2015 (3) TMI 637 - AT - Income Tax

Reopening of assessment - assessing the total income at ₹ 93,30,260/-, by bringing the transfer value of the goodwill , i.e., by the assessee-firm to its partners on its dissolution on 01.04.2006 to tax, as against the returned income of nil - CIT(A)held the condition of section 47(xiii) was satisfied, so that it would not be a transfer liable for charge of capital gains u/s.45 of the Act - whether CIT(A) in allowing relief to the assessee, admitted additional evidence, in contravention of Rule 46A of the Income Tax Rules, 1962 - Held that - While the A.O. s objection, with reference to the terms of the conversion deed dated 01.04.2006, was that the shares in the successor company stood allowed to the erstwhile partners in their profit sharing ratio in the firm, the ld. CIT(A) found it as not so; the shares being allocated in the ratio of their capital balances as on the date of the conversion, i.e., in terms of section 47(xiii). Both the conversion deed and the allocation of shares, as well as the firm s balance-sheet, both as on 31.03.2006 and 01.4.2006, were before the A.O., whose objection was on merits. Qua merits, the conversion deed clearly states that the partners shall be allotted shares as per the profit sharing ratio as on the date of conversion (i.e., 01.04.2006) (refer clause 2). With regard to the allotment, the actual allotment would prevail over that specified in the conversion deed, recording agreement qua share allocation in the profit sharing ratio. A contract can, besides being reduced in writing, also be oral and, therefore, to the extent the subsequent allotment, being undisputed, is at variance with that agreed to, could only be considered as a novation or in modification of the written agreement to that extent. This is as the allotment would only have been returned, as stated before us, to the Registrar of Companies, so that all the legal formalities of registration of the said allotment stand completed, finalizing the allotment process. We are therefore, in principle, in agreement with the assessee that the mention of a different ratio in the conversion deed would not be by itself fatal to its case; what being relevant is the actual satisfaction, or not so, of the conditions of section 47(xiii). - Decided against revenue.

Summary

Issues Involved:
1. Condonation of delay in filing Cross Objection (C.O.)
2. Assessment of total income including goodwill transfer value
3. Validity of reopening assessment
4. Allocation of shares in successor company based on capital balances
5. Admission of additional evidence in contravention of Rule 46A
6. Maintainability of assessment in law

Issue 1: Condonation of delay in filing Cross Objection (C.O.)
The C.O. was delayed by 236 days due to the demise of the Chartered Accountant handling the firm's affairs. The reason for delay was deemed genuine and sufficient for condonation. The appeal and C.O. were proceeded with after condonation.

Issue 2: Assessment of total income including goodwill transfer value
The assessment was framed under section 147 r/w s. 143(3) of the Income Tax Act, 1961, bringing the transfer value of goodwill to tax. The condition of section 47(xiii) was not satisfied, leading to short term capital gain on the transfer of goodwill. The assessee's appeal was partly allowed by the CIT(A) on merits.

Issue 3: Validity of reopening assessment
The A.O.'s action in issuing notice u/s.148 was deemed valid as the return of income was not filed by the due date. The notices u/s.142(1)(i) were considered invalid as they were issued after the time limit. The A.O. was not bound to frame the assessment u/s.143(3) as claimed by the assessee.

Issue 4: Allocation of shares in successor company based on capital balances
The shares in the successor company were issued to the erstwhile partners based on their capital balances as on the date of conversion, satisfying the condition of section 47(xiii). The actual allotment prevailed over the conversion deed's specified ratio, leading to dismissal of the Revenue's appeal on merits.

Issue 5: Admission of additional evidence in contravention of Rule 46A
The Revenue's objection regarding admission of additional evidence was dismissed as the ld. CIT(A) found the shares were allocated based on capital balances as on the conversion date. The actual allotment was considered final, and the objection was on merits, leading to dismissal of relevant grounds in the Revenue's appeal.

Issue 6: Maintainability of assessment in law
As the Revenue's appeal was dismissed on merits, the assessee's C.O. raising a legal issue on maintainability of assessment was rendered infructuous. Both the Revenue's appeal and the assessee's C.O. were ultimately dismissed.

This detailed analysis covers the various issues involved in the legal judgment delivered by the Appellate Tribunal ITAT MUMBAI.