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2010 (2) TMI 992 - AT - Income TaxCapital gain - revaluation of assets on conversion of the firm into company - Whether capital gain tax is to be taxed on revaluation of assets before conversion of firm into company u/s 45(4)? - HELD THAT:- Section 45(4) clearly shows that on distribution of capital assets as a result of the dissolution of a firm for the purpose of section 48, the fair market value [as defined in section 2(22B)] of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. In such a situation, the value of the capital asset, on transfer, as a result of the dissolution of the firm, should be the fair market value and not the written down value or any other value. Considering the view held in the case of Rajlaxmi Trading Co. v. CIT [2001 (2) TMI 84 - ANDHRA PRADESH HIGH COURT] u/s 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 twin conditions are satisfied then, in that event, for the purposes of computation of capital gains u/s 48, the market value on the date of the transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. Where a firm becomes a limited company under Part IX of the Companies Act, 1956, section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, latter part of section 45(4), which refers to computation of capital gains u/s 48 by treating the fair market value of the asset on the date of transfer, does not arise. In the present case before us, neither there is dissolution of firm nor transfer of assets of the firm, rather it is purely a case of conversion of firm into company and accordingly the provisions of section 45(4) will not apply. In view of the above discussion, we uphold the order of CIT (A) and this issue of the Revenue's appeal is dismissed.
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