TMI Blog2013 (11) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... ceiving of consideration or benefit directly or indirectly by way of allotment of shares in the company. It is not a case where the Assessee has received any other consideration or benefit other than the allotment of shares in the company - Clause (c) of Section 47(xiv) does not prohibit receipt of higher number of shares because the re-valuation. Receipt of higher value of shares because of re-valuation of the assets at the time of succession cannot be treated as consideration or benefit received other than by way of allotment of shares – Reliance has been placed upon the decision in the case of Asstt. CIT v. Nayan L. Mepani [2011 (12) TMI 347 - ITAT, Mumbai] – Decided against the Revenue. Applicability of section 14A read with Rule 8D - Assessing Officer disallowed a sum of Rs. 3,05,423/- applying the provisions of Sec. 14A r/w Rule 8D - There is no precise finding given by the Assessing Officer relating to the expense incurred by the assessee in respect of the income not forming part of the total income. The CIT(A) reduced the disallowance to Rs. 1 lac but also noted that the assessee did not file the full details of the expenditure - Held that:- Not filed any details of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inster Holdings Ltd. v. Anand Kedia, Dy. CIT 260 ITR 6 (Bom.) (c) Mannalal Nirmal Kumar Surana v. CIT [2003] 263 ITR 328 (Raj.) (d) Inland Revenue Commissioner v. Burma Oil Company Ltd. [1982] (STC) 39 HL. 5. The CIT(A) has erred in restricting the disallowance u/s 14A to Rs. one lakh as against Rs.3,05,423 disallowed by the assessing officer without considering the provision of section 14A of the I.T. Act r.w Rule 8D." 2. In the Cross Objection, the Assessee even though has taken ground nos. 1 to 2.8 but the only issue involved is whether the CIT(A) erred in partially confirming the disallowance made under Section 14A r/w Rule 8D by the Assessing Officer. The issue involved in ground nos. 1 to 4 taken by the revenue is whether the provision of Sec. 47(xiv) are applicable in the case of the Assessee when the Assessee has transferred the whole of the business to a private limited company. 3. The brief facts of the case are that the Assessee is engaged for the several years in carrying out the real estate business as proprietorship in the name and style of J.M. Developers Corporation by acquiring the land, developing the same by sub-dividing the same into plo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y additional income/profit than what is due as per the books of accounts of proprietorship, it amounted to benefit directly or indirectly in any form or manner and is covered within the ambit of above section even though the said benefit is received by way of shares. Ultimately, the Assessing Officer took the view that the provisions of sec. 47(xiv) were not applicable in the case of the assessee and he treated the profit of Rs. 961,38,34,680/- as business income and added to the income of the assessee. In this regard, the Assessing Officer also relied on the decision of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 The Assessee went in appeal before the CIT(A). The CIT(A) deleted the addition by observing as under : "I have gone through the facts of the case, contents of the assessment order and written submission of the assessee. An expert group was constituted to submit a report for rationalization and simplifying the Income-Tax law. Such report is available at 224 ITR 149 (statute). The expert group suggested new provision to help the business organization. The expert group made the following recommendation in respect of business re organization relevant to conversion/ s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to attract levy of capital gains subject to certain condition. The conditions are:- 1) All assets and liabilities of the firm become the asset and liability of the company. 2) The partners of the firm become the shareholders of company in the same proportion in which they hold shares in the firm 3) No considerations other than share shares arise to partners and; 4) The aggregate shareholding of the partners in the company is at least 5 0% for a period of 5 years from the date of succession. Similar conditions are also stipulated in the case of the sole proprietary concern being succeeded by a company". Whether any time limit is provided for compliance of conditions mentioned in proviso to sec 47(xiii), one has to consider the provisions of section 47A. as per sec. 47A(3) if any of the condition laid down in proviso to sec 47(xiii) are not complied then, the amount of profit and gains arisen from transfer of such capital assets not charged u/s 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 sec 47(xiii) are not complied with. Hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tworth tantamounts to benefit derived during the course of business. The Assessing Officer has rightly treated the income so derived by the assessee by transferring the business to a private limited company even though consideration is received by allotment of shares is a business income. Reliance was also place to the decision of Mcdowell co. Ltd. (supra) for the proposition that this is for the purpose of tax evasion. 5. The Learned AR on the other hand vehemently contended that it is not the business of the assessee to deal with the purchase and sale of the undertaking. The assessee has simply transferred the proprietorship concern to the private limited company and whatever consideration has been received by the assessee, that was received in the form of allotment of share capital. Receipt of additional consideration by way of allotment of shares over and above the proprietor's capital in the proprietary concern when the business is transferred to a private limited company does not amount to violation of conditions laid down under Section 47(xiv). The assessee has not obtained any benefit except the consideration in the form of shares. The Assessing Officer has not pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the provision of Section 47(xiv) introduced in the Income Tax Act w.e.f. 1.4.1999 to encourage re-organization by conversion of proprietary concerns into companies are applicable or not in the case of the Assessee. It is undisputed fact that the Assessee was carrying on the business in property development in a proprietary concern. It is not the business of the Assessee to dispose off the undertaking. The Assessee during the year under consideration disposed off the proprietorship concern to a private limited company by transferring the undertaking as such and consideration has been received by the Assessee by way of allotment of shares. The Assessee re-valued all the assets and liabilities of the proprietary concern at Rs. 963 crores. The consideration was received by way of allotment of 1,80,000 equity shares of Rs. 50/- each at a premium of Rs.53,450/- per share. The networth of the undertaking i.e. proprietary concern, M/s. J.M. Developers Corporation was Rs. 1,61,65,320/-. Section 45 of the Income Tax Act stipulates that any profit or gain arising from transfer of capital asset shall be chargeable to Income Tax under the head Capital Gains. Such income shall be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 45, Section 47 provides for certain exceptions according to which certain transactions are not regarded to be transfer so that the provisions of Section 45 will not apply to those transactions. Had the provisions of Sec. 47 not been there, the transactions would have been chargeable to tax in view of the specific provisions of Section 45. 10. Now, the question in the case of the Assessee arises whether the provisions of Section 47(xiv) are applicable or not. Section 47(xiv) was inserted by the Finance Act, 2008 w.e.f. 1.4.1999. This section reads as under : "47 - Nothing contained in section 45 shall apply to the following transfers (xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company: Provided that a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company; b) the shareholding of the sole proprietor in the company is not less than fifty per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing contained in section 45 shall apply to transfer of any building, machinery, plant, furniture or intangible asset to the company where a proprietary concern is succeeded by a company in the business carried on by it, subject to certain specified conditions. The conditions inter alia are that the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company. The shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and shareholding shall continue to so remain for a period of five years from the date of the succession. The sole proprietor does 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." 13. Simultaneously, subsection 3 in Section 47A was also inserted which reads as under : "47A(3) - Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xiv) does not prohibit receipt of higher number of shares because the re-valuation. Receipt of higher value of shares because of re-valuation of the assets at the time of succession cannot be treated as consideration or benefit received other than by way of allotment of shares. Our aforesaid view is duly covered by the decision of the Mumbai bench in the case of Asstt. CIT v. Nayan L. Mepani 18 Taxmann.com 59(Mum) (supra) in which while dealing with similar issue, the Hon'ble Tribunal held as under: "As far as proviso (c) of section 47(xiv) is concerned the revenue has not disputed that the Assessee has not received any consideration apart from allotment of shares in the company. The grievance of the revenue is only that prior to the transfer of the business to the Limited Company revaluation of assets had taken place and that intangible assets were also revalued. According to the revenue by doing so shares were issue at a higher cost to the Assessee and in future when Assessee transfers such shares cost of acquisition of the shares will be higher and consequently there would be a benefit of lesser capital gain on transfer of those shares. At the outset we are not convinced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of D.P. Sandu Bros. Chembur (P.) Ltd. (supra) the issue before the Hon'ble Supreme Court do not relate to the provisions of Sec. 47(xiv). The issue before the Hon'ble Supreme Court related to the chargeability of the income to tax prior to the amendment of sec. 55(2) arising due to the consideration received for surrendering of tenancy rights. In this case, the Hon'ble Supreme Court ultimately held if the income cannot be taxed under Section 45, it cannot be taxed at all. This decision, in our opinion, is entirely different to the facts relating to the case before us. 18. In the case of K.V. Mohammad Zakir v. Asstt. CIT [2010] 36 SOT 433 (Cochin), the issue before the Cochin Bench related to the validity of the order passed under Section 263. In this case, the Hon'ble Tribunal while dealing with the order revised under Section 263 with regard to the applicability of Sec. 47(xiv) took the view that the proprietor's business was taken over by the company alongwith all assets and liabilities by paying consideration to extent of proprietor's capital by way of allotment of shares and the same was to the extent of 51% of share capital of the company and thus conditions of Sec. 47(x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing given by the Assessing Officer relating to the expense incurred by the assessee in respect of the income not forming part of the total income. The CIT(A) reduced the disallowance to Rs. 1 lac but also noted that the assessee did not file the full details of the expenditure. Before us also, the Learned AR vehemently contended deleting the disallowance and even referred to the decision of the Hon'ble Mumbai High Court in the case of Godrej but did not file any details of expenditure incurred by the assessee not relating to the dividend income. Under these facts, we do not have any other alternative except to confirm the order of CIT(A) because, in our opinion, the onus lies on the assessee to prove that the assessee has not incurred any expenses relating to the income not forming part of the total income. Applicability of Sec. 14A has not been denied by the Learned AR. Therefore, in our opinion, the Assessing Officer was correct in law in applying Rule 8D. We, therefore, set aside the order of CIT(A) and restore the order of the Assessing Officer, as in our opinion, the Assessing Officer has rightly computed the disallowance by applying Rule 8D. Accordingly, this ground of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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