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TMI Blog2024 (11) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... by his order dated 30.03.2022 had determined the total income of the assessee at Rs. 189,11,81,757/- as against the loss reported by the assessee by making the addition of capital gains on the conversion of partnership firm M/s. Perpetual Investments into the assessee company. The assessee challenged the above said order of assessment before the ld. CIT(A) on the ground that there was no seizure of any incriminating materials at the time of search and the assessment made u/s 143(3) of the Act is bad in law since no notice u/s 143(2) of the Act was issued by the AO. The assessee also contended that the addition made under the head "Long Term Capital Gain" on conversion of the partnership firm into a company is also not in accordance with section 47(xiii) of the Act. The ld. CIT(A) had dismissed the appeal and confirmed the addition made under the head capital gains and in respect of the ground No.6, which relates to the levy of interest u/s 234B & 234C of the Act, the ld. CIT(A) had remitted the issue to the file of AO for recomputing the interest while giving effect to the order. The assessee aggrieved with the order of the ld. CIT(A) had filed the present appeal before this Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have appreciated that there was no scheme or arrangement devised by the appellant to disentitle the exemption on capital gains arising from conversion of the partnership firm into a private limited company, which finding recorded is purely on assumptions and presumptions and hence, the impugned addition made deserves to be deleted under the facts and in the circumstances of the appellant's case. 6. Without further prejudice, the learned CIT [A] erred in holding that the conditions as laid down is Section 47[xiii] of the Act had been violated under the facts and in the circumstances of the appellant's case. 7. Without further prejudice, the learned CIT [A] ought to have appreciated that the NAV method for computation of capital gains was unwarranted under the facts and in the circumstances of the appellant's case. 8. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234B and 234C of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 9. For the above and other grounds that may be urged at the time of hearing of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by an assessee, whether or not connected with his business or profession; (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);' [(c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof,] but does not include- (i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession ; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes- (a)jewellery; (b)archaeological collections; (c)drawings; (d) paintings; (e)sculptures; or (f)any work of art. ******* "Section 2(47) of the Act: "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.] (2)Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (2A)Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and D = the amount of balance in the capital account (represented in any manner) of the specified person in the books of account of the specified entity at the time of its reconstitution: Provided that if the value of "A" in the above formula is negative, its value shall be deemed to be zero : Provided further that the balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account the increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset. "Section 47(xiii) of the Act" [any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of [demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer and consequently Sec 45 would not apply and therefore it would not be treated as income and attract capital gains. The statute laid down five conditions by way of proviso to the sub-clause (xiii) of section 47 for the entitlement of the benefit. The AO mainly relied on these provisos and alleged that the assessee had violated the proviso (a) & (c) of section 47(xiii) of the Act and therefore, the transfer of the capital asset by a firm to assessee company by way of succession is liable to be taxed as income arising out of the transfer of the capital asset. In the assessment order dated 30.3.2022, the AO had mainly relied on the search conducted u/s 132 of the Act and the alleged seizer of incriminating materials and on that basis notice u/s 153A was issued as if the seized materials are incriminating materials. Thereafter assessment proceedings commenced and the AO raised the following queries and also extracted the details of the incriminating documents found at the time of search, which are as follows: 1. What are the tax implications, if any in the hands of the partners on withdrawals from their respective capital/ current account(s), including the profits on sale of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and invest the sale proceeds in wind/solar power projects in individual capacity. Subsequently, after claiming the depreciation on wind/solar projects assets, the wind/solar project business will be transferred to a newly formed company. 3. A/ABPPL/BVSC/01 Page 23-28 Valuation report prepared by king & Partridge for fixed assets of M/s Perpetual Investments dated 28.02.2017 5.1.2 During the course of survey proceedings u/s 133A of the Income Tax Act, 1961 from office of Shri CA Rama Mohan Rao KNS who is the main auditor of accounts for Atria group of companies following incriminating materials were impounded S.No. Seizure Annexure Description 1. 1/RMR/133/1 Page 1-40 Documents consists of indenture of retirement cum release of partner firm M/s Perpetual investments dated 06.07.2015 and copies of forms of registry of firm and PAN card of M/s Perpetual Investments. 2. 1/RMR/133/1 Page 41-98 Copies of Indenture of reconstitution of firm M/s Perpetual Investments dates 06.07.2015. 3. 1/RMR/133/1 Page 99-148 Copy of Indenture of retirement cum release of partnership firm M/s Perpetual Investments dated 06.07.2015. 4 108-148 Financials including computation of income, Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the objections filed by the assessee which is as follows: 1. As regards to the condition a), the Partnership Firm "Perpetual Investments" has transferred all its Power generation activities by converting Partnership Firm to Atria Wind (Kadambur) P L. M/S Perpetual Investments, diversified into the business of generation of power by the wind energy by establishing and commissioning wind power plant at Ottapidaram, Kayathar, Tuticorin District, Tamil Nadu. The summary of assets and liabilities as per the books "Perpetual Investments" relating to power projects as on 26/03/2017 before succession as verifiable from the audited financial statements of M/s.Perpetual Investments as on 26/03/2017. The copy of Audited Financials as on 26/03/2017 is enclosed vide Enclosure 1. All the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company as verifiable from the assets and liabilities that have been recorded in the books of the company on conversion of Partnership Firm into company as on 26.03.2017 enclosed vide Enclosure-2. 2. As regards to the condition b), the Partners of the firm immediately bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn of the firm for the assessment year 2016-17. b) Copy of the Partnership Deed dt 31.01.2008 and the Indenture of Reconstitution of partnership dt 10.04.2015 and the copy of the Reconstitution of partnership dt 16.01.2017. c) Copy of the stamped affidavit for dissolution of firm. 5.7 In order to appreciate the explanation offered by the assessee, we have gone through the proviso (a) to section 47(xiii) of the Act in which the words used are that "immediately before the succession", which means that the assets and liabilities of the firm immediately before the date of succession would become the assets and liabilities of the company. In this case, the succession was taken into effect from 27.03.2017 and therefore all the assets and liabilities of the firm stood immediately before the date of succession i.e as on 26.03.2017 vests with the company. The meaning of the word immediately as given in the Black's Law Dictionary is as follows; "without interval of time, without delay, straight away" 5.8 Further we found that the assets and liabilities of the firm as on 26.03.2017 i.e. immediately before succession, was transferred to the company and therefore, we are of the view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the transactions pointed out by the AO was done by the firm well before succession and not immediately before succession. In order to attract the proviso, the AO should establish the fact that the partners had received consideration or benefit other than the allotment of shares in the company. In the case on hand, there is no such evidence to show that the partners had received any consideration from the company apart from the shares. On the wrong interpretation of the provision the AO cannot assume that the assessee had violated the provisions and therefore, long term capital gains would arise for the transfer of the firm into company. 5.11 We have also gone through the various documents filed by the assessee and found that the sale of the capital asset, i.e. shares of ACT, by the firm was made long time back and thereafter, because of the reconstitution of the firm, the surplus amounts stood in the capital account of the partners were withdrawn much before the succession and therefore we are of the view that the same could not be treated as consideration received by the partners for the transfer of the firm into a company. The firm in its normal course of business had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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