TMI Blog2016 (5) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... y revalued its assets which will not amount to transfer ; (c) the provision of section 45(4) of the Act is applicable only when the firm is dissolved. In the instant case, there is no distribution of asset, but only taking over of the assets from the firm to the company. Therefore, it is clear that the vesting of the property in the private limited company is not consequent or incidental to a transfer. There is no transfer of capital assets as contemplated by section 45 (1) of the Income- tax Act. - Decided in favour of assessee. - Tax Case (Appeal) No. 2619 of 2006 and M. P. No. 1 of 2007 - - - Dated:- 1-12-2015 - M. Jaichandren And S. Vimala, JJ. For the Petitioner : D. Anand, M/s. Pathy and Pathy For the Respondent : T. Ravi Kumar JUDGMENT S. Vimala, J. 1. When a firm is succeeded by a company, with no change either in the number of members or in the value of assets, with no dissolution of the firm and no distribution of assets, with change in legal status alone, whether there is a transfer as contemplated under sections 2(47) and 45(4) of the Income-tax Act, 1961 and whether the assessee is liable to be taxed, are the issues canvassed in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the business of private limited company as a going concern and all the assets of the firm got vested as assets of the private limited company, in which, the same partners are interested. On succession of the firm by private limited company, the shares were held in parity between V. Sathyamoorthy (son) and Chandra (mother), who were equal partners in the firm CADD India. 3.2 For the assessment year 1992-93, the appellant filed its return of income on October 23, 1992, declaring an income of ₹ 1,85,000. From the records, the Assessing Officer found that the accounts of the appellant firm was closed on November 30, 1991 and its existing business was taken over by a company M/s. CADD Centre India Pvt. Ltd. The Assessing Officer came to the conclusion that the transfer of business assets of the appellant firm to the private limited company would constitute distribution of assets and would attract capital gains as contemplated under section 45(4) of the Income-tax Act and that the assessee is liable to pay tax on capital gains . 4. Against the order of the Assessing Officer, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals) VI, Chennai. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not raised before the Commissioner of Income-tax, that is before the first appellate authority. It is further submitted that the Income-tax Appellate Tribunal rightly declined to entertain that ground, (regarding reopening of assessment) and therefore, that issue does not arise for consideration. In order to appreciate the justifiability of the preliminary objection, it is necessary to look into the observations made by the Income-tax Appellate Tribunal, which reads as under : In the cross-objection, the assessee is aggrieved in the reopening of assessment under section 148 of the Income-tax Act. The learned counsel for the assessee submitted that there is no failure on the part of the assessee to submit all the information required for the completion of the assessment before the Assessing Officer and all the information were available in the return of income and the balance- sheet filed along with the return of income and hence the Assessing Officer was not justified in reopening the assessment. We find that this issue does not arise out of the order of the Commissioner of Income-tax (Appeals) and hence, we decline to entertain this ground. 7. A perusal of the grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital gains are deemed to be income, under section 2(24)(vi) of the Income-tax Act. 9.1 One of the pre-conditions to be fulfilled is that there should be transfer of a capital asset for a gain to be taxed as capital gains. In other words, in order to bring a transaction under the ambit of capital gains, it is a must that the receipt or accrual must have originated in a transfer within the meaning of section 45(1) read with section 2(47) of the Act. The transfer presumes the existence of both the asset and the transferee, to whom, it is transferred, as held by the Supreme Court in the case of Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647 (SC). 10. It is an admitted fact that the partnership firm as on April 1, 1988 was converted into an incorporated company as on November 21, 1991. Whether it would amount to transfer of capital asset, is the issue raised in this case. 10.1 It is an admitted case of both parties that originally, there was a partnership firm consisting of only two partners, and later, the partners transformed the partnership firm into a private limited company, by name, M/s. CADD India Pvt. Ltd., with the same two partners becoming shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) (w.e.f. April 1, 1988) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property (as defined). Before a levy on the capital gain can be imposed, it is a must to ensure that, such a gain has arisen from the disposal of the asset, by any one of the mode, referred to in the definition of the term transfer in section 2(47). 13.2. Section 45(4) of the Income-tax Act 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 charge able 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions 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 . . . In this case, the erstwhile firm has been treated as a limited company by virtue of section 575 of the Companies Act. It is not in dispute that in this case, the erstwhile firm became a limited company under Part IX of the Companies Act. Now, section 45(4) clearly stipulates that there should be transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a partnership firm is treated as a limited company, the properties of the erstwhile firm vests in the limited company. The question is whether such vesting stands covered by the expression 'transfer by way of distribution' in section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the limited company and distribution of the property. On vesting in the limited company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution presupposes division, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 354 of 263 ITR) : 'In the present case, we are concerned with a partnership firm being treated as a company under the statutory provisions of Part IX of the Companies Act. In such cases, the company succeeds the firm. Generally, in the case of a transfer of a capital asset, two important ingredients are : existence of a party and a counter-party and, secondly, incoming consideration qua the transferor. In our view, when a firm 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 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 properties in the company as the firm is treated as a limited company. On the vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is now treated as a company, after a given date. In the circumstances, in our view, there is no transfer of a capital asset as contemplated b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the priority like payment of taxes to the Government, BMC etc., payment to unsecured creditors etc. This difference is very important. This difference is amply brought out conceptually in the judgment of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC). In the present case, therefore, we are of the view that section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the latter part of section 45(4), which refers to computation of capital gains under section 48 by treating fair market value of the asset on the date of transfer, does not arise.' The underlined portion, in a way, signifies the basic tenets of transfer of assets. 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 share holder. 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion otherwise and therefore, it is a deemed transfer attracting capital gains. 15.1 Further contention of the learned counsel for the respondent is that the Legislature has used the expression 'or otherwise' and not 'and otherwise' ; therefore, the intention of the Legislature is to cover cases of capital gains even where there is no dissolution of the firm at all and when the transfer takes place in other mode also. In support of this and other legal contentions, the following decisions are relied upon : (i) CIT v. Southern Tube [2008] 306 ITR 216, 219 (Ker) : We are unable to agree with the view taken by the Tribunal that section 2(47) does not cover dissolution and distribution of assets of a firm because sub-clause (vi) of section 2(47) covers every agreement or arrangement in whatever manner which has the effect of transferring or enabling enjoyment of any immovable property. In fact the transactions referred to in the latter part of clause (vi) are exhaustive and in our view the scope of the section is such that if the result of arrangement or agreement of a transaction is a transfer of assets or enabling enjoyment of any immovable property, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red. If so read it will further the object and the purpose and intent of the amendment of section 45. Once, that be the case, we will have to hold that the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which is chargeable to tax under section 45(4) of the Income-tax Act. We will, therefore, have to answer question No. 3 by holding that the word 'otherwise' takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. This decision has been followed by the honourable Madras High Court in the case of CIT v. Nathan and Co. (TC (A) No. 1458 of 2005 (Mad). In the reported case, there was a transfer of asset in favour of retiring partner. That is not the situation contemplated in the facts of this case. Hence, this decision is not applicable. (iii) Suvardhan v. CIT [2006] 287 ITR 404, 408 (Karn) : The Finance Act, 1987, with effect from April 1, 1988, omitted this clause, instead of amending section 2(47), the effect of which is that distribution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction by the appellants amounts to transfer of capital asset which attracts liability for tax for capital gains. The transaction in this case involves sale of partnership business along with retirement of two partners. Therefore, this case is distinguishable on fact. (v) Ana Labs v. Deputy CIT [2015] 371 ITR 295, 301 (T AP) : An attempt is made to apply the concept underlying clause (xiii) of section 47 of the Act. Firstly, the provision was not in vogue in the relevant assessment year. Secondly, assuming that the concept was in the offing and in a given case, it may be applied if the facts support. The case of the appellant does not fall into that. It was not a case of succession of the firm by the appellant firm by the transferee company, much less there was any exercise of corporatisation or demutualization, which are essential to attract clause (xiii) of section 47 of the Act. The appellant is not able to demonstrate that the figures mentioned by the Assessing Officer are incorrect. In the reported case, there is a factual finding that sale took place before the dissolution of the firm and therefore, there was an obligation to pay tax. It is not so in this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause, the distribution of capital assets on the dissolution of firm will be a transfer. This proposition is not in dispute. The question here is, when there is no dissolution at all of the partnership firm, whether there is transfer of capital assets and consequently, whether there is a liability to pay tax on capital gains. On facts, the finding is that there is no dissolution of partnership firm. It is not in doubt that, in case of dissolution of partnership firm, there is transfer of assets and consequently, the assessee is liable to pay tax on capital gains. 18. It would be appropriate to quote the decision in Asst. CIT v. Unity Care and Health Services [2006] 286 ITR (AT) 121 (Bang) ; [2006] 106 TTJ 1086 (Bang.), whereunder, in a similar fact situation, it has been held that when a partnership firm is transformed into a company, there is no transfer of capital asset, as the transfer is by operation of law and the relevant observation reads as under (page 130 of 286 ITR (AT)) : When a conversion of a firm into company takes place under the provisions of the company law, such conversion can be construed only as occasioned by operation of law. Hence, no controversy can ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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