TMI Blog1987 (7) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... any right or interest in any of the assets or properties of the firm excepting the share capital contributed by it during the continuance of the firm and in the event of dissolution of the firm or retirement of partner No. 8 it will be entitled either to recover the share capital standing to its credit till date of dissolution and any undrawn profit or to share in the assets of the firm equivalent to the share capital contributed by it and in any undrawn profit, but not in the profits of dissolution, if any. 3. On 5-12-1973, an agreement was entered into between the assessee and one K. Jeyaraj Ballal in which it was recited that the assessee-firm intended to take necessary steps to vest exclusively the hotel business with all its assets and liabilities in the company and thereafter all the shares of the company were to be transferred to Mr. Ballal and his nominees for a consideration of Rs. 55,00,000. A sum of Rs. 5,00,000 was advanced by Mr. Ballal to the first partner L.G. Balakrishnan on 5-12-73 and another sum of Rs. 10,00,000 on 17-1-1974 which were brought by him as his funds into the firm's accounts. On 2-2-1974 the company resolved at a meeting of the Directors to take ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revaluing the assets before the dissolution. He accordingly brought to tax a sum of Rs. 16,31,492 as profit under section 41(2) apart from disallowing depreciation in the amount of Rs. 1,24,249 and development rebate in the amount of Rs. 2,215 and also added a sum of Rs. 23,69,208 as capital gains arising from the transfer of the property. When this was confirmed on appeal, the matter was taken up to the Tribunal. By an order dated 25-11-1980 in ITA No. 2628/Mds/79 the Appellate Tribunal set aside the orders of the authorities below and remitted the matter to the ITO to probe further into the matter to ascertain when the steps for the dissolution of the firm were initiated and whether the induction of the company as a partner was a step towards the transfer of the firm to Mr. Ballal. The Tribunal also directed that Shri Ballal should be examined, but unfortunately he passed away before he could be examined. 7. The ITO in pursuance of the order of the Tribunal examined Shri L. G. Balakrishnan on 11-2-1983 and he stated that negotiations were started with Mr. Ballal in 1973 after the company was floated on 13-3-73 and that the company itself was formed only for the purpose of conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al method of executing a deed of transfer and in a case where immovable property is involved it has to be by way of an instrument in writing duly registered. If there had been such a transfer by an instrument duly registered, as required by section 54 of the Transfer of Property Act, then of course it will be a transfer within the meaning of section 45 of the Income-tax Act and the capital gains arising therefrom would be taxable. Such is admittedly not the case here. 11. The other well-recognised method is that for a firm to convert its property into the property of a company by itself becoming a company. In other words, individual partners themselves form a company which becomes a partner of the firm and upon dissolution of the firm the entire property is allotted to the company which holds it as the property of the company. This method is so well-recognised that the Legislature has taken note of it in section 33 of the Income-tax Act where an Explanation states that where the firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any capital asset, the sub-clause (3) which excludes the withdrawa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09, it was argued on behalf of the Revenue that the method adopted by the assessee to convert the property from a firm's holding into a company's holding was only a device to camouflage the sale of the property through a mode which does not attract tax and though it may be regarded as a tax planning device it was in fact to be frowned upon and the transaction brought to tax. For this purpose, it was emphasised that the conversion had taken place after negotiations with Ballal and that the properties of the firm have been re-valued to equalise the consideration by Ballal. 15. Taking the second point first, we do find that there has been a re-valuation of the assets of the firm inasmuch as the balance sheet of the firm showed the value at Rs. 20,60,196.14 whereas the shares were allotted to the partners in the sum of Rs. 58 lakhs which was almost equivalent the amount of Rs. 55 lakhs which Ballal had agreed to pay for the purchase of the shares. But the re-valuation by itself cannot give rise to any profit as long as the owners of the assets remained the same. It was then argued that the motive for the revaluation should be taken into account. But we are of the view that when the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these and other pertinent considerations may be taken into regard when the Income-tax Officer enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth." 17. In the present case, the assessee-firm was initially constituted in 1959. The partnership is a genuine one. In 1973 the same partners were shareholders in a company newly incorporated on 14-4-83 and thereafter the company was admitted as a partner on 16-4-1983 in the assessee-firm. Though at the point of taking in the new partner it cannot be said that intention was established of handing over the assets of the firm to the company-partner especially because it was specially provided that the company-partner will have no share in the assets, it was made manifest shortly thereafter especially when the agreement dated 5-12-1983 was executed, that the firm would be dissolved and the assets would go to the company and thereafter the shares in the company would be transferred to another group. This would be a case where the partnership is genuine looking to the track ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because, according to the definition of section 2(47) read with section 47(ii), as it then stood, such a transaction would not amount to transfer within the meaning of section 2(47). 19. To get over such instances apparently provisions have been introduced in the form of new provisions such as section 45(4), which reads as under : " 45. (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value 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." Consequentially the definition of ' transfer ' in section 2(47) has also been amended to include : " 2. (47) " transfer " in relation to a capital asset, includes,--- (vi) any transaction (whether by way of becoming a member of, or acquiring shares ..... X X X X Extracts X X X X X X X X Extracts X X X X
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