AI Drafter 
TaxTMI 
TaxTMI 
2017 (5) TMI 1720
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....ld the decision of the Assessing Officer of taxing the capital 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 incr....
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.... 12. The appellant craves leave to add, alter or amend all or any of the grounds of appeal before or at the time of the hearing 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 ins....
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.... Register land in Company name, (39 cents land yet to be transferred from individuals firm's name) land brought to common stock section 14 of partnership act (86cents) 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" a....
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....ip) to 28/02/2008 for closing its books. For this purpose, the Directors should give us a photocopy of the Partnership Firm's Pass Book to date and also give a photocopy to Vinod Rao. Dr. Yusuf has given necessary instructions to Noushad in this regard. 2. The Company was incorporated 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 ....
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....Dr. Yusuf and Mr. Haneef (brother of Dr. Yusuf) who would be admitted into partnership. Thus the Partnership would have 1.5 acre land. This land will be required by the company for its TNDIANA HOSPITAL project for which ALIF INSTITUTE OF MEDICAL SCIENCES PRIVATE LIMITED was incorporated. The project is of Rs. 50 crare approximately of which 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 priva....
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....section 47(xiii) of the Income-tax Act, 1961. The sale consideration value of the land is Rs. 12 crores and a device is formed to transfer the land. 10.1. From the above tabular column it is amply evident that months of planning were undergone for the transfer of the land from individual to company through the firm as a device to evade the capital gains tax with proyisions 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....
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.... and adopting revaluation and conversion as accounting techniques for transferring property. The transfer of land from the individuals to the firm and from there on to the company and revaluing the same from the purchase cost of 1.275 Crore to the value of consideration received in kind in the form of shares in the company Mls Indiana Hospital & Heart Institute Ltd at Rs. 13 Crore is nothing but again accruing to the assessees U/s 45(3) of the I.T. Act. 12.2. The overwhelming 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 th....
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....tion of the land and if yes, in whose hands it needs to be taxed, individuals or the firm. In his detailed submission, the appellant has given counter argument on every argument of the A.O. on the issue of taxability as capital Gains, the learned counsel for the appellant sated that revaluation does not amount to sale and therefore the value adopted on revaluation cannot be equated with sale consideration. Revaluation of assets can not constitute income. In opinion also, the incidence of income arises on 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....
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.... without dwelling into the chargeability of capital gains on account of conversion of a firm into a company under the provisions of Schedule IX of the Companies Act, 1956. Now the law is quite settled that an assessment u/s. 153A can be made only based on the incriminating material found as a result of action u/s. 132 of the Act. In the present cases, the alleged incriminating material was in the form of partnership deed and minutes of the Board meeting. In our considered opinion, this material does not indicate any undisclosed 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....
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.... setting forth such other particulars as may be prescribed and the provisions of the Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139. The Assessing Officer can assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made. However, assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years 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 ....
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.... inserted Chapter XIV-B in the Act, incorporating a new scheme of block assessment in cases relating to search conducted under Section 132 of the Act or requisitions made under Section 132A after 30/06/1995. Section 158B(b) defines 'undisclosed income' to include any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly 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 i....
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....of a search, then the books of account or other documents or valuable assets could be seized. Under Section 153A, the satisfaction regarding an inference of liability must be recorded. The Assessing Officer has to issue notice to the assessee i.e., the person searched for the purpose of assessment or reassessment of the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted. Section 153C as already noted, deals with assessment of income of any other person, when the Assessing Officer is satisfied 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. ....
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....rticulars of income declared in the return is already available with the Assessing Officer, such income cannot form part of undisclosed income even if such return is filed beyond the timelimit, but before search, as long as they relate to any year covered in the block. Thus, a block assessment is justified only on the basis of evidence found during search and the materials or information relatable thereto. Section 153C is in pari materia with Section 158BD conferring jurisdiction over third parties to a search providing certain conditions before the Assessing Officer having jurisdiction 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 not....
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....s had been searched or whose documents and other assets had been requisitioned under Section 132A of the Act." In that case, it was held that the Assessing Officer had not recorded his satisfaction, which is mandatory; nor had he transferred the case to the Assessing Officer having jurisdiction over the matter. Therefore, the judgment of the High Court was set aside and the appeals were allowed. 52. The decisions relied upon by the learned Senior Counsel appearing for the assessee are as under: (a) In CIT v. Calcutta Knitwears [2014] 362 ITR 673/223 Taxman 115 (Mag.)/43 taxmann.com 446 (SC), the Hon'ble 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....
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....Act, the Hon'ble Supreme Court opined as under: "We would certainly say that before initiating proceedings under section 158BD of the Act , the Assessing Officer who has initiated proceedings for completion of the assessments under section 158BC of the Act should be satisfied that there is an undisclosed income which has been traced out when a person was searched under Section 132 or the books of account were requisitioned under Section 132A of the Act. This is in contrast to the provisions of section 148 of the Act where recording of reasons in writing are a sine qua non. Under Section 158BD, the existence of cogent and demonstrative 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 o....
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.... conducted requiring him to file returns for six assessment years immediately proceeding the previous year relevant to the assessment year in which the search takes place. (ii) Assessment and reassessments pending on the date of the search shall abate. The total income for such assessment years will have to be computed by the Assessing Officers as a fresh exercise. (iii) The Assessing Officer will exercise normal assessment powers in respect of the six years previous to the relevant assessment year in which the search takes place. The Assessing Officer has the power to assess and reassess the "total income" of the six years in separate assessment orders for each of the six 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 w....
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....t seized or documents seized or requisitioned should belong to a person other than a person referred in Section 153A of the Act. (b) In Filatex India Ltd. v. CIT [2015] 49 Taxman 465/[2014] 49 taxmann.com 465 (Delhi), the court rejected the argument that during assessment under Section 153A additions had to be restricted or limited to incriminating material only, found during course of search. (c) In Savesh Kumar Agarwal v. Union of India [2013] 35 taxmann.com 85/216 Taxman 109 (Mag.)/353 ITR 26 (All.), the question considered was whether on receipt of satisfaction note, the Assessing Officer had not found anything adverse against the assessee and seized goods having been released in favour 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 w....
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....e. (g) in SSP Aviation Ltd. v. Dy. CIT [2012] 20 taxmann.com 214/207 Taxman 260 (Delhi), the observations of the court were in light of the fact that incriminating material had been found. (h) In CIT v. Anil Kumar Bhatia [2012] 211 Taxman 453/24 taxmann.com 98 (Delhi), the court did not express any opinion as to whether Section 153 A can be invoked in a case where no incriminating material was found during the search as it was in fact dealing with a case where incriminating material had been found. 54. On a consideration of the relevant sections as well as judicial precedent referred to above, what emerges is that, Section 158BD of the Act deals with undisclosed income of a third party. However, insofar as the incriminating 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 i....
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.... recording of satisfaction note, may be brought to the notice of all for strict compliance. It is further clarified that even if the AO of the searched person and the "other person" is one and the same, then also he is required to record his satisfaction as has been held by the Courts. 4. In view of the above, filing of appeals on the issue of recording of satisfaction note should also be decided in the light of the above judgment. Accordingly, the Board hereby directs that pending litigation with regard to recording of satisfaction note under section 158BD/153C should be withdrawn/not pressed if it does not meet the guidelines laid down by the Apex Court.' As per the aforesaid circular, at the time of or along with initiation of the proceedings, against the searched person 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 satisfactio....