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2019 (6) TMI 1428 - AT - Income TaxLong Term Capital Gain & Short Term Capital Gain - Revaluation of assets to be treated as “transfer” within the meaning of section 2(47) - conversion of firm into company - HELD THAT:- Only event took place during the year under consideration i.e. January 2011 is “revaluation of land” and on 01.04.2011 “conversion of firm into company” took place i.e. A.Y. 2012-13, the subsequent year. AO treated the “revaluation of assets” and brought to tax but such “revaluation of assets” cannot be treated as “transfer” within the meaning of section 2(47) - Very footing of the Learned AO is incorrect since “conversion from firm to company” took place in A.Y. 2012-13 and not in A.Y. 2011-12. Charging of capital gain, therefore, is thus totally unjustified. AO that the capital gain arose on distribution of assets i.e. land to the partners by the assessee’s firm due to revaluation of assets and thereby subsequent allotment of shares to the erstwhile partners is sought to be evaded against the provision and intent of the law is not correct. We would like to mention that when a firm is converted into company under Part – XI, properties of the erstwhile firm vest in the company. The difference between “vesting of property” and “distributions of property” as discussed above does not permit section 45(4) to be invoked. In the instant case, since there was no sale or conveyance from the firm to the company, the partner’s capital has not increased on account of sale on capital asset but it is only on account of revaluation of asset. The capital has been increased because of such conversion. The properties of the partnership firm have been vested with the company where all the assets and liability of the erstwhile firm also vested with the present company. We find no justification to hold that there was any transfer of asset and thus question of liability to pay tax on capital gain on the appellant firm does not and cannot arise at all. - Decided in favour of the assessee. Addition u/s 14A - HELD THAT:- We restrict the disallowance to dividend income earned by the assessee before us which is exempted from tax. Thus this ground of appeal filed by the assessee is allowed. Ad hoc disallowance being 1/5th of total expenses of telephone, mobile, insurance, vehicle, repair and maintenance, interest on car loan and depreciation on account of personal use - HELD THAT:- It appears from the records that various expenses such as mobile and telephone expenses, car loan, vehicle repair and maintenance has been claimed as expenses in the Profit and Loss account. Details of the entire expenses were also placed before the authorities below. The agreement of the assessee with the expenses of insurance includes the medical expenses of ₹ 13,779/- to be disallowed reveals the good conduct of the assessee. Apart from that, the expenses which has been discussed above for running a company are necessary expenses which sometimes difficult to be ascertained whether any personal expenses element is available or not. However, taking into consideration the entire gamut of the matter it seems that the assessee’s pleas are genuine taking into consideration the details submitted by the assessee before the authorities below and before us as well. We are thus restrict such disallowance to 20% of the disallowance made by the authorities below which is calculated at ₹ 44,854/-. The assessee’s Cross Objection is thus partly allowed. Addition on account of commission - HELD THAT:- It is a settled principle of law that commission paid to persons for referring names of customers is allowable u/s 37 of the Act for introducing potential customers to the assessee falls within the ambit of service. Addition on account of difference in job work receipts - nature of income - HELD THAT:- Apex Court in the matter of Kedarnath Jute Mfg. Co. Ltd.-vs-CIT [1971 (8) TMI 10 - SUPREME COURT] where it was held that what is necessary is to be considered as the true nature of income. In that view of the matter, the true income emanating from real character of the transaction is to be looked into. On that basis, the Learned CIT(A) also clarifies the position that in the event the addition is to be sustained same amount requires to be reduced from sales so as to avoid double taxation he thus deleted the addition. The clarification so given by the CIT(A) is according to us just and proper and without any infirmity the same is confirmed. The revenue’s appeal is dismissed. Under valuation of closing stock u/s 145A - Assessee had followed exclusive method of accounting - HELD THAT:- It is mandatory for an assessee to follow “exclusive method” of accounting for valuation of inventories in the light of AS-2 on “Valuation of Inventories” issued by ICAI. But in terms of Section 145A, and assessee is to follow “inclusive method” of accounting. Since there is no impact of profitability whether an assessee follows “exclusive method” or “inclusive method” no addition is called for u/s 145A - See M/S. AIA ENGINEERING LTD [ 2017 (9) TMI 1753 - ITAT AHMEDABAD ] Disallowance u/s 40A(2) - CIT(A) deleted such addition following the order passed in assessee’s own case for A.Y. 2011- 12 - HELD THAT:- AR contention before us that since the order passed by the Learned CIT(A) in assessee’s case for A.Y. 2011-12 has not been challenged before us following the principle of consistency, the department ought not to have challenged the issue in the instant appeal and DR failed to controvert such submission made by the Learned AR. We find substances in such submission made by the Learned AR. Taking into consideration the order passed by the Learned CIT(A) and the conduct of the Revenue in not preferring appeal in the previous A.Y.2011-12, we find no required. - Decided in favour of assessee.
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