Case Law Details

Case Name : Income Tax Officer Vs Shri. Sanjay Singh (ITAT Delhi)
Appeal Number : ITA No. 202 1/DEL/2008
Date of Judgement/Order : 18/11/2011
Related Assessment Year : 2001-02
Courts : All ITAT (4274) ITAT Delhi (937)

IT0 Vs. Shri Sanjay Singh (ITAT Delhi)-As entire consideration was shown as share application money and shares were issued against the same and same was continued to be held by the taxpayer for more than 5 years, the condition prescribed in clause (b) of Section 47(xiv) of the Act is also satisfied. Merely because there is a delay in the allotment of shares against the share application money, it cannot be said that there is a violation of clause (b) of Section 47(xiv) of the Act.

The intention of the legislature in providing the conditions is to ensure that in the garb of conversion or succession of a proprietorship into a company, assets are not transferred to persons other than the sole proprietor and facts of the case it is abundantly clear that the assets are not transferred to other persons. Thus, order of the CIT(A) is sustained and revenue’s appeal is dismissed.

INCOME TAX APPELLATE TRIBUNAL DELHI

ITA NO. 202 1/DEL/2008 ASST. YEAR: 2001-02

Income Tax Officer        

Vs

Shri Sanjay Singh

O R D E R

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PER G.D. AGRAWAL, V.P.

In this appeal by the revenue, as many as four grounds are raised. However, they are all against the deletion of the addition of Rs. 55,42,877 made by the Assessing Officer under the head ‘Long Term Capital Gain’. At the time of hearing before us, it is stated by the ld. DR that during the accounting year relevant to assessment year under consideration, the assessee converted his proprietorship business into company and claimed exemption u/s 47(xiv) in respect of transfer of capital assets. The Assessing Officer found that the assessee has not satisfied the conditions for claiming exemption u/s 47(xiv). He pointed out that as per clause (b) of Section 47(xiv), the shareholding of the sole proprietor in the company should not be less than 50% 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 succession. He submitted that the Assessing Officer has pointed out that on the date of succession i.e. 6.9.2000 and till the end of the relevant accounting year i.e. 3 1st March 2001, the shareholding of the sole proprietor was not more than 50% in the company. In fact, the shares were allotted to the sole proprietor on 7.3.2002, thereafter his shareholding exceeded 50%. Thus, there was clear violation of clause (b) of Section 47(xiv). Therefore, the AO rightly denied exemption to the assessee and the CIT(A), without properly appreciating the facts of the case and legal position, accepted the assessee’ s claim. He submitted that the order of the CIT(A) should be reversed and that of the AO may be restored.

2. On the other hand, it is stated by the ld. Counsel that the assessee was running a proprietorship business of running computer training centre till 6.9.2000 and from 7.9.2000, the running business was converted into the company. That all the conditions of Section 47(xiv) were duly fulfilled i.e. all the assets and liabilities of the sole proprietary concern immediately before the succession became the assets and liabilities of the company. The entire sale consideration was paid by way of allotment of the shares in the company and the assessee i.e. the sole proprietor did not receive any consideration in any other form. That after the allotment of the shares against the sale consideration, the shares held by the assessee, i.e. the sole proprietor, were worth more than Rs. 55 lakh, while the shares owned by the others were worth only Rs.6000. Thus, the sole proprietor held the shares much more than 50% limit as prescribed in the Section. That the entire sale consideration of the proprietorship business was shown as share application money in the company’s books of accounts and the assessee was allotted the shares for Rs. 55,69,700 vide Resolution of allotment of shares on 7.3.2002. That the company was registered with the issued share capital of Rs. 7000 i.e. of 700 equity shares of Rs. 10 each. The assessee, along with six other persons, was initially allotted 100 equity shares of Rs. 10 each. It was done because for the registration of company, seven shareholders were required. He further stated that the provisions of Section 47(xiv) were fully complied with in substance. If at all there is any lapse, it is only by way of delay in allotment of the shares against the share application money, but for such delay, the benefit of Section 47(xiv) cannot be denied to the assessee. That the purpose of providing conditions u/s 47(xiv) is to ensure that in the garb of conversion of proprietorship business into a company, there should not be transfer of the assets to any other person than the sole proprietor. That in the case of the assessee, it is evident that assets are not transferred to anybody and in fact, the assessee i.e. sole proprietor of the erstwhile business continues to hold more than 90% of shares in the said company till today. He, therefore, submitted that the order of the CIT(A) should be sustained and the revenue’s appeal may be dismissed.

3. We have carefully considered the arguments of both the sides and perused the material placed before us. The assessee was carrying on the business of running computer centre as proprietor thereof till 6.9.2000 and w.e.f. 7.9.2000, all the assets and liabilities were transferred to a company known as M/s Tuples Info tech Limited. The position of assets and liabilities of the company was as under:-

Assets
Fixed assets 8,887,788.31
Current assets 348,010.59
Loans & Advances 319,640.32
Total 9,555,439.22
Liabilities 
Current liabilities 3,343,232.01
Secured & Unsecured Loans 669,335.00
Total – 4,012,567.01
Excess of assets over liabilities 5,542,872.21 

3.2 The entire surplus of Rs.5,542,872 was credited in the company’s books of account as share application money and eventually, the shares were allotted to the assessee for the above amount. It is not in dispute that the assessee did not transfer the shares till the date of hearing of this appeal i.e. 14.11.2011. The other shareholders taken together are 600 equity shares of Rs.10 each i.e. Rs. 6000. Thus, the shareholding of the sole proprietor is almost 99%. Section 47(xiv) reads as under:-

“(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—

(a)  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) 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

(c) 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;”

4. It is not in dispute that all the assets and liabilities of the sole proprietary concern relating to the computer training centre became assets and liabilities of the company. Thus, the conditions of clause (a) were duly satisfied. The sole proprietor, i.e. the assessee, did not receive any consideration or the benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. Thus, the condition of clause (c) is also duly satisfied. As per clause (b) the shareholding of sole proprietor in the company should not be less than 50% of the total voting power in the company and his shareholding should continue as such for a period of five years from the date of succession. The consideration against the transfer of assets was credited in the company’s books of accounts as share application money and, ultimately, the share was allotted against such share application money. After the allotment of shares, the shareholding by the proprietor of the erstwhile business is approximately 99% of total shareholding of the company. The sole proprietor continued to hold the shares for a much longer period than the minimum period of five years as prescribed in clause (b). Thus, the condition of clause ‘b’ is also satisfied. The only mistake, if any, on the part of the company, is delay in the allotment of shares against share application money. However, in our opinion, merely because there is some delay in the allotment of shares against the share application money, it cannot be said that there is a violation of clause (b) of Section 47(xiv). From the totality of the facts, it is evident that there was total compliance of all the three conditions of Section 47(xiv) and merely because there was some delay in compliance of clause (b), it cannot be fatal for claiming the exemption u/s 47(xiv). The intention of the legislature in providing these conditions is to ensure that in the garb of conversion of proprietary business into company, there should not be transfer of assets to the persons other than sole proprietor; otherwise it will become a tool for avoidance of capital gain. From the facts of the assessee’s case, it is abundantly clear that the ownership of the assets has not been transferred to any other person but it remained with the company in which approximately 99% shares are held by the erstwhile sole proprietor. In view of the above, we do not find any infirmity in the order of the ld. CIT(A). The same is sustained and revenue’s appeal is dismissed.

Order pronounced in the open court on 18th November, 2011.

Date: 18th NOVEMBER, 2011

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0 responses to “Income-tax Act Benefit u/s. 47(xiv) of the cannot be denied in case there is a delay in allotment of shares to the proprietor on conversion of a proprietary concern into a company”

  1. Sharat Sindhwani says:

    I bought land for Rs. 5000/- in 1986. Built a house in 1991 with permission of competent authority in Rs 10 lacs. I have been conducting group tours off and on but economy of the hills is seasonal and reached the age of 65. Uttrakhand Government introduced a special industrial policy for developing far flung areas in Uttrakhand to curb/mitigate the migration of able bodied young people to metros to reverse the money order economy. I applied I was told 
    (i) people over 60 years of age are NOT given loans by banks!! To get loan I have to form a company!! So much of respect for Senior citizens when a 80 year old PM can run a country!! Waste of experienced human resource?
    (ii) So I made a company with Rs 1 lac authorised capital to transfer my business assets to it. My CA told me that
    (A) I can only show Rs 5000 (Land purchase price in 1986) 
    (B) Building cost Rs.10 lacs (Built in 1991)
    as unsecured loan to the company

    My Property is worth One Crore to day why can I not show this amount of unsecured loan rather than Rs 10 lac when I am not selling my property nor getting benefit or anything else in return except 99% shares in a P Ltd Co?

    Does the age of 65 years mean death to commoners and PMship to some special??!!
     Even Prime Minister’s Rozgar Yojna says the same when you reach the Bank!!

    Can anyone help me get the right answer to this please?
    +919897531965

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