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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 ..... see. Further, there is no suppression or escaped income made out by the AO, based on the seizure of the above said incriminating documents and therefore we are of the view that no assessment proceedings could be initiated u/s 153A of the Act when the assessment was completed. To arrive such a conclusion we relied on the judgement of the Hon ble Supreme Court in the case of Abhisar Buildwell P Ltd. [ 2023 (4) TMI 1056 - SUPREME COURT] Whether the assessee had committed any violation of the provisos to Section 47 (xiii) of the Act as alleged by the AO? - There is no evidence available with the AO to show that the partners had received consideration at the time of succession and the AO also not brought out any specific instances of receiving any consideration at the time of effecting the succession. As seen from the various records, and the balance sheet, it is clear that before the transfer of the firm into a company, the partners have withdrawn their surplus share capitals and therefore, there is no evidence or any materials available with the AO to show that the partners have received consideration for the purpose of transferring the assets and liabilities of the firm to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 Tribunal with the following grounds : 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub- section (1) of section 10 of the Depositories Act, 1996, and for the purposes of (i)section 48; and (ii)proviso to clause (42A) of section 2, the cost of acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 succeeded by such company] :Provided that (a) all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company; (b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, 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 investments? 2. Whether transfer of the business by the Firm to New Co and subsequent receipt of consideration by the partners in their individual capacity would be considered as a valid transfer of business under general law? 3. Would the business of the Firm (comprising of assets and liabilities) qualify as a 'capital asset' as contemplated under Section 47(xiii) of the Income Tax Act ( IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33A 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, Balance sheet and P L, Auditor's report, Fixed asset valuation sheet, ITR acknowledgement of M/s Perpetual Investments for FY 2015-16. 5.4 We have gone through the alleged incriminating documents seized at the time of search and we found that at no stretch of imagination, the above said documents could be treated as incriminating records because they are only the documents maintained by the assessee during the normal course of business lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 before the succession become the shareholders of the Company in the same proportion in which their capital accounts stood in the books of firm as under: Particular Partnership Share % No of Equity shares allotted Percentage of Equity Share Capital Atria Brindavan Power Pvt Ltd 1% 10000 1% CS Sunder Raju 1% 10000 1% K Nagaraju 1% 10000 1% Atria Wind Pvt Ltd 94% 940000 94% Mrs. Bharathi N Raju 1% 10000 1% Mrs. Thejavathi Raju 1% 10000 1% Kaushik Raju 1% 1000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 that the assets and liabilities of the firm immediately before the succession were rightly transferred to the company and hence there is no violation of proviso (a) to section 47 (xiii) of the Act. The AO relied on the events that took place not immediately before the succession and therefore the findings of the AO and the ld CIT(A) are liable to be set aside. We also relied on the judgement of the Hon ble Madras High Court reported in 90 ITR page 412 in the case of Thangam Textiles Vs First ITO, Salem wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 effected the sale of shares and by no stretch of imagination it could be treated as consideration received by the partners for effecting the transfer and hence the same is also not a violation committed by the assessee in order to get the benefit prescribed u/s 47(xiii) of the Act. 5.12 We do not find any merit in the above finding of the AO since Section 47(xiii) proviso (c) of the Act specifies that the partners should not receive any consideration or benefit directly or indirectly other than by way of the allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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