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2019 (6) TMI 1428 - AT - Income TaxLong Term Capital Gain Short Term Capital Gain - Revaluation of assets to be treated as transfer within the meaning of section 2(47) - conversion of firm into company - HELD THAT - Only event took place during the year under consideration i.e. January 2011 is revaluation of land and on 01.04.2011 conversion of firm into company took place i.e. A.Y. 2012-13, the subsequent year. AO treated the revaluation of assets and brought to tax but such revaluation of assets cannot be treated as transfer within the meaning of section 2(47) - Very footing of the Learned AO is incorrect since conversion from firm to company took place in A.Y. 2012-13 and not in A.Y. 2011-12. Charging of capital gain, therefore, is thus totally unjustified. AO that the capital gain arose on distribution of assets i.e. land to the partners by the assessee s firm due to revaluation of assets and thereby subsequent allotment of shares to the erstwhile partners is sought to be evaded against the provision and intent of the law is not correct. We would like to mention that when a firm is converted into company under Part XI, properties of the erstwhile firm vest in the company. The difference between vesting of property and distributions of property as discussed above does not permit section 45(4) to be invoked. In the instant case, since there was no sale or conveyance from the firm to the company, the partner s capital has not increased on account of sale on capital asset but it is only on account of revaluation of asset. The capital has been increased because of such conversion. The properties of the partnership firm have been vested with the company where all the assets and liability of the erstwhile firm also vested with the present company. We find no justification to hold that there was any transfer of asset and thus question of liability to pay tax on capital gain on the appellant firm does not and cannot arise at all. - Decided in favour of the assessee. Addition u/s 14A - HELD THAT - We restrict the disallowance to dividend income earned by the assessee before us which is exempted from tax. Thus this ground of appeal filed by the assessee is allowed. Ad hoc disallowance being 1/5th of total expenses of telephone, mobile, insurance, vehicle, repair and maintenance, interest on car loan and depreciation on account of personal use - HELD THAT - It appears from the records that various expenses such as mobile and telephone expenses, car loan, vehicle repair and maintenance has been claimed as expenses in the Profit and Loss account. Details of the entire expenses were also placed before the authorities below. The agreement of the assessee with the expenses of insurance includes the medical expenses of ₹ 13,779/- to be disallowed reveals the good conduct of the assessee. Apart from that, the expenses which has been discussed above for running a company are necessary expenses which sometimes difficult to be ascertained whether any personal expenses element is available or not. However, taking into consideration the entire gamut of the matter it seems that the assessee s pleas are genuine taking into consideration the details submitted by the assessee before the authorities below and before us as well. We are thus restrict such disallowance to 20% of the disallowance made by the authorities below which is calculated at ₹ 44,854/-. The assessee s Cross Objection is thus partly allowed. Addition on account of commission - HELD THAT - It is a settled principle of law that commission paid to persons for referring names of customers is allowable u/s 37 of the Act for introducing potential customers to the assessee falls within the ambit of service. Addition on account of difference in job work receipts - nature of income - HELD THAT - Apex Court in the matter of Kedarnath Jute Mfg. Co. Ltd.-vs-CIT 1971 (8) TMI 10 - SUPREME COURT where it was held that what is necessary is to be considered as the true nature of income. In that view of the matter, the true income emanating from real character of the transaction is to be looked into. On that basis, the Learned CIT(A) also clarifies the position that in the event the addition is to be sustained same amount requires to be reduced from sales so as to avoid double taxation he thus deleted the addition. The clarification so given by the CIT(A) is according to us just and proper and without any infirmity the same is confirmed. The revenue s appeal is dismissed. Under valuation of closing stock u/s 145A - Assessee had followed exclusive method of accounting - HELD THAT - It is mandatory for an assessee to follow exclusive method of accounting for valuation of inventories in the light of AS-2 on Valuation of Inventories issued by ICAI. But in terms of Section 145A, and assessee is to follow inclusive method of accounting. Since there is no impact of profitability whether an assessee follows exclusive method or inclusive method no addition is called for u/s 145A - See M/S. AIA ENGINEERING LTD 2017 (9) TMI 1753 - ITAT AHMEDABAD Disallowance u/s 40A(2) - CIT(A) deleted such addition following the order passed in assessee s own case for A.Y. 2011- 12 - HELD THAT - AR contention before us that since the order passed by the Learned CIT(A) in assessee s case for A.Y. 2011-12 has not been challenged before us following the principle of consistency, the department ought not to have challenged the issue in the instant appeal and DR failed to controvert such submission made by the Learned AR. We find substances in such submission made by the Learned AR. Taking into consideration the order passed by the Learned CIT(A) and the conduct of the Revenue in not preferring appeal in the previous A.Y.2011-12, we find no required. - Decided in favour of assessee.
Issues Involved:
1. Deletion of disallowance on account of Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). 2. Disallowance under section 14A of the Income Tax Act. 3. Ad hoc disallowance of expenses on account of personal usage. 4. Disallowance of commission expenses. 5. Addition on account of difference in job work receipts. 6. Addition on account of under-valuation of closing stock under section 145A. 7. Disallowance under section 40A(2) for excessive interest paid. Issue-wise Analysis: 1. Deletion of Disallowance on Account of LTCG and STCG: The Revenue appealed against the deletion of disallowance of ?25,46,06,987/- as LTCG and ?3,26,02,919/- as STCG by the CIT(A). The assessee argued that the revaluation of land and subsequent conversion of the firm into a Private Limited Company did not constitute a "transfer" under section 45(4) of the Income Tax Act. The CIT(A) accepted this argument, citing precedents such as CIT vs. Texspin Engg. & Mfg. Works and CIT vs. Rita Mechanical Works, which held that conversion under Part IX of the Companies Act does not amount to a transfer by way of distribution of capital assets. The Tribunal upheld the CIT(A)'s decision, noting that the revaluation did not result in any actual transfer or distribution of assets to partners. 2. Disallowance under Section 14A: The assessee challenged the disallowance of ?4,01,147/- under section 14A for investments made from non-interest-bearing funds. The Tribunal observed that the disallowance should not exceed the exempt income earned, which was ?2,09,251/-. Following the principle established in Madhusudan Industries Ltd. vs. ITO, the Tribunal restricted the disallowance to the amount of exempt income, thereby partially allowing the assessee's appeal. 3. Ad Hoc Disallowance of Expenses: The assessee contested the ad hoc disallowance of ?2,24,276/- for personal usage of telephone, mobile, insurance, vehicle repair, and maintenance expenses. The Tribunal found that the disallowance was based on conjecture and restricted it to 20% of the disallowed amount, i.e., ?44,854/-, considering the difficulty in segregating personal and business expenses. 4. Disallowance of Commission Expenses: The assessee appealed against the disallowance of ?20,08,977/- paid as commission. The CIT(A) had confirmed the disallowance, stating that mere introduction of customers does not constitute a service. However, the Tribunal, relying on precedents such as Suzlon Energy Ltd. vs. DCIT and Swastic Textile Co. (P.) Ltd. vs. CIT, held that introducing potential customers does qualify as a service under section 37 of the Act. The Tribunal thus deleted the disallowance. 5. Addition on Account of Difference in Job Work Receipts: The Revenue appealed against the deletion of ?2,11,26,463/- added due to a discrepancy between job work receipts as per Form 26AS and the assessee's books. The CIT(A) found that the discrepancy arose because certain sales were recorded as job work by the payees. The Tribunal upheld the CIT(A)'s decision, noting that the amount had been correctly accounted for in the sales, making the addition unwarranted. 6. Addition on Account of Under-Valuation of Closing Stock: The Revenue challenged the deletion of ?62,93,378/- for under-valuation of closing stock under section 145A. The CIT(A) and the Tribunal found that the assessee's method of accounting, which did not include excise duty and VAT in the closing stock, was in compliance with AS-2 and had no impact on profitability. The Tribunal, following judgments such as DCIT vs. AIA Engineering Ltd., confirmed the deletion. 7. Disallowance under Section 40A(2): The Revenue's appeal against the deletion of ?2,25,530/- disallowed under section 40A(2) for excessive interest paid was dismissed. The CIT(A) had deleted the addition, following the principle of consistency as the Revenue had not appealed against a similar deletion in the assessee's case for A.Y. 2011-12. The Tribunal upheld the CIT(A)'s decision. Conclusion: - Revenue’s appeals in ITA No. 2316/Ahd/2014 and ITA No. 3055/Ahd/2015 were dismissed. - Assessee’s Cross Objection No. 271/Ahd/2014 was partly allowed. - Assessee’s appeal in ITA No. 2945/Ahd/2015 was partly allowed.
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