[Citation -1985-LL-0430-4]

Citation 1985-LL-0430-4
Respondent Name V. S. CHABBRA
Court ITAT
Relevant Act Income-tax
Date of Order 30/04/1985
Assessment Year 1974-75
Judgment View Judgment
Keyword Tags private limited company • settlement commission • period of limitation • proprietary business • development rebate • extension of time • dissolution deed • fresh assessment • cross-objection • business profit • capital account • cogent evidence • stock-in-trade • fresh evidence • share capital • excess amount • capital gain • co-operative • time barred • book entry • new ground
Bot Summary: Under section 251 when an order is made by the AAC the ITO derives his power to make a fresh assessment in conformity with the order of the AAC only from that order of the AM. Such an order, thus, would fall under section 251(1)(a) and 'not under any power under section 143(3) of the Act itself. Section 144B of the Act comes into operation only when an assessment is made under section 143(3) and not when it is made under section 251(1)(a). Applying section 153(2A) no extension under any other section of the Act including section 144B is permissible. Section 153(2A) is as under: Notwithstanding anything contained in sub-sections and, in relation to, the assessment year commencing on the Ist day of April, 1971, and any subsequent assessment year, an order of fresh assessment under section 146 or in pursuance of an order, under section 250, section 254, section 263 or section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of two years from the end of the financial year in which the order under section 146 cancelling the assessment is passed by the Income-tax Officer or the order under section 250 or section 254 is received by the Commissioner or, as the case may be, the order under section 263 or section 264 is passed by the Commissioner. A plain reading of section 153(2A) rules out any extension of the time limit under section 144B or any other section of the Act. While section 146 specifically refers to section 143(3), section 251 does not do so. The argument of the learned counsel for the department that the extended time limit provided in section 144B would govern section 153(2A) also is not supported by any other or the clear provisions of the section itself.

assessee-individual, qualified marine engineer, started business of repairing ships, etc., somewhere in year 1968. individual business was converted into partnership from 1-7-1973. partnership consisted of assessee, his wife Mrs. Geeta Chabbra and private limited company whose shares were mostly held by assessee and his wife. assessee had 45 per cent share, his wife 15 per cent and limited company Bombay Marine Engg. (P.) Ltd., balance 40 per cent. limited company was incorporated on 16- 6-1973. partnership came into existence on 1-7-1973. firm was dissolved on 1-1-1974 and entire business was taken over by limited company. At time of dissolution of firm assets of firm were revalued and its goodwill was ascertained. in final settlement of account, taking into account depreciation in value of assets, value of goodwill, etc., assessee was paid in full and final settlement sum of Rs. 12,65,991. As on 31-12-1973 his capital account stood in firm at Rs. 1,63,835 and he was entitled to share in development rebate reserve worked out at Rs. 49,855. ITO on above facts held that action of assessee in constituting firm and making revaluation of assets within short time was done with intention to avoid capital gains tax by bringing matter within scope of section 47(ii) of Income-tax Act, 1961 ('the Act'). He also held that no genuine firm came into existence on 1-7-1973 and in effect there was transfer from individual assessee to company of business attracting capital gains tax. ITO computed capital gains after giving deduction under section 80T of Act at Rs. 6,31,381. Commissioner (Appeals) accepted assessee's claim that this was case of distribution of assets on dissolution of firm and in view of provisions of section 47(ii) no capital gains could be determined. He accordingly deleted addition of Rs. 6,31,381. 2. Before Commissioner (Appeals) along with other grounds dealing with different points, assessee had also claimed that order of ITO was bad in law, since it was time barred. This point Commissioner (Appeals) decided against assessee. 3. department has come up on appeal against order of Commissioner (Appeals) deleting addition of Rs. 6,31,381. It would appear that assessee had filed appeal against some of points decided against him, but since he wanted to approach Settlement Commission for settlement of his affairs he withdrew appeal filed. 4. At time of hearing of appeal learned counsel for assessee pointed out that apart from merits of case relating to deletion of sum of Rs. 6,31,381 added as capital gains, there were certain legal grounds which were fatal to addition of Rs. 6,31,381 to total income. assessee had claimed before Commissioner (Appeals) that assessment was time barred having been made beyond period of limitation. Other preliminary points taken were that in original assessment ITO had not included income from capital gains. It was only after matter was set aside by AAC and ITO made fresh assessment that he included for first time addition on account of capital gains. This procedure was illegal and beyond jurisdiction of ITO. AAC had given certain directions while making reassessment. Even these directions did not cover inclusion of capital gains in total income. What AAC himself could not do by way of making enhancement in respect of this item, ITO in giving effect to appellate order under section 251 of Act could not have done. assessee also claimed that having recognised firm as genuine assessed and also granted registration to it for same assessment year, ITO was estopped from treating it as not genuine for purpose of assessing capital gains. As regards first point about limitation, Commissioner (Appeals) had decided this point against assessee. As regards other points relating to jurisdiction as well as assessment of new item not considered in earlier assessment, Commissioner (Appeals) did not give any finding. According to learned counsel, he was authorised by provisions of rule 27 as well as rule 11 of Income-tax (Appellate Tribunal) Rules, 1963, to raise these legal contentions also against departmental appeal in addition to challenge to merits of addition itself. 5. learned counsel for department has objected to assessee raising this ground about limitation as well as absence of jurisdiction. appeal was filed by department on mere question of addition of Rs. 6,31,381. was filed by department on mere question of addition of Rs. 6,31,381. assessee could have filed cross-objection which he did not do. assessee could have also come up on appeal under right granted to him by statute. Even though he did this, he withdrew appeal. According to learned counsel, it was not open to assessee to raise question of limitation as well as jurisdiction against above background. When Act has provided facility of filing appeal on his own as well as filing cross objection when department filed appeal assessee could not resort to rule 27 to agitate this point. provisions of rule 27 were brought into statute book earlier. After introduction of section 253(4) of Act, rule 27 has become, if not redundant and of no significance, certainly inoperative. rule itself is hedged in with lot of restrictions as interpreted earlier. After introduction of section 253(4), according to learned counsel, its significance has completely disappeared. assessee should not, therefore, be permitted to raise these questions of limitation or jurisdiction either under rule 27 or under rule 11. 6. According to learned counsel for assessee, apart from provisions of rule 27 judicial decisions support his case that new ground of appeal which goes to root of matter can be admitted and heard by Tribunal. Reference is made in this connection to decisions in B.R. Bamasi v. CIT [1972] 83 ITR 223 (Bom.), CED v. Estate of Late Smt. K. Narasamma [1980] 125 ITR 196 (AP) and CIT v. Dehati Co-operative Marketing-cum-Processing Society [1981] 130 ITR 504 (Punj. & Har). On question of limitation, according to learned counsel, assessment has been made far beyond time it could be made. original assessment was made in this case on 19- 8-1977. AAC set aside assessment by his order dated 30-2-1978. Under section 153(2A) of Act, which sets limit for completion of such assessment, assessment should be made before 31-3-1980. Under section 251 when order is made by AAC ITO derives his power to make fresh assessment in conformity with order of AAC only from that order of AM. Such order, thus, would fall under section 251(1)(a) and 'not under any power under section 143(3) of Act itself. Section 251(1)(a) is self- contained code. Section 144B of Act comes into operation only when assessment is made under section 143(3) and not when it is made under section 251(1)(a). Section 144B, therefore, is inapplicable in present case on its very terms. It is also pointed out that section 153(2A), which sets time limit for completion of assessment following order under section 251, is absolute rule with paramount jurisdiction. It excludes any general provision. Applying section 153(2A) no extension under any other section of Act including section 144B is permissible. On question of nature of assessment made pursuant to order under section 251, reference is made to decision in CIT v. Carona Sahu Co. Ltd. [1984] 146 ITR 452 (Bom.) (FB). This decision has clearly laid down that while for purposes of filing appeal ITO's order could be treated as one under section 143(3). This is not so for all other purposes. Reference is made in this connection to decisions in CIT v. Devidayal Metal Industries (P.) Ltd. [1968] 68 ITR 50 (Bom.) and Surrendra Overseas Ltd. v. CIT [1979] 120 ITR 872 (Cal.). former case clearly stresses point that ITO's order is under section 31(3)(b) of Indian Income-tax Act, 1922. 7. It is also pointed out that in original assessment capital gains was not included. AAC in his order dated 13-2-1978 did not touch this point or enhance assessment. ITO for first time made addition on account of capital gains. What AAC himself has not done and could not do, according to learned counsel for assessee, ITO cannot do in giving effect to order under section 251. It is pointed out that since AAC did not decide this ground specifically raised before him, this should be treated as having been decided against assessee and this would also justify application of rule 27. In effect, according to learned counsel, ITO's order including capital gains was beyond his jurisdiction. Reference is made in this connection to decisions in Katihar Jute Mills (P.) Ltd. v. CIT [1979] 120 ITR 861 (Cal.) and CIT v. Aich Kay Farm [1983] 141 ITR 928 (MP). In support of his point that AAC himself has no jurisdiction to travel beyond subject-matter of assessment, which in effect constrained jurisdiction of ITO also, reference is made to decisions in Debi Dutt Moody v. Belan [1959] 35 ITR 781 (Cal.), CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC), Smt. Sneh Lata v. CIT [1966] 61 ITR 139 (All.), Prabhudas Ramji v. CIT [1966] 62 ITR 621 (Guj.), CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC and Sterling Construction & Trading Co. v. ITO [1975] 99 ITR 236 (Kar.). Thus, in effect addition of capital gains itself is not in pursuance of direction of AAC. part of order making this addition, therefore, is clearly without jurisdiction and time barred. In support of his stand that ITO should stick to and not stray beyond remand order, learned counsel his referred to several decisions, viz., Bhopal Sugar Industries Ltd. v. ITO [1960] 40 ITR 618 (SC), Kartar Singh v. CIT [1978] 111 ITR 184 (Punj. & Har.), State of Uttar Pradesh v. Raza Buland Sugar Co. Ltd. [1979] 118 ITR 50 (SC), CIT v. Bandaru Sanyasi Raju [1981] 127 ITR 453 (AP), Grindlays Bank Ltd. v. CIT [1984] 145 ITR 119 (Cal.), Orissa Ceramic Sales v. ITO [1984] 145 ITR 464 (Ori.), Citizen Watch Co, Ltd. v. IAC [1984] 148 ITR 774 (Kar.), J.P. Sharma & Sons v. CIT [1985] 151 ITR 138 (Raj.) and [1980] SLT 80 (Cal.). In. present case ITO having granted registration to firm, thus, accepting its genuineness he was also estopped from questioning genuineness of firm now. 8. On merits it is pointed out that firm has been accepted to be genuine. It did business for some time. At time of constitution of firm it could certainly not be stated that purpose was to dissolve it and transfer business to private limited company. This was subsequent development motivated by subsequent facts which assessee could not even think of earlier. There was real dissolution of firm and business was taken over by private limited company. According to learned counsel, decision was purely commercial one. By conversion of firm into partnership several business advantages were expected. In fact assessee was forced to make conversion to realise these advantages. When genuineness of firm, which has been accepted by department earlier, is granted, on dissolution of that firm and distribution of assets amongst partners provisions of section 47(ii) apply. Even if, therefore, as ITO has contemplated, there were capital gains, they are not exigible to tax in view of section 47(ii). In fact no evidence has now been produced to even challenge genuineness of firm, which has been properly and legally constituted. 9. For department it is pointed out that assessee having not filed cross-objection and withdrawn appeal filed against some of points, he cannot urge question of time bar or legal infirmities in assessment. Rule cannot urge question of time bar or legal infirmities in assessment. Rule 27 is not applicable to case. At any rate, rule 27 has restricted operation. effect of accepting claim for intervention under rule 27 would be that even though assessee has not agitated question of limitation on validity of assessment, he would be given another opportunity to set aside assessment on this score. In fact department would be worse off on having come to Tribunal on appeal. According to learned counsel, certainly this cannot be supported. 10. On question of time limit itself judicial decisions have settled that assessment made pursuant to AAC's direction setting aside original assessment is assessment under section 143(3). When addition proposed in such assessment is in excess of Rs. 1 lakh, automatically provisions of section 144B including extension of period of limitation following it, apply. extension of time under section 144B is, therefore, available to ITO. assessment made is not, therefore, time barred. On question of jurisdiction to assess capital gains, it is pointed out that when once assessment order was set aside by AAC entire matter was open before ITO. He had necessarily to make assessment and proper provision of law would be section 143(3). In this wider context it is open to ITO to include in total income of assessee all items deserving to be so included. If in original assessment, therefore, capital gains had been omitted to be assessed, ITO is legally competent to include same in fresh assessment to be made now. 11. On merits of computation of capital gains itself, it is pointed out that same business was carried on by individual and partnership and now taken over by limited company.' only persons who were in 'the partnership were assessee and his wife. latter's contribution to business was negligible if not nil. She was not expert. Nothing has been pointed out to show that her capital or any other qualification was either necessary contributed to advancement of business. Being husband and wife nature of partnership also would be same as that of husband, there being no other business justification to create partnership between husband and wife. firm, according to learned counsel, has been merely created to take benefit of section 47(ii). Merely because legal formalities of formation of firm has been gone through, ITO is not precluded from enquiring into genuineness of firm, its purpose or objective and its relation to persons around it. fact that subsequently assessee as matter of fact exercised his right to dissolve firm is clear. indication that this was purpose from very beginning. Inevitably object was avoiding some capital gain by almost what is crude forcing of provisions of section 47(ii) on to situation. This is evident, according to learned counsel, also from fact that assessee filed appeal in respect of certain points and withdrew same. firm was only device to avoid capital gains. 12. On question of company itself, it is pointed out that even though its members are assessee and his wife mainly, it was separate legal person. Capital gains, therefore, were clearly involved and liable to tax. There has been revaluation of le assets which also led to obtaining capital gains. If any other mode of working out effective taxable capital gains was needed, according to learned counsel, matter may be sent back to ITO to recompute capital gains. limited company is separate entity for all purposes. transfer, therefore, of business from individual to company was real. When firm is not genuine, capital gains, thus, really accrue to individual assessee. decisions in Abhai Ram Gopi Nath v. CIT [1971] 79 ITR 339 (All.) and CIT v. Seth Manicklal Fomra [1975] 99 ITR 470 (Mad.) are stressed in this context. 13. It is also pointed out that even accepting assessee's case question of limitation does not arise. Section 153(2A) is not absolute provision operating in vacuum. It takes into account limitation in normal process of making assessment whether originally or after remand or setting aside by appellate authorities. Benefit of section 144B as to limitation is clearly available. Even on other grounds about ITO not having included capital gains in original assessment, according to learned counsel, assessee's point should not be accepted. entire assessment being open before him, he has to make proper assessment. Knowing that certain item of income has not been included in assessment it was not merely too artificial procedure but been included in assessment it was not merely too artificial procedure but in fact really abdication of ITO's duty if he does not include new non- assessed item of income in assessment made. There was no law prohibiting him to making assessment including all includible items. On contrary non- inclusion of clearly known includible item of income would be erroneous. 14. In our view assessee is entitled to advance his arguments with reference to limitation as well as legality or validity of assessment as defence to departmental challenge in its appeal. scope of rule 27 is very clear. assessee may have filed appeal on his own. Where he has not filed appeal but department files appeal it is open to him to file cross- objection dealing with matters not covered by departmental appeal or even those covered by departmental appeal. In particular case assessee may not adopt any of these methods. He May just accept first appellate authority's order either as matter of compromise or otherwise, but when department files appeal on point where assessee has won he may not decide to give up his defence altogether against point agitated in departmental appeal. In such case even if he does not want to agitate other points on which he has grievance against first appellate authority's order, he cannot be precluded from putting up defence against departmental appeal. This is proper scope of rule 27. In our view there seems to be misunderstanding on part of department in seeking to exclude operation of rule 27. In first place neither provision of appeal as such nor grant of right of cross-objection really renders rule 27 inoperative. This rule operates in restricted field of pure defence. literal reading of rule also indicates that it comes into operation only where respondent has not appealed but some point has been decided against him by first appellate authority. In present case amongst other things two sets of grievances were advanced by assessee before appellate authority: One, relating to limitation and validity of assessment and second, challenging addition of Rs. 8,31,381. question of limitation Commissioner (Appeals) decided against assessee. On question of validity Commissioner (Appeals) did not pronounce any decision but insofar as assessee did not withdraw this ground before Commissioner (Appeals), Commissioner (Appeals) must be regarded as having decided this point also against assessee. On question of addition itself of Rs. 6,31,381 Commissioner (Appeals) decided in favour of assessee. assessee, therefore, could not have come on appeal against this point; Nor is it necessary for him to come on appeal on other grounds of limitation and validity decided against him when on merits of addition of Rs. 6,31,381 he has won. It is exactly against such background and in such situation that rule 27 comes in. As pointed out above, grievance of learned departmental counsel appears to be that by resorting to rule 27 AAC could not have either on ground of limitation or on ground of invalidity set aside entire assessment. application of rule 27 does not and in our opinion cannot lead to this incongruity. All that it can help assessee is with regard to addition of Rs. 6,31,381 only and nothing more. limited extent to which assessee can urge points relating to limitation and invalidity of assessment is question of addition of Rs. 6,31,381. department having come on appeal cannot be worse off than if it had not come on appeal. fear expressed by learned counsel for department, therefore, that in case where assessee has not filed appeal or cross-objection has been permitted to urge grounds relating to limitation and validity would render entire assessment non-existence is not correct. decision would only relate to addition of Rs. 6,31,381 and nothing more. 15. In above view of matter and for limited purpose of dealing with addition of Rs. 6,31,381 we permit assessee to advance his points against limitation question as well as invalidity of assessment. It requires to be mentioned that as far as first point is concerned it is settled law that limitation need not be invoked by parties in every case where it comes up. Even if parties do not urge point of limitation if it comes to knowledge of Court, Court is bound to act on it. In other words, limitation is question on which if it comes to knowledge of Court, Court has to take action whether parties urge before it or not. From this general position of law also we cannot ignore question of limitation. 16. assessee's case is that ITO having made assessment pursuant to directions of AAC, he must complete assessment within two year period specified in section 153(2A). Some of decisions of the two year period specified in section 153(2A). Some of decisions of High Courts have termed assessments made pursuant to appellate directions as assessments under section 143(3). As far as we within jurisdiction of Bombay High Court are concerned, this point is governed by decision in Carona Sahu Co. Ltd.'s case (supra) which has clarified that while for purposes of appeal assessment made in pursuance of appellate direction could be treated as assessment under section 143(3), it is not so for all other purposes. In view, therefore, of binding decision of Bombay High Court in Carona Sahu Co. Ltd.'s case (supra), it is not necessary to regard assessment as made under section 143(3). Inevitably application of section 144B is also precluded. In this view of matter, extended time limit granted by section 144B is not available to case of assessment made by ITO, pursuant to direction of appellate authority. That apart, provisions of section 153(2A) do not give any scope for reading into it any extension of time limit on account of section 144B or any other provision. Section 153(2A) is as under: "(2A) Notwithstanding anything contained in sub-sections (1) and (2), in relation to, assessment year commencing on Ist day of April, 1971, and any subsequent assessment year, order of fresh assessment under section 146 or in pursuance of order, under section 250, section 254, section 263 or section 264, setting aside or cancelling assessment, may be made at any time before expiry of two years from end of financial year in which order under section 146 cancelling assessment is passed by Income-tax Officer or order under section 250 or section 254 is received by Commissioner or, as case may be, order under section 263 or section 264 is passed by Commissioner." It specifically deals with sub-sections (1) and (2) of same section by referring to them: 'Notwithstanding anything contained', etc. It, however, does not deal with section 144B or any other section. plain reading, therefore, of section 153(2A) rules out any extension of time limit under section 144B or any other section of Act. contrast made between sections 146 and 251 of Act also strengthens this point. While section 146 specifically refers to section 143(3), section 251 does not do so. There is no other provision of Act which in any way puts restraint on or otherwise modifies clear time limit of two years mentioned in section 153(2A). inevitable conclusion, therefore, is that this time limit is absolute time limit unaffected by provisions of any other section of Act. argument, therefore, of learned counsel for department that extended time limit provided in section 144B would govern section 153(2A) also is not supported by any other or clear provisions of section itself. We, therefore, hold that in absence of any other saving provision for this purpose, time limit for completion of assessment provided in section 153(2A) is absolute time limit. ITO, therefore, has to complete assessment within time limit provided. It may be mentioned that section 153(2A) gives period of two years. This in effect is addition to time limit already given to ITO for making original assessment. Normally every possible investigation which ITO should make, would have been made during this period. It is only certain loose ends which he has failed to tie up, which appellate authority directs him to do he has to do in fresh assessment to be made. Even here if he has to make reference under section 144B (we are not deciding this question here) he has got sufficient time for that. At any rate, there would be no inequity in granting department only two years for completing fresh assessment pursuant to appellate direction and not two and half years, both in addition to time limit granted for original assessment under section 153. In this case assessment not having been completed before 31-3-1980 must be regarded as overtaken by limitation provided in section 153(2A). 17. On question of ITO's jurisdiction to include new item of income in assessment made pursuant to appellate direction also law is c l e r . decided cases clearly indicate that even AAC or Commissioner (Appeals) cannot go beyond scope of appeal before them. Their powers of enhancement are also limited to scope of appeal before them, on grounds of appeal clearly covered by and arising out of assessment order appealed against. decisions referred to by learned counsel for assessee clearly settled this issue. This being so and power of AAC himself to travel beyond subject-matter of appeal being restricted legally, ITO in making assessment pursuant to appellate direction certainly cannot travel beyond what AAC himself can do. In such assessment, therefore, ITO cannot include any other item of income not considered by him in original assessment. decisions referred to above clarify this point also. We have, therefore, to uphold assessee's case that ITO not having considered question of including capital gains in original assessment in making fresh assessment pursuant to appellate directions he cannot include this new item of income. Such inclusion may be made only by resorting to appropriate provisions of Act such as section 148 of Act, but not by general argument such as that when entire assessment is open to him, ITO is bound to include all assessable items of income in such assessment. This is too general sweep of jurisdiction which law cannot and does not give to ITO. On this point also assessee's claim has to be accepted. Both on question, therefore, of limitation as well as on ITO's general legal disability to travel beyond subject of his original assessment order, inclusion of sum of Rs. 6,31,381 in assessment made pursuant to appellate direction cannot be supported. addition has to be deleted on this ground. 18. On merits Commissioner (Appeals) has deleted addition on ground that there is no evidence to question genuineness of firm which was constituted on 1-7-1973 and which was dissolved on 1-1-1974. learned counsel for assessee has relied on assessments made. on firm, registration granted to firm and other accompanying circumstances to support genuineness of firm. While these facts indicate that firm was assessed and registration was also granted to firm, in our view they do not operate as estoppel against revenue's showing that firm was not genuine. It would be open to department either by adducing proper evidence in this regard or otherwise to show that as matter of fact firm is not genuine. department has not, however, adduced any fresh evidence in this regard. learned counsel for department has only pointed out drawing support from only existing facts that individual was carrying on business for very long time. His wife was neither expert nor could contribute effectively to functioning of individual business. limited company's members were composed mainly of assessee and his wife. Thus, there was no business reason justifying conversion of proprietary business into partnership. Almost immediately after such conversion and with practically little business having been done firm was dissolved. There is no particular business reason for dissolution also. only ground made out is that business had to be taken over by limited company, functioning of business under limited company being more useful for its future. If this latter be reason certainly individual could have transferred business to limited company directly without going through intermediate partnership level. That was not done. It would, therefore, be, in our opinion, difficult to decide that constitution of firm was positive business necessity and not step or only device to get away from capital gains tax liability. There are, however, other reasons which compel us to support order of Commissioner (Appeals) and also accept assessee's case. 19. purpose of forming partnership, according to department, is to avoid capital gains tax. If we start with premise so vociferously urged by learned counsel for department that firm was sham one, proper course to understand position would be to find out tax result by excluding firm from picture as it obtains. question is; does disregarding firm result in any liability to capital gains tax or at any rate to such high figure of tax? facts on record do not support this stand. If individual who was carrying on personal business had converted that business into limited company and received as consideration, therefore, sum of Rs. 12 lakhs, under no circumstances can this amount be taken as basis for computing capital gains on transfer. individual business (and this is supported by details, balance sheet, etc., filed) had fixed assets on which depreciation was granted by ITO, stock-in-trade which would fetch profit or loss on transfer and above all goodwill which in present case has been computed by ITO at about Rs. 6 lakhs. individual started his business by himself and from some scratch. He was serving earlier. If, therefore, his business had during year of account acquired any goodwill, that goodwill was developed by him over period of years and had no original cost. As far as goodwill is concerned, therefore, decision of Supreme Court in case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 would apply and no capital gains tax would be leviable on same. assessee-individual was carrying on repairing business. question of stock-in-trade, therefore, would not figure except perhaps to negligible extent. Apart from question, therefore, of there being on capital gains on stock-in-trade, even other profit realisable on its transfer would be negligible. If there are tools, etc., to what extent they have been allowed in accounts over years and what they would fetch on sale would be another problem. Lastly, there are depreciable assets held by individual. On transfer of these to limited company, in respect of some assets obsolescence allowance will have to be given. In respect of other, section 41(2) of Act profit should have been computed and there might or might not be any capital gains also in addition. At any rate, disregarding firm if ITO were to compute capital gains on transfer to limited company especially of such large figure of Rs. 12 lakhs, it would be prima facie erroneous apart from being inconsistent with department's own stand. At any rate, there are no figures or facts to show that there was either capital gain on one or other of above items or any taxable profit. 20. Apart from above, transfer in present case ignoring partnership, would be from individual to private limited company of which himself and his wife are principal shareholders. This company was formed just month before formation of alleged firm. It had nominal capital subscribed by these family members. It had no assets. constitution of limited company could at best have resulted in incurring some expenditure, etc., which would show itself as loss to existing capital of company in its balance sheet. Thus, formation of company would have prima facie resulted in its cash capital introduced by way of shareholdings to extent of preliminary expenses, etc., being reduced. company takes over business of individual and credits to his account sum of Rs. 12 lakhs as against assets taken over. above amount credited resulted from valuation upwards of assets, etc., of business. Even so what assessee- individual has got for transfer of his business to company is only book entry in company's books company itself being virtually owned by him. He has not received any cash from any outside source. only assets in company are also very assets of individual business written up and treated as sold by individual to company. net result is as against individual holding these assets in personal balance sheet, he would be holding same assets reduced by preliminary expenses, etc., of company as against which he would have entry for Rs. 12 lakhs and odd as money owing to him from company. In other words, if company has to give him money it has to sell his own assets-a very peculiar proposition. Against these clear facts and accountancy entries one cannot imagine much less establish individual as having received any consideration for sale of his assets in personal business to company owned by him. What we want to emphasise is that if we ignore partnership as department wants us to do, assessee has got absolutely no excess amount on which he could be assessed either as business profit or as capital gains. question, therefore, of charging him with constituting firm along with his wife and limited company as partners as device to avoid capital gains would be, in our opinion, mere figment of imagination. 21. Whether, therefore, we consider situation from point of view of treating firm as genuine-for which no evidence has been produced by department-or for argument sake treating firm as non-genuine, there is nothing to show that assessee had made capital gain. We, therefore, uphold order of Commissioner (Appeals) on merits also though not for reasons given by him. 22. departmental appeal is dismissed. Per Shri D.S. Meenakshisundaram, Judicial Member I have perused order of my learned brother Dr. V. Balasurbramanian, and I agree with him that revenue's appeal has to be dismissed. But I would to add my own reasons in support of this conclusion. 2. facts of case and contentions addressed by learned counsel on both sides, have been elaborately set out in order of my learned brother and is, therefore, not necessary for me to repeat same. However, I would like to point out that objection of revenue in this appeal filed by t h e m is against following findings of Commissioner (Appeals) in paragraph No. 20 of his order: "On careful consideration of matter I find force in appellant's contention that payment of Rs. 12,65,991 against his share capital, etc., after making revaluation of assets of firm is case of distribution of assets on dissolution of firm under section 47(d) so that no capital gains could be determined in hands of appellant at that point of time. Had assets been revalued not at time of dissolution of firm but earlier to that and additional sum credited in capital account on account of revaluation of assets position would have been different. In present case, however, appellant has received Rs. 12,65,991 as result of distribution of assets at time of dissolution of firm. It, therefore, cannot be said that there was any transfer of assets by appellant to company in which he was allotted shares. Since firm has been granted registration it cannot also be said that firm was not genuine and it is really proprietary business of appellant which was transferred to company. Considering above facts and circumstances of case I think that no capital gains is involved in hands of appellant on receipt of Rs. 12,65,991 on dissolution of firm. While giving above finding I have kept in view Allahabad High Court decision in Bankey Lal Vaidya v. CIT [1965] 55 ITR 400, affirmed by Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, Kerala High Court decision in CIT v. C.K. Sunderaraja Naidu [1974] 95 ITR 45 Punjab and Haryana High Court decision in Raman Lal Khanna v. CIT [1972] 84 ITR 217 and Gujarat High Court decision in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42. Consequent to above finding ITO is directed to delete from assessment addition of Rs. 6,31,381 made on account of capital gains." It is against these findings of Commissioner (Appeals) that department has come up in appeal to Tribunal on following two grounds: "1. On facts and in circumstances of case and in law, Commissioner (Appeals) erred in deleting Rs. 6,31,381 added in assessment as capital gains. 2. On facts and in circumstances of case and in law, Commissioner (Appeals) erred in holding that provisions of section 47(ii) were attracted in this case." , 3. main contention of revenue in this appeal is that we should ignore partnership firm formed by assessee with his wife and private limited company, Marine Engg. (P.) Ltd. on 1-7-1973, on dissolution of which partnership, capital gains in question are stated to have arisen to assessee. According to revenue, registration granted to this partnership firm under section 185(1)(a) of Act would not stand in way of revenue ignoring this partnership and seeking to tax capital gains arising to assessee in his hands under section 45 of Act. I agree with department that granting of registration to partnership would not be impediment in way of revenue in seeking to tax this capital gains in hands of present assessee, if it is so assessable in accordance with law. At same time, it can hardly be disputed that there should be cogent and relevant evidence, which would justify inference that partnership firm constituted on 1-7-1973 was merely device and only sham partnership. No evidence has been placed to that effect to justify conclusion that partnership firm was mere sham and should, therefore, be ignored as mere device. On contrary, materials placed before us on behalf of assessee at pages 183 and 184 of paper book clearly establish that partnership firm was genuine firm and was not mere sham. At page 183 we have profit and loss account of partnership firm as on 31-12-1973. This account shows that partnership firm had carried on business of repairing ships during period of its existence from 1-7-1973 to 31-12-1973 and labour charges received by this firm during this period amounted to Rs. 30,69,631. net profit earned by this firm from this business amounted to Rs. 1,11,880, which was divided amongst three partners in accordance with their profit-sharing ratios specified in partnership deed. next document is balance sheet of this partnership as on 31-12- 1973 at page 184 of paper book. This balance sheet is stated to have been prepared before revaluation of assets for purpose of transfer to private limited company. This balance sheet discloses that Mrs. Geeta Chabbra, who was taken as partner on 1-7-1973, had contributed capital of Rs. 65,547 while other partner, Bombay Marine Engg. (P.) Ltd., had contributed capital of Rs. 75,000 on 1-7-1973. Of course, capital of assessee as on 1-7- 1973 amounted to Rs. 2,60,697. It is after examining all these materials, which were placed before him by partnership firm, that ITO assessing partnership firm came to conclusion that it was genuine partnership and accordingly granted registration to said firm by his order dated 31-12-1976 at pages 94 to 97 of assessee's paper book. In order granting registration at page 96 of paper book, ITO specifically states that he was satisfied that genuine firm was in existence before granting registration to firm. Unless revenue is able to place relevant and cogent evidence to displace these findings recorded by ITO in' case of firm, it would be difficult, if not impossible, to ignore above materials placed by assessee as well as findings of ITO and hold that partnership firm was merely sham and that same should be ignored. In present case, no such material has been placed before us by revenue to ignore findings of ITO holding that partnership firm was genuine firm and that it was entitled to registration. 4. If once it is accepted that partnership firm was genuine partnership, it has also to be accepted that its dissolution was also genuine transaction put through by parties. It is on these facts that Commissioner (Appeals) came to conclusion that assessee is entitled to benefit of section 47(ii). revenue wants us to ignore not only formation of partnership but also its dissolution, which is incorporated in dissolution deed dated 1-1-1974, at pages 101 to 106 of assessee's paper book. In my view, these documents, which have been found to be genuine and valid, cannot be ignored merely because department now thinks in case of present assessee that it has been executed only with view to avoid payment of capital gains tax by taking advantage of section 47(ii). It is not open to revenue to simply ignore these transactions put through by parties in lawful manner without bringing on record any material, which would establish that these transactions were neither genuine nor valid, but were intended to be sham transactions by parties. In absence of any such material placed by revenue, I find myself unable to accept contentions put forward on behalf of revenue that all these transactions of formation of partnership on 1-7- 1973, business carried on by it from 1-7-1973 to 31-12-1973 and its dissolution on 31-12-1973, should be ignored. In my new there is no justification for such conclusion either on facts or in law. It, therefore, follows that order of Commissioner (Appeals) deleting this addition by holding that assessee is entitled to benefit of section 47(ii) in respect of addition of Rs.6,31,381 added by ITO's capital gains, is right and same has to be upheld. 5. In view of above conclusion reached by me on objections raised b y revenue in its appeal to grant of exemption to assessee under section 47(ii), various other submissions raised by assessee's learned counsel and by learned departmental representative in reply thereto (which are fully set out in order of my learned brother) become academic and, therefore, do not require any further examination and decision. I, therefore, do not express any opinion on any of those contentions. 6. For reasons discussed above, I agree with learned Vice President that revenue's appeal has to be dismissed. *** INCOME TAX OFFICER v. V. S. CHABBRA
Report Error