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TMI Blog2010 (10) TMI 1097X X X X Extracts X X X X X X X X Extracts X X X X ..... nand Citi Centre Holding P. Ltd. 2. Short facts relating to this ground are that the assessee had for the impugned assessment year filed a return of income on 31-10-2007, in which its status was shown as firm . Case of the assessee was selected for scrutiny assessment and notice under sec.143(2) of the Income-tax Act 1961 (in short the Act ) was issued on 8-9-2008 and after a number of hearings, the assessment was finally completed on 31-12-09. As aforesaid, return of income was filed by the assessee in the status as a firm . However, assessee had based on a memorandum of association entered on 5- 12-2007, applied for incorporation under Part IX of the Companies Act 1956, as a joint stock company relying on Sec. 565 (1) (b) of that Act. It was granted registration as a company incorporated under Part IX of the Companies Act 1956, on 12-12-2007 by the Registrar of Companies, Karnataka. The factum of the conversion of the partnership firm as a joint stock company was duly noted by the AO in the assessment order at para-8 which is reproduced hereunder: The firm was converted into the Private Limited Company on 12-12-2007. All the partners of the firm become the shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence when the assessment was completed and, therefore, the assessment done on a non-existent firm was void. 5. Per contra, the ld. DR submitted that during the relevant previous year the firm was very much in existence and according to him, conversion to joint stock company was done after the relevant previous year. Relying on sec. 189 of the Act, ld. DR pointed out that an assessment could be made on a firm even if business of the firm had discontinued or where a firm was dissolved. Therefore, according to him, the AO was very well justified in completing the assessment in the name of the firm itself. In any case, as per the ld. DR, the issue had to go back to the ld. CIT(A) since he had not adjudicated on it. 6. In reply, ld. AR submitted that sec. 189 of the Act would apply when there was a dissolution of the firm and here there was no dissolution but only conversion of the firm into a joint stock company. He also submitted that there was no discontinuation of business since assessee had entered into a joint development agreement on 10-11-2008 with M/s ETA Star Property Developers Ltd. (paper book Vo. I page 64). For his contention that even a dissolution would not al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act 1956 as evidenced by his own noting in the assessment order, which has been verbatim reproduced at para-2 above. Despite such knowledge the AO chose to complete the assessment in the name of the firm Anand Theatres. Conversion of a firm into a company under Part IX of the Companies Act 1956, can only be construed as occasioned by operation of law. There is no transfer on conversion of a firm into a company under Part IX pf the Companies Act 1956. There is no dissolution of the firm when a firm is converted into a company under Part IX of the Companies Act. As admitted by the AO himself, the partners of the firm were shareholders of the joint stock company. As per sec.565 of the Companies Act any company consisting of seven or more members, formed under any Indian law may at any time register itself under that Section as a company limited by shares and by operation of Sec.575 of that Act, all the properties shall vest in such Company. The Registrar is bound to give a certificate of registration under sec.574 of that Act and this is a conclusive proof of its incorporation. When there is a statutory vesting of all properties from the previous firm in the newly incorporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was continuity in business as well. There was continuation with change in form. The firm was never dissolved, neither was its business discontinued. Subsec.( 1) of sec.189 of the Act relied on by the ld.DR reads as under: 189(1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the (Assessing) Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment. 9. No doubt, if the assessee firm was dissolved or its business was discontinued, sub-sec. (1) of sec. 189 could have been invoked for making an assessment in the name of the firm . But here there was no discontinuation of business and the firm was not dissolved and therefore, sub-sec.(1) of sec.189 would have no application. That conversion of a firm to a company under Part IX of the Companies Act 1956 was not to be treated as a dissolution was clearly held by the Hon ble Mumbai High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33/- and it did not include any capital gains. According to the AO the main business of the assessee was exhibition of motion pictures. M/s Anand Theatres was started in the year 1962 as a sole proprietorship concern of one Shri G.Umapathy. In 1965 it was convered into a partnership firm by admitting Shri U.Prakasham, eldest son of Shri G.Umapathy as a partner. There was a reconstitution of the firm on 01-04-1971 whereby four persons were inducted, which included a minor named U.Balashanmugam. The assets of the firm were revalued as on 31-3-1971. On 02-03-1972 the firm was again reconstituted, whereby Shri G.Umapathy retired. On 15-4-1979 Shri U Balashanmugam who was a minor became a full-fledged partner and thereafter on 01-08-1986 three more family members were admitted to the firm. There was a revaluation of the assets of the firm on 31-3-1986 also. On 14- 4-92 the partnership was again reconstituted and its capital structure was changed and provision made for remuneration to working partners as well as interest on capital. Thereafter also there were some supplementary deeds, whereby either capital was increased and/or remuneration for working partners were changed. On 24-2-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned below: (a) On the Party of the first part handing over vacant possession of the properties described in Schedule A to C hereto i.e. 16 grounds 1204 sq.ft. and the originals of the title deeds and parent documents, including latest receipts for payment of Property Tax, water tax, electricity and telephone alongwith the existing car-park areas to the Party of the Second Paert, which shall be on or before 6-7-2006 ₹ 4,00,00,000/- (Rupees four crores only). (b) On the Party of the First Part handing over vacant possession of the office premises of Mr.U.Karunakaran, M/s Hansa Pictures and Mr. Balashanmugam, which shall be on or before 15-9-2006, to the Party of the Second Part ₹ 3,00,00,000/- (Ruipees Three crores only). (c) On the Party of the First Part handing over vacant possession of the building leased to state Bank of India before 31st December 2006, to the Party of the Second Part ₹ 2,00,00,000/- (Rupees Two crores only). (d) On the Party of the First Part handing over the original Title Deeds of the property, more fully described in Schedule D hereto, admeasuring 3 Grounds and 961 sq.ft., which shall be on or before 31st March 2007 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned in Schedule-D of the original MOU was completed and title deed handed over to M/s ETA within a period of thirty days. Certain revised documentation requirements were also specified. There was also a specific clause in second MOU whereby the latter was given primacy if there were any conflict between the two MOUs. But for this the original MOU was to continue in force. 15. The AO, after going through the MOUs and payments made by M/s ETA, came to the following conclusion: (i) The transaction of a transfer of property was complete in the relevant previous year since key ingredient of possession and handing over had taken place based on the first MOU and prior to the second MOU dated 26-9-2007. (ii) Conversion of the firm into company was an afterthought and colorable device. (iii) Second MOU, where it was stated that partners of the firm and their family members would be provided 20800 s.ft. built up area proved that the assessee was the settler. (iv) From second MOU dated 26-9-2007 it was clear that approximately 20 grounds were transferred to M/s ETA and substantial part of the consideration coming to ₹ 10.80 crores was also received by the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in the form of a letter from M/s ETA wherein M/s ETA had expressed its inability to undertake the project. In his remand report it was stated by the AO that the assessee had not produced any evidence for cancellation of the MOUs with M/s ETA and letter from M/s ETA was only an afterthought. According to the AO, contention of the assessee that no transfer had taken place in the relevant previous year could not be accepted. He was of the opinion that the assessee had given vacant possession of land measuring 19 grounds and 2255 s.ft to M/s ETA in the relevant previous year. AO also requested the CIT(A) to enhance the capital gains based on guideline value of the property as per sec.50C of the Act. 18. After considering the submission of the assessee and the remand report of the AO, the ld. CIT(A) was of the opinion that both the parties had fulfilled the primary conditions for application of sec.53A of the Transfer of Property Act 1882. According to him, assessee had received part consideration and there was handing over of possession of scheduled property during the relevant financial year and hence, there was a deemed transfer, coming within the meaning of sec.2(47)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him, para-3 of the first MOU clearly mentioned that assessee s role vis- -vis such purchase was only as a facilitator. Ld. Counsel further submitted that it was the duty of M/s ETA to obtain all necessary approvals from competent authority within six months of handing over of the vacant possession. Ld. Counsel also pointed out that as per para-13 of the first MOU (paper book Vol.I page 8), the proposed construction could start only after demolition of the existing structures by the assessee and handing over the possession. Referring to para-17 (paper book Vol. I page 9), ld. Counsel submitted that assessee was to cooperate with M/s ETA for construction of the structure and was also liable to pay all the taxes, rates and outgoings in respect of properties mentioned at Schedule A to D till the date of handing over of vacant possession. Ld. Counsel pointed out that properties mentioned at Schedule A to D alone were owned by the assessee. There were properties mentioned at Schedule E to H owned by other parties and these were to be acquired by M/s ETA. He was at pains to point out that there was nothing to show any possession being handed over to M/s ETA. To a query paused by the Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason for the assessee to promote the project in joint venture with M/s ETA and M/s Seethakathi Trust, and the transactions were not at all sham. Thereafter ld. Counsel drew our attention to letter dated 02-11-09 from the assessee to CMDA (paper book Vol.2 page 1), which, according to him proved receipt for the payment of fee for plan approval. Ld. Counsel also pointed out to the contract entered into between assessee and M/s DFS Foundations Structures P.Ltd. on 31-08-2009 (paper book Vol.II pages 8 to 11) for arguing out that it was the assessee company which had initiated the work of the project. Great stress was placed by the ld. Counsel on a letter of State Bank of India addressed to the assessee sanctioning ₹ 50 crores to the assessee on 04-08-2009 (paper book Vol.II page 12), for the construction of the complex. According to him, the security given was the same land for which assessee was being fastened with a capital gains tax liability, even without an effective transfer. Insofar as the adjustment of money received from M/s ETA was concerned, ld. AR pointed out that the assessee had filed Form No.2 with Registrar of Companies for increase of share capital an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of the property was complete, for application of sec.2(47)(v) of the Act. He therefore, submitted that capital gains was rightly assessed in the impugned assessment year. 22. We have perused the records and heard the rival submissions. The primary issue is whether there was a transfer of capital asset being immovable property owned by M/s Anand Theatres and/or its successor company to M/s ETA. No doubt, by virtue of sec.2(47)(v) if possession was handed over, in part performance of an agreement, by application of sec.53A of Transfer of Property Act 1882, a transfer could be said to have happened. The issue that needs to be addressed therefore is whether a transfer as specified in sec. 53A of the Transfer of Property Act 1882 was there. Sec.53A of the Transfer of Property Act 1882 requires certain conditions to be satisfied for application thereof. Such condition were spelt out by various Courts including the Hon ble Apex Court Court in Nathulal vs. Phoolchand AIR 1970 (SC) 546). They are as under: (i) there must be a contract to transfer for consideration any immovable property; (ii) the contract must be in writing, signed by the transferor, or by someone on his be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pting the finding of the AO, nevertheless also accepted that assessee had given sufficient evidence to prove, M/s ETA to be a FDA company. Ld. CIT(A) has also given a finding that the project could not be taken up by it on account of restrictions as per FDI norms. From the assessment order as well as the order of the CIT(A) and on the basis of submissions made by the ld. DR, one safe conclusion that can be drawn is that the transfer was deemed as completed and assessment of capital gain done on a sole reasoning that possession was handed over by the assessee to M/s ETA as per original MOU dated 05.06.2006, in the relevant previous year. One of the reason for coming to this conclusion seems, was from a clause in the said MOU, wherein it was mentioned that possession was to be handed over by the assessee to M/s ETA when ₹ 4 crores was paid by M/s ETA. No doubt more than ₹ 4 crores was paid by M/s ETA to the assessee in the relevant previous year. However, there is nothing in the assessment order nor in the submissions of the ld. DR or any material placed before us to show that the possession was in fact handed over by the assessee to M/s ETA, in accordance with that stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd documents have to be taken as a whole in arriving at a conclusion whether there was transfer by way of possession. As already mentioned by us, we are not in agreement with the contention of the ld. DR that the word today used in clause 8(xi) of the Supplementary MOU had to give way to the word already in the same clause and therefore, possession was already handed over in the relevant previous year. At the best we can say that today only meant a part of the same day prior to the signing of the second MOU. We are also not in agreement with the contention of the Revenue that the handing over of original document would constitute handing over of possession. No doubt, such title deeds were handed over to the director of M/s ETA, but, nevertheless, such handing over as mentioned in cl. 22 of the original MOU (paper book vol.I Page 10) contemplates its return as well. In our opinion, all the documents and agreement have to be considered as a whole and not piecemeal. Such a consideration would lead to an irresistible conclusion that the property in question was never transferred by the assessee firm or assessee company to M/s ETA. The development of the property was to be jointly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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