect, it is clear that the word ‘served’ as appearing in section 153(2) of the Income-tax Act cannot be equated with the word ‘issue’. Hence, it is held that the order passed by the Assessing Officer is within the time prescribed u/s 153(2) of the Income-tax Act and the finding on this issue as given by the learned CIT(A) is upheld. Computation of Capital gains - Transactions not regarded as transfer - Income escaping assessment - whether any time limit is provided for compliance of conditions mentioned in proviso to section 47(xiii), one has to consider the provisions of section 47A - HELD THAT:- It is clearly mentioned in the statement of fact by the assessee-firm that the assessee has transferred the assets other than goodwill and software to the company at a price of Rs. 2,21,72,950 as against written down value of Rs. 1,50,53,446. The software was transferred at Rs. 14 lakhs and goodwill valued for the purpose of transfer of Rs. 48,24,210. On account of these revaluations of the assets at the time of succession of business of the firm by the company, the firm has earned capital gain and the same is to be considered for exemption u/s 47(xiii). Hence, this profit of the firm was to be allocated amongst the partners in the profit-sharing ratio. In the memorandum of the association of the company it is clearly mentioned that main object of the company was to takeover the assets and liabilities of the assessee firm. The partnership firm can be constituted to carry a business and if the business is transferred, then the firm is to be treated as dissolved. Section 42 of the Partnership Act says that the partnership firm will stand dissolved, if the adventure or undertaking for which, it was constituted has been completed. When the assets have been sold, the final account of the firm, are to be ascertained on the basis of the value of the assets, at which, these have been transferred to the company. It is, therefore, held that shares in the company should have been allotted in the ratio as given in Col. 4 and, therefore, it is held that clause (b) of proviso to section 47(xiii) is not satisfied. Ascertain the implication of non-compliance of clause (b) of proviso to section 47(xiii) - If one is required to harmoniously interpret section 47(xiii) and 47A(3), it is to be inferred that if all the conditions mentioned in proviso to section 47(xiii) are not satisfied at the time of succession, then capital gain will be chargeable in the hands of the firm and section 45 will not be excluded. However, if any of the conditions mentioned in the proviso to section 47(xiii) is not complied then, section 47A will be applicable. In the instant case, shareholders of the company are the persons who are partners of the assessee-firm. In the grounds of appeal, it has been mentioned that if there is non-compliance of conditions of section 47(xiii), then the tax should be charged on the successor-company. In order to decide the issue of charging of capital gain, when condition as mentioned in clause (d) of proviso to section 47(xiii) is not complied, then it is necessary to give finding that such capital gain will be chargeable in the hands of the successor. Accordingly, it is held that capital gain is not chargeable in the hands of the assessee-firm. Depreciation on actual cost of assets - HELD THAT:- In the immediately preceding year, WDV of the assets in the hands of company at the close of year is based on the value of assets taken by the firm for the purpose of depreciation. Hence, for assessment year 2001-02, WDV of block of assets is to be taken as closing W.D.V. in the hands of company for assessment year 2000-01 subject to adjustments as mentioned in section 43(6)(c). Since we had already held that section 45 is not applicable for charging capital gain in the hands of the firm, therefore, the cost of assets as acquired by the company cannot be taken at the revalued figure. However, finally if it is held that capital gain is chargeable either in the hands of the firm or in the company, then the assessee-company will be entitled to depreciation on the revalued value of assets. Looking to the finding given in the case of the firm, it is held that learned CIT(A) is justified in holding that depreciation will be allowable on the value of the assets, as per the written down value in the case of the firm. In the result, the appeal in the case of the firm is allowed, while appeals in the case of the company are dismissed. Issues Involved:1. Limitation period for assessment under section 153(2) of the Income-tax Act.2. Compliance with the conditions under section 47(xiii) for exemption from capital gains tax.3. Applicability of capital gains tax on the firm or the successor company.4. Re-opening of the assessment.5. Allowability of depreciation on revalued assets.Detailed Analysis:1. Limitation Period for Assessment under Section 153(2):The first grievance of the assessee was that the assessment order was passed beyond the limitation period prescribed under section 153(2) of the Income-tax Act. The notice under section 148 was issued on 25-3-2003 and served on 4-4-2003. The assessee argued that the assessment should have been completed by 31-3-2004, but it was completed on 30-3-2005, hence barred by limitation. The CIT(A) held that the terms 'issue' and 'service' are not interchangeable and the assessment was within the time limit. The Tribunal upheld the CIT(A)'s decision, emphasizing that the jurisdiction to re-assess is assumed upon the issue of a notice, and the time limit for completion of assessment should be reckoned from the date of service.2. Compliance with Conditions under Section 47(xiii):The firm was succeeded by a company, and the assessee contended that all conditions under section 47(xiii) were met except for the proportionate shareholding condition. The CIT(A) held that the shareholding pattern should be the same on the date of succession itself. The Tribunal agreed, stating that the conditions must be met at the time of succession, and any delay in compliance would invalidate the exemption.3. Applicability of Capital Gains Tax:The assessee argued that if the conditions under section 47(xiii) were not met, the capital gains tax should be levied on the successor company, not the firm. The Tribunal held that if the conditions are not met at the time of succession, the firm is liable for capital gains tax. However, if the conditions are not met in subsequent years, the successor company would be liable under section 47A(3).4. Re-opening of the Assessment:The company appealed against the re-opening of the assessment for claiming excessive depreciation on revalued assets. The Tribunal referred to the Supreme Court decision in Rajesh Javeri Stock Brokers (P.) Ltd., which allows re-opening if there is material for a reasonable belief. The Tribunal upheld the re-opening of the assessment, stating that the Assessing Officer had sufficient grounds.5. Allowability of Depreciation on Revalued Assets:The company claimed depreciation based on the revalued assets. The Tribunal held that depreciation should be allowed based on the written down value (WDV) in the hands of the firm before the succession. The revalued value of assets would be considered only if capital gains tax is charged on the revaluation.Conclusion:The Tribunal upheld the CIT(A)'s decisions on all issues, emphasizing the strict interpretation of statutory provisions and the necessity of meeting all prescribed conditions for exemptions and benefits under the Income-tax Act. The appeal by the firm was allowed, while the appeals by the company were dismissed.