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IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI
, ,
BEFORE SHRI SANJAY ARORA, AM AND SHRI VIJAY PAL RAO, JM
./I.T.A. No. 3880/Mum/2012
( / Assessment Year: 2007-08)
I.T.O. Ward-21(1)(4), Paton
Room No. 606, 6th Floor, C-10, 10, Sagar Complex,
/
Pratyakshakar Bhavan, Opp. Electrical House,
Bandra Kurla Complex, Vs. Vile Parle (E), Mumbai-400 057
Bandra (E), Mumbai
. / . /PAN/GIR No. AAAFP 6455 C
( /Appellant) : ( / Respondent)
&
./ Cross objection No. 35/Mum/2014
(Arising out of ITA No. 3880/Mum/2012)
( / Assessment Year: 2007-08)
Paton I.T.O. Ward-21(1)(4),
10, Sagar Complex, Room No. 606, 6th Floor, C-10,
/
Opp. Electrical House, Pratyakshakar Bhavan,
Vile Parle (E), Mumbai-400 057 Vs. Bandra Kurla Complex,
Bandra (E), Mumbai
. / . /PAN/GIR No. AAAFP 6455 C
( / Cross Objector) : ( / Respondent)
/Revenue by : Shri Neil Philip
/ Assessee by : Shri Vijay Kothari
/ : 08.10.2014
Date of Hearing
/
: 18.12.2014
Date of Pronouncement
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Paton
/ O R D E R
Per Sanjay Arora, A. M.:
This is an Appeal by the Revenue and Cross Objection (C.O.) by the Assessee
directed against the Order by the Commissioner of Income Tax (Appeals)-32, Mumbai
(`CIT(A)' for short) dated 05.03.2012, partly allowing the assessee's appeal contesting its
assessment u/s.147 r/w s. 143(3) of the Income Tax Act, 1961 (`the Act' hereinafter) for
the assessment year (A.Y.) 2007-08 vide order dated 28.12.2010.
2. At the outset, we observe the C.O. to be delayed by 236 days; having been filed on
18.02.2014, as against the due date of 26.06.2013 (proof of receipt of Memorandum of
Appeal in Form 36 being served on the assessee on 27.05.2013 on record). The
condonation petition, since filed, states the demise of Shri Prashant Dave, Chartered
Accountant, handling the affairs of the firm, and Shri Premji Viram Satra, partner, as a
reason for the delay in filing the cross objection, raising a legal issue, which stood also
raised before the first appellate authority. After preliminary hearing, we find the delay as
on account of genuine and sufficient reasons and, hence, fit for condonation. The hearing
of the appeal and the C.O. were accordingly proceeded with.
3. The assessment in this case was framed u/s.147 r/w s. 143(3) of the Act, assessing
the total income at Rs.93,30,260/-, by bringing the transfer value of the `goodwill', i.e.,
by the assessee-firm to its partners on its dissolution on 01.04.2006 to tax, as against the
returned income of nil. Though the firm had been succeeded to in its' business by a
company, by the name `Paton Fashions Pvt. Ltd.', in which all the erstwhile partners
were shareholders, as a going concern, their shareholding therein is, as per the terms of
the conversion deed dated 01.04.2006 (PB pgs. 77-80), in their profit sharing ratio in the
firm. The condition of section 47 (xiii) of the Act was thus not satisfied, which requires
such shareholding to be in the ratio of the respective capitals of the partners, i.e., in the
total capital of the firm, as on the date of conversion. Consequently, the transfer, being
not excepted from s. 45, the provision of section 2(47) r/w s. 45 would stand attracted.
Section 45(4) provides for the fair market value of a capital asset to be deemed as the full
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value of the consideration arising on its transfer to the partner/s, on the dissolution of the
firm or otherwise. Hence, the short term capital gain (STCG) on the transfer of the
goodwill with reference to the value at which the accounts of the partners stood allowed
credit in its respect on the conversion of the partnership into a company.
In appeal, the assessee found favour with the ld. CIT(A). The shares in the
successor-company had been issued to the erstwhile partners in the ratio of their capital
balances as at the close of 31.03.2006. The Assessing Officer (A.O.) had wrongly
compared the same with the capital balances as on 31.03.2007, which is not relevant; the
relevant date being that immediately prior to succession on 01.04.2006, i.e., 31.03.2006.
In fact, even though further shares were subsequently issued to the partners, making the
shareholding of each of the three groups (of partners) equal, at 10 lac shares each, the
aggregate holding of the partners is 100% of the shareholding in the company, while the
legal requirement is for them to continue to hold 51% shareholding in the company for a
period of five (5) years after the succession/takeover. The assessee's case was thus to be
allowed.
The assessee's legal plea of the reopening (of assessment) being not valid was,
however, discountenanced by him, rejecting its' first ground. No return was filed by the
assessee by the due date of filing the return of income u/s. 139(1) or even the belated
return u/s.139(4). The A.O. issued notices u/s. 142(1)(i) on 07.01.2009, 15.06.2009 and
03.11.2009, all of which remained un-responded, prompting the A.O. to issue notice
u/s.144 on 16.11.2009. Though a notice u/s. 142(1)(i) could after 01/4/2006 be served on
the assessee even after the end of the relevant assessment year, a notice there-under could
not be issued without any restriction as to time. The proper, and in fact the only manner
of construing the said provision was that a notice there-under could be issued not later
than the expiry of one year from the end of the relevant assessment year, i.e., the time
limit u/s.139(5). Not so reading the provision would lead to an incongruity in-as-much as
it would render section 139(4)/(5) infructuous, also removing any time limit for
furnishing the return except of course that of completion of assessment (i.e., two years
from the end of the relevant assessment year), and which cannot be. No notice u/s.
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142(1)(i) could therefore be issued for the relevant year after 31.03.2009. Accordingly,
the notices u/s. 142(1)(i) dated 15.06.2009 and 03.11.2009 were not valid in law. The
assessee's return of income filed on 20.11.2009 could not be considered to be in response
to notice u/s. 142(1) dated 07.01.2009 and, in any case, as a valid return in law. The issue
of notice u/s. 143(2) on 20.11.2009, i.e., in pursuance to the said return, was consequently
invalid. Accordingly, the A.O.'s action in issuing notice u/s.148 on 14.12.2009, in the
wake of the assessee failing to file the return of income even by the extended period
allowed u/s.139(4), was thus a valid notice in law. The assessee's claim that the ensuing
proceedings were not valid in-as-much as the A.O. was bound to frame the assessment
u/s.143(3), taking the proceedings initiated by issue of notice u/s.143(2) to their logical
conclusion, was thus not valid. (refer paras 3.1 to 3.3 of the impugned order)
On merits, however, the assessee found favour with the ld. CIT(A), who found
that the shares had in fact been issued to the erstwhile partners on the basis of their
capital balances as on the date of conversion, i.e., 01.04.2006. In this view of the matter,
the condition of section 47(xiii) was satisfied, so that it would not be a transfer liable for
charge of capital gains u/s.45 of the Act. Aggrieved, the Revenue is in appeal.
4. We shall proceed with the Revenue's appeal, agitating the assessment on merits,
first, i.e., in the same sequence in which the same stood heard. The ld. AR, on being
questioned by the Bench during hearing in the matter, would submit that, true, the
conversion deed states so, but the allotment was actually made as per the capital balances
as on 31.03.2006, the relevant date, as found by the ld. CIT(A). The A.O., while correctly
observing the same, had failed to verify this aspect of the matter, even as all the figures
were before him, comparing the allocation with the capital balances as on 31.03.2007
instead, and which is clearly incorrect. Further, the allocation as made had attained
finality in-as-much as it stands duly communicated to the Registrar of Companies. No
objection to the said allotment has been raised by any of the ex-partners. The mention in
the conversion deed of the allocation in the profit sharing ratio, which did not materialize,
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could not therefore be taken cognizance of, so as infer the allocation as being not in terms
of section 47(xiii) of the Act.
5. We have heard the parties, and perused the material on record.
The Revenue's principal objection, raised per its Gd. # 1, is that the ld. CIT(A)
had, in allowing relief to the assessee, admitted additional evidence, in contravention of
Rule 46A of the Income Tax Rules, 1962 (the `Rules'). The said rule, procedural in
character, is yet mandatory. However, we consider the Revenue's charge as not valid.
This is for the simple reason that while the A.O.'s objection, with reference to the terms
of the conversion deed dated 01.04.2006, was that the shares in the successor company
stood allowed to the erstwhile partners in their profit sharing ratio in the firm, the ld.
CIT(A) found it as not so; the shares being allocated in the ratio of their capital balances
as on the date of the conversion, i.e., in terms of section 47(xiii). Both the conversion
deed and the allocation of shares, as well as the firm's balance-sheet, both as on
31.03.2006 and 01.4.2006, were before the A.O., whose objection was on merits.
Qua merits, the conversion deed (PB pgs. 77-80) clearly states that the partners
shall be allotted shares as per the profit sharing ratio as on the date of conversion (i.e.,
01.04.2006) (refer clause 2). With regard to the allotment, in our view, the actual
allotment would prevail over that specified in the conversion deed, recording agreement
qua share allocation in the profit sharing ratio. A contract can, besides being reduced in
writing, also be oral and, therefore, to the extent the subsequent allotment, being
undisputed, is at variance with that agreed to, could only be considered as a novation or
in modification of the written agreement to that extent. We have, toward this, accorded
due weight to the facts and circumstances as well. This is as the allotment would only
have been returned, as stated before us, to the Registrar of Companies, so that all the
legal formalities of registration of the said allotment stand completed, finalizing the
allotment process. We are therefore, in principle, in agreement with the assessee that the
mention of a different ratio in the conversion deed would not be by itself fatal to its case;
what being relevant is the actual satisfaction, or not so, of the conditions of section
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47(xiii). Grounds # 2 and 3 of the Revenue's appeal, would also therefore stand to be
dismissed. We decide accordingly.
6. We having dismissed the Revenue's appeal on merits, do not consider it necessary
to adjudicate the assessee's C.O., raising a legal issue with regard to the maintainability
of the assessment in law; the same being rendered infructuous.
7. In the result, both the Revenue's appeal and the assessee's C.O. are dismissed.
Order pronounced in the open court on December 18, 2014
Sd/- Sd/-
(Vijay Pal Rao) (Sanjay Arora)
/ Judicial Member / Accountant Member
Mumbai; Dated : 18.12.2014
. ../Roshani, Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent
3. () / The CIT(A)
4. / CIT - concerned
5. , , / DR, ITAT, Mumbai
6. / Guard File
/ BY ORDER,
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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