TMI Blog2013 (9) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... firm as per their profit sharing ratio. After the revaluation, the partnership firm was converted into a private limited company under Chapter IX of the Companies' Act. The ld. representative further submitted that the assessee company complied with the provisions of section 47(xiii) of the Act. Therefore, there is no liability for capital gain tax on transfer of asset to the company on conversion of the partnership firm into a private limited company. 2. Referring to the order of the CIT(A), the ld. representative for the assessee submitted that the CIT(A) proceeded himself on the presumption that the partnership firm was converted into a company only with an intention to avoid tax on capital gain. Accordingly, he applied the principles laid down by the Apex Court in the case of Mcdowell Co vs. CTO 154 ITR 148 (SC). According to the ld. representative, the assessee is a well established dealer for Hyundai Motor India Ltd. Hyundai Motor India Ltd. as well as the banker insisted for the conversion of the partnership firm into a private limited company. The bankers insisted for revaluation of the land for the purpose of conversion. Therefore, according to the ld. representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly in any form or manner other than by way of allotment of shares in the company. In the case before us, according to the ld. DR, the revaluation of the land of the erstwhile firm was credited in the partners' current account and it was treated as loan in the hands of the company. Therefore, to the extent of the value of the land shown as loan in the accounts of the company, the company has a liability towards the partners of the firm. Moreover, the partners at their sweet will have every right to withdraw the amount which was shown as loan to the company. Therefore, the transaction is in the form of transfer of the property to the company giving right to the shareholders, who were erstwhile partners either to withdraw the money shown as advance or to receive interest on the amount shown as loan in the balance-sheet of the company. Therefore, according to the ld. DR, the profit accrued on revaluation of the assets were indirectly transferred to the benefits the partners. Therefore, according to the ld. DR, the conditions laid down in section 47(xiii) are not fulfilled; hence, the assessing officer has rightly treated the same as capital transaction. 6. We have considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] corporatization 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;] So, notwithstanding anything contained in section 45, the transfer of capital asset by a firm to a company as a result of succession cannot be subjected to capital gain tax, provided - (i) all the assets and liabilities of the firm relating to the business immediately before succession became the assets and liabilities of the company; (ii) 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; and (iii) the partners of the firm did not receive any consideration or benefit directly or indirectly in any form or manner other than by way of shareholders of the company. 8. In the case before us, all the assets and liabilities of the firm did not become the assets and liabilities of the company. In fact, the asset, viz. the land which was shown as asset of the company, the revaluation amount was shown as loan in the balance-sheet of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 chargeable 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 value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. 12. Section 45(4) was introduced in the statute book by Finance Act, 1987 with effect from 01-04-1988. Whenever there was a transfer of capital asset by way of distribution of capital asset on dissolution of the firm or association of persons or body of individuals, the profit shall be chargeable to capital gain tax. Before introduction of this section, there was no capital gain on distribution of capital asset when the firm was dissolved for the simple reason that when the firm was dissolved and the asset was distributed amongst the partners, there was no transfer of property under the common law. It is well settled principles of law that under the common law, partners and partnership firm are conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company, there is an indirect transfer of property and the partners of the erstwhile partnership firm can withdraw the money at any point of time which was shown as loan in the books of the assessee company apart from drawing interest. In fact, the partnership firm indirectly transferred the land to the private limited company and distributed the consideration to the erstwhile partners by treating the same as if the partners advanced loan to the private limited company. This is an accounting technique adopted by the firm for indirect transfer of property to evade tax and the capital gain. Therefore, there was distribution of assets which enables the partners of the erstwhile partners of the firm to withdraw the value of the landed property at any point of time from the accounts of the company. This Tribunal is of the considered opinion that the decision of the Ahmedabad Bench of this Tribunal in Alto Inter-Chem Industries (supra) is not applicable since the conditions laid down in section 47(xiii) of the Act are not complied with. The partners of the firm made an attempt to transfer the property by treating the value of the land as loan in the company. Therefore, this Trib ..... 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