TaxTMI 
TaxTMI 
2019 (6) TMI 1428
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....by a common order. ITA No.2316/Ahd/2014 for A.Y. 2011-12 2. The instant appeal has been filed by the Revenue with the following grounds: "i. The CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 25,46,06,987/- on account of Long Term Capital Gain & Short Term Capital Gain of Rs. 3,26,02,919/-. ii. On the facts and circumstances of the case, the Learned CIT(A) ought to have upheld the order of the AO. iii. It is, therefore, prayed that the order of the Learned CIT(A) may be set-aside and that of the AO be restored." 3. Ground No.1relates to deletion of disallowance of Rs. 25,46,06,987/- on account of Long Term Capital Gain (LTCG) and Rs. 3,26,02,919/- on account of Short Term Capital Gain (STCG). 4. The brief facts leading to this case is this that the assessee engaged in the business of Manufacturing of Transmission Towers and Job work of Engineering Fabrication and Galvanizing, filed its return of income through Electronic Media on 02.09.2011 declaring total income at Rs. 38,82,630/- for A.Y. 2011-12, which was processed u/s 143(1) of the Act on 21.03.2013. It was further mentioned in the E-return that the accounts of t....
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....ety) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer." 8.2 The above quoted provision would show that u/s 45(4), profits arising from transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm is chargeable to tax as income of the firm in a previous year in which the transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 48 deals with mode of computation. It, inter alia, lays down that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset. 8.3 Therefore, under section 45(4), two cond....
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....f the Act is not attracted in a situation where the firm is converted into company under Chapter IX of the 1956 Act, and consequently, no capital gain arises on the said transaction : * CIT vs. Texspin Engg. & Mfg. Works 263 ITR 345 5. In this matter, we are concerned with assessment year 1996-97. Section 45(1) is a charging section as far as capital gains is concerned. Under section 45(4), profits arising from transfer of a capital asset by way of distributionof capital assets on the dissolution of a firm is chargeable to tax as income of the firm in a previous year in which the transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 48 deals with mode of computation. It, Inter alia, lays down that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset. Therefore, under section 45(4), two conditions are required to be satisfi....
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.... 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 realized 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 ofMalabar Fisheries Co. v. CIT[1979] 120 ITR 49. 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 48 by treating fair market value of the asset on the date of transfer, does not arise. * CIT vs. Rita Mechanical Works 344 ITR 544 (P&H) 12. Section 45(4) of the Act which is relevant reads thus : "The profits or gains a....
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....ection with the transfer and the cost of acquisition of the asset. Therefore, under section 45(4), two conditions are required to be satisfied, viz., transfer by way of distribution of capital assets, and, secondly, such transfer should be on dissolution of the firm or otherwise. Once these two conditions are satisfied then, in that event, for the purpose of computation of capital gains under section 48, the market value on the date of the transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer." 16. The court had concluded that section 45(4) of the Act was not attracted in a situation where the firm was converted into company under Chapter IX of the 1956 Act. The relevant observations are as follows (page 352): "In this case, the erstwhile firm has been treated as a limited company by virtue of section 575 of the Companies Act. It is not in dispute that in this case, the erstwhile firm became a limited under Part IX of the Companies Act. Now, section 45(4) clearly stipulates that there should be a transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a partnership firm i....
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....tatutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm now treated as a company, after a given date. In the circumstances, in our view, there s no transfer of a capital asset as contemplated by section 45(1) of the Act. Even assuming for the sake of argument that there is a transfer of a capital asset under section 45(1) because of the definition of the word 'transfer1 in section 2(47)(ii), even then we are of the view that the liability to pay capital gains tax would not arise because section 45(1) is required to be read with section 48, which provides for mode of computation. These two sections are required to be read together as the charging section and the computation section constitute one package. Now, under section 48 it is laid down, inter alia, that the income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accrued as a result of the transfer, the cost of acquisition of the asset and the expenditure incurred in connection with the transfer. Section 45(4) is mutually exclusive to section 45(1). Section 45(4) categorically states that w....
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....usiness also continued. The gain in the hands of the retiring partners was held to be amenable to capital gains tax. 22. These judgments are, thus, not applicable and are clearly distinguishable. 23. In view of the above, the irresistible conclusion is that no capital gain under section 45(4) of the Act would be attracted in the present case. Accordingly, questions Nos. 1 and 2 are answered against the Revenue. 8.7 In view of above made submission, it is most respectfully submitted that revisions of S.45(4) of the Act cannot be invoked in the present case, an no addition on 'account of capital gain can be made." However, such plea of the assessee that the assessee firm converted into Private Limited Company under Part-IX of the Companies Act, 1956 whereupon the property of the erstwhile firm vested in the company thus the same is not covered by the expression of transfer by way of distribution u/s 45(4) of the Act was not found tenable by the Learned AO. He, therefore finalized the assessment by making an addition of Rs. 3,26,02,919/- as STCG and Rs. 25,46,06,987/- as LTCG which was, in turn, deleted by the Learned CIT(A). Hence, the instant appeal....
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.... Decisions relied by the assessee are distinguishable on facts and law, (v) The value of the asset (land in the case) stood enhanced and the increase value got distributed by the assessee firm to the partners thus increasing their Capital accounts, (vi) Shares of enhanced value allotted to the erstwhile partners worth increase value and thus increasing the value of capital in the hands of thepartners, (vii) Thus the capital gain arose on distribution of assets i.e. land to the partners by the assessee firm, due to revaluation and thereby subsequentallotment shares is sought to be evaded against the provisions and intent of the law." On the basis of such finding of the Learned AO, capital gain on the amount transferred/credited to the capital account of partners as per said provision of Section 45(4) of the Act was brought to tax against the assessee to the tune of Rs. 25,46,06,987/- as LTCG and capital gain out of the transfer of part of land has been treated to be STCG which was worked out at Rs. 3,26,02,919/- and added to the total income of the assessee. However, the Learned CIT(A) Rs. 25,46,06,987/- has been treated as LTCG while deleting such addi....
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....erence between vesting of the property and distribution of the property the provisions of section 45 (4) were not attracted as there is no distribution of the capital asset. The appellant has further submitted that the issue is fully and squarely covered by the decision of Ahmedabad ITAT in several cases. It has placed reliance on the following judgements of Ahmedabad ITAT: - 1. Alta Interchem Industries - 20 ITR(T) 103 2. Gulabdas Printers - 4 ITR(T) 264 3. Well Pack Packaging 130 Taxman 215 I have carefully gone through the facts of the issue it is noted that the facts which are relevant for the present our that the land has been revalued the enhanced value on account of revaluation has been credited to the partners capital account; the appellant firm has been converted into a Private Limited Company under Part-IX of the Companies Act 1956; all assets and liabilities of the appellant firm have become assets and liability of the new Private Limited Company on Part -IX conversion; the shares in the Private Company have been allotted to the partners in their profit-sharing ratio in the appellant firm; and the partners of the appellant firm have no....
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.... (Appeals) confirmed the order of the Assessing Officer on the ground that there was a transfer within the meaning of section 2(47), read with section 45." On the basis of these facts the honourable Tribunal held as under: - "Simple revaluation of assets does not lead to incidence of capital gain inasmuch as the revaluation is made in the hands of the assessee by writing up the value of the assets in the books. Accordingly, it could be said that mere revaluation of assets of the firm would not result into any liability under the Act. Under both sections 567 and 568 of the Companies Act, there is specific mention of deed of partnership as a document to be submitted before the Registrar. Section 574 provides that on compliance with the requirement of Part IX with respect to registration formality, the Registrar will certify that the assessee is a company incorporated under the Companies Act. Section 576 makes it clear that the registration of a company under Part IX shall not affect its rights and liabilities in respect of any deed or obligation incurred before registration and section 577 provides for continuation of the pending suits and legal proceedings....
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....s to be held that the assessee was not liable to any capital gain fax either under section 45(1] or under section 45(4)." The above judgement has subsequently been followed in the case of Alta Interchem (Supra), whose facts are also similar. The facts of the case are exactly identical to the cases decided by honourable ITAT Ahmedabad and relied by the appellant. In the present case there is no dissolution of the firm and the partnership capital has not been increased on account of sale' of the capital asset but it is only on account of revaluation of the asset the capital has been increased. The properties of the partnership firm have been vested with the company. The company has taken over all the assets and liability of the erstwhile Firm. The appellant has also suitably distinguished the judgement relied by the AO in the written submission which has been reproduced in the preceding discussion. In view of the above discussion, I am of the considered opinion that there is no transfer of assets and accordingly there is no liability of capital gain on the appellant firm. The addition made by the AO on account of long-term capital gain and short term ca....
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....conversion of the firm into a company under Part IX of the Companies Act, there does not arise any question of applicability of section 50 or 45 or any other provisions of the Act. 12. Aggrieved, the Revenue took up the issue before the hon'ble jurisdictional High Court through a reference application. The Tax Appeal No. 368 of 2001 of the Revenue was, however, dismissed by the hon'ble court with an observation that no question of law, much less substantial question of law arose out of the order of the Tribunal. The Revenue preferred a SLP before the hon'ble Supreme Court against the ruling of the hon'ble High Court (supra). The hon'ble Supreme Court in CIT v. Well Pack Packaging[2009] 309 ITR 338/174 Taxman 102 had ruled as under (page 340) : "We do not agree with the view taken by the High Court. In our opinion, the questions of law raised by the Revenue before the High Court are substantial questions of law which arise from the order of the Tribunal. The High Court should have decided these questions by recording its findings thereon. Accordingly, the impugned order is set aside. Tax Appeal No. 368 of 2001 is admitted on the aforementioned f....
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....tion in question does not constitute a transfer under the Act. In that view of the matter, we answer the first substantial question of law framed, against the Revenue and in favour of the assessee." (3) In the case of Gulabdas Printers (supra), the hon'ble earlier Bench of this Tribunal had recorded its findings as under (headnote) : "Where a firm becomes a limited company under Part IX of the Companies Act, 1956, section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital asset is not satisfied. In the circumstances, latter part of section 45(4) which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not apply." Aggrieved, the Revenue had preferred a reference application before the hon'ble jurisdictional High Court in Tax Appeal No. 1559 of 2010 which, according to the Assessing Officer, is still pending for disposal before the hon'ble court (Refer : The Assessing Officer's letter dated June 18, 2012 to the Departmental representative) 13. Let us now analyse the case laws relied on by the Revenue as und....
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.... - IX of the Companies Act, 1956, Section 45(4) is not attracted as very first condition of transfer by way of distribution of capital assets is not satisfied. We have further considered the judgment passed by the Co-ordinate Bench in the matter of Well Pack Packaging where again the same ratio has been laid down. In the said judgment, it was held that when transfer took place from the firm to the Company the assets were transferred for which consideration was paid by the Company by allotment of shares to the erstwhile partners of the firm. Therefore, the revenue could tax only the erstwhile transfer as the AOP or BOI and not the firm. Taking into consideration the entire aspect of the matter, the observation made by the Learned AO and the Learned CIT(A), the submission made by the Learned AR and the case made out by the Revenue and particularly upon considering the judgments cited by the Learned AR appearing for the assessee, We find that the only event took place during the year under consideration i.e. January 2011 is "revaluation of land" and on 01.04.2011 "conversion of firm into company" took place i.e. A.Y. 2012-13, the subsequent year. The Learned AO treated the "reva....
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.... in law and on facts of the case in confirming the disallowance of Rs. 4,01,147/- made u/s 14A of the Act by invoking provisions of Rule 8D of the Income-tax Rules without appreciating the fact that appellant has not made investment out of interest bearing funds. 2. The learned CIT(A) has erred in law and on facts of the case in confirming the ad hoc disallowance of Rs. 2,24,276/- being 1/5th of total expenses o: telephone, mobile, insurance, petrol/diesel, vehicle repair and maintenance, interest on car loan and depreciation on account of personal usage. 3. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 4. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C of the Act. 5. The learned CI....
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....ubmitted before us. On the other hand, the Learned DR relied upon the order passed by the authorities below. 11. Heard the respective parties, perused the relevant materials available on record and the submissions rendered by the Learned AR in support of his case. It is a settled principle of law that when there is no expenditure incurred for earning exempt income Rule 8D is generally not permissible. However, we accept the alternative arguments advanced by the Learned Counsel. We have also taken into consideration the judgment passed by the Co-ordinate Bench where disallowance has been made on interest expenditure and on administrative expenses but the same is restricted to the dividend income of Rs. 33,445/-. The relevant portion of the said judgment is as follows: "5. As regards the disallowance made out of administrative expenses of Rs. 76,566/-, the CIT(A) held it to be fair and reasonable and confirmed the same. 6. Before us, the only arguments of the AR of the assessee was that the disallowance under section 14A of the Act should not exceed the exempt income. On the other hand, DR supported the orders of the lower authorities. 7. We have heard r....
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.... disallowance if the Hon'ble Tribunal thinks it fit and proper for the ends of justice. On the contrary, the Learned DR relied upon the order passed by the authorities below. 14. We have heard the respective parties, we have also perused the relevant materials available on record. It appears from the records that the insurance expenses and medi-claim expenses of Rs. 13,779/- was agreed to be disallowed by the assessee since the same were personal in nature but rest of the expenses could not be ascertained whether those were personal or business purposes. In that view of the matter, the Learned AO 1/5th out of the mixed expenses of Rs. 10,52,487/- being personal and business expenses, disallowed Rs. 2,10,497/- which was again confirmed by the Learned CIT(A). It appears from the records that various expenses such as mobile and telephone expenses, car loan, vehicle repair and maintenance has been claimed as expenses in the Profit and Loss account. Details of the entire expenses were also placed before the authorities below. The agreement of the assessee with the expenses of insurance includes the medical expenses of Rs. 13,779/- to be disallowed reveals the good conduct of the asse....
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.... before us. 18. During the course of assessment proceeding under section 263, it was noticed that the assessee made commission payment to two parties namely Basic Wing Energy Pvt. Ltd. and Shri Upendrasingh D. Darbar. In terms of the direction passed by the Learned CIT(A) to examine the genuineness of such commission a notice dated 11.04.2013 was issued by the Learned AO requesting the assessee to justify the payment of commission along with details of services received with supporting evidence. However, the assessee has not been able to submit the copy of the agreement with the commission agent and ultimately the Learned AO in the absence of any reply received from the said two parties disallowed the claim of commission payment made by the assessee to the tune of Rs. 20,08,977/-. In appeal before the Learned CIT(A) the assessee submitted as follows: "8.1 During the course of the assessment proceedings, it was observed by the ld. AO that the Appellant has claimed commission expenditure to two parties viz., Basic Wind Energy Pvt. Ltd. and Shri Upendrasingh D Darbar. The Id. AO asked the Appellant to prove the genuineness of the said expenditure. The Appellant vide reply ....
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....iness through reference or introduction also and paying incentives for this purpose then there is nothing wrong in this approach because such practice is prevalent in all trade/industrial and commercial activities. A satisfied customer or social contact can bring business more effectively as compared to own marketing efforts. It is also a fact that a person may help other person once or twice without any monetary consideration but when some interest is created then more focused efforts are made, however, generally no direct evidence can be produced and the "relationship of the services rendered and business purpose has to be established only by circumstantial evidence and growth in business in such cases. It is also in the common knowledge that even medical professionals get referral commission from the hospitals for referring clients to such hospitals without having formal agreement with such institutions. Be that as it may, this much is clear that the Commission Agents have introduced the Appellant to the customers in connection with the sale of products of the appellant. That itself would be a service rendered by Agency for the purposes of the Appellant's business. It is fur....
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....) has not found the order passed by the Learned AO justified. According to the Learned CIT(A) merely because the agreement was not submitted by the assessee or no reply has been rendered by the Commission agent the Assessing Officer should not held against the assessee. But the Learned CIT(A) confirmed the impugned disallowance on the count that the only service rendered by commission agents was that of introducing potential customers to the appellant which does not fall within the ambit of "service" so as to make claim of commission eligible for deduction u/s 37. The Learned AR at the time of hearing of the instant appeal relied upon number of judgments including Suzlon Energy Ltd.-vs-DCIT reported in 20 ITR(T) 391 (Ahd) and Gujarat High Court Swastic Textile Co. (P.) Ltd.-vs-CIT reported in (1984) 150 ITR 155 (Guj) which speaks otherwise. We have carefully considered the judgment as cited above. It is a settled principle of law that commission paid to persons for referring names of customers is allowable u/s 37 of the Act for introducing potential customers to the assessee falls within the ambit of service. We thus find the order passed by the Learned CIT(A) not incoherence wi....
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.... job work receipt of Rs. 3,54,04,388/- whereas, the total job work receipts as per Form No.26AS were of Rs. 5,65,30,851/-. Since there was difference of Rs. 2,11,26,463/- in the job work income found by the Assessing Officer, the assessee was requested to submit the reconciliation and explain the reason for such difference. The assessee clarified that as per chart enclosed to the letter dated 25.09.2013 the total receipts as per the TDS certificate were Rs. 5,70,47,656/-. Certain parties to whom sales have been made by the assessee TDS whereon was deducted on sales by them. The ledger account of those parties to whom sales have been made and the details of TDS deducted thereon by the parties were also furnished before the Learned AO by the assessee. The job work receipts was shown at Rs. 3,54,04,388/- in P&L Account while Rs. 2,16,43,268/- have been account for in sales during the year under consideration. It was further contended by the assessee that the basis of valuation of closing stock was at cost of the books of accounts. The Excise and VAT have been deducted in the valuation of closing stock because the firm has taken Cenvat credit of excise and VAT and therefore the cost va....
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....s. 2,11,26,463/- has been disclosed as a part of sales. The mere fact that the concerned parties erroneously deducted tax at source on such differential sum cannot change the very nomenclature of such receipts from sales to job-work receipts. Since the said sum has been duly credited to Profit & Loss a/c as a part of sales, the accounting treatment becomes revenue neutral and hence, question of making addition in respect of the same doesn't hold any water. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 82 ITR 363 (SC) has held that, "what is necessary is to be considered is the true nature of income." Therefore, the department has to assess the true income emanating from real character of the transaction involved. In any case, if the impugned addition is sustained, then equivalent amount needs to be reduced from sales so as to avoid double taxation of such sum of Rs. 2,11,26,463/- which, in my opinion, shall be an exercise in futility. In light of the above, the impugned addition is hereby deleted. This ground of appeal is, therefore, allowed." It appears that the Learned CIT(A) was of the opinion that the balance sum of Rs. 2,11,26,463/- ....
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....At the time of hearing of the instant appeal, the Learned Counsel appearing for the assessee submitted before us that the Learned AO failed to appreciate the very basic fact. It is mandatory for an assessee to follow "exclusive method" of accounting for valuation of inventories in the light of AS-2 on "Valuation of Inventories" issued by ICAI. But in terms of Section 145A, and assessee is to follow "inclusive method" of accounting. Since there is no impact of profitability whether an assessee follows "exclusive method" or "inclusive method" no addition is called for u/s 145A of the Act. The Learned ARalso relied upon the judgment passed by the Co-ordinate Bench in the matter of PCIT-vs-Mamta Brampton Engg. P. Ltd. reported in ITA No.2387/Ahd/2013 as also in the matter of DCIT-vs-AIA Engineering Ltd. in ITA No.1122/Ahd/2015 which were passed in favour of the assessee in identical issue. A copy of each of the judgments has been submitted before us. He, thus prayed for confirmation of the order passed by the Learned CIT(A). The Learned DR, on the other hand, relied upon the order passed by the Learned AO. 28. Heard the respective parties, perused the relevant materials available on....
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....smiss the appeal of the Revenue. 5. In the result, appeal of the Revenue is dismissed. Pronounced in the open court today on the 26th day of September, 2017." We have further considered the judgment passed in the matter of ITOvs- Mamata Brampton Engg. Pvt. Ltd. reported in ITA No.2387/Ahd/2013. The relevant portion whereof is as follows: "4.1. Before us, ld.Sr.DR supported the order of A.O. Ld.AR on the other hand reiterated the submissions made before the AO and ld.CIT(A) ITA No.2387/Ahd/2013 ITO vs. Mamata Brampton Engg.Pvt.Ltd. Asst.Year - 2008-09 - 7 - and further submitted that the ld.CIT(A) while deleting the addition has relied on the decision of Hon'ble Gujarat High Court in the case of Narmada Chematur Petrochemicals Ltd. (327 ITR 369). He further submitted that there are various decisions of similar issues where the Coordinate Bench of Tribunal (ITAT "D" Bench Ahmedabad) has decided the issue in favour of assessee. He placed on record the copy of the decision in the case of M/s.GH Industries vs. ACIT passed in ITA No.2613/Ahd/2011 for AY 2008-09, dated 12/02/2016. He thus supported the order of ld.CIT(A). 5. We have heard the rival submission....