TMI Blog2016 (1) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Insofar as invocation of subsection (2) of section 45 of the Act is concerned, while the Assessing Officer has briefly referred to the said provision in paragraph 5.7 of his order, no factual foundation has been laid down in that regard to establish that the said properties had been brought into the books as stock-in-trade. On the contrary the learned counsel for the assessee has maintained that the said properties were always treated as capital assets and were never converted into stock in trade. Under the circumstances, in the absence of any factual foundation having been laid in that regard, the question of invoking sub-section (2) to section 45 of the Act would not arise. Thus the provisions of section 45(4) of the Act would not be attracted in the present case as the provisions of section 45(1) and section 45(4) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of land from Sarita Co-operative Housing Society Ltd. on lease for a period of 99 years without any premium consideration except annual lease rent of ₹ 8,000/- payable to the lessor-Society as per lease deed executed on July 18, 1980. On construction of the first floor, the assessee was to pay a sum of ₹ 16,000/- to the lessor. The assessee was assigned the right to transfer, assign or sub-lease the land alongwith constructions thereon. It kept the land and the shopping centres and godowns built thereon as non-business asset outside the balance sheet, and had shown the rental income from the said source as income from House Property. 6. In the enclosures to Form No.3CD, in the notes to the accounts, it had been mentioned that the firm was having shopping centre at Sarita Society at Bhavnagar, the cost of which was not recorded in the earlier year. During the financial year 1995-96 the asset known as Sarita Shopping Centre was revalued with land and building at ₹ 1,16,40,000/- and during the financial year 1995-96 such amount was considered as asset of the firm. The revaluation reserve was created on the basis of a certificate of a Chartered Engineer who had cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00/- which had been revalued at ₹ 61,00,000/- in assessment year 1996-97, shares to the extent of revaluation came to be allotted to the partners as was done in the case of Sarita Shopping Centre. 9. The assessee was asked as to why the capital gain upon such transfer of the assets should not be brought to tax. The assessee replied that under Chapter IX of the Companies Act, the firm has been registered as M/s. Kalathia Engineering Construction Ltd. and all the assets and liabilities have been owned by the company, hence there is no capital gain. Secondly, since the assets have been revalued in the hands of the firm and partners capital have been appropriated accordingly, it cannot be said to be a transfer as the asset had remained in the firm. The assessee also made an application under section 144A of the Act before the Additional Commissioner of Income-tax on this issue claiming that capital gain does not arise as there is no transfer. The Additional Commissioner of Income-tax directed the Assessing Officer to consider the issue after looking into the submissions of the assessee. The assessee submitted that there was no transfer of property inasmuch as immovable prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 1,16,40,000/- The Assessing Officer treated the same as short term capital gain as the asset had been brought for the first time in its books of account and added it to the income of the assessee. B) Land Sale consideration Rs.61,00,000/- Less: Cost of acquisition Rs.12,00,000/- Capital Gain Rs.49,00,000/- This was also treated as short term capital gain as the asset had been transferred within three years of acquisition and was added to the income of the assessee. 11. The assessee carried the matter in appeal before the Commissioner (Appeals). Before the Commissioner (Appeals), it was contended on behalf of the assessee that the need for revaluation of the assets of the firm represented by Sarita Shopping Centre arose because the assessee firm was to be converted into a joint stock company and wanted to enter the capital market by way of public issue for which the promoters were required to acquire capital of ₹ 3,00,00,000/ (Rupees three crores). It was also contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the two plots on which shops and godowns were subsequently built on 18th July, 1980. It was only on 16th February, 1996 on which date the assessee firm was succeeded to a company known as M/s Kalathia Engineering Construction Limited that the asset was transferred from the firm to the company for an amount of ₹ 1,16,40,000/- The making of entries on 31st July, 1995 was not relevant to the date on which the said asset was acquired owned by the assessee firm. According to the Commissioner (Appeals), the law is settled that a transfer of assets by a partnership firm to the company comprising only of share holders who were earlier partners of the firm involves liability under section 45 of the Act. This position remained in force till assessment year 1998-99 when the law came to be amended with effect from 1st April, 1999 to provide that where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset to the company, the provisions of section 45 would not apply to such a transaction subject to certain conditions. Therefore, the aforesaid amendment is not applicable to such transfers made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the transferor. The consideration in the instant case is stated to be allotment of shares though the shares were issued by the company not to the firm but to its partners. Even if we consider that the shares somehow represented the consideration, the firm would not be liable to tax. 18. If it is assumed to be transfer u/s.45(4) of the Act, then also it is difficult to fit in the facts of the present case to the provisions of sec. 45(4). One of the essential requirements to attract sec. 45(4) is that there must be distribution of capital assets belonging to the firm. Moreover, the sub-section implies distribution of capital assets in specie . In the instant case, no such distribution has taken place. Therefore, viewed from any angle, it is difficult to accept the contention of the revenue that capital gains accrued to the assessee on its conversion into a joint stock company under Chapter IX of the Companies Act. 19. We need not deal with the issue whether the amounts are taxable either as casual income or u/s. 28(iv) of the Act, since finally AO treated it as capital gains only and the CIT(A) also had held it as such. Accordingly, the additions of ₹ 1,16,40,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onverted into stock in trade and thereafter transferred to the company and hence, in view of section 45(2) read with section 2(47)(iv), that amount was exigible to capital gains tax. Also land which was acquired in the assessment year 1995-96 at the value of ₹ 12,00,000/- has been revalued at ₹ 61,00,000/- in assessment year 1996-97 and shares to the extent of revaluation have been allotted to the partners of the firm in proportion to the shares held by them as has been done in the case of Sarita Shopping Centre. Thus, the value of land has been enhanced by ₹ 49,00,000/- and hence capital gain would arise under sub-section (4) of section 45 of the Act because of transfer of this asset to the company . 14.2 It was pointed out that section 47(xiii) of the Act which provides that a transaction involving any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm is not regarded as a transfer was brought on the statute book with effect from 1st April, 1999 and would therefore, not be applicable in the present case. It was submitted that since the assets of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. At the instance of the assessee, the Tribunal inter alia referred the following questions for the opinion of the High Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the principle of mutuality will not apply and, therefore, the assessee was liable to be taxed? 2. Whether, on the facts and in the circumstances of the case, section 41(2) was applicable? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus was not capital gains, but was business income? The High Court answered the first question in favour of the revenue and the second and third questions in favour of the assessee. The revenue carried the matter in appeal before the Supreme Court. Since the first question was answered in favour of the revenue, the appeal was confined to the other questions. The Supreme Court held that the income was chargeable to tax under section 41(2) of the Act. It, however, observed that since the liability under section 41(2) of the Act is limited to the amount of surplus to the extent of the difference between the written down value and the actual cost, if the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m is treated as a Company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the Limited Company. It is no doubt true that all the properties of the Firm vest in the Limited Company on the Firm being treated as a Company under Part IX of the Companies Act, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of the properties in the Company as the Firm is treated as a Limited Company. On vesting of all the properties statutorily in the Company, the cloak given to the Firm is replaced by the different cloak and the same Firm is now treated as a Company, after a given date. The court was accordingly of the view that there was no transfer of a capital asset as contemplated under section 45(1) of the Act. 15.1 Ms. Shah accordingly, urged that when a partnership firm is converted to a company and the assets and liabilities are taken over, it is not a transfer of a capital asset within the meaning of such expression as envisaged under section 2(47) of the Act. 15.2 Reliance was placed upon the decision of the Punjab Haryana High Court in the case of Commissioner of Income-tax v. Rita Mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment in Electric Control Gear Mfg. Co.3 is given by the same Bench which decided the case of Artex Mfg. Co.1 In fact, both the judgments are reported one after other in 227 ITR at pp. 260 and 278 respectively. 20. In the present case, as can be seen from the impugned judgment of the Delhi High Court, the judgment of this Court in Electric Control Gear Mfg. Co.3 is missed out. That judgment has not been considered by the High Court. As stated above, this Court has clarified its judgment in Artex Mfg. Co.1 in its judgment in Electric Control Gear Mfg. Co.3 Therefore, Section 41(2) has no application to the facts of the present case. 21. As regards applicability of Section 45 is concerned, three tests are required to be applied. In this case, Section 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated code. Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the contention that there is no transfer, even if there is a transfer, it is a slump sale and section 45 would not apply to the present case as the entire undertaking has been transferred as a going concern. 15.5 Reliance was placed upon the decision of this court in Commissioner of Income-tax v. Garden Silk Weaving Factory, (2005) 279 ITR 136 (Gujarat), for the proposition that where what was sold by the assessee-firm to the limited company was its running business as a going concern together with all the assets and liabilities and the provision of section 41(2) of the Act cannot be invoked. Reliance was also placed upon the decision of this court in Assistant Commissioner of Income Tax v. Patel Specific Family Trust, (2011) 330 ITR 397 (Guj), for the proposition that in case of sale of the entire business, including all assets and liabilities, as a going concern, it was not possible to bifurcate the consideration received on account of the transfer. 15.6 As regards the contention raised by the learned counsel for the appellant that the present case would fall within the ambit of section 45(2) of the Act as the capital assets had been converted into stock in trade, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High Court in Commissioner of Income-tax v. Texspin Engineering and Manufacturing Works does not consider words or otherwise appearing in section 45(4). To that extent the view taken by the Bombay High Court is not correct. 17. It is in the backdrop of the aforesaid facts and contentions that the controversy involved in the present case has to be examined. In the facts of the present case, capital gains tax is sought to be levied in respect of immovable property being land and building. Insofar as the building being Sarita Shopping Centre is concerned the same was for the first time brought into the books of account after revaluation only in the year under consideration. Evidently, therefore, no depreciation had been claimed in respect thereof. Under the circumstances, the question of invoking section 41(2) of the Act would not arise in the present case. Strong reliance has been placed by the learned counsel for the appellant on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Artex Manufacturing Co. (supra) for the purpose of contending that the transaction would be exigible to capital gains tax. In the facts of that case, it may be noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Insofar as invocation of subsection (2) of section 45 of the Act is concerned, while the Assessing Officer has briefly referred to the said provision in paragraph 5.7 of his order, no factual foundation has been laid down in that regard to establish that the said properties had been brought into the books as stock-in-trade. On the contrary the learned counsel for the assessee has maintained that the said properties were always treated as capital assets and were never converted into stock in trade. Under the circumstances, in the absence of any factual foundation having been laid in that regard, the question of invoking sub-section (2) to section 45 of the Act would not arise. Sub-section (4) of section 45 of the Act provides that 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, according to the Assessing Officer, on vesting of the properties of the firm in the company, there was a resultant dissolution of the firm. Therefore, according to the Assessing Officer, both the conditions under Section 45(4) stood satisfied and, therefore, he was entitled to take the fair market value of the asset on the date of the transfer to be the full value of the consideration received as a result of the transfer. It is for this reason that the Assessing Officer has computed the capital gains under Section 48 by referring to the comparative figures of the book value and the market value. As stated above, in this connection, the Assessing Officer has computed capital gains arising to the assessee-firm at ₹ 9 lakhs on the basis of the difference between the market value and the written down value. The Assessing Officer has taken the written down value as on 1st April, 1995 and he has taken the market value as on 8th November, 1995 (alleged date of transfer) and on that basis, he has computed the capital gains. However, as stated, computation under Section 45(4) read with Section 48 would arise only if the aforestated two conditions are satisfied to attract Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced with effect from 1st April, 1999 in order to encourage more and more Firms becoming Limited Companies. It also indicates the difference between transfer and transmission. Basically, when a Firm is treated as a company under Part IX, it is a case similar to transmission. This is amply made clear by clause (xiii) to Section 47, which states that where a Firm is succeeded by a company in the business, the transaction shall not be treated as a transfer. Now, this amendment has been made in Section 47 in view of the controversy arising on Section 45(1) read with Section 2(47)(ii). As stated above, Section 45(1) is a charging section. Section 45, read with the computation Section viz. 48 etc., form one composite scheme. This point is very important. Section 45(1) provides that where any profit, arising from transfer of a capital asset is effected in the previous year then such profit shall be chargeable to income-tax under the head Capital gains . The expression transfer of a capital asset in Section 45(1) is required to be read with Section 2(47)(ii) which states that transfer in relation to a capital asset shall include extinguishment of any rights therein. The moot poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Section 2(47)(iii), even then we are of the view that liability to pay capital gains would not arise because Section 45(1) is required to be read with Section 48, which provides for mode of computation. These two sections are required to be read together as the charging section and the computation section constitute one package. Now, under Section 48 it is laid down, inter alia, that the income chargeable under the head Capital gains shall be computed by deducting from the full value of the consideration received or accrued as a result of the transfer, the cost of acquisition of the asset and the expenditure incurred in connection with the transfer. Section 45(4) is mutually exclusive to Section 45(1). Section 45(4) categorically states that where there is a transfer by way of distribution of capital assets and where such transfer is due to dissolution or otherwise of the firm, the Assessing Officer was entitled to treat the market value of the asset on the date of the transfer as full value of the consideration received. This latter part of Section 45(4) is not there in Section 45(1). Therefore, one has to read the expression full value of the consideration received/accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not there in Section 45(1) read with Section 48. If one reads Section 45(1) with Section 48, it is clear that the former is a charging section and if that section is applicable, the computation has to be done under Section 48, which only refers to deductions from full value of consideration received or accruing. Section 48 does not empower the Assessing Officer to take market value as full value of consideration as in the case of Section 45. In the circumstances, even if we were to hold that vesting amounts to transfer, the computation is not possible because it has been laid down in the above judgment of the Supreme Court that full consideration cannot be construed to mean market value of the asset transferred. The Legislature, in its wisdom, has amended only Section 45(4) by which the market value of the asset on the date of the transfer is deemed to be the full value of consideration. However, such amendment is not there in Section 45(1). In the circumstances, neither Section 45(1) nor Section 45(4) stand attracted. [Emphasis supplied] 19.1 This court is in complete agreement with the view adopted by the Bombay High Court in the above decision and is further of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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