2018 (9) TMI 1027 - HC - Income Tax

Capital gain tax liability - Allotment of shares of the company which succeeds to the business of the partnership firm - reasonable period - Non-compliance with the condition stipulated in clause (b) of Clause (xiii) of Section 47 - capital gains tax liability of the erstwhile firm or the successor-company - delay the process of allotment of shares of the Company in favour of the erstwhile partners - Held that - No sufficient reason or excuse to delay the process of allotment of shares of the Company in favour of the erstwhile partners to an unreasonably long period of about 3 years. By such delay of 3 to 4 years, not only the partners were deprived of their right to receive the Dividends for this period of delay because had they been allotted these shares at the time of succession of the business or immediately thereafter, before the end of previous year on 31.03.2000 as against the succession of business on 01.05.1999, they would have become entitled to receive the Dividends for the financial year ending on 31.03.2000, but since in the present case last allotment of shares to larger extent was made by the Company only on 11.03.2003, they were deprived of such an opportunity for 3 years in a row. Had it been a case of other shareholders or outside shareholders also joining the said company and the allotment process of shares could have been legally delayed for 3 years for such other persons also, in a hypothetical case, even such other shareholders would have been deprived of such Dividends from the company, if the reasons assigned by the Company that Authorized Share Capital of the company was not suitably increased was to be taken as a valid excuse, for that purpose. Therefore, we are satisfied that on a reasonable and harmonious construction of the relevant provisions of the Act quoted above, the Company in the present case was rightly held liable for the capital gains tax liability by virtue of Section 47(A)(3) of the Act read with Section 47(xiii)(b) of the Act. We are of the opinion therefore that the learned Tribunal was justified in holding that the Assessee-company was liable to pay such capital gains tax liability instead of the partnership firm and to that extent the Assessing Authority as well as the First Appellate Authority viz., CIT(A) fell in error in affixing such liability on the partnership firm. Answer the aforesaid substantial question of law in favour of the Revenue and against the Assessee, by holding that the allotment of shares of the company which succeeds to the business of the partnership firm has to be complied before the end of relevant previous year in which such succession of business takes place.

Summary

Issues Involved:
1. Taxation of the firm under Section 47(xiii)(b) when conditions are not satisfied.
2. Applicability of Section 47A when conditions in the proviso to Section 47(xiii)(b) are not complied with.
3. Timing of satisfaction of conditions under Section 47(xiii)(b) for succession.
4. Allocation of shares in proportion to capital accounts and its compliance with Section 47(xiii)(b).

Detailed Analysis:

1. Taxation of the Firm Under Section 47(xiii)(b):
The first issue revolves around whether the firm should be taxed if the provisions of Section 47(xiii)(b) are not met. The court examined the phased allotment of shares to the erstwhile partners of the firm and concluded that the firm did not meet the condition of allotting shares immediately upon succession. The phased allotment was considered non-compliant with the proviso clause (b) of Section 47(xiii), leading to the imposition of capital gains tax on the firm.

2. Applicability of Section 47A:
The second issue pertains to the applicability of Section 47A when any conditions in the proviso to Section 47(xiii)(b) are not fulfilled. The court held that if any conditions laid down in the proviso to Section 47(xiii) are not complied with, Section 47A(3) becomes applicable. This section mandates that the capital gains tax should be imposed on the successor company, not the firm, if conditions are not met. The Tribunal's decision to shift the tax liability to the successor company, M/s Prakash Electric Company Private Limited, was upheld.

3. Timing of Satisfaction of Conditions Under Section 47(xiii)(b):
The third issue is whether the conditions under Section 47(xiii)(b) need to be satisfied only at the time of succession or can be met within a reasonable period thereafter. The court concluded that the law does not specify a fixed time limit for the allotment of shares but implies that it should be done within a reasonable period. However, a delay of 3 to 4 years, as in this case, was deemed unreasonable. The court opined that the process should be completed within the relevant previous year, i.e., before the end of the financial year in which the succession occurred.

4. Allocation of Shares in Proportion to Capital Accounts:
The fourth issue examines whether the allocation of shares in proportion to the capital accounts of the partners at the time of succession satisfies Section 47(xiii)(b). The court noted that all partners were allotted shares in the successor company, and their shareholding never fell below 50% for the required five-year period. However, the delayed allotment was considered non-compliant with the immediate requirement of Section 47(xiii)(b). The court emphasized that the shares should be allotted before the end of the relevant previous year to comply with the provisions.

Conclusion:
The court affirmed that the successor company, not the firm, should bear the capital gains tax liability due to non-compliance with the conditions of Section 47(xiii)(b). The allotment of shares should be completed within the relevant previous year of succession. Both appeals were disposed of without costs, and the substantial question of law was answered in favor of the Revenue and against the Assessee.