TMI Blog2023 (5) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... unting technique adopted to evade tax liability? - Tribunal held that there was change of opinion involved in the reopening the case of the assessee HELD THAT:- On facts it has been established that revaluation of the fixed assets did not give rise to any profit to the partnership firm and there is no accrual of benefits in the hands of the partners and if that be so can there be any tax liability in the hands of the firm as well as in the hands of the partners. The learned tribunal after noting the accounting treatment followed by the assessee on facts found that no profit allotment on account of revaluation has accrued or arisen to the assessee firm and the revaluation of fixed asset did not give any profit to the firm and the revaluation was done so that the value of the fixed assets in the balance sheet would match the market price and the object behind such revaluation is to avail loans from banks and financial institutions by showing market price of the fixed assets in the balance sheet. Thus, in our view, the learned tribunal rightly rejected the contention raised by the revenue and also rightly noted the decision of Sanjeev Woolen Mills Versus Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of accounts books or other evidence will not necessarily amount to disclosure within the meaning of the proviso? (ii) Whether on the facts and circumstances and in law, the Income Tax Appellate Tribunal was erred in holding that the conditions of Section 47(xiii) of the Income Tax Appellate Tribunal, 1961 had been complied with by the assessee although the assessee had converted the stock-in-trade into capital asset during the Financial Year 2007-08 revaluing it at market value ? (iii) Whether on the facts and circumstances and in law, the Income Tax Appellate Tribunal was wrongly held that the case pertaining to the Assessment Year 2009-10 the reason recorded by the Assessing Officer was for subjective satisfaction and not for objective satisfaction and that the reason recorded was not independent? (iv) Whether on the facts and circumstances and in law, the Income Tax Appellate Tribunal was failed to appreciate that plaint questioningabout the taxability of the transaction involved in this case during the assessment proceedings does not necessarily mean that the Assessing Officer had examined the turn of events and the whole mount so appreciated should be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners of the assessee firm had withdrawn substantial amount from its capital. The three partners namely, Blue Heaven, Orchid Griha Nirma and Command Constructions had withdrawn Rs. 8 crores each from its capital of Rs. 8.16 crores, Rs. 8.15 crores and Rs. 8.15 crores respectively and their capital balance as on 31st March, 2008 was Rs. 15.89 lakhs, Rs. 15 lakhs and Rs. 15 lakhs respectively. The fourth partner M/s. Well Growth had withdrawn Rs. 158.19 crores from its capital account and the balance as on 31.03.2008 was Rs. 98.53 lakhs. The enhanced value after revaluation were entered in a separate account created as partners current account where amount was credited in the name of the partners. The balance as on 31st March, 2008 of the partners in this account was shown as Rs. 38.10 crores in respect of Blue Heaven Griha Nirman, Rs. 37.87 crores in respect of Orchid Griha Nirman and Command Constructions and Rs. 267.70 crores in respect of Wellgrowth Griha Nirman. This according to the department that on the enhanced value of the asset at the instance of the partners, was without paying any tax on such transaction. With effect from 29th September, 2008, the assessee firm was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons recorded by the Assessing Officer it was clear that there was genuine reason to believe that income tax had escaped assessment in the case of assessee. The chain of events that led to this reason to believe was spread over two Financial Years namely, FY 2007-08 and 2008-09 and, therefore, the Assessing Officer had to reopen the case of both the assessment years in order to prevent any possibility of leakage of revenue. Further, it is contended that the Tribunal erred in holding that just because in the reason for reopening, it was mentioned that the reopening is a subject to outcome of the proceedings initiated in the immediate previous year, it cannot be stated that the reason was not independent and not objective. Further, it was contended if the assessee had transferred the land and building as stock-in-trade they would have made a profit of Rs. 370.33 crores on which the assessee was liable to pay tax and in order to circumvent this tax liability, the assessee converted stock-in-trade into capital asset during the Financial Year, FY-2007-08 and revalued it at the market rate and in the subsequent year the land and building so capitalized was transferred to the company upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains. The first condition to be fulfilled is transfer by way of distribution of capital assets which is not satisfied in the case of the assessee and there was no distribution or transfer of any capital asset to anyone and what was done was only the conversion of the firm into the company in the Financial Year 2008-09 resulting in the assets and the liabilities of the firm getting transmitted to the company. Further, it is submitted that in the previous year, relevant to the Assessment Year 2008-09, there was no reconstitution of the firm or transfer or distribution of any capital asset and in the Financial Year 2008-09 three more partners were taken into the firm but there was no distribution of any capital asset upon such reconstitution and thus, it is submitted that there is no case for taxation of the revaluation amount in the Assessment Year 2008-09. With regard to the Assessment Year 2009-10, it is submitted that upon the firm being converted as a company, it was a statutory vesting of the property in the company and there was no transfer of the capital asset as contemplated under Section 45(1) of the Act. No capital gain could be computed and no liability to pay any capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny tax liability in the hands of the firm as well as in the hands of the partners. The learned tribunal after noting the accounting treatment followed by the assessee on facts found that no profit allotment on account of revaluation has accrued or arisen to the assessee firm and the revaluation of fixed asset did not give any profit to the firm and the revaluation was done so that the value of the fixed assets in the balance sheet would match the market price and the object behind such revaluation is to avail loans from banks and financial institutions by showing market price of the fixed assets in the balance sheet. Thus, in our view, the learned tribunal rightly rejected the contention raised by the revenue and also rightly noted the decision of the Hon ble Supreme Court in Sanjeev Woolen Mills Versus Commissioner of Income Tax (2005) 279 ITR 434 (SC) wherein it was held that valuation of the assessee at market value, which was higher than the cost, resulted in the imaginary or notional potential profit out of itself and not any real profit or income which can be taxed. 8. The next aspect which the tribunal dealt with was with regard to the applicability of Section 45(4) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being credited to the partner s current account and upon conversion of the firm as a company, the partners did not get any extra right to withdraw any sum out of the said revalued amount and accordingly rejected the revenue s appeal. 9. With regard to the correctness of the reopening, the tribunal had first noted the reasons for reopening. On examining the facts, the tribunal found that in the assessment order it is seen that the assessing officer was fully aware of the fact that with effect from September 29, 2008, the firm was converted into a company and the firm ceased to exist and consequently, the notice under Section 148 and the reassessment made pursuant thereto are invalid. Further the tribunal noted from the reasons recorded by the assessing officer and the impugned order of assessment that the reassessment proceedings were initiated to tax the revaluation amount and this would be a clear case of change of opinion on the part of the assessing officer. This conclusion was arrived at by the tribunal after noting that the assessee had submitted the balance sheet and profit and loss account as on March 31, 2008 which contain information about the conversion of the invento ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same material which was considered during the original assessment proceedings. 10. Nextly, the tribunal examined the reasons recorded by the assessing officer for the assessment year 2009-2010. Interestingly, in the penultimate paragraph of the reasons for reopening, it has been stated that subject to the merits of the addition in A.Y. 2008-2009 and appellate order thereon the revaluation profit on conversion from capital account of partners to loan is transfer of assets and i.e. to be taxed as income in the hands of the firm . The tribunal on noting the said reasons, rightly held that the reasons recorded are not independent and the assessing officer had failed to note that each assessment year, is a separate unit and reasons are to be recorded separately year wise and it is evident from the reasons recorded that it depends upon outcome of the assessment year 2008-2009 to tax the income escaped for the assessment year 2009-2010 and therefore the assessing officer is merely suspecting that income for the assessment year 2009-2010 may or may not escape assessment. This being guess work was held to be unsustainable. In support of its conclusion, the tribunal relied on the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a private limited company which had filed its return of income admitting the total income of Rs. 12,44,401/-.Originally the said assessee was a partnership firm and it was converted into a private limited company under the Companies Act. The partnership firm revalued its assets on November 30, 2008 and the value increased to an extent of Rs. 1,17,24,04,974/- but book value of the assets on the date of revaluation was Rs. 52,16,526/-. The assessment was reopened and the assessing officer held that the total revalued value of the capital accounts of all the four partners stood at Rs. 1,17,32,87,069,51/- that the shares were allotted to the partners of the firm for a total amount of Rs. 10,00,000/- and that the balance has given a credit of loan to the partners of the erstwhile firm in the same proportion as their share capital of the firm. In the said case, the assessing officer held that this was a deviation stipulated under Section 47(xiii) of the Act for exemption from capital gains and therefore made the addition towards short term capital gains and it may not be taxed thereto. The appeal filed before Commissioner of Tax was dismissed and the further appeal to the tribunal was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 45(4) of the Act . In this regard, the court took into consideration the decision in CADD Centre Versus Assistant Commissioner of Income Tax (2016) 383 ITR 258 (Mad) and the decision in Commissioner of Income Tax Versus Texspin Engineering and Manufacturing Works (2003) 263 ITR 345 (Bom). Ultimately the legal position was culled out as follows:- 14. In our considered view, the legal position having been well settled that when vesting takes place, it vests in the company as they exist. Therefore, unless and until the first condition of transfer by way of distribution of assets is satisfied, Section 45(4) of the Act will not be attracted. Therefore, in the facts and circumstances of the case, we find that there is no transfer by way of distribution of assets. 15. The above decision would squarely apply to the facts and circumstances of this case and the tribunal rightly took note of the decision and granted relief to the assessee. 16. The decision in the K.T.C. Automobiles relied on by the revenue will be wholly inapplicable as the facts noted in paragraphs 9 and 12 of the judgment, ultimately it was held that the liability to pay tax on the profit and gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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