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TMI Blog2021 (9) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant facts like issue of stock in trade, the way in which the stock of proprietary concern came to be gifted to the family members by proprietor Mr. Ashok Zinzuvadia. It could be said that there was proper application of mind on the part of the AO while recording the reasons for reopening. When the return of income of both the assessees was processed under Section 143(1) of the Act and not under Section 143 (3) of the Act, the AO is justified in arriving at the conclusion that the income has escaped assessment. As held by the Apex court in the case of Central Provinces Manganese Ore Company Ltd.[ 1991 (8) TMI 4 - SUPREME COURT ] and Rajesh Jhaveri [ 2007 (5) TMI 197 - SUPREME COURT] that the word reason in the phrase reason to believe in Section 147 would mean cause or justification. If the AO has cause or justification to know or suppose that income has escaped assessment, he can be said to have reason to believe that income has escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. We are convinced that there was tangible material before the AO to initiate the proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment is sought to be reopened on the ground that, the applicants have transferred the capital asset received by them in the form of gift, to the partnership firm M/s. Radhika Jewelers by way of capital contribution at the market rate and therefore, they are liable for capital gain under Section 45(3) of the Act. 4. Being aggrieved by the disposal of the objections against the Notice for reopening of the assessment, the writ applicants are before this Court by filing present writ applications. 5. We have heard Mr. Saurabh Soparkar, the learned Senior Counsel assisted by Mr. Bandish S. Soparkar, the learned counsel for the writ applicants and Mr. Manish Bhatt, the learned Senior Counsel assisted by Mrs. Mauna M. Bhatt, the learned Standing Counsel appearing for the revenue. 6. In assailing the impugned notice issued under Section 148 of the Act, the learned Senior Counsel Mr. Soparkar appearing for the writ applicants urged the following submissions :- (i) That, Mr. Ashok Zinzuvadia was the proprietor of M/s. Radhika Jewelers, engaged in the business of gold, gold ornaments etc. and had opening stock of gold ornaments etc. valued at ₹ 48,54,09,686/- as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset to the writ applicants. In such circumstances, the learned Senior Counsel vehemently submitted that, the reasons recorded for reopening lacks validity and are completely erroneous in law and therefore, the impugned Notice has been issued without jurisdiction as the condition precedent for reopening the assessment under Section 147 of the Act is not satisfied. (iii) It was further submitted that, while recording the reasons, the AO has not applied his independent mind to form a belief that the capital gain as referred has escaped assessment. In this context, it was submitted that, the reasons for reopening having been borrowed from the observations and findings recorded by the then AO while passing the order in case of partnership firm M/s. Radhika Jewelers, wherein, additions were made on protective basis in the hands of the firm and thereafter, the impugned notice under Section 148 of the Act has been issued. Thus, the AO has not applied his mind independently so as to reach to a conclusion that income has escaped assessment and therefore, the assumption of jurisdiction by the AO on borrowed satisfaction is impermissible in law and on that ground, notice is bad in law and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted by the learned Senior Counsel for the revenue that the decision of Sunil Siddharthbhai (supra) relied upon by the writ applicants is not applicable to the facts of present case as Section 45(3) has been introduced in the Income Tax Act, 1961 by the Finance Act, 1987 w.e.f. 01.04.1988. Thus, the profits or gains arising from the transfer of a capital asset by the partners to a firm by way of capital contribution shall be chargeable to tax. 11. In such circumstances referred to above, Mr. Manish Bhatt, the learned Senior Counsel for the revenue prays that there being no merit in the writ applications, those be dismissed. 12. Having heard the learned counsel appearing for the respective parties and having gone through the material on record, the only question that falls for our consideration is that, whether the revenue is justified in reopening the assessment for the year under consideration ? 13. In order to appreciate the issue raised in both the writ applications, it is relevant to refer to the reasons recorded for reopening, which reads as under:- Reasons recorded:- 2. Brief facts of the case are that initially Shri Ashok Kumar M. Zinzuvadia was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total value of stock as on 01.07.2014 777510150/- It is seen that in the grab of transfer of business of going concern, the assessee has inflated the value of stock from ₹ 34,33,30,821/to 77,75,10,150/-. This stock has been brought in the partnership firm by way of capital contribution by the above 3 mentioned partners. In such case, the provision of section 45(3) are attracted and the value recorded in the books of the firm is treated as full value of sale consideration for the purpose of computing capital gain. According, the capital gain is worked out at ₹ 43,41,79,329 (77,75,10,150 34,33,30,821). The same has been taxed in the hands of the firm M/s. Radhika Jewellers on protective basis and consequential actions will be taken in the hands of respective partners to tax the same on substantive basis. It is pertinent to note that as on 01.04.214, there was opening stock of ₹ 485490388/with Shri AShokkumar M Zinzuwadia. Out of this, Shri Ashok M. Zinzuwadia gifted stock of ₹ 26364173 to his son Shri Darshit Ashokkumar Zinzuwadia and he also gifted the stock of ₹ 144864958/to his brother Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on either side, it is important to bear in mind that, Section 147 of the Act substituted w.e.f. 01.04.1989, empowered the AO to assess or reassess income chargeable to tax if the AO has reason to believe that income for any assessment year has escaped assessment. To confer the jurisdiction under Section 147 of the Act, two conditions have to be fully satisfied i.e. (i) the AO must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment and (ii) if the reopening of assessment was after 4 years from the end of the relevant assessment year, the AO must also have reason to believe that such escapement had occurred by reason of either omission or failure on the part of the assessees to disclose fully or truly all the material facts necessary for his assessment of that year. 15. In the present case, we have taken note of the following undisputed facts. (i) On 01.04.2014, Mr. Ashok Zinzuvadia, the proprietor of M/s. Radhika Jewelers had opening stock of ₹ 48,54,90,388/-. (ii) On 10.04.2014, Mr. Ashok Zinzuvadia gifted stock of ₹ 14,48,64,958/- to his brother -writ applicant Mr. Haresh Zinzuvadia and also gifted stock of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration received or accruing as a result of the transfer of the capital asset. 19. There need not be a debate with regard to the proposition of law as laid in the case of Sunil Siddharthbhai (supra), that where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of asset within the terms of Section 45 of the I.T.Act, 1961 because an exclusive interest of the partner in personal asset is reduced, on their entry into the firm, into a share interest. The Supreme Court further held that consideration, which a partner acquires on making over a personal asset to the firm as his contribution to its capital cannot fall within the terms of Section 48 and as that provision is fundamental to the computation machinery, incorporated in the scheme relating to the determination of the charge provided in Section 45 of the Act, such a case must be regarded as falling outside the scope of capital gain taxation altogether. 20. However, the Supreme Court also observed therein that the determination of the appeal on the assumption that, the partnership firm in question is a genuine firm and not the result of sham ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that falls for our consideration is, whether the writ applicants were engaged in trading business of gold and gold ornaments before the partnership firm came into existence ? 23. Upon perusal of the order disposing of the objections against the reopening of the proceedings, it appears that, the AO has taken into consideration the fact that the alleged stock in trade introduced in the firm on 01.07.2014 of ₹ 36,74,97,429/- has not been reflected in the trading account of both the writ applicants for the A.Y. 2015-16. It was further observed by the AO while rejecting the objections that, in the capital account, there is no credit of the value of the gift received from Mr. Ashok Zinzuvadia. Both the writ applicants failed to submit the balancesheet as on 01.07.2014 and 30.06.2014 respectively, as a result of which, considering the huge mismatch in the stock introduced in the firm and stock received as a gift, by reasoned order, the objections came to be rejected. 24. Upon perusal of the documentary evidence, it appears that, at the time of filing the writ applications as well as at the time of filing the objections against reopening, both the writ applicants failed to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by proprietor Mr. Ashok Zinzuvadia. It could be said that there was proper application of mind on the part of the AO while recording the reasons for reopening. When the return of income of both the assessees was processed under Section 143(1) of the Act and not under Section 143 (3) of the Act, the AO is justified in arriving at the conclusion that the income has escaped assessment. It has been held by the Apex court in the case of Central Provinces Manganese Ore Company Ltd. [(1991) 191 ITR 662 (SC)]; Rajesh Jhaveri [(2008) 14 SCC 208], that the word reason in the phrase reason to believe in Section 147 would mean cause or justification. If the AO has cause or justification to know or suppose that income has escaped assessment, he can be said to have reason to believe that income has escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. 27. Our attention has been invited to a decision of the Apex Court in the case of Sunilbhai Vs. Commissioner of Income Tax (AIR 1996 SC 368). In that case, the appellant assessee was a partner in M/s. Suvas Trading Company and had introduced his share ..... X X X X Extracts X X X X X X X X Extracts X X X X
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