Case Law Details
DCIT Vs Thulasi Mohan Constructions Pvt. Ltd. (ITAT Chennai)
Introduction: The case of DCIT Vs. Thulasi Mohan Constructions Pvt. Ltd. (ITAT Chennai) revolves around a dispute concerning capital gains in the context of a business slump sale. In this assessment for the year 2011-12, the Revenue challenged the order of the Commissioner of Income Tax (Appeals) dated 13-09-2019.
Detailed Analysis: The core issues addressed in this case include:
i. Jurisdiction and Reopening: The assessee contested the assumption of jurisdiction, claiming that the notice under section 148 was served without a valid basis. It argued that an assessment under section 143(3) had already been completed.
ii. Existence of the Firm: The central point of contention was whether the firm (M/s. Thulasi and others) was in existence after the business was taken over by M/s. Tulasi Mohan Constructions Pvt. Ltd. The firm had filed its income tax return for AY 2011-12. The assessing officer had issued a notice under section 148 in the name of the firm.
iii. Succession vs. Business Transfer: The distinction between a succession of the firm by a company under section 47(xiii) and a simple business transfer on a slump sale basis was a critical aspect. The firm’s continuity and the nature of the transfer were key factors in determining whether capital gains could be attributed to the transferee company.
Conclusion: The ITAT Chennai upheld the decision of the Commissioner of Income Tax (Appeals), emphasizing that the firm remained in existence even after the business transfer. It ruled that this was not a case of succession but a straightforward transfer of a business line. The capital gains were not attributable to the transferee company. Therefore, the appeal by the Revenue was dismissed.
This case sheds light on the importance of distinguishing between business succession and business transfer, providing clarity on the tax implications of such transactions. It underscores the significance of proper documentation and the assessment of continuity in determining tax liabilities.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by revenue for Assessment Year (AY) 2011-12 arise out of order of learned Commissioner of Income Tax (Appeals)-11, Chennai [CIT(A)] dated 13-09-2019 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) r.w.s. on 30-12-2018. The grounds raised by the revenue read as under: –
1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.
2. The ld. CIT(A) has erred in allowing the assessee’s appeal without proper appreciation of the facts?
3. The ld. CIT(A) erred in overlooking the fact that the Firm was not in existence after the takeover by the assessee company on 01/ 11/2010 and hence the Assessing Officer has rightly invoked the provisions of section 170 and made the addition in the hands of the successor i.e. M/s. Thulasi Mohan Constructions Pvt. Ltd.
4. The ld. CIT(A) having co-terminus powers as that of the Assessing Officer ought to have verified the reopened assessment details of the firm and its partners before arriving at the decision that the Firm was in existence and the Short Term Capital Gains should not be brought to tax in the hands of the transferee company, even while the assessee company was not forthcoming with details of reopened assessment details of the firm and its partners before the ld.CIT(A).
5.The ld. CIT(A) erred in holding that this is not a case of succession of the firm by a company u/s.47(xiii) even while there was no successor entity to the erstwhile partnership firm, after the date of succession, the company which acquired the partnership “lock stock and barrel” “as where is” along with all the liabilities of the partnership firm which includes the income tax liability of the erstwhile partnership firm on account of the transfer and therefore the resulting capital gains is assessable in the hands of the assessee company.
2. The Ld. Sr. DR advanced arguments supporting the case of the revenue and cited various judicial decisions to support the assessment framed by Ld. AO. The Ld. AR controverted the same and referred to the findings rendered in the impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as follows.
Assessment Proceedings
3.1 The assessee being resident corporate assessee was assessed u/s 143(3) on 19-03-2014 accepting returned income of Rs.147.67 Lacs. However, the case was reopened and a notice u/s 148 was issued on 31-03-2018. The assessee offered original return of income and demanded reasons for reopening which were supplied. The assessee objected to the same which were disposed-off vide order dated 16-12- 2018.
3.2 The Ld. AO noted that the assessee took over a partnership firm namely M/s M. Thulasi & ors. The net asset value was Rs.2396.88 Lacs whereas the consideration paid to the firm was Rs.2995.60 Lacs leaving gap of Rs.568.71 Lacs. Since the consideration was partly in the form of equity share capital and partly in the form of unsecured loans, the transaction would not fall under the purview of Sec. 47(xiii) and clause (c) thereof would apply which provide that the partners of the firm do not receive any consideration or benefit other than by way of allotment of shares. However, the net consideration was paid in the form of equity share capital for Rs.16.50 Lacs and balance Rs.2979.10 Lacs was in the form of unsecured loans. The clause (c) to Sec.47(xiii) stipulate that the partners of the firm should not received any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. The erstwhile firm would get the benefit of interest on loans. Since the assessee company has taken over the firm as ‘Lock stock and Barrel’, there is no firm in existence on the date of issue of notice u/s 148 and the assessee company has taken over all the assets and liabilities and therefore, the capital gains arising from the above transaction was to be taxed in the hands of the assessee company u/s 170.
3.3 It was further held by Ld. AO that the majority of sale consideration comprises of inventories which is business assets and theretofore, the gains are to be assessed as Short-Term Capital Gains (STCG). Since the firm was not in existence and the assessee took over all the assets and liabilities including Income Tax liability, the capital gains was to be taxed in the hands of the assessee company as a successor in terms of Sec.170 of the Act.
3.4 The assessee submitted a copy of notice issued u/s 148 in the name of erstwhile firm by Ld. DCIT, non-corporate Circle 8(1), Chennai to support the submissions that the firm was in existence and therefore, the provisions of Sec.170 would not apply. However, in the absence of information regarding assessment in the hands of the firm, the capital gains were assessed in the hands of Assessee Company as STCG for Rs.568.71 Lacs.
First Appellate proceedings
4.1 The assessee objected to reopening and also assailed applicability of Sec. 170(2) on the ground that the payee firm was very much in existence. The assessee filed various submissions during the course of appellate proceedings to support its case on legal ground as well as on merits.
4.2 The aforesaid submissions found favor with ld. CIT(A) and Ld. CIT(A) deleted the impugned additions by observing as under: –
7. The facts of the case are examined. The assessee has objected to the assumption of jurisdiction. It has also alleged that the 148 notice was served on it only on 04.04.2018. The assessee has also objected to initiation or reassessment proceedings without any valid basis when an assessment u/s.143(3) had been completed in the case of the assessee. The assessee has also filed detailed objections on merits of the vase. The merits are examined and adjudicated as under.
8. As per the agreement dated 01.11.2010 the entire real estate and construction business of the firm M/s. Thulasi and others had been taken over by the company M/s. Tulasi Mohan Constructions Pvt. Ltd. However the firm continued to be in existence and has filed its return of income for AY 2011-12. The firm has not filed any returns of income for the subsequent period. In the assessment order, the Assessing Officer has noted that a notice u/s 148 had been issued in the name of the firm by DCIT, NCR- 8(1) Chennai. The whereabouts of this assessment in the hands of the firm for the AY 2011-12 are not known. The firm had transferred its real estate and construction business. However, the firm continued to be in existence. This is not a case of succession of the firm by a company as attracted u/s 47(xiii) of the Income tax Act. This is a simple case of the business of the firm transferred to the company on a slump sale basis ‘lock stock and barrel’ to the company. The company is the transferee and there cannot be any capital gains in the hands of the transferee when transferor was very much in existence. There cannot be any rectification of capital gain in the hands of the company on account of taking over the business of the firm. Merely because the Assessing Officer could not readily locate the assessment particulars of the firm, he is not entitled to bring the transaction for taxation as capital gains in the hands of the company being the transferee. The assessment framed and the STCG brought to taxation cannot be seconded. The grounds of appeal are accepted. The Assessing Officer is directed to delete the STCG brought to taxation.”
Aggrieved as aforesaid, the revenue is in further appeal before us.
Our findings and Adjudication
5. From the findings rendered in the impugned order, it could very well be seen that the case for the firm was also reopened by issuance of notice u/s 148 and the firm was in existence which is further substantiated by the fact that the firm has filed return of income for AY 2011-12 also. The firm has merely transferred its real estate and construction business and this is not a case of succession of the firm by a company rather a simple case of transfer of a certain line of business on slump sale basis. The assessee is a transferee and paid the sale consideration and hence, it could not be subjected to any capital gains. Therefore, no fault could be found in the impugned order.
6. The appeal stands dismissed.
Order pronounced on 8th September,2023
