TMI Blog2005 (6) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... rutiny by issuing notices under sections 143(2) and 142(1) of the Act. It is stated that the partnership firm was converted into a private limited company, known as Unity Care and Health Services Pvt. Ltd. with effect from 3-10-2000, in accordance with a revised Partnership Deed, which was drawn up on 7-9-2000. The above conversion of the partnership firm into a private limited company is stated to have been done under Chapter IX of the Companies Act. The appellant firm had revalued its assets at Rs. 20,03,21,670 as against the written down value of the same at Rs. 3,96,67,634 as on 30-9-2000, that is, prior to its conversion into a private limited company. The appellant had advanced various arguments before the Assessing Officer in support of its contention that there was no 'transfer' in the conversion of the partnership firm into a private limited company under Chapter IX of the Companies Act as well as under the provisions contained in the Income-tax Act. The Assessing Officer has, however, held that there has been a transfer in this case and accordingly he has brought to tax a sum of Rs. 15,67,18,702 as short-term capital gains. 3.1 Learned CIT(A) held that there is a conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese two conditions are satisfied then, in that event, for the purposes of computation of capital gains under section 48, the market value on the dale of the transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer. Now, according to the Assessing Officer, in this case, on vesting of the properties of the firm in the Limited Company, there was a transfer by way of distribution of capital assets. Further, according to the Assessing Officer, on vesting of the properties of the firm in the company, there was a resultant dissolution of the firm. Therefore, according to the Assessing Officer, both the conditions under section 45(4) stood satisfied and, therefore, he was entitled to take the fair market value of the asset on the date of the transfer to be the full value of the consideration received as a result of the transfer. It is for this reason that the Assessing Officer has computed the capital gains under section 48 by referring to the comparative figures of the book value and the market value. As stated above, in this connection, the Assessing Officer has computed capital gains arising to the assessee-firm at Rs. 9 lakhs on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e brought on the statute book with effect from 1-4-1999 and the present assessment year is being 2001-02. Even under the provisions of section 47(xiii), the conversion of partnership firm into a company do not attract capital gain. Learned CIT(A) erred in holding that conversion of firm into a company do not amount to succession and hence exemption available under section 47(xiii) will not apply. Since there is no transfer between a firm and a company, neither section 45(1) nor 45(4) applies and even if it is held that there is a transfer, by virtue of section 47(xiii), the capital gain is not chargeable to tax. He further submitted that at any rate since there is also transfer of land, the transfer thereof does not give rise to short-term capital gain as computed by the Assessing Officer. 5. Learned DR Shri Rajguru strongly relied upon the appellate order. He firstly submitted that at first instance, the partnership firm revalued its assets from the small sum of Rs. 3.96 crores to Rs. 20 crores and more. The surplus was credited to the capital accounts of the partners. Thereafter, the firm is dissolved and the company is incorporated. The assets are transferred to the company. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which enacts the prohibition of associations exceeding a certain members from carrying on trade, starts with saying that no company, association or partnership consisting of more than ten members shall be formed. Section 253 of the 1913 Act corresponds to section 565 of the 1956 Act. Section 565(1)(6) of the 1956 Act corresponds to section 253(1)(ii) of the 1913 Act, which permits any company otherwise duly constituted according to law consisting of seven or more members to be registered as a company. A partnership must be one such. This is made clear by the provisions of section 255 of the 1913 Act (section 568 of the 1956 Act) whereunder a deed of partnership has to be tiled before the Registrar before seeking the registration. Hence, a partnership which was treated as a company for the purpose of the Companies Act can be registered under Part 8 of the 1913 Act (Part 9 of the 1956 Act) and the vesting is provided by section 263 of the 1913 Act (section 575 of the 1956 Act). The provision is mandatory and there will be statutory vesting in the corporation so incorporated under the provisions of the Companies Act. The Registrar is bound to give a certificate of registration under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferor, the transferee is not in existence. If it can be held that the transferee is the Company which came in existence on 3-10-2000 the firm i.e., the transferor is not in existence in 3-10-2000. Thus, it is not the case of transfer by one person to another; it is merely a change under the Act under which the persons are registered to carry on the business. The decision of Hon'ble Bombay High Court is squarely applicable. We do not find any reason to hold any other view than that taken by Hon'ble Bombay High Court. 6.1 It is not the case that section 45(1) can be invoked to tax the capital gain in the present situation. The interest of a partner in a firm is not an interest in any specific item of the partnership property. It is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the firm or on his retirement from the partnership, to get the value of his share in the net assets of the firm. When, therefore, on dissolution or retirement, a partner's share in the net partnership asset is determined on taking accounts, what he receives is his share in the partnership and not any consideration for transfer of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es only to a case of transfer by sale, but there is no authority for capital gain at all in the absence of a transfer under Part IX of the Companies Act inasmuch as such conversions do not fall within the definition of transfer under section 2(47) of the Act. Section 45(4) would have application only when there is distribution of assets to the partners so that its application cannot be justified, firstly because it can apply only, when there is transfer and secondly only when there is distribution of assets to the partners. This is neither in the conversion of a firm into a company. It is also seen that section 47(xiii) is also complied with if it is held that there is transfer of capital asset to a company. All the clauses of section 47(xiii) are fulfilled and thus even if it is held that there is a transfer of capital asset 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. 7. The next ground of appeal is regarding disallowance of a sum of Rs. 1,53,000 by way of commission paid to certain persons who helped in procuring the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them." From the aforesaid proviso, it is clear that when the depreciation is allowable on the assets to the predecessor and the successor, the depreciation has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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