2024 (11) TMI 1367 - AT - Income Tax

Assessment u/s 153A - Addition of long-term capital gains - transfer of capital asset owned by the firm during the previous year while converting the partnership firm into a company - HELD THAT - As alleged incriminating documents seized at the time of search and we found that at no stretch of imagination, the above said documents could be treated as incriminating records because they are only the documents maintained by the assessee during the normal course of business like Board Resolution, note prepared by the Advocate and the valuation report prepared by the advocate and the indenture of retirement-cum-release of partnership firm dated 06.07.2015 and financial statements for the assessment year 2015-16. From the above said documents we are not able to find any incriminating evidence for the suppression of income. We therefore, does not accept the reasoning of the AO that these are all incriminating records recovered at the time of search from the assessee. Further, there is no suppression or escaped income made out by the AO, based on the seizure of the above said incriminating documents and therefore we are of the view that no assessment proceedings could be initiated u/s 153A of the Act when the assessment was completed. To arrive such a conclusion we relied on the judgement of the Hon ble Supreme Court in the case of Abhisar Buildwell P Ltd. 2023 (4) TMI 1056 - SUPREME COURT Whether the assessee had committed any violation of the provisos to Section 47 (xiii) of the Act as alleged by the AO? - There is no evidence available with the AO to show that the partners had received consideration at the time of succession and the AO also not brought out any specific instances of receiving any consideration at the time of effecting the succession. As seen from the various records, and the balance sheet, it is clear that before the transfer of the firm into a company, the partners have withdrawn their surplus share capitals and therefore, there is no evidence or any materials available with the AO to show that the partners have received consideration for the purpose of transferring the assets and liabilities of the firm to the assessee company. The partners have withdrawn their surplus capital amount after the reorganization of the firm and not immediately before the succession and therefore, it cannot be treated as consideration received for the transfer of the assets and liabilities of the firm to the company. Therefore, we are not agreeing with the reasons adduced by the AO in order to attract proviso (c) to section 47(xiii) of the Act. In the present case, there are no violation of the conditions laid down in section 47(xiii) proviso (a) or (c) of the Act and therefore, the order of the AO treating the value of the assets and liabilities of the firm, as capital gain obtained by way of transfer of capital asset liable to be taxed under the head long term capital gains u/s 45(4) of the Act is not sustainable. In coming to the above conclusion, we derive assistance from the judgement of M/S CADD Centre 2016 (5) TMI 422 - MADRAS HIGH COURT . CIT(A) also in his order simply extracted the findings of the AO and confirmed the order passed by the AO and therefore we are setting aside both the orders of the CIT(A) and the AO and held that the addition made under the head long term capital gains is not sustainable and hence the assessee is entitled for exemption u/s 47 (xiii) of the Act. Assessee appeal allowed.

Issues Involved:

1. Legality of the search and subsequent assessment under section 153A of the Income Tax Act, 1961.
2. Validity of the addition of long-term capital gains on the conversion of a partnership firm into a company.
3. Alleged violation of conditions under Section 47(xiii) of the Income Tax Act, 1961.
4. Imposition of interest under sections 234B and 234C of the Income Tax Act, 1961.

Detailed Analysis:

1. Legality of the Search and Subsequent Assessment:

The assessee challenged the legality of the search conducted under section 132 of the Income Tax Act, 1961, arguing that the conditions specified under section 132A(1)(a), (b), and (c) did not exist, rendering the search warrant and subsequent assessment illegal. The Tribunal examined the documents seized during the search and concluded that they could not be considered incriminating. The documents were standard business records, such as board resolutions and valuation reports, maintained in the ordinary course of business. The Tribunal referenced the Supreme Court's judgment in Abhisar Buildwell P Ltd., emphasizing that no assessment proceedings could be initiated under section 153A without incriminating materials. Consequently, the Tribunal found the initiation of proceedings under section 153A unwarranted.

2. Validity of the Addition of Long-Term Capital Gains:

The Assessing Officer (AO) had determined the total income of the assessee by adding long-term capital gains arising from the conversion of the partnership firm, M/s. Perpetual Investments, into a company. The Tribunal scrutinized whether the conversion constituted a "transfer" under Section 45 of the Act and whether it attracted capital gains tax. The Tribunal noted that Section 47(xiii) of the Act provides exceptions to Section 45, wherein certain transactions are not treated as transfers. The Tribunal found that the conversion did not constitute a transfer, as the conditions under Section 47(xiii) were met, thus exempting the transaction from capital gains tax.

3. Alleged Violation of Conditions Under Section 47(xiii):

The AO alleged that the assessee violated provisos (a) and (c) of Section 47(xiii), which would render the conversion taxable. Proviso (a) requires that all assets and liabilities of the firm immediately before succession become those of the company. Proviso (c) stipulates that partners should not receive any consideration other than shares. The Tribunal found that the assets and liabilities were transferred as required, and the partners received only shares as consideration. The Tribunal emphasized that the AO's reliance on events before the succession was misplaced, as the law focuses on the state of affairs immediately before the succession. The Tribunal concluded that there was no violation of the provisos, and thus, the addition of capital gains was unjustified.

4. Imposition of Interest Under Sections 234B and 234C:

The CIT(A) had remitted the issue of interest computation under sections 234B and 234C to the AO. The Tribunal, having allowed the appeal on substantive grounds, did not specifically adjudicate this issue. However, it implied that the imposition of interest would not stand, given the primary relief granted to the assessee.

Conclusion:

The Tribunal allowed the appeal, setting aside the orders of the CIT(A) and the AO. It held that the addition of long-term capital gains was not sustainable, and the assessee was entitled to exemption under Section 47(xiii) of the Act. The Tribunal did not address other grounds raised by the assessee, as the primary issues were resolved in their favor. The decision was pronounced in open court on October 15, 2024.

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