2000 (12) TMI 896 - AT - Income Tax

Summary

Issues Involved:
1. Liability to capital gains tax u/s 45(4) of the Income-tax Act.
2. Applicability of capital gains tax u/s 45(1) due to "extinguishment" of rights.
3. Eligibility for depreciation on assets.

Summary:

1. Liability to Capital Gains Tax u/s 45(4):
The primary issue was whether the assessee, a partnership firm converted into a joint-stock company, was liable to capital gains tax u/s 45(4). The firm did not revalue its assets and liabilities upon conversion. The Assessing Officer (AO) contended that the firm was liable to capital gains tax as there was a "distribution" of assets upon dissolution or otherwise, estimating the capital gains at Rs. 9,00,000. The CIT(A) upheld this view. However, the Tribunal held that there was no actual distribution of capital assets among the partners. The assets vested in the company by operation of law u/s 575 of the Companies Act, without any conveyance deed, thus not fulfilling the requirement of "distribution" u/s 45(4). The Tribunal concluded that s. 45(4) was not attracted.

2. Applicability of Capital Gains Tax u/s 45(1) due to "Extinguishment" of Rights:
The AO alternatively argued that s. 45(1) was applicable due to the "extinguishment" of the firm's rights over the assets, constituting a "transfer" u/s 2(47)(ii). The Tribunal noted that even if the firm's rights were extinguished, the full value of consideration must be received by the firm for capital gains to be assessed. Since shares were issued to the partners and not the firm, and these shares did not represent the fair market value of the assets, the Tribunal held that s. 45(1) was not applicable.

3. Eligibility for Depreciation on Assets:
The AO denied depreciation on the firm's assets, arguing that the assets were transferred to the joint-stock company and were not in existence on 31st March 1996. The CIT(A) endorsed this view. The Tribunal, however, held that the vesting of assets in the company by operation of law did not constitute a "sale, discard, demolishing, or destruction" of assets as per s. 43(6)(c)(i)(B). Since there was no formal conveyance deed and no "moneys payable" for the transfer, the Tribunal concluded that the firm was entitled to depreciation on the assets held till 7th Nov., 1995.

Conclusion:
The Tribunal allowed the appeal, holding that the assessee-firm was not liable to capital gains tax either u/s 45(1) or 45(4) and was eligible for depreciation on the assets held till 7th Nov., 1995.