PER U.B.S. Bedi, J.M. This appeal of the assessee is directed against the order passed under section 263 by the ld. CIT I, Chennai dated 20.03.2009 relevant to the assessment year 2004-05.
2. During the examination of assessment records for the year under consideration, the ld. CIT has find that the order of the Assessing Officer is erroneous and pre-judicial to the interest of the Revenue and while invoking the provisions of section 263 issued noticed to the assessee and reasons for issuing such notice are as under: The assessee-company had taken over the business of a partnership firm namely Updater Services. Under section 47(xiii) of the Income Tax Act any transfer of capital asset or any tangible asset by a firm to a company as a result of succession of the firm by a company shall not be subject to capital gains tax provided certain conditions are met. One of the conditions is that partners of the firm do no receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. The assessee-company has made a payment of `.1.25 Crore in ITA No.840/Mds/09 2 consideration of the takeover of the firm and this amount was classified as goodwill in the accounts of the company. Therefore, the exemption given u/s 47(xiii) will not apply and the income should be assessed in the hands of the assessee-company as deemed income under Sec.47A(3). The assessment has been completed by the Assessing Officer without verification of application of Sec.47A(3) in the case of the assessee company.
3. The assessee filed its reply and the ld. CIT has discussed the reply and issue in hand as under: The assessee has objected to the proceedings on the ground that the assessee's case is not governed by Sec.47(xiii), as it is not a case of succession but conversion of partnership firm into a company. According to the assessee, there is no transfer of asset. The assessee has relied on the decision of Bombay High Court in the case of CIT Vs. Texpin Engineering Manufacturing Works 263 ITR 345. The assessee has also claimed that the Assessing Officer's decision cannot be considered to be erroneous following the decision of Supreme Court in the case of Malabar Industries Co. Vs. CIT (243 ITR 83) and therefore CIT cannot exercise his jurisdiction under section 263. On merits the assessee contended that even before the conversion of the partnership into company, the assessee had allotted to the share holders, shares equal to the credit balance including share of goodwill. Thus there was no payment by the company to the erstwhile partners in consideration of the takeover of the firm. And then the ld. CIT concluded as under: I have carefully considered the assessee's contentions. In my view, the decision in the case of Malabar Industries Co. Vs. CIT is not applicable to the present case as there is no conscious decision taken by the Assessing Officer choosing either of the two alternative views. There is no discussion about this issue in the assessment order or in the correspondence in the course of the assessment proceedings apart from a factual statement in the assessment order that the assessee company is said to have been formed on conversion of partnership from in to a company. The assessee's contention that this is not a case of succession is also not correct. The assessee has clearly stated in the Part II Notes on accounts of Schedule XVII that the company was incorporated on 13.11.2003 under Part IX of the Companies Act for carrying on and continuing the business of partnership firm namely Updater Services and has allotted one lakh equity shares to the partners. If it is a case of conversion of firm into company, the ITA No.840/Mds/09 3 assessee should have filed return in the status of firm for the period from 01.04.2003 to 12.11.2003 in the status of the firm. It has been ascertained from the Assessing Officer having jurisdiction over the case of the firm that the firm has not filed any return. In the case decided by the Bombay High Court (supra) relied on by the assessee, action to assess the capital gains was taken in the case of the firm and the firm had filed return from 1.4.1995 to 7.11.1995, the date on which it was said to have been dissolved and converted into a company. The assessee has admitted that the return in the status of firm has not been filed and one return alone has been filed for the entire twelve months from 01.04.2003 to 31.03.2004 in the status of the company. The tax deducted at source on payment made to the firm has been given credit in the case of the assessee company. As the books of accounts in the status of the firm do not appear to have been maintained, the assessee is unable to corroborate its claim that it has allotted the partners their share of goodwill before the take over of the business of the firm by the company. The Assessing Officer's order is erroneous as well as prejudicial to the interest of revenue as he has completely overlooked the provisions of Sec.47(xiii) and also Sec.47A(3) which clearly provides that any amount received by the partners in excess or where there is any violation of conditions prescribed u/s,47(xiii), the capital gains arising from the transfer shall be deemed to be the income of the previous year in which the requirement of the proviso to clause (xiii) of Sec.47 are not complied with. The assessing Officer's order therefore is set aside with a direction to verify whether the assessee has complied with the provisions of sec.47(xiii) and if not, apply the provisions of Sec.47A(3) in accordance with law. It would be open to the assessee to put forth any claim on merits before the Assessing Officer. If the capital gain arising on transfer is admitted by the firm by filing the return and it has not availed the exemption u/s.47(xiii), the Assessing Officer may take a decision in accordance with law to avoid double taxation of income both in the case of the firm as well as in the company.
4. Aggrieved by this order of the ld. CIT, the assessee has come in appeal and submitted following grounds: I JURISDICTION: 1.1 The order of the Commissioner of Income-tax passed under sec.263 is contrary to law, erroneous and unsustainable on the facts of the case. ITA No.840/Mds/09 4 1.2 The CIT erred in directing the officer to re-examine the provisions of sec.47(xiii) and 47A(3) in as much there was neither any error nor prejudice caused to the Revenue in the assessment completed under sec.143(3). 1.3 The CIT failed to appreciate that in the course of assessment proceedings, the officer had considered the facts of the assessee's case and was satisfied that the conversion of Firm into Company does not fall within the meaning of 'transfer' u/s.2(47) for application of sec.45 and hence there was no error in the order warranting action u/s.263 of the Act. 1.4 The CIT further failed to appreciate that in as much as the tax rate was the same for the Firm and Company, the take over the Firm's business by the Company did not result in any prejudice to the interests of the Revenue and hence the action u/s.263 lakhs in jurisdiction. 1.5 The CIT further failed to appreciate that revision under sec.263 is not permissible merely because he disagrees with the conclusion reached by the officer and therefore the directions given to the officer to re-examine and assess is untenable in law. 1.6 The CIT further failed to appreciate that in the light of the Supreme Court decision in Malabar Industries Co. (243 ITR 83), the proceedings u/s.263 are untenable in law. 1.7 The CIT, in any event, ought to have seen that the assessee's case is of conversion falling under chapter IX of Companies Act, 1956, and that the question of 'transfer' does not arise since it is a statutory vesting of properties of Firm on the Company and hence dropped the proceedings u/s.263 considering that the officer in his order passed u/s.143(3) had rightly applied the provisions of the Act. II MERITS 2.1 The CIT erred in his directions to the officer to examine and apply the provisions of the Act with regard to the conversion of the Firm, M/s Updater Services into a Private limited company - Updater Services Private Limited under Part IX of the Companies Act, 1965. 2.2 The CIT failed to appreciate that on the conversion of Firm to a Private limited company, the entire business and properties of the Firm vested with the company statutorily and there is no transfer within the meaning of section 2(47) and consequently provisions of section 45(1) would not be attracted in the assessee's case. 2.3 The CIT erred in setting aside the order of the ITO and directing ITA No.840/Mds/09 5 him to verify the compliance with the provisions of section 47 (xiii) and to apply the provisions of section 47A(3). 2.4 The CIT failed to appreciate that the conditions enumerated in the Proviso to sec.47(xiii) are satisfied and hence the application of sec.47A(3) to the facts of the case does not arise. 2.5 The CIT has erred in not relying on the following judicial precedents relied upon by the appellant in the course of the proceedings under section 263: * CIT vs. Texspin Engg. and Mfg. Works (263 ITR 345) * ACIT vs. Unity Care and Health Services 286 ITR 121 I MISCELLANEOUS GROUNDS 3.1 For these and such other ground or grounds as may be raised during the course of the hearing, it is humbly prayed that this Honourable Tribunal may be pleased to set aside the order passed by the learned CIT under section 263 dated 20 March 2009 and thus render justice. 3.2 The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all relief consequential thereto.
5. The assessee challenged such action of the ld. CIT while relying upon the decision of the Honble Supreme Court in the case of Malabar Industries Co. 243 ITR 83, it was pleaded for quashment of the order of the ld. CIT. The assessees counsel further pleaded that since the assessee is transferee and not transferor, so the assessee does not come within the purview of the taxability and the order of the ld. CIT could not be said to be erroneous at all. Therefore, invocation of provisions of section 263 is unwarranted and uncalled for and moreover, the Assessing Officer has also taxed the same payment in firms case of M/s. Updaters Services and by filing copy of the order of the assessment dated 31.12.2009, it was pleaded that same amount has been taxed by the Assessing Officer in the case of the firm, so there was no occasion for the ld. CIT to treat ITA No.840/Mds/09 6 the order as erroneous as there cannot be double taxation and the same may be quashed.
6. The ld. DR strongly pleaded that the order of the assessment passed in the case of the assessee is dated 17.11.2006, in that order, there is no mention about the issue on which provisions of section 263 have been invoked. There is no specific provision provided under section 47(xiii) of the Income Tax Act, which provide that any transfer of capital asset or any tangible asset by the asset by the firm to a company as a result of succession of the firm by a company shall not be subject to capital gains tax provided certain conditions are met and one of the conditions is that partners of the firm do not receive any consideration or benefit directly or indirectly in any firm or manner other than by way of allotment of shares in the company. The company has made the payment of `.1.25 crore in consideration of the takeover of the firm and this amount was classified as goodwill in the accounts of the company. Therefore, the exemption given under section 47(xiii) will not apply and income should be assessed in the hands of the company as deemed income under section 47A(3). Since the Assessing Officer without verification of the application of the section 47A(3) has completed the assessment, therefore this makes the order to be erroneous. Moreover, the order of assessment in the case of the firm as filed by the assessee during appeal proceedings was passed on 31.12.2009, so this document was neither in existence nor before the ld. CIT while invoking the provisions of section 263. Therefore, the ld. CIT is justified in setting aside the order of the Assessing Officer and restoring the matter back on his file with the direction to verify whether the assessee has complied with the provisions of section 47(xiii) and if ITA No.840/Mds/09 7 not to apply the provisions of section 47A(3) in accordance with law and it was given option to put forth any claim before the Assessing Officer and capital gains arising on transfer is admitted by filing return and is not availed the exemption under section 47(xiii) the Assessing Officer may take a decision in accordance with law to avoid double taxation of income both in the case of firm as well as in that of the company. So, for want of proper enquiry and application of mind by the Assessing Officer, while making the assessment, the issue has been set aside for considering the same afresh in the light of the directions issued so it cannot be said that the ld. CIT is not reasonable in passing such order, whose action being legally correct needs to be upheld, which may be upheld.
7. After having heard both the sides, considering the material on record, we find that the Assessing Officer passed the assessment order dated 17.11.2006 under section 143(3) and para 5 of the order contains computation of income and tax liability, whereas operative portion from para 1 to 4 reads as under: The assessee company is engaged in the business of integrated facility management servicing. It filed the return of income for the assessment year 2004-05 on 01.11.2004 admitting an income of `.1,58,54,482/-. The return was processed under sec.143(1) on 31.03.2006. The case was selected for scrutiny and notice u/s.143(2) of the Act was issued.
2. In response to the notice, Shri L.Sukumar, C.A. appeared and filed the details called for. After examining the details filed by the representative and after discussing the case with the representative the assessment is finalised.
3. The assessee which was running the business since 1990 as a Partnership Firm was converted into a Private Company w.e.f. 13.11.2003. It is claimed by the assessee's representative that there was no transfer and that the continuity of business has been established. The assessee therefore admitted the income for the whole year in the hands of the Company.
4. On the perusal of the accounts it is noticed that the assessee has ITA No.840/Mds/09 8 claimed substantial expenses towards establishment expenses and administrative expenses. A test check of the expenses was made and some of the expenses are supported by mere self made vouchers. The veracity of the expenditure in such expenses could not be verified. Therefore an estimated expenditure of `.10,00,000/- is disallowed and added to the total income.
8. From the above reproduced portion of the order of assessment it transpires that the issue raised in the notice under section 263 and final order passed by the ld. CIT, the Assessing Officer has not considered such issue at all and the ld. CIT has remanded such issue to the file of the Assessing Officer giving direction to examine the issue afresh. From the contents of the order it becomes amply clear that the enquiry has not been conducted by the Assessing Officer and there is no application of mind of the Assessing Officer with regarding to the issue raised in notice/order under section 263 and as per non-conduct of enquiry and non-application of mind in relation to the issue makes the order to be erroneous and pre-judicial to the interest of Revenue. The Honble Supreme Court in the case of Malabar Industries Co. Ltd. vs. CIT 243 ITR 83 has opined as under: . He accepted the entry in the statement of account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous was irresistible. The High court had rightly held that the exercise of jurisdiction by the Commissioner under section 263(2) was justified. 8.1 Useful reference in this regard can further be made to the Honble Madras High Courts decision in the case of Express Newspapers Pvt. Ltd. vs. CIT 255 ITR 137 has held as under: The Commissioner has the discretion to set aside the assessment in while or in part. The exercise of that discretion is not to be ordinarily interfered with unless the facts show that the ITA No.840/Mds/09 9 exercise of the discretion itself is required to be characterized as arbitrary. 8.2 Similarly, in the case of CIT vs. Kohinoor Tobacco Products P. Ltd. reported in 234 ITR 557, the Honble Madhya Pradesh High Court has held as under: . This failure on the part of the Assessing Officer to make necessary enquiry rendered the assessment erroneous and also prejudicial to the interests of the Revenue 8.3 Further, the Honble Madhya Pradesh High Court in the case of CIT vs. Mahavar Traders 220 ITR 167 has held as under: Held that the Income-tax Officer should have examined the matter in the light of the conditions mentioned in both the sections before granting relief. The Commissioner of Income-tax had not given any finding but only remanded the case to the Income-tax Officer for making assessment afresh. The Tribunal instead of approaching the matter in the proper prospective, had on their own started making enquiries and found that the order passed by the Income-tax Officer was correct. This was erroneous. The order passed by the Commissioner of Income-tax was valid. 8.4 Yet, the Honble Delhi High court in the case of Duggal and Co. and CIT,
220 ITR 456, has held as under: The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is incumbent on the Income-tax Officer to further investigate the facts stated in the return, when circumstances would make such an inquiry product and the word erroneous in section 263 of the Income-tax Act, 1961, includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts state therein are assumed to be correct. 8.5 In another case titled Swarup Vegetable Products Industries Ltd. vs. CIT
187 ITR 412, the Honble Allahabad High Court has observed as under: ITA No.840/Mds/09 10 It is beyond dispute that, under section 263 of the Income- tax Act, 1961, the Commissioner has power to set aside the assessment order and send the matter for fresh assessment if he is satisfied that further enquiry is necessary and that the order of Income-tax Officer is prejudicial to the interests of the Revenue.
9. In view of the ratio of the above noted decisions, non-conducting of proper enquiry renders the order erroneous as well as prejudicial to the interest of the Revenue and nothing has been placed on record to show as to how the order of the ld. CIT is not valid or proper. Therefore, in view of the facts of the case and precedents relied upon and discussed as above, we are of the view that the action of the ld. CIT is justified and does not call for any interference at this level. As such, the same is confirmed and the appeal of the assessee being devoid of any merit is dismissed.
10. In the result, appeal of the assessee gets dismissed. Order pronounced on 29.07.2011. Sd/- Sd/- (N.S. SAINI) ACCOUNTANT MEMBER (U.B.S. BEDI) JUDICIAL MEMBER Vm/- Dated : 29.07.2011. Copy To: The assessee//A.O./CIT(A)/CIT/D.R.