2017 (9) TMI 171 - HC - Income Tax

Relation of sole proprietor and his business concern - Profits or gains arising from the transfer of capital assets - proprietorship concern had borrowed an amount from the proprietor - ITAT treating the amount in the current account of the proprietorship concern, as a loan to the proprietor - transfer u/s 2(47) - worth of the assets of the proprietorship concern transferred to the company by the assessee - whether the sole proprietor and his business concern can be treated as two separate entities in the realm of the assessment of long-term capital gain tax ? - Can, a person borrow from himself? - section 47(xiv)(c) applicability - value of the goodwill admittedly forming part of the assets transferred - revision u/s 263 Held that - Since the value of the total shares amounted to only ₹ 1,52,94,900 (while showing ₹ 2,73,07,905 as unsecured loan), it was observed that section 47(xiv)(c) was not satisfied completely and the good will portion to an extent of ₹ 2,45,00,000 was also liable to be taxed. This is not an attempt on the part of the Commissioner to generate some more revenue by refixing the assessment, if two views were possible. It is not a question of two alternate views, but a case of only one view , which came to be wrongly decided by the Tribunal. As it stands so, it is the correct view that can be sustained and not the impaired one. Non-satisfaction of the ingredient under section 47(xiv)(c) in toto is a major defect and as such, value of the goodwill , i.e., ₹ 2,45,00,000 admittedly forming part of the assets transferred, required to be taxed under such circumstances. This being the position, the judicial precedents cited and sought to be relied on by the assessee (as relied on by the Tribunal) actually do not come to the rescue of the assessee. This court is of the firm view that the power exercised by the Commissioner under section 263 of the Act is correct and that the finding rendered by the Tribunal, to the contrary, is not sustainable. Coming to the reasoning given by the Tribunal, that deficit has to be treated as loan given by the proprietorship concern, to the proprietor; (in turn taken over by the company as loan to be cleared on demand), it is to be noted that, under no circumstances can a person borrow from himself and transpose as creditor and borrower at the same time. To this extent, proprietor and proprietorship concern are not two different entities. Whatever is pumped in by the proprietor to his proprietorship, is nothing other than investment and it forms part of the asset, which, when taken over by the company, will have to be compensated (after deducting the liabilities). The proprietorship concern could have borrowed any amount to have categorised as a loan , only if it was procured from some other source, than himself/the proprietor. The finding and reasoning given by the Tribunal are not at all correct and it is liable to be intercepted. Part of the consideration was paid by the company to the proprietor pursuant to taking over the proprietorship concern with all the assets and liabilities; which included the cost of the goodwill as well, to an extent of ₹ 2,45,00,000. In so far as there is no dispute that the total number of shares transferred was only 1,52,949 (having face value of ₹ 100 each), with a total worth of ₹ 1,52,94,900, there was clear deficit, which was never paid or satisfied in the form of shares as envisaged under section 47(xiv)(c) of the Act. The value of goodwill of the proprietorship firm passed on to the company, having a value of ₹ 2,45,00,000 as part of consideration/benefit which has been indirectly/wrongly shown as loan from the proprietorship concern, to the proprietor , taken over by the company, to be satisfied as and when demanded. Viewed in the above circumstances, the said consideration had legally come to the credit of the proprietor/assessee on October 1, 2000 itself, to have transposed the latter as a creditor of the company, who sought to show the said amount as a loan procured from the proprietor. The legal position applied correctly by the Commissioner to the given set of facts and circumstances, as per annexure B order, came to be disturbed by the Tribunal, as per annexure D order. It is true that in tax parlance, partnership is different from partners and both can be taxed, though partnership firm is not a legal entity. But coming to proprietorship concern, there is no identity to proprietorship concern , leaving the proprietor and the assessee is always the proprietor in such cases. In other words, there cannot be any assessment separately for the proprietor and proprietorship concern . There is absolutely no rhyme or reason to have interfered with annexure B order. The finding and reasoning given by the Tribunal is per se wrong and unsustainable in all respects. Annexure D order passed by the Tribunal stands set aside. Annexure B passed by the Commissioner is restored. The appeal stands allowed.

Summary

Issues Involved:
1. Whether a sole proprietor and his business concern can be treated as separate entities for the assessment of long-term capital gain tax.
2. Compliance with the requirements under section 47(xiv) of the Income-tax Act for exemption from capital gain tax.
3. Justification of the Tribunal's order treating the amount in the current account of the proprietorship concern as a loan to the proprietor.

Detailed Analysis:

1. Separate Entities for Sole Proprietor and Business Concern:
The court addressed whether a sole proprietor and his business concern can be treated as two separate entities. It was concluded that under no circumstances can a person borrow from himself. The court stated, “To this extent, ‘proprietor’ and ‘proprietorship concern’ are not two different entities.” Therefore, any amount shown as a loan from the proprietorship concern to the proprietor was deemed an accounting gimmick and not legally valid.

2. Compliance with Section 47(xiv) of the Income-tax Act:
Section 47(xiv) provides conditions under which the transfer of assets from a sole proprietorship to a company is exempt from capital gains tax. The court emphasized the necessity to satisfy all conditions under section 47(xiv)(a), (b), and (c):

- Section 47(xiv)(a): All assets and liabilities of the sole proprietorship must become the assets and liabilities of the company.
- Section 47(xiv)(b): The shareholding of the sole proprietor in the company must not be less than 50% of the total voting power and must remain so for five years.
- Section 47(xiv)(c): The sole proprietor must not receive any consideration or benefit other than by way of allotment of shares in the company.

The court found that the assessee did not satisfy section 47(xiv)(c) because the shares allotted were worth ?1,52,94,900, while a sum of ?2,73,07,905 was treated as an unsecured loan. This indicated that the proprietor received consideration other than by way of allotment of shares, thus failing to meet the exemption criteria.

3. Tribunal’s Order on Loan Treatment:
The Tribunal had treated the amount in the current account of the proprietorship concern as a loan to the proprietor, which was taken over by the company. The court disagreed, stating, “Whatever is pumped in by the ‘proprietor’ to his proprietorship, is nothing other than investment and it forms part of the asset.” The court held that the Tribunal’s reasoning was flawed, as it incorrectly categorized the amount as a loan, thereby failing to recognize it as part of the consideration received by the proprietor.

Conclusion:
The court concluded that the power exercised by the Commissioner under section 263 of the Act was correct. The Commissioner’s order to tax the goodwill amount of ?2,45,00,000 was upheld, as the assessee did not satisfy all the conditions under section 47(xiv). The Tribunal’s order was set aside, and the Commissioner’s order was restored, emphasizing the importance of adhering strictly to statutory provisions for tax exemptions. The appeal was allowed with no costs.