The ITO, Ward-10(2),, Ahmedabad v. M/s. Gulabdas Printers, Ahmedabad

ITA 1931/AHD/2007 | 1994-1995
Pronouncement Date: 05-02-2010 | Result: Dismissed

Appeal Details

RSA Number 193120514 RSA 2007
Bench Ahmedabad
Appeal Number ITA 1931/AHD/2007
Duration Of Justice 2 year(s) 8 month(s) 28 day(s)
Appellant The ITO, Ward-10(2),, Ahmedabad
Respondent M/s. Gulabdas Printers, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 05-02-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 05-02-2010
Date Of Final Hearing 01-02-2010
Next Hearing Date 01-02-2010
Assessment Year 1994-1995
Appeal Filed On 08-05-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE SHRI N.S.SAINI ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH JUDICIAL MEMBER ITA NO.1931/AHD/2007 ASSESSMENT YEAR: 1994-95 DATE OF HEARING:01 02 10 DRAFTED:01.02.10 INCOME TAX OFFICER WARD-10(2) AHMEDABAD V/S . M/S. GULABDAS PRINTERS 4 TH FLOOR SAHAJANAND COMPLEX C.G. ROAD AHMEDABAD PAN NO. NOT FOUND. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI SANJAY RAI SR-DR RESPONDENT BY:- SHRI S.N.DIVETIA AR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER COMMISSIONER OF INCOME-TAX (APPEALS)-III AHMEDABAD IN APPEAL NO. C IT(A)-III/221/CC-1(1)/06-07 DATED 21-02-2007. THE ASSESSMENT WAS FRAMED BY THE DY. COMM. OF INCOME-TAX CENTRAL CIRCLE-1(2) AHMEDABAD U/S. 144 OF THE INCO ME-TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR THE ASSESSMENT YEAR 1 994-95 VIDE HIS ORDER DATED 28-03- 2002. 2. THE ONLY ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF CAPITAL GAINS CHARGEABLE. FOR THIS THE REVENUE HAS RAISED THE F OLLOWING GROUND NO.1 :- (1) THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DE LETING THE ADDITION OF RS.95 91 810/- MADE BY THE AO AS CAPITAL GAIN CHARG EABLE TO TAX ON TRANSFER OF ASSETS TO M/S. GULABDAS FLEXIPACK PVT. LTD. BY T HE ASSESSEE ON THE BASIS OF REVALUATION OF ASSETS MADE BY THE ASSESSEE FIRM. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSEE-FIRM FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 1994-95 AN D THIS RETURN WAS PROCESSED. SUBSEQUENTLY THE ASSESSING OFFICER RE-OPENED THE A SSESSMENT BY ISSUING NOTICE ITA NO.1931/AHD/2003 A.Y. 1994-95 ITO WD-10(2) ABD V. M/S. GULABDAS PRINTERS PAGE 2 U/S.148 OF THE ACT AND EX PARTE ASSESSMENT WAS FRAM ED U/S.144 OF THE ACT VIDE ORDER DATED 28-03-2002 ASSESSING THE INCOME ON ACCOUNT OF CAPITAL GAIN ARISING ON TRANSFER OF ASSETS TRANSFERRED TO PRIVATE LIMITED C OMPANY. IN THIS CASE FOR THE ASSESSMENT YEAR 1994-95 THE PREVIOUS YEAR ENDED ON 06-01-1994 AS THE FIRM WAS CONVERTED INTO A PRIVATE LIMITED COMPANY. BEFORE TH E CONVERSION THE ASSETS WERE RE-VALUED AT MARKET PRICE AS ON 01-04-1992. THIS P ARTNERSHIP FIRM CONSISTS OF SIX PARTNERS AND WAS ENGAGED IN THE BUSINESS OF PRINTIN G & LAMINATION. THE ASSETS OF THE FIRM WAS RE-VALUED AT MARKET PRICE AS ON 1-4-1992 A ND THEREAFTER A 7 TH PARTNER WAS INTRODUCED W.E.F. 1-10-1993 BY THE PARTNERSHIP DEED DATED 12-10-1993 SUBSEQUENTLY THE FIRM WAS CONVERTED INTO A COMPANY BY THE NAME GULABDAS FLEXIPACK INDUSTRIES LTD. ON 06-10-1994 AND THE CERTIFICATE OF COMMENCEMENT OF BUSINESS WAS GIVEN ON 12-01-1994 BY THE ROC. THESE SEVEN PARTNERS WERE ALLOTTED SHARES WORTH OF RS.35 LAC IN THEIR PROFIT SHARING R ATIO AND THE BALANCE RS.97 LAC WAS CREDITED TO THE CAPITAL ACCOUNT. ON THESE FACTS T HE ASSESSING OFFICER TREATED THE CONVERSION OF FIRM INTO COMPANY AS TRANSFER OF ASSE TS AND CHARGED CAPITAL GAINS ON RE-VALUATION OF ASSETS BY GIVING FOLLOWING FINDING: - IN VIEW OF THE ABOVE FACT & IN VIEW OF DECISION IN THE CASE OF R. TAX MFG. CO. 227 ITR 260 THE ADDITION ON ACCOUNT OF REVALUATION OF THE ASSETS TRANSFERRED TO GULABDAS FLEXIPACK INDS. PVT. LTD. TO THE TUNE O F RS.95 91 810/- IS ADDED AS INCOME UNDER THE HEAD CAPIAL GAIN. AGGRIEVED THE ASSESSEE PREFERRED BEFORE CIT(A) AND CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND STATING THAT IN THE PRESENT CASE THE COMPANY HAS NOT COME INTO EXISTEN CE AT AN EARL DATE SO THAT THE ASSETS OF THE UNDERTAKING (THE FIRM) CANNOT BE TRA NSFERRED TO IT. ALSO THE INDIVIDUAL ASSETS HAVE NOT BEEN TRANSFERRED TO THE COMPANY AND ACCORDINGLY HE DELETED THE ADDITION. AGGRIEVED THE REVENUE CAME IN APPEAL BE FORE US. 4. BEFORE US THE LD. SR-DR SHRI SANJAY RAI SUPPORT ED THE ORDER OF ASSESSING OFFICER BY STATING THAT THE ASSESSING OFFICER HAS R IGHTLY ADDED THE CAPITAL GAIN ON ACCOUNT OF RE-VALUATION OF ASSETS TRANSFERRED TO GU LABDAS FLEXIPACK INDUSTRIES PVT. LTD. AS THE ASSESSEE FIRM KNOWINGLY THE RE-VALUED T HE ASSETS AT MARKET PRICE AS ON 01-04-1992 AND ALSO ADMITTED SEVEN PARTNER W.E.F. 1 -10-1993 AND EXECUTED A FRESH PARTNERSHIP DEED DATED 12-10-1993 AND THEREAFTER CO NVERTED THIS FIRM INTO A COMPANY. HE STATED THAT THESE SEVEN PARTNERS WERE A LLOTTED SHARES WORTH RS.35 ITA NO.1931/AHD/2003 A.Y. 1994-95 ITO WD-10(2) ABD V. M/S. GULABDAS PRINTERS PAGE 3 LAKHS IN THEIR PROFIT SHARE RATIO AND THE BALANCE R S.97 LAKHS WERE CREDITED TO THEIR CURRENT ACCOUNT IN THE COMPANY. HE ARGUED THAT THI S IS A TRANSFER OF ASSETS AND BY REVALUING ENHANCE THE VALUE SO THAT THE AMOUNT CAN BE GIVEN AS LOAN TO ANYBODY OR CREDIT CAN BE GIVEN FOR THE SAME. HE ALSO ARGUED T HAT EVEN THE PROFIT RATIO IS CHANGED AND CAPITAL OF EACH PARTNERS IS ALSO CHANGE D. ACCORDINGLY HE URGED THE BENCH TO CONFIRM THE ADDITION MADE BY THE ASSESSING OFFICER. 5. ON THE OTHER HAND THE LD. COUNSEL FOR THE ASSES SEE ARGUED THAT WHEN THE REVALUATION OF ASSETS OF THE ERSTWHILE FIRM WAS UND ERTAKEN THERE NEITHER CHANGE IN CONSTITUTION NOR CONVERSION OF THE FIRM INTO A COMP ANY. THE 7 TH PARTNER WAS ADMITTED FROM 01-10-1993 AS EVIDENT FROM THE COPY OF PARTNER SHIP DEED EXECUTED ON 03-12- 1993 AND PLACED IN THE PAPER BOOK AT PAGE 18 TO 28. ACCORDING TO HIM IT WAS MERELY A BOOK ENTRY PASSED BY THE FIRM SO AS TO BRING THE ASSETS TO ITS PRESENT VALUE AND DISCLOSED THE NET WORTH AT ITS REAL VALUE AND THERE FORE MERE PASSING OF A BOOK ENTRY SO AS TO BRING THE ASSETS TO ITS MARKET VALUE WILL NOT GIVE RISE TO ANY INCOME MUCH LESS TRANSFER OF ASSETS AND PROFIT THEREON SO AS TO BE LIABLE AS CAPITAL GAINS U/S.45(1) OF THE ACT. THE LD. COUNSEL FURTHER STATED THAT THE AO IS NOT JUSTIFIED IN OBSERVING THAT THE ASSETS WERE TRANSFERRED TO GULABDAS FLEXIPACK I NDUSTRIES PVT. LTD. ON REVALUATION SO THAT ADDITION WAS REQUIRED TO BE MADE AND WHEN T HE ASSETS WERE REVALUED AND ACCOUNTING ENTRIES WERE PASSED ON 1-4-1993 THERE W AS NO TRANSFER OF ASSETS TO THE SAID COMPANY WHICH WAS CONVERTED LATER ON AS EVIDEN CED BY CERTIFICATE OF INCORPORATION DATED 06-01-1994. HE STATED THAT IT W AS NOW WELL SETTLED POSITION IN LAW THAT SIMPLE REVALUATION OF ASSETS DOES NOT LEAD TO INCIDENCE OF CAPITAL GAINS INASMUCH AS THE REVALUATION IS MADE IN THE HANDS OF THE ASSESSEE BY WRITING UP THE VALUE OF ASSETS IN THE BOOKS. HE PLACED RELIANCE ON THE HONBLE APEX COURT IN THE CASE OF CIT V. HIND CONSTRUCTION CO. LTD. (1972) 83 ITR 211 (SC) WHICH IS FOLLOWED BY THE ITAT AHMEDABAD BENCH IN THE CASE OF WELLPACK PACKAGING V. DCIT (2003) 78 TTJ 448 (AHD) AND THE IDENTICAL ADDITION WAS DEL ETED. HE FURTHER STATED THAT THE TAX APPEAL FILED BY THE DEPARTMENT BEFORE THE HONB LE JURISDICTIONAL HIGH COURT HAD BEEN DISMISSED ON THE GROUND THAT NO SUBSTANTIAL QU ESTION OF LAW ARISES. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THIS ADDITION COULD BE LOOKED AT FROM ANOTHER ANGLE ALSO THAT THE COMPANY HAS ISSUED SHARES WORT H RS.35 LAKHS TO SEVEN PARTNERS OF THE ASSESSEE-FIRM IN RESPECT OF CAPITAL ACCOUNT OF THE SAID PARTNERS IN THE BOOKS OF THE FIRM WHEREAS THE COMPANY HAS TREATED AS UNSECU RED LOAN THE BALANCE IN THE ITA NO.1931/AHD/2003 A.Y. 1994-95 ITO WD-10(2) ABD V. M/S. GULABDAS PRINTERS PAGE 4 CURRENT ACCOUNT OF THE SAID PARTNERS. HE REFERRED T HE FACTS THAT THE ERSTWHILE PARTNERS HAVE BEEN ISSUED SHARES WORTH RS.35 LAKHS WHEREAS B ALANCE RS.97 LAKHS HAS BEEN TREATED AS UNSECURED LOAN BY THE ASSESSEE-COMPANY. ACCORDINGLY HE ARGUED THAT WHAT IS CHARGEABLE TO TAX U/S.45(1) OR 45(4) OF THE ACT IS THE PROFIT OR GAIN ARISING ON TRANSFER OF THE ASSET DISTRIBUTED ON DISSOLUTION OF THE FIRM OR OTHERWISE AND IT IS NOT THE CONTENTION OF THE AO THAT RS.95 91 824/- IS THE PROFIT OR GAIN ARISING ON CONVERSION OF THE FIRM. IN VIEW OF THIS HE ARGUED THAT THIS CONTENTION OF THE ASSESSEE WOULD ALSO HOLD GOOD AS REGARDS THE OBSERVATION MAD E BY CIT(A) THAT THE FIRM STOOD DISSOLVED ON 06-01-1994. ACCORDINGLY HE STATED THA T THERE IS NO INFIRMITY IN THE ORDER OF CIT(A) AND THAT IS TO BE UPHELD. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE ALSO PERUSED TH E CASE RECORDS INCLUDING THE ASSESSMENT ORDER AS WELL AS THE ORDER OF CIT(A). T HE FACTS ABOVE STATED ARE UNDISPUTED. THE ONLY ISSUE ARISES BEFORE US IN VI EW OF THE ABOVE STATED FACTS IN PARA-3 OF THIS ORDER IS:- WHETHER CAPITAL GAIN TAX IS TO BE TAXED ON REVALUA TION OF ASSETS BEFORE CONVERSION OF FIRM INTO COMPANY U/S.45(4) OF THE AC T IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. THE PROVISIONS OF SECTION 45(4) OF THE ACT READS AS UNDER:- CAPITAL GAINS 45 (1) 45(4) THE PROFITS OR GAINS ARISING FROM THE TRANSF ER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE SHALL BE CHARGEABLE TO TAX AS HE INCOME OF THE FIRM ASSOCIATION OR BODY OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAK ES PLACE AND FOR THE PURPOSES OF SECTION 48 THE FAIR MARKET VALUE OF THE ASSET ON T HE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER.] IN THE PRESENT CASE BEFORE US NEITHER THERE WAS DI SSOLUTION OF FIRM NOR TRANSFER OF ASSETS OF THE FIRM. IN THIS CASE THE PREVIOUS YEAR ENDED ON 06-01-1994 FOR THE ASSESSMENT YEAR 1994-95 AND THE FIRM WAS CONVERTED INTO A PRIVATE LIMITED COMPANY. BEFORE THE CONVERSION THE ASSETS WERE RE-V ALUED AT MARKET PRICE AS ON 01-04-1992. THIS PARTNERSHIP FIRM CONSISTS OF SIX PARTNERS AND WAS ENGAGED IN THE BUSINESS OF PRINTING & LAMINATION. THE ASSETS OF TH E FIRM WAS RE-VALUED AT MARKET PRICE AS ON 1-4-1992 AND THEREAFTER A 7 TH PARTNER WAS INTRODUCED W.E.F. 1-10-1993 BY ITA NO.1931/AHD/2003 A.Y. 1994-95 ITO WD-10(2) ABD V. M/S. GULABDAS PRINTERS PAGE 5 THE PARTNERSHIP DEED DATED 12-10-1993 SUBSEQUENTL Y THE FIRM WAS CONVERTED INTO A COMPANY BY THE NAME GULABDAS FLEXIPACK INDUSTRIES LTD. ON 06-10-1994 AND THE CERTIFICATE OF COMMENCEMENT OF BUSINESS WAS GIVEN O N 12-01-1994 BY THE ROC. THESE SEVEN PARTNERS WERE ALLOTTED SHARES WORTH OF RS.35 LAC IN THEIR PROFIT SHARING RATIO AND THE BALANCE RS.97 LAC WAS CREDITED TO THE CAPITAL ACCOUNT. THERE WAS NO CHANGE IN PROFIT-SHARING RATIO IN THE HANDS OF THE FIRM. IN VIEW OF THE ABOVE PROVISIONS OF SECTION 45(4) WE ARE OF THE VIEW THAT THE TRANS FER OF CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION O F A FIRM ETC. PROFITS OR GAINS ARISING FROM SUCH TRANSFER IS CHARGED U/S.45(4) WHICH IS N EWLY INSERTED BY THE FINANCE ACT 1987 WITH EFFECT FROM 1 ST APRIL 1988 TAKES CARE OF A SITUATION WHERE PROFI TS OR GAINS ARISE FROM - TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DISSOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSO NS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO-OPERATIVE SOCIETY) OR OTHERWISE. WE FIND FROM THE ABOVE PROVISIONS THAT IN SUCH A SI TUATION THE PROFITS OR GAINS SO ARISING FOR AND FROM ASSESSMENT YEAR 1988-89 CHAR GEABLE TO TAX AS THE INCOME OF THE FIRM ASSOCIATION OR BODY OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE. FOR THAT PURPOSE THE FAIR MARKET VALUE OF T HE ASSET ON THE DATE OF SUCH TRANSFER IS TO BE DEEMED TO BE THE FULL VALUE OF TH E CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. THIS LAW IS OPERATIVE FOR AND FROM ASSESSMENT YEAR 1988- 89. SECTION 45(4) CLEARLY SHOWS THAT ON DISTRIBUTIO N OF CAPITAL ASSETS AS A RESULT OF THE DISSOLUTION OF A FIRM FOR THE PURPOSE OF SECTION 48 THE FAIR MARKET VALUE [AS DEFINED IN SECTION 2(22B)] OF THE ASSET ON THE DATE OF SUCH TR ANSFER SHALL DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. IN SUCH A SITUATION THE VALUE OF THE CAPITAL ASSET ON TRANS FER AS A RESULT OF THE DISSOLUTION OF THE FIRM SHOULD BE THE FAIR MARKET VALUE AND NOT T HE WRITTEN DOWN VALUE OR ANY OTHER VALUE. THIS VIEW HAS BEEN HELD BY THE HONBLE ANDHR A PRADESH HIGH COURT IN THE CASE OF RAJLAXMI TRADING CO. V. CIT (2001) 250 ITR 581 583 (AP). UNDER SECTION 45(4) TWO CONDITIONS ARE REQUIRED TO BE SATISFIED VIZ. TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS AND SECONDLY SUCH TRANSFER SHO ULD BE ON DISSOLUTION OF THE FIRM OR OTHERWISE. ONCE THESE TWIN CONDITIONS ARE SATISFIED THEN IN THAT EVENT FOR THE PURPOSES OF COMPUTATION OF CAPITAL GAINS UNDER SECT ION 48 THE MARKET VALUE ON THE DATE OF THE TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. WHERE A FI RM BECOMES A LIMITED COMPANY ITA NO.1931/AHD/2003 A.Y. 1994-95 ITO WD-10(2) ABD V. M/S. GULABDAS PRINTERS PAGE 6 UNDER PART IX OF THE COMPANIES ACT 1956 SECTION 4 5(4) IS NOT ATTRACTED AS THE VERY FIRST CONDITION OF TRANSFER BY WAY OF DISTRIBUTION OF CAPITAL ASSETS IS NOT SATISFIED. IN THE CIRCUMSTANCES LATTER PART OF SECTION 45(4) WHICH REFERS TO COMPUTATION OF CAPITAL GAINS UNDER SECTION 48 BY TREATING THE FIRM MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER DOES NOT ARISE. THIS VIEW HAS BEEN HELD B Y THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. TEXSPIN ENGINEERING & MANUFACTURING WORKS (2003) 263 ITR 345 352 353 (BOM). THE EFFECT OF THE INSERTION OF SECTION 45(4) IS THAT THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BY A FIRM TO A PARTNER ON DISSOLUTION OR OTHERWISE WOULD BE CHARGEABLE AS THE FIRMS INCO ME IN THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE AND FOR THE PURPOSE OF COMP UTATION OF CAPITAL GAINS THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER W OULD BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUED AS A RESULT OF THE TRANSFER. IN THE PRESENT CASE BEFORE US NEITHER THERE IS DISSOLUTIO N OF FIRM NOR TRANSFER OF ASSETS OF THE FIRM RATHER IT IS PURELY A CASE OF CONVERSION OF FIRM INTO COMPANY AND ACCORDINGLY THE PROVISIONS OF SECTION 45(4) OF THE ACT WILL NOT APPLY. IN VIEW OF THE ABOVE DISCUSSION WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 7. IN THE RESULT REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 05/02/2010 SD/- SD/- (N.S.SAINI) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD DATED : 05/02/2010 *DKP COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-III AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD