9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2019 (8) TMI 58 - HC - Income TaxConversion of the partnership firm into a private limited company - Violation of the conditions stipulated u/s 47(xiii) - transfer by way of distribution of assets - partners of the erstwhile firm derived benefit other than allotment of shares by way of loan credits in their favour on conversion of the partnership firm into a private limited company - HELD THAT - In our considered view the legal position having been well settled that when vesting takes place it vests in the company as they exist. Therefore unless and until the first condition of transfer by way of distribution of assets is satisfied Section 45(4) will not be attracted. Therefore in the facts and circumstances of the case we find that there is no transfer by way of distribution of assets. We find that the CIT(A) did not take into consideration the legal issue involved i.e. when a firm is succeeded by a company with no change either in the number of members or in the value of assets with no dissolution of the firm and no distribution of assets with change in legal status alone whether there is a transfer as contemplated u/ss 2(47) and 45(4). This issue was rightly decided by the Tribunal by taking into consideration the decision of a Division Bench of this Court in the case of CADD Centre Vs. ACIT 2016 (5) TMI 422 - MADRAS HIGH COURT in which the decision of a Division Bench of the Bombay High Court in the case of CIT Vs. Texspin Engineering and Manufacturing Works 2003 (3) TMI 56 - BOMBAY HIGH COURT was taken into consideration. The vital difference is that shares worth of 10 lakhs alone were allotted and that the remaining was given as credit of loan to the partners of the erstwhile firm in the same proportion as their share capital of the firm. In our considered view what is required to be considered is the effect of vesting as held in the case of Texspin Engineering and Manufacturing Works which followed the decision of the Hon ble Supreme Court in the case of Malabar Fisheries Co. Vs. CIT 1979 (9) TMI 1 - SUPREME COURT and there can be no distribution of assets when a partnership firm vests in a company under Part IX of the Companies Act 1956. Thus we are of the view that the Tribunal rightly followed the decision in the case of CADD Centre. - Decided against revenue.
Issues:
Violation of conditions under Section 47(xiii) of the Income Tax Act for exemption from capital gains. Interpretation of conversion of partnership firm into a private limited company under the Companies Act. Applicability of Section 45(4) regarding transfer by way of distribution of assets. Analysis: Issue 1: Violation of conditions under Section 47(xiii) of the Income Tax Act for exemption from capital gains: The appeal by Revenue challenged the Tribunal's decision regarding the violation of conditions stipulated in Section 47(xiii) of the Act. The dispute arose from the conversion of a partnership firm into a private limited company and the treatment of assets and liabilities post-conversion. The Assessing Officer added a significant amount towards short-term capital gains due to a perceived deviation from Section 47(xiii). The CIT(A) upheld this view, but the Tribunal ruled in favor of the assessee, leading to the appeal. The key argument revolved around whether the conversion constituted a violation of the exemption conditions under Section 47(xiii). Issue 2: Interpretation of conversion of partnership firm into a private limited company under the Companies Act: The crux of the matter was the legal effect of the conversion of the partnership firm into a private limited company under the Companies Act. The assessee contended that this conversion did not amount to a transfer of assets, as the assets and liabilities were vested into the company by operation of law without dissolution or distribution among partners. The CIT(A) disagreed, emphasizing the credit of loan to partners as a violation of Section 47(xiii). However, the Tribunal considered legal precedents and concluded that no transfer occurred by way of distribution of assets, aligning with the decision in the CADD Centre case. Issue 3: Applicability of Section 45(4) regarding transfer by way of distribution of assets: The Tribunal's decision hinged on the interpretation of Section 45(4) concerning transfer by way of distribution of assets. The Tribunal, guided by legal precedents, highlighted the distinction between vesting of assets in a company and distribution of assets upon dissolution. It was established that in the case of conversion from a partnership firm to a company, where assets vest in the company without distribution, Section 45(4) was not attracted. The Tribunal's reliance on the CADD Centre case underscored the non-applicability of capital gains tax in the absence of asset distribution post-conversion. In conclusion, the High Court dismissed the appeal by the Revenue, affirming the Tribunal's decision based on the legal principles governing the conversion of a partnership firm into a private limited company and the absence of asset distribution constituting a transfer under relevant tax provisions. The judgment provided clarity on the interpretation of Section 47(xiii) and Section 45(4) in the context of such conversions, aligning with established legal precedents.
|
