2010 (7) TMI 765 - HC - Income Tax

Transfer - whether assets at written down value level valued at ₹ 3,01,700 in exchange of shares valued at ₹ 15,74,874 did not constitute transfer within the meaning of section 2(47) as held by Tribunal ? - Tribunal deleting the addition made by the AO by invoking the proviso to section 41(2) - Held that - As decided in Kartikeya V. Sarabhai v. CIT 1997 (9) TMI 2 - SUPREME Court while considering the scope of transfer within the meaning of section 2(47) of the Act, where the company had sought to reduce the share capital by reducing the face value of the preference shares, had held the same to be transfer under section 2(47) of the Act. Ths the answer to the first question that assets given at the written down value in exchange of shares would amount to transfer within the meaning of section 2(47) of the Act. Section 41 2 applies wherever the sale proceeds of the capital asset of an assessee exceeds the written down value. The amount that is chargeable to tax under this section is so much of the excess as does not exceed the difference between the actual cost and the written down value. This is taxed as income arising from business or profession of the assessee in the previous year in which the asset is sold. The said charge is termed as balancing charge. This represents the depreciation allowance which is allowed in the previous years from the profits earned by the assessee in those years and where subsequently the capital asset has been sold for excess value, then the difference between the original cost and the written down value is treated as income under section 41(2) of the Act by way of balancing charge.Thus following Chandra Katha Industries case 1982 (4) TMI 49 - ALLAHABAD High Court transfer of assets at written down value for shares of higher value amounts to transfer and attract tax under section 41(2) of the Act. View taken by the Tribunal, thus, cannot be upheld.

Summary

Issues Involved:
1. Whether the transfer of assets at written down value in exchange for shares constitutes 'transfer' within the meaning of section 2(47) of the Income-tax Act, 1961.
2. Whether the allotment/exchange of shares for higher consideration than the written down value of the assets attracts the provisions of section 41(2) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Definition of 'Transfer' under Section 2(47):
The court examined whether the transaction of transferring assets at written down value in exchange for shares falls under the definition of 'transfer' as per section 2(47) of the Income-tax Act, 1961. Section 2(47) defines 'transfer' to include sale, exchange, relinquishment of the asset, or extinguishment of any rights therein. The court noted that this clause introduces an artificial extended meaning to the term 'transfer,' encompassing transactions of 'sale' and 'exchange,' and also 'relinquishment' or 'extinguishment of rights.'

The court referred to the Supreme Court's judgment in Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163 (SC), which held that reducing the face value of shares constitutes a 'transfer' under section 2(47). The court distinguished this from the earlier judgment in CIT v. R. M. Amin [1977] 106 ITR 368 (SC), where it was held that receiving money in liquidation did not amount to a transfer. Consequently, the court concluded that the transfer of assets at written down value in exchange for shares indeed constitutes a 'transfer' within the meaning of section 2(47).

2. Applicability of Section 41(2):
Next, the court analyzed whether the transaction attracts the provisions of section 41(2) of the Act. Section 41(2) pertains to situations where the sale proceeds of a capital asset exceed its written down value, and such excess is chargeable to tax as income from business or profession. The court emphasized that this provision aims to recoup the depreciation allowances granted in previous years when the asset is sold for a higher value.

The court cited the Allahabad High Court's judgment in Chandra Katha Industries v. CIT [1982] 138 ITR 168 (All), which explained that the term 'sold' in section 41(2) includes a transfer by way of exchange. The judgment clarified that if the 'moneys payable' for an asset exceed its written down value, the excess amount is taxable under section 41(2).

In light of these precedents, the court held that the transfer of assets at written down value for shares of higher value amounts to a transfer and attracts tax under section 41(2). The court rejected the Tribunal's view that no transfer was involved and that it was merely a reduction in share capital.

Conclusion:
The court concluded that the transfer of assets at written down value in exchange for shares constitutes a 'transfer' under section 2(47) and attracts tax under section 41(2) of the Income-tax Act, 1961. The Tribunal's decision was overturned, and the question referred was answered accordingly.