2012 (12) TMI 495 - AT - Income Tax

Conversion of partnership firm into company versus dissolution of firm - Going concern - Addition u/s 40A cash transaction during purchase of old jewellery - Income escaping assessment - reassessment u/s 147 on the firm after conversion - held that - Where the surrender value of the old jewellery entrusted by the customers to the assessee firm is Rs. 100/- and the value of new jewellery returned by the assessee is Rs. 200/- the differential amount of Rs. 100/- alone is paid by the customers to the assessee. The assessee is not making payment of Rs. 100/- to the customer at the time of accepting the old ornaments. That is why the Commissioner of Income tax (Appeals) has correctly appreciated that the entire transaction consisted of cash entries as well as journal entries. The cash entries related to the payment of the differential amount by the customers to the assessee firm. There is no payment of cash by the assessee firm to its customers at the time of receipt of old ornaments. - there is no question of the assessee violating the provisions of law stated in section 40A(3). - Decided in favor of assessee. Valuation of closing stock at the time of conversion of the partnership firm into a private limited company. - held that - All the partners of the erstwhile firm became the shareholders of the new company. Nobody else was admitted as shareholder. No asset of the old firm was distributed among the partners. No capital was withdrawn by the partners. The capital of the partners was converted into shares contributing towards the capital of the company. All other assets and liabilities were taken over by the company. - there was no cessation of business and therefore the closing stock had to be valued at cost or market price whichever is lower. - CIT(A) rightly deleted the stock valuation addition - Decided in favor of assessee.

Summary

Issues Involved:
1. Violation of Section 40A(3) of the Income-tax Act, 1961.
2. Valuation of closing stock at market price upon conversion of a partnership firm into a private limited company.
3. Levy of interest under Section 234A of the Income-tax Act, 1961.

Detailed Analysis:

1. Violation of Section 40A(3):

The Assessing Officer (AO) added Rs. 11,50,90,165/- to the assessee firm's income, alleging violations of Section 40A(3) due to cash payments exceeding Rs. 20,000/- for the purchase of old gold jewelry. The Commissioner of Income-tax (Appeals) [CIT(A)] examined the accounting entries and found that the transactions involved journal entries without actual cash movement. The CIT(A) observed that the surrender value of old jewelry was adjusted against the sale value of new jewelry, and no cash payments were made by the assessee firm to its customers. The CIT(A) upheld an addition of Rs. 13,11,390/- due to the absence of details or vouchers but deleted the rest of the addition. The Tribunal upheld the CIT(A)'s decision, confirming that there was no actual cash payment to attract Section 40A(3) provisions.

2. Valuation of Closing Stock:

The AO valued the firm's closing stock at market price upon its conversion into a private limited company, adding Rs. 26,51,49,027/- to the income. The CIT(A) found that the business was not discontinued but succeeded by the company without interruption. The CIT(A) relied on judicial precedents, including the Hon'ble Supreme Court's judgment in Sakthi Trading Co. vs. CIT, which held that in cases of business succession without discontinuance, closing stock should be valued at cost or market price, whichever is lower. The CIT(A) deleted the addition, and the Tribunal upheld this decision, noting that the business conversion did not warrant market price valuation of the closing stock.

3. Levy of Interest under Section 234A:

The assessee raised an additional ground regarding the levy of interest under Section 234A, arguing that no return was required to be filed. The CIT(A) directed the AO to compute the interest after giving effect to the appellate order. The Tribunal did not specifically address this issue in detail, as the primary focus was on the major additions made by the AO.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the major additions related to the alleged violation of Section 40A(3) and the valuation of closing stock at market price. The Tribunal found no violation of Rule 46A by the CIT(A) and confirmed that the assessee's accounting methods and transactions did not involve actual cash payments that would attract Section 40A(3) provisions. Additionally, the Tribunal agreed that the business succession did not necessitate market price valuation of the closing stock.