2016 (3) TMI 235 - AT - Income Tax

Capital gain - conversion of the partnership firm into company - whether transfer of factory land and building, etc., and holding that the conditions stipulated in sub-section (xiii)(c) and (d) of section 47 were not fulfilled? - Held that - The aggregate of the shareholding in the company of the partners of the firm was not found less than 50 per cent. of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession. The learned Commissioner of Income-tax (Appeals), on examination of the record specifically found that aggregate of the shareholding of the companies by the partners is not less than 50 per cent. of the total voting powers because though the shares of Shri Vijay Sood were transferred, Shri Rajat Sood and erstwhile partners share in the company were more than 50 per cent. and these were retained as such for a period of more than 5 years. Therefore, the same would not disqualify the assessee from exemption under section 47(xiii) of the Act. This finding of fact recorded by the learned Commissioner of Income- tax (Appeals) have not been rebutted through any evidence or material on record. Further, the findings of fact recorded by the learned Commissioner of Income-tax (Appeals) under section 47(xiii) have not been challenged by the Revenue Department in the present appeal. It may be noted here again that since on the registered agreements dated April 1, 1999 and December 30, 1999, the business of the assessee-firm was taken over by the limited company which have been signed by Shri Vijay Sood as well on behalf of the firm, therefore, story made up by Shri Vijay Sood later on and accepted by the Assessing Officer, will demolish the entire case of the Revenue. In view of the above discussion, the learned Commissioner of Income- tax (Appeals) has correctly held that no consideration, what-so-ever has gone to Shri Vijay Sood, partner of the assessee-firm on the basis of the alleged agreement dated December 7, 1998. The learned Commissioner of Income-tax (Appeals) also correctly held that the conditions laid down under section 47(xiii) of the Act have been fulfilled in this case. Therefore, no capital gain is chargeable under the provisions of section 45(4) of the Act. Thus, there is no merit in the Departmental s appeal, the same is accordingly dismissed. - Decided against revenue

Issues Involved:
1. Validity of the agreement dated December 7, 1998.
2. Applicability of Section 45(4) of the Income-tax Act, 1961.
3. Fulfillment of conditions under Section 47(xiii) of the Income-tax Act, 1961.
4. Addition of Rs. 1,58,63,380 as capital gains.
5. Deletion of additions of Rs. 21 lakhs and Rs. 23,50,000 on account of income from undisclosed sources.

Issue-wise Detailed Analysis:

1. Validity of the Agreement Dated December 7, 1998:
The primary contention was whether the agreement dated December 7, 1998, was genuine. The assessee argued that the agreement was fabricated and not signed by the partners. The Assessing Officer relied on this agreement to assess capital gains but did not verify the signatures through a handwriting expert. The Commissioner of Income-tax (Appeals) (CIT(A)) found that the agreement was not shown in its original form to the assessee and concluded that it was not a valid or genuine document. The CIT(A) noted discrepancies in the statements of witnesses and the lack of corroborative evidence from Shri Vijay Sood, who claimed the agreement's authenticity.

2. Applicability of Section 45(4) of the Income-tax Act, 1961:
The Assessing Officer invoked Section 45(4), which deals with capital gains arising from the transfer of capital assets by way of distribution on the dissolution of a firm. However, the CIT(A) held that since the agreement dated December 7, 1998, was not genuine, Section 45(4) was not applicable. The CIT(A) emphasized that the transfer of business to M/s. Oriental Knit Fab. Pvt. Ltd. was governed by agreements dated April 1, 1999, and December 30, 1999, which were genuine and registered documents.

3. Fulfillment of Conditions Under Section 47(xiii) of the Income-tax Act, 1961:
Section 47(xiii) exempts certain transfers from being considered as capital gains if specific conditions are met. The CIT(A) found that all conditions under Section 47(xiii) were satisfied:
- All assets and liabilities of the firm became those of the company.
- All partners became shareholders in the same proportion as their capital accounts.
- No consideration was received by the partners other than by way of allotment of shares.
- The aggregate shareholding of the partners was not less than 50% of the total voting power and continued for more than five years.

4. Addition of Rs. 1,58,63,380 as Capital Gains:
The Assessing Officer added Rs. 1,58,63,380 as capital gains based on the alleged agreement dated December 7, 1998. The CIT(A) deleted this addition, concluding that the agreement was not genuine and that the conditions for exemption under Section 47(xiii) were met. The Tribunal upheld this finding, noting that the business transfer was validly executed through registered agreements dated April 1, 1999, and December 30, 1999.

5. Deletion of Additions of Rs. 21 Lakhs and Rs. 23,50,000 on Account of Income from Undisclosed Sources:
The Assessing Officer made these additions based on the alleged payments mentioned in the disputed agreement dated December 7, 1998. The CIT(A), following the reasoning in the main appeal, deleted these additions. The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision that the agreement was not genuine and no such payments were made.

Conclusion:
The Tribunal dismissed all the Revenue's appeals, affirming the CIT(A)'s findings that the agreement dated December 7, 1998, was not genuine, Section 45(4) was not applicable, and the conditions under Section 47(xiii) were fulfilled. Consequently, the additions of Rs. 1,58,63,380 as capital gains and Rs. 21 lakhs and Rs. 23,50,000 as income from undisclosed sources were deleted.

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