2014 (12) TMI 1199 - HC - Income Tax

Capital gain - interpretation of Sec. 45 - revaluation of the assets of the assessee firm and subsequent conversion of the firm into Limited Company under Chapter IX of the Companies Act - whether no transfer involved when the assessee gets itself registered under Para IX of the Companies Act 1957 ? - Held that - The same question came up for consideration before the Andhra Pradesh High Court in the case of Commissioner of Income Tax vs. United Fish Nets 2014 (10) TMI 574 - ANDHRA PRADESH HIGH COURT wherein held that the distribution must result in some tangible act of the physical transfer of properties or the intangible act of conferring exclusive rights vis.a.vis an item of property on the erstwhile shareholder. Unless these or other legal correlatives take place it cannot be inferred that there was any distribution of assets. In the instant case the shares of the respective shareholders in the respondent-company were defined under the partnership deed. The only change that has taken place on the respondent being transformed into a company was that the shares of the partners were reflected in the form of share certificates. Beyond that there was no physical distribution of assets in the form of dividing them into parts or allocation of the same to the respective partners or even distributing the monetary value thereof following the decision in Commissioner of Income-Tax Versus Texspin Engineering And Manufacturing Works 2003 (3) TMI 56 - BOMBAY High Court . Income Tax Appellate Tribunal is right in law and on facts of the case in holding that the assessee is not liable to any capital gain tax either u/s. 45(1) or 45(4) of the IT Act - Decided in favour of assessee

Summary

Issues:
1. Challenge to judgment and order by Income Tax Appellate Tribunal
2. Substantial questions of law:
a. Revaluation of assets and conversion of firm into Limited Company
b. Transfer involved in registration under Companies Act
c. Liability to capital gain tax under IT Act
d. Addition of specific amount

Analysis:
1. The appellant challenged the judgment of the Income Tax Appellate Tribunal regarding the assessment year 1995-96. The matter was referred back to the High Court by the Apex Court for a fresh decision on substantial questions of law. These questions included the treatment of revalued assets upon conversion of a partnership firm into a Limited Company under the Companies Act, the existence of a transfer when registering under the Companies Act, liability to capital gain tax, and the addition of a specific amount to the income.

2. The facts revealed that the respondent-assessee, initially a partnership firm, revalued assets and converted into a company under the Companies Act. The Assessing Officer initiated reassessment proceedings, determining the total income of the assessee at a specific amount. The CIT(A) upheld the addition, which was later set aside by the Tribunal, leading to the Revenue's appeal before the High Court.

3. During the hearing, the advocate for the respondent cited a similar case before the Andhra Pradesh High Court, emphasizing the interpretation of Section 45 regarding asset transfers. The High Court's decision highlighted the necessity of tangible or intangible acts in asset distribution. The advocate also referenced decisions by the Bombay High Court and the Punjab & Haryana High Court, supporting the assessee's position on capital gain tax.

4. Considering the precedents and legal interpretations, the High Court dismissed the appeal, ruling in favor of the assessee on all substantial questions of law raised by the Revenue. The Court aligned with the Tribunal's decision, citing consistency with previous judgments and declined to provide detailed reasons for the ruling. Consequently, the Tax Appeal was dismissed, upholding the Tribunal's decision in favor of the assessee.