TMI Blog2012 (6) TMI 647X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 - - - Dated:- 24-9-2010 - ADARSH KUMAR GOEL, AJAY KUMAR MITTAL, JJ. JUDGMENT Ajay Kumar Mittal J.- 1. This appeal under section 260A of the Income-tax Act, 1961 (in short "the Act"), against the order dated April 28, 2000, annexure A 3, passed by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (in short "the Tribunal") in Income-tax Appeal No. 2/Chandi/99 for the assessment year 1995-96, has been filed by the Revenue-appellant. 2. The facts as narrated in the appeal are that M/s. Rita Mechanical Works, Ludhiana, the respondent-firm, which during the relevant year was engaged in the business of manufacturing sewing machines and its spare parts, filed its return for the assessment year 1995-96 declaring income of Rs. 54,31,400, on October 31, 1995. The respondent re-evaluated its assets on March 31, 1994, and on the basis of the report of valuer enhanced the value of the assets to the tune of Rs. 3,27,38,045, i.e., Rs. 2,51,49,229 in respect of land and building and Rs. 75,88,816 in respect of plant and machinery. The profit accruing on the above amount was credited to the capital account of the partners as per their profit sharing ratios. The exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from an unregistered company to a registered company ; since an unregistered company succeeded a registered company, there was vesting of assets in favour of successor company and since there was no transfer the provisions of section 45(4) are not applicable. The Commissioner of Income-tax (Appeals) dismissed the appeal, vide order dated November 13, 1998 (annexure A 2), as none of the above grounds found favour with it. The Commissioner of Income-tax (Appeals), however, differed with the Assessing Officer who had held that the capital gain was of short-term nature. According to the appellate authority, the land was not depreciable asset and as such capital gain chargeable was not short-term but it should be given a long-term treatment and this view of the appellate authority was accepted by the Depart- ment and long-term capital gain was charged instead of short-term capital gain. 5. The assessee did not feel satisfied and took the matter in appeal before the Tribunal. The Vice President and the Judicial Member constituting the Bench differed from each other on certain points and expressed their individual views. All that is essential needed to be noticed here is that the Vic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inter-related and are being taken up together. In the present case, the partnership firm has been converted into company under the provisions of Part IX of the Companies Act, 1956 (in short "the 1956 Act"). There is no dissolution of the erstwhile firm and the company has been formed with the same partners as its shareholders. The question for adjudication would be whether capital gain arises on taking over of business of an erstwhile firm by formation of a limited company in which the partners of the erstwhile firm are the shareholders. The reliance of the Revenue is on the judgments, Artex Manufacturing Co. v. CIT [1981] 131 ITR 559 (Guj) ; Suvardhan v. CIT (ITRC No. 21 of 1999, decided on August 4, 2006, by the Karnataka High Court-since reported in [2006] 287 ITR 404 (Karn), CIT v. A. N. Naik Associates [2004] 265 ITR 346 (Bom) whereas the reliance by the assessee has been placed on CIT v. Texspin Engineering and Manufacturing Works [2003] 263 ITR 345 (Bom), CIT v. Kunnamkulam Mill Board [2002] 257 ITR 544 (Ker), CIT v. Vijayalakshmi Metal Industries [2002] 256 ITR 540 (Mad). 9. We have given our thoughtful consideration to the submissions made by the counsel for the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45(4), profits arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm are chargeable to tax as the income of the firm in a previous year in which the transfer takes place and for the purposes of section 48, the fair market value of the asset on the date of such transfer is deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 48 deals with mode of computation. It, inter alia, lays down that the income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset. Therefore, under section 45(4), two conditions are required to be satisfied, viz., transfer by way of distribution of capital assets, and, secondly, such transfer should be on dissolution of the firm or otherwise. Once these two conditions are satisfied then, in that event, for the purpose of computation of capital gains under section 48, the market value on the date of the transfer shall be deemed to be the full value of consideration received or accruing as a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gredients are : existence of a party and a counter-party and, secondly, incoming consideration qua the transferor. In our view, when a firm is treated as a company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the limited company. It is no doubt true that all properties of the firm vest in the limited company on the firm being treated as a company under Part IX of the Companies Act, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of properties in the company as the firm is treated as a limited company. On the vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is now treated as a company, after a given date. In the circum- stances, in our view, there is no transfer of a capital asset as contemplated by section 45(1) of the Act. Even assuming for the sake of argument that there is a transfer of a capital asset under section 45(1) because of the definition of the word 'transfer' in section 2(47)(ii), even then we are of the view that the liability to pay capital gains tax would not arise because sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partners of the firm in the shape of shares of the company and the shares were allotted to the partners on the same basis as their shares in the profits of the partnership firm. It was in those facts that the provisions of capital gains were held to be exigible. The Karnataka High Court in Suvardhan's case [2006] 287 ITR 404 (Karn) was adjudicating the matter where the partners had derived share on the dissolution of the partnership firm. 21. The factual matrix in A. N. Naik Associates' case [2004] 265 ITR 346 before the Bombay High Court was that a new partner was inducted before outgoing partners had been relieved and the business also continued. The gain in the hands of the retiring partners was held to be amenable to capital gains tax. 22. These judgments are, thus, not applicable and are clearly distinguish- able. 23. In view of the above, the irresistible conclusion is that no capital gain under section 45(4) of the Act would be attracted in the present case. Accordingly, questions Nos. 1 and 2 are answered against the Revenue. 24. Adverting to question No. 3 regarding depreciation, the authorities below had concurrently recorded that there was no dissolu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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