1. The assessee-individual, a qualified marine engineer, started a business of repairing ships, etc., somewhere in the year 1968. The individual business was converted into a partnership from 1-7-1973. The partnership consisted of the assessee, his wife Mrs. Geeta Chabbra and a private limited company whose shares were mostly held by the assessee and his wife. The assessee had 45 per cent share, his wife 15 per cent and the limited company Bombay Marine Engg. (P.) Ltd., the balance 40 per cent. The limited company was incorporated on 16-6-1973. The partnership came into existence on 1-7-1973. The firm was dissolved on 1-1-1974 and the entire business was taken over by the limited company.
At the time of the dissolution of the firm the assets of the firm were revalued, and its goodwill was ascertained. In the final settlement of account, taking into account depreciation in the value of the assets, the value of the goodwill, etc., the assessee was paid in full and final settlement a sum of Rs. 12,65,991. As on 31-12-1973 his capital account stood in the firm at Rs. 1,63,835 and he was entitled to a share in the development rebate reserve worked out at Rs. 49,855. The ITO on the above facts held that the action of the assessee in constituting the firm and making a revaluation of assets within a short time was done with an intention to avoid capital gains tax by bringing the matter within the scope of Section 47(ii) of the Income-tax Act, 1961 ('the Act'), He also held that no genuine firm came into existence on 1-7-1973 and in effect there was a transfer from the individual assessee to the company of the business attracting capital gains tax.
The ITO computed the capital gains after giving the deduction under Section 80T of the Act at Rs. 6,31,381. The Commissioner (Appeals) accepted the assessee's claim that this was a case of distribution of assets on the dissolution of the firm and in view of the provisions of Section 47(ii) no capital gains could be determined. He accordingly deleted the addition of Rs. 6,31,381.
2. Before the Commissioner (Appeals) along with other grounds dealing with different points, the assessee had also claimed that the order of the ITO was bad in law, since it was time barred. This point the Commissioner (Appeals) decided against the assessee.
3. The department has come up on appeal against the order of the Commissioner (Appeals) deleting the addition of Rs. 6,31,381. It would appear that the assessee had filed an appeal against some of the points decided against him, but since he wanted to approach the Settlement Commission for settlement of his affairs he withdrew the appeal filed.
4. At the time of the hearing of the appeal the learned counsel for the assessee pointed out that apart from the merits of the case relating to the deletion of the sum of Rs. 6,31,381 added as capital gains, there were certain legal grounds which were fatal to the addition of Rs. 6,31,381 to the total income. The assessee had claimed before the Commissioner (Appeals) that the assessment was time barred having been made beyond the period of limitation. Other preliminary points taken were that in the original assessment the ITO had not included the income from capital gains. It was only after the matter was set aside by the AAC and the ITO made a fresh assessment that he included for the first time an addition on account of capital gains. This procedure was illegal and beyond the jurisdiction of the ITO. The AAC had given certain directions while making the reassessment. Even these directions did not cover the inclusion of capital gains in the total income. What the AAC himself could not do by way of making enhancement in respect of this item, the ITO in giving effect to an appellate order under Section 251 of the Act could not have done. The assessee also claimed that having recognised the firm as genuine assessed and also granted registration to it for the same assessment year, the ITO was estopped from treating it as not genuine for the purpose of assessing the capital gains. As regards the first point about limitation, the Commissioner (Appeals) had decided this point against the assessee. As regards the other points relating to the jurisdiction as well as assessment of a new item not considered in the earlier assessment, the Commissioner (Appeals) did not give any finding. According to the learned counsel, he was authorised by the provisions of Rule 27 as well as Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, to raise these legal contentions also against the departmental appeal in addition to the challenge to the merits of the addition itself.
5. The learned counsel for the department has objected to the assessee raising this ground about limitation as well as absence of jurisdiction. The appeal was filed by the department on the mere question of addition of Rs. 6,31,381. The assessee could have filed a cross-objection which he did not do. The assessee could have also come up on appeal under the right granted to him by the statute. Even though he did this, he withdrew the appeal. According to the learned counsel, it was not open to the assessee to raise the question of limitation as well as jurisdiction against the above background. When the Act has provided the facility of filing an appeal on his own as well as filing a cross objection when the department filed an appeal the assessee could not resort to Rule 27 to agitate this point. The provisions of Rule 27 were brought into the statute book earlier. After the introduction of Section 253(4) of the Act, Rule 27 has become, if not redundant and of no significance, certainly inoperative. The rule itself is hedged in with a lot of restrictions as interpreted earlier.
After the introduction of Section 253(4), according to the learned counsel, its significance has completely disappeared. The assessee should not, therefore, be permitted to raise these questions of limitation or jurisdiction either under Rule 27 or under Rule 11.
6. According to the learned counsel for the assessee, apart from the provisions of Rule 27 judicial decisions support his case that a new ground of appeal which goes to the root of the matter can be admitted and heard by the Trihunal. Reference is made in this connection to the decisions in B.R. Bamasi v. CIT  83 ITR 223 (Bom.), CED v. Estate of Late Smt. K. Narasamma  125 ITR 196 (AP) and CIT v. Dehati Co-operative Marketing-cum-Processing Society  130 ITR 504 (Punj.
& Har.). On the question of limitation, according to the learned counsel, the assessment has been made far beyond the time it could be made. The original assessment was made in this case on 19-8-1977. The AAC set aside the assessment by his order dated 30-2-1978. Under Section 153(2A) of the Act, which sets the limit for completion of such an assessment, the assessment should be made before 31-3-1980. Under Section 251 when an order is made by the AAC, the ITO derives his power to make a fresh assessment in conformity with the order of the AAC only from that order of the AAC. Such an order, thus, would fall under Section 251(1)(a) and not under any power under Section 143(3) of the Act itself. Section 251(1)(a) is a self-contained code. Section 144B of the Act comes into operation only when an assessment is made under Section 143(3) and not when it is made under Section 251(1)(a). Section 144B, therefore, is inapplicable in the present case on its very terms.
It is also pointed out that Section 153(2A), which sets a time limit for completion of an assessment following an order under Section 251, is an absolute rule with a paramount jurisdiction. It excludes any general provision. Applying Section 153(2A) no extension under any other section of the Act including Section 144B is permissible. On the question of the nature of the assessment made pursuant to the order under Section 251, reference is made to the decision in CIT v. Carona Sahu Co. Ltd.  146 ITR 452 (Bom.) (FB). This decision has clearly laid down that while for the purposes of filing an appeal the ITO's order could be treated as one under Section 143(3). This is not so for all other purposes. Reference is made in this connection to the decisions in CIT v. Devidayal Metal Industries (P.) Ltd.  68 ITR 50 (Bom.) and Surrendra Overseas Ltd. v. CIT  120 ITR 872,(Cal.).
The former case clearly stresses the point that the ITO's order is under Section 31(3)(b) of the Indian Income-tax Act, 1922.
7. It is also pointed out that in the original assessment the capital gains was not included. The AAC in his order dated 13-2-1978 did not touch this point or enhance the assessment. The ITO for the first time made an addition on account of capital gains. What the AAC himself has not done and could not do, according to the learned counsel for the assessee, the ITO cannot do in giving effect to an order under Section 251. It is pointed out that since the AAC did not decide this ground specifically raised before him, this should be treated as having been decided against the assessee and this would also justify the application of Rule 27. In effect, according to the learned counsel, the ITO's order including the capital gains was beyond his jurisdiction. Reference is made in this connection to the decisions in Katihar Jute Mills (P.) Ltd. v. CIT  120 ITR 861 (Cal.) and CIT v. Aich Kay Farm  141 ITR 928 (MP). In support of his point that the AAC himself has no jurisdiction to travel beyond the subject-matter of the assessment, which in effect constrained the jurisdiction of the ITO also, reference is made to the decisions in Debi Dutt Moody v.Belan  35 ITR 781 (Cal.), CIT v. Shapoorji Pallonji Mistry  44 ITR 891 (SC), Smt. Sneh Lata v. C/T 61 ITR 139 (All.), Prabhudas Ramji v. CIT  62 ITR 621 (Guj.), CIT v. Rai Bahadur Hardutroy Motilal Chamaria  66 ITR 443 (SC) and Sterling Construction & Trading Co. v. ITO  99 ITR 236 (Kar.). Thus, in effect the addition of capital gains itself is not in pursuance of the direction of the AAC. The part of the order making this addition, therefore, is clearly without jurisdiction and time barred. In support of his stand that the ITO should stick to and not stray beyond the remand order, the learned counsel has referred to several decisions, viz., Bhopal Sugar Industries Ltd. v. ITO  40 ITR 618 (SC), Kartar Singh v. CIT  111 ITR 184 (Punj. & Har.), State of Uttar Pradesh v. Raza Buland Sugar Co. Ltd.  118 ITR 50 (SC), CIT v.Bandaru Sanyasi Raju  127 ITR 453 (AP), Grindlays Bank Ltd. v.CIT  145 ITR 119 (Cal.), Orissa Ceramic Sales v. ITO  145 ITR 464 (Ori.), Citizen Watch Co, Ltd, v. IAC  148 ITR 774 (Kar.), J.P, Sharrna & Sons v. CIT  151 ITR 138 (Raj.) and  SLT 80 (Cal.). In the present case the ITO having granted registration to the firm, thus, accepting its genuineness he was also estopped from questioning the genuineness of the firm now.
8. On merits it is pointed out that the firm has been accepted to be genuine. It did business for some time. At the time of the constitution of the firm it could certainly not be stated that the purpose was to dissolve it and transfer the business to the private limited company.
This was a subsequent development motivated by subsequent facts which the assessee could not even think of earlier. There was a real dissolution of the firm and the business was taken over by the private limited company. According to the learned counsel, the decision was a purely commercial one. By conversion of the firm into a partnership several business advantages were expected. In fact the assessee was forced to make the conversion to realise these advantages. When the genuineness of the firm, which has been accepted by the department earlier, is granted, on the dissolution of that firm and distribution of assets amongst partners the provisions of Section 47(ii) apply. Even if, therefore, as the ITO has contemplated, there were capital gains, they are not exigible to tax in view of Section 47(ii). In fact no evidence has now been produced to even challenge the genuineness of the firm, which has been properly and legally constituted.
9. For the department it is pointed out that the assessee having not filed a cross-objection and withdrawn the appeal filed against some of the points, he cannot urge the question of time bar or legal infirmities in the assessment. Rule 27 is not applicable to the case.
At any rate, Rule 27 has a restricted operation. The effect of accepting the claim for intervention under Rule 27 would be that even though the. assessee has not agitated the question of limitation on the validity of the assessment, he would be given another opportunity to set aside the assessment on this score. In fact the department would be worse off on having come to the Tribunal on appeal. According to the learned counsel, certainly this cannot be supported.
10. On the question of time limit itself judicial decisions have settled that an assessment made pursuant to an AAC's direction setting aside the original assessment is an assessment under Section 143(3).
When the addition proposed in such an assessment is in excess of Rs. 1 lakh, automatically the provisions of Section 144B including the extension of the period of limitation following it, apply. The extension of time under Section 144B is, therefore, available to the ITO. The assessment made is not, therefore, time barred. On the question of jurisdiction to assess the capital gains, it is pointed out that when once the assessment order was set aside by the AAC the entire matter was open before the ITO. He had necessarily to make an assessment and the proper provision of law would be Section 143(3). In this wider context it is open to the ITO to include in the total income of the assessee all items deserving to be so included. If in the original assessment, therefore, the capital gains had been omitted to be assessed, the ITO is legally competent to include the same in the fresh assessment to be made now.
11. On the merits of computation of capital gains itself, it is pointed out that the same business was carried on by the individual and the partnership and now taken over by the limited company.' The only persons who were in the partnership were the assessee and his wife. The latter's contribution to the business was negligible if not nil. She was not an expert. Nothing has been pointed out to show that her capital or any other qualification was either necessary contributed to the advancement of the business. Being husband and wife the nature of the partnership also would be the same as that of the husband, there being no other business justification to create the partnership between the husband and the wife. The firm, according to the learned counsel, has been merely created to take the benefit of Section 47(ii). Merely because the legal formalities of formation of a firm has been gone through, the ITO is not precluded from enquiring into the genuineness of the firm, its purpose or objective and its relation to the persons around it. The fact that subsequently the assessee as a matter of fact exercised his right to dissolve the firm is a clear indication that this was the purpose from the very beginning. Inevitably the object was avoiding some capital gain by almost what is a crude forcing of the provisions of Section 47(ii) on to the situation. This is evident, according to the learned counsel, also from the fact that the assessee filed an appeal in respect of certain points and withdrew the same. The firm was only a device to avoid capital gains.
12. On the question of the company itself, it is pointed out that even though its members are the assessee and his wife mainly, it was a separate legal person. Capital gains, therefore, were clearly involved and liable to tax. There has been a revaluation of the assets which also led to obtaining capital gains. If any other mode of working out the effective taxable capital gains was needed, according to the learned counsel, the matter may be sent back to the ITO to recompute the capital gains. The limited company is a separate entity for all purposes. The transfer, therefore, of the business from the individual to the company was real. When the firm is not genuine, the capital gains, thus, really accrue to the individual assessee. The decisions in Abhai Ram Gopi Nath v. CIT  79 ITR 339 (All.) and CIT v. Seth Manicklal Fomra  99 ITR 470 (Mad.) are stressed in this context.
13. It is also pointed out that even accepting the assessee's case the question of limitation does not arise. Section 153(2A) is not an absolute provision operating in vacuum. It takes into account a limitation in the normal process of making an assessment whether originally or after remand or setting aside by the appellate authorities. Benefit of Section 144B as to limitation is clearly available. Even on the other grounds about the ITO not having included the capital gains in the original assessment, according to the learned counsel, the assessee's point should not be accepted. The entire assessment being open before him, he has to make a proper assessment.
Knowing that a certain item of income has not been included in the assessment it was not merely too artificial a procedure but in fact fealty an abdication of the ITO's duty if he does not include the new non-assessed item of income in the assessment made. There was no law prohibiting him to making an assessment including all includible items.
On the contrary non-inclusion of a clearly known includible item of income would be erroneous.
14. In our view the assessee is entitled to advance his arguments with reference to the limitation as well as the legality or validity of the assessment as a defence to the departmental challenge in its appeal.
The scope of Rule 27 is very clear. An assessee may have filed an appeal on his own. Where he has not filed an appeal but the department files an appeal it is open to him to file a cross-objection dealing with matters not covered by the departmental appeal or even those covered by the departmental appeal. In a particular case the assessee may not adopt any of these methods. He may just accept the first appellate authority's order either as a matter of compromise or otherwise, but when the department files an appeal on a point where the assessee has won he may not decide to give up his defence altogether against the point agitated in the departmental appeal. In such a case even if he does not want to agitate the other points on which he has a grievance against the first appellate authority's order, he cannot be precluded from putting up a defence against the departmental appeal.
This is the proper scope of Rule 27. In our view there seems to be a misunderstanding on the part of the department in seeking to exclude the operation of Rule 27. In the first place neither the provision of an appeal as such nor the grant of right of cross-objection really renders Rule 27 inoperative. This rule operates in a restricted field of pure defence. A literal reading of the rule also indicates that it comes into operation only where the respondent has not appealed but some point has been decided against him by the first appellate authority. In the present case amongst other things two sets of grievances were advanced by the assessee before the appellate authority: One, relating to the limitation and validity of the assessment and the second, challenging the addition of Rs. 8,31,381.
The question of limitation the Commissioner (Appeals) decided against the assessee. On the question of validity the Commissioner (Appeals) did not pronounce any decision but insofar as the assessee did not withdraw this ground before the Commissioner (Appeals), the Commissioner (Appeals) must be regarded as having decided this point also against the assessee. On the question of addition itself of Rs. 6,31,381 the Commissioner (Appeals) decided in favour of the assessee.
The assessee, therefore, could not have come on appeal against this point; Nor is it necessary for him to come on appeal on other grounds of limitation and validity decided against him when on the merits of the addition of Rs. 6,31,381 he has won. It is exactly against such a background and in such a situation that Rule 27 comes in. As pointed out above, the grievance of the learned departmental counsel appears to be that by resorting to Rule 27 the AAC could not have either on the ground of limitation or on the ground of invalidity set aside the entire assessment. The application of Rule 27 does not and in our opinion cannot lead to this incongruity. All that it can help the assessee is with regard to the addition of Rs. 6,31,381 only and nothing more. The limited extent to which the assessee can urge the points relating to limitation and invalidity of the assessment is the question of addition of Rs. 6,31,381. The department having come on appeal cannot be worse oif than if it had not come on appeal. The fear expressed by the learned counsel for the department, therefore, that in a case where the assessee has not filed an appeal or cross-objection has been permitted to urge the grounds relating to limitation and validity would render the entire assessment non-existence is not correct. The decision would only relate to the addition of Rs. 6,31,381 and nothing more.
15. In the above view of the matter and for the limited purpose of dealing with the addition of Rs. 6,31,381 we permit the assessee to advance his points against the limitation question as well as the invalidity of the assessment. It requires to be mentioned that as far as the first point is concerned it is settled law that limitation need not be invoked by the parties in every case where it comes up. Even if the parties do not urge the point of limitation if it comes to the knowledge of the Court, the Court is bound to act on it. In other words, limitation is a question on which if it comes to the knowledge of the Court, the Court has to take action whether the parties urge before it or not. From this general position of law also we cannot ignore the question of limitation.
16. The assessee's case is that the ITO having made an assessment pursuant to the directions of the AAC, he must complete the assessment within the two year period specified in Section 153(2A). Some of the decisions of the High Courts have termed assessments made pursuant to the appellate directions as assessments under Section 143(3). As far as we within the jurisdiction of the Bombay High Court are concerned, this point is governed by the decision in Carona Sahu Co. Ltd.'s case (supra) which has clarified that while for purposes of appeal an assessment made in pursuance of appellate direction could be treated as an assessment under Section 143(3), it is not so for all other purposes. In view, therefore, of the binding decision of the Bombay High Court in Carona Sahu Co. Ltd.'s case (supra), it is not necessary to regard the assessment as made under Section 143(3). Inevitably the application of Section 144B is also precluded. In this view of the matter, the extended time limit granted by Section 144B is not available to the case of an assessment made by the ITO, pursuant to the direction of an appellate authority. That apart, the provisions of Section 153(2A) do not give any scope for reading into it any extension of the time limit on account of Section 144B or any other provision.
Section 153(2A) is as under: (2A) Notwithstanding anything contained in Sub-sections (1) and (2), in relation to the assessment year commencing on the 1st day of April, 1971, and any subsequent assessmant year, an order of fresh assessment under Section 146 or in pursuance of an order, under Section 250, Section 254, Section 263 or Section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of two years from the end of the financial year in which the order under Section 146 cancelling the assessment is passed by the Income-tax Officer or the order under Section 250 or Section 254 is received by the Commissioner or, as the case may be, the order under Section 263 or Section 264 is passed by the Commissioner.
It specifically deals with Sub-sections (1) and (2) of the same section by referring to them: 'Notwithstanding anything contained', etc. It, however, does not deal with Section 144B or any other section. A plain reading, therefore, of Section 153(2A) rules out any extension of the time limit under Section 144B or any other section of the Act. A contrast made between Sections 146 and 251 of the Act also strengthens this point. While Section 146 specifically refers to Section 143(3), Section 251 does not do so. There is no other provision of the Act which in any way puts a restraint on or otherwise modifies the clear time limit of two years mentioned in Section 153(2A). The inevitable conclusion, therefore, is that this time limit is an absolute time limit unaffected by the provisions of any other section of the Act. The argument, therefore, of the learned counsel for the department that the extended time limit provided in Section 144B would govern Section 153(2A) also is not supported by any other or the clear provisions of the section itself. We, therefore, hold that in the absence of any other saving provision for this purpose, the time limit for completion of the assessment provided in Section 153(2A) is an absolute time limit. The ITO, therefore, has to complete the assessment within the time limit provided. It may be mentioned that Section 153(2A) gives a period of two years. This in effect is an addition to the time limit already given to the ITO for making the original assessment. Normally every possible investigation which the ITO should make, would have been made during this period. It is only certain loose ends which he has failed to tie up, which the appellate authority directs him to do he has to do in the fresh assessment to be made. Even here if he has to make a reference under Section 144B (we are not deciding this question here) he has got sufficient time for that. At any rate, there would be no inequity in granting the department only two years for completing a fresh assessment pursuant to an appellate direction and not two and a half years, both in addition to the time limit granted for the original assessment under Section 153. In this case the assessment not having been completed before 31-3-1980 must be regarded as overtaken by the limitation provided in Section 153(2A).
17. On the question of the ITO's jurisdiction to include a new item of income in an assessment made pursuant to an appellate direction also the law is clear. The decided cases clearly indicate that even the AAC or the Commissioner (Appeals) Cannot go beyond the scope of the appeal before them. Their powers of enhancement are also limited to the scope of the appeal before them, on the grounds of appeal clearly covered by and arising out of the assessment order appealed against. The decisions referred to by the learned counsel for the assessee clearly settled this issue. This being so and the power of the AAC himself to travel beyond the subject-matter of the appeal being restricted legally, the ITO in making an assessment pursuant to an appellate direction certainly cannot travel beyond what the AAC himself can do. In such an assessment, therefore, the ITO cannot include any other item of income not considered by him in the original assessment. The decisions referred to above clarify this point also. We have, therefore, to uphold the assessee's case that the ITO not having considered the question of including capital gains in the original assessment in making a fresh assessment pursuant to appellate directions he cannot include this new item of income. Such an inclusion may be made only by resorting to appropriate provisions of the Act such as Section 148 of the Act, but not by a general argument such as that when the entire assessment is open to him, the ITO is bound to include all assessable items of income in such an assessment. This is too general a sweep of jurisdiction which the law cannot and does not give to the ITO. On this point also the assessee's claim has to be accepted. Both on the question, therefore, of limitation as well as on the ITO's general legal disability to travel beyond the subject of his original assessment order, the inclusion of the sum of Rs. 6,31,381 in an assessment made pursuant to an appellate direction cannot be supported.
The addition has to be deleted on this ground.
18. On merits the Commissioner (Appeals) has deleted the addition on the ground that there is no evidence to question the genuineness of the firm which was constituted on 1-7-1973 and which was dissolved on 1-1-1974. The learned counsel for the assessee has relied on the assessments made on the firm, the registration granted to the firm and other accompanying circumstances to support the genuineness of the firm. While these facts indicate that the firm was assessed and registration was also granted to the firm, in our view they do not operate as estoppel against the revenue's showing that the firm was not genuine. It would be open to the department either by adducing proper evidence in this regard or otherwise to show that as a matter of fact the firm is not genuine. The department has not, however, adduced any fresh evidence in this regard. The learned counsel for the department has only pointed out drawing support from only the existing facts that the individual was carrying on the business for a very long time. His wife was neither an expert nor could contribute effectively to the functioning, of the individual business. The limited company's members were composed mainly of the assessee and his wife. Thus, there was no business reason justifying the conversion of the proprietary business into the partnership. Almost immediately after such conversion and with practically little business having been done the firm was dissolved.
There is no particular business reason for the dissolution also. The only ground made out is that the business had to be taken over by the limited company, the functioning of a business under a limited company being more useful for its future. If this latter be the reason certainly the individual could have transferred the business to a limited company directly without going through the intermediate partnership level. That was not done. It would, therefore, be, in our opinion, difficult to decide that the constitution of the firm was a positive business necessity and not a step or only a device to get away from the capital gains tax liability. There are, however, other reasons which compel us to support the order of the Commissioner (Appeals) and also accept the assessee's case.
19. The purpose of forming the partnership, according to the department, is to avoid capital gains tax. If we start with the premise so vociferously urged by the learned counsel for the department that the firm was a sham one, the proper course to understand the position would be to find out the tax result by excluding the firm from the picture as it obtains. The question is ; does disregarding the firm result in any liability to capital gains tax or at any rate to such a high figure of tax The facts on record do not support this stand. If the individual who was carrying on a personal business had converted that business iuto a limited company and received as consideration, therefore, a sum of Rs. 12 lakhs, under no circumstances can this amount be taken as the basis for computing capital gains on the transfer. The individual business (and this is supported by the details, balance sheet, etc., filed) had fixed assets on which depreciation was granted by the ITO, stock-in-trade which would fetch a profit or loss on a transfer and above all goodwill which in the present case has been computed by the ITO at about Rs. 6 lakhs. The individual started his business by himself and from some scratch. He was serving earlier. If, therefore, his business had during the year of account acquired any goodwill, that goodwill was developed by him over a period of years and had no original cost. As far as the goodwill is concerned, therefore, the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty  128 ITR 294 would apply and no capital gains tax would be leviable on the same. The assessee-individual was carrying on repairing business. The question of stock-in-trade, therefore, would not figure except perhaps to a negligible extent. Apart from the question, therefore, of there being on capital gains on stock-in-trade, even other profit realisable on its transfer would be negligible. If there are tools, etc., to what extent they have been allowed in the accounts over the years and what they would fetch on a sale would be another problem. Lastly, there are depreciable assets held by the individual. On a transfer of these to a limited company, in respect of some assets obsolescence allowance will have to be given. In respect of other, Section 41(2) of the Act profit should have been computed and there might or might not be any capital gains also in addition. At any rate, disregarding the firm if the ITO were to compute a capital gains on the transfer to a limited company especially of such a large figure of Rs. 12 lakhs, it would be prima facie erroneous apart from being inconsistent with the department's own stand. At any rate, there are no figures or facts to show that there was either a capital gain on one or the other of the above items or any taxable profit.
20. Apart from the above, the transfer in the present case ignoring the partnership, would be from an individual to a private limited company of which himself and his wife are the principal shareholders. This company was formed just a month before the formation of the alleged firm. It had a nominal capital subscribed by these family members. It had no assets. The constitution of the limited company could at best have resulted in incurring some expenditure, etc., which would show itself as a loss to the existing capital of the company in its balance sheet. Thus, the formation of the company would have prima facie resulted in its cash capital introduced by way of shareholdings to the extent of the preliminary expenses, etc., being reduced. The company takes over the business of the individual and credits to his account a sum of Rs. 12 lakhs as against the assets taken over. The above amount credited resulted from the valuation upwards of the assets, etc., of the business. Even so what the assessee-individual has got for the transfer of his business to the company is only a book entry in the company's books the company itself being virtually owned by him. He has not received any cash from any outside source. The only assets in the company are also the very assets of the individual business written up and treated as sold by the individual to the company. The net result is as against the individual holding these assets in a personal balance sheet, he would be holding the same assets reduced by the preliminary expenses, etc., of the company as against which he would have an entry for Rs. 12 lakhs and odd as the money owing to him from the company. In other words, if the company has to give him money it has to sell his own assets--a very peculiar proposition. Against these clear facts and accountancy entries one cannot imagine much less establish the individual as having received any consideration for the sale of his assets in the personal business to the company owned by him. What we want to emphasise is that if we ignore the partnership as the department wants us to do, the assessee has got absolutely no excess amount on which he could be assessed either as business profit or as capital gains. The question, therefore, of charging him with constituting a firm along with his wife and a limited company as partners as a device to avoid capital gains would be, in our opinion, a mere figment of the imagination.
21. Whether, therefore, we consider the situation from the point of view of treating the firm as genuine--for which no evidence has been produced by the department--or for argument sake treating the firm as non-genuine, there is nothing to show that the assessee had made a capital gain. We, therefore, uphold the order of the Commissioner (Appeals) on merits also though not for the reasons given by him.
1. I have perused the order of my learned brother Dr. V.Balasurbramanian, and I agree with him that the revenue's appeal has to be dismissed. But I would to add my own reasons in support of this conclusion.
2. The facts of the case and the contentions addressed by the learned counsel on both sides, have been elaborately set out in the order of my learned brother and is, therefore, not necessary for me to repeat the same. However, I would like to point out that the objection of the revenue in this appeal filed by them is against the following findings of the Commissioner (Appeals) in paragraph No. 20 of his order: On a careful consideration of the matter I find force in the appellant's contention that the payment of Rs. 12,65,991 against his share capital, etc., after making revaluation of the assets of the firm is a case of distribution of assets on the dissolution of a firm under Section 47(ii) so that no capital gains could be determined in the hands of the appellant at that point of time. Had the assets been revalued not at the time of dissolution of the firm but earlier to that and an additional sum credited in the capital account on account of revaluation of the assets the position would have been different. In the present case, however, the appellant has received Rs. 12,65,991 as a result of the distribution of the assets at the time of dissolution of the firm. It, therefore, cannot be said that there was any transfer of assets by the appellant to the company in which he was allotted shares. Since the firm has been granted registration it cannot also be said that the firm was not genuine and it is really the proprietary business of the appellant which was transferred to the company. Considering the above facts and circumstances of the case I think that no capital gains is involved in the hands of the appellant on receipt of Rs. 12,65,991 on dissolution of the firm. While giving the above finding I have kept in view the Allahabad High Court decision in Bankey Lal Vaidya v. CIT  55 ITR 400, affirmed by the Supreme Court in CIT v. Bankey Lal Vaidya  79 ITR 594, the Kerala High Court decision in CIT v. C.K. Sunderaraja Naidu  95 ITR 45 the Punjab and Haryana High Court decision in Raman Lal Khanna v. CIT  84 ITR 217 and the Gujarat High Court decision in CIT v. Kartikey V. Sarabhai  131 ITR 42. Consequent to the above finding the ITO is directed to delete from the assessment addition of Rs. 6,31,381 made on account of capital gains.
It is against these findings of the Commissioner (Appeals) that the department has come up in appeal to the Tribunal on the following two grounds: 1. On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in deleting Rs. 6,31,381 added in the assessment as capital gains.
2. On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in holding that provisions of Section 47(ii) were attracted in this case.
3. The main contention of the revenue in this appeal is that we should ignore the partnership firm formed by the assessee with his wife and the private limited company, Marine Engg. (P.) Ltd. on 1-7-1973, on the dissolution of which partnership, the capital gains in question are stated to have arisen to the assessee. According to the revenue, the registration granted to this partnership firm under Section 185(1)(a) of the Act would not stand in the way of the revenue ignoring this partnership and seeking to tax the capital gains arising to the assessee in his hands under Section 45 of the Act. I agree with the department that the granting of registration to the partnership would not be an impediment in the way of the revenue in seeking to tax this capital gains in the hands of the present assessee, if it is so assessable in accordance with law. At the same time, it can hardly be disputed that there should be cogent and relevant evidence, which would justify the inference that the partnership firm constituted on 1-7-1973 was merely a device and only a sham partnership. No evidence has been placed to that effect to justify the conclusion that the partnership firm was a mere sham and should, therefore, be ignored as a mere device. On the contrary, the materials placed before us on behalf of the assessee at pages 183 and 184 of the paper book clearly establish that the partnership firm was a genuine firm and was not a mere sham.
At page 183 we have the profit and loss account of the partnership firm as on 31-12-1973. This account shows that the partnership firm had carried on business of repairing ships during the period of its existence from 1-7-1973 to 31-12-1973 and the labour charges received by this firm during this period amounted to Rs. 30,69,631. The net profit earned by this firm from this business amounted to Rs. 1,11,880, which was divided amongst the three partners in accordance with their profit-sharing ratios specified in the partnership deed. The next document is the balance sheet of this partnership as on 31-12-1973 at page 184 of the paper book. This balance sheet is stated to have been prepared before the revaluation of the assets for purpose of transfer to the private limited company. This balance sheet discloses that Mrs.
Geeta Chabbra, who was taken as a partner on 1-7-1973, had contributed capital of Rs. 65,547 while the other partner, Bombay Marine Engg. (P.) Ltd., had contributed capital of Rs. 75,000 on 1-7-1973. Of course, the capital of the assessee as on 1-7-1973 amounted to Rs. 2,60,697. It is after examining all these materials, which were placed before him by the partnership firm, that the ITO assessing the partnership firm came to the conclusion that it was a genuine partnership and accordingly granted registration to the said firm by his order dated 31-12-1976 at pages 94 to 97 of the assessee's paper book. In the order granting registration at page 96 of the paper book, the ITO specifically states that he was satisfied that genuine firm was in existence before granting registration to the firm. Unless the revenue is able to place relevant and cogent evidence to displace these findings recorded by the ITO in the case of the firm, it would be difficult, if not impossible, to ignore the above materials placed by the assessee as well as the findings of the ITO and hold that the partnership firm was merely a sham and that the same should be ignored. In the present case, no such material has been placed before us by the revenue to ignore the findings of the ITO holding that the partnership firm was a genuine firm and that it was entitled to registration.
4. If once it is accepted that the partnership firm was a genuine partnership, it has also to be accepted that its dissolution was also a genuine transaction put through by the parties. It is on these facts that the Commissioner (Appeals) came to the conclusion that the assessee is entitled to the benefit of Section 47(ii). The revenue wants us to ignore not only the formation of the partnership but also its dissolution, which is incorporated in the dissolution deed dated 1-1-1974, at pages 101 to 106 of the assessee's paper book. In my view, these documents, which have been found to be genuine and valid, cannot be ignored merely because the department now thinks in the case of the present assessee that it has been executed only with a view to avoid payment of capital gains tax by taking advantage of Section 47(ii). It is not open to the revenue to simply ignore these transactions put through by the parties in a lawful manner without bringing on record any material, which would establish that these transactions were neither genuine nor valid, but were intended to be sham transactions by the parties. In the absence of any such material placed by the revenue, I find myself unable to accept the contentions put forward on behalf of the revenue that all these transactions of formation of the partnership on 1-7-1973, the business carried on by it from 1-7-1973 to 31-12-1973 and its dissolution on 31-12-1973, should be ignored. In my new there is no justification for such a conclusion either on facts or in law.
It, therefore, follows that the order of the Commissioner (Appeals) deleting this addition by holding that the assessee is entitled to the benefit of Section 47(ii) in respect of the addition of Rs. 6,31,381 added by the ITO's capital gains, is right and the same has to be upheld.5. In view of the above conclusion reached by me on the objections raised by the revenue in its appeal to the grant of exemption to the assessee under Section 47(ii), the various other submissions raised by the assessee's learned counsel and by the learned departmental representative in reply thereto (which are fully set out in the order of my learned brother) become academic and, therefore, do not require any further examination and decision. I, therefore, do not express any opinion on any of those contentions.
6. For the reasons discussed above, I agree with the learned Vice President that the revenue's appeal has to be dismissed.