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TMI Blog2017 (5) TMI 1720X X X X Extracts X X X X X X X X Extracts X X X X ..... s illegal or the transaction of conversion of firm into a company is per se illegal nor indicates any undisclosed income. Hon'ble jurisdictional High Court in the case of CIT v. IBC Knowledge Park (P) Ltd. [ 2016 (5) TMI 372 - KARNATAKA HIGH COURT] held that when no material was found during the course of search indicating undisclosed income, no addition can be made based on the inference of undisclosed income under the provisions of section 153A and 153C of the Act. In the present cases, the AO had not referred to any incriminating material which indicates that the tax planning adopted by the respondent-assessee is not legally permissible nor indicating any undisclosed income. These are all the public documents which are available for inspection by anybody and that cannot be called incriminating material. By no stretch of imagination these material can be called incriminating material. The Assessing Officer had not recorded any satisfaction as to how the material found is incriminating in nature. Further no addition can be made in the assessment u/s. 153A based on inferences drawn from already disclosed / public documents found. This kind of issues can be examined only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of the firm has been credited only to the capital accounts of Dr.Ali Kumble and Dr.Yusuf Kumble and not to the capital accounts of other partners on the basis of their share in the partnership. This is an inconsistency which the learned CIT(A) has failed to observe. 7. The assessee and his brother Dr.Ali Kumble have received an advance of ₹ 1 crore apart from shares worth ₹ 12 crores as consideration for the land valued at ₹ 13 crores, on conversion of the firm M/s Medicity Hospital and Research Centre into the company M/s Mangalore Indiana Hospital Pvt. Ltd. in violation of clause (c) of section 47(xiii) of the Income tax Act,1961 which infraction the learned CIT(A) has failed to take cognizance. 8. The partnership deed has been amended 4 times during 2009 and the dates of the stamp papers on which the various deeds have been executed and the dates of registration are not in conformity with the chronological sequence of the deeds and the Supplemental Addendum to partnership deed dated 02.04.2009 by way of rectification of apparent errors is made on 23.03.2010 which is after the conversion of the firm into the company M/s Mangalore Indiana Hospital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and executed it by forming a firm only in the paper and acquired the required land and revalued it step by step to the actual cost. It is evident from the statement mentioned in the minutes of meeting held on 21.03.2008 (The project is of ₹ 50 crore approximately of which the land value itself is about ₹ 12 crore) that the actual land cost is approximately ₹ 12 Crore 9.2. The seized material inventorised as IHHIL/12 dated 23.11.2011 contains copy of proceedings of the meeting held at Alif Institute of Medical Sciences Pvt. Ltd., (which is renamed as Indiana Hospital Heart Institute Ltd.) on 19.12.2007, Minutes of Board Meetings of Alif Institute of Medical Sciences Pvt. Ltd. held on 08.02.2008, 15.03.2008 and 21 st March, 2008. 9.3. Given below the extract from the proceedings held at Alif Institute of Medical Science Ltd held on 19.12.2007 that:- ..... the partnership firm transfer to private limited.co (following IT and for avoiding capital gain within one year to private to public 86 cents land purchase is already firm's property as per deed of partnership. Other properties to be transferred to firm change in consultation as March 1st 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r business assets liabilities in the company same proportionate in which they have capital account balance in the company partner of the firm a/c not receive any considers others than shares in the company. Only shares can be allotted to the extent of their capital contributes. The aggregate of the shareholding of the partner in the company is not less than 50% of the total voting power outsider allowed upto 50%, held for a period of 5 years than date of incorporation ₹ 10 Crore to be put is at the of transfer it should be in same properties 24 cent to come on January 15, 2008 (court order as Jan 7/2008) 31-05-2008 - whatever you want to be with firm (Venugopal). Revalue assets enhance partner capital 31-03-2008 final balance sheet transfer on 01-04-2008. License from Mangalore Corporation - building license - whether it can be made in name of the firm and then transferred. Firm should carry on same business before upto 31-03-2008. Expansion project can be done in name of the company, deed of amendment not transfer for setting up a hospital within 2 months business can be carried on resolution of partner can pass a resolution of partners is enough Jan, Feb, March pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company. The directors raised a point that only 86 cents land was with the partnership firm which was intended to be taken over by succession by the company. The succession agreement would be prepared by Sri. Vinod Rao. Another 39 cents were with Dr. Yusuf and Dr. AIi though nor brought into the Firm as yet. Further about 25 cents was with Dr. Yusuf and Haneef, being jointly held by them. On Dr. Yusuf's query on how to bring this land into the company, Vinod Rao said that as discussed with Sri. Venugopal, it would be advisable if all this land is brought into the books of the Firm and all other adjustments such as bringing in of Hannef into the partnership be made by March 31, 2008, so as to enable succession of the firm by the Company and compliance with provisions of section 47 (xiii) of the Income Tax Act, 1961, for saving capital gain tax ........... 5. A few transactions have to be shown between M/S MEDICITY HOSPITAL AND DIOGANISTlCs CENTRE M/S MEDICITY as advised by Sri. Venugopal, consultant for the company. The Directors have confirmed that a few transactions of buying and selling of about ₹ 200001- have been made between the two firms to the date for this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as March 1 st 2008 bring it into common stock. Finally from firm to Company final partnership deed constant amendment fresh deed business from January to March 31-03-2008 revalue the partner account to be created 01-04-2008 transfer to private ltd. These works clearly reflect that the partnership firm is formed nly to avoid capital gains and the entire arrangement is pre-planned not for tax avoidance but for tax evasion. To avoid capital gains 4 to 5 conditions are must . There words reiterate that firm is merely a device. 08.02.2008 - Partnership Firm holding land. It will be shortly taken over by the Company. Its books are to close by end of Feb 2008 or mid March 2008. Till now there are very few transactions in it. Purchase/Sale of medicines and a few other transactions should be shown from 23/03/2007 (date of formation of partnershyip) to 28/02/2008 for closing its books. The word Its books or to close by Feb-2008 or Mid March 2008 indicate the pre-planned nature of the device and meticulous planning to avoid capital gains tax. The words Transactions should be shown from 23.03.2007 to 28.02.2008 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.3. Thus the bill proposes to allow tax benefits in case of business reorganisation with the objective of economic development and does not allow to be used merely as a device to secure tax advantage. In the given case, the Firm is merely used only as a device to secure tax advantage and hence, the capital gains needs to be taxed in the hands of the individual. 11. Relevant case laws and applicability : 11.1. As discussed in para 4.9 the facts of the case are clearly against the principles laid down by the Hon'ble Supreme Court in the land mark case of McDowell and Co. Ltd. Vs CTO(1985) 3 SCC 320. 11.2. In the case of Sunil Sidharth Bhai Vs CIT, it is reiterated that when the partnership firm has no real business or there is no real need for partnership firm, then pertinent considerations to be taken into regard when the ITO enters upon a scrutiny of transaction for in the task of determining whether a transaction sham or a device, he is entitled to penetrate the veil covering it and ascertain the truth. 11.3. Thus as per the discussion the firm is, by book the definition of the device as discussed in the para 6.2. Hence, the firm is nothing but an arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme amounts to a part IX transfer as described under the companies act also fails miserably as the basic conditions could not be fulfilled as ₹ 1 crore is reflected as advance received from Indiana Hospital and Heart Institute Ltd which in turn has been transferred to the accounts of Or Ali Kumble and Or Yusuf Kumble.This is evident from the fact that the assessees have received benefit in the form a loan asset in the books of the company in leiu of the land surrendered over and above the equity shares allotted to them in proportion to their capital in the so called firm. 12.4. Thus, as explained the capital gains is computed by taking value of the land entered in the books of the company as sale consideration and the purchase cost of the land in the individual hands as cost of acquisition. 4. After search and seizure operations, notice u/s. 153A was issued to respondent-assessee calling upon them to file return of income. The respondent-assessee filed return of income in response to notice u/s. 153A same as the return of income originally filed under the provisions of section 139 of the Act. Against the said return of income, the AO computed the long term capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in my opinion, since the land has not been sold only on revaluation and in absence of any consideration coming to the doctor brothers, no Capital Gain arise. The A.O. is directed to delete the additions made on this account. These grounds of appeal of the appellant is allowed accordingly. 7. Being aggrieved, the Revenue is in appeal before us in the present appeals. 8. The ld. DR vehemently contended before us that the respondentassessee transferred the land at cost to the firm which was subsequently revalued at a much higher value and the firm was taken over by company, M/s Mangalore Indiana Hospital Pvt. Ltd. Thus, the respondentassessee by adopting tax planning has avoided payment of capital gains tax. He further contended that the very fact that the partnership deed of M/s Medicity Hospital and Research Centre was amended several times goes to prove that assessee has been avoiding the payment of capital gains tax by resorting to tax planning device. Therefore, he supported the order of the ld. Assessing Officer. 9. On the other hand, the ld. AR for the assessee submitted that when a firm was converted into a limited company under provisions of Schedule IX of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndisclosed income, no addition can be made based on the inference of undisclosed income under the provisions of section 153A and 153C of the Act. The relevant portion of the judgment is extracted below :- 44. Before considering the rival contentions, it is necessary to advert to the scheme of the Act regarding special procedure for assessment in cases of search. Sub-section (1) of Section 132 of the Act states that where the Chief Commissioner or any other officer mentioned therein having information in his possession, has reason to believe that inter alia, any person is in possession of any money, bullion, jewellery or other valuable article or thing (hereinafter referred to as valuable assets for the sake of convenience) and such valuable assets represents either wholly or partly income or property, which has not been, or would not be, disclosed for the purposes of the Act, then, the authorized officer can enter and search any building, place, vessel, vehicle or aircraft, where he has reason to suspect that such books of account, other documents, or valuable assets are kept or search any person, break open the lock of any door etc., seize any books of account, other documen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, or any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to a person other than the person referred to in Section 153A, then, the books of account or documents or valuable assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of Section 153A, if that Assessing Officer is satisfied that the books of account or documents or valuable assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in sub-section (1) of Section 153A. Sub-section (2) of Section 153C states that where books of account or documents or valuable assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said search was conducted or requisition was made. The proviso is not relevant for the purpose of this case. 48. Section 158BD is relevant for the present case and it states that where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 or whose books of account or other documents or any assets were requisitioned under Section 132A, then the books of account, other documents or valuable assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed under Section 158BC against such other person and the provisions of Chapter XIV-B shall apply accordingly. Section 158BE prescribes time-limit for completion of block assessment. Section 158BH states that except as otherwise provided in Chapter XIV-B all other provisions of the Act shall apply to the assessment made under the said chapter. Section 153C provides for the role of the Assessing Officer having jurisdiction over the person searched/requisitioned as regards third party liability. The said section covers assessments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, the computation thereof and such other provisions. Undisclosed income is defined in Clause (b) of Section 153B. Undisclosed income includes money, bullion or other valuable assets. It is only when the concerned officer has information about the same and has reason to believe that the said valuable assets has not been or would not be disclosed would give jurisdiction to the officer authorized to conduct a search operation. Therefore, the object and purpose of a search is to detect undisclosed income. As defined under Clause (b) of Section 158B of the Act, it is only when the undisclosed income is detected in a search operation that there would be assessment or reassessment, under the provisions of Chapter XIV-B of the Act, of the person who is presumed to be in possession of the undisclosed income. If during the course of search, any valuable assets belongs to or any books of account or document seized or requisitioned pertains to or any information contained therein relates to a person other than the persons searched, then the Assessing Officer, on recording satisfaction, can also assess and reassess the income of any other person. Thus, what emerges is that the sine qua non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the said third party. Thus, where no material belonging to a third party is found during a search, but only an inference of an undisclosed income is drawn during the course of enquiry, during search or during post-search enquiry, Section 153C would have no application. Thus, the detection of incriminating material leading to an inference of undisclosed income is a sine qua non for invocation of Section 153C of the Act. 51. Before considering the decisions cited at the Bar, it is necessary to refer to a decision of the Hon'ble Supreme Court in Manish Maheshwari v. Asst. CIT [2007] 289 ITR 341/158 Taxman 258. In that case, search was conducted on one of the directors of the assessee-company M/s. Indore Construction (Pvt.) Ltd. When the search was conducted in the premises of the director Sri. Manish Maheshwari and his wife several incriminating documents relating to the company were seized. While dealing with Section 158BD of the Act, the Hon'ble Supreme Court has observed as under: Condition precedent for invoking a block assessment is that a search has been conducted under Section 132, or documents or assets have been requisitioned under Section 132A. The said prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in the case of Bhatia group. Since certain other documents did not pertain to the person searched under Section 132 of the Act, the Assessing Authority therein thought it fit to transmit those documents, which according to him pertained to undisclosed income on account of investment element and profit element of the assessee-firm and required to be assessed under Section 158BC read with Section 158BD of the Act to another Assessing Authority in whose jurisdiction the assessments could be completed. In doing so, the Assessing Authority recorded his satisfaction note dated 15/7/2005. The jurisdictional Assessing Authority for the assessee had issued show-cause notice under Section 158BD for the block period of six years dated 10/2/2006 to the assessee. The assessee had replied that no action could be initiated against the assessee and requested the Assessing Authority to drop the proceedings. The stand of the assessee was rejected by the Assessing Authority, who concluded the assessment proceedings under Section 158BD of the Act. It was also held that notice could be issued even after completion of the proceedings of the searched person under Section 158BC of the Act. Aggrieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a search was made under Section 132 or requisition of books of account were made under Section 132A of the Act. The language of the provision is clear and unambiguous. The Legislation has not imposed any embargo on the Assessing Officer in respect of the stage of proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person. Further Section 158BE(2)(b) only provides for the period of limitation for completion of block assessment under Section 158BD in case of the person other than the searched person as two years from the end of the month in which the notice under this Chapter was served on such other person in respect of search carried on after January 1, 1997. The said section does neither provide for nor impose any restrictions or conditions on the period of limitation for preparation of the satisfaction note under Section 158BD and consequent issuance of notice to the other person. (c) In Jai Steel (India) v. Asstt. CIT [2013] 36 taxmann.com 523/219 Taxman 223 (Raj.), it was held that no doubt the Assessing Officer is free to disturb income, expenditure or deduction de hors any incriminating material, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assessment can be reiterated and the abated assessment or reassessment can be made. The word assess in Section 153A is relatable to abated proceedings (i.e., those pending on the date of search) and the word reassess to completed assessment proceedings. (vi) Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one. Only one assessment shall be made separately for each assessment year on the basis of the finding of the search and any other material existing or brought on record of the Assessing Officer. (vii) Completed assessments can be interfered with by the Assessing Officer while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. The Delhi High Court further held that in the cases before it on the date of the search the assessment already stood concluded since no incriminating material was unearthed during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine whether the books of account or other evidence or materials seized in the course of search of an assessee represents or proves undisclosed income of another assessee. On the other hand, for transferring the file to the Assessing Officer of such other assessee, all that is required to be considered is whether the materials or books of account or evidence recovered relates to another assessee, which may or may not lead to an assessment in the case of the other assessee after transfer of the file to his Assessing Officer. This is only an internal arrangement to be made between two Departmental Officers and in this regard the only fact that needs to be verified is whether the assessee whose books of account or materials are recovered in the course of search of any other assessee, is a regular assessee before another Officer, and if so, to transfer the file to such other Officer for his consideration and for passing orders, whether assessment or penalty or such other order permissible under the Act by that Officer. (e) In Canara Housing Developnment Co. v. Dy. CIT [2014] 49 taxmann.com 98 (Kar.), a Division Bench of this court in the said case noted that in the course of search, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such can be at three stages: one, at the stage when the reassessment is initiated, the second, at the stage during the course of reassessment and third, at a stage where the reassessment is altered by a different assessment in respect of searched person or in respect of third party. In this regard, reference may be made to the decision of Apex Court in case of M/s. Calcutta Knitwear (supra) and based on the said decision, the CBDT has also issued circular dated 31.12.2015 vide No.24/2015.The relevant extract of the circular for ready reference can be extracted as under: 'The issue of recording of satisfaction for the purposes of section 158BD/153C has been subject matter of litigation. 2. The Hon'ble Supreme Court in the case of M/s Calcutta Knitwears in its detailed judgment in Civil Appeal No.3958 of 2014 dated 12.3.2014(available in NJRS at 2014-LL-0312-51) has laid down that for the purpose of Section 158BD of the Act, recording of a satisfaction note is a prerequisite and the satisfaction note must be prepared by the AO before he transmits the record to the other AO who has jurisdiction over such other person u/s 158BD. The Hon'ble Court held that the sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndisclosed income of another assessee was detected in a search operation, in those cases, reopening of the concluded assessment have taken place. There has been no single decision cited by the learned counsel for the Revenue where the assumption of jurisdiction of the Assessing Officer is in the absence of any incriminating material or undisclosed income having been detected during the course of search leading to reopening of a concluded assessment. In the instant case, though documents belonging to the assessee were seized at the time of search operation, there was no incriminating material found leading to undisclosed income. Therefore, assessment of income of the assessee was unwarranted. Consequently, no satisfaction was recorded in the case of the assessee. We answer substantial question of law No.2 by holding that the Tribunal was not correct in holding that the assessment under Section 153C was valid despite there being no satisfaction recorded to the effect that the documents found during the search on 17/06/2008 were incriminating in nature and prima facie represented undisclosed income. 15. The ratio that can be culled out from the above decision is that assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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