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2011 DIGILAW 1086 (KAR)

Commissioner of Income Tax v. Gokuldas Exports

2011-11-08

S.N.SATYANARAYANA, V.G.SABHAHIT

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JUDGMENT V.G. Sabhahit, J.—This appeal is filed by the revenue being aggrieved by the order passed by the Income Tax Appellate Tribunal, Bangalore Bench 'B' (hereinafter referred to as the 'ITAT') in ITA No. 1062/Bang./2004 for the assessment year 1995-96 wherein the appeal filed by the assessee has been allowed by setting aside the order passed by the first appellate authority confirming the order of the Assessing Officer that the impugned transaction would attract capital gain under Section 45(4) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). The material facts leading up to this appeal are as follows: The assessee-company is in the business of garment exports. It filed annual return income for the assessment year 1995-96 on 31-10-1995 declaring a total income of Rs. 73,45,020/- which was processed under Section 143(1)(a) of the Act and scrutiny under Section 143(3) completed on 16-3-1998. The case was re-opened on the basis of revenue audit objection as according to the revenue, there was transaction of immovable property and to that extern there was capital gain. Thereafter, after enquiry, notice was issued and the assessee filed a revised return declaring the income as 'nil'. The Assessing Officer, by order dated 26-3-2002 held that transfer of assets to the partners of the firm would amount to transfer of capital asset which would attract capital gain under Section 45(4) of the Act. and directed to issue demand notice accordingly. Being aggrieved by the same, the assessee preferred an appeal before the first appellate authority - the Commissioner of Income Tax (Appeals)-I, Bangalore in ITA No. 554/R-11/CIT(A)-I/02-03 and the first appellate authority by order dated 31-3-2004 dismissed the appeal and confirmed the order passed by the Assessing Officer. Being aggrieved by the same, the assessee preferred an appeal in ITA No. 1062/Bang./2004 before the ITAT contending that re-opening of the assessment was illegal and the impugned transaction would not attract under Section 45(4) of the Act. It was contended that there was no transfer of immovable property and therefore the question of adding any capital gain under Section 45(4) of the Act would not arise. In support of his contention, the assessee relied upon the earlier decision of the ITAT in Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.). It was contended that there was no transfer of immovable property and therefore the question of adding any capital gain under Section 45(4) of the Act would not arise. In support of his contention, the assessee relied upon the earlier decision of the ITAT in Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.). The ITAT negatived the first contention regarding validity of re-opening of the assessment as invalid and answered the same against the assessee. However, insofar as the second contention regarding impugned transaction was concerned, on the basis of the decision rendered by them in Unity Care & Health Services (supra) case, held that there was no transfer of capital asset and therefore, provisions of Section 45(4) of the Act would not be attracted and accordingly allowed the appeal in part, Being aggrieved, this appeal is filed by the revenue. 2. The learned counsel appearing for the revenue contended that ITAT was not justified in relying upon the decision of the ITAT in Unity Care & Health Services (supra) and the said judgment is not applicable to the facts of the case though the said decision is confirmed by this Court in ITA No. 3170/2005 by order dated 5-7-2010. The learned counsel submitted that there was transfer of capital asset on 29-3-1995 by making book entry and thereafter there was conversion of firm into joint stock company on 3-4-1995. Therefore, since erstwhile partners have received the capital asset which is to be valued under Section 45(4) of the Act, the same would attract capital gain and therefore, the order passed by the ITAT is liable to be set aside. 3. The learned counsel appearing for the respondent submitted that the transfer of capital asset which had been put into partnership by the partners has been done on 29-3-1995 itself and the firm was re-constituted into a joint stock company by obtaining order of the Company Court and the decision in Unity Care & Health Services (supra) is applicable to this case. In support of his contention, he relied upon the decision of this Court in Jansons Vs. Commissioner of Income Tax, Karnataka, (1985) 154 ITR 432 KAR. The learned counsel submitted that there is no transfer of conveyance which would attract the provisions under Section 45(4) of the Act so as to impose capital gain and the order passed by the ITAT is justified. Commissioner of Income Tax, Karnataka, (1985) 154 ITR 432 KAR. The learned counsel submitted that there is no transfer of conveyance which would attract the provisions under Section 45(4) of the Act so as to impose capital gain and the order passed by the ITAT is justified. The learned counsel further submitted that if this Court comes to the conclusion that decision in M/s. Unity Care & Health Services (supra) is not applicable, the question of fact has to be considered by the ITAT and the matter is to be remanded and if it comes to the conclusion that it should be remanded, the ITAT is the final authority on the question of fact. The learned counsel appearing for the revenue in reply, has relied upon the decisions in The Commissioner of Income Tax and The Assistant Commissioner of Income Tax Vs. Gurunath Talkies, (2010) 328 ITR 59 KAR and Commissioner of Income Tax Vs. A.N. Naik Associates and Anr. and Rangavi Realtors and Anr., (2004) 2 BomCR 801 in support of his contention that impugned transaction would attract capital gain. 4. The appeal has been admitted on 28-9-2007 to consider the substantial question of law as framed in ITA No. 1414/2006. However, learned counsel for the parties submit that ITA No. 1414/2006 is not connected to this appeal as the subject-matter of ITA No. 1414/2006 is not applicable to the facts of this case. 5. Having regard to the contentions of the parties, the following substantial question of law arises for determination in this case: Whether the order of the ITAT allowing the appeal filed by the assessee and setting aside the order passed by the first appellate authority confirming the order of the Assessing Officer, holding the impugned transaction would attract capital gain on the basis of the earlier judgment of the ITAT in M/s. Unity Care & Health Services which has been confirmed in ITA No. 3170/2005 by order dated 5-7-2010 is perverse and arbitrary and unsustainable. 6. We have given careful consideration to the contentions of learned counsel appearing for the parties and scrutinised the material on record with reference to the abovesaid substantial question of law. 7. It is well-settled that the ITAT is the final authority to decide the question of fact. 6. We have given careful consideration to the contentions of learned counsel appearing for the parties and scrutinised the material on record with reference to the abovesaid substantial question of law. 7. It is well-settled that the ITAT is the final authority to decide the question of fact. Both the Assessing Officer and the first appellate authority have held that since there was transfer of capital asset on 29-3-1995 in favour of the new partners of the firm, the same would attract provisions of Section 45(4) of the Act and tax has to be paid on the capital gain. However the ITAT has set aside the order passed by the first appellate authority and the Assessing Officer only on the ground that in the earlier order passed by the ITAT in Unity Care & Health Services (supra), it has been held that on similar facts that the transaction would not attract Section 45(4) of the Act. The relevant account extracts were made available in the original records. It is the case of the assessee that on 29-3-1995 there was book entry wherein individual property contributed by partners is allowed to be withdrawn by making entry and thereafter those properties have not been shown as asset of the joint stock company and the conversion was on 3-4-1995. However, in the case of Unity Care & Health Services (supra), it was a partnership firm registered by eight partners on 2-10-2000 under the Partnership Act and on 3-10-2000, it got registered under the Companies Act. Before registration or conversion as a company, the assets of the partnership firm were revalued. The total value arrived at such revaluation was Rs. 20,03,21.670/-. The written down value was Rs. 3,96,67.634/-. As on 2-10-2000. after depreciation, the firm did not declare any capital gains on transfer of assets from partnership firm to the company which is a separate entity and therefore, the Assessing Officer was of the view that due to conversion of partnership firm into a limited company, there was transfer of capital assets by the firm to the limited company and capital gain arose on account of this transfer. However, in the present case, as already narrated above, facts are clearly different. However, in the present case, as already narrated above, facts are clearly different. It is well-settled that the said decision cannot be allowed to dehors the facts of the case or the facts and circumstances under which each case is decided, Even though the order passed by the ITAT in Unity Care & Health Services (supra) has been confirmed by this Court in ITA No. 3170/2005 filed by the revenue by order dated 5-7-2010, it is clear that facts under which the finding was given that the impugned transaction would not amount to capital gain is entirely different from the one in the present case as narrated above and therefore the ITAT was not at all justified in relying upon the decision of the Unity Care & Health Services (supra). The ITAT has not gone into other aspects which are in the reasonings given by the first appellate authority and the Assessing Officer while holding that the capital gain under Section 45(4) of the Act is attracted and the assessee is liable to pay tax on the same and therefore the order passed by the ITAT is perverse and arbitrary and cannot be sustained and liable to be set aside. 8. Since the question as to whether there was transfer of immovable property which would attract capital gain under Section 45(4) of the Act is a pure question of fact and the same is to be decided by the ITAT. Therefore, we hold that the matter is to be remitted to the ITAT for fresh disposal in accordance with law. Accordingly, we answer the substantial question of law in favour of the revenue and against the assessee and pass the following: ORDER The appeal is allowed. The order dated 6-1-2007 passed by the ITAT in ITA No. 1062/Bang./2004 is set aside. ITA No. 1062/Bang./2004 is restored to the file of the ITAT with a direction to dispose of the appeal in the light of the observations made in the order. All the contentions of the parties are kept open to be urged before the ITAT.