TaxTMI 
TaxTMI 
2017 (5) TMI 1720
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....tal gain arising on the transfer of land of 1.50 acres consequent upon the conversion of the firm M/s Medicity Hospital and Research Centre into the company M/s Mangalore Indiana Hospital Pvt. Ltd., in the hands of the assessee. 3. The learned CIT(A) has erred in concurring with the assessee that the land was transferred at cost to the firm and the subsequent revaluation of the land and conversion of the firm into company were effected within the legal framework and therefore there is no incidence of capital gain in the hands of the assessee. 4. The learned CIT(A) has erred in holding that the creation of the firm and its conversion into the company was a legal requirement and there is no infirmity in the same and that the land was introduced at cost, as capital into the firm and as it was not sold after revaluation and the doctor brothers had not received any consideration, capital gain does not arise. 5. The land of 0.64 acre has been introduced as capital into the firm at Rs. 4.48 crores as is apparent from available documents which the learned CIT(A) has failed to observe. 5. The increase in the value of 1.50 acres of land after revaluation in the books of the firm has ....
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.... of the appeal." 3. The facts in brief are that the respondent-assessee is an individual deriving income from profession as a medical Doctor. The return of income for AY 2009-10 & 2010-11 was filed and processed u/s. 143(1) of the Income Tax Act, 1961 ["the Act"]. Subsequently, there was search & seizure operation conducted in the residential premises of respondentassessee on 23.11.2011. During the course of search operations, the investigating wing of the department found certain material alleged to be incriminating material in the form of Minutes of the Board meeting which are extracted below:- "9. Evidence from the seized material: 9.1. It is evident from the seized materials that the assessee has conspicuously planned the programme to avoid the capital gain tax on the land acquired for the hospital project with the help of one Sri. Venugopal, who is a professional in this matters. It is seen from the seized materials that the assessee has taken advice from Sri. Venugopal frequently on the matters of Income Tax and followed his instructions religiously. According to that the assessee has tailor made his program thread by thread and executed it by forming a firm only in the ....
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.... July 2007 deed not filed with anyone enough it from 1 is filed for firm. (AIi & Yusuf) brother gave the land as gift to them as it is agriculture land Rs. 8 -10 Lakhs per cent quotes. Property value has gone up in Mangalore. Last 24 cents of land yet to come COI 22-08-2006 whatever land is to be brought why not buy in the name of the firm. Buy as partner on behalf of the firm (whether they can go by part IX risky clarity case held up) land Dr Partner Cr, succession of firm by company agreement between firm & company avoiding capital gains tax 4 to 5 condition must. -All assets & liabilities to be transferred -All partners of firm to be shareholders of the company. -Partners should hold 51% of shares capital for at least 5 years (only 2 are these are other to be added) whether other doctors can be brought in as partners of the firm yes allowed but before the agreement with the company. "Succession of firm by company in the same business as the firm" agreement with a view to have a succession. In the process of succession of firm by the company immediately before the succession -Partner business assets & liabilities in the company same proportionate in which they have....
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....orated on 07/08/2006. It will have to close its books on 31/03/2007 and prepare its Balance Sheet and Profit and Loss Account for that date and hold First Annual General Meeting on 31/12/2007 and do annual filing as early as possible. For preparing the accounts, they need to give a photocopy of the Bank Pass Book of the Company to us and Vinod Rao (their auditor), Vinod Rao will then prepare final accounts and deal with their income tax return for AY 2007-08, while we will use the same information for doing annual filing of the Company for 2006- 07. Necessary instructions were given by Dr. Yusuf to Noushad in this regard. 11 9.6. From the above, it is very much evident that the assessee and others have preciously made the planning thread by thread to avoid paying capital gain tax to the country by forming a paper firm and acquire the land in its name and revalued it to the market value step by step. 9.7. Para 3 & 5 from the Minutes of Board Meeting held on 15.03.2008 is as follows:- "3. Sri Vinod Rao has prepared the deposit agreement for every shareholder giving deposit to the Company. The directors raised a point that only 86 cents land was with the partnership firm which w....
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....h the land value itself is about Rs. 12 crore. For the purpose of bringing in this land, the partnership firm will be succeeded by the company by way of SUCCESSION AGREEMENT (which will be drafted by Vinod Rao. The land for the project will be acquired in this manner from the firm. The payment for the land will be made to the partners in the form of EQUITY SHARES in the company. To ensure compliance with provisions of section 47 (xiii) of the incometax Act,1961, the proportion of the existing partners will need to be maintained in the company for a minimum period of 5 years ......." 10. Analysis of the Minutes of the Meeting: Date of the Meeting Discussion in the meeting Analysis & Remarks 19.12.2007 ..... the partnership firm transfer to private limited co. (following IT and for avoiding capital gain with one year to private to public 86 cents land purchase is already firm's property as per deed of partnership. Other properties to be transferred to firm change in consultation as March 1st 2008 & bring it into common stock. Finally from firm to Company final partnership deed constant amendment fresh deed business from January to March 31-03-2008 revalue the partner account t....
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....s u/s 47(xiii). 10.2. The reason for enacting section 47(xiii) by the finance Act of 1998 as seen from the notes on clause are: "Under the existing provision of the I.T.Act, business organisations have definite tax implications. Transfer of assets attracts levy of capital gains tax. 'Similarly, carry forward of losses and that of unabsorbed depreciation are not available to successor business entities. However, in cases of amalgamation, capital gains tax, is not levied and losses and absorbed depreciation are allowed to be carried forward under certain conditions. The expert Group, in the draft Income-Otax Bill, has recognized the need to encourage business reorganizations when they are in consonance with the objective of economic development and are not merely device to secure tax advantage." 10.3. Thus the bill proposes to allow tax benefits in case of business reorganisation with the objective of economic development and does not allow to be used merely as a device to secure tax advantage. In the given case, the Firm is merely used only as a device to secure tax advantage and hence, the capital gains needs to be taxed in the hands of the individual. 11. Relevant ca....
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....lming evidence in the form of minutes of Board meeting, non genuine activities of the firm and other documents like substantial gap in the registration of the so called firm have all been parts of a scheme which has the sole objective of evading capital gains tax and hence, the definition of colorable device has propounded by the supreme court is squarely applicable to these scheme. Therefore the nail needs to be pierced and the gain that is accruing to the assessees as the difference in the value of assets that the assessees have got in the company for the land that has been surrendered and the purchase cost of this land has to be brought to the tax of sec 45(3) of the Act. 12.3. The attempt by the assessee to seek shelter under 47(XIII) of the Act to show that the entire scheme amounts to a part IX transfer as described under the companies act also fails miserably as the basic conditions could not be fulfilled as Rs. 1 crore is reflected as advance received from Indiana Hospital and Heart Institute Ltd which in turn has been transferred to the accounts of Or Ali Kumble and Or Yusuf Kumble.This is evident from the fact that the assessees have received benefit in the form a loan ....
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.... sale and not on revaluation. An assessee may revalue his assets any number of times, but when that assets is sold. In cost price shall be the original price of that asset as recorded originally in the books of accounts. There is no doubt about the fact that the land was purchased with an intention of starting a hospital, a hospital has been erected on the piece of land and the land has not been sold. The doctor brothers have not received any sale consideration. The firm was created and then converted into a company was a legal requirement and I do not find any legal infirmity in the same. As per the provisions of the Act, it the property introduced in the firm is sold, the cost of acquisition shall be the cost recorded in the books before revaluation. Therefore, in my opinion, since the land has not been sold only on revaluation and in absence of any consideration coming to the doctor brothers, no Capital Gain arise. The A.O. is directed to delete the additions made on this account. These grounds of appeal of the appellant is allowed accordingly." 7. Being aggrieved, the Revenue is in appeal before us in the present appeals. 8. The ld. DR vehemently contended before us that the ....
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....d income in the form of money, bullion or other valuable assets. It only indicates that the assessee adopted a tax planning device in order to escape the clutches of the provisions of section 45 of the I.T. Act. The legality or otherwise of these transactions can only be examined in the regular assessment proceedings. The minutes of the Board meeting of the said company or the partnership deep does not reveal that the transactions per se is illegal or the transaction of conversion of firm into a company is per se illegal nor indicates any undisclosed income. 14. The Hon'ble jurisdictional High Court in the case of CIT v. IBC Knowledge Park (P) Ltd., 385 ITR 346 (Kar) held that when no material was found during the course of search indicating undisclosed income, no addition can be made based on the inference of undisclosed income under the provisions of section 153A and 153C of the Act. The relevant portion of the judgment is extracted below :- "44. Before considering the rival contentions, it is necessary to advert to the scheme of the Act regarding special procedure for assessment in cases of search. Sub-section (1) of Section 132 of the Act states that where the Chief Comm....
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....rs referred to in this subsection pending on the date of initiation of the search under Section 132 or making of requisition under Section 132A, as the case may be, shall abate. The explanation states, save as otherwise provided in Sections 153A, 153B and 153C, all other provisions of the Act shall apply to the assessment made under Section 153A. Section 153B speaks about time-limit for completion of assessment under Section 153A. 46. 153C is relevant for the purposes of this case. Sub-section (1) of Section 153C begins with a non-obstante clause and it states that notwithstanding anything contained in Sections 139, 147, 148, 149, 151 and 153, where the Assessing Officer is satisfied that any valuable assets, seized or requisitioned, belongs to, or any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to a person other than the person referred to in Section 153A, then, the books of account or documents or valuable assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person a....
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....olly or partly income or property, which has not been or would not have been disclosed for the purposes of this Act or any expense, deduction or allowance claimed under this Act which is found to be false. Section 158BA deals with assessment of undisclosed income as a result of search, while Section 158BB deals with computation of undisclosed income of the block period. Block period is defined in Section 158B(a) to mean the period comprising previous years relevant to six assessment years preceding the previous year in which the search was conducted under Section 132 or any requisition was made under Section 132A and also includes the period up to the date of commencement of such search or date of such requisition in the previous year in which the said search was conducted or requisition was made. The proviso is not relevant for the purpose of this case. 48. Section 158BD is relevant for the present case and it states that where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 or whose books of account or other documents or any assets were requisitioned under Section ....
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....isfied that the books of account or documents or valuable assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to under sub-section(1) of Section 153A of the Act. In such a case, the Assessing Officer has to issue notice to assess or reassess income of other person under Section 153A of the Act. Thus, the fact that search has been conducted would not justify issuance of notice under Section 153A. If it is only during a valid search when certain incriminating materials are detected, notice could be issued. 50. Chapter XIV-B which deals with special procedure for assessment of search cases deals with undisclosed income as a result of search, the computation thereof and such other provisions. Undisclosed income is defined in Clause (b) of Section 153B. Undisclosed income includes money, bullion or other valuable assets. It is only when the concerned officer has information about the same and has reason to believe that the said valuable assets has not been or would not be disclosed would give jurisdiction to the officer authorized to conduct a search operation. Therefore, the obj....
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....ction over a third party can assume jurisdiction. Materials such as books of account, documents or valuable assets found during a search should belong to a third party which would lead to an inference of undisclosed income of such third party. Such an inference should be recorded by the Assessing Officer having jurisdiction over the searched persons and communicated to the Assessing Officer having jurisdiction over such third party along with the seized documents and other incriminating materials on the basis of which the Assessing Officer having jurisdiction over such third party would issue notice under Section 153C. On receipt of the aforesaid material, the Assessing Officer having jurisdiction over such third party would proceed against the said third party. Thus, where no material belonging to a third party is found during a search, but only an inference of an undisclosed income is drawn during the course of enquiry, during search or during post-search enquiry, Section 153C would have no application. Thus, the detection of incriminating material leading to an inference of undisclosed income is a sine qua non for invocation of Section 153C of the Act. 51. Before considering t....
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....le Supreme Court considered the question, as to at what stage of the proceedings under Chapter XIV-B, the Assessing Authority was required to record his satisfaction for issuing notice under Section 158BD of the Act. In that case, the facts were that a search operation under Section 132 of the Act was carried out in two premises of the Bhatia Group, namely M/s. Swastik Trading Co., and M/s. Kavita International Co., on 5/2/2003 and certain incriminating documents pertaining to the assessee-firm i.e., Calcutta Knitwear were traced in the said search. After completion of the investigation by the investigating agency and handing over of the documents to the assessee to the Assessing Authority, the latter had completed the block assessments in the case of Bhatia group. Since certain other documents did not pertain to the person searched under Section 132 of the Act, the Assessing Authority therein thought it fit to transmit those documents, which according to him pertained to undisclosed income on account of investment element and profit element of the assessee-firm and required to be assessed under Section 158BC read with Section 158BD of the Act to another Assessing Authority in whos....
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....ve material is germane to the Assessing Officers' satisfaction in concluding that the seized documents belong to a person other than the searched person is necessary for initiation of action under Section 158BD. The bare reading of the provision indicates that the satisfaction note could be prepared by the Assessing Officer either at the time of initiating proceedings for completion of assessment of a searched person under Section 158BC of the Act or during the stage of the assessment proceedings. It does not mean that after completion of the assessment, the Assessing Officer cannot prepare the satisfaction note to the effect that there exists income-tax belonging to any person other than the searched person in respect of whom a search was made under Section 132 or requisition of books of account were made under Section 132A of the Act. The language of the provision is clear and unambiguous. The Legislation has not imposed any embargo on the Assessing Officer in respect of the stage of proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person. Further Section 158BE(2)(b) only provides for the period of limi....
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.... years. In other words, there will be only one assessment order in respect of each of the six assessment years in which both the disclosed and the undisclosed income would be brought to tax. (iv) Although Section 153A does not say that additions should be strictly made on the basis of evidence found in the course of the search, or other post-search material or information available with the Assessing Officer which can be related to the evidence found, it does not mean that the assessment can be arbitrary or made without any relevance or nexus with the seized material. Obviously, an assessment has to be made under this section only on the basis of the seized material. (v) In the absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word "assess" in Section 153A is relatable to abated proceedings (i.e., those pending on the date of search) and the word "reassess" to completed assessment proceedings. (vi) Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately fo....
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....r of the assessee, notice could be issued under Section 153C of the Act to file returns for six years. The stand of the Revenue therein was that the Assessing Officer could still proceed under Section 153A of the Act in order to find out the source of income. In that case the writ petition filed under Article 226 of the Constitution of India challenging the notice was dismissed on the premises that the power under Section 153C exists in the Assessing Officer, if he is satisfied with regard to the need for examination of the source of income. (d) In Dr. K.M. Mehaboob v. Dy. CIT [2012] 26 taxmann.com 54 (Ker.), it was held that unlike under Section 158BD, for transferring a file under Section 153C, there is no need to examine whether the books of account or other evidence or materials seized in the course of search of an assessee represents or proves undisclosed income of another assessee. On the other hand, for transferring the file to the Assessing Officer of such other assessee, all that is required to be considered is whether the materials or books of account or evidence recovered relates to another assessee, which may or may not lead to an assessment in the case of the other a....
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....ng material of the searched person or other person detected during the course of search is concerned, the same can be considered during the course of assessment. Further, such incriminating material must relate to undisclosed income which would empower the Assessing Officer to upset or disturb a concluded assessment of the other person. Otherwise, a concluded assessment would be disturbed without there being any basis for doing so which is impermissible in law. Even in case of a searched person, the same reason would hold good as in case of any other person. As observed by us, detection or the existence of incriminating material is a must for disturbing the assessment already made and concluded. But, at the same time, such can be at three stages: one, at the stage when the reassessment is initiated, the second, at the stage during the course of reassessment and third, at a stage where the reassessment is altered by a different assessment in respect of searched person or in respect of third party. In this regard, reference may be made to the decision of Apex Court in case of M/s. Calcutta Knitwear (supra) and based on the said decision, the CBDT has also issued circular dated 31.12.....
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....or third party under Section 153C or in the course of assessment proceedings under Section 153C of the Act or immediately after the assessment proceedings are completed under Section 153C of the Act, recording of satisfaction is required. 55. If the observations made by the Tribunal are considered in this regard, it is noted by the Tribunal that it is not necessary that satisfaction should be recorded that documents or valuable assets found in the course of search showed undisclosed income. In view of the aforesaid discussion, we do not think that such can be the correct position of law. 56. Further, in the judgments referred to by the learned counsel for the Revenue, where incriminating material leading to undisclosed income of another assessee was detected in a search operation, in those cases, reopening of the concluded assessment have taken place. There has been no single decision cited by the learned counsel for the Revenue where the assumption of jurisdiction of the Assessing Officer is in the absence of any incriminating material or undisclosed income having been detected during the course of search leading to reopening of a concluded assessment. In the instant case, tho....