IN INCOME TAX APPELLATE TRIBUNAL PUNE BENCH , PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM ITA No. 1200/PN/2009 Assessment Year : 2006-07 Addl. Commissioner of Income Tax, Range-3, Pune Appellant Vs. M/s. Universal Construction Machinery, 4/1, Ganesh Peth, Pune 411030 Respondent PAN: AABFR5145G Appellant by : Shri Anil Chaware Respondent by : S/Shri Sunil Pathak and Mandar Kharpudikar Date of Hearing : 04.07.2016 Date of Pronouncement: 30.09.2016 ORDER PER SUSHMA CHOWLA, JM: This appeal filed by Revenue is against order of CIT(A)-II, Pune, dated 31.07.2009 relating to assessment year 2006-07 against order passed under section 143(3) of Income Tax Act, 19 61 (in short Act ). 2. Revenue has raised following concise grounds of appeal:- 1. order of learned Commissioner of Income-tax (Appeals) is contrary to law and to facts and circumstances of case. 2. learned Commissioner of Income-tax (Appeals) grossly erred in allowing assessee's appeal instead of confirming Assessing Officer's order. 2 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 3. learned Commissioner of Income-tax (Appeals) grossly erred in deleting disallowance of Rs.57,16,864/- made u/s 40A(2) on account of excess payment of commission made by assessee to its sister concern not appreciating facts that commission so paid was patently excessive vis- a-vis paid to others and that assessee was reimbursing expenses to its sister concerns which, as per Memorandum of Understanding were to be borne by sister concern. 4. learned Commissioner of Income-tax (Appeals) grossly erred in attaching undue importance to fact that its sister concern, being assessed to tax which is not relevant to sec. 40A(2) which deals with reasonableness of payments made vis-a-vis services provided. 5. learned Commissioner of Income-tax (Appeals) grossly erred in observing that assessee's sister-concern (Universal Sales Corporation) was also paying taxes in higher brackets when as appears prima facie this concern was incurring loss in its other business activity. 6. learned Commissioner of Income-tax (Appeals) grossly erred in ignoring fact that assessee had shown other plants and machineries under head 'computer and cranes' and thereby holding assessee to be eligible for deduction u/s 80 IB(3) when in fact, assessee's investment in Plant & Machinery exceeded Rs.1 Crore. 7. learned Commissioner of Income-tax (Appeals) grossly erred in holding that assessee's case was covered under provisions of sec. 47(xiii) and therefore, section 45(4) would not apply, without appreciating that revaluation of assets and consequential distribution of enhanced value amongst two partners was patently in nature of distribution of capital assets, thereby confirming benefits on partners who would not have got any shares from new company as their capital balances were otherwise negative, but for such conferment. 8. For these and such other grounds as may be urged at time of hearing, order of learned CIT (Appeals) may be vacated and that of Assessing Officer be restored. 3. grounds of appeal No.1 and 2 raised by Revenue are general in nature and hence, are dismissed. 4. issue in ground of appeal No.3 is against deletion of disallowance made under section 40A(2) of Act on account of excess payment of commission by assessee to its sister concern at Rs.57,16,864/-. grounds of appeal No.4 and 5 are inter-linked to issue raised vide ground of appeal No.3. 5. Briefly, in facts of case, assessee was engaged in manufacturing of construction equipment. For year under consideration, assessee had furnished return of income declaring total income of Rs.89,35,270/-. assessee was partnership firm which was in existence till 31.12.2005 and w.e.f. 01.01.2006, 3 ITA No.1200/PN/2009 M/s. Universal Construction Machinery assets & liabilities of assessee firm were taken over by private limited company Universal Construction Machinery and Equipment Pvt. Ltd. by way of Takeover Agreement. assessee firm was constituted of two partners i.e. Mr. R.H. More and Mr. R.R. More. sister concern by name of Universal Sales Corporation was proprietary concern of Shri Abhijit More, son of Mr. R.H. More and brother of Mr. R.R. More. During year under consideration, assessee had paid commission of Rs.2,20,19,027/- to sister concern Universal Sales Corporation (hereinafter referred to as USC ). said commission was paid as USC had done marketing job of products of assessee firm. assessee was asked to justify payment of Rs.2.20 crores to USC and also asked to give rate of commission which was paid to USC and other parties. assessee claimed that it paid commission @ 7.5% to USC as per Memorandum of Understanding executed on 01.10.2004. In respect of other parties, normally commission was paid @ 10% to 13%, but there were instances, where it was paid at 3%. Assessing Officer noted from account of USC that every month, there was credit of commission which was 7.5% on net sales and other sum which was difference in sales commission for said month. For month of June, 2005, commission on net sales was Rs.17,96,724/- and difference in sales commission was Rs.18,84,352/-. assessee explained that difference in sales commission was on account of difference between dealer price and sales price. net sales effected by USC were to tune of Rs.13.02 crores, against which it was paid sales commission of Rs.97,74,081/- and differential sales commission of Rs.1,02,70,957/-. total amount paid after deducting service tax was Rs.2,00,45,038/-. Assessing Officer noted that same worked out to 15.39% which was much higher than commission paid to other parties. assessee was asked to explain as to why excess sales commission paid to USC be not disallowed as excessive, in view of provisions of section 40A(2) of Act. assessee vide reply dated 11.12.2008 pointed out that commission paid was not only for sales by USC but 4 ITA No.1200/PN/2009 M/s. Universal Construction Machinery also that USC had incurred expenditure on employees, selling and distribution expenses, travelling expenses, advertising and exhibition expenses, etc. and hence, amount paid was reasonable. Assessing Officer noted that as per MOU between parties, USC was completely responsible for marketing of total range of products manufactured by assessee. USC was to appoint staff, undertake extensive travelling, take part in all sales exhibition, etc. In case of warranty services, USC was to inform assessee and cost was to be borne by USC and all components / parts, which assessee had given warranty to customers were to be provided by assessee free of cost. assessee had claimed USC was also given reimbursement of expenses incurred by it on account of seminars, conferences, travelling expenses, lodging charges and other sales related expenses incurred for assessee. Assessing Officer noted that expenditure incurred by USC for seminars, conferences, travelling expenses, etc. was reimbursed by assessee and also cost of parts which were replaced in warranty period were also borne by assessee. expenditure on wages, travel, etc. were common to any business and have no special bearing with transactions with assessee. other concerns had been paid commission @ 10%, 13% or 3%, who were also incurring these expenses and were not borne by assessee. plea of assessee before Assessing Officer was that USP had shown entire commission received as income and paid taxes. However, this fact was brushed aside by Assessing Officer as issue was to be seen from angle of reasonableness of payment made vis- -vis services provided. Referring to provisions of section 40A(2) of Act, he was of view that assessee had paid excessive commission to USC, which was proprietary concern of their family members. Where said concern was reimbursed for expenditure also including seminars, exhibition, warranty, etc, Assessing Officer was of view that there was no need to pay commission @ 15.39%. In view thereof, Assessing Officer held that commission @ 11% would be reasonable as that was 5 ITA No.1200/PN/2009 M/s. Universal Construction Machinery average rate of commission paid to other parties. Accordingly, net commission @ 11% at Rs.1,43,28,174/- was allowed and difference of Rs.57,16,864/- was disallowed. 6. Before CIT(A), contention of assessee was that out of total amount of commission paid of Rs.2 crores, there was element of reimbursement of expenses of Rs.1.31 crores and only balance amount of Rs.69,43,393/- actually related to commission paid which worked out to 5.33% on sales. assessee further pointed out that there was no exercise to evade tax by making this payment as USC had also paid taxes at maximum rate of 30%. In this regard, reliance was placed on ratio laid down by Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) Pvt. Ltd. (2009) 310 ITR 306 (Bom), in which issue of disallowance of commission was decided on parameters of tax implication. assessee also filed detailed submissions which are reproduced at pages 4 to 7 of appellate order. first contention raised by assessee in this regard was that payment made to USC was of marketing commission, whereas payment made to other parties was simply sales commission. It was further stated that assessee had not incurred marketing expenses which were incurred by USC i.e. expenses on marketing, staff, travelling and conveyance of marketing staff, etc. assessee further contended that effectively commission @ 19.27% was paid in financial year 2003-04, 15.22% was paid in financial year 2004-05 and 15.34% was paid in financial year 2005-06 and same had been allowed vide order passed under section 143(3) of Act except sum of Rs.75,000/- was disallowed in assessment year 2004-05 for want of vouchers, against which reimbursement of expenses was claimed. In year under appeal, assessee pointed out that expenses are not reimbursed separately but rate of commission was inclusive of reimbursement of expenses. It was stressed by assessee that commission paid included element of reimbursement of expenditure since for past two 6 ITA No.1200/PN/2009 M/s. Universal Construction Machinery years, USC was given reimbursement of expenditure in addition to commission, whereas in year under appeal, no such separate reimbursement was given. In this regard, assessee stressed that element of reimbursement of expenses was to tune of Rs.1.31 crores and rate of commission after excluding same worked out to 5.33%. Another plea was raised that there was no evasion of tax by making commission payment. CIT(A) observed that there was MOU between assessee and USC, according to which, it had complete responsibility for marketing of total range of assessee s products. Accordingly, certain expenses of employees as well as related to sales functions, exhibitions, travelling, etc. was undertaken by USC which was also reimbursed by assessee. After excluding these reimbursements as per assessee, rate of commission worked out only to 5.33%. CIT(A) observed that Assessing Officer had not doubted services rendered by associate concern USC nor reimbursement of expenses have been doubted. Only adhoc disallowance has been made out of total payment relying on average rate of payment of commission to other parties, which worked out to 11%. Reference was made to ratio laid down by Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) Pvt. Ltd. (supra) for proposition that in facts of said case, Hon ble High Court noted that sister concern to whom commission was paid to assessee was also assessed to tax. Therefore, it relied on CBDT Circular No.6P dated 06.07.1968, in which it was stated that no disallowance under section 40A(2) of Act was to be made in respect of payment made to relatives and sister concerns, where there was no attempt to evade tax by making such payments. CIT(A) vide para 3.4 of appellate order noted that on disallowed amount of Rs.57,16,864/-, tax effect would worked out to Rs.19,24,296/-. On other hand, same was excluded from payment to USC, net tax effect would worked out to Rs.19,36,186/-. Therefore, CIT(A) in this regard observed that disallowance of commission paid to sister concern 7 ITA No.1200/PN/2009 M/s. Universal Construction Machinery being revenue neutral and following judgment of jurisdictional High Court, disallowance made under section 40A(2) of Act was thus, deleted. 7. Revenue is in appeal against order of CIT(A). 8. learned Departmental Representative for Revenue pointed out that issue raised vide grounds of appeal No.1 to 5 was in relation to commission paid to sister concern, which was disallowed by invoking provisions of section 40A(2) of Act. assessee had paid to its sister concern commission @ 7.5% and also paid sales value over and above listed price. He referred to MOU executed between parties placed at pages 35 and 36 of Paper Book, wherein under clause 9 it was agreed that commission would be paid to USC to cover cost of employees, etc. Our attention was drawn to Profit & Loss Account placed at page 38 of Paper Book and it was pointed out that assessee on one hand, had paid commission to cover cost of employees, etc. on account of marketing, but had also simultaneously, incurred expenses on various items and debited to its Profit & Loss Account. 9. learned Authorized Representative for assessee in turn, relying on various clauses of MOU pointed out that assessee was paying commission @ 7.5% of net sales for marketing of its products and if machinery was sold for higher price, then it was agreed that balance would be retained by USC. learned Authorized Representative for assessee however, stressed that quantum of commission paid was similar / constant over period of time. It was also pointed out by him that there was no tax evasion and in absence of same, there was no merit in any disallowance of said expenditure. He further claimed that said amount was paid as business exigency and since similar rate was allowed in earlier years i.e. 3.78% in assessment year 2004-05, 10.76% in assessment year 8 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 2005-06, which was excluding reimbursement of expenses, then rule of consistency is to be applied and amount is to be allowed as deduction. Another issue raised by learned Authorized Representative for assessee was that 75% of sales made by assessee were through USC and hence, necessity to make aforesaid payment. learned Authorized Representative for assessee was asked to compare terms of agreement which were earlier entered into by assessee and new agreement, which was applicable to year under appeal. matter was adjourned to next date of hearing. learned Authorized Representative for assessee pointed out that as per earlier agreement, in addition to commission paid to sister concern, there was reimbursement of expenses. However, under new MOU, there was only payment of commission to USC, as per MOU placed at pages 35 and 36 of Paper Book. He stressed that commission paid during year was comparable to earlier years. However, Assessing Officer had invoked provisions of section 40A(2) of Act since Shri Abhijit More, who was proprietor of USC was related person of partners of assessee firm. Our attention was drawn to details of expenses claimed and comparison chart placed at page 37 of Paper Book. He further stressed that there was no tax evasion since in earlier years also, same rate of commission was paid to USC in assessment year 2004-05, commission @ 19.74% was worked out and Assessing Officer had also accepted same. learned Authorized Representative for assessee in this regard placed reliance on ratio laid down by Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) Pvt. Ltd. (supra), wherein sister concern was paying taxes at higher taxes and commission paid was allowed in entirety by Hon ble Bombay High Court. Another point raised by learned Authorized Representative for assessee was that Assessing Officer had allowed commission @ 11% out of total payment @ 15%. He further stressed that where business decision had been taken to pay commission, then Assessing Officer cannot sit in judgment of decision of assessee. 9 ITA No.1200/PN/2009 M/s. Universal Construction Machinery Reference was made to various case laws, wherein rate of commission paid was higher. 10. We have heard rival contentions and perused record. assessee before us was engaged in business of manufacturing of construction equipment. assessee was carrying on his business for past several years, but during accounting period, assets and liabilities of assessee firm were taken over by private limited company under name and style of M/s. Universal Equipment Machinery and Equipment Pvt. Ltd. on 31.12.2005. assessee claims that it had entered into MOU with USC for marketing of its products. assessee firm constituted of two partners i.e. Mr. R.H. More and Mr. R.R. More . sister concern USC was sole proprietor concern of Shri Abhijit More, who is son of Mr. R.H. More and brother of Mr. R.R. More. assessee had paid commission to tune of Rs.2.20 crores to USC during year and since payment was made to related party as defined under section 40A(2)(b) of Act, assessee was asked to justify payment made to related party. assessee in this regard claimed that it had paid commission @ 7.5% to USC as per MOU dated 01.10.2004. However, Assessing Officer noted that in addition to commission paid, there was credit of other amounts, which was different from sales commission for said manufacture. total sales effected by USC for accounting period were to tune of Rs.13.02 crores against which, sales commission of Rs.97,74,081/- was paid and differential sales commission of Rs.1,02,70,957/- was paid. Thus, total amount paid was Rs.2.00 crores after deducting service tax, which worked out to 15.39%, which was higher than commission paid to other parties, who were being reimbursed @ 10% to 13%. assessee in this regard was asked to justify reasonableness of payment made to sister concern, in view of provisions of section 40A(2) of Act. 10 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 11. In order to adjudicate issue raised by way of grounds of appeal, we need to take note of terms agreed upon between parties for payment of aforesaid sales commission. assessee had initially entered into MOU on first day of April, 2003 with USC, by which said concern was appointed as commission agent. As per clause (1) of said agreement, copy of which was placed on record during course of hearing, USC was to act as commission agent for total range of products manufactured by assessee. Further, as per clause (2) USC was to appoint staff exclusively for assessee, of which salary and other expenses such as travelling, lodging, etc. would be reimbursed at actual on submission of proof of expenditure. Further, vide clause (3), USC was to obtain orders in name of assessee, who would pass bill directly to customers/ distributors. As per clause (4), in case of warranty services, USC was to inform assessee who would take care of warranty services. It was agreed between parties as per clause (5), all components, parts of which assessee had given warranty to customers, would be provided by assessee free of cost. In view thereof, it was agreed as per clause (6), assessee would make on account payment of Rs.7.5 lakhs per month to USC as specified under clause (3), for which USC was to provide statement of expenditure along with proof of reimbursement. If in any given month, expenditure was lower than amount so stated, it was to be adjusted in following months. In month where expenditure reimbursement was beyond limit of Rs.7.5 lakhs, then it was agreed that amount in excess of Rs.7.5 lakhs would be borne by USC and assessee would not reimburse same. In addition, to said Rs.7.5 lakhs, assessee was to further pay sales commission of 2.5% of net sales to USC on quarterly basis. This MOU between parties was in force till 30.09.2004. MOU between parties was amended w.e.f. 01.10.2004. As per amended MOU, assessee appointed USC as marketing organization i.e. for marketing of total range of products manufactured by it. As per clause (2) of said MOU, USC was to take total 11 ITA No.1200/PN/2009 M/s. Universal Construction Machinery responsibility of marketing, appointing, distribution and promotion of sales of all production of assessee. For this, as per clause (3), USC was to appoint staff which would undertake extensive travelling, appoint dealers/distributors all over India exclusively for assessee. understanding was that USC would obtain orders in name of assessee, who in turn, would bill directly to customers / distributors. Another term agreed between parties as per clause (5), USC would totally be responsible for collection of payment and in case, if payment becomes bad, USC was to take responsibility of legal action and follow up of payment. Further, treatment of bad debts was to be decided with mutual understanding on case to case basis. It was further agreed between parties as per clause (6) that USC would take part in all sales exhibitions as well as would undertake responsibility of printing of leaflets, brochures. In respect of warranty services, as per clauses (7) and (8) of MOU, USC had to inform assessee and all components / parts of which assessee had given warranty to its customers would be provided by assessee, free of cost. As per clause (9), it was agreed that assessee would make payment as sales commission to cover cost of employees, other expenses including exhibition expenses, dealer commission and other services rendered which would be on basis of 7.5% of net sales and difference between selling price and dealer s price. As per clause (10), USC was to raise Invoice on assessee for sales commission due along with all details on monthly basis. It was also agreed between parties as per clause (11) that USC would take written consent from assessee for any special discount to be offered to any customer. deliveries were to be made in factory and transportation charges would be charged as per terms of order. In agreement thereof, MOU was signed between parties, copy of which is placed at pages 35 and 36 of Paper Book. 12. As per amended clauses of MOU entered into on 01.10.2004, understanding was that assessee as manufacturer of its goods appointed USC 12 ITA No.1200/PN/2009 M/s. Universal Construction Machinery as marketing organization, wherein USC undertook total responsibility of marketing, appointing distributors and promotion of sales of assessee. It was duty of USC to appoint staff and to undertake extensive travelling, appoint dealers / distributors all over India exclusively for assessee. In addition, USC also undertook responsibility for collection of payments and also to appoint all sales exhibitions. However, warranty commitments had to be provided by assessee at its own cost. understanding between parties was that sales commission would cover cost of employees, other expenses including exhibition expenses, dealer commission and other services rendered by making payment @ 7.5% on net sales and also in addition paying difference between selling price and dealer s price. terms of MOU implied that dealer s price would be charged by assessee and in case USC manages to sell products at price higher than dealer s price, then difference between sales price and dealer s price would be retained by him, in addition to payment of commission @ 7.5% on net sales. However, in earlier understanding between parties, when assessee was new to market, understanding was that USC would act as commission agent for total range of products manufactured by assessee by way of appointment of staff, exclusively for assessee, cost of salary and other expenses was to be reimbursed at actual on submissions of proof of expenditure. upper limit of Rs.7.5 lakhs per month was specified on this account. It was understood between parties that expenses on account of staff would be to tune of Rs.7.5 lakhs per month and in case in any month, it was lesser of Rs.7.5 lakhs, then same would be adjustied in following months. However, in case it went beyond limit of Rs.7.5 lakhs, amount in excess had to be borne by USC and assessee would not reimburse same. In addition, sales commission was to be paid @ 2.5% of net sales to USC on quarterly basis. These were terms entered into by assessee with USC, which is related concern at start of its business of manufacturing of construction machinery. 13 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 13. But later on, terms were amended by way of MOU entered on 01.10.2004, wherein as against sales commission, 2.5% of net sales, it was agreed between parties that commission would be paid @ 7.5% of net sales. Admittedly, said sales commission was to cover cost of employees, other expenses including exhibition, dealer s commission, etc. in addition. higher rate of commission of 7.5% on net sales was as against 2.5% agreed between parties earlier. Also another remuneration was agreed upon between parties. parties came to understanding that USC can sell products manufactured by assessee at price higher than dealer s price and difference between selling price and dealer s price was retained by USC. Other terms of providing warranty on goods manufactured by assessee were responsibility of assessee including cost of components and parts, on which assessee had given warranty to customers. assessee has furnished comparison percentage of commission paid to USC year-wise. perusal of said details filed at page 37 of Paper Book reflects that total sales of assessee have steadily increased from year to year i.e. as against sales of Rs.6.59 crores in financial year 2003-04, sales in financial year 2004-05 were to tune of Rs.11.26 crores. Further, in year under consideration for period up to 31.12.2005, sales were to tune of Rs.18.25 crores. percentage of sales through USC to total sales was 89% in first year to 96% in next year and only 17.34% in year under appeal. assessee had paid commission to USC in financial year 2003-04 at Rs.22,20,761/-, in financial year 2004-05 at Rs.1,16,44,891/- and in year under appeal was amounting to Rs.1,99,80,971/-. In actual fact, as noted by Assessing Officer, on sales effected by USC to tune of Rs.13.02 crores, assessee had paid sales commission of Rs.97,74,081/- and had paid differential sales commission of Rs.1,02,70,957/- which totaled to Rs.2.00 crores after deducting service tax. assessee had reimbursed expenses to USC to tune of Rs.90,90,349/- in financial year 2003-04 and Rs.48,21,709/- in financial year 2004-05. claim of assessee before us, which 14 ITA No.1200/PN/2009 M/s. Universal Construction Machinery was vehemently stressed by learned Authorized Representative for assessee time and again, that percentage of total commission to sales through USC after including reimbursement of expenses worked out to 19.27% in financial year 2003-04, 15.22% in financial year 2004-05 and 15.34% in financial year 2005-06, which was in range. However, in case reimbursement of expenses is excluded, then assessee had paid commission @ 3.78% to USC in financial year 2003- 04, @ 10.76% in financial year 2004-05 and @ 15.34% in financial year 2005-06. 14. Another aspect which has been highlighted by assessee is Profit & Loss Account prepared for year ending 31.03.2006, wherein assessee had bifurcated commission income and trading income vis- -vis commission expenses and trading expenses. perusal of details filed at page 38 of Paper Book reflected trading sales to be at Rs.2.82 crores, whereas in comparison figure, total sales of assessee were declared at Rs.1.82 crores. perusal of assessment order with special mention at page 4 of assessment order reflected that assessee vide reply dated 11.12.2008 had claimed that commission was paid to USC not only for sales but also since USC had incurred expenditure on employees, selling and distribution expenses, travelling expenses, advertisement and exhibition, etc. However, in later paragraph, Assessing Officer notes that assessee had reimbursed expenses incurred by USC on account of seminars, conference, travelling expenses, lodging charges and other sales related expenses incurred for assessee. Assessing Officer further reiterates that expenditure incurred by USC for seminars, conference, travelling, etc. were reimbursed by assessee. assessee in written submissions filed before CIT(A) claims that commission paid to USC included element of reimbursement of expenditure to tune of Rs.1.31 crores and in case same is excluded from total commission payment, then rate of commission would be worked out to 5.33%. In this, assessee has taken turnover on which 15 ITA No.1200/PN/2009 M/s. Universal Construction Machinery commission has been paid at Rs.13.02 crores and after excluding element of reimbursement of expenses at Rs.1.31 crores out of total commission of Rs.2.00 crores. assessee claims that actual commission paid was only Rs.69,43,393/-. In case reimbursement of expenses as made under present MOU are compared to reimbursement of expenses as under earlier MOU where there was upper limit of reimbursement of expenditure to tune of Rs.7.5 lakhs per month, whereas in year under consideration, where business of assessee stands established, reimbursement of expenditure is claimed to be to tune of Rs.1.31 crores. claim made by assessee thus, is on higher side and since person to whom payment has been made is related concern, onus is upon assessee to establish that said payment has been made on reasonable basis as per market conditions. 15. In order to establish its claim, assessee time and again has claimed that in case it is held that assessee had made excess payment of sales commission to USC by Rs.57,16,864/-, then it is tax neutral as USC has paid excess tax on sales commission. In order to justify its claim, assessee has re-worked figures of Trading and Profit & Loss Account of USC, under which it was pointed out that USC has two types of transaction; one trading on its own and second one is commission income earned by said USC. expenses have also been bifurcated between two units, wherein as per details filed on sales of Rs.2.82 crores, USC has incurred loss of Rs.23,68,451/- as against net profit of Rs.73,48,947/- on total commission of Rs.2.04 crores. loss arising in trading business is to be set off against profit arising in commission business. Profit & Loss Account was re-casted by assessee in order to work out profit on commission income. However, no such bifurcation is made by USC in its books of account. said concern USC has only shown net profit of Rs.49,80,496/- in its cumulative Trading, Profit & Loss Account for its trading business and also 16 ITA No.1200/PN/2009 M/s. Universal Construction Machinery commission income earned by it. copy of Profit & Loss Account is placed at page 41 of Paper Book. sole proprietor of USC Mr. Abhijit More has furnished return of income declaring income from Universal Sales Corporation at Rs.49,18,574/-. In addition, it has declared income from another unit and income from other sources declaring total income of Rs.63,72,716/-. contention of assessee that on so-called income, sales commission of Rs.57,16,864/-, Mr. Abhijit More had paid taxes @ 33.66% is misplaced as from sole proprietary concern of USC, only net income of Rs.49,18,574/- has been declared. As referred to in paras hereinabove, said Rs.49,18,574/- is inclusive of trading income on sales of Rs.2.82 crores and also commission received. balance income declared by said Shri Abhijit More in his return of income is from another service division at Rs.13,92,220/- which then totals up to income of Rs.62,10,754/- has no connection with sales commission paid by assessee to USC and hence, benefit of same cannot be allowed in order to determine whether transaction is revenue neutral or not. In given set of facts, where recipient of commission has declared its income at figure lower than disallowance made in hands of assessee, there is no merit in claim of assessee in this regard. Consequently, reliance placed upon by learned Authorized Representative for assessee on ratio laid down by Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) Pvt. Ltd. (supra) is misplaced. 16. Now, coming to allowability of claim of commission in hands of assessee vis- -vis provisions of section 40A(2) of Act. provisions of section 40A(1) of Act shall have effect notwithstanding anything to contrary contained in any other provisions of Act, relating to computation of income under head profits and gains of business , provisions of this section would apply. Under section 40A(2)(a) of Act, it is provided that where assessee incurs any expenditure in respect of which payment is made or is to be made to any persons 17 ITA No.1200/PN/2009 M/s. Universal Construction Machinery specified under clause (b) of said sub-section and where Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to market value of goods, services or facilities, for which payment is made, then so much of expenditure as so considered by him to be excessive or unreasonable shall not be allowed as deduction. list of persons referred to in clause (a) are provided under clause (b) to said sub-section. Admittedly, in given facts of case, payment made by assessee to USC is covered by provisions of section 40A(2)(a) of Act as USC is person covered under clause (b) to that sub-section. issue which arises is whether in facts and circumstances of present case, expenditure incurred by assessee is excessive or unreasonable having regard to market value of goods, services or facilities for which payment is made. As pointed out in paras hereinabove, assessee had paid sales commission of Rs.97,74,081/- and had paid differential sales commission of Rs.1,02,70,957/-. differential sales commission was difference between listed price of goods and price at which commission agent i.e. USC had sold said goods in market. sales commission was paid @ 7.5% of net sales. assessee was also paying commission to other parties. However, there was no such clause of paying any differential sales commission to any other person. Even in earlier years when assessee was setting up his business, no such understanding existed between parties. contract provided certain amount to be paid on account of commission but there was no understanding to pay any differential sales commission. total commission paid to assessee works out to about Rs.2 crores after deducting services tax which worked out to 15.39% on sales effected through USC, which was admittedly, higher than commission paid to other parties who were being reimbursed at 10% to 13%. assessee claims that it was business decision and understanding between parties and same cannot be disturbed by any of authorities. However, in cases where provisions of section 40A(2)(a) of Act 18 ITA No.1200/PN/2009 M/s. Universal Construction Machinery are attracted then said provisions are to be applied irrespective of understanding between parties. endeavour of assessee in this regard was to justify market value of services provided by USC, against which payment was being made to assessee. amended clauses of agreement as agreed upon vis- -vis clauses of original agreement itself points out that, in scenario where sales through USC had dropped substantially, but rate of commission has been increased without any basis. Assessing Officer had allowed commission @ 11% out of total payment of 15%. Against said order of Assessing Officer, learned Authorized Representative for assessee before us has referred to various case laws where rate of commission paid was higher than what has been allowed in hands of assessee. We find no merit in said reliance placed upon by learned Authorized Representative for assessee, in view of peculiar facts and circumstances of case, where assessee in addition to paying sales commission at particular rate has further paid differential sales commission on account of difference in listed price and price at which goods are sold. There is no justification for such payment, in view of provisions of section 40A(2)(a) of Act. We hold that ends of justice would be met by allowing net commission @ 12.5% and balance would be disallowed in hands of assessee. Accordingly, first issue raised by Revenue is thus, partly allowed. 17. second issue raised by way of ground of appeal No.6 by Revenue is against claim of deduction under section 80IB(3) of Act. 18. Briefly, facts relating to issue are that assessee for year under consideration had claimed deduction on account of Small Scale Industrial Undertaking @ 25% of profits and gains derived from industrial undertaking u/s.80IB(3) of Act. assessee claims that it was registered as Small Scale Industrial (SSI) Undertaking in December, 1995 and was claiming deduction under 19 ITA No.1200/PN/2009 M/s. Universal Construction Machinery section 80IB(3) of Act. According to assessee, year under appeal i.e. assessment year 2006-07 was last year for claiming deduction. Assessing Officer noted that in order to be eligible for claiming deduction under section 80IB(3) of Act, one of pre-conditions was that investment of assessee in plant & machinery as on last date of previous year should not exceed Rs.1 crore. In this regard, reliance was placed on ratio laid down by Hon ble Kerala High Court in CIT Vs. Hintannia Plastics (P) Ltd., reported in 267 ITR 114 (Ker). In order to examine that assessee was fulfilling criteria, Assessing Officer show caused assessee to give Schedule of Fixed Assets from inception. assessee in reply, filed schedules from financial year 1996-97 to financial year 2005- 06 except for financial year 1998-99. assessee further relied on Circular issued by Ministry of SSI Agro and Rural Industries, as per which any unit which had received provisional / permanent registration prior to 24.12.1999 and had taken concrete steps for implementing project would continue to enjoy SSI Status so long as investment in plant & machinery does not exceed Rs.300 lakhs. upper limit of investment in plant & machinery up to 10.12.1997 was Rs.100 lakhs which was increased to Rs.300 lakhs w.e.f. 11.12.1998 and w.e.f. 21.12.1999, investment limit was again reduced to Rs.100 lakhs. Assessing Officer noted clarification with regard to units which have been registered when credit limit was Rs.300 lakhs and those who had taken concrete steps for implementing project. However, when assessee was registered as SSI, investment limit in plant & machinery was only Rs.100 lakhs and even when limit was increased to Rs.300 lakhs, assessee s investment did not exceed Rs.100 lakhs, so as per assessee, Circular had no relevance to instant case. Assessing Offi cer has tabulated year-wise investments in plant & machinery, computer and cranes, office equipment and vehicles at page 7 of assessment order. As per assessee, for arriving at investment figure in plant & machinery, items shown under head plant & machinery in chart only should be taken. However, 20 ITA No.1200/PN/2009 M/s. Universal Construction Machinery Assessing Officer was of view that since as per depreciation schedule of Income Tax Act, plant & machinery include s office equipment, computers, vehicles, etc. and even Ministry of Industry vide S.O. No.857(E) dated 10.12.1997 had defined plant & machinery, which excludes cost of Research & Development, Pollution control Equipment, Tool, jigs, dies, moulds and spare parts. , bank charges, erection and installation charges, cost of transportation, etc. Assessing Officer further noted that whatsoever had to be excluded as per said notification, had been excluded and cost had been arrived accordingly. Assessing Officer further observed that even if cost of plant & machinery as described by assessee was taken, cost of investment was Rs.1,02,26,946/- and in case cost of investment in office equipment, computers, cranes and vehicles was also taken by adopting plant & machinery as per Income Tax Act, then c ost comes to Rs.1,81,87,705/-. Assessing Officer thus, held that assessee was ineligible to claim deduction under section 80IB(3) of Act and accordingly, sum of Rs. 29,77,149/- was added back to returned income. 19. CIT(A) vide para 4 onwards considered claim of assessee under section 80IB(3) of Act. case of assessee before CIT(A) was that while calculating investment in plant & machinery for working out cost at Rs.1,02,26,946/-, Assessing Officer had made arithmetic error. assessee stressed that only investment in plant & machinery was to be considered and extended meaning under Income Tax Act was not to be applied and consequently, computers, office equipment and vehicles were not to be considered as plant & machinery. assessee further pointed out that investment in plant & machinery as on 31.12.2005 was Rs.96,94,358/- which was much less than ceiling limit of Rs.1 crore, hence assessee was to be regarded as SSI under section 11B of Industries (Development and Regulation) Act, 1951 (IDRA) and was thus, entitled to claim of deduction under section 80IB(3) of Act. 21 ITA No.1200/PN/2009 M/s. Universal Construction Machinery assessee pointed out that certain costs had to be excluded in calculating cost of plant & machinery as per notification issued under section 11B of IDRA. Further, reliance was placed on certificate issued by District Industries Centre, which was authority to grant status of SSI under IDRA, under which it has been certified that assessee was SSI. assessee elaborated working out of cost of plant & machinery by way of application filed under Rule 46A of Income Tax Rules, 1962 (the Rules) and pointed out year-wise adjustments to be made in hands of assessee. additional evidence was forwarded to Assessing Officer, in view of Rule 46 of Rules, who in turn, filed remand report. Assessing Officer commented upon various documents furnished by assessee and concluded by stating that where assessee had submitted relevant details along with certain documents, assessee s contention regarding additions to plant & machinery and Cenvat deduction in respective years appeared to be genuine and hence, assessee s claim for deduction under section 80IB(3) of Act be decided on merits. CIT(A) vide para 4.5 noted that assessee had pointed out that there was error to extent of Rs.2,51,227/- in respect of figure of addition in plant & machinery for assessment year 1999-2000 and Rs.2,19,770/- in respect of assessment year 2005-06, which was found to be correct by Assessing Officer as per his report. Further, total amount of Rs.61,392/- towards cost of tools was not deducted from plant & machinery value, whereas as per notification defining SSI, issued under provisions of section 11B of IDRA, this was required to be deducted. Considering thereof, CIT(A) referred to remand report of Assessing Officer dated 28.07.2009 in which Assessing Officer had accepted contention of assessee and held that after excluding amounts as stated by assessee, condition of investment in plant & machinery below Rs.1 crore was fulfilled and as such, assessee was entitled to claim of deduction under section 80IB(3) of Act. 22 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 20. Revenue is in appeal against order of CIT(A). 21. learned Departmental Representative for Revenue placed reliance on order of Assessing Officer and pointed out that no deduction is to be disallowed in hands of assessee as investment in plant & machinery was more than Rs.1 crores. 22. learned Authorized Representative for assessee in first instance pointed out that assessee is eligible to aforesaid deduction, in view of certificate of registration granted to assessee as on 31.12.2005. He further pointed out that Assessing Officer has computed cost of plant & machinery at Rs.1,02,70,957/-. However, perusal of list at page 76 of Paper Book reflects that in assessment year 2005-06, it appears that Cenvat credit of Rs.2,19,770/- in Schedule of Fixed Assets had remained to be deducted. In this regard, assessee placed reliance on calculation placed at page 76 of Paper Book. He further pointed out that out of additions made during year of Rs.37,43,971/-, amount of Rs.9,85,137/- on account of cost of tools is to be excluded. He further pointed out that in case both these adjustments are given to assessee, cost of plant & machinery for year under consideration would go below Rs.1,02,70,957/- and hence assessee would be eligible to claim deduction under section 80IB(3) of Act. adjusted working of cost of plant & machinery is annexed at page 76 of Paper Book. learned Authorized Representative for assessee further pointed out that cost of vehicles, office equipment and computers have to be excluded while computing total cost of plant & machinery. 23. We have heard rival contentions and perused record. issue arising in present appeal vide ground of appeal No.6 is in relation to claim of deduction under section 80IB(3) of Act on account of unit being SSI. 23 ITA No.1200/PN/2009 M/s. Universal Construction Machinery requirement of said section 80IB(3) of Act is that where investment in plant & machinery is less than Rs.100 lakhs, then in such circumstances, assessee is entitled to claim deduction. As per sub-section (3) to section 80IB of Act, term Small Scale Industrial Undertaking is defined under section 80IB(14)(g) of Act, which reads as under:- 80IB(14)(g) small scale industrial undertaking means industrial undertaking which is, as on last day of previous year, regarded as small scale industrial undertaking under section 11B of Industries (Development and Regulation) Act, 1951. 24. Under section 11B of IDRA, 1951, Central Government is empowered to issue notification defining Small Scale Industries, which has been so issued by Central Government. As per said notification, investment in Fixed Assets and plant & machinery should not exceed Rs.100 lakhs and further, it is provided that investment in plant & machinery only is to be considered in this regard. It is further provided that certain basic costs which are to be capitalized to cost of plant & machinery under Income Tax Act are also not to be included and are to be excluded vide Note to clause (B) of said notification. case of assessee before authorities below and also before us was that only cost of plant & machinery and not computers, office equipment and vehicles were to be considered as plant & machinery. assessee further claims that applying said provisions, investment in plant & machinery was less than ceiling limit of Rs.1 crore and as such, assessee was entitled to claim of deduction under section 80IB(3) of Act. Another facet to issue is that District Industries Centre has granted status of SSI under IDRA, 1951 to assessee and same has not been withdrawn. copy of notification issued by Central Government under section 11B of IDRA defining SSI is placed at pages 84 to 87 of Paper Book. 25. perusal of same reflects that while calculating value of plant & machinery, it is provided that cost of equipment, such as, tools, jigs, dies, moulds 24 ITA No.1200/PN/2009 M/s. Universal Construction Machinery and spare parts for maintenance and also cost of consumable stores, cost of installation of plant & machinery, cost of Research & Development equipment and Pollution Control Equipment, cost of generation set, cost of bank charges and service charges, cost involved in procurement or installation of cables, wiring, bus bars, electrical control panels, etc. transportation charges (excluding sales tax and excise) and charges paid for technical know-how, have to be excluded. Further, certificate issued by District Industries Centre, Satara certifying assessee to be SSI as on 31.12.2005 which in turn, is based on certificate issued on application by unit vide letter dated 05.06.2009 is enclosed at page 88 of Paper Book. Further, In view of definition of plant & machinery under section 11B of IDRA, cost of office equipment, computers and vehicles are not to be included as plant & machinery. In view of certificate issued by statutory authority, admittedly, those items are not to be included in order to hold that assessee is eligible as SSI. 26. plea of assessee before us is two-fold that working of total value of plant & machinery at Rs.1,02,70,957/- by Assessing Officer is incorrect. Even if we consider additions made from year to year, first issue raised in this regard is inclusion of Cenvast credit of Rs.2,90,770/- which is to be excluded from Schedule of Fixed Assets filed by assessee for financial year 2004-05. Further, cost of tools at Rs.9,85,137/-, which was part of additions made during year at Rs.37,43,971/- also has to be excluded. perusal of chart placed at page 76 of Paper Book reflects that though claim was made in respect of exclusion of Rs.2,19,770/- but no such claim was made in respect of exclusion of cost of tools of Rs.9,85,137/- before CIT(A). In line of arguments of assessee, we are of view that this particular aspect needs to be verified by Assessing Officer and in case above two costs are to be excluded i.e. Rs.2,19,770/- and Rs.9,85,137/-, then admittedly, value of plant & machinery would go below Rs.100 lakhs and assessee would be entitled to claim 25 ITA No.1200/PN/2009 M/s. Universal Construction Machinery deduction under section 80IB(3) of Act. error in excluding Rs.2,51,227/- in respect of figure of addition in plant & machinery had arisen because annual accounts for said financial year 1998-99 were not traceable during course of assessment proceedings. In respect of tools, assessee claims that this item was pointed out to CIT(A) which has not been considered. Now, before us, learned Authorized Representative for assessee has prepared list of other items which need to be excluded but no such claim was made before Assessing Officer and CIT(A) in this regard and we find no merit in same. 27. second aspect of case is exclusion of various other assets i.e. computers, office equipment and vehicles, which have been held to be not part of plant & machinery by decision of Hon ble High Court of Kerala in CIT Vs. Travancore Mats & Mattings Co. (1998) 229 ITR 93 (Ker) and partly by decision of Ahmedbad Bench of Tribunal in DCIT Vs. Samir Diamond Mfg. (P) Ltd. (1998) 67 ITD 25 (Ahd.Trib). Accordingly, we hold that same are to be excluded. We direct Assessing Officer to verify claim of assessee and re-compute cost of plant & machinery accordingly and also thereafter, allow deduction under section 80IB(3) of Act, if total cost of plant & machinery is less than Rs.100 lakhs. ground of appeal No.6 raised by Revenue is thus, allowed for statistical purposes. 28. Now, coming to last issue raised by Revenue i.e. addition made on account of capital gains under section 45(4) of Act at Rs.1,40,77,446/-. 29. Briefly, facts relating to issue are that assessee was partnership firm which was in existence till 31.12.2005. M/s. Universal Construction Machinery & Equipment Pvt. Ltd. was incorporated on 09.09.2005 and by agreement dated 02.07.2006, assets and liabilities of assessee firm were taken over by said company. partners of firm i.e. Mr. R.H. More and Mr. R.R. More are 26 ITA No.1200/PN/2009 M/s. Universal Construction Machinery also directors of private limited company. As per clause (2) of said agreement, it is provided that company would take over existing business of partnership firm named M/s. Universal Construction Machinery, Pune with all its assets and liabilities and activities; and upon such takeover, partnership firm shall stand dissolved. Assessing Officer noted from Schedule of Fixed Assets that opening WDV of factory building for assessment year 2006-07 was Rs.40,55,705/- and addition to extent of Rs.29,60,999/- was made during year. old building was re-valued at Rs.1,00,58,695/- and on gross value of Rs.1,70,75,399/-, depreciation of Rs.4,43,529/- was claimed and closing WDV was taken at Rs.1,66,31,871/-. capital introduction by both partners Mr. R.H. More and Mr. R.R. More was to extent of Rs.70,36,223/- each by way of re- valuation of factory building. As per assessee s explanation, new company had not claimed depreciation on revalued amount but had claimed depreciation only on old WDV. Both partners who had become directors in new company had been allotted shares to extent of capital balance in firm. assessee was asked to explain as to why accretion to capital account due to revaluation of factory building should not be taken as distribution of assets by firm. Reference was made to section 45(4) of Act and Assessing Officer show caused assessee. Assessing Officer further noted that as per Takeover Agre ement, firm stood dissolved and when assets and liabilities were taken over by company, so this was case of distribution of assets on dissolution of firm. He further observed that even assuming that assessee s stand that there is no question of dissolution of firm as same was taken over as going concern, Assessing Officer observed that transaction would fall under framework of otherwise . He further pointed out that fact remained that assets have been distributed amongst two partners and they have got benefit of shares to that extent from company and hence, it was clear case of distribution of assets. Vide submissions dated 02.12.2008, assessee explained 27 ITA No.1200/PN/2009 M/s. Universal Construction Machinery that its case fell within section 47(xiii) of Act, which was transaction not regarded as transfer, as per which four conditions had to be fulfilled for transaction not to be regarded as transfer, which are as under:- (a) all assets and liabilities of firm (or association of persons or body of individuals) relating to business immediately before succession become assets and liabilities of company. (b) all partners of firm immediately before succession become shareholders of company in same proportion in which their capital accounts stood in books of firm on date of succession. (c) partners of firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotm ent of shares in company and (d) aggregate of shareholding in company of partners of firm is not less than fifty per cent of total voting power in company and their shareholding continues to be as such for period of five years from date of succession. 30. Assessing Officer observed that assessee s case was not covered by said section because clause (c) of said section states that partners of firm have not received any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in company. Assessing Officer noted that in present case, partners had benefited by way of accretion to capitals on account on revaluation of factory building. In case same was not done, their capital balances would have been in negative and since both partners had benefited by way of addition of shares than what they were otherwise entitled, assessee s case was held to be not covered under section 47(xiii) of Act. Assessing Officer further held as under:- Moreover, W.D.V. of factory building before revaluation was Rs.40,55,705/ - to which revaluation of Rs.1,00,58,695/- has been added. After some additions gross value of building has been taken at Rs.1,70,75,399/- and after claiming depreciation of Rs.4,43,529/- closing WDV is shown at Rs.1,66,31,871/-. partners capitals have been increased due to this revaluation with amount of Rs.70,36,223/- each. accretion to capitals of partners put together on this count is Rs.1,40,72,446/-. This shows that it is not just increase of revaluation which is added to their capital but entire value of building which means asset of factory building has been distributed between two partners and market value of building has been distributed equally between them. Therefore, capital gains has to be charged as per section 45(4) of Income Tax Act, 1961, in hands of firm on sale consideration of Rs.1,40,77,446/- . 28 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 31. Before CIT(A), assessee agitated said addition made on account of capital gains under section 45(4) of Act. In alternate, it was also agitated that capital gains would be chargeable @ 20% along with indexation. CIT(A) after considering submissions made by assessee, was of opinion that assessee s case was covered under provisions of section 47(xiii) of Act, wherein Preamble of section 47 of Act provides that nothing contained in section 45 of Act shall apply to following transfers. CIT(A) held that there was no question of application of section 45(4) of Act. CIT(A) further observed that provisions of section 45(4) of Act are to be read with Circular No.495 dated 22.09.1987 and it was explained that section would be applicable in case of dissolution of firm and distribution of capital assets of firm to partners at time of dissolution or otherwise. In case there was no distribution of capital assets of firm amongst partners on dissolution, there was no capital gains. It was also explained that present case was takeover of all assets and liabilities of firm by successor company by way of agreement dated 02.01.2006. Once entire assets of assessee firm had been taken over by company as single party, there was no distribution in sense that distribution presupposes two or more parties. CIT(A) held that in case of assessee, it was neither transfer of assets to retiring partner nor distribution of assets on dissolution and hence, there was no merit in assessability of capital gains in hands of assessee. 32. Revenue is in appeal against order of CIT(A) in this regard. 33. learned Departmental Representative for Revenue pointed out that assessee had revalued building which was taken over by successor company and effect of revaluation was capitalization of partners capital account, hence, addition in case is warranted under section 45(4) of Act. 29 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 34. learned Authorized Representative for assessee on other hand, pointed out that there was no dissolution of firm and there was no distribution of said assets to partners and he further submitted that assessee satisfied all conditions of proviso to section 45(iii) of Act. Our attention was drawn to clauses of agreement dated 02.01.2006 placed at pages 89 to 92 of Paper Book. He further submitted that erstwhile partners had same shareholding in successor company. He opposed order of Assessing Officer in applying provisions of section 45(4) of Act which dealt with distribution of assets on dissolution of partnership. However, in facts of present case, there was no dissolution but there was takeover of assets and liabilities by successor company which resulted in transfer of business from partnership firm to company and hence, provisions of section 47(xiii) of Act were applicable. Further, reliance was placed on decision of Ahmedabad Bench of Tribunal in ITO Vs. M/s. Alta Inter-Chem Industries in ITA No.223/Ahd/2012, relating to assessment year 2008 -09, order dated 19.10.2012. He admitted that there was revaluation of assets but there was no distribution of assets. It was also admitted by assessee that partners had negative balances and only on revaluation of assets, partners had positive balance against which shares allotted by successor company. He stressed that under provisions of section 47(xiii) of Act, there is no bar on revaluation of assets. He strongly opposed to application of section 45(4) of Act by Assessing Officer which was to be applied only when there was distribution of assets. 35. learned Departmental Representative for Revenue in rejoinder pointed out that in case there was no revaluation of assets, then no shares would have been allotted to partners of assessee firm. He further referred to provisions of section 45(4) of Act and pointed out that term otherwise covers transaction of assessee under which assessee had been allotted shares in successor company. 30 ITA No.1200/PN/2009 M/s. Universal Construction Machinery 36. We have heard rival contentions and perused record. assessee was partnership firm which continued in business till 31.12.2005 i.e. during accounting period under consideration. assessee entered into agreement with Universal Construction Machinery and Equipment Pvt. Ltd., under which it was agreed that all assets and liabilities of assessee firm would be taken over by successor company. As per agreement executed on 02.01.2006, successor company was to take over entire business of assessee firm w.e.f. 01.01.2006 and in consideration of takeover of entire business, successor company was to issue equity shares of amount equal to total amount to credit of each of partners capital account as per balance sheet of dissolved firm as on 31.12.2005. It was agreed between parties that partners immediately before succession would become shareholders of company. As per clause (5) of agreement, partners of assessee firm were not entitled to receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of shares in company. Various other terms and conditions were also agreed upon between parties as per agreement placed at pages 89 to 92 of Paper Book. assessee before us has revalued assets of partnership firm and corresponding entry was made in capital account of partners. partners before capitalization of revaluation of assets had negative balance. However, after revaluation had positive capital balance, against which it was allotted shares by company, which had taken over by partnership firm. case of Assessing Officer in this regard was that in case there was no revaluation of assets, then no shares would have been allotted to partners of assessee firm and hence, it was case of dissolution of partnership firm, which was to be charged to tax under section 45(4) of Act. perusal of said provisions reflect that where profits or gains arises from transfer of capital asset by way of distribution of capital assets on dissolution of firm or AOP or body of individuals or otherwise, then same is chargeable to tax as income of firm, association or body, of previous year in 31 ITA No.1200/PN/2009 M/s. Universal Construction Machinery which said transfer taken place. sub-section further provides that for purpose of section 48 of Act, fair market value of asset on date of such transfer shall be deemed to be full value of consideration received or accruing as result of transfer. provisions of section 45 of Act are attracted where there is transfer of asset and under sub-section (4) deemed transfer of assets is covered i.e. in case there is dissolution of firm or AOP or body of individuals, then it is provided that on such dissolution, where capital assets are distributed in case of firm to partners, then profits or gains arising from such transfer are to be brought to tax. However, in facts of present case before us, partnership firm which was carrying on business was taken over by Private Limited Company and question which arises is that once such takeover takes place, whether it is covered under section 45(4) of Act. We find no merit in order of Assessing Officer in this regard since on takeover of partnership firm by Private Limited Company, there is no dissolution of firm and consequently, there is no distribution of capital assets. On other hand, transaction in question is covered by provisions of section 47 of Act, which provides list of transactions which are not regarded as transfer of assets. Under clause (xiii) to section 47 of Act, it is provided that any transfer of capital asset or intangible asset by firm to company as result of succession of firm by company, shall not be regarded as transfer and nothing contained in section 45 of Act shall apply to such transfer. We are not referring to balance provisions of said clause as same are not relevant to decide present issue. transaction entered into between parties i.e. assessee before us and Private Limited Company was succession of firm by company, under which assets and liabilities of firm were taken over by company and as against capital account of partners, shares were allocated. Admittedly, capital account of partners was negative, however, there were certain assets in hands of firm which were revalued, against which capital balance of partners was enhanced and 32 ITA No.1200/PN/2009 M/s. Universal Construction Machinery against such enhanced capital balance, shares were allotted. However, Private Limited Company took over assets at its original value and not at enhanced value and did not claim appreciated value on said assets. In view thereof, where transaction undertaken by assessee firm was not transfer, there is no merit in computing income from capital gains in hands of assessee. partners did not receive any consideration on account of enhanced value of capital assets. In this regard, we find support from ratio laid down by Ahmedabad Bench of Tribunal in ITO Vs. M/s. Alta Inter -Chem Industries (supra). Upholding order of CIT(A), we dismiss third issue raised by Revenue. grounds of appeal raised by Revenue are partly allowed. 37. In result, appeal of Revenue is partly allowed. Order pronounced on this 30th day September, 2016. Sd/- Sd/- (R.K. PANDA) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated : 30th September, 2016. GCVSR Copy of Order is forwarded to : 1. Appellant; 2. Respondent; 3. CIT(A)-II, Pune; 4. CIT-II, Pune; 5. DR , ITAT, Pune; 6. Guard file. BY ORDER, //True Copy // Sr. Private Secretary ITAT, Pune Addl. Commissioner of Income-tax, Range-3, Pune v. M/s. Universal Construction Machinery