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TMI Blog2018 (10) TMI 1708X X X X Extracts X X X X X X X X Extracts X X X X ..... el, the documents relating to registration of assessee-company was said to be found. Accordingly, a notice under Section 153C of the Act was issued by the Assessing Officer to the erstwhile partnership firm on 26.09.2014. According to the Ld. counsel, before the assessee-company was incorporated as a company under the Companies Act, it was a partnership firm. The partnership firm had revalued its assets on 03.11.2008. On account of revaluation, the value of the asset was increased to the extent of Rs.117,24,04,974/- and the book value of the asset on the date of revaluation was Rs.52,16,526/-. According to the Ld. counsel, the difference between the book value of the asset and the revaluation was given credit as loan from the partners' capital account in the same proportion as their respective capital in the partnership firm. On conversion of partnership firm into a private limited company, the present assessee before this Tribunal, the balance in the capital account of all the shareholders / partners was Rs.117,32,87,070/-. Consequently, according to the Ld. counsel, shares were allotted to the partners of the firm for a total amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 153C of the Act was dropped, according to the Ld. counsel, the assessment framed under Section 143(3) read with Section 147 of the Act is invalid. For the same proposition, the Ld.counsel also placed his reliance on the judgment of Delhi High Court in CIT v. Anil Kumar Bhatia (2012) 82 CCH 113. 4. Referring to the copy of the notice dated 26.09.2014 issued by the Assessing Officer to the erstwhile partnership firm, the Ld.counsel for the assessee submitted that the Assessing Officer admitted that there was search operation in the case of SBQ Steels Ltd. On examination of seized material, the Assessing Officer found that part of the seized material belongs to erstwhile partnership firm. Therefore, he initiated proceeding under Section 153C of the Act. Having initiated the proceeding under Section 153C of the Act, according to the Ld. counsel, the Assessing Officer is expected to take the same to the logical conclusion. However, the Assessing Officer dropped the proceeding initiated under Section 153C of the Act, therefore, according to the Ld. counsel, the assessment framed by the Assessing Officer under Section 143(3) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the same proportion in which their capital accounts stood in the books of the firm on the date of succession. Here also, the partners of erstwhile partnership firm became shareholders of the assessee-company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession. Hence, the second condition is also fulfilled. Referring to the third condition, the Ld.counsel submitted that the partners of the firm do not receive any consideration or benefit directly or indirectly in any manner other than by way of allotment of shares in the company. According to the Ld. counsel, this condition was said to be violated since after revaluation, the revalued amount was credited in the capital accounts of the partners as a loan in the same proportion as their capital accounts stood on the date of revaluation. According to the Ld. counsel, the same credit on the date of revaluation continued even after the succession to the assessee-company in the same proportion. Therefore, according to the Ld. counsel for the assessee, the third condition of Section 47(xiii) of the Act are not violated. In other words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the Ld. counsel, it is a case of succession and not a case of dissolution and distribution. Therefore, in view of judgment of Madras High Court in CADD Centre (supra) and judgment of Apex Court in Malabar Fisheries Co. (supra), according to the Ld. counsel, it cannot be construed as transfer of capital asset by way of distribution on dissolution, hence, no capital gain tax is chargeable in the case of succession of the capital asset by a company from the erstwhile partnership firm. The Ld.counsel has also invited our attention to sub-section (3) of Section 45 of the Act and submitted that even in worst case, if the succession of the company to the partnership firm is construed as transfer of capital asset, then the capital gain may, at the best, be levied either in the hands of erstwhile partnership firm or in the hands of erstwhile partners. In the case before us, according to the Ld. counsel, the private limited company, which succeeded to the assets and liabilities of the partnership firm is the assessee. Therefore, according to the Ld. counsel, the assessee-company is not liable to capital gain tax even if it is construed as transfer of capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iolation of condition stipulated in Section 47(xiii) (c) of the Act. Therefore, the assessee is liable to pay tax on the capital gain. Referring to Section 2(47) of the Act, the Ld. D.R. submitted that extinguishment of right is also considered to be a transfer. On a query from the Bench, when the company succeeded to the assets and liabilities of the partnership firm, even for argument sake, it was construed as transfer, whether the assessee-company is liable to pay capital gain tax or the partners of the erstwhile partnership firm is liable to pay the tax? the Ld. D.R. could not clarify who is liable to pay tax on the capital gain in case it was construed as transfer. 11. We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee-company was constituted by converting a partnership firm into a private limited company. The assessee-company succeeded to all the assets, liabilities and business as a going concern of the erstwhile partnership firm. This is not in dispute. Moreover, the erstwhile partners of the partnership f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such and hence, there is no transfer. Therefore, the erstwhile partnership firm is not liable to pay tax on capital gain. In fact, the Madras High Court has observed as follows:- "16. It is not in dispute that the partnership firm transformed into a private limited company. The partnership firm and a private limited company are two different legal entities, with different legal liability. In other words, the liability of a partner is different from that of the liability of a director of a company. The company has an independent legal entity, de hors its share- holders, whereas the partnership firm has no such independent existence, de hors the partners. Therefore, when a partnership firm is transformed into a limited company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence, there is no liability to pay tax on capital gains. 17. It is strenuously contended that earlier, distribution of capital assets on dissolution of firm was not considered as transfer, but, on the Finance Act, 1987 (w.e.f. April 1, 1988), amending the said clause, the distribution of capital assets on the dissolution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set by a firm to a company as a result of succession, the same is not chargeable, as the condition prescribed therein are complied with. Thus, looking at either angle, the capital gain is not chargeable to tax." 19. So far as this case is concerned, there is no transfer of asset as (a) no consideration was received or accrued on transfer of assets from the firm to the company ; (b) the firm has only 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. 20. 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." 13. In view of the above judgment of Madras High Court, which is binding on this Tribunal, when the assets and liabilities and business of the partnership firm as a going concern were taken over by a private limited company incorporated and the partners of the erstwhile partne ..... 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