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DEPUTY COMMISSIONER OF INCOME-TAX Versus ORIENTAL DYEING AND FINISHING MILLS and INCOME-TAX OFFICER Versus RAJAT SOOD

2016 (3) TMI 235 - ITAT CHANDIGARH

Capital gain - conversion of the partnership firm into company - whether transfer of factory land and building, etc., and holding that the conditions stipulated in sub-section (xiii)(c) and (d) of section 47 were not fulfilled? - Held that:- The aggregate of the shareholding in the company of the partners of the firm was not found less than 50 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 the successi .....

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from exemption under section 47(xiii) of the Act.

This finding of fact recorded by the learned Commissioner of Income- tax (Appeals) have not been rebutted through any evidence or material on record. Further, the findings of fact recorded by the learned Commissioner of Income-tax (Appeals) under section 47(xiii) have not been challenged by the Revenue Department in the present appeal. It may be noted here again that since on the registered agreements dated April 1, 1999 and December 3 .....

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n the basis of the alleged agreement dated December 7, 1998. The learned Commissioner of Income-tax (Appeals) also correctly held that the conditions laid down under section 47(xiii) of the Act have been fulfilled in this case. Therefore, no capital gain is chargeable under the provisions of section 45(4) of the Act. Thus, there is no merit in the Departmental's appeal, the same is accordingly dismissed. - Decided against revenue - I. T. A. No. 230/Chd/2008, I. T. A. Nos. 286 and 287/Chd/2008 - .....

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No. 230 of 2008 2. This appeal by the Revenue is directed against the order of the learned Commissioner of Income-tax (Appeals)-II Ludhiana, dated January 9, 2008 for the assessment year 1999-2000, challenging the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of ₹ 1,58,63,380 made by the Assessing Officer under section 45(4) of the Income-tax Act, 1961, as capital gains. The assessee challenged the action of the Assessing Officer before the learned Comm .....

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d to have been received from the office of the Deputy Director of Income-tax (Investigation)-II, Ludhiana reporting that in a process of takeover of business of the assessee-firm under assessment by M/s. Oriental Knit Fab. (P.) Ltd., Ludhiana a private limited company, substantial amount of ₹ 1.02 crores was agreed to be paid by S/Shri Rajat Sood and Narinder Sood, partners (transferees) to Shri Vijay Sood, partner (transferor) vide agreement dated December 7, 1998. This firm was originall .....

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way of distribution of capital asset on the dissolution of the firm, a notice under section 148 was issued on March 24, 2006 and served upon the assessee on March 27, 2006. In response to the queries of the Assessing Officer with regard to capital gains arising on the taking over of the assets of the firm by the private limited company as above, it was contended that no capital gain is chargeable under section 45(4) as it is exempt by virtue of clause (xiii) of section 47 of the Act. As all the .....

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Sood partner by Shri Narinder Sood and Shri Rajat Sood. This amount was to be paid in three or more instalments as per the following schedule as also the delivery of two motor cars (of the firm) described as under : (i) ₹ 26,00,000 from to date to January 1, 1999. (ii) ₹ 36,00,000 from January 1, 1999 to June 30, 1999. (iii) ₹ 40,00,000 from July 1, 1999 to December 30, 1999. Motor cars PB-10-A-3433 (Contessa) PB-10-S-3637 (Maruti Esteem) 6. As per this alleged document land (m .....

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ur of the transferee, i.e., Shri Narinder Sood and Shri Rajat Sood. In view of considering this agreement to be a genuine agreement, the Assessing Officer was of the view that of section 45(4) are applicable in the assessee's case. He accordingly asked the assessee to explain as to why the capital gains should not be brought to tax. 7. During the assessment proceedings it was submitted on behalf of the assessee that the agreement dated December 7, 1998 was never entered or executed between t .....

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need for any agreement dated April 1, 1999 and dated December 30, 1999. It was submitted that no cash payment of ₹ 36 lakhs and ₹ 21 lakhs as claimed to be made by Shri Vijay Sood to him by Shri Rajat Sood as per the agreement dated December 7, 1998 was ever made. Certain contradictions in the statement of Shri Vijay Sood were also pointed out during the assessment proceedings by the assessee to contend that the, alleged agreement dated December 7, 1998 was not a genuine document. T .....

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er him, no partner will release/relinquish his interest in the specified assets which in addition to land and factory, building also includes his interest in electrical, goodwill, licences, quotas and contracts, etc., at the book value. The Assessing Officer also observed that the market value of specified assets of the assessee was many more times than the book value as also indicated by the consideration agreed to pass as per the agreement dated December 7, 1998. He, therefore, concluded that .....

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dated December 7, 1998 was duly produced by Shri Vijay Sood before the Income-tax Officer-VI(2) in the proceedings before him in the case of Shri Rajat Sood (assessment year 2000-01). He also noted that Shri Vijay Jain and Shri Rajinder Pal Sood, the witnesses to the agreement dated December 7, 1998 in their statements recorded by that Assessing Officer did confirm signing the alleged document As per the Assessing Officer the contention of the assessee that the witnesses have no knowledge of the .....

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that Shri Vijay Sood corroborated the utilisation of cash with some documentary evidence, the said documentary evidence has not been discussed in the assessment order. 8. Coming to the applicability of the provisions of section 47(xiii) the Assessing Officer observed that in the case of the assessee the conditions stipulated in sub-clause (xiii)(c) and (xiii)(d) are not fulfilled in the assessee's case. This is so, because the shares of the company floated on account of takeover of the asses .....

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x 351/223) 21,23,508 Written down value of other assets 24,13,112 45,36,620 Long-term capital gain 1,58,63,380 10. He added this amount to the total income of the assessee in the assessment year under consideration. 11. The addition was challenged before the learned Commissioner of Income-tax (Appeals) and in appeal, learned counsel for the assessee vehemently argued that the Assessing Officer as not at all justified in holding that the provisions of section 45(4) were applicable in the facts an .....

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the management of the business along with all the assets and liabilities of the assessee-firm were transferred to M/s. Oriental Knit Fab. Pvt. Ltd. vide agreement for takeover dated April 1, 1999. It is further submitted that this agreement is duly signed by all the then partners Shri N. M. Sood, Shri V. M. Sood and Shri Rajat Sood and Shri Vijay Sood, Karta of his Hindu undivided family along with Shri Rajat Sood in the capacity of the director of the company. Two witnesses Shri Vijay Kumar Ja .....

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of its partners were left with no right, title or interest in the property being the land and building belonging to the assessee-firm and that this would become the property of the company. This agreement has also been signed by all the parties and this is stated to be read in supplement to the agreement dated April 1, 1999. He submitted that it is on the basis of these agreements that the land and building pertaining to the assessee-firm was transferred to the said company and that the agreeme .....

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ross-examination of Shri Vijay Sood and the statements of the witnesses recorded by the Deputy Director Income-tax- Investigation-II, and other allied evidence and papers go on to prove that no agreement dated December 7, 1998 was ever executed and no payment in cash as alleged by Shri Vijay Sood has ever been made pursuant to the so called agreement. All the allegations are false, without any sub-stratum of factual content. The agreement is only an afterthought of Shri Vijay Sood, who created t .....

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an agreement would have been there, he might have proceeded for recovery and pursued the legal action to its logical conclusion. Mr. Vijay Sood also filed a complaint dated February 27, 2004 with the Registrar of Companies, Jalandhar, regarding wrong transfer of shares, which was properly replied by the partners of the appellant-firm and the transfer deeds and other papers were duly verified by the said authority and after verification, the complaint was found to be false and hence filed which .....

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o the so tailed agreement dated December 7, 1998 after these figures were arrived at by the two witnesses. Whereas both the witnesses, in their statements before the Deputy Director of Income-tax-Investigation-II, Ludhiana have shown their ignorance about the contents of the so-called agreement. Shri Rajinder Pal Sood, another witness to the agreement has also not admitted about the knowledge of existence of any such agreement, but simply said that the parties asked him to put sign on some docum .....

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itness in the court, which clearly refer to the agreement dated April 1, 1999 and agreement dated December 30, 1999 which was got registered. Evidently if the said figures have been arrived at and filled in by one of the witnesses, they should evidently have known the contents of this agreement, which further proves that this agreement never existed and its creation is an afterthought on the point of Mr. Vijay Sood. As regards the ignorance of Shri Vijay Sood to the agreement dated April 1, 1999 .....

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April 1, 1999 for takeover of firm by the company. His act of denying the fact of having signed such an agreement vide para 6 of his cross-exami nation, even after the fact that such an agreement was signed before the Sub-Registrar, Ludhiana, further proves his mala fide and that whatever he is stating is false and the fabrication of the alleged agreement dated December 7, 1998 is just a means to harass the other party and it was never executed and the agreement dated April 1, 1999 is the only v .....

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Sood started refusing to pay him the balance amount. On the contrary he is saying that ₹ 36 lakhs was paid on June 30, 1999 in cash in his statement recorded before the Deputy Director of Income-tax-II and ₹ 7 lakhs by cheques thereafter. Further more in the court case he has admitted of having alleg edly received ₹ 23.5 lakhs in cash instead of ₹ 36 lakhs which reveal the self-contradictory nature of his statements arising out of the mala fide intentions exhibited unfab .....

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1999 thereof proves that the alleged agree ment dated December 7, 1998 was by fabricating/conceiving fake papers. 13. Learned counsel for the assessee specifically mentioned that the agreement dated December 7, 1998 which is on a plain paper and denied by the assessee having been signed at all has been accepted by the Assessing Officer to be genuine and whereas the agreement dated April 1, 1999 which was on revenue stamp paper and duly registered before the Sub- Registrar, Ludhiana on December .....

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ause (xiii) of section 47. As per him, therefore, no capital gains whatsoever were chargeable under the provisions of section 45(4) of the Act. In view of the above, learned counsel submitted that the appeal of the assessee might be decided in the light of the above submissions and the grounds of appeal should be allowed. 14. The detailed written submission of the assessee were sent to the Assessing Officer for his comments on each and every point that the assessee had raised. The report of the .....

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iii) of section 47 are not satisfied in the case of the assessee and, therefore, denial of benefit under section 47(xiii) was fully justified in this case and that the Assessing Officer correctly applied the provisions of section 45(4) in this case. The Assessing Officer also attended the hearing on January 1, 2008 wherein he reiterated the contentions as above. 15. The learned Commissioner of Income-tax (Appeals) considering the submissions of the assessee and material on record, deleted the ad .....

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the agreement dated December 7, 1998. Before the Assessing Officer and during the appellate proceed ings learned counsel had been vehemently arguing that Shri Rajat Sood had never signed any such document and that his signatures whatsoever on this document were forged signatures. In view of such a serious allegation and contention of the appellant the Assessing Officer could not validly proceed further without meeting the objec tions of the appellant. From the assessment order it appears that th .....

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could have been validly drawn on this document before showing the original document and without meeting the objection as above. 12. The other important aspect of the case is that in a civil suit filed by Shri Vijay Sood he has requested to treat the agreement dated December 7, 1998 to be null and void. This is apparently done against Shri Rajat Sood. However, on the other hand, Shri Rajat Sood himself is contending that there was no such agreement at all. Therefore, in the face of the factual po .....

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document. Both of them were rather ignorant about the contents of the document. As pointed out by learned counsel in his cross-examination before the Assessing Officer Shri Vijay Sood stated that the amounts in the document were writ ten by Shri Vijay Jain, a witness to the said agreement dated Decem ber 7, 1998, after these figures were arrived at by the two witnesses, whereas both witnesses in their statements before the Deputy Direc tor of Income-tax (Investigation)-II, Ludhiana have shown th .....

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ion of the documents which have to be the doc uments dated April 1, 1999 and December 30, 1999 as only these were got registered and whereas the document dated December 7, 1998 was not registered at all. An other important fact which is brought out from the submissions of learned counsels that Shri Vijay Sood was issued corresponding shares of Oriental Knit Fab. Pvt. Ltd. after December 7, 1998 and that original transfer deeds for transfer of the shares were available with the company and that t .....

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hri Vijay Sood was paid for the assets, he could not have been entitled to the shares of the company in the books of which the same assets were included. The fact with regard to issuance of shares to Shri Vijay Sood and their subsequent transfer are some how undisputed facts of the case. From this angle also agreement dated December 7, 1998 does not appear to be a valid or a genuine agreement. There is also considerable force in the argument of learned counsel that the contentions of Shri Vijay .....

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respect to the agreement dated December 7, 1998 cannot be accepted as it is. I am also in agreement with the contention of learned counsel that if any agreement dated December 7, 1998 had been actually entered, there would not have been any agreement dated April 1, 1999 and agreement dated December 30, 1999. However, as already mentioned, the agreements dated April 1, 1999 and December 30, 1999 are there and copies of the same are on record. These agree ments are signed by Shri Rajat Sood and S .....

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: (11) As per clause (xiii) of section 47 of the Income-tax Act 1961, 'any transfer of a capital asset or intangible asset by a firm to a com pany as a result of succession of the firm by a company in the busi ness carried on by the firm is not regarded as a transfer if the following conditions are satisfied : (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 .....

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ners 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 the succession ; 15. In view of the discussion as above it cannot be said that the partners of the firm did receive any consideration or benefit directly or indirectly other than by way of allotment of shares in the company. Further, the aggregate of the shareholdings of the companies of the partners is not less tha .....

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the company of the other part ners of the firm, does not come below 50 per cent. of the total voting power in the company. 16. In view of the above discussion it has to be held that no con sideration whatsoever has gone to Shri Vijay Sood, the partners of the appellant-firm on the basis of the alleged agreement dated December 7, 1998. It is further to be held that the conditions laid down under section 47(xiii) having been fulfilled in this case, no capital gain is chargeable under the provision .....

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m and none of the parties have denied their signatures. The learned Departmental representative submitted that the conditions of section 47(xiii)(c)(d) have not been satisfied by the assessee in this case because shares of Shri Vijay Sood were not kept for five years, therefore, the capital gain is chargeable in the matter. 17. On the other hand, learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that agreement in question dated December 7 .....

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tners, there was no need to execute unregistered document. Shri Vijay Sood signed all the documents of transfer of shares of M/s. Orient Knit Fab Pvt. Ltd. Co. The last payment is alleged to be made after death of Shri Narinder Sood on May 3, 1999 which shows that agreement dated December 7, 1998 was forged document. No evidence has been brought on record of receipt or payment of any money in question to Shri Vijay Sood. It is also admitted fact that Shri Vijay Sood has not declared the amount i .....

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these serious allegations, the Assessing Officer should have made proper enquiry into the matter and should have referred the matter to the handwriting expert for obtaining the opinion of the handwriting expert as to the genuineness of the signatures on the agreement dated December 7, 1998, but the Assessing Officer did not do anything in the matter. Further, Shri Vijay Sood has also not produced any report of handwriting expert on record to prove that the same bears the genuine signatures of Sh .....

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ed in the assessment order that original agreement dated December 7, 1998 have been produced by Shri Vijay Sood during the assessment proceedings in the case of Shri Rajat Sood for the assessment year 2000-01. It was also noted by the Assessing Officer in the assessment order that same could not be confronted to the assessee as Shri Vijay Sood had been reluctant to show it publicly. In view of these serious allegations, it was necessary for the Assessing Officer to bring the original agreement d .....

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ts partners. It is also interesting to note that Shri Vijay Sood filed a civil suit making a prayer that agreement dated December 7, 1998 is null and void. This suit for declaration was filed against the assessee Shri Rajat Sood only. It would mean that Shri Vijay Sood himself did not place reliance upon the agreement dated December 7, 1998. Shri Rajat Sood has been claiming since beginning that there were no such agreements executed between the parties, therefore, the learned Commissioner of In .....

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ent. Copy of statement of Shri Vijay Jain is filed on record in which he has denied contents of the agreement in question and stated that he has signed this agreement in good faith without reading the same. The learned Commissioner of Income-tax (Appeals) discussed in detail the role of these two witnesses in signing the agreement in question as a witness but apparently none of them supported theory propounded by Shri Vijay Sood and the Assessing Officer. 19. The assessee has, however, contended .....

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l assets and liabilities with immediate effect, i.e., April 1, 1999. All assets, rights, title, interest, etc., of the transferor firm, at the close of the business on March 31, 1999 were transferred and vested in the transferee company through the agreement. In consideration of the said transfer, transferee company shall allot fully paid up equity shares at par to each of the partners of the assessee-firm immediately before the transfer/succession as mentioned above. As noted above, this agreem .....

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sferee company which is also registered document in which also, it was confirmed that entire business and management have been taken over by the private limited company of the assessee-firm with effect from April 1, 1999. All assets and liabilities of the firm have been taken over by the private limited company and all immovable assets would vest in the transferee company. This registered agreement is also signed by Shri Vijay Sood, Shri Rajat Sood and Smt. Meena Sood, w/o. Late Shri Narinder So .....

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shares to all the partners of the assessee-firm, Shri Vijay Sood was also allotted corresponding shares of the company. Shri Vijay Sood filed a complaint with Registrar of Companies regarding wrong transfer of shares which matter was considered by the Registrar of Companies and the transfer deeds and other papers were duly verified by the said authority and after verification, the complaint of Shri Vijay Sood was found to be false and was therefore, filed. Therefore, no adverse inference could b .....

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i Vijay Sood. There was also no need for Shri Vijay Sood to sign the registered agreement later on dated April 1, 1999 and December 30, 1999 for taking over entire business of the assessee-firm by the private limited company. Otherwise, he could have objected to these documents before the Registrar where these agreements have been registered. If Shri Vijay Sood has received any alleged amount through the agreement dated December 7, 1998, Shri Vijay Sood would not be entitled for the shares of th .....

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is not valid and genuine agreement. No preference can be given of this disputed agreement against the registered agreements dated April 1, 1999 and December 30, 1999 which have also been admittedly signed by Shri Vijay Sood. In both the registered agreements, the signature of the parties have been admitted but on the agreement dated December 7, 1998, the signatures of two of the partners along with the witnesses have been denied. Thus, no evidence have been brought on record for dissolution of .....

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l 1, 1999 and subsequent registered agreement dated December 30, 1999. 22. The learned Departmental representative further contended that conditions of section 47(xiii)(c)(d) have not been satisfied by the assessee. However, on going through the same provisions as reproduced in the findings of the learned Commissioner of Income-tax (Appeals), we are of the view that conditions of section 47(xiii) have been fulfilled by the assessee in this case. The facts of the case clearly support the findings .....

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y in the same proportion in which their capital accounts stood in the books of the firm on the date of the 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. Even these provisions referred to the word "partners" and the same did not say of "a partner". Since, in this case Shri Narinder Sood and Shri Rajat Sood partner in the assessee-firm always .....

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ding of the companies by the partners is not less than 50 per cent. of the total voting powers because though the shares of Shri Vijay Sood were transferred, Shri Rajat Sood and erstwhile partners' share in the company were more than 50 per cent. and these were retained as such for a period of more than 5 years. Therefore, the same would not disqualify the assessee from exemption under section 47(xiii) of the Act. 23. This finding of fact recorded by the learned Commissioner of Income- tax ( .....

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ehalf of the firm, therefore, story made up by Shri Vijay Sood later on and accepted by the Assessing Officer, will demolish the entire case of the Revenue. 24. In view of the above discussion, the learned Commissioner of Income- tax (Appeals) has correctly held that no consideration, what-so-ever has gone to Shri Vijay Sood, partner of the assessee-firm on the basis of the alleged agreement dated December 7, 1998. The learned Commissioner of Income-tax (Appeals) also correctly held that the con .....

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