IN THE ITAT, BANGALORE BENCH, ‘A’

Prakash Electric Co.

v.

Income tax Officer, Ward 1, Udupi

P. MOHANARAJAN, JUDICIAL MEMBER

AND N.L. KALRA, ACCOUNTANT MEMBER

IT APPEAL NOS. 179 TO 182 (BANG) OF 2007

[Assessment years 2000-01 to 2003-04]

July 18, 2007

I Section 153, read with sections 147 and 148, of the Income-tax Act, 1961 - Income escaping assessment - Time limit for completion of reassessment - Assessment year 2000-01 - Assessing Officer reopened assessment of assessee under section 147 and issued notice under section 148 on 25-3-2003 - Said notice was served on assessee on 4-4-2003 - Thereafter Assessing Officer passed reassessment order on 30-3-2005 - Assessee claimed that reassessment order passed on 30-5-2005 was beyond time limit prescribed under section 153(2) inasmuch as word ‘served’ as appearing in section 153(2) should be regarded as equivalent to ward ‘issue’ and if service of notice was regarded as being same as on date of issue, that is, 25-3-2003 then time for completing reassessment would have been expired on 31-3-2004 - Whether since ward ‘served’ as appearing in section 153(2) could not be equaled with word issue, reassessment order passed on 30-5-2005 was within time prescribed under section 153(2) - Held, yes

Section 47, read with sections 45 and 47A, of income-tax Act, 1961 - Capital gains - Transactions not regarded as transfer - Assessment year 2000-01 - Whether conditions mentioned in proviso to section 47 (xiii) are mandatory and to be complied at time of succession of business of partnership from by company - Held, yes - Whether where business of partnership firm is succeded by a company requirement of clause (b) of proviso to section 47(xiii) is to be satisfied in ratio of capital of partners and further surplus arising on account of taking over of assets and liabilities of firm by successor company is also to be apportioned in hands of partners in profit sharing ratio while preparing balance sheet as on date of succession of business - Held, yes - Whether where business of a partnership firm is succeed by a company and if all conditions mentioned in proviso to section 47 (xiii) are not satisfied at time of succession, then capital gain would be chargeable in hands of firm and section 45 would not be excluded - Held, yes - Whether in case if any of conditions mentioned in proviso to section 47(xiii) is not satisfied, then section 47A would be applicable - Held, yes

Words and phrases

The word ‘served’ as appearing in section 153(2) of the Income-tax Act, 1961

FACTS-I

For the relevant assessment year 2000-01, the Assessing Officer reopened the assessment of the assessee under section 147 and issued the notice under section 148 on 25-3-2003. The said notice was served on the assessee on 4-4-2003. Thereafter the Assessing Officer passed the reassessment order on 30-3-2005.

On appeal, the assessee contended that as per section 153(2) no order of re-assessment shall be made after the expiry of one year from the end of financial year, in which, the notice under section 148 was served that the Supreme Court in the case of Banarsi Debi v. ITO [1964] 53 ITR 100 had held that the word ‘issued’ is to be held as served, that once the word ‘serve’ was taken as equivalent to issue and further if the service of notice was regarded as being the same as on date of issue, that is, 25-3-2003 then the time for completing the reassessment would have been expired on 31-3-2004 and that, therefore, the reassessment order passed on 30-5-2005 was beyond the time limit prescribed under section 153(2). The Commissioner (Appeals) disagreed with the assessee and held that the reassessment order passed on 30-3-2005 was within the limitation period prescribed under section 153(2).

On second appeal:

HELD-I

It is provided under section 148 that before making the assessment/re-assessment reopened under section 147, the Assessing Officer has to serve on the assessee a notice requiring him to furnish a return. Thus, the jurisdiction for making the assessment starts with the services of notice and not with the issue of notice. Service of notice under section 148 is pre-requisite, before making assessment or reassessment under section 147.

[Para 11]

Section 156 provides that whenever any tax, interest, penalty or any other sum is payable in consequence of any order, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifing the sum so payable. In that case, the word ‘served’ has been used. Interest under section 220(2) is to be paid in case the sum is not paid within 30 days of the services of notice. It is an accepted proposition that the word ‘served’ used under section 156 and also used under section 220 (1) cannot be equated with the word issue. The assessee cannot be asked to pay the demand within 30 days of the issue of the demand notice. The service is pre-requisite before the demand becomes payable within 30 days from the services of the notice. Similarly, section 249(2) prescribes the time limit of filing the appeal before the first appellate authority within the period of 30 days of the date of services of the notice of demand. Here also it is an accepted proposition that the time limit would start from the services of notice of demand and not from the date of issue of notice of demand. Hence, the word ‘issue’ and ‘serve’ cannot be equated in all the circumstances. The Legislature in its wisdom has used the word ‘issued’ in respect of time limit for the commencement of proceedings under section 148, while the word ‘served’ has been used in respect of completion of such proceedings. Therefore, one was not agreed with the assessee that the word served appearing in section 153(2) should be equated with the word ‘issue’ and the time limit should be linked form the date of issue of notice under section 148. Therefore, the reassessment order had been passed within the time limit prescribed under section 153(2). [Para 13]

Further section 282 provides the service of notice. In case the word ‘issue’, is to be equated with the word service then there was no need of providing section 282. One is required to make harmonious interpretation of the provisions of the Act and considering this aspect, it is clear that the word ‘served’ as appearing in section 153(2) cannot be equated with’ the word ‘issue’. Hence, the reassessment order passed by the Assessing Officer was within the time prescribed under section 153(2). [Para 18]

FACTS-II

The assessee firm was succeeded by a company on 1-5-1999. The Assessing Officer having noticed that the share holdings in the company by the partners of the assessee firm were not in the ratio of their capital accounts as appearing in the books of the firm before the succession and this requirement was not complied even by the end of the previous year, that is 31-3-2000, held that the condition prescribed in clause (b) of the proviso to section 47(xiii) was not complied with by the assessee firm. He, therefore, taxed the capital gain arising from the transfer of business to the company under section 45 in the hands of the assessee firm.

On appeal, the Commissioner (Appeals) held that the harmonious construction of section 47(xiii) read with section 47A(3) lead to the conclusion that necessary conditions as mentioned in proviso to section 47 (Xiii) were to be met during the previous year, in which, the transfer/transaction had taken place. He further referred to clause (b) of proviso to section 47(Xiii) and held that the expression ‘from the date of succession’ as appearing in the said clause is quite significant and it left no doubt that requirement of clause (b) of the proviso to sections 47(Xiii) should be made on the date of succession itself. He further pointed out that when even the Legislature intended to put a time frame beyond the relevant section, it had been done in the Act itself. He, therefore, upheld the order passed by the Assessing Officer.

On second appeal:

HELD-II

In the instant case, the profit arising from the transfer of business had also not been apportioned in the hands of the partners in the profit sharing ratio, while preparing balance sheet as on 30-4-1999. If that profit was appropriated then ratio of partner’s capital would be different from the ratio without crediting such profit. However, shares had been subsequently allocated in the ratio of partner’s capital, in which, the profit from transfer of business had not been credited in the capital account. To this query, the assessee had submitted that, it was the balance in the capital account in the books of the firm on the date of succession that would determine, the ratio of shares to be received from the company. The succession of the firm’s business by the company occurred on 30-4-1999. The firm’s financial statements were drawn up from 1-4-1999 to 30-4-1999. Profits from operation for this period were credited to partner’s capital account. Profits from the transfer accrued or arose only after the transfer had been completed. The profit from transfer, therefore, would not have to be reckoned in determining the capital balance to the credit of the partners on the date of the succession. Such profits were matter of post succession recognition and adjustment. Profits on revaluation were notional and not the realized profits. They did not represent capital contributed by the partners into the firm. Therefore, the method adopted by it was correct. [Para 33]

Section 47(xiii) was introduced by the Finance (No. 2) Act, 1998. [Para 35]

In the instant case, except the condition mentioned in clause (b) of the proviso to section 47(xiii) all the conditions mentioned in clauses (a), (c) and (d) of the proviso to section 47(xiii) were satisfied by the assessee. However, it was contended by the assessee that the condition mentioned in clause (b) of the proviso to section 47(xiii) was got satisfied in March 2003, that there was no requirement in law that such condition should be satisfied at the time of succession, and that where the time limit was not provided then reasonable time should be given for the compliance of the condition.

Section 139 provides the time limit for filing the return of income. Therefore, the assessee-firm was required to file the return by 31st October of the assessment year. In case, the conditions mentioned in proviso to section 47(Xiii) were not satisfied then the assessee firm could not claim exemption from capital gain. Whenever some rectifications are to be made after compliance of certain condition then such rectifications are provided under section 155. The assessment made is to be amended in case the assessee disputes or invests the amount. Such amendment is to be made after the completion of assessment because such condition would be satisfied after the completion of assessment. In respect of compliance to be made under proviso to section 47(xiii), there is no provision in the Act for rectification. Therefore, conditions mentioned in clauses (a) to (d) of section 47(xiii) are to be satisfied at the time of succession of business. [Para 38]

As per section 47A(3), if any of the condition laid down in proviso to section 47 (Xiii) is not complied then the amount of profit and gains arisen from transfer of such capital assets not charged under section 45 is to be deemed to be the profit and gains chargeable to tax in the hands of successor-company for the previous year, in which, the requirements of the proviso to section 47(Xiii) are not complied with. Hence, the requirement of proviso to section 47 (Xiii) is to be complied with in all the succeeding years. Section 47A(3) does not refer that this would be applicable in a case when clause (d) of proviso to section 47 (Xiii) is not complied in the succeeding five years. The language of section 47A(3) clearly shows that condition as mentioned in clause (d) of proviso to section 47 (Xiii) is to be satisfied for all the succeeding previous years. Therefore, the shareholder should hold the shares in the same proportion, in which, their capital stood in the books of the firm. [Para 39]

Therefore, the conditions mentioned in proviso to section 47(xiii) are mandatory and to be complied at the time of succession of business. [Para 40]

It was argued by the assessee that the requirement of clause (b) o£ proviso to section 47(Xiii) was to be satisfied in the ratio of capital of partners without considering the surplus arising on account of taking over of the assets and liabilities by the successor company. [Para 43]

In the book ‘Advanced accounts by Shukla and Gharwal, 1984 Edition’, the method has been prescribed to draw the accounts of the firm, when the assets are sold to the company. It is mentioned that in such a case realization account is to be prepared in the same way as the accounts are prepared on dissolution. The profit or loss on realization is to be transferred to the capital accounts of the partners in the profit sharing ratio. Hence, the capital of the partners would have to be seen after crediting of excess of assets and liabilities paid by the company to the assessee-firm. If the same was considered in the capital accounts of the partners of the assessee-firm, then the percentage of shares of the partners would be between 23.255 and 18.615. It was clearly mentioned in the statement of fact by the assessee-firm that the assessee had transferred the assets other than goodwill and software to the company at a price of Rs. 2,21,72,950 as against written down value of Rs. l,50,53,446. The software was transferred at Rs. 14 lakhs and goodwill valued for the purpose of transfer was of Rs.48,24,210. On account of these revaluations of the assets at the time of succession of business of the assessee-firm by the company, the firm had earned capital gain and the same was to be considered for exemption under section 47(Xiii). Hence, this profit of the firm was to be allocated amongst, the partners in the profit sharing ratio. In the memorandum of the association of the company it was clearly mentioned that the main object of the company was to takecover the assets and liabilities of the assessee-firm. The partnership firm can be constituted to carry a business and if the business is transferred, then the firm is to be treated as dissolved. Section 42 of the Partnership Act, 1932 says that the partnership firm will stand dissolved, if the adventure or undertaking for which, it was constituted has been completed. When the assets have been sold, the final account of the firm, are to be ascertained on the basis of the value of the assets, at which, these have been transferred to the company. Therefore, the shares in the company should have been allotted in the ratio between 23.255 and 18.615. Therefore, clause (b) of proviso to section 47 (Xiii) was not satisfied. [Para 44]

It was also contended by the assessee that if there was non-compliance of the condition under section 47 (Xiii), the incidence of tax should be on the successor company and not on the assessee. [Para 46]

Section 47A(3) provides that if any of the conditions laid down in the proviso to section 47(xiii) is not complied with, then profit or gains arising from the transfer of capital assets not charged under section 45 shall be deemed to be the profit and gains chargeable to tax of the successor company. Section 47A(3) has used the word ‘any’ Clause (d) of proviso to section 47 (Xiii) specifies that the aggregate of the share holding of the partners of the firm in the company should not be less then 50 per cent of the total voting power in the company and such share holding should continue to be as such for a period of 5 years from the date of succession. Thus, such condition is to be satisfied for the five years from the date of succession. [Para 48]

Therefore, if all the conditions mentioned in proviso to section 47 (Xiii) are not satisfied at the time of succession, then capital gain would be chargeable in the hands of the firm and section 45 would not be excluded. However, if any of the conditions mentioned in the proviso to section 47(Xiii) is not complied then section 47A would be applicable. In the instant case, shareholders of the company were the persons, who were partners of the assessee firm. In the grounds of appeal, it had been mentioned that if there was non-compliance of conditions of section 47 (Xiii), then the tax should be charged on the successor company. Therefore, the capital gain arising in the instant case would be chargeable in the hands of the successor company and it was not chargeable in the hands of the assessee-firm. [Para 49]

EDITOR’S NOTE

Where the Assessing Officer processed under section 143(1) the returns of income filed by the assessee-company and issued the intimation and subsequently having noticed that the assessee had claimed excessive depreciation reopened the assessments of the assessee for the assessment years 2001-02 and 2002-03, since Explanation 2 (b) to section 147 mentions, if Assessing Officer notices that the assessee claimed excessive deduction, then it will be a deemed case where income chargeable to tax has escaped assessment and further since the requisite belief had been demonstrated, the Assessing Officer was justified in his action.

2. Where the assessee, a partnership firm, was succeeded by a company on 1-5-1999 and the successor company claimed depreciation on the block of assets for the assessment year 2001-02, since provisions of section 43(6)(c) provides that WDV of the block of assets is to be taken at the beginning of the previous year and to be further adjusted as per clauses (A), (B) and (C) of section 43(6)(c) and further since, in the immediately proceeding year, W.D.V of the assets in the hands of company at the close of year was based on the value of assets taken by the firm for the purpose of depreciation, for the assessment year 2001-02, WDV of block of assets was to be taken as closing WDV in the hands of company for the assessment year 2000-01 subject to adjustments as mentioned in section 43(6)(c).