9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2012 (11) TMI 22 - AT - Income TaxAddition of capital gain - conversion of the firm into company - CIT(A) deleted the addition - Held that - As decided in ACIT, Mangalore v. Unity Care & Health Services 2005 (6) TMI 209 - ITAT BANGALORE-A When a conversion of a firm into company takes place under the provisions of Companies Law, such conversion can be construed only as occasioned by operation of law. Hence, no controversy could arise on the application of that principle even for purposes of capital gains under section 45(4). By insertion of section 47(xiii), it cannot be said that the conversion of a firm into a company under part IX is to be first treated as dissolution of firm within the meaning of section 45(4) and only if condition as contained in section 47(iii) are complied with, the exemption will be available. Section 47(xiii) applies 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). Where a firm becomes a limited company under Part IX of the Companies Act, 1956, section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital asset is not satisfied.In the circumstances, latter part of section 45(4) which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not apply - in favour of assessee.
Issues Involved:
1. Whether the CIT (A) erred in deleting Rs. 92,07,817/- made by the AO under the head 'Capital Gains'. 2. Applicability of Section 45(iv) and Section 47(xiii) of the Income Tax Act in the context of revaluation of assets and conversion of a partnership firm into a company. Detailed Analysis: 1. Deletion of Rs. 92,07,817/- under the head 'Capital Gains': The Revenue's appeal was directed against the CIT (A)'s order, which deleted an addition of Rs. 92,07,817/- made by the AO under the head 'Capital Gains'. The AO had reopened the assessment under Section 147 of the Income Tax Act, issuing a notice under Section 148. The AO observed that the firm had revalued its assets significantly and introduced new partners, leading to an appreciation of investments without paying taxes. The AO argued that the assessee had not met the provisions of Section 47(xiii) and thus, capital gains under Section 45(iv) were applicable. The CIT (A) observed that the conversion of a firm to a company does not involve a transfer, and thus, the appreciation of assets is not liable to be taxed under 'capital gains'. This view was supported by precedents from various courts, including the Ahmedabad Tribunal and the Bangalore ITAT, which held that revaluation of assets and conversion of a partnership firm into a company does not lead to capital gains as there is no transfer involved. 2. Applicability of Section 45(iv) and Section 47(xiii): The AO's stance was that the firm did not meet the conditions of Section 47(xiii), which exempts certain transfers from being considered as transfers for tax purposes. Specifically, the AO noted that the shares in the company were not allotted in the same proportion as the capital accounts of the partners in the firm, and the partners received consideration in forms other than shares, such as loans reflected in the company's balance sheet. However, the CIT (A) and judicial precedents consistently held that the conversion of a firm into a company under Part IX of the Companies Act does not constitute a transfer. The CIT (A) relied on several cases, including: - Well Pack Packaging v. DCIT: No transfer occurs on conversion under Part IX, thus Sections 45 and 50 do not apply. - Unity Care & Health Services v. ACIT: Conversion under Companies Law is by operation of law, not a transfer, and thus not subject to capital gains tax. - Gulabdas Printers v. ITO: Conversion under Part IX does not satisfy the condition of transfer by distribution of capital assets, hence Section 45(4) is not applicable. The Revenue's reliance on cases such as Om Namah Shivay Builders & Developers and Goel Udyog v. ACIT was found to be distinguishable as those cases involved dissolution of firms and distribution of assets, which were not applicable to the issue of conversion of a firm into a company. Conclusion: The Tribunal upheld the CIT (A)'s decision, concluding that the conversion of the firm into a company did not involve a transfer and thus, the addition of Rs. 92,07,817/- under 'capital gains' was not justified. The appeal of the Revenue was dismissed.
|
