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TMI Blog2013 (11) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... are not the transactions sham, when considered from the AO's contention that the assessee and succeeding company have devised scheme of tax planning for tax avoidance ? Is McDowell decision not applicable ? Should it not be recognized that tax avoidance has occurred when neither the assessee nor the company have paid tax on surplus of Rs. 961,38,34,680. 4. The CIT(A) erred in not appreciating the following judicial decisions which are squarely applicable to the facts of the case as the object of the assessee in converting the proprietary concern into company is avoidance of tax as the assessee transferred/sold the undertaking whose net worth was Rs. 1,61,65,320 for Rs. 963 crores to the company, and hence even if the transaction is genuine it is to be ignored as the object is tax avoidance by claiming the exemption u/s 47(xiv) r.w.s. 50B. The judicial decisions which are applicable to the facts of the case are as under: (a) Hela Holdings (P.) Ltd. v. CIT 263 ITR 129 (Cal.) (b) Twinster Holdings Ltd. v. Anand Kedia, Dy. CIT 260 ITR 6 (Bom.) (c) Mannalal Nirmal Kumar Surana v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown at Rs. 1,61,65,320/-. The Assessee claimed that the provisions of Sec. 47(xiv) were applicable in the case of the Assessee which provides that the provision of sec. 45 shall not apply to the transfer so made. The Assessing Officer took the view that the Capital Gains are chargeable to tax under Section 45 and Capital Gains arising under Section 45 are not exempt under Section 47(xiv). Sec. 47(xiv) does not exempt income arising of Capital Gains if same are transferred at a higher value than the value appearing in the books. The Assessing Officer also took the view that receipt of additional consideration by way of allotment of shares over and above the proprietor's share capital in the proprietary concern when assets are transferred to the private limited company amounts to violation of conditions laid down under Section 47(xiv) of the Income Tax Act. The Assessing Officer held that one of the conditions under Sec. 47(xiv) is that the proprietor should not receive any direct or indirect benefit in any form or manner or consideration other than by way of allotment of shares. If the proprietor is getting any additional income/profit than what is due as per the books of accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recommendation of the expert group. In the memo explaining the provisions of Finance Bill No.2, it was mentioned as under: "Under the existing provision of the Income-Tax Act, business re-organization has definite tax applications. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available to the successor business entities. However, in case of amalgamation, capital gains tax is not levied and losses and absorbed depreciation are allowed to be carried forward under certain conditions. The experts group, in the Draft Income-tax Bill, has reorganized the need to encourage the business reorganizations when they are in consance with the objective of Economic development and are not merely device to secure tax advantage. The bill proposes to allow tax benefits in the case of business re-organization where a firm is succeeded by company in the business carried by it and a proprietary concern is succeeded by a company. It is proposed that the transfer of building, machinery, plant, furniture or intangible assets to the company shall not be regarded as transfer to attract levy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me as that in the hands of the appellant. e) There is no benefit to the appellant other than consideration and that also has been paid only by way of allotment of shares. f) There is no justification for holding the income as the business income in any case. g) There is no room left to apply the decision of McDowell as exemption for succession is being promoted by the wisdom of parliament and sec 47(xiv) is introduced with the due care to prevent any mischief. In view of the detailed discussion, taking into considerations of the written submission, the case laws referred and relied by the AO and the appellant and considering the latest changes made to the relevant provisions of the IT Act and the recommendations of the expert group which categorically mentioned that the AO' s version that sec. 47(xiv) is not applicable and the assessee's transaction of succession of the proprietary concern by the limited company which attract the sec 50-B of the IT Act is not appropriate. Hence, the addition made by the AO Rs. 961,38,34,680/- is deleted, and the assessee's ground of appeal is allowed." 4. The learned DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asstt. CIT v. Nayan L. Mepani [2012] 18 taxmann.com 59 6. Our attention was also drawn towards the explanatory note of Finance Act (No. 2) of 1998. This note states as under: "The proposed new clause (xiv) provides that nothing contained in section 45 shall apply to transfer of any building, machinery, plant, furniture or intangible asset to the company where a proprietary concern is succeeded by a company in the business carried on by it, subject to certain specified conditions. The conditions inter alia are that the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company. The shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and shareholding shall continue to so remain for a period of five years from the date of the succession. The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company." 7. It was vehemently contended that the case of the assessee was duly cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Property of any kind includes not only tangible assets but also intangible assets. It could be material in nature e.g. land, building etc. or non-material e.g. tangible rights, leasehold rights etc. The business undertaking owned by the Assessee as such is a capital asset. There cannot be any dispute on this. There must be transfer of the capital asset. The Assessee and the private limited company both are different persons under the Income Tax Act. The Private Limited Company even though an artificial person, but cannot be regarded to be the same person. The transfer in relation to the capital asset has been defined under Section 2(47) which gives an inclusive definition. Sale or exchange of an asset falls within the definition of transfer. In this case, the Assessee has disposed off the industrial undertaking to a private limited company and in exchange thereof, the Assessee received consideration by way of shares in the company. Therefore, this is a clear-cut case of a transfer of an undertaking to a private limited company. Thus, this condition is also satisfied. Section 45 is applicable when there is a profit or gain arising from the transfer. Profit and gains will also inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applications. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available to the successor business entities. However, in case of amalgamation, capital gains tax is not levied and losses and absorbed depreciation are allowed to be carried forward under certain conditions. The experts group, in the Draft Income-tax Bill, has reorganized the need to encourage the business reorganizations when they are in consonance with the objective of Economic development and are not merely device to secure tax advantage. The bill proposes to allow tax benefits in the case of business re-organization where a firm is succeeded by company in the business carried by it and a proprietary concern is succeeded by a company. It is proposed that the transfer of building, machinery, plant, furniture or intangible assets to the company shall not be regarded as transfer to attract levy of capital gains subject to certain condition. The conditions are:- 1) All assets and liabilities of the firm become the asset and liability of the company. 2) The partners of the firm become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise transfers any capital asset or intangible asset to the company, the transactions are not treated as transfer subject to the three conditions laid down therein. It is not denied by the revenue that all the assets and liabilities of the same proprietorship concern relating to business immediately before the succession has become the assets and liabilities of the company. It is also not denied that the shareholding of the same proprietor was not less than 50% of the total voting power in the company. The only objection on the part of the revenue is that the Assessee did not comply with the condition no. 3 since the Assessee has received consideration by way of allotment of shares in the company and the value of those shares are much more than the value of the assets as was disclosed in the books of the proprietary concern. In our opinion, the Assessee has duly complied with the condition as stipulated under clause (c) to Section 47(xiv). This proviso only requires that same proprietor does not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. The words 'other than by way of allotment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the Assessee receipt of higher number of shares because of revaluation cannot be treated as consideration or benefit received other than by allotment of shares." 15. In the case of Asstt. CIT v. Madan Mohan Chandak [2011] 14 taxmann.com 27 (Chennai), (URO) the Hon'ble Tribunal has taken the view that provision of Sec. 47(xiv) shall apply even in case of sale and the provisions of Sec. 50B will not apply. While dealing with the issue, the Tribunal under para 6 of its order held as under : "6. Even in a case of sale, this section would apply. The term 'sole proprietary concern sells or otherwise transfers any capital asset" purportedly establishes that 'sale' is also exempt. When there is a specific provision i.e. 47(xiv) in the Act dealing with a particular case, it is not advisable to shift to other similarly worded provision. Hence, section 50B will not apply to the facts of the given case. It is true that the assets and liabilities of the proprietary concern cannot become the assets and liabilities of the company before the succession. The term "immediately before" cannot be taken to mean that they should precede the succession. The transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706(SC) duly considered this decision and held that the basis of mcdowell case did not appear to be correct. Legal steps cannot be termed as non-est based upon some hypothetical assessment of the 'real motive" of the assessee. The apex court held that an act which is otherwise permissible and valid in law cannot be termed as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest. The provision of section 47(xiv) has been incorporated by the government through the Finance Act and therefore same cannot be said to be illegal and the transactions being carried out according to that provision cannot be regarded to be against the national interest and for tax evasion. We, therefore, are of the firm view that the decision of Mcdowell & co is not applicable in the case of the assessee. In view of the aforesaid discussion and the decisions of co-ordinate bench and there being no contrary decision brought to our knowledge by the learned DR, we are of the view that no interference is called for in the order of CIT(A) i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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