My proprietary concern was taken over by a company and the proprietor took some cash as well as shares. The AO is invoking s.47A(3) against the company. Can he, when we never claimed s.47(xiv)?
No. The Punjab and Haryana High Court held that s.47A applies only if it is established that s.47 was pressed into service; in the absence of any finding that s.47 was invoked to claim exemption from capital gains on the succession, the deeming provision in s.47A(3) cannot be invoked. On the facts, s.47(xiv) had no application at all because the proprietor had received cash consideration of Rs.5,81,231, contrary to proviso (c), and had not received shares as consideration for the brand name.
Decided by the High Court (Hon'ble Mr. Justice S.J. Vazifdar, Chief Justice and Hon'ble Mr. Justice Avneesh Jhingan (judgment delivered by Avneesh Jhingan, J.)) on 2018-02-22, reported as I.T.A. No. 434 of 2015 (O&M), High Court of Punjab and Haryana at Chandigarh. It bears on section 47(xiv), section 47A, section 47A(3), section 45, section 37(1), section 143(3) of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
This is the short, clean High Court authority for a point that Assessing Officers get wrong constantly: s.47A is a withdrawal provision, and a withdrawal presupposes something to withdraw. Where the transaction never qualified — because the proprietor or the partners took cash, or because a condition failed at the outset — the exemption was never availed, and the charge, if any, falls under s.45 in the ordinary way on the transferor, not under the s.47A deeming fiction on the successor. The Mumbai Tribunal reached the same conclusion on the parallel wording of s.47A(4) in ACIT v Celerity Power LLP. The judgment also settles the narrower point that proviso (c) to s.47(xiv) is breached by ANY consideration received directly or indirectly other than by allotment of shares — here, royalty paid for the use of the brand name that the proprietor had retained.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Shri Tarun Mohan, the sole proprietor of phoneytunes.com and afterwards a director of the assessee company, transferred his business to the assessee company by an agreement dated 18.02.2003, retaining ownership of the phoneytunes.com brand name and granting the company a non-exclusive licence for a royalty of a percentage of gross revenue. He received cash consideration of Rs.5,81,231, which included payment of royalty for the use of the brand name, and did not receive shares as consideration for the brand name. The company separately paid licence fees to M/s Phonographic Performance Ltd for the use of copyright in creating ringtones. The Assessing Officer completed the assessment under s.143(3) by order dated 29.12.2011, adding Rs.17,97,858 on account of royalty paid to Shri Tarun Mohan and treating licence fees of Rs.2,03,78,978 as capital expenditure. The Tribunal decided in the assessee's favour, and the Revenue appealed, framing six questions of which question (iii) was whether the Tribunal was correct in not appreciating the applicability of s.47(xiv) read with s.47A(3).
Question (iii) was answered in favour of the assessee. Section 47(xiv) had no application to the case: proviso (c) requires that the sole proprietor has not received directly or indirectly any consideration except by way of allotment of shares in the company, and Shri Tarun Mohan had admittedly received cash consideration of Rs.5,81,231, which included payment of royalty for the use of the brand name, and had admittedly not received shares as consideration for it. Further, the issue raised had no foundation to stand, because there were no findings of fact recorded that the provisions of s.47 had been invoked for claiming exemption from capital gains on the transfers from the sole proprietary concern to the assessee company; the applicability of s.47A would arise only if it is established that s.47 was pressed into service, and in its absence the deeming provision in s.47A(3) cannot be invoked. On questions (iv), (v) and (vi), which raised the common question whether the copyright fee paid to M/s Phonographic Performance Ltd was revenue or capital expenditure, the Court held the Tribunal's findings were based on an appreciation of the facts, could not be said to be perverse or irrational, and did not raise substantial questions of law.
The Court set out the structure: s.45 charges capital gains, s.47 excludes certain transfers from s.45, and clause (xiv) covers the succession of a sole proprietary concern by a company, subject to three conditions in the proviso. Proviso (c) is a complete bar on any consideration, direct or indirect, other than allotment of shares, and it was breached on admitted facts. It then reproduced s.47A(3), which deems the profits or gains not charged under s.45 by virtue of the conditions in the proviso to clause (xiii) or clause (xiv) to be the profits and gains of the successor company for the previous year in which those conditions are not complied with, and noted that the result of violation would be that the amount of profits or gains arising from the transfer is treated as deemed profits and gains of the successor company chargeable to tax in that year. But the deeming operates only on an amount 'not charged under section 45 by virtue of' the s.47 conditions, and there was no finding that s.47 had ever been invoked to claim exemption. The provision therefore had nothing to work on.
The applicability of section 47A would arise only if it is established that section 47 was pressed into service. In absence thereof, the deeming provision of sub-section (3) of section 47A cannot be invoked.
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Handle my notice → Ask a CA on WhatsAppNo. The Punjab and Haryana High Court held that s.47A applies only if it is established that s.47 was pressed into service; in the absence of any finding that s.47 was invoked to claim exemption from capital gains on the succession, the deeming provision in s.47A(3) cannot be invoked. On the facts, s.47(xiv) had no application at all because the proprietor had received cash consideration of Rs.5,81,231, contrary to proviso (c), and had not received shares as consideration for the brand name. This was decided by the High Court (Hon'ble Mr. Justice S.J. Vazifdar, Chief Justice and Hon'ble Mr. Justice Avneesh Jhingan (judgment delivered by Avneesh Jhingan, J.)) and bears on section 47(xiv), section 47A, section 47A(3), section 45, section 37(1), section 143(3) of the Income Tax Act 1961. It is reported as I.T.A. No. 434 of 2015 (O&M), High Court of Punjab and Haryana at Chandigarh. This is the short, clean High Court authority for a point that Assessing Officers get wrong constantly: s.47A is a withdrawal provision, and a withdrawal presupposes something to withdraw. Where the transaction never qualified — because the proprietor or the partners took cash, or because a condition failed at the outset — the exemption was never availed, and the charge, if any, falls under s.45 in the ordinary way on the transferor, not under the s.47A deeming fiction on the successor. The Mumbai Tribunal reached the same conclusion on the parallel wording of s.47A(4) in ACIT v Celerity Power LLP. The judgment also settles the narrower point that proviso (c) to s.47(xiv) is breached by ANY consideration received directly or indirectly other than by allotment of shares — here, royalty paid for the use of the brand name that the proprietor had retained. If it applies to you, the first step is this: Ask first whether s.47 was ever claimed. If the return and the computation show no s.47(xiii) or s.47(xiv) exemption was taken, s.47A(3) is unavailable — say so as a threshold objection.
Shri Tarun Mohan, the sole proprietor of phoneytunes.com and afterwards a director of the assessee company, transferred his business to the assessee company by an agreement dated 18.02.2003, retaining ownership of the phoneytunes.com brand name and granting the company a non-exclusive licence for a royalty of a percentage of gross revenue. He received cash consideration of Rs.5,81,231, which included payment of royalty for the use of the brand name, and did not receive shares as consideration for the brand name. The company separately paid licence fees to M/s Phonographic Performance Ltd for the use of copyright in creating ringtones. The Assessing Officer completed the assessment under s.143(3) by order dated 29.12.2011, adding Rs.17,97,858 on account of royalty paid to Shri Tarun Mohan and treating licence fees of Rs.2,03,78,978 as capital expenditure. The Tribunal decided in the assessee's favour, and the Revenue appealed, framing six questions of which question (iii) was whether the Tribunal was correct in not appreciating the applicability of s.47(xiv) read with s.47A(3). The matter was decided on 2018-02-22 by the High Court (Hon'ble Mr. Justice S.J. Vazifdar, Chief Justice and Hon'ble Mr. Justice Avneesh Jhingan (judgment delivered by Avneesh Jhingan, J.)). On those facts the High Court held as follows. Question (iii) was answered in favour of the assessee. Section 47(xiv) had no application to the case: proviso (c) requires that the sole proprietor has not received directly or indirectly any consideration except by way of allotment of shares in the company, and Shri Tarun Mohan had admittedly received cash consideration of Rs.5,81,231, which included payment of royalty for the use of the brand name, and had admittedly not received shares as consideration for it. Further, the issue raised had no foundation to stand, because there were no findings of fact recorded that the provisions of s.47 had been invoked for claiming exemption from capital gains on the transfers from the sole proprietary concern to the assessee company; the applicability of s.47A would arise only if it is established that s.47 was pressed into service, and in its absence the deeming provision in s.47A(3) cannot be invoked. On questions (iv), (v) and (vi), which raised the common question whether the copyright fee paid to M/s Phonographic Performance Ltd was revenue or capital expenditure, the Court held the Tribunal's findings were based on an appreciation of the facts, could not be said to be perverse or irrational, and did not raise substantial questions of law.
The Court set out the structure: s.45 charges capital gains, s.47 excludes certain transfers from s.45, and clause (xiv) covers the succession of a sole proprietary concern by a company, subject to three conditions in the proviso. Proviso (c) is a complete bar on any consideration, direct or indirect, other than allotment of shares, and it was breached on admitted facts. It then reproduced s.47A(3), which deems the profits or gains not charged under s.45 by virtue of the conditions in the proviso to clause (xiii) or clause (xiv) to be the profits and gains of the successor company for the previous year in which those conditions are not complied with, and noted that the result of violation would be that the amount of profits or gains arising from the transfer is treated as deemed profits and gains of the successor company chargeable to tax in that year. But the deeming operates only on an amount 'not charged under section 45 by virtue of' the s.47 conditions, and there was no finding that s.47 had ever been invoked to claim exemption. The provision therefore had nothing to work on. In the words reproduced by the source cited on this page: "The applicability of section 47A would arise only if it is established that section 47 was pressed into service. In absence thereof, the deeming provision of sub-section (3) of section 47A cannot be invoked."
It was decided by the High Court on 2018-02-22 and is reported as I.T.A. No. 434 of 2015 (O&M), High Court of Punjab and Haryana at Chandigarh. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 47(xiv), section 47A, section 47A(3), section 45, section 37(1), section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Question (iii) was answered in favour of the assessee. Section 47(xiv) had no application to the case: proviso (c) requires that the sole proprietor has not received directly or indirectly any consideration except by way of allotment of shares in the company, and Shri Tarun Mohan had admittedly received cash consideration of Rs.5,81,231, which included payment of royalty for the use of the brand name, and had admittedly not received shares as consideration for it. Further, the issue raised had no foundation to stand, because there were no findings of fact recorded that the provisions of s.47 had been invoked for claiming exemption from capital gains on the transfers from the sole proprietary concern to the assessee company; the applicability of s.47A would arise only if it is established that s.47 was pressed into service, and in its absence the deeming provision in s.47A(3) cannot be invoked. On questions (iv), (v) and (vi), which raised the common question whether the copyright fee paid to M/s Phonographic Performance Ltd was revenue or capital expenditure, the Court held the Tribunal's findings were based on an appreciation of the facts, could not be said to be perverse or irrational, and did not raise substantial questions of law. It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 47(xiv), section 47A, section 47A(3), section 45, section 37(1), section 143(3) of the Income Tax Act 1961, and was decided by Hon'ble Mr. Justice S.J. Vazifdar, Chief Justice and Hon'ble Mr. Justice Avneesh Jhingan (judgment delivered by Avneesh Jhingan, J.). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the succession agreement leaves the proprietor with a retained asset (a brand, a domain, a copyright) licensed back for a royalty, understand that the royalty is itself consideration received otherwise than by allotment of shares and puts you outside s.47(xiv) from the start. Keep the two consequences separate: falling outside s.47(xiv) means the ordinary s.45 charge applies to the transferor on the transfer, not that the successor company is deemed to have income under s.47A(3). Where the department has assessed the successor company under s.47A(3), check whether the Assessing Officer recorded any finding that s.47 was invoked. The absence of such a finding was decisive here.
Validity check could not be completed. Validity check could not be completed. I did not establish whether the Revenue took this judgment to the Supreme Court, and I did not search the Supreme Court record. The same reading of the s.47A deeming fiction — that it withdraws an exemption actually availed and does not create a charge where none was claimed — was reached independently on the parallel wording of s.47A(4) by the Mumbai Tribunal in ACIT v. Celerity Power LLP (16.11.2018), para 14. Note that on the incidence question the Karnataka High Court in CIT v. Prakash Electric Company (23.07.2018) applied s.47A(3) to fix the charge on the successor company where a condition in the proviso to s.47(xiii) had in fact been breached after the exemption was taken; the two are consistent, because there the exemption had been availed. No decision doubting or overruling this judgment was located. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The s.47(xiv) and s.47A(3) point was question (iii) of six questions in a Revenue appeal whose main subject matter was whether royalty paid to the assessee's director for use of the brand name phoneytunes.com, and licence fees paid to M/s Phonographic Performance Ltd, were revenue or capital expenditure; questions (i) and (iii) were recorded at paragraph 5 as covered in the assessee's favour by an earlier judgment of the same Court dated 07.08.2015 in ITA Nos. 193, 194 and 197 of 2015, and the Court dealt with s.47(xiv) and s.47A(3) only because the Revenue said that earlier judgment had not considered them. I retrieved paragraphs 3, 5, 6, 11, 12, 14, 17, 18 and 19 verbatim; I did NOT retrieve the operative disposal paragraph of the judgment, so the statement that the appeal failed rests on paragraph 5 (question answered in the assessee's favour) and paragraph 14 ('The issue raised has no foundation to stand'), not on a reproduced order of dismissal. The Court refers to the assessment order dated 29.12.2011 under s.143(3); the assessment year is not stated in the fragments I retrieved. The appeal is I.T.A. No. 434 of 2015 (O&M) and was decided by S.J. Vazifdar, Chief Justice, and Avneesh Jhingan, J., the judgment being delivered by Jhingan, J.; the header was recovered on a ?type=print fetch asking for a positional slice of the first forty lines, after fetches asking for named content had returned only summaries. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Question (iii) was answered in favour of the assessee. Section 47(xiv) had no application to the case: proviso (c) requires that the sole proprietor has not received directly or indirectly any consideration except by way of allotment of shares in the company, and Shri Tarun Mohan had admittedly received cash consideration of Rs.5,81,231, which included payment of royalty for the use of the brand name, and had admittedly not received shares as consideration for it. Further, the issue raised had no foundation to stand, because there were no findings of fact recorded that the provisions of s.47 had been invoked for claiming exemption from capital gains on the transfers from the sole proprietary concern to the assessee company; the applicability of s.47A would arise only if it is established that s.47 was pressed into service, and in its absence the deeming provision in s.47A(3) cannot be invoked. On questions (iv), (v) and (vi), which raised the common question whether the copyright fee paid to M/s Phonographic Performance Ltd was revenue or capital expenditure, the Court held the Tribunal's findings were based on an appreciation of the facts, could not be said to be perverse or irrational, and did not raise substantial questions of law.
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