2003 (3) TMI 56 - HC - Income Tax

(i) Whether, Tribunal was justified in holding that the provisions of section 45(1) and (4) are not attracted even though there was a transfer of assets from the firm to the newly constituted company on conversion of firm to company under Part IX of the Companies Act, 1956? - (ii) Whether, Appellate Tribunal was justified in directing to allow depreciation for the year even though the written down value of the block of the assets at the end of the year was nil as per the provisions of section 32 read with section 43(6)(c)(i)(B) of the Act? - both the aforestated questions are answered in the affirmative, i.e., in favour of the assessee and against the Department.

Summary

Issues Involved:
1. Applicability of Section 45(1) and Section 45(4) of the Income-tax Act, 1961, on the transfer of assets from a firm to a newly constituted company.
2. Entitlement to depreciation under Section 32 read with Section 43(6)(c)(i)(B) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of Section 45(1) and Section 45(4)

Section 45(4):
- Facts and Arguments:
- The firm converted into a limited company under Part IX of the Companies Act, 1956, did not show capital gains in its return.
- The Assessing Officer (AO) argued that the conversion resulted in a transfer of assets, invoking Section 45(4), which concerns profits from the transfer of a capital asset by way of distribution on the dissolution of a firm.
- The assessee contended that Section 45(4) requires both dissolution and distribution of assets, neither of which occurred as the firm was merely converted into a company.

- Findings:
- The court noted that under Part IX of the Companies Act, the firm's properties vest in the company statutorily, not by distribution.
- Citing the Supreme Court's judgment in Malabar Fisheries Co. v. CIT, the court emphasized the difference between vesting and distribution of assets.
- Since there was no distribution of assets, Section 45(4) was not applicable.

Section 45(1):
- Facts and Arguments:
- The Department argued that the vesting of the firm's properties in the company constituted a transfer under Section 45(1) due to the extinguishment of the firm's rights in the capital assets.
- The assessee argued that Section 45(1) requires the existence of two parties and consideration, which was not the case here as the firm was merely treated as a company.

- Findings:
- The court held that when a firm is treated as a company under Part IX, it is akin to a statutory transmission rather than a transfer.
- Section 45(1) read with Section 48 requires consideration, which was not present as the assets vested statutorily without an actual transfer.
- The court referenced Supreme Court judgments in CIT v. George Henderson and Co. Ltd. and CIT v. Gillanders Arbuthnot and Co., which stated that "full value of consideration" means the price bargained for, not the market value of the asset.
- Therefore, Section 45(1) was not applicable as the computation of capital gains was not possible under Section 48.

Issue 2: Entitlement to Depreciation

- Facts and Arguments:
- The AO disallowed the depreciation claim of Rs. 27,67,000, arguing that the assets were sold during the year due to the conversion and hence, the firm did not own the assets at the end of the year.
- The assessee argued that depreciation should be allowed as long as the assets were used for business purposes during the year, regardless of ownership at the year-end.

- Findings:
- The court cited the Madras High Court's judgment in A.M. Ponnurangam Mudaliar v. CIT, which distinguished the term "transfer" for capital gains from the terms "sold, discarded, demolished or destroyed" used in the context of depreciation.
- The court concluded that the vesting of assets in the company did not constitute a sale, and the firm was entitled to depreciation as the assets were used during the year.
- There is no requirement for the firm to remain the owner of the assets for the entire year to claim depreciation.

Conclusion:
Both issues were resolved in favor of the assessee. The court held that neither Section 45(1) nor Section 45(4) was applicable to the conversion of the firm into a company, and the assessee was entitled to claim depreciation for the year. The appeal was disposed of, with no order as to costs.