2009 (6) TMI 668 - AT - Income Tax

Transfer of sole proprietorship business to company - exemption u/s 47(xiv) - revision u/s 263 - whether the CIT is right in invoking revisional jurisdiction under section 263 of the Act and directing to assess the goodwill to the extent of Rs. 2,45,00,000 under capital gains tax on the ground that all the conditions as laid down under the proviso to section 47(xiv)( c) of the Act are not fulfilled. - held that - if the full amount due under the capital account and also the current account of the proprietor have to be clubbed and treated as the consideration payable to the sole proprietary concern on the transfer, then there could be no case of violation of sub-clause (c) of section 47(xiv) of the Act, during the previous year ended 31-3-2001, relevant to the assessment year 2001-02. This is because under sub-clause (c) of section 47(xiv) only if the consideration is received in any form or manner other than by way of allotment of shares, there can be said to be a violation of the provisions. During the year under appeal, the sole proprietor has not received any payment in cash or in kind or otherwise, except for allotment of shares in the company. - Decided in favor of assessee.

Issues Involved:
1. Whether the Commissioner of Income-tax (CIT) was right in invoking revisional jurisdiction under section 263 of the Income-tax Act.
2. Whether the transfer of the proprietary concern to the company fulfilled the conditions laid down under the proviso to section 47(xiv)(c) of the Income-tax Act.
3. Whether the goodwill amounting to Rs. 2,45,00,000 should be assessed under "capital gains tax."

Issue-wise Detailed Analysis:

1. Invocation of Revisional Jurisdiction under Section 263:
The primary issue raised in the appeal is whether the CIT was justified in invoking revisional jurisdiction under section 263 of the Income-tax Act. The CIT issued a notice to revise the assessment on 24-11-2004, arguing that the conditions stipulated under section 47(xiv)(c) were not satisfied, and hence, the goodwill valued at Rs. 2,45,00,000 should be taxed under "capital gains."

The assessee objected, stating that all conditions under section 47(xiv) were met, including the issuance of shares for 51% of the paid-up capital and the transfer of all assets and liabilities to the company. The CIT, however, rejected these objections and directed the Assessing Officer to recompute the assessee's total income, including the capital gains tax on the goodwill.

2. Fulfillment of Conditions under Section 47(xiv)(c):
The assessee argued that all conditions under section 47(xiv)(c) were satisfied. The proprietary concern's balance sheet as on 30-9-2000 showed a capital account of Rs. 2,55,00,000 and a current account of Rs. 2,62,03,897.63. The company allotted equity shares worth Rs. 2,55,00,000 to the proprietor, fulfilling the condition that shares should be issued for the capital account balance.

The CIT contended that the proprietary concern's current account balance should also be considered, arguing that the proprietor received a benefit indirectly. However, the assessee maintained that the current account balance was a liability and not part of the consideration for the transfer. The company's treatment of this amount as an unsecured loan was consistent with accounting principles and legal precedents.

3. Assessment of Goodwill under "Capital Gains Tax":
The assessee argued that the CIT's interpretation of the provisions was incorrect. The assessee cited various judicial decisions to support the contention that the order of the Assessing Officer was neither erroneous nor prejudicial to the interests of the Revenue. The assessee relied on the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which held that if the Assessing Officer's view was one of the possible views, it could not be considered erroneous or prejudicial to the Revenue.

The Tribunal examined the provisions of section 47(xiv) and concluded that the transfer of the proprietary concern to the company complied with the conditions under clauses (a), (b), and (c). The liabilities, including the current account balance, were transferred as part of the agreement between the proprietor and the company. The consideration for the transfer was agreed upon as Rs. 2,55,00,000, for which shares were allotted.

The Tribunal also noted that the Assessing Officer's interpretation that the full amount of consideration was not allotted in shares was incorrect. The shares were allotted in compliance with the agreed consideration, and the current account balance was correctly treated as a liability.

Conclusion:
The Tribunal allowed the appeal, concluding that the order of the Assessing Officer was not erroneous or prejudicial to the interests of the Revenue. The conditions under section 47(xiv) were fulfilled, and there was no violation of sub-clause (c) during the assessment year 2001-02. The Tribunal held that the CIT's invocation of revisional jurisdiction under section 263 was without legal basis.

Result:
The appeal filed by the assessee was allowed.

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