TMI Blog2007 (7) TMI 443X X X X Extracts X X X X X X X X Extracts X X X X ..... with the service then, there was no need of providing section 282 in the Income-tax Act. One is required to make harmonious interpretation of the provisions of the Act and considering this aspect, it is clear that the word served as appearing in section 153(2) of the Income-tax Act cannot be equated with the word issue . Hence, it is held that the order passed by the Assessing Officer is within the time prescribed u/s 153(2) of the Income-tax Act and the finding on this issue as given by the learned CIT(A) is upheld. Computation of Capital gains - Transactions not regarded as transfer - Income escaping assessment - whether any time limit is provided for compliance of conditions mentioned in proviso to section 47(xiii), one has to consider the provisions of section 47A - HELD THAT:- It is clearly mentioned in the statement of fact by the assessee-firm that the assessee has transferred the assets other than goodwill and software to the company at a price of Rs. 2,21,72,950 as against written down value of Rs. 1,50,53,446. The software was transferred at Rs. 14 lakhs and goodwill valued for the purpose of transfer of Rs. 48,24,210. On account of these revaluations of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets in the hands of company at the close of year is based on the value of assets taken by the firm for the purpose of depreciation. Hence, for assessment year 2001-02, WDV of block of assets is to be taken as closing W.D.V. in the hands of company for assessment year 2000-01 subject to adjustments as mentioned in section 43(6)( c ). Since we had already held that section 45 is not applicable for charging capital gain in the hands of the firm, therefore, the cost of assets as acquired by the company cannot be taken at the revalued figure. However, finally if it is held that capital gain is chargeable either in the hands of the firm or in the company, then the assessee-company will be entitled to depreciation on the revalued value of assets. Looking to the finding given in the case of the firm, it is held that learned CIT(A) is justified in holding that depreciation will be allowable on the value of the assets, as per the written down value in the case of the firm. In the result, the appeal in the case of the firm is allowed, while appeals in the case of the company are dismissed. - P. MOHANARAJAN AND N.L. KALRA, JJ. H. Padamchand Khincha for the Appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to the following decisions which have been rendered in respect of interpretation. (1) Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC); (2) CGT v. Smt. C.D.R. Laxmidevi [1996] 220 ITR 50 (Guj.); (3) CIT v. (1) Deep Cand (2) Chhotam [2002] 257 ITR 756 (Delhi); (4) Keshavji Ravji Co. v. CIT [1990] 183 ITR 1 (SC); (5) CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC); (6) Krishna Oberoi v. Union of India [2002] 257 ITR 105 (AP); (7) M.K. Srikanta Setty v. CIT [1986] 160 ITR 517 (Kar.). During the course of proceedings before us, the learned AR reiterated the arguments as taken before the learned CIT(A). 6. It was submitted that as per section 153(2) of the Income-tax Act, no order of re-assessment shall be made after the expiry of one year from the end of financial year, in which, the notice under section 148 was served. If the services of notice is regarded as being the same as on date of issue that is 25-3-2003, then the time for completing the assessment would have been expired on 31-3-2004. However, the assessment order has been passed on 30-3-2005. The learned AR submitted that under section 27 of General Clauses Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that these two words have different meanings. The learned DR, therefore, argued that the time-limit for completion of assessment should be considered from the date of services of notice under section 148. In the instant case, notice under section 148 was served on 4-4-2004 and, therefore, the assessment have been completed within the time limit prescribed under section 153(2) of the Income-tax Act. 8. We have heard both the parties. Section 153(2) is as under : " Section 153(2) . No order of assessment, reassessment or re-computation shall be made under section 147 after the expiry of one year from the end of the financial year in which the notice under section 148 was served : Provided that where the notice under section 148 was served on or after the 1-4-1999 but before the 1st day of April, 2000, such assessment, reassessment or re-computation may be made at any time up to 31st day of March, 2002." 9. The learned AR has relied on the decision of the Apex Court in the case of Banarsi Debi s case ( supra ). In the case before the Apex Court, notice under section 34 for the assessment year 1947-48 was issued within 8 years from the end of the relevant assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce anomalies. In the circumstances, by interpretation, we accept the wider meaning the word issued bears. In this view, though the notices were served beyond the prescribed time, they were saved under section 4 of the Amending Act. No other point was raised before us." 10. The Apex Court in the case of CWT v. Kundanlal Beharilal [1975] 99 ITR 581 had also an occasion to consider the meaning of the word issue as appearing in section 18(2A) of the Wealth-tax Act. Section 18(2A) provided the waiver/reduction of penalty. The Commissioner rejected the application on the ground that returns of wealth were filed after notices under section 17 of the Wealth-tax Act were issued. However, in that case, the returns were filed before such notices were served on the assessee. The Apex Court observed that the section would be effective if the wider meaning is given to the expression issued. The Apex Court held that strict meaning would lead to absurd results. In view of the facts that returns were filed before the notices were served on the assessee, the learned Apex Court held that the word issue used in section 18(2A) of the Wealth-tax Act should be interpreted in a wider sense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority within the period of 30 days of the date of services of the notice of demand. Here also it is an accepted proposition that the time-limit will start from the services of notice of demand and not from the date of issue of notice of demand. Hence, the words issue and serve cannot be equated in all the circumstances. One has to consider the indication of the Legislature in using the word. The Legislature in its wisdom has used the word issued in respect of time-limit for the commencement of proceedings under section 148 while the word served has been used in respect of completion of such proceedings. We are, therefore, not inclined to agree to the contention of the learned AR that the word serve appearing under section 153(2) should be equated with the word issue and the time-limit should be linked from the date of issue of notice under section 148. It is held that Assessment order has been passed within the time limit prescribed under section 153(2) of the Income-tax Act. 14. The three-member Bench of the Apex Court in the case of CIT v. Major Tikka Khushwant Singh [1995] 212 ITR 650 dealt with the issue of period of limitation in respect of a notice of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion provision creating a precise bar with regard to reopening of assessments. In sub-section (3) of section 149, the word employed is served in the first line while in the penultimate line the word employed is issued . Thus, in the same short sub-section, the Legislature has used these words as distinct and separate. The hallmark of a limitation provision is that the same must have clear cut and fixed termini at both ends. Section 149 fixed the terminus a quo from the end of the relevant assessment year, i.e., on the 31st March, of the said year. On the other hand, the terminus ad quem under clauses ( a ) and ( b ) is fixed at 4 years, 8 years and 16 years, from the fixed date of 31st day of March of the relevant assessment year. Clearly enough, if the terminus a quo is fixed as the relevant assessment year, namely, 31st March of the said year the other terminus must equally be fixed with regard to the fixed date of the issuance of the notice, which is precise and predictable. The plain scheme of sections 148 and 151 is that the satisfaction and the sanction of the Commissioner or the Board on the reason recorded by the Income-tax Officer is necessary before the noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Sant Lal Arvind Kumar [1982] 136 ITR 379 (Delhi); (3) CIT v. Lallubhai Jogibhai [1995] 211 ITR 769 (Bom.); (4) CIT v. Smt. Beefathumma [1991] 188 ITR 649 (Ker.). 18. The attention is drawn towards section 282 of the Income-tax Act. This section provides the service of notice. In case the issue is to be equated with the service then, there was no need of providing section 282 in the Income-tax Act. One is required to make harmonious interpretation of the provi-sions of the Act and considering this aspect, it is clear that the word served as appearing in section 153(2) of the Income-tax Act cannot be equated with the word issue . Hence, it is held that the order passed by the Assessing Officer is within the time prescribed under section 153(2) of the Income-tax Act and the finding on this issue as given by the learned CIT(A) is upheld. 19. The next grievance of the assessee is that the learned CIT(A) has erred in holding that provision of section 47( xiii ) were not complied with and, therefore, the assessee is liable to capital gain tax under section 45 of the Income-tax Act. 20. The firm was succeeded by the company on 1-5-1999. The following was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 13-12-2002 to comply with 1 lakh paid up criteria. Therefore, the company to comply with aforesaid provision allotted the balance equity shares. The above ( a ), ( b ) and ( c ) in fact meet the initial Minimum Subscription Capital requirements of the company being incorporated as a Private Limited Company under the Companies Act, 1956. The sections 69 to 75 of the Act there cannot be any allotment of shares, therefore it clearly explains that the aforesaid sub-points ( a ), ( b ) and ( c ) were to meet before any allotment can be done. 3.In order to meet the compliance under section 47( xii ) of the Income-tax Act, 1961 the company did the following : ( a )The company first and foremost arrived at the business purchase price of Rs. 240 lakhs on the date of succession. The Business Purchase price was arrived at as Goodwill and Revaluation of Fixed Assets. ( b )The purchase consideration was to be paid by the Company to the shareholders who were erstwhile partners of the Partnership Firm in the ratio of partners capital account as on the date of succession towards the aforesaid business purchase price. ( c )The company deferred allotment to the shareholders for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd capital gain is chargeable in the hands of the firm. 25. Before the learned CIT(A), it was submitted that the purchase price was arrived at after valuing the goodwill and re-valuing the fixed assets. In addition to the capital account of the partners in the firm, the company was required to pay Rs. 240 lakhs to the firm, which represented value of the goodwill and the increase in the value of the assets. The company had only 100 lakhs authorized capital and, therefore, it was not possible to allocate the share to the partners and sum of Rs. 240 lakhs was shown in the balance sheet as an amount pending allotment. The authorized capital was increased by regulation dated 4-4-2001. The company allotted on 11-3-2003, 18,50,000 equity shares of Rs. 10 each at premium of Rs. 2.97 per equity share to the erstwhile partners. The details of shares allotted were as under : Name Date of Allotment Total Shares Pending allotment to be proposed to be allotted as below (Rs.) % of shares allotted to ratio as below 4-10-1997 1-5-1999 11-12-02 11-3-03 Surya Prakash 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, observed that harmonious construction of section 47( xiii ) read with section 47A(3) leads to the conclusion that necessary conditions as mentioned in proviso to section 47 ( xiii ) are to be met during the previous year, in which, the transfer/transaction has taken place. The learned CIT(A) further referred to clause ( b ) of proviso to section 47( xiii ), in which, it has been provided that shareholding pattern should be the same for a period of 5 years from the date of succession. The expression from the date of succession is quite significant and it leaves no doubt that requirement of succession proviso ( b ) should be made on the date of succession itself. The learned CIT(A) further pointed out that whenever the Legislature intended to put a time frame beyond the relevant section, it has been done in the Act itself. Reference has been made to provisions of sections 54 and 54B. The learned CIT(A), therefore, held that capital gain is chargeable in the hands of the firm. 28. During the course of proceedings before us, the learned AR submitted that the facts have already been mentioned by the learned CIT(A) in his order. It is not in dispute that in the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. On the other hand, the learned DR supported the order of the authorities below : 32. The learned DR drew our attention to the article appearing at 149 CTR Article 257. In that Article it is mentioned that the condition as mentioned in proviso to section 47( xiii ) are to be satisfied at the time of succession. Particular reference has been made to clause ( b ) of the condition and it has been mentioned that it should be satisfied at the time of succession. The learned DR also drew our attention to section 47A, where it is mentioned that if any of the condition mentioned in proviso to section 47( xiii ) is not satisfied in a previous year, then the capital gain will be taxable in the hands of the successor-company. This shows that the condition mentioned in proviso to section 47( xiii ) is to be satisfied during the previous year. 33. During the proceedings, it was noticed that the profit arising from the transfer of business has not been apportioned in the hands of the partners in the profit-sharing ratio, while preparing balance sheet as on 30-4-1999. If that profit is appropriated then ratio of partner s capital will be different from the ratio without crediting such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, adequate safeguards will be provided to prevent abuse of the provisions. In line with this thinking, the following are proposed : In order to encourage conversion of sole proprietary business and partnership firms into companies, capital gains resulting from such conversion will be exempt from tax." 35. Sections 47( xiii ) and 47A were introduced by Finance (No. 2) Bill, 1998. Such provisions were introduced in view of the recommendation of the expert group. In the memo explaining the provisions of Finance Bill No. 2, it was mentioned as under : "Under the existing provision of the Income-tax Act, business reorganizations have definite tax implications. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available to successor business entities. However, in cases of amalgamation, capital gains tax is not levied and losses and absorbed depreciation are allowed to be carried forward under certain conditions. The Expert Group, in the draft Income-tax Bill, has reorganized the need to encourage business reorganizations when they are in consonance with the objective of economic development and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which their capital accounts stood in the books of the firm on the date of succession. The partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. The aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of succession." 37. After taking note of the objectives, for which, the amendments were made by the Finance Bill No. 2, 1988, it will be useful to reproduce section 47( xiii ). " Section 47( xiii ). Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset or intangible asset to the company." Provided that ( a )all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company; ( b )all the partners of the firm immediately before the succession bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent because such condition will be satisfied after the completion of assessment. In respect of compliance to be made under proviso to section 47( xiii ), there is no provision in the Act for rectification. This means that conditions are to be satisfied at the time of succession. 39. While deciding the issue, as to whether any time limit is provided for compliance of conditions mentioned in proviso to section 47( xiii ), one has to consider the provisions of section 47A. As per section 47A(3), if any of the condition laid down in proviso to section 47( xiii ) are not complied then, the amounts of profits at gains arisen from transfer of such capital assets not charged under section 45 is to be deemed to be the profit and gains chargeable to tax in the hands of successor-company for the previous year, in which, the requirements of the proviso to section 47( xiii ) are not complied with. Hence, the requirement of proviso to section 47( xiii ) are to be complied with in all the succeeding years. Section 47A(3) does not refer that this will be applicable in a case when clause ( d ) of proviso to section 47( xiii ) is not complied in the succeeding five years. The language of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for satisfying the requirement. 42. The final allocation of shares has been mentioned by the learned CIT(A) at page 9 of his order. Before, we see as to whether capital accounts of the partners were prepared in accordance with the principle of account-tancy and the requirement as mentioned in clause ( b ) of proviso to section 47( xiii ) is satisfied, it will be relevant to reproduce the following chart. Name of the partner (1) (2) (3) (4) Suryaprakash 36,08,853 29.71 84,26,966 23.255 Ashok Kumar 21,35,177 17.58 69,53,290 19.19 Harish M 23,58,226 19.41 71,76,341 19.80 Suresh M 21,17,341 17.43 69,35,454 19.14 Rajesh M 19,27,253 15.87 67,45,366 18.615 Col. 1 : It gives the capital account of partners as on 30-4-1999 without distribution of surplus amongst partners on account of revaluation of assets including software and goodwill. Col. 2 : It gives percentage of capital held by the partner as compared to the total capital of all the partners. Col. 3 : It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm was to be allocated amongst the partners in the profit-sharing ratio. In the memorandum of the association of the company it is clearly mentioned that main object of the company was to takeover the assets and liabilities of the assessee firm. The partnership firm can be constituted to carry a business and if the business is transferred, then the firm is to be treated as dissolved. Section 42 of the Partnership Act says that the partnership firm will stand dissolved, if the adventure or undertaking for which, it was constituted has been completed. When the assets have been sold, the final account of the firm, are to be ascertained on the basis of the value of the assets, at which, these have been transferred to the company. It is, therefore, held that shares in the company should have been allotted in the ratio as given in Col. 4 and, therefore, it is held that clause ( b ) of proviso to section 47( xiii ) is not satisfied. 45. Now, before we discuss as to whether the capital gain should be charged in the hands of the firm or in the hands of the company, for this, we have to ascertain the implication of non-compliance of clause ( b ) of proviso to section 47( xiii ). 46. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from that order : "Before coming to the context in which word a is used in section 54/55F, we would like to mention that much emphasis was made on the word any . It has been contended that the word a means any which in turn means many or more than one . This appears to be partially true. As per various dictionary meanings, it also includes one or one out of many . According to Law Lexicon, the word any may have several meanings according to the circumstances. It may mean all , each , some or one or more out of several . It further says that it is not confined to a plural sense. According to illustrated Oxford Dictionary as well as Webster s Encyclopedic Unabridged dictionary also, the word any has various meanings including one . This clearly shows that the word any does not always mean more than one. It may also be used to denote one . So, both the words a as well as any are ambiguous and, therefore, the meaning of these words has to be seen with reference to the context in which these words are used." 49. If one is required to harmoniously interpret section 47( xiii ) and 47A(3), it is to be inferred that if all the conditions mentioned in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2000-01, the company claimed the depreciation by treating the value of the assets as adopted by the firm. The Assessing Officer was of the opinion that the opening W.D.V. of the assets for subsequent year, i.e., 2001-02 should be the same as has been determined in the case of the company for the assessment year 2000-01. The same value is to be adopted for taking opening W.D.V. depreciation in subsequent years. The Assessing Officer was of the opinion that the assessee-company has claimed excessive depreciation and, therefore, issued notices under section 148. The Apex Court in the case of Asstt. CIT v. Rajesh Javeri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 has considered the scope of issuing of notice under section 148, when the return has been processed. The learned Apex Court held intimation and assessment are different. Failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings. If there is material, on which, reasonable person can form the reasonable belief then the notice under section 148 can be issued. It is subjective satisfaction of the Assessing Officer. 58. Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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