2001 (5) TMI 136 - AT - Income Tax

Summary

Issues Involved:
1. Whether the conversion of a partnership firm into a company under Part IX of the Companies Act constitutes a 'transfer' u/s 2(47) of the IT Act.
2. Applicability of capital gains tax on the revaluation of depreciable assets during the conversion.
3. Validity of charging interest u/s 234B and 234C of the IT Act.

Summary:

Issue 1: Conversion as 'Transfer'
The assessee, a partnership firm, converted into a company under Part IX of the Companies Act, 1956. The AO initiated reassessment proceedings u/s 148, arguing that the conversion constituted a 'transfer' of assets, thus attracting capital gains tax. The assessee contended that there was no transfer within the meaning of s. 2(47) of the IT Act, as the firm merely changed its status to a company without any actual transfer of assets. The Tribunal held that the conversion did not involve a 'transfer' as defined u/s 2(47) and cited the Andhra Pradesh High Court's decision in V.P. Rao vs. Ramanuja Ginning and Rice Factory (P) Ltd., which stated that registration under Part IX does not constitute a transfer.

Issue 2: Capital Gains Tax on Revaluation
The AO argued that the revaluation of depreciable assets and their subsequent transfer to the company should be taxed as short-term capital gains. The assessee claimed that the revaluation did not result in any actual transfer and that the firm did not receive any consideration for the revalued assets. The Tribunal agreed with the assessee, stating that mere revaluation does not lead to capital gains liability. It further noted that the firm was not dissolved and the assets were not taken over at the revalued price, thus no capital gains tax was applicable.

Issue 3: Interest u/s 234B and 234C
The CIT(A) upheld the AO's decision to charge interest u/s 234B and 234C. However, the Tribunal restored this issue to the AO for fresh adjudication in accordance with the Supreme Court's decision in CIT & Ors. vs. Ranchi Club Ltd.

Conclusion:
The Tribunal concluded that the conversion of the partnership firm into a company did not constitute a 'transfer' u/s 2(47) of the IT Act, and thus, no capital gains tax was applicable on the revaluation of assets. The addition of Rs. 1,28,13,831 was directed to be deleted, and the issue of interest u/s 234B and 234C was remanded for fresh adjudication. The assessee's appeal was allowed.