TMI Blog2003 (6) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made on 22nd April, 1997, did not tantamount to any transfer within the meaning of s. 2(47) of the IT Act, 1961." 3. Briefly stated, the facts of the case are that the assessee-firm carried on the business of manufacturing of rice and remains into existence upto 5th May, 1997, on which it was converted into a private limited company in the name of M/s Sachdeva Sons Industries (P) Ltd. A certificate of incorporation issued by the Registrar of Companies on 5th May, 1997. The assessee-firm was consisted of seven partners. As per the memorandum of association, a deed of settlement was made on 22nd April, 1997, by all the seven partners when they had settled that their holding of the subscribed capital in the new company would be in the shape of shares in the company. During the assessment proceedings, the AO required the assessee to explain as to whether the provisions of s. 45(2) were not applicable in its case. He further requested the assessee to intimate the exact address of land worth Rs. 28,45,845 as per balance-sheet dt. 5th May, 1997. He also directed the assessee to supply the details of area of land, date, cost of acquisition and fair market value of the land as at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed the long-term capital gain on the land at Amritsar at Rs. 41,35,250. Similarly, the long-term capital gain on the land at Delhi came to Rs. 17,51,300. The total amount of capital gain was worked out at Rs. 58,86,550. The AO after allowing business loss of Rs. 4,580 relating to the current year worked out the balance capital gain at Rs. 58,81,970. 4. The assessee carried the matter in appeal to the CIT(A). Before the CIT(A), the assessee filed the written submissions, which is reproduced hereunder: "The AO did not appreciate the fact that conversion of the erstwhile firm M/s Sachdeva Sons EOU into a company under s. 565 of the Companies Act, 1956, did not tantamount to transfer within the meaning of s. 2(47) of the IT Act. This conversion does not tantamount to transfer under s. 2(47) of the IT Act, 1961. There is also no deemed transfer within the meaning of s. 45(4) of the Act, as no distribution of capital assets on dissolution of a firm has taken place. It is submitted that the same entity viz. M/s Sachdeva Sons has emerged with a different mantle. A transfer presupposes existence of two parties i.e. a transferor and a transferee before as well as at the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) The only inference that could be drawn from this situation is that the said firm, M/s Sachdeva Sons was dissolved on 5th May, 1997, by the partners and all the properties of the firm were taken over by the company, M/s Sachdeva Sons Inds.(P) Ltd. (d) That the said company is a distinct and separate legal entity as distinguished from the assessee-firm, M/s Savhdeva Sons. (e) The firm, M/s Sachdeva sons stands dissolved having no existence after 5th May, 1997, although the shareholdings in the new company are in exactly the same proportion as it was with the shares in the partnership firm, yet it cannot be denied that the assets of the firm has been taken over by a distinct legal entity in the form of a company and this act of transfer of assets from the firm to the company is a deliberate act on the part of the partners and this cannot be taken as anything except dissolution of the partnership firm." In view of the above, the learned CIT(A) held that the provisions of s. 45(4) were clearly applicable to the facts of the present case. He, further observed that from the asst. yrs. 1988-89 profit and gains arising from any transfer of the assets are chargeable to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) held that there was a dissolution of the firm and, therefore, the profits or gains from such transfer was liable to tax under s. 45(4) of the Act. From the records, it would be clear that the AO has computed the capital gains at Rs. 50,81,970 after allowing a reduction of Rs. 4,580 on account of business loss. It is relevant to point out here that a similar case has been decided by the Hon'ble Bombay High Court in the case of CIT vs. Texspin Engg. Mfg. Works (2003) 180 CTR (Bom) 497 : (2003) 129 Taxman 1 (Bom) (IT Appeal No. 222 of 2001 dt. 5th March, 2003). The Hon'ble Bombay High Court has held as under: "Sec. 45(1) provides that where any profit, arising from 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 s. 45(1) is required to be r/w s. 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 interpretation of s. 45(1) in numerous matters was that on extinguishment of the rights in the capital assets, there was a transfer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These two sections are required to be read together as the charging section and the computation section constitute one package. Now, under s. 48 it is laid down, inter alia, that the income chargeable under 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. Sec. 45(4) is mutually exclusive to s. 45(1). Sec. 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 AO 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 s. 45(4) is not there in s. 45(1). Therefore, one has to read the expression "full value of the consideration received/accruing" under s. 48 de hors s. 45(4) and if one reads s. 48 with s. 45(1) de hors s. 45(4) then the expression "full value of consideration" in s. 48 cannot be the market value of the capital asset on the date of transfer. In such a case, we have to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal assets. Under Part IX of the Companies Act, when a partnership firm is treated as a limited company, the properties of the erstwhile firm vest in the limited company. The question is whether such vesting stands covered by the expression "transfer by way of distribution" in s. 45(4) of the Act. There is a difference between vesting of the property, in this case, in the limited company and distribution of the property. On vesting in the limited company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution pre-supposes division, realisation, encashment of assets and appropriation of the realised amount as per the priority like payment of taxes to the Government, BMC, etc., payment to unsecured creditors, etc. This difference is very important. This difference is amply brought out conceptually in the judgment of the Supreme Court in the case of Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC). In the present case, therefore, s. 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pending suits and legal proceedings taken by or against the company. As per s. 575, all properties including actionable claim belonging to or vested in a company at the date of its registration shall, on such registration, pass to and vest in the company as incorporated. Thus, in view of the relevant provisions of the Companies Act discussed above, it has to be held that there is no 'transfer' involved when the company gets itself registered under Part-IX and it has been so held by the Hon'ble Andhra Pradesh High Court in the case of V.P. Rao vs. Ramanuja Ginning Rice Factory (P) Ltd. In this connection, it will be useful to refer to the observations of Sir Francis Palmer as under: 'The method by which a company obtained incorporation is not free from some of the complications attendant on the conversion in the ordinary way of sale or transfer. This method was preferred by businessmen as it avoids the sale by partners to the company consisting of themselves which to the ordinary men seem absurd. Under this method, registration would follow as of course without any need for sale or conveyance or without any breach of continuity of the concern.' Thus, it has to be held that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f value of existing assets in proportion to their profit sharing ratio in the partnership firm, which shows that there was no transfer of the assets. However, the firm was converted into a private limited company without revaluing the assets. 5.2 In view of the above discussion, we are of the considered view that the provisions of s. 45(4) are not applicable to the facts of the present case. As such, the learned CIT(A) was not justified in confirming the action of the AO for charging tax on capital gain. Accordingly, we allow ground Nos. 1 to 3. 6. Ground No. 4 to 8 read as under: "4. That both the CIT(A), Amritsar and the learned Dy. CIT, C.C.I, Amritsar having grossly erred in determining the fair market value of land situated at Amritsar at Rs. 9,00,000 per acre. 5. That both the CIT(A), Amritsar and the learned AO have failed to appreciate that the plot of the land of the assessee was a large piece of land and the fair market value of a larger piece had to be lower as compared to smaller plots. 6. That the CIT(A), Amritsar has failed to appreciate that the learned AO has failed to lead any evidence about the fair market value of land situated at Amritsar estimated at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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