TMI Blog2001 (5) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... version of firm into a company was not offered as capital gain though according to the AO, there was a transfer of assets from partnership firm to the company, a separate entity. In this view of the matter, the AO initiated reassessment proceedings by issue of notice under s. 148 of the IT Act on 27th Dec., 1996, and thereafter, he took up the proceedings and after issuing notices under s. 143(2)/143(3) of the IT Act and after considering the explanation given by the assessee, the AO finally determined the total income of the assessee at Rs. 1,30,07,761. 2.1. As mentioned earlier, after the initiation of the assessment proceedings, the AO issued letter dt. 11th Feb., 1999, requiring the assessee to furnish written explanation as to why capital gain should not be taxed in the hands of the assessee for the additional income of the depreciable assets on enhancement of the price and thereafter conversion of the firm into a company which has resulted in transfer of assets from the assessee-firm to the company under Part IX of the Companies Act. 2.2. The assessee furnished the written explanation, dt. 22nd March, 1999, wherein it inter alia made the following submissions: (i) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the facts of the case, (ii) on conversion of partnership-firm, the original partners became the directors of the company, and (iii) the value of the depreciable assets stood enhanced on conversion and, therefore, the shareholding of the directors has increased in comparison with their capital available with the partners. Therefore, the increase in shareholding arising out of the revaluation of assets is sought to be kept beyond the tax liability by the assessee and as such it was a tax planning device only. Accordingly, the AO held that capital gain was leviable. 2.4. The AO further, held that the contention of the assessee founded on the ground that partnership properties got statutorily vested in the company as a consequence of registration under Part-IX of the Companies Act, was not acceptable because under Part-IX of the Companies Act, there was transfer of capital assets in view of the decision of the Hon'ble Gujarat High Court in the case of Artex Manufacturing Co. vs. CIT (1981) 21 CTR (Guj) 31 : (1981) 131 ITR 589 (Guj) and the decision of Ahmedabad Bench of the Tribunal in the case of ITO vs. Ahmedabad Engineering and Services Co-operative Society (1992) 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the learned CIT(A) did observe in para 8 of the impugned order that the ratio given in the case of Artex Mfg. Co. and Electric Control Gear Mfg. Co. are not applicable to the facts of the present case as in the said two cases, there was no dispute regarding the transfer whereas in the instant case, the assessee is disputing the very factum of transfer within the meaning of s. 2(47) of the IT Act. The learned CIT(A), however, held that the decision in the case of Vania Silk Mills (P) Ltd. relied upon by the assessee was not applicable whereas the decision of the Hon'ble Gujarat High Court in the case of Vadilal Soda and Ice Factory was applicable wherein it was held that where there is a vesting of rights by operation of law by a unilateral act of State, it constitutes 'transfer'. The learned CIT(A) confirmed the action of the AO on the ground that there was a transfer within the meaning of s. 2(47) r/w s. 45 of the IT Act. He, therefore, upheld the action of the AO by relying on the view expressed by the JM of the Tribunal in the case of Rita Mechanical Works vs. Asstt. CIT a decision of the Chandigarh Bench of the Tribunal reported in (2000) 111 Taxman 92 (Chd) (Mag). There wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm into company under Part-IX of the Companies Act, there does not arise any question of applicability of s. 50 or any other provision of the IT Act. (iv) Alternatively, it was pleaded that even assuming, though not admitting, that the provisions of s. 45(4) are attracted, even then, the provision requires the following conditions to be satisfied: (a) there should be profit and gain, (b) it should arise from the transfer of a capital asset, (c) the transfer should be by way of a distribution of the capital assets, (d) such distribution should be on the dissolution of a firm or otherwise, and (e) profit and gain should be chargeable to tax in the hands of firm, AOP or BOI. It was submitted that even assuming that there was a dissolution of firm at the time of conversion into company under Part IX of the Companies Act, there should be distribution of capital assets in specie among the partners which has not happened in the present case because the capital assets stood vested in the joint stock company and the same cannot be said to be distributed among the partners of the erstwhile firm. Accordingly, there could not be any liability to capital gains tax. Reliance was placed on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shares to the erstwhile partners of the firm who became the directors of the joint stock company. He, accordingly, submitted that the AO as well as the learned CIT(A) were perfectly justified in taxing the disputed amount as short-term capital gain because the revaluation of assets of the firm was done on 31st July, 1994, and the firm was converted into a joint stock company under Part-IX of the Companies Act on 17th Oct., 1994, when the certificate of incorporation was issued by the Registrar of Companies. Reliance was placed on the decision of Hon'ble Delhi High Court in the case of Jagdev Singh Mumick vs. CIT (1971) 81 ITR 500 (Del). Reliance was also placed on the decision of Ahmedabad Bench of the Tribunal in ITA No. 5108/Ahd/1996 order dt. 14th Aug., 2000 in the case of Shri Kishorechand K. Bansal vs. Dy. CIT as well as the decision of the learned J.M. of the Tribunal in the case of Rita Mechanical Works. 7. We have considered the rival submissions and have also gone through the orders passed by the AO as well as the learned CIT(A). The facts which emerge from the orders of the AO as well as the learned CIT(A) are that the assessee is a partnership-firm carrying on busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gain tax and whether the registration under Part-IX involves a 'transfer'. The Departmental authorities are of the view that the provisions of s. 45(1)/45(4) are also attracted as there was an "extinguishment" of the rights of the firm over the assets transferred to the company which fell within the decision of the word 'transfer' under s. 2(47) of the IT Act. The assessee has converted the partnership-firm into a joint stock company by adopting the procedures laid down in Part-IX of the Companies Act. Sec. 565 of the Companies Act provides for the company capable of being registered in Part-IX. It states that any company consisting of seven or more members may, at any time, register under the Act, is an unlimited company or a company limited by guarantee. Sec. 566 defines a joint stock company for the purposes of this part, ss. 567 and 568 list out the documents that are to be submitted to the Registrar of Companies for registration. Under both these sections, there is specific mention of deed of partnership as a document to be submitted before the Registrar. Sec. 574 provides that on compliance with the requirement of Part-IX with respect to registration formality, the Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the firm. 7.6. In the instant case, there is no sale or conveyance from the firm to the company and the firm has neither been dissolved nor come to an end on account of conversion into a joint stock company under Part-IX of the Companies Act whereas in the cases relied upon by the AO, the firm had come to an end due to transfer by sale. 7.7. It is also important to note that the erstwhile partners of the firm have not been allotted shares of M/s Well Pack Packers and Containers Ltd. of the value of Rs. 1,28,13,831, but only of Rs. 1 crore so that it clearly indicates that the assets were not taken over at the revalued price and it does not refer to the value allotted to different assets. As such, it cannot be said that the firm through their partners has received price equal to the revaluation on conversion. 7.8. Further, we have to observe that a business undertaking as a going concern includes all rights, assets contingent or definite and all interest at the present or future. It also includes the management, executive employees and anything which goes as part of organisation including the potentiality of the organisation to grow. It contains a variety of elements bo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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