2017 (5) TMI 1720 - AT - Income Tax

Assessment u/s 153A - conversion of firm into company - assessment of capital gains - land shown as capital contribution in the hands of the firm and the same was revalued subsequently in the hands of the firm and converted into a company under the provisions of Schedule IX of the Companies Act, 1956 - HELD THAT - An assessment u/s. 153A can be made only based on the incriminating material found as a result of action u/s. 132 of the Act. In the present cases, the alleged incriminating material was in the form of partnership deed and minutes of the Board meeting - this material does not indicate any undisclosed income in the form of money, bullion or other valuable assets. It only indicates that the assessee adopted a tax planning device in order to escape the clutches of the provisions of section 45 - legality or otherwise of these transactions can only be examined in the regular assessment proceedings. The minutes of the Board meeting of the said company or the partnership deep does not reveal that the transactions per se is illegal or the transaction of conversion of firm into a company is per se illegal nor indicates any undisclosed income. Hon'ble jurisdictional High Court in the case of CIT v. IBC Knowledge Park (P) Ltd. 2016 (5) TMI 372 - KARNATAKA HIGH COURT held that when no material was found during the course of search indicating undisclosed income, no addition can be made based on the inference of undisclosed income under the provisions of section 153A and 153C of the Act. In the present cases, the AO had not referred to any incriminating material which indicates that the tax planning adopted by the respondent-assessee is not legally permissible nor indicating any undisclosed income. These are all the public documents which are available for inspection by anybody and that cannot be called incriminating material. By no stretch of imagination these material can be called incriminating material. The Assessing Officer had not recorded any satisfaction as to how the material found is incriminating in nature. Further no addition can be made in the assessment u/s. 153A based on inferences drawn from already disclosed / public documents found. This kind of issues can be examined only in the regular assessment proceedings. Therefore, the assessments made cannot be upheld in law as the additions have not been based on any incriminating material. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of capital gains on the transfer of land due to conversion of a partnership firm into a company.
2. Legality of revaluation of land and its impact on capital gains.
3. Validity of assessment under Section 153A based on the material found during search and seizure operations.

Detailed Analysis:

1. Taxability of Capital Gains on the Transfer of Land:
The central issue was whether the capital gains arising from the transfer of land upon the conversion of a partnership firm into a company should be taxed. The Revenue argued that the conversion resulted in a capital gains event, as the land was revalued and transferred to the company, M/s Mangalore Indiana Hospital Pvt. Ltd. The CIT(A) countered this by stating that the revaluation did not amount to a sale and hence did not trigger capital gains tax. The CIT(A) emphasized that the land was introduced at cost into the firm, and no sale occurred after revaluation, meaning no capital gains arose since the doctor brothers did not receive any consideration.

2. Legality of Revaluation of Land and Its Impact on Capital Gains:
The Revenue contended that the revaluation of the land and its subsequent transfer to the company was a scheme to avoid capital gains tax. They highlighted that the partnership deed was amended multiple times and that the firm was used as a device to evade tax. The CIT(A) found that the revaluation of assets does not constitute income and that capital gains arise only upon the sale of the asset. The CIT(A) concluded that since the land was not sold and no consideration was received by the assessee, no capital gains tax was applicable.

3. Validity of Assessment under Section 153A:
The assessment under Section 153A was challenged on the grounds that it was based on the material found during search and seizure operations. The Revenue argued that the material indicated a tax avoidance scheme. However, the Tribunal held that the material found during the search did not indicate any undisclosed income or illegal transactions. The Tribunal referred to the jurisdictional High Court's ruling in CIT v. IBC Knowledge Park (P) Ltd., which stated that assessments under Section 153A should be based on incriminating material found during the search. The Tribunal concluded that the partnership deed and minutes of the Board meeting did not constitute incriminating material and that the legality of the transactions could only be examined in regular assessment proceedings.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue, holding that the assessments made under Section 153A were not based on any incriminating material and that the revaluation and conversion of the firm into a company did not result in a capital gains event. The Tribunal emphasized that the material found during the search did not indicate any undisclosed income, and therefore, the additions made by the AO were not justified.