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2019 (6) TMI 1369 - AT - Income TaxAddition of transfer of accumulated profit - charitable institution - accumulation of income u/s 11(2)/(3) - HELD THAT - Hon ble High Court while quashing the notice u/s 148 for assessment years 1998-99 to 2000-01 held that any accumulated profit u/s 11(3) in the hands of the assessee of the past years is liable to be taxed in assessment year 2001-02. Thus the limited question which we are required to adjudicate in this appeal is whether there were any accumulated profits in the hands of the assessee within the meaning of Section 11(3) which can be taxed on account of merger of the assessee with EHIRC Chandigarh. We further find that learned CIT(A) has given the finding that there was no accumulated profit u/s 11(2). Learned CIT(A) after considering the facts of the case in detail including the application of income in each assessment year beginning from assessment year 1986-87 has arrived at the conclusion that there was no accumulation of income in any of the years. On the other hand the application of income was more than the prescribed limit of 85%. The above finding of fact recorded by the CIT(A) has not been controverted by the Revenue. The assessee has stated before the learned CIT(A) as well as before us that the assessee has not accumulated any income in any of the past assessment year by filing application as prescribed in that Section. The Revenue neither in the assessment order nor during appellate proceedings before the CIT(A) including the remand report before learned CIT(A) has been able to establish that there was any accumulation of income as provided in Section 11(2). Before us also no evidence is brought on record by the Revenue to establish any accumulation of profit u/s 11(2) by the assessee society. In view of the above we do not find any justification to interfere with the order of the learned CIT(A) in this regard. The same is sustained and all the grounds raised by the Revenue in this appeal are dismissed. Addition on account of capital gain - EHIRC Delhi merged with the assessee and all the assets and liabilities vested with the assessee society was converted into a company limited by shares - AO concluded that there is transfer of the assets owned by the assessee AOP to another legal entity within the meaning of Section 2(47) which would attract capital gain u/s 45(1) HELD THAT - We find the issue to be squarely covered in favour of the assessee by the decision of Hon ble Bombay High Court in the case of Texspin Engineering and Manufacturing Works 2003 (3) TMI 56 - BOMBAY HIGH COURT . The ratio of their Lordships would be squarely applicable to the case of the assessee because in this case also the assessee AOP was converted into a company under Part IX of the Companies Act. Thus till the time of conversion the AOP remained in existence and the moment conversion took place the company came into existence. However the AOP and company never remained in existence simultaneously. Section 45(1) would be applicable on transfer of a capital asset. The transfer of a capital asset is possible only when there is a transferor and the transferee. In the absence of existence of the two entities the transferor and the transferee there cannot be any transfer. Similarly in the absence of two entities the consideration cannot pass from transferor to the transferee. In view of the above we hold that the above decision of Hon ble Bombay High Court would be squarely applicable to the case of the assessee and has rightly been followed by the learned CIT(A). No contrary decision is brought to our knowledge. In view of the above we respectfully following the above decision of Hon ble Bombay High Court in the case of Texspin Engineering and Manufacturing Works (supra) uphold the order of learned CIT(A) and dismiss the appeal filed by the Revenue.
Issues Involved:
1. Deletion of addition on account of transfer of accumulated profit. 2. Interpretation of Section 11(3) in relation to accumulation under Section 11(2) and Section 11(1). 3. Addition on account of excess of assets over liabilities and its implication on charitable status. 4. Addition in respect of donation, keyman insurance, software expense, and difference in the value of land under Section 11(3). 5. Determination of surplus chargeable to income under Section 11(3). 6. Deletion of addition on account of capital gain due to conversion of a society into a company. 7. Interpretation of "transfer" within the meaning of Section 2(47) and applicability of Section 45(1) for capital gains. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Transfer of Accumulated Profit: The Revenue appealed against the deletion of Rs. 156,44,47,193/- added by the Assessing Officer (AO) on account of transfer of accumulated profit. The CIT(A) held that there was no accumulated profit under Section 11(2) of the Act, and thus, the addition was deleted. 2. Interpretation of Section 11(3) in Relation to Accumulation under Section 11(2) and Section 11(1): The CIT(A) interpreted that the reference in Section 11(3) pertains only to accumulation under Section 11(2) and not Section 11(1). The High Court upheld that any accumulated income should be taxed in the year the breach occurs, i.e., the assessment year 2001-02, and not by reopening past assessments. 3. Addition on Account of Excess of Assets Over Liabilities and Its Implication on Charitable Status: The CIT(A) found that the addition of Rs. 95,26,54,640/- representing the excess of assets over liabilities tantamount to a retrospective withdrawal of charitable status. This was disapproved by the High Court, which quashed the notices for the earlier assessment years. 4. Addition in Respect of Donation, Keyman Insurance, Software Expense, and Difference in the Value of Land Under Section 11(3): The CIT(A) ruled that donations, keyman insurance, software expenses, and the difference in the value of land could not be treated as income under Section 11(3). These items were not considered income within the statutory provisions and relevant judgments. 5. Determination of Surplus Chargeable to Income Under Section 11(3): The CIT(A) concluded that the assessee never had any surplus chargeable to income under Section 11(3) as the application of income exceeded the prescribed limit of 85% in each year. This finding was not rebutted by the Revenue. 6. Deletion of Addition on Account of Capital Gain Due to Conversion of a Society into a Company: The CIT(A) deleted the addition of Rs. 1,44,34,72,911/- on account of capital gain. It was held that the conversion of a society into a company under Part IX of the Companies Act did not constitute a transfer attracting capital gains under Section 45(1). 7. Interpretation of "Transfer" Within the Meaning of Section 2(47) and Applicability of Section 45(1) for Capital Gains: The CIT(A) and ITAT held that there was no transfer within the meaning of Section 2(47) as the conversion did not involve two parties (transferor and transferee) and no consideration passed. The decision was supported by the precedent set in the case of Texspin Engineering and Manufacturing Works by the Bombay High Court, which was also followed by the Jurisdictional High Court. Conclusion: The ITAT upheld the CIT(A)'s orders, dismissing the Revenue's appeals. The Tribunal confirmed that there was no accumulated profit under Section 11(2) to be taxed under Section 11(3), and the conversion of the society into a company did not constitute a transfer attracting capital gains under Section 45(1). The decision emphasized the statutory interpretation and judicial precedents, affirming the deletion of the additions made by the AO.
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