TaxTMI 
TaxTMI 
2024 (11) TMI 1367
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.... the documents called for by the AO. The AO by his order dated 30.03.2022 had determined the total income of the assessee at Rs. 189,11,81,757/- as against the loss reported by the assessee by making the addition of capital gains on the conversion of partnership firm M/s. Perpetual Investments into the assessee company. The assessee challenged the above said order of assessment before the ld. CIT(A) on the ground that there was no seizure of any incriminating materials at the time of search and the assessment made u/s 143(3) of the Act is bad in law since no notice u/s 143(2) of the Act was issued by the AO. The assessee also contended that the addition made under the head "Long Term Capital Gain" on conversion of the partnership firm into a company is also not in accordance with section 47(xiii) of the Act. The ld. CIT(A) had dismissed the appeal and confirmed the addition made under the head capital gains and in respect of the ground No.6, which relates to the levy of interest u/s 234B & 234C of the Act, the ld. CIT(A) had remitted the issue to the file of AO for recomputing the interest while giving effect to the order. The assessee aggrieved with the order of the ld. CIT(A) had....
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.... and hence, the same deserves to be deleted. 5.2 The learned CIT[A] further ought to have appreciated that there was no scheme or arrangement devised by the appellant to disentitle the exemption on capital gains arising from conversion of the partnership firm into a private limited company, which finding recorded is purely on assumptions and presumptions and hence, the impugned addition made deserves to be deleted under the facts and in the circumstances of the appellant's case. 6. Without further prejudice, the learned CIT [A] erred in holding that the conditions as laid down is Section 47[xiii] of the Act had been violated under the facts and in the circumstances of the appellant's case. 7. Without further prejudice, the learned CIT [A] ought to have appreciated that the NAV method for computation of capital gains was unwarranted under the facts and in the circumstances of the appellant's case. 8. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234B and 234C of the Act, which under the facts and in the circumstances of the appellant's c....
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....eal and for the sake of clarity, we reproduce the sections. "Section 2(14)"capital asset" means- (a) property of any kind held by an assessee, whether or not connected with his business or profession; (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);' [(c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof,] but does not include- (i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession ; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes- (a)jewellery; (b)archaeological collections; (c)drawings; (d) paintings; (e)sculptures; or (f)any work of art. ....
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.... under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.] (2)Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. ....
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....his Act, such profits or gains shall be determined in accordance with the following formula, namely:- A = B + C - D Where, A = income chargeable to income-tax under this subsection as income of the specified entity under the head "Capital gains"; B = value of any money received by the specified person from the specified entity on the date of such receipt; C = the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and D = the amount of balance in the capital account (represented in any manner) of the specified person in the books of account of the specified entity at the time of its reconstitution: Provided that if the value of "A" in the above formula is negative, its value shall be deemed to be zero : Provided further that the balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account the increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated....
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....d therefore not attracted the Capital Gains provision. We are concerned with sub clause (xiii) of Sec 47 of the Act in which the statute imposed some conditions by way of proviso to Section 47 (xiii) of the Act. In sub clause (xiii) of Sec 47, the statute had not recognized transfer of capital asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm as transfer of capital asset. In the above circumstances there is no transfer and consequently Sec 45 would not apply and therefore it would not be treated as income and attract capital gains. The statute laid down five conditions by way of proviso to the sub-clause (xiii) of section 47 for the entitlement of the benefit. The AO mainly relied on these provisos and alleged that the assessee had violated the proviso (a) & (c) of section 47(xiii) of the Act and therefore, the transfer of the capital asset by a firm to assessee company by way of succession is liable to be taxed as income arising out of the transfer of the capital asset. In the assessment order dated 30.3.2022, the AO had mainly relied on the search conducted u/s 132 of the Act and the alleged seizer of incriminat....
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....of the Firm to New Co, pursuant to the succession as contemplated under Section 47(xiii) of the IT Act? 5.3 Similarly, the AO had also extracted the incriminating documents seized at the time of search which are as follows; S.No. Seizure Annexure Description 1. A/XBI/PO/04 Page 183-188 Board resolution of ABPPL and AWPL and NOCs from M/s perpetual investment for conversion of firm to company. 2. A/ABPPL/BVSC/01 Page 7-22 Note prepared by King & Partridge on income tax implications over sale of ACT equity shares by Shri C.S.Sunder Raju and invest the sale proceeds in wind/solar power projects in individual capacity. Subsequently, after claiming the depreciation on wind/solar projects assets, the wind/solar project business will be transferred to a newly formed company. 3. A/ABPPL/BVSC/01 Page 23-28 Valuation report prepared by king & Partridge for fixed assets of M/s Perpetual Investments dated 28.02.2017 5.1.2 During the course of survey proceedings u/s 133A of the Income Tax Act, 1961 from office of Shri CA Rama Mohan Rao KNS who is the main auditor of accounts for Atria group of companies following incriminating materials were impou....
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....essee had not violated any of the conditions mentioned in the provisos to section 47(xiii) of the Act. The AO initially issued a show cause notice, proposing to add the long-term capital gains for the reason that the assessee had violated section 47(xiii) proviso (a) & (c) of the Act. Subsequently the assessee filed their detailed objections and demonstrated before the AO that none of the provisos were violated by them while transferring the firm into a company and therefore, claimed that the addition made under the head long term capital gains is not warranted. For the purpose of clarity, we are reproducing the objections filed by the assessee which is as follows: 1. As regards to the condition a), the Partnership Firm "Perpetual Investments" has transferred all its Power generation activities by converting Partnership Firm to Atria Wind (Kadambur) P L. M/S Perpetual Investments, diversified into the business of generation of power by the wind energy by establishing and commissioning wind power plant at Ottapidaram, Kayathar, Tuticorin District, Tamil Nadu. The summary of assets and liabilities as per the books "Perpetual Investments" relating to power projects as on 26/0....
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....e to see that the succession was taken into effect from 27.03.2017 and all the assets and liabilities of the firm relating to the business of the firm immediately before the succession i.e on 26.03.2017 becomes the assets and liabilities of the assessee company. The assessee had enclosed the copy of the audited financial statements of the firm for the period up to 26.03.2017 at page numbers 71 to 85 in support of their contention. Similarly, the assessee also filed the summary of assets and liabilities of the firm as on 26.03.2017 in page 86 of the paper book. Even though the assessee filed number of documents, we are relying on the following documents in order to appreciate the facts. a) Copy of the ITR V and IT Return of the firm for the assessment year 2016-17. b) Copy of the Partnership Deed dt 31.01.2008 and the Indenture of Reconstitution of partnership dt 10.04.2015 and the copy of the Reconstitution of partnership dt 16.01.2017. c) Copy of the stamped affidavit for dissolution of firm. 5.7 In order to appreciate the explanation offered by the assessee, we have gone through the proviso (a) to section 47(xiii) of the Act in which the words used a....
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....ii) of the Act. In view of the withdrawal of the respective shares out of the surplus capital of the partners, the AO made an allegation that the partners have substantially derived benefit within the said succession and thus clause (c) to section 47(xiii) of the Act stands violated. 5.10 We do not find any merit in the above finding of the AO. We have verified the balance sheet as on 26.03.2017 which was also extracted by the AO in his order and the statement showing the reserves and surplus for coming to the conclusion that the assessee had violated clause (a) & (c) of the Section 47(xiii) of the Act. The language of section 47(xiii) of the Act is very simple and it has not restricted anything done prior to the succession i.e. before 26.3.2017 and therefore, the transactions pointed out by the AO was done by the firm well before succession and not immediately before succession. In order to attract the proviso, the AO should establish the fact that the partners had received consideration or benefit other than the allotment of shares in the company. In the case on hand, there is no such evidence to show that the partners had received any consideration from the company apart from....