2023 (5) TMI 225 - HC - Income Tax

Reopening of assessment u/s 147 - Undisclosed capital gains - Firm is succeeded by a company with no change either in the number of members or in the value of assets - Transfer by way of distribution of assets - case of the revenue is that the amount of revaluation of the land and building which was credited to the current accounts of the partners which was treated as loans to new companies amounted to accrual of consideration or benefit to the partners which was a transfer and therefore the firm is liable to pay tax on long term capital gain and short term capital gain - whether Tribunal erred in holding that the reassessment was a change of opinion without noting the facts that the AOnever raised any direct question regarding why it should not be held that the conversion of land and building by the assessee from stock-in-trade to capital asset followed by revaluation of land and building should not be taken as an accounting technique adopted to evade tax liability? - Tribunal held that there was change of opinion involved in the reopening the case of the assessee HELD THAT - On facts it has been established that revaluation of the fixed assets did not give rise to any profit to the partnership firm and there is no accrual of benefits in the hands of the partners and if that be so can there be any tax liability in the hands of the firm as well as in the hands of the partners. The learned tribunal after noting the accounting treatment followed by the assessee on facts found that no profit allotment on account of revaluation has accrued or arisen to the assessee firm and the revaluation of fixed asset did not give any profit to the firm and the revaluation was done so that the value of the fixed assets in the balance sheet would match the market price and the object behind such revaluation is to avail loans from banks and financial institutions by showing market price of the fixed assets in the balance sheet. Thus, in our view, the learned tribunal rightly rejected the contention raised by the revenue and also rightly noted the decision of Sanjeev Woolen Mills Versus Commissioner of Income Tax 2005 (11) TMI 26 - SUPREME COURT wherein it was held that valuation of the assessee at market value, which was higher than the cost, resulted in the imaginary or notional potential profit out of itself and not any real profit or income which can be taxed. As decided in Ram Krishanan Kulwant Rai Holdings Private Limited. 2019 (8) TMI 58 - MADRAS HIGH COURT court found that the CIT(A) did not take into consideration the legal issue involved i.e. when the firm is succeeded by a company with no change either in the number of members or in the value of assets with no dissolution of the firm and no distribution of the assets with change in legal status alone, whether there is transfer as contemplated under Section 2(47) and Section 45(4) of the Act. The legal position having been well settled that when vesting takes place, it vests in the company as they exist. Therefore, unless and until the first condition of transfer by way of distribution of assets is satisfied, Section 45(4) of the Act will not be attracted. Therefore, in the facts and circumstances of the case, we find that there is no transfer by way of distribution of assets. We are of the definite view that the learned tribunal rightly dismissed the appeal filed by the revenue.

Issues Involved:
1. Change of opinion in reopening the case.
2. Compliance with Section 47(xiii) of the Income Tax Act.
3. Subjective vs. objective satisfaction in reasons for reopening.
4. Examination of transaction taxability during assessment proceedings.

Summary:

Issue 1: Change of Opinion in Reopening the Case
The revenue contended that the Tribunal erred in holding that the reassessment was a change of opinion without noting that the Assessing Officer did not directly question the conversion of land and building from stock-in-trade to capital asset. The Tribunal found that the revaluation of fixed assets did not give rise to any profit to the partnership firm and that the revaluation was done to match the market price for availing loans. The Tribunal concluded that the Assessing Officer's reasons for reopening were based on the same facts considered during the original assessment, thus constituting a change of opinion.

Issue 2: Compliance with Section 47(xiii) of the Income Tax Act
The revenue argued that the assessee violated Section 47(xiii) by converting stock-in-trade into capital assets and revaluing them at market value, resulting in partners receiving loans instead of shares. The Tribunal noted that Section 47(xiii) conditions were met, and there was no distribution of assets to partners. The Tribunal held that the revaluation did not result in any real profit or income, and thus, there was no capital gain taxable in the hands of the firm or partners.

Issue 3: Subjective vs. Objective Satisfaction in Reasons for Reopening
The revenue contended that the Tribunal wrongly held that the reasons recorded by the Assessing Officer for the Assessment Year 2009-10 were for subjective satisfaction and not independent. The Tribunal found that the reasons for reopening were dependent on the outcome of the previous year's assessment, indicating a lack of independent reasoning. The Tribunal concluded that the reopening was based on guesswork and was unsustainable.

Issue 4: Examination of Transaction Taxability During Assessment Proceedings
The revenue argued that the Tribunal failed to appreciate that questioning the taxability of the transaction during assessment does not mean the Assessing Officer examined the entire sequence of events. The Tribunal noted that the assessee had fully disclosed all relevant material facts during the original assessment, and the Assessing Officer had accepted that the revaluation amount was not taxable. The Tribunal held that the reassessment proceedings were an attempt to review the original assessment based on the same material, which is not permissible.

Conclusion:
The Tribunal dismissed the revenue's appeal, holding that the reassessment was a change of opinion, the conditions of Section 47(xiii) were met, the reasons for reopening were not independent, and the transaction taxability was adequately examined during the original assessment. The High Court upheld the Tribunal's decision, answering the substantial questions of law against the revenue.

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