P.M Jagtap, A.M:— This appeal is preferred by the Revenue against the order of learned CIT (Appeals)-XIX, Mumbai dated 08-02-2008 and in the solitary ground raised therein, the Revenue has challenged the action of the learned CIT (Appeals) in holding that the assessee was eligible for exemption u/s 47(xiii) of the Income-tax Act, 1961.
2. The assessee in the present case is a partnership firm engaged in the business of entertainment industry. In response to a notice issued by the AO on 20-03-2006 u/s 148, the return of income was filed by it on 30-10-2006 declaring total income at Nil. In the said return of income, capital gains arising from transfer of capital assets to Star Ya Kalakar Com Ltd. amounting to Rs. 29,89,35,432/- was claimed to be exempt by the assessee under the provisions of section 47(xiii). It was submitted on behalf of the assessee before the AO that a limited company by the name Star Ya Kalakar Com. Ltd. was incorporated under Chapter IX of the Companies Act, 1956 to take over the assets and running business of the assessee firm. It was submitted that the certificate of incorporation was issued by the Registrar of Companies on 18-04-2000 and the assets of the assessee firm were taken over by the said company at the value estimated by the registered valuer as per the valuation report. It was submitted that the newly incorporated company had allotted only the equity shares of Rs. 50 lakhs to the partners of the assessee firm and there was no other consideration received by the assessee firm or its partner from the said company. It was contended that the transfer of assets and business of the assessee firm to the newly incorporated company under Chapter IX of the Companies Act, 1956 thus did not amount to “transfer” in view of the provisions of section 47(xiii) of the Income-tax Act, 1961. In support of this stand, the assessee also filed relevant documentary evidence in the form of copy of partnership deed, valuation report, memorandum and articles of association of the new company etc.
3. From the details and documents furnished by the assessee, it was noticed by the AO that two of the partners of the assessee firm, namely, Sanam Foundation and Neha Foundation holding 6% share of profit each had not become shareholders of the new company. He also noted from the Memorandum of Association of the said company that shares in lieu of share of profit of the said two partners in the partnership firm were allotted to other partner, namely, Amin Mehdi Merchant. According to the AO, the condition laid down in section 47(xiii)(b) i.e all the partners of the firm should be the shareholders of the new company in the same ratio was not fulfilled. He, therefore, required the assessee to explain as to why the transfer of its assets and business to the company should not be treated as transfer and capital gain u/s 45 arising from the said transfer should not be brought to tax. In reply, the following explanation was offered by the assessee:
1. “The assessee firm was constituted by 10 partners. All the partners were allotted shares of a limited company in the ratio as prescribed in section 47(xiii) of the Income Tax Act. Among the 10 partners, two of the partners were Trusts by the name Neha Foundation and Sanam Foundation. The said trusts were partners, is clear and bears out from the partnership deeds submitted to you. The said trusts were represented by its Trustee Mr. Amin Merchant in the assessee firm. After the incorporation, the company issued following share certificates in respect of the said two trusts and Mr. Amin Merchant:
Share Certificate No.
Regd. Folio No.
No. of Shares
Name of Shareholder as appearing on the share certificate.
1
1
3,00,000
Sanam Foundation Represented by Amin M. Merchant.
2
1
3,00,000
Neha Foundation Represented by Amin M. Merchant.
3
1
10,50,000
Amin M. Merchant.
The copies of the above share certificates and the copies of the relevant pages of the statutory register has been submitted to you and the original thereof were produced before you for verification.
2. At the cost of repetition, it is submitted that under the Companies Act, certain entities, including trusts can not be member/shareholders and therefore Mr. Amin Merchant's name is entered into Register of Members maintained by the Company. Your attention is also drawn to the fact that in the remarks column on Folio No. 1 of the Register of Members, it is mentioned hat “it includes 3,00,000 shares issued to Sanam Foundation” and “3,00,000 shares issued to Neha Foundtion”.
3. We have also submitted the copies of the income tax returns submitted by Mr. Amin Merchant in his personal case. He has also attached and submitted is personal statement of affairs as on 31.3.2002 and 31.3.2004 In the said statement of affairs his shareholdings in the company Star Ya Kalakar. Com Limited is shows as 10,50,000 shares at Rs. 6.30 Crores. This shows that Mr. Amin Merchant is not the owner holder of balance 6,00,000 shares. Since the said trusts did not have any taxable income they have not been filing their returns of income. Their respective statement of affairs as on 31.9.2006 are enclosed herewith.”
4. The explanation offered by the assessee as above was not found satisfactory by the AO for the following reasons given in the assessment order:
i) The Memorandum of Association clearly states the list of subscribers to the formation of the company along with the respective shareholding. The list doesn't contain the names of ‘Neha Foundation’ and ‘Sanam Foundation’. Mr. Amin Merchant to hold 16,50,000 shares.
ii) The register of members also doesn't contain the names of ‘Neha Foundation’ and ‘Sanam Foundation’. Though there is a remark next to the name of Shri Amin Merchant that he is holding 3,00,000 shares each on behalf of ‘Neha Foundation’ and ‘Sanam Foundation’.
iii) The assessee has taken a plea that the trust cannot become a member of the company. However, it has submitted the share certificates issue din the name of ‘Neha Foundation’ and ‘Sanam Foundation’. Assessee did not furnish any explanation as to how the share certificates were issued to these two trusts when these trusts namely ‘Neha Foundation’ and ‘Sanam Foundation’ are not shareholders at all by the own submission of the assessee.
iv) The assessee has taken a stand that Mr. Amin Merchant though allotted 16,50,000 shares, he is the owner of only 10,50,000 shares and the balance 6,00,000 shares are held by him on behalf of ‘Neha Foundation’ and ‘Sanam Foundation. In this regard, the copies of returns filed by Mr. Amin Merchant have been perused. For the A.Y 2001-2002, there is not mention of investments in Star Ya Kalakar. Com Ltd., at all. Same is for the A.Y 2002-2003. The assessee was also asked to furnish the copy of Trust Deed and the Accounts of Trust by name of ‘Neha Foundation’ and ‘Sanam Foundation’. But the assessee did not furnish the same.”
5. For the reasons given above, the AO held that the shares of the new company were never allotted to the two trusts, namely, Neha Foundation and Sanam Foundation even though the said trusts were partners in the assessee firm. He held that the said partners of the assessee firm thus did not become shareholders in the company which has taken over the assets and the business of the assessee firm and there was a breach of condition stipulated in section 47(xiii)(b) of the Act. He held that all the pleas taken by the assessee regarding restrictions in the Company's Act whereby private trusts are not allowed to hold shares in the company and related documentation was an after thought just to fit in the facts of the case to avail the benefits of exception laid down u/s 47(xiii)(b). He, therefore, disallowed the claim of the assessee for exemption u/s 47(xiii)(b) and brought to tax long term capital gain arising from the transfer of assets and business of the assessee firm to newly incorporated company in the assessment completed u/s 143(3) read with section 147 vide an order dated 26-12-2006.
6. Against the order passed by the AO u/s 143(3) read with section 147, an appeal was preferred by the assessee before the learned CIT (Appeals) and the submissions made before the AO were reiterated on behalf of the assessee during the course of appellate proceedings before the learned CIT (Appeals) in support of his claim for exemption u/s 47(xiii). The learned CIT (Appeals) found merit in the said submissions. According to him, there were no specific reasons given by the AO to ignore or overcome the said submissions. He noted that names of the two trusts who were partners of the assessee firm had been mentioned both in the share certificates as well as in the register of members of the new company. He held that the assessee thus had complied with the regulations of the Companies Act and at the same time ensured that the share of beneficial ownership between various partners remained the same while deciding the share holding of the converted company. He held that there was nothing in the Income-tax Act, 1961 prohibiting the trustee to hold the shares on behalf of the trust and since Shri Amin M. Merchant had held the shares of Sanam Foundation and Neha Foundation, who were actually the beneficial owners of the shares, the conditions stipulated in section 47(xiii)(b) were fully satisfied. Accordingly the claim of the assessee for the said exemption was allowed by the learned CIT (Appeals). Aggrieved by the order of the learned CIT (Appeals), the Revenue has preferred this appeal before the Tribunal.
7. We have heard the arguments of both the sides and also perused the relevant material on record. It is no doubt true that Sanam Foundation and Neha Foundation, who were the partners in the assessee firm being private trusts could not be allotted the shares of the new company directly in their name. As claimed by the assessee before the authorities below as well as before us, shares of the new company which were to be allotted to the said two trusts to comply with the conditions stipulated in section 47(xiii)(b), therefore, had been issued in the name of Shri Amin Mehdi Merchant who was the trustee in the said two trusts. According to the assessee, the said shares, however, were held by Amin Mehdi Merchant on behalf of the two trusts who were beneficial owners of the said shares. At the time of hearing before us, the learned DR has contended that if the said two trusts were the beneficial owners of the shares of the new company and the said shares were issued in the name of the trustee just to comply with the requirement of the Companies Act, the investment made in the shares of the new company should have been reflected in the books of account as well as balance sheets of the said trusts. In this regard, he invited our attention to paragraph No. 4.6(iv) on page No. 6 of the assessment order to point out that the assessee did not furnish the copy of trust deed and accounts of the two trusts to show that the investment in shares of new company was reflected therein. In reply to a query raised by the Bench in this regard, the learned counsel for the assessee, however, has submitted that the shares of a new company of which the two trusts were beneficial owners have been duly reflected in the accounts of the said trusts and he is in a position to establish the same by filing the relevant record. In our opinion, this is a crux of the matter inasmuch as if it is established that the shares of the new company claimed to be beneficially owned by the two trusts are reflected in the accounts of the said trusts, the condition stipulated in section 47(xiii)(b) can be taken as fulfilled. We, therefore, consider it fair and proper and in the interest of justice to restore this issue to the file of the AO with a direction to give an opportunity to the assessee to establish its case on the basis of relevant record. The AO is also directed to consider other legal submissions sought to be raised on behalf of the assessee in support of its case on this issue relying on the provisions of section 47A and decide this issue afresh in accordance with law.
8. In the result, the appeal of the Revenue is treated as allowed for statistical purposes.