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TMI Blog2020 (11) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... icial to the interests of the revenue on this issue. Set-off of unabsorbed depreciation from the income - unabsorbed depreciation of the partnership firm, the business of which has been taken over by the assessee in his individual capacity, which has been set off by the assessee from his income as an individual - Succession to business otherwise than on death - HELD THAT:- Consequences on retirement of all the partners except one of a partnership firm is that the partnership firm gets dissolved because, for a partnership to exist, there has to be more than one partner. On retirement of all the partners except one, the partnership firm gets dissolved and if the sole partner carries on the business it becomes a proprietary concern. In view of the Section 32(2) of the Act, the unabsorbed depreciation becomes the depreciation of the current year of the business and the same is eligible for set off against the individual income of the assessee u/s 170 of the Act as he is the successor to the business. Capital gain Computation - application of Sec.50C - difference between the sale consideration received by the assessee and the SRO value - HELD THAT:- In the case before us, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to AY 2012-13, which was accepted in the scrutiny assessment for AY 2011-12 dated 22.02.2015 and consequently loss on sale of shares incurred in the subsequent year was properly assessed after adequate enquires (as evidenced by assesses letter dated 29.02.2016 14.03.2016) in the impugned assessment. (b) Consequently the directions of the Pr.CIT to conduct de novo enquiry deserves to be cancelled . 4. (a) The learned Pr.CIT grossly erred in setting aside the issue relating to set off of unabsorbed depreciation because she failed to appreciate that the AO, after due and adequate enquires, concluded that the appellant's claim was validly allowable in terms of the provisions of Sec.32(1) (2) read with Sec.43(6). Consequently the direction of the Pr.CIT setting aside this issue for fresh adjudication is bad in law and liable to be cancelled. 5. The learned Pr.CIT grossly erred in setting aside the issue relating to application of Sec.50C on an assumed fair market value, as she failed to appreciate that there would be still long term loss of ₹ 54.19 lakh due to indexed cost of acquisition and consequently the result of such computation would be only p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the case was selected for scrutiny under CASS to verify the sources for introduction of capital in the year and the large increase in unsecured loans, but the A.O. has completed the assessment u/s 143(3) of the Act, by bringing to tax only the capital gains chargeable on the Development Agreement entered into by the assessee with M/s. Pranit Projects (P) Limited and also disallowing the interest on TDS. She further observed that the following points were not considered by the A.O. (i) A perusal of profit and loss account revealed that the assessee has claimed an amount of ₹ 8,95,97,600/- as loss on sale of shares'. This loss should be treated as loss from capital gains', as the assessee is in the business of generation of energy' and not trading of shares'. (ii) Unabsorbed depreciation of ₹ 5,47,59,555/- claimed by the assessee was allowed, even though the assessee was having taxable income for the asst. years 2011-12 and 2012-13. (iii) Assessee has sold land during the financial year for a consideration of ₹ 3,56,25,000/- on which capital gains of ₹ 2,15,93,863/- was offered. However, a perusal of sale deed revealed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies over the years and till the F.Y. 2010-11, the same were shown as investments and that during the F.Y. 2011-12, the assessee had converted these shares into stock-in-trade at book value and accordingly, the same were shown under current assets in the audited balance sheet of the assessee on 31.03.2012. Since the shares were converted into stock-in-trade at book value, no capital gains/loss was recorded in the books of the assessee. It was further submitted that the assessee had sold the shares worth ₹ 9,93,97,600/- to Shilpa Mega Projects Pvt.Ltd. for ₹ 98,00,000/- and thereby incurred a business loss of ₹ 8,98,97,600/-. 4.1. To justify the claim of loss, it was submitted that because the assessee was into the business of generation of hydro power, it was awarded a mini hydel project at Rajolibanda on Thungabhadra River in Raichur District, Karnataka and due to various reasons, the company had to stop the construction work for many years and due to such delay the project cost had increased and consequently the project had become unviable. It was submitted that during the year under consideration, the company M/s Shilpa Mega Projects Private Limited had s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the F.Y. 2012-13 relevant to A.Y. 2013-14. He submitted that the AO, during assessment proceedings u/s 143(3) of the Act, has required the assessee to explain the loss on account of sale of shares and the assessee, in his reply to the AO, clearly stated the reasons for the loss. Therefore, according to him, the assessment order is not erroneous and cannot be revised u/s 263 of the Act. He submitted that for invoking the provisions of S.263 both the conditions i.e. the assessment order being erroneous and prejudicial to the interest of revenue have to be satisfied. He submitted that even where the assessment order is prejudicial to the interest of revenue, if it is not erroneous, then such an order cannot be revised u/s 263 of the Act. He submitted that even otherwise, the capital loss arising out of sale of shares is only to the extent of the shares which were converted into stock-in-trade at book value and not the shares which were acquired subsequent to such conversion of shares which have all along been treated as stock-in-trade only. Thus he prayed that the order u/s 263 of the Act to the extent of claim of loss on sale of shares be set aside. 4.4. The Ld.DR, on the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90/-. Therefore, she was of the opinion that the unabsorbed depreciation claimed by the assessee and allowed by the AO needs to be withdrawn. In response to the show-cause letter issued by the Pr.CIT, the assessee submitted that the firm M/s Swarna Properties was originally formed as partnership firm by a partnership deed dated 07.09.1995 with five partners and that one more partner was inducted w.e.f. 1.6.1996 therefore, total number of partners became 6 and that the partnership was AT WILL . And w.e.f. 01.04.2012, Sri YV Subba Reddy, the assessee herein, has taken over the business of the firm as proprietor, since all the other five partners have retired and had agreed to receive only their capital account balances as on that date and also making it clear that there would not be any distribution of capital assets belonging to the firm. It was submitted that the conversion of firm into a proprietary concern is legally valid because the duration of the firm was AT WILL, and since the assessee continued the business of the firm as a successor-in-business in his individual capacity, the unabsorbed business loss or unabsorbed depreciation of the erstwhile firm is to be allowed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in his individual capacity, which has been set off by the assessee from his income as an individual. The Ld.Counsel for the assessee has relied upon the provisions of sec.170 to argue that the assessee is a successor to the business and, therefore, the unabsorbed depreciation of the business carried forward from the earlier years should be allowed to be set off against the income of the assessee for relevant A.Y. 5.6. We have gone through the partnership deed which is placed at pages 58 to 68 of the paper book and we find that as per Clause 4 of the partnership deed, the duration of the partnership firm was AT WILL . We have also gone through the Deed of Retirement and Dissolution and Conversion into Proprietary Concern. The title of this document itself mentions about the retirement and dissolution of the firm and conversion of the business into proprietary concern. The Ld.Counsel for the assessee has argued that there was no prohibition in conversion of a partnership firm into a proprietary concern and we also agree with this proposition. However, the consequences on retirement of all the partners except one of a partnership firm is that the partnership firm gets d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeded to, up to the date of succession, shall be assessed and recovered in the manner provided in section 171, but without prejudice to the provisions of this section. Explanation.-For the purposes of this section, income includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession. 5.7. As per above Section, in case of succession, the predecessor shall be assessed in respect of the income till the date of succession, while the successor shall be assessed in respect of income after the date of succession. Sub-section (2), thereof provides that where the predecessor cannot be found, then the entire income shall be assessed in the hands of the successor only. 5.8. Sec.78 of the Income Tax Act restricts or prohibits the carry forward or set off of losses in case of change in the constitution of a firm. In the case before us, due to dissolution of the partnership firm, it is no longer in existence and hence not available for assessment. In such cases, what are the income/loss which is not allowable for a set off? However, we find that section 78 does not deal with the unabsorbed depreciation. For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. Thus, the allowance for depreciation is allowed to be carried forward for set off against future years' profits. It is because of this that the unabsorbed depreciation allowance was carried forward in the assessments of the firm and in the partners' assessment full effect of the proportionate carried forward unabsorbed depreciation will have to be given. Therefore, as per section 32(2) read with section 72(2), the unabsorbed depreciation which has been carried forward in the firm's assessment has to be given effect to fully in the individual assessment of the partners. Since tax is chargeable under section 28 on the aggregate of the profits of all the businesses carried on by the assessee, if the profits of a particular business are insufficient to absorb the depreciation allowance permitted by section 32, the allowance like any other business loss can be set off under sections 70 and 71. If some part of the depreciation allowance remained unabsorbed, it can be carried forward under section 32(2) to the following year and set off against the year's profits and so on for succeeding years. The carried forward depreciation allowance is deemed to be part of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at these two decisions cannot be treated as precedents on the issue. 7. Having regard to rival contentions and material placed on record, we find that: the AO has not looked into this issue at all and therefore, the assessment order is clearly erroneous and prejudicial to the interest of revenue on this issue. As regards the decisions relied upon by the assessee, we find that in the case of Buttepatil Properties cited (supra) the Tribunal has referred to the provisions of Sec.43CA and Sec.50C of the Act to hold that where the difference between the stamp duty valuation adopted by the Valuation Officer u/s 50C(2) and the actual consideration received is less than 10% then such difference shall not be considered for the purpose of Sec.50C of the Act. 7.1. In the case of Suresh C Mehta, the Coordinate Bench of the Tribunal had relied upon the decision of Hon ble Patna High Court reported in 308 ITR 71 (Patna) in the case of Bimla Singh vs. CIT and the Punjab Haryana High Court decision in the case of Prem Narain Co., reported in 287 ITR 56 (P H) to hold that if the difference assessed by the Valuation Officer and value received by assessee is not more than 15%, the same shou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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