TMI Blog2019 (6) TMI 1369X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her on the facts and in the circumstances of the case and in law, Ld.CIT(A) has erred in deleting the addition of ₹ 156,44,47,193/- on account of transfer of accumulated profit. 2. Whether the CIT(A) was correct in holding that reference in section 11(3) of the Act is to be accumulation u/s 11(2) of the Act only and out to the accumulation u/s 11(1) of the Act. 3. Whether the CIT(A) was correct in holding that addition of ₹ 95,26,54,640/- on account of excess of assets over liabilities tantamount to retrospective withdrawal of the charitable status. 4. Whether the CIT(A) was correct in holding that addition in respect of donation, keyman insurance, software expense and difference in the value of land couldn t have been made u/s 11(3) of the Act. 5. Whether the CIT(A) was correct in holding that the assessee had no surplus which could have been charged to income under the provision of section 11(3) of the act. 6. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing. 3. The facts of the case are that a society by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The statute having thus fixed the assessment year in which the entire past accumulated income falls to be taxed, it is impermissible in law for the assessing officer to entertain a reason to believe that income chargeable to tax for the assessment years 1998-99 to 2000-01 had escaped assessment. The statute has imposed a fetter on the power of the assessing officer to consider the accumulated income, as the income of the respective earlier years and has mandated it to be the income of the previous year i.e. the previous year commencing on 01.04.2000 and ending on 31.03.2001 relating to the assessment year 2001-02, which is the year in which the petitioner was amalgamated with Escorts Hospital, Chandigarh and transferred all its assets to the Chandigarh Hospital which is looked upon as a breach of the statutory provisions subject to which the exemption under section 10(21) was allowed. The consequences of the breach having been provided by the statute itself, it is not open to the assessing officer to consider the accumulated income as having escaped assessment in the past assessment years. He has to perforce bring to tax the accumulated income only in the year in which the breac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notices issued u/s 148 of the Act for the assessment years 1998-99 to 2000- 01 as also the order dated 25.01.2012 whereby the notice u/s 148 of the Act for the assessment year 1997-98 was quashed. The orders of the Hon'ble Delhi High Court are stated to have attained finality. Three other additions need to be referred to : ( 1) donations received over the years ₹ 14,87,58,297. ( 2) additions on account of keyman insurance. ( 3) software expenses aggregating ₹ 8,14,63,413/- made in the assessment years 1998-99 to 2000-01. These by no stretch of imagination can be treated as income within the meaning of section 11(3) of the Act and if done would be contrary to the statutory provisions and the judgments relied upon including the appellant s own case. Coming to the addition of ₹ 38,15,70,842/-, being the difference in the value of land pursuant to the valuation by the DVO, this again does not qualify to be considered and for that matter u/s 11(3) of the Act. Reverting back at this stage to the addition of ₹ 95,26,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84724675 87319172 -86756192 562980 1989-90 27638328 33745343 29354417 31185914 94285674 -66647346 27638328 1990-91 98399991 73799993 33326044 49066295 156192332 -57792341 98399991 1991-92 139892069 112150939 27678366 15822008 6700000 162351313 -22459244 1398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 769490417 69983453 839473870 1999-00 101559931 6 714376465 95890459 93056648 903323572 112275744 1015599316 2000-01 123729721 5 863814310 114709927 170508026 114903223 88264952 1237297215 [ Total Exempted accumulation u/s 11(1)(a)] -232624368 The assessee filed the chart for the application of income before the Assessing Officer during the reassessment proceedings but the Assessing Officer has not rebutted the contention of the assessee that the accumulated amount in column 8 results in the negative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 11(2) which can be taxed under Section 11(3) and therefore, learned CIT(A) rightly deleted the addition made by the Assessing Officer. 9. We have considered the arguments of both the sides. Section 11(3) of the Income-tax Act, 1961 reads as under :- [( 3) Any income referred to in sub-section (2) which ( a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or [( b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or] ( c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof, [( d) is credited or paid to any trust or institution registered under subsection 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mulate the balance income provided he fulfills the conditions as prescribed in sub-clause (a), (b) and (c) above. From a combined reading of Section 11(2) and 11(3), it is evident that under Section 11(3), the accumulated income of the past years under Section 11(2) is to be taxed if there is a breach of any condition prescribed under sub-clauses (a) to (d) of Section 11(3). Hon'ble Jurisdictional High Court, after considering the facts of the case, has arrived at the conclusion that during the accounting year relevant to assessment year 2001-02 i.e., the year under appeal, there is violation of conditions prescribed under sub-clauses (a) to (d) of Section 11(3) and therefore, accumulated income of past years of the assessee is to be taxed as income in assessment year 2001-02. 12. Now, the question remains whether there was any accumulated income within the meaning of Section 11(2) of the Income-tax Act. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The initial assessment was reopened under Section 147 of the Act on the ground that the conversion of assessee AOP into a company tantamount to a transfer and capital gain arose in the hands of the assessee under Section 45(4) of the Act. The Assessing Officer worked out the short term capital gain at ₹ 149,08,97,151/- and completed the assessment at ₹ 154,34,28,751/- in the order passed under Section 143(3) read with Section 147 dated 28th March, 2005. Learned CIT(A), by order dated 10th February, 2006, sustained the order of the Assessing Officer. The assessee, aggrieved with the order of the learned CIT(A), filed appeal before the ITAT and, before the ITAT, the Revenue, by invoking the provision of Rule 27 of the ITAT Rules, contended that the capital gain is leviable under Section 45(1) also. The ITAT held as under :- 25.5 By applying the ratio laid down by the Hon ble Gauhati High Court it can be said that in the present case, the issue has been decided by the Ld.CIT(A) in favour of the department, therefore, the department opted not to file any cross objection even when the appeal has been preferred by the assessee. The provisions of Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sec 2(47) which was not explicitly not considered as transfer by certain transaction as mentioned in section 47 and would attract capital gain u/s 45(1) of IT Act 1961. In absence of any sale, there can be no question of taking sale price as the full value of consideration since no price has been settled and nor is the relationship between the two is that of vendor and vendee. In the context of this case the full value of the consideration is the fair market value of the assets received on account of extinguishments rights over the property . 17. On appeal, learned CIT(A), vide order dated 2nd March, 2015, agreed with the assessee s contention that there was no transfer within the meaning of Section 45(1) because there were no two parties transferor and transferee. The relevant finding of the CIT(A) reads as under :- The crux of the matter is the absence of two parties i.e. a transferor and a transferee when a conversion takes place under Part IX of the Companies Act and this being a sine qua non for a transfer to take place within the meaning of section 2(47) read with section 45(1) of the Act. Further the concept of full value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the certificate of incorporation issued by the ROC which as per section 35 of the Companies Act is conclusive in all respects and remains unchallenged till date. Further, the Revenue cannot tax capital gains and challenge the conversion process at the same time. As regards the tax avoidance , the question cannot be raised at this stage having not even been adverted to in the order impugned or for that matter any facts referred to for proving the allegation. It needs to be noted as a fact that pursuant to the merger of EHIRC, Delhi with EHIRC, Chandigarh and the conversion of the latter into a limited company under Part IX of the Companies Act each of the resulting entities came to be assessed on the substantive basis and the company i.e. EHIRC Limited is assessed till date with a substantial contribution on account of taxes to be exchequer and continuing to render services in the field of the healthcare. The Assessing Officer has relied on the judgments in the case of A Gasper vs. CIT reported in 117 ITR 581 (Cal.) and CIT vs. Mrs. Grace Collis reported in 248 ITR 323 (SC) to support the case of the Revenue. On a close read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to company and therefore, it is a clear case of transfer of asset by the AOP to the company and Section 45(1) was rightly invoked by the Assessing Officer for levying the capital gain on such transfer of asset from the AOP to the company. That the learned CIT(A), without properly appreciating the facts of the case, deleted the addition made by the Assessing Officer. He requested that the order of learned CIT(A) should be reversed and that of the Assessing Officer may be restored. 20. Learned counsel for the assessee, on the other hand, relied upon the order of the learned CIT(A) and he stated that there was no transfer within the meaning of Section 2(47) of the Act because the word transfer presupposes the existence of two parties viz., transferor and transferee whereas in the case of a conversion under Part IX of the Companies Act, when an entity is converted into a company, no two parties remained in existence at any point of time. He, therefore, submitted that neither there was existence of two entities nor there was passing of consideration from one entity to another and therefore, Section 45(1) is not applicable. In support of this contention, he relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Capital gains . The expression transfer of a capital asset in Section 45(1) is required to be read with Section 2(47)(ii) which states that transfer in relation to a capital asset shall include extinguishment of any rights therein. The moot point which arose on interpretation of Section 45(1) in numerous matters was that on extinguishment of the rights in the capital assets, there was a transfer and in certain cases of reconstitution of firms and introduction of new partners, there was a resultant extinguishment of the rights in the capital assets proportionately. In order to get over this controversy, and keeping in mind the object of encouraging Firms being treated as Companies, the controversy is resolved by the Legislature by introducing clause (xiii) in Section 47 with effect from 1st April, 1999. Now, in the present case, it is argued on behalf of the department before the Tribunal, for the first time, that in this case, on vesting of the properties of the erstwhile Firm in the Limited Company, there was a transfer of capital assets and, therefore, it was chargeable to income-tax under the head Capital gains as, on such vesting, there was extinguishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of CIT Vs. Rita Mechanical Works [2012] 344 ITR 544 (P H) has also relied upon the decision of Hon ble Bombay High Court in the case of Texspin Engineering and Manufacturing Works (supra) for taking the view that taking over the assets of the firm by a company does not give rise to profit chargeable to capital gain under Section 45(4) of the Income-tax Act. Though in the above mentioned case the issue before the Hon'ble Jurisdictional High Court was with regard to the capital gain under Section 45(4) of the Act, but, their Lordships, while considering the decision of Hon ble Bombay High Court in the case of Texspin Engineering and Manufacturing Works (supra) has specifically referred and discussed the applicability of Section 45(1) read with Section 247(2) of the Act in paragraph 17 of their order. 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. 24. In the result, both the appeals of the Revenue are dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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