O R D E R
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 Infotech 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 applicationmoney 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 theallotment 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 ofclause (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.
No comments:
Post a Comment