2016 (5) TMI 1319 - AT - Income Tax

Validity of reopening of assessment - notice to company being dissolved - Held that - The company was not in existence at the time when the notice was issued u/s.148 therefore respectfully following the decision of the Delhi Bench of the Tribunal in the case of Impsat Pvt. Ltd. Vs. ITO 2004 (7) TMI 299 - ITAT DELHI-A we hold that the issue of notice u/s.148 after the company was dissolved and its name struck off the register of the Registrar of Companies is without jurisdiction invalid and unlawful in the eyes of law. The subsequent proceedings on the basis of such invalid notice are also not tenable therefore ground of cross objection No.1 raised by the assessee is allowed. Set off of carried forward business losses against the capital gains computed u/s.50 of the Act in view of provisions of section 72 - whether the deeming fiction created under section 50 is restricted to section 50 only or is it applicable to section 54E of the Income-tax Act as well ? - Held that - The fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly section 54E does not make any distinction between depreciable asset and non-depreciable asset and therefore the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets the assessee shall not be charged to capital gains. Therefore the exemption under section 54E of the Income-tax Act cannot be denied to the assessee on account of the fiction created in section 50. The benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50. The contention of the Revenue that by amendment to section 50 the longterm capital asset has been converted into a short-term capital asset is also without any merit. As stated hereinabove the legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as shortterm capital asset. Therefore it cannot be said that section 50 converts a long-term capital asset into a short-term capital asset. The assessee in our opinion is entitled to set off the brought forward business loss from the deemed short term capital gain. Therefore the order of the CIT(A) is upheld and the ground rasied by the revenue is dismissed.

Summary

Issues Involved:

1. Validity of notice issued under section 148 after the dissolution of the company.
2. Set off of carried forward business losses against capital gains computed under section 50 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued Under Section 148 After Dissolution of the Company:

The first issue pertains to the validity of the notice issued under section 148 of the Income Tax Act after the dissolution of the company. The Assessing Officer (AO) issued a notice under section 148 on 28-03-2011, after the company was dissolved on 03-03-2011. The assessee argued that the notice was void as the company was no longer in existence. However, the AO rejected this contention, stating that the proceedings were initiated for the Assessment Year (A.Y.) 2006-07, during which the company was in existence. The CIT(A) upheld the AO's decision, noting that the assessee failed to provide evidence that the dissolution order was published in the Gazette of India before the notice was issued.

The Tribunal, however, found merit in the assessee's argument. Citing the Delhi Bench Tribunal's decision in Impsat Pvt. Ltd. Vs. ITO, it was held that there is no provision in the Income-tax Act to assess a company that has been dissolved. The Tribunal concluded that the notice issued under section 148 after the company's dissolution was without jurisdiction, invalid, and unlawful. Consequently, the subsequent proceedings based on such an invalid notice were also deemed untenable. Thus, the ground of cross-objection raised by the assessee was allowed.

2. Set Off of Carried Forward Business Losses Against Capital Gains Computed Under Section 50:

The second issue involved the set-off of carried forward business losses against capital gains computed under section 50 of the Income Tax Act. The AO disallowed the set-off, stating that section 72 allows business losses to be carried forward and set off only against business income, not capital gains. The CIT(A), however, directed the AO to allow the set-off, relying on the Mumbai Bench Tribunal's decision in Digital Electronics Ltd. Vs. ACIT, which held that income from the sale of depreciable assets, although assessed as capital gains under section 50, is in the nature of business income.

The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's rulings in CIT Vs. Parrys (Eastern) Pvt. Ltd. and CIT Vs. Ace Builders Pvt. Ltd. These rulings clarified that the deeming fiction created under section 50 is restricted to the mode of computation of capital gains and does not convert a long-term capital asset into a short-term capital asset. Thus, the assessee was entitled to set off the brought forward business loss from the deemed short-term capital gain. The Tribunal dismissed the revenue's appeal on this issue.

Conclusion:

The Tribunal concluded that the notice issued under section 148 after the company's dissolution was invalid, and the subsequent proceedings were untenable. Additionally, it upheld the CIT(A)'s decision allowing the set-off of carried forward business losses against capital gains computed under section 50. Consequently, the revenue's appeal was dismissed, and the assessee's cross-objection was allowed.