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TMI Blog1985 (4) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... account depreciation in the value of the assets, the value of the goodwill, etc., the assessee was paid in full and final settlement a sum of Rs. 12,65,991. As on 31-12-1973 his capital account stood in the firm at Rs. 1,63,835 and he was entitled to a share in the development rebate reserve worked out at Rs. 49,855. The ITO on the above facts held that the action of the assessee in constituting the firm and making a revaluation of assets within a short time was done with an intention to avoid capital gains tax by bringing the matter within the scope of section 47(ii) of the Income-tax Act, 1961 ('the Act'). He also held that no genuine firm came into existence on 1-7-1973 and in effect there was a transfer from the individual assessee to the company of the business attracting capital gains tax. The ITO computed the capital gains after giving the deduction under section 80T of the Act at Rs. 6,31,381. The Commissioner (Appeals) accepted the assessee's claim that this was a case of distribution of assets on the dissolution of the firm and in view of the provisions of section 47(ii) no capital gains could be determined. He accordingly deleted the addition of Rs. 6,31,381. 2. Befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, to raise these legal contentions also against the departmental appeal in addition to the challenge to the merits of the addition itself. 5. The learned counsel for the department has objected to the assessee raising this ground about limitation as well as absence of jurisdiction. The appeal was filed by the department on the mere question of addition of Rs. 6,31,381. The assessee could have filed a cross-objection which he did not do. The assessee could have also come up on appeal under the right granted to him by the statute. Even though he did this, he withdrew the appeal. According to the learned counsel, it was not open to the assessee to raise the question of limitation as well as jurisdiction against the above background. When the Act has provided the facility of filing an appeal on his own as well as filing a cross objection when the department filed an appeal the assessee could not resort to rule 27 to agitate this point. The provisions of rule 27 were brought into the statute book earlier. After the introduction of section 253(4) of the Act, rule 27 has become, if not redundant and of no significance, certainly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of filing an appeal the ITO's order could be treated as one under section 143(3). This is not so for all other purposes. Reference is made in this connection to the decisions in CIT v. Devidayal Metal Industries (P.) Ltd. [1968] 68 ITR 50 (Bom.) and Surrendra Overseas Ltd. v. CIT [1979] 120 ITR 872 (Cal.). The former case clearly stresses the point that the ITO's order is under section 31(3)(b) of the Indian Income-tax Act, 1922. 7. It is also pointed out that in the original assessment the capital gains was not included. The AAC in his order dated 13-2-1978 did not touch this point or enhance the assessment. The ITO for the first time made an addition on account of capital gains. What the AAC himself has not done and could not do, according to the learned counsel for the assessee, the ITO cannot do in giving effect to an order under section 251. It is pointed out that since the AAC did not decide this ground specifically raised before him, this should be treated as having been decided against the assessee and this would also justify the application of rule 27. In effect, according to the learned counsel, the ITO's order including the capital gains was beyond his ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business advantages were expected. In fact the assessee was forced to make the conversion to realise these advantages. When the genuineness of the firm, which has been accepted by the department earlier, is granted, on the dissolution of that firm and distribution of assets amongst partners the provisions of section 47(ii) apply. Even if, therefore, as the ITO has contemplated, there were capital gains, they are not exigible to tax in view of section 47(ii). In fact no evidence has now been produced to even challenge the genuineness of the firm, which has been properly and legally constituted. 9. For the department it is pointed out that the assessee having not filed a cross-objection and withdrawn the appeal filed against some of the points, he cannot urge the question of time bar or legal infirmities in the assessment. Rule 27 is not applicable to the case. At any rate, rule 27 has a restricted operation. The effect of accepting the claim for intervention under rule 27 would be that even though the assessee has not agitated the question of limitation on the validity of the assessment, he would be given another opportunity to set aside the assessment on this score. In fact the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dissolve the firm is a clear indication that this was the purpose from the very beginning. Inevitably the object was avoiding some capital gain by almost what is a crude forcing of the provisions of section 47(ii) on to the situation. This is evident, according to the learned counsel, also from the fact that the assessee filed an appeal in respect of certain points and withdrew the same. The firm was only a device to avoid capital gains. 12. On the question of the company itself, it is pointed out that even though its members are the assessee and his wife mainly, it was a separate legal person. Capital gains, therefore, were clearly involved and liable to tax. There has been a revaluation of the assets which also led to obtaining capital gains. If any other mode of working out the effective taxable capital gains was needed, according to the learned counsel, the matter may be sent back to the ITO to recompute the capital gains. The limited company is a separate entity for all purposes. The transfer, therefore, of the business from the individual to the company was real. When the firm is not genuine, the capital gains, thus, really accrue to the individual assessee. The decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view there seems to be a misunderstanding on the part of the department in seeking to exclude the operation of rule 27. In the first place neither the provision of an appeal as such nor the grant of right of cross-objection really renders rule 27 inoperative. This rule operates in a restricted field of pure defence. A literal reading of the rule also indicates that it comes into operation only where the respondent has not appealed but some point has been decided against him by the first appellate authority. In the present case amongst other things two sets of grievances were advanced by the assessee before the appellate authority : One, relating to the limitation and validity of the assessment and the second, challenging the addition of Rs. 8,31,381. The question of limitation the Commissioner (Appeals) decided against the assessee. On the question of validity the Commissioner (Appeals) did not pronounce any decision but insofar as the assessee did not withdraw this ground before the Commissioner (Appeals), the Commissioner (Appeals) must be regarded as having decided this point also against the assessee. On the question of addition itself of Rs. 6,31,381 the Commissioner (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 153(2A). Some of the decisions of the High Courts have termed assessments made pursuant to the appellate directions as assessments under section 143(3). As far as we within the jurisdiction of the Bombay High Court are concerned, this point is governed by the decision in Carona Sahu Co. Ltd.'s case which has clarified that while for purposes of appeal an assessment made in pursuance of appellate direction could be treated as an assessment under section 143(3), it is not so for all other purposes. In view, therefore, of the binding decision of the Bombay High Court in Carona Sahu Co. Ltd.'s case, it is not necessary to regard the assessment as made under section 143(3). Inevitably the application of section 144B is also precluded. In this view of the matter, the extended time limit granted by section 144B is not available to the case of an assessment made by the ITO, pursuant to the direction of an appellate authority. That apart, the provisions of section 153(2A), do not give any scope for reading into it any extension of the time limit on account of section 144B or any other provision. Section 153(2A) is as under : "(2A) Notwithstanding anything contained in sub-sections (1) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to do in the fresh assessment to be made. Even here if he has to make a reference under section 144B (we are not deciding this question here) he has got sufficient time for that. At any rate, there would be no inequity in granting the department only two years for completing a fresh assessment pursuant to an appellate direction and not two and a half years, both in addition to the time limit granted for the original assessment under section 153. In this case the assessment not having been completed before 31-3-1980 must be regarded as overtaken by the limitation provided in section 153(2A). 17. On the question of the ITO's jurisdiction to include a new item of income in an assessment made pursuant to an appellate direction also the law is clear. The decided cases clearly indicate that even the AAC or the Commissioner (Appeals) cannot go beyond the scope of the appeal before them. Their powers of enhancement are also limited to the scope of the appeal before them, on the grounds of appeal clearly covered by and arising out of the assessment order appealed against. The decisions referred to by the learned counsel for the assessee clearly settled this issue. This being so and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the individual was carrying on the business for a very long time. His wife was neither an expert nor could contribute effectively to the functioning of the individual business. The limited company's members were composed mainly of the assessee and his wife. Thus, there was no business reason justifying the conversion of the proprietary business into the partnership. Almost immediately after such conversion and with practically little business having been done the firm was dissolved. There is no particular business reason for the dissolution also. The only ground made out is that the business had to be taken over by the limited company, the functioning of a business under a limited company being more useful for its future. If this latter be the reason certainly the individual could have transferred the business to a limited company directly without going through the intermediate partnership level. That was not done. It would, therefore, be, in our opinion, difficult to decide that the constitution of the firm was a positive business necessity and not a step or only a device to get away from the capital gains tax liability. There are, however, other reasons which compel us to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have been computed and there might or might not be any capital gains also in addition. At any rate, disregarding the firm if the ITO were to compute a capital gains on the transfer to a limited company especially of such a large figure of Rs. 12 lakhs, it would be prima facie erroneous apart from being inconsistent with the department's own stand. At any rate, there are no figures or facts to show that there was either a capital gain on one or the other of the above items or any taxable profit. 20. Apart from the above, the transfer in the present case ignoring the partnership, would be from an individual to a private limited company of which himself and his wife are the principal shareholders. This company was formed just a month before the formation of the alleged firm. It had a nominal capital subscribed by these family members. It had no assets. The constitution of the limited company could at best have resulted in incurring some expenditure, etc., which would show itself as a loss to the existing capital of the company in its balance sheet. Thus, the formation of the company would have prima facie resulted in its cash capital introduced by way of shareholdings to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. But I would to add my own reasons in support of this conclusion. 2. The facts of the case and the contentions addressed by the learned counsel on both sides, have been elaborately set out in the order of my learned brother and is, therefore, not necessary for me to repeat the same. However, I would like to point out that the objection of the revenue in this appeal filed by them is against the following findings of the Commissioner (Appeals) in paragraph No. 20 of his order: "On a careful consideration of the matter I find force in the appellant's contention that the payment of Rs. 12,65,991 against his share capital, etc., after making revaluation of the assets of the firm is a case of distribution of assets on the dissolution of a firm under section 47(ii) so that no capital gains could be determined in the hands of the appellant at that point of time. Had the assets been revalued not at the time of dissolution of the firm but earlier to that and an additional sum credited in the capital account on account of revaluation of the assets the position would have been different. In the present case, however, the appellant has received Rs. 12,65,991 as a result of the distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue in seeking to tax this capital gains in the hands of the present assessee, if it is so assessable in accordance with law. At the same time, it can hardly be disputed that there should be cogent and relevant evidence which would justify the inference that the partnership firm constituted on 1-7-1973 was merely a device and only a sham partnership. No evidence has been placed to that effect to justify the conclusion that the partnership firm was a mere sham and should, therefore, be ignored as a mere device. On the contrary, the materials placed before us on behalf of the assessee at pages 183 and 184 of the paper book clearly establish that the partnership firm was a genuine firm and was not a mere sham. At page 183 we have the profit and loss account of the partnership firm as on 31-12-1973. This account shows that the partnership firm had carried on business of repairing ships during the period of its existence from 1-7-1973 to 31-12-1973 and the labour charges received by this firm during this period amounted to Rs. 30,69,631. The net profit earned by this firm from this business amounted to Rs. 1,11,880, which was divided amongst the three partners in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the present assessee that it has been executed only with a view to avoid payment of capital gains tax by taking advantage of section 47(ii). It is not open to the revenue to simply ignore these transactions put through by the parties in a lawful manner without bringing on record any material, which would establish that these transactions were neither genuine nor valid, but were intended to be sham transactions by the parties. In the absence of any such material placed by the revenue, I find myself unable to accept the contentions put forward on behalf of the revenue that all these transactions of formation of the partnership on 1-7-1973, the business carried on by it from 1-7-1973 to 31-12-1973 and its dissolution on 31-12-1973, should be ignored. In my new there is no justification for such a conclusion either on facts or in law. It, therefore, follows that the order of the Commissioner (Appeals) deleting this addition by holding that the assessee is entitled to the benefit of section 47(ii) in respect of the addition of Rs. 6,31,381 added by the ITO's capital gains; is right and the same has to be upheld. 5. In view of the above conclusion reached by me on the objections ..... X X X X Extracts X X X X X X X X Extracts X X X X
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