COMMISSIONER OF INCOME TAX Vs. GOKULDAS EXPORTS

JUDGEMENT

(1.) THIS appeal is filed by the revenue being aggrieved by the order passed by the Income Tax Appellate Tribunal, Bangalore Bench 'B' (hereinafter referred to as the 'ITAT') in ITA No. 1062/Bang./2004 for the assessment year 1995 -96 wherein the appeal filed by the assessee has been allowed by setting aside the order passed by the first appellate authority confirming the order of the Assessing Officer that the impugned transaction would attract capital gain under Section 45(4) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). The material facts leading up to this appeal are as follows: The assessee -company is in the business of garment exports. It filed annual return income for the assessment year 1995 -96 on 31 -10 -1995 declaring a total income of Rs. 73,45,020/ - which was processed under Section 143(1)(a) of the Act and scrutiny under Section 143(3) completed on 16 -3 -1998. The case was re -opened on the basis of revenue audit objection as according to the revenue, there was transaction of immovable property and to that extern there was capital gain. Thereafter, after enquiry, notice was issued and the assessee filed a revised return declaring the income as 'nil'. The Assessing Officer, by order dated 26 -3 -2002 held that transfer of assets to the partners of the firm would amount to transfer of capital asset which would attract capital gain under Section 45(4) of the Act. and directed to issue demand notice accordingly. Being aggrieved by the same, the assessee preferred an appeal before the first appellate authority - the Commissioner of Income Tax (Appeals) -I, Bangalore in ITA No. 554/R -11/CIT(A) -I/02 -03 and the first appellate authority by order dated 31 -3 -2004 dismissed the appeal and confirmed the order passed by the Assessing Officer. Being aggrieved by the same, the assessee preferred an appeal in ITA No. 1062/Bang./2004 before the ITAT contending that re -opening of the assessment was illegal and the impugned transaction would not attract under Section 45(4) of the Act. It was contended that there was no transfer of immovable property and therefore the question of adding any capital gain under Section 45(4) of the Act would not arise. In support of his contention, the assessee relied upon the earlier decision of the ITAT in Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.). The ITAT negatived the first contention regarding validity of re -opening of the assessment as invalid and answered the same against the assessee. However, insofar as the second contention regarding impugned transaction was concerned, on the basis of the decision rendered by them in Unity Care & Health Services (supra) case, held that there was no transfer of capital asset and therefore, provisions of Section 45(4) of the Act would not be attracted and accordingly allowed the appeal in part, Being aggrieved, this appeal is filed by the revenue.

(2.) THE learned counsel appearing for the revenue contended that ITAT was not justified in relying upon the decision of the ITAT in Unity Care and Health Services (supra) and the said judgment is not applicable to the facts of the case though the said decision is confirmed by this Court in ITA No. 3170/2005 by order dated 5 -7 -2010. The learned counsel submitted that there was transfer of capital asset on 29 -3 -1995 by making book entry and thereafter there was conversion of firm into joint stock company on 3 -4 -1995. Therefore, since erstwhile partners have received the capital asset which is to be valued under Section 45(4) of the Act, the same would attract capital gain and therefore, the order passed by the ITAT is liable to be set aside.

(3.) THE appeal has been admitted on 28 -9 -2007 to consider the substantial question of law as framed in ITA No. 1414/2006. However, learned counsel for the parties submit that ITA No. 1414/2006 is not connected to this appeal as the subject -matter of ITA No. 1414/2006 is not applicable to the facts of this case.