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TMI Blog2019 (6) TMI 1376X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm and brought it to tax. The assessee firm filed appeal before the Commissioner of Income Tax (Appeals) against the assessment order but it was dismissed. The further appeal filed by the assessee before the Income Tax Appellate Tribunal was also dismissed. The assessee has challenged the order of the Tribunal in this appeal. 3. The following substantial questions of law, as reframed by us, arise for consideration in this appeal: i) Whether revaluation of a capital asset of the assessee firm before its conversion as a company and crediting the enhanced value of the asset to the current account of the partners and treating it as loan from the partners in the account of the company amounts to violation of clause (c) of the proviso to Section 47(xiii) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') and if so, whether the transaction amounts to transfer of a capital asset within the purview of Section 45 of the Act? ii) Whether, on the facts and circumstances of the case, revaluation of a capital asset of the assessee firm before its conversion as a company and crediting the enhanced value of the asset to the current account of the partners, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ody of individuals relating to the business immediately before the succession become the assets and liabilities of the company; (b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession; (c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession; (e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);" 8. Inviting our attention to Section 47(xiii) of the Act, learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revaluation of the asset and crediting the enhanced value of the asset to the current account of the partners, the consideration was distributed to the partners by showing it as loan advanced by partners in the accounts of the company. 12. Learned counsel for the appellant contended that the partnership firm was converted into a company on 21.04.2004 and all the assets and liabilities of the firm as on the date 20.04.2004 were transferred to the company and therefore, there was no violation of clause (a) of the proviso to Section 47(xiii) of the Act, as found by the Tribunal. We find no merit in this contention. What is mentioned under clause (a) of the proviso to Section 47(xiii) of the Act is that all the assets and liabilities of the firm immediately before the conversion of the firm as a company shall become the assets and liabilities of the company. Crediting the enhanced value of the land, just before the conversion of the firm into a company, to the current account of the partners of the firm thereby creating a liability on the firm and showing it as liability of the company, on conversion of the firm as a company, was only a device adopted by the partners of the firm for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal gains. The first and the second substantial questions of law raised are answered in favour of the revenue and against the assessee. 15. Learned counsel for the appellant invited our attention to Section 47(A)(3) of the Act and contended that even if the enhanced value of the land is treated as capital gains, it should have been brought to tax liable to be paid not by the assessee firm but by the successor company. We find merit in this contention. 16. Section 47(A)(3) of the Act provides that where any of the conditions laid down in the proviso to clause (xiii) of Section 47 of the Act are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under Section 45 by virtue of the conditions laid down in the proviso to clause (xiii) of Section 47 shall be deemed to be profits and gains chargeable to tax of the successor company for the previous year in which such requirements are not complied with. It is evident from this provision that on violation of the conditions provided in the proviso to clause (xiii) of Section 47 of the Act, when the transfer of the capital asset is brought within the ambit of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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