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2012 (11) TMI 22 - AT - Income TaxAddition of capital gain - conversion of the firm into company - CIT(A) deleted the addition - Held that:- As decided in ACIT, Mangalore v. Unity Care & Health Services [2005 (6) TMI 209 - ITAT BANGALORE-A] When a conversion of a firm into company takes place under the provisions of Companies Law, such conversion can be construed only as occasioned by operation of law. Hence, no controversy could arise on the application of that principle even for purposes of capital gains under section 45(4). By insertion of section 47(xiii), it cannot be said that the conversion of a firm into a company under part IX is to be first treated as dissolution of firm within the meaning of section 45(4) and only if condition as contained in section 47(iii) are complied with, the exemption will be available. Section 47(xiii) applies only to a case of transfer by sale, but there is no authority for capital gain at all in the absence of a transfer under Part IX of the Companies Act inasmuch as such conversions do not fall within the definition of ‘transfer’ under section 2(47). 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 asset is not satisfied.In the circumstances, latter part of section 45(4) which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not apply - in favour of assessee.
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