2005 (9) TMI 517 - AT - Income Tax

Summary

Issues:
1. Dispute settlement under Kar Vivad Samadhan Scheme, 1998.
2. Treatment of fair market value of shares in a partnership firm's conversion into a company.
3. Liability for capital gains tax under section 45(4) of the Income-tax Act, 1961.

Issue 1: Dispute Settlement under Kar Vivad Samadhan Scheme, 1998
The appellant sought to withdraw the appeal against the order of the Commissioner of Income-tax (Appeals) for assessment year 1995-96, citing settlement under the Kar Vivad Samadhan Scheme, 1998. The appellant's counsel confirmed the settlement, and a certificate from the Department was presented. Consequently, the appeal was dismissed as withdrawn.

Issue 2: Treatment of Fair Market Value of Shares
The case involved a partnership firm converting into a company, where revalued assets were transferred. The Assessing Officer considered this transfer as liable for capital gains tax under section 45(4) of the Income-tax Act, 1961. The firm's contention was that only the face value of the shares should be considered, not the market value. The CIT(A) upheld this argument, directing the tax assessment at a lower value. Both the appellant and the revenue challenged this decision.

Issue 3: Liability for Capital Gains Tax
The revenue contended that the fair market value of the shares should be considered for determining capital gains tax liability, as per section 45(4). However, the appellant argued that no transfer of assets occurred during the firm's conversion into a company. The appellant relied on legal precedents to support this claim. The Tribunal ruled in favor of the appellant, stating that no capital gains tax was chargeable on the conversion. The Tribunal also upheld the CIT(A)'s decision on the valuation of assets, dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed both appeals, affirming that no capital gains tax was applicable on the firm's conversion into a company under Chapter IX of the Companies Act. The fair market value of the assets transferred was deemed to be lower than initially determined, based on the face value of the shares issued during the conversion process.