TMI Blog2003 (3) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, 1961, for the assessment year 1996-97 with the following questions of law for our opinion: "(i) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the provisions of section 45(1) and (4) are not attracted even though there was a transfer of assets from the firm to the newly constituted company on conversion of firm to company under Part IX of the Companies Act, 1956? (ii) Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in directing to allow depreciation for the year even though the written down value of the block of the assets at the end of the year was nil as per the provisions of section 32 read with section 43(6)(c)(i)(B) of the Act?" Facts: A firm by the name Texspin Engineering and Manufacturing Works was engaged in the business of manufacturing ball bearings. The said firm filed its return of income for the period April 1, 1995, up to November 7, 1995, stating that it had been thereafter converted into a limited company. The return of the remaining period from November 7, 1995, to March 31, 1996, was fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer. Being aggrieved, the assessee carried the matter in appeal to the Tribunal, which took the view on question No.1 that section 45(4) was not applicable as there was no distribution of capital assets amongst the partners of the firm on the vesting of their capital assets of the firm in the company. That, section 45(1) was also not attracted as no consideration was received by the assessee-firm on the vesting of the capital assets in the limited company. On non-allowance of depreciation, the Tribunal took the view that vesting of capital assets in the company did not amount to sale and, therefore, the conditions of section 43(6)(c)(i)(B) were not satisfied. In the circumstances, the Tribunal allowed the claim for depreciation. Being aggrieved by the decision of the Tribunal, the matter has come in appeal before us under section 260A of the Income-tax Act. Arguments: Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, contended that on vesting of the properties of the firm in the limited company, the partners of the erstwhile firm became shareholders of the company. That, on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year and, therefore, the capital gains was rightly calculated at Rs. 9 lakhs on the basis of the difference between the market value of the assets on the date of vesting, i.e., November 7, 1995, and the written down value at the beginning of the year, i.e., on April 1, 1995. On question No.2, it was submitted that on March 31, 1996, the assessee-firm was not the owner of the assets as the assets stood sold during the accounting year ending March 31, 1996, and, therefore, the Assessing Officer was right in disallowing the assessee's claim for depreciation amounting to Rs. 27,67,000. Mr. Patil, learned counsel for the assessee, submitted that under section 45(4) of the Act, two conditions are required to be satisfied. Firstly, there must be a transfer by way of distribution of capital assets and secondly, that, such transfer should be either on account of dissolution of the firm or otherwise. Mr. Patil contended that in this case, there was no transfer because under Part IX of the Companies Act, the firm is merely treated as a company statutorily. He submitted that under Part IX of the Companies Act, the same entity, viz., the firm is treated as a company and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the partners on the one hand and the vesting of the assets in the limited company on the other hand. Under the circumstances, Mr. Patil contended that even if one assumes accrual of capital gains, computation of capital gains can be done only under section 48, which as stated above, was not attracted. He, therefore, contended that there is no merit in this appeal. On the question of depreciation, it was submitted that under section 32, an assessee is entitled to depreciation once he makes use of the assets. That, there is no requirement that the assessee should continue to hold the capital assets till the end of the year. He contended that depreciation is to be calculated on actual costs or written down value. He contended that in the present case, the Department has invoked section 43(6)(c)(i)(B) to justify its conclusion that in the case of block of assets, the written down value has got to be adjusted by deduction of monies payable in respect of any asset falling within the block of assets, which is sold, discarded, demolished or destroyed during the previous year. He contended that in the present case, none of the conditions are applicable. He contended that vesting was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the capital gains arising to the assessee-firm at Rs. 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 April 1, 1995, and he has taken the market value as on November 8, 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 section 45(4). 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) dearly stipulates that there should be a transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a partnership fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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., section 48, etc., form one composite scheme. This point is very important. Section 45(1) provides that where any profit, arising from the 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 point which arose on an interpretation of section 45(1) in numerous matters was that on extinguishment of the rights in the capital assets, there was a transfer and in certain cases of reconstitution of firms and introduction of new partners, there was a resultant extinguishment of the rights in the capital assets proportionately. In order to get over this controversy, and keeping in mind the object of encouraging firms be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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" under section 48 de hors section 45(4) and if one reads section 48 with section 45(1) de hors section 45(4) then the expression "full value of consideration" in section 48 cannot be the market value of the capital asset on the date of transfer. In such a case, we have to read the said expression in the light of the two judgments of the Supreme Court in the case of CIT v. George Henderson and Co. Ltd. [1967] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer to take the market value as the full value of consideration as in the case of section 45(4). 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 the 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. (C) On disallowance of claim for depreciation: In this case we are concerned with the assessment year 1996-97. Section 32 provides for allowance of depreciation in respect of assets owned by the assessee and used for the purpose of the business. Prior to April 1, 1988, the allowance was subject to conditions prescribed in section 34. At that time, section 34(2)(ii) provided that no depreciation shall be allowed in respect of assets sold, discarded, demolished or destroyed. After April 1, 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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