2013 (9) TMI 1280 - AT - Income Tax

Chargeability of capital gain. - Transfer - Conversion of Partnership Firm into a private limited company under Chapter IX of the Companies' Act, 1956. Compliance of the provisions of section 47(xiii) of the Act. - According to the ld. DR, the total value of the land in the balance-sheet of the erstwhile partnership firm was ₹ 181 lakhs. However, on revaluation it was valued at ₹ 772 lakhs and the same was credited to partners' current account. - According to the ld. DR is that the partners of the firm do not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company. - HELD THAT - This Tribunal is of the considered opinion that by treating the value of the land as loan in the hands of the assessee company, there is an indirect transfer of property and the partners of the erstwhile partnership firm can withdraw the money at any point of time which was shown as loan in the books of the assessee company apart from drawing interest. In fact, the partnership firm indirectly transferred the land to the private limited company and distributed the consideration to the erstwhile partners by treating the same as if the partners advanced loan to the private limited company. This is an accounting technique adopted by the firm for indirect transfer of property to evade tax and the capital gain. Therefore, this Tribunal is of the considered opinion that the conditions laid down in section 47(xiii) of the Act is not complied with. The partners of the firm made an attempt to transfer the property by treating the value of the land as loan in the company. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the addition made by the assessing officer.

Summary

Issues Involved:
1. Chargeability of capital gain on conversion of a partnership firm into a private limited company.
2. Compliance with the provisions of section 47(xiii) of the Income Tax Act.

Summary:

1. Chargeability of Capital Gain:
The primary issue in this appeal is the chargeability of capital gain on the conversion of a partnership firm into a private limited company. The assessee, a partnership firm engaged in automobile dealership, converted into a private limited company under Chapter IX of the Companies' Act, 1956. During this conversion, the land belonging to the partnership firm was revalued at market value, and the realization was credited to the partners' current account. The assessee argued that this conversion complied with section 47(xiii) of the Income Tax Act, thereby exempting it from capital gain tax.

2. Compliance with Section 47(xiii):
The CIT(A) presumed that the conversion was intended to avoid capital gain tax and applied the principles from Mcdowell & Co vs. CTO 154 ITR 148 (SC). The assessee contended that the conversion was due to business exigency and not to avoid tax. The CIT(A) found that the revaluation of the land and its credit to the partners' current account constituted a benefit to the partners, violating section 47(xiii). The Tribunal noted that the revaluation amount was treated as a loan in the company's balance sheet, creating a liability towards the partners, which did not exist in the partnership firm. This treatment allowed partners to withdraw the amount or receive interest, constituting an indirect transfer of property and violating the conditions of section 47(xiii).

Conclusion:
The Tribunal concluded that the conditions of section 47(xiii) were not met, as the revaluation amount was treated as a loan rather than share capital. This constituted an indirect transfer of property, enabling partners to withdraw the amount, thus evading capital gain tax. The appeal was dismissed, and the order of the lower authority was confirmed.