HIGH COURT OF JAMMU AND KASHMIR AT JAMMU ITA No. 13/2008 Date of order: 12.09.2017 M/s Jamkas Vehicleades (P) ltd vs. Income Tax Officer Coram: Hon ble Mr Justice Alok Aradhe, Judge Hon ble Mr Justice B. S. Walia, Judge Appearing counsel: For Petitioner/appellant(s) : Mr.Virender Bhat, Advocate For respondent (s) : Mr. K.D. S. Kotwal, Advocate i/ Whether to be reported in Yes/No Press/Media? ii/ Whether to be reported in Yes/No Digest/Journal? Per Alok Aradhe-J This appeal under section 260-A of Income Tax Act, 1961 was admitted by Bench of this Court vide order dated 05.04.2011 on following substantial questions of law: i) Whether stocks transferred on cost price can be assessed to tax on notional price? ii) Whether assessee has right to fix price of stock and transfer same at price less than market value, if so whether tax can be levied on notional profits or on actual profits? iii) Whether principles of assessing value of stock of dissolved firm for assessing mutual adjustment of partner's shares can be applied to running company?. 2. facts giving rise to filing of this appeal briefly stated are that there was change in Management and Shareholdings of Company. M/s Janki Motor Pvt. Ltd. was having dealership rights for sale of vehicles etc. ITA No. 13/2008 Page 1 of 4 of Maruti Udyog Ltd. In aforesaid company, one Krishan Kumar and Ushal Amla were shareholders and Directors having 4 lacs equity shares of Rs. 10 per share. By agreement dated 26.07.2001, Directors agreed to transfer dealership rights of Maruti Udyog ltd. and entire shareholdings to one Daveder Singh Rana for consideration of Rs. 40 lacs. In balance sheet assessee had shown goodwill of Rs. 40 lacs as transferee had purchased dealership rights from then Directors and assets and liabilities of company as on date of takeover were transferred to outgoing Directors. Assessing Officer observed that there was no change in company which continued to carry out business. Despite several opportunities being granted, assessee did not produce books of accounts. Assessing Officer thereafter issued Show Cause Notice dated 04.03.2005. assessee submitted its reply on 21.03.2005. Thereafter, Assessing Officer observed that outgoing Directors of Company were entitled only to amount of Rs. 40.00 lacs being share held by them and it was observed that amount of goodwill shown in balance sheet was only to create impression that no amount was due towards company and that assets were equal to that of liabilities. Accordingly, Assessing Officer came to conclusion that it was merely device to evade tax. He applied gross profit @ 9.6 per cent and estimated profit to transfer tradable assets worth R. 70,11,090/- and made addition of Rs. 6,35,204/- 3. Being aggrieved, assessee filed appeal before Commissioner of Income Tax (Appeals) in relation to addition to Rs. 40 lacs amount on account of short term capital gains by Assessing Officer, which was withdrawn. Commissioner of Income Tax (Appeals) allowed appeal. Being aggrieved Revenue approached Income Tax Appellate Tribunal. Tribunal set aside order passed by Commissioner of Income Tax (Appeals) and restored order of Assessing Officer. In aforesaid factual background, this appeal has been filed. ITA No. 13/2008 Page 2 of 4 4. Learned counsel for appellant submitted that principle which is to be applied while dissolving firm cannot be applied to continue Company. It is further submitted that Tribunal has failed to appreciate that decision of Supreme Court in case of A.L.A. Firm vs. C.I.T 189 ITR 285 has no application to fact situation of case. It is further submitted profit, if any, can be in hands of outgoing Directors in their individual capacity and not in hands of Assessee. Therefore, no addition could be made in hands of Assessee. 5. On other hand, learned counsel for Revenue has submitted that plea that principle which is to be applied while dissolving firm cannot be applied to continue company, has been taken for first time in this appeal, which is not permissible. It is further submitted that instant case is case of transfer of capital assets and orders passed by Assessing Officer as well as Tribunal are perfect, just and legal. 6. We have considered submissions made by learned counsel for parties and have perused record. outgoing Directors and Shareholders had dealership of Maruti Cars and stock of cars and spare parts, which were part of trading assets of company. resultant profits of these assets also stood transferred to outgoing Directors as these were transferred at book value. It is also admitted position that assessee had shown profit @ 9.6 per cent on sale of cars and spare parts. By virtue of transfer of trading assets at cost price, profit component also stood transferred to outgoing Directors, which otherwise belonged to Company. profit so transferred would form part of cost of acquisition of shares, dealership rights and goodwill. transferee was required to incur extra cost for acquisition of these assets. Such cost being capital in nature is not allowable expenditure. Therefore, component of gross profit on transfer of trading assets ITA No. 13/2008 Page 3 of 4 belonging to assessee at cost price is profit liable to tax in hands of company. 7. In our considered view Tribunal has rightly applied ratio laid down in case of A.L.A Firm (supra) to fact situation of case. Even otherwise, fact that Assessing Officer has made addition in hands of Directors would not make any difference in present case for reason that such income actually belongs to assessee and therefore, taxable as such in its hand. 8. In preceding analysis, first substantial question of law in fact situation of case is answered in negative. second substantial question of law is answered by stating that tax is to be levied on actual profits as has been done in instant case. third substantial question of law is also answered in affirmative in favour of Revenue. 9. In result, we do not find any merit in this appeal. same fails and is hereby dismissed. (B. S. Walia ) (Alok Aradhe) Judge Judge Jammu 12.09.2017 Karam Chand ITA No. 13/2008 Page 4 of 4 Jamkas Vehicleades (P) ltd. v. Income-tax Officer