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2010 (3) TMI 112 - AAR - Income TaxTransfer of asset - whether the conversion of partnership firm as a private limited company under Part-IX of the Companies Act, 1956 in September, 2005 will be regarded as transfer within the meaning of section 2(47) and other relevant provisions of the Income-tax Act, 1961? If so, will it give rise to capital gains liable to income-tax consequent upon the transaction entered into by the applicant of buying the shares of the said company in August, 2008 and making it its wholly owned subsidiary by reason of the provision in clause (d) of proviso to section 47(xiii) of the Act? Held that - Though we are not inclined to express a final opinion on the point of transfer, we would like to say this much : Section 47(xiii) read with Section 47A(3) cannot be construed to introduce a fiction to the effect that the income which is not liable to be taxed under the other provisions of the Chapter on capital gains can be deemed to be capital gains, if the violation of conditions take place. May be, these provisions were introduced on a supposition that the conversion of the firm into company under Part IX of the Companies Act would lead to realization of profits or gains on account of transfer of capital assets. But, S.47A(3) does not achieve the desired objective, as the language of the said Provision now stands. Section 47A(3) only emphasizes the obvious, that is to say, the profits and gains resulting from the transfer of capital asset chargeable under the Provisions of the Act.. To judge whether this prerequisite is fulfilled or not, we have to go back to the basic provisions, namely Section 45(1) and Section 48 and S.47-A(3) cannot be read as a ‘stand alone’ provision. no capital gains accrued or arose at the time of conversion of partnership firm into a private limited company under Part IX of the Companies Act and therefore, notwithstanding the non-compliance with clause (d) of proviso to Section 47(xiii) of the Income Tax Act, by reason of premature transfer of shares, the said company is not liable to pay capital gains tax.
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