The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has held that the mere transfer of real estate and construction business 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. Thus the assessee is a transferee and paid the sale consideration and hence, it could not be subjected to any capital gains.
The assessee M/s. Thulasi Mohan Constructions Pvt. Ltd. being resident corporate assessee was assessed under Section 143(3) of the Income Tax Act accepting returned income of Rs.147.67 Lakhs. However, the case was reopened and a notice under Section 148 of the Income Tax Act was issued. The assessee offered original return of income and demanded reasons for reopening which were supplied.
The Assessing Officer (AO) noted that the assessee took over a partnership firm namely M/s M. Thulasi & ors. The net asset value was Rs.2396.88 Lakhs whereas the consideration paid to the firm was Rs.2995.60 Lakhs leaving gap of Rs.568.71 Lakhs.
It was further held by the AO that the majority of sale consideration comprises of inventories which is business assets and therefore, 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 Section 170 of the Income Tax Act.
The assessee objected to reopening and also assailed applicability of Section 170(2) of the Income Tax Act 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.
The Commissioner of Income Tax (Appeals) [CIT(A)] observed that 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 under Section 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.
The CIT(A) held that merely because the AO 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 AO was directed to delete the STCG brought to taxation.
Aggrieved as aforesaid, the revenue is in further appeal before the Tribunal.
The Bench comprising of Mahavir Singh, Vice President and Manoj Kumar Aggarwal, Accountant Member held that 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, notice issued under Section 148 of Income Tax Act was invalid and no fault could be found in the impugned order of CIT(A).
Hence appeal of the revenue was dismissed.
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