P.K. Bansal, Accountant Member - The Appeal as well as the Cross Objection has been filed against the order of CIT(A) dt. 30.11.2012. The Revenue has taken the following effective grounds of appeal in their appeal.
"1. |
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The CIT(A) erred in deleting the addition of Rs. 961,38,34,680 made by the AO. It is that addition made by the AO be restored for the various reasons discussed in the assessment order. |
2. |
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When the assessee has received shares from the company far exceeding the book value of assets or net worth of proprietary concern, does it not amount to violation of proviso(c) of clause (xiv) of Section 47 and therefore, is not the AO's action correct in denying exemption/relief u/s 47 (xiv) r.w.s. 50B ? |
3. |
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Without prejudice to the above and alternatively, are not the transactions sham, when considered from the AO's contention that the assessee and succeeding company have devised scheme of tax planning for tax avoidance ? Is McDowell decision not applicable ? Should it not be recognized that tax avoidance has occurred when neither the assessee nor the company have paid tax on surplus of Rs. 961,38,34,680. |
4. |
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The CIT(A) erred in not appreciating the following judicial decisions which are squarely applicable to the facts of the case as the object of the assessee in converting the proprietary concern into company is avoidance of tax as the assessee transferred/sold the undertaking whose net worth was Rs. 1,61,65,320 for Rs. 963 crores to the company, and hence even if the transaction is genuine it is to be ignored as the object is tax avoidance by claiming the exemption u/s 47(xiv) r.w.s. 50B. The judicial decisions which are applicable to the facts of the case are as under: |
(a) |
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Hela Holdings (P.) Ltd. v. CIT 263 ITR 129 (Cal.) |
(b) |
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Twinster Holdings Ltd. v. Anand Kedia, Dy. CIT 260 ITR 6 (Bom.) |
(c) |
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Mannalal Nirmal Kumar Surana v. CIT [2003] 263 ITR 328 (Raj.) |
(d) |
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Inland Revenue Commissioner v. Burma Oil Company Ltd. [1982] (STC) 39 HL. |
5. |
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The CIT(A) has erred in restricting the disallowance u/s 14A to Rs. one lakh as against Rs.3,05,423 disallowed by the assessing officer without considering the provision of section 14A of the I.T. Act r.w Rule 8D." |
2. In the Cross Objection, the Assessee even though has taken ground nos. 1 to 2.8 but the only issue involved is whether the CIT(A) erred in partially confirming the disallowance made under Section 14A r/w Rule 8D by the Assessing Officer. The issue involved in ground nos. 1 to 4 taken by the revenue is whether the provision of Sec. 47(xiv) are applicable in the case of the Assessee when the Assessee has transferred the whole of the business to a private limited company.
3. The brief facts of the case are that the Assessee is engaged for the several years in carrying out the real estate business as proprietorship in the name and style of J.M. Developers Corporation by acquiring the land, developing the same by sub-dividing the same into plots and selling the said plots with or without constructing residential and commercial premises thereon. The land so acquired or negotiated for development and sale are held by the Assessee as stock in trade. During the year, the Assessee filed the return showing income of Rs. 7,36,10,066/- on 30.9.2009 against which the assessment was completed under Section 143(3) on 29.12.2011 at the total income of Rs. 969,01,59,464/-. The Assessing Officer during the course of the assessment noted that the Assessee transferred on 31.3.2009 all the assets and liabilities of its proprietorship concern to a private limited company, M/s. Mathias Constructions Pvt. Ltd. as per the Deed of Succession dtd. 31.3.2009. In this Deed of Succession, the Assessee has valued the assets and liabilities at Rs. 963 crores and against the entire consideration, the Assessee was allotted 1,80,000 equity shares of Rs. 50/- each at a premium of Rs. 53,450/- per share. The audited report under Section 50B(3) in form no. 3CEA working out the aggregate value of the total assets of the undertaking at Rs. 37,41,83,033/- and value of the liabilities relating to the undertaking at Rs. 35,80,17,713/- was worked out and accordingly, the networth of the proprietorship concern of the Assessee was shown at Rs. 1,61,65,320/-. The Assessee claimed that the provisions of Sec. 47(xiv) were applicable in the case of the Assessee which provides that the provision of sec. 45 shall not apply to the transfer so made. The Assessing Officer took the view that the Capital Gains are chargeable to tax under Section 45 and Capital Gains arising under Section 45 are not exempt under Section 47(xiv). Sec. 47(xiv) does not exempt income arising of Capital Gains if same are transferred at a higher value than the value appearing in the books. The Assessing Officer also took the view that receipt of additional consideration by way of allotment of shares over and above the proprietor's share capital in the proprietary concern when assets are transferred to the private limited company amounts to violation of conditions laid down under Section 47(xiv) of the Income Tax Act. The Assessing Officer held that one of the conditions under Sec. 47(xiv) is that the proprietor should not receive any direct or indirect benefit in any form or manner or consideration other than by way of allotment of shares. If the proprietor is getting any additional income/profit than what is due as per the books of accounts of proprietorship, it amounted to benefit directly or indirectly in any form or manner and is covered within the ambit of above section even though the said benefit is received by way of shares. Ultimately, the Assessing Officer took the view that the provisions of sec. 47(xiv) were not applicable in the case of the assessee and he treated the profit of Rs. 961,38,34,680/- as business income and added to the income of the assessee. In this regard, the Assessing Officer also relied on the decision of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC). The Assessee went in appeal before the CIT(A). The CIT(A) deleted the addition by observing as under :
"I have gone through the facts of the case, contents of the assessment order and written submission of the assessee. An expert group was constituted to submit a report for rationalization and simplifying the Income-Tax law. Such report is available at 224 ITR 149 (statute). The expert group suggested new provision to help the business organization. The expert group made the following recommendation in respect of business re organization relevant to conversion/ succession of business by a company from firm.
"The process of globalization has increasingly made business re-organization inevitable for developing a globally competitive edge and this process has to be given the requisite impetus. The group, therefore, is of the view that re-organization must be encouraged where they are in consonance with the objective of economic development and not where they are merely devices engineered to secure tax advantage. The need for re-organization for increasing the size of operation, sharpening of the technological edge, spurring the urge for enhancing core competence, etc., it is felt should not be impeded because of consideration of provisions in the taxing statute. It is, therefore, proposed that while providing for re-organization without tax consequence, adequate safeguards will provided to prevent abuse of the provisions. In line with this thinking, the following are proposed:
In order to encourage conversion of sole proprietary business and partnership firms into companies, capital gains resulting from such conversion will be exempt from tax".
Sec. 47(xiii), 47(xiv) and 47 A were introduced by finance (No.2) Bill, 1998. Such provisions were introduced in view of the recommendation of the expert group. In the memo explaining the provisions of Finance Bill No.2, it was mentioned as under:
"Under the existing provision of the Income-Tax Act, business re-organization has definite tax applications. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available to the successor business entities. However, in case of amalgamation, capital gains tax is not levied and losses and absorbed depreciation are allowed to be carried forward under certain conditions. The experts group, in the Draft Income-tax Bill, has reorganized the need to encourage the business reorganizations when they are in consance with the objective of Economic development and are not merely device to secure tax advantage.
The bill proposes to allow tax benefits in the case of business re-organization where a firm is succeeded by company in the business carried by it and a proprietary concern is succeeded by a company.
It is proposed that the transfer of building, machinery, plant, furniture or intangible assets to the company shall not be regarded as transfer to attract levy of capital gains subject to certain condition. The conditions are:-
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All assets and liabilities of the firm become the asset and liability of the company. |
(2) |
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The partners of the firm become the shareholders of company in the same proportion in which they hold shares in the firm |
(3) |
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No considerations other than share shares arise to partners and; |
(4) |
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The aggregate shareholding of the partners in the company is at least 5 0% for a period of 5 years from the date of succession. Similar conditions are also stipulated in the case of the sole proprietary concern being succeeded by a company". |
Whether any time limit is provided for compliance of conditions mentioned in proviso to sec 47(xiii), one has to consider the provisions of section 47A. as per sec. 47A(3) if any of the condition laid down in proviso to sec 47(xiii) are not complied then, the amount of profit and gains arisen from transfer of such capital assets not charged u/s 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 sec 47(xiii) are not complied with. Hence, the requirements of the proviso to sec 47(xiii) are to be complied with in all the succeeding years. Sec. 47A(3) does not refer that this will be applicable in the case when clause (d) of proviso to sec 47(xiii) is not complied in succeeding five years. The language of sec 47 A(3) clearly shows that the condition as mentioned in clause (d) of proviso to sec 47(xiii) is to be satisfied for all the succeeding previous years. It means that the shareholder should hold the shares in the same proportion, in which, their capital stood in the books of the firm.
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There is a de facto and legal succession of the proprietary business by a company. |
(b) |
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The condition prescribed under clause (a) to (c) of sec 47(xiv) are fulfilled by the appellant. |
(c) |
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The revaluation of the assets done by the appellant for the purpose of transfer to the company is not explicitly prohibited by sec. 47(xiv) |
(d) |
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The amendment effected to sec 49(1)(e) makes the revaluation of no consequences to the tax impact as the cost in the hand of the company remains the same as that in the hands of the appellant. |
(e) |
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There is no benefit to the appellant other than consideration and that also has been paid only by way of allotment of shares. |
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There is no justification for holding the income as the business income in any case. |
(g) |
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There is no room left to apply the decision of McDowell as exemption for succession is being promoted by the wisdom of parliament and sec 47(xiv) is introduced with the due care to prevent any mischief. |
In view of the detailed discussion, taking into considerations of the written submission, the case laws referred and relied by the AO and the appellant and considering the latest changes made to the relevant provisions of the IT Act and the recommendations of the expert group which categorically mentioned that the AO' s version that sec. 47(xiv) is not applicable and the assessee's transaction of succession of the proprietary concern by the limited company which attract the sec 50-B of the IT Act is not appropriate. Hence, the addition made by the AO Rs. 961,38,34,680/- is deleted, and the assessee's ground of appeal is allowed."
4. The learned DR before us relied on the order of the Assessing Officer and contended that by transferring the undertaking to a private limited company for a consideration which is much more than the networth tantamounts to benefit derived during the course of business. The Assessing Officer has rightly treated the income so derived by the assessee by transferring the business to a private limited company even though consideration is received by allotment of shares is a business income. Reliance was also place to the decision of Mcdowell & co. Ltd. (supra) for the proposition that this is for the purpose of tax evasion.
5. The Learned AR on the other hand vehemently contended that it is not the business of the assessee to deal with the purchase and sale of the undertaking. The assessee has simply transferred the proprietorship concern to the private limited company and whatever consideration has been received by the assessee, that was received in the form of allotment of share capital. Receipt of additional consideration by way of allotment of shares over and above the proprietor's capital in the proprietary concern when the business is transferred to a private limited company does not amount to violation of conditions laid down under Section 47(xiv). The assessee has not obtained any benefit except the consideration in the form of shares. The Assessing Officer has not pointed out any benefit other than the sale consideration. The consideration received on sale of the undertaking as a result of the succession cannot be regarded to be a benefit. Referring to clause (c) of Sec. 47(xiv) it was stressed that the condition explicitly excludes not only the consideration but also the direct or indirect benefit if it is by way of allotment of shares. In the case of the assessee, there is no direct or indirect benefit other than the consideration received by the assessee by way of allotment of shares. Reliance was placed in this regard on the following decisions:-
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ITAT – Asstt. CIT v. Madan Mohan Chandak [2011] 14 taxmann.com 27/47 SOT 207 (Chennai) |
2. |
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ITAT - Prakash Electrical Co. v. ITO [2008] 22 SOT 382 (Bang) |
3. |
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CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 (SC) |
4. |
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K.V. Mohammad Zakir v. Asstt. CIT [2010] 36 SOT 433 (Cochin) |
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Asstt. CIT v. Nayan L. Mepani [2012] 18 taxmann.com 59/49 SOT 641 (Bom.) |
6. Our attention was also drawn towards the explanatory note of Finance Act (No. 2) of 1998. This note states as under:
"The proposed new clause (xiv) provides that nothing contained in section 45 shall apply to transfer of any building, machinery, plant, furniture or intangible asset to the company where a proprietary concern is succeeded by a company in the business carried on by it, subject to certain specified conditions. The conditions inter alia are that the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company. The shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and shareholding shall continue to so remain for a period of five years from the date of the succession. The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company."
7. It was vehemently contended that the case of the assessee was duly covered by the provisions of Sec. 47(xiv) and there is no violation of the conditions stated therein.
8. We have carefully considered the rival submissions along with the order of CIT(A). We have also gone through various case laws submitted before us. The only issue involved in this appeal is whether the provision of Section 47(xiv) introduced in the Income Tax Act w.e.f. 1.4.1999 to encourage re-organization by conversion of proprietary concerns into companies are applicable or not in the case of the Assessee. It is undisputed fact that the Assessee was carrying on the business in property development in a proprietary concern. It is not the business of the Assessee to dispose off the undertaking. The Assessee during the year under consideration disposed off the proprietorship concern to a private limited company by transferring the undertaking as such and consideration has been received by the Assessee by way of allotment of shares. The Assessee re-valued all the assets and liabilities of the proprietary concern at Rs. 963 crores. The consideration was received by way of allotment of 1,80,000 equity shares of Rs. 50/- each at a premium of Rs.53,450/- per share. The networth of the undertaking i.e. proprietary concern, M/s. J.M. Developers Corporation was Rs. 1,61,65,320/-. Section 45 of the Income Tax Act stipulates that any profit or gain arising from transfer of capital asset shall be chargeable to Income Tax under the head Capital Gains. Such income shall be deemed to be income of previous year in which the transfer takes place unless such capital gains is exempt under Section 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H. The essential feature of taxing capital gains are:-
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there must be a capital asset, |
(b) |
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there must be transfer of a capital asset during the year, |
(c) |
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profit or gain must arise from the transfer, |
(d) |
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capital gain should not be exempt under Section 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H. |
9. 'Capital Asset' has been defined under Section 2(14) to mean property of any kind held by the Assessee whether or not connected with the business or profession. Some of the items had specifically been excluded from the scope of capital asset. The definition of capital asset exempts property of any kind appearing in the exceptions stated therein. Property of any kind includes not only tangible assets but also intangible assets. It could be material in nature e.g. land, building etc. or non-material e.g. tangible rights, leasehold rights etc. The business undertaking owned by the Assessee as such is a capital asset. There cannot be any dispute on this. There must be transfer of the capital asset. The Assessee and the private limited company both are different persons under the Income Tax Act. The Private Limited Company even though an artificial person, but cannot be regarded to be the same person. The transfer in relation to the capital asset has been defined under Section 2(47) which gives an inclusive definition. Sale or exchange of an asset falls within the definition of transfer. In this case, the Assessee has disposed off the industrial undertaking to a private limited company and in exchange thereof, the Assessee received consideration by way of shares in the company. Therefore, this is a clear-cut case of a transfer of an undertaking to a private limited company. Thus, this condition is also satisfied. Section 45 is applicable when there is a profit or gain arising from the transfer. Profit and gains will also include losses. The undertaking has been valued by the Assessee more than the networth, therefore, there is profit and gain and the provision of Section 45 was clearly applicable in the case of the Assessee. It is the case of the revenue that the provisions of Section 45 were not applicable in case of the Assessee. Once a capital gain arises and is chargeable to tax under Section 45, Section 47 provides for certain exceptions according to which certain transactions are not regarded to be transfer so that the provisions of Section 45 will not apply to those transactions. Had the provisions of Sec. 47 not been there, the transactions would have been chargeable to tax in view of the specific provisions of Section 45.
10. Now, the question in the case of the Assessee arises whether the provisions of Section 47(xiv) are applicable or not. Section 47(xiv) was inserted by the Finance Act, 2008 w.e.f. 1.4.1999. This section reads as under :
"47 - Nothing contained in section 45 shall apply to the following transfers ………
(xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company:
Provided that—
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all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company; |
(b) |
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the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and |
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the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; |
11. Sec. 47(xiii), 47(xiv) and 47 A were introduced by finance (No.2) Bill, 1998. Such provisions were introduced in view of the recommendation of the expert group. In the memo explaining the provisions of Finance Bill No.2, it was mentioned as under :
"Under the existing provision of the Income-Tax Act, business re-organization has definite tax applications. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available to the successor business entities. However, in case of amalgamation, capital gains tax is not levied and losses and absorbed depreciation are allowed to be carried forward under certain conditions. The experts group, in the Draft Income-tax Bill, has reorganized the need to encourage the business reorganizations when they are in consonance with the objective of Economic development and are not merely device to secure tax advantage.
The bill proposes to allow tax benefits in the case of business re-organization where a firm is succeeded by company in the business carried by it and a proprietary concern is succeeded by a company.
It is proposed that the transfer of building, machinery, plant, furniture or intangible assets to the company shall not be regarded as transfer to attract levy of capital gains subject to certain condition. The conditions are:-
(1) All assets and liabilities of the firm become the asset and liability of the company.
(2) The partners of the firm become the shareholders of company in the same proportion in which they hold shares in the firm
(3) No considerations other than share shares arise to partners and;
(4) The aggregate shareholding of the partners in the company is at least 50% for a period of 5 years from the date of succession. Similar conditions are also stipulated in the case of the sole proprietary concern being succeeded by a company".
12. The explanatory note of Finance Act (No. 2) of 1998 states as under :
"The proposed new clause (xiv) provides that nothing contained in section 45 shall apply to transfer of any building, machinery, plant, furniture or intangible asset to the company where a proprietary concern is succeeded by a company in the business carried on by it, subject to certain specified conditions. The conditions inter alia are that the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company. The shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and shareholding shall continue to so remain for a period of five years from the date of the succession. The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company."
13. Simultaneously, subsection 3 in Section 47A was also inserted which reads as under :
"47A(3) - Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements of the proviso to clause (xiii) or the proviso to clause (xiv), as the case may be, are not complied with."
14. As per Section 47(xiv) it is apparent that where the sole proprietorship concern is succeeded by a company in the business carried on by it, as a result of which some proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company, the transactions are not treated as transfer subject to the three conditions laid down therein. It is not denied by the revenue that all the assets and liabilities of the same proprietorship concern relating to business immediately before the succession has become the assets and liabilities of the company. It is also not denied that the shareholding of the same proprietor was not less than 50% of the total voting power in the company. The only objection on the part of the revenue is that the Assessee did not comply with the condition no. 3 since the Assessee has received consideration by way of allotment of shares in the company and the value of those shares are much more than the value of the assets as was disclosed in the books of the proprietary concern. In our opinion, the Assessee has duly complied with the condition as stipulated under clause (c) to Section 47(xiv). This proviso only requires that same proprietor does not 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 words 'other than by way of allotment of shares in the company' qualifies the words 'does not receive any consideration or benefit' as well as 'directly or indirectly'. This clearly denotes that proviso (c) permits receiving of consideration or benefit directly or indirectly by way of allotment of shares in the company. It is not a case where the Assessee has received any other consideration or benefit other than the allotment of shares in the company. In view of this interpretation, we do not find any illegality as caused in the order of CIT(A) in deleting the addition made by the Assessing Officer. Clause (c) of Section 47(xiv) does not prohibit receipt of higher number of shares because the re-valuation. Receipt of higher value of shares because of re-valuation of the assets at the time of succession cannot be treated as consideration or benefit received other than by way of allotment of shares. Our aforesaid view is duly covered by the decision of the Mumbai bench in the case of Asstt. CIT v. Nayan L. Mepani (supra) in which while dealing with similar issue, the Hon'ble Tribunal held as under:
"As far as proviso (c) of section 47(xiv) is concerned the revenue has not disputed that the Assessee has not received any consideration apart from allotment of shares in the company. The grievance of the revenue is only that prior to the transfer of the business to the Limited Company revaluation of assets had taken place and that intangible assets were also revalued. According to the revenue by doing so shares were issue at a higher cost to the Assessee and in future when Assessee transfers such shares cost of acquisition of the shares will be higher and consequently there would be a benefit of lesser capital gain on transfer of those shares. At the outset we are not convinced with this line of reasoning adopted by the AO. The section envisages denial of exemption under section 47(xiv) under proviso (c) only in a case where consideration benefit for transfer of the business is received other than by way of allotment of shares in the company. It is not the case of the revenue that any other consideration or benefit directly or indirectly received by the Assessee other than allotment of shares the section does not contemplate a future benefit which the Assessee is likely to get (even such benefit is only contingent and not certain). As rightly contended on behalf of the Assessee receipt of higher number of shares because of revaluation cannot be treated as consideration or benefit received other than by allotment of shares."
15. In the case of Asstt. CIT v. Madan Mohan Chandak [2011] 14 taxmann.com 27/47 SOT 207 (Chennai), (URO) the Hon'ble Tribunal has taken the view that provision of Sec. 47(xiv) shall apply even in case of sale and the provisions of Sec. 50B will not apply. While dealing with the issue, the Tribunal under para 6 of its order held as under :
"6. Even in a case of sale, this section would apply. The term 'sole proprietary concern sells or otherwise transfers any capital asset" purportedly establishes that 'sale' is also exempt. When there is a specific provision i.e. 47(xiv) in the Act dealing with a particular case, it is not advisable to shift to other similarly worded provision. Hence, section 50B will not apply to the facts of the given case. It is true that the assets and liabilities of the proprietary concern cannot become the assets and liabilities of the company before the succession. The term "immediately before" cannot be taken to mean that they should precede the succession. The transfer can take place only at the time of succession and not before, which is impossible. Consequently, we do not find any infirmity in the order of the ld. CIT(A) and we are also of the considered opinion that this transaction has to be treated as a transfer within the meaning of section 47(xiv) and the surplus over the net worth is held to be exempt from income tax."
16. In the case of Prakash Electrical Co. (supra) the issue involved does not relate to the transfer of the undertaking by the proprietorship concern to the company. Therefore, this decision in our opinion will not apply to the facts of this case.
17. In the case of D.P. Sandu Bros. Chembur (P.) Ltd. (supra) the issue before the Hon'ble Supreme Court do not relate to the provisions of Sec. 47(xiv). The issue before the Hon'ble Supreme Court related to the chargeability of the income to tax prior to the amendment of sec. 55(2) arising due to the consideration received for surrendering of tenancy rights. In this case, the Hon'ble Supreme Court ultimately held if the income cannot be taxed under Section 45, it cannot be taxed at all. This decision, in our opinion, is entirely different to the facts relating to the case before us.
18. In the case of K.V. Mohammad Zakir v. Asstt. CIT [2010] 36 SOT 433 (Cochin), the issue before the Cochin Bench related to the validity of the order passed under Section 263. In this case, the Hon'ble Tribunal while dealing with the order revised under Section 263 with regard to the applicability of Sec. 47(xiv) took the view that the proprietor's business was taken over by the company alongwith all assets and liabilities by paying consideration to extent of proprietor's capital by way of allotment of shares and the same was to the extent of 51% of share capital of the company and thus conditions of Sec. 47(xiv)(c) was satisfied and held that the CIT was not justified in revising order under Section 263 on the ground that amount lying to credit of current account of proprietor was not clubbed with amount of consideration while issuing shares as current account of the proprietor being current liability, the same cannot enter into computation of consideration and the revision under Section 263 was not valid.
19. We have also gone through the applicability of the decision of Mcdowell & co. (supra) In our opinion, this decision is not applicable in the case of the assessee. Hon'ble Supreme court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373 (SC) duly considered this decision and held that the basis of mcdowell case did not appear to be correct. Legal steps cannot be termed as non-est based upon some hypothetical assessment of the 'real motive" of the assessee. The apex court held that an act which is otherwise permissible and valid in law cannot be termed as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest. The provision of section 47(xiv) has been incorporated by the government through the Finance Act and therefore same cannot be said to be illegal and the transactions being carried out according to that provision cannot be regarded to be against the national interest and for tax evasion. We, therefore, are of the firm view that the decision of Mcdowell & co is not applicable in the case of the assessee.
In view of the aforesaid discussion and the decisions of co-ordinate bench and there being no contrary decision brought to our knowledge by the learned DR, we are of the view that no interference is called for in the order of CIT(A) in deleting the addition made by the Assessing Officer holding that the provisions of Sec. 47(xiv) are not applicable. We confirm the order of CIT(A) deleting the said addition. Thus, ground nos. 1 to 4 stands dismissed.
20. Ground no. 5 as well as the only ground in assessee's Cross Objection relates to disallowance made under Section 14A r/w Rule 8D. We have heard the rival submissions and perused the material on record. We noted that the Assessing Officer disallowed a sum of Rs. 3,05,423/- applying the provisions of Sec. 14A r/w Rule 8D. The matter went before CIT(A) and CIT(A) noted that there is no precise finding given by the Assessing Officer relating to the expense incurred by the assessee in respect of the income not forming part of the total income. The CIT(A) reduced the disallowance to Rs. 1 lac but also noted that the assessee did not file the full details of the expenditure. Before us also, the Learned AR vehemently contended deleting the disallowance and even referred to the decision of the Hon'ble Mumbai High Court in the case of Godrej but did not file any details of expenditure incurred by the assessee not relating to the dividend income. Under these facts, we do not have any other alternative except to confirm the order of CIT(A) because, in our opinion, the onus lies on the assessee to prove that the assessee has not incurred any expenses relating to the income not forming part of the total income. Applicability of Sec. 14A has not been denied by the Learned AR. Therefore, in our opinion, the Assessing Officer was correct in law in applying Rule 8D. We, therefore, set aside the order of CIT(A) and restore the order of the Assessing Officer, as in our opinion, the Assessing Officer has rightly computed the disallowance by applying Rule 8D. Accordingly, this ground of the revenue is allowed while the ground taken in the Cross Objection stands dismissed.
21. In the result, the appeal filed by the Revenue is partly allowed while the Cross Objection filed by the Assessee is dismissed.