2003 (6) TMI 165 - AT - Income Tax

Summary

Issues Involved:
1. Application of Section 2(47) read with Section 45(4) of the IT Act, 1961.
2. Determination of fair market value of land situated at Amritsar and Delhi.
3. Chargeability of interest under Sections 234A, 234B, and 234C.

Issue-wise Detailed Analysis:

1. Application of Section 2(47) read with Section 45(4) of the IT Act, 1961:
The primary issue was whether the conversion of the assessee-firm into a company constituted a "transfer" under Section 2(47) and whether such a transfer attracted capital gains tax under Section 45(4). The assessee-firm, engaged in manufacturing rice, was converted into a private limited company on 5th May 1997. The AO contended that this conversion amounted to a transfer of assets, thus attracting capital gains tax. The AO computed the long-term capital gain based on the fair market value of the assets as on the date of conversion.

The assessee argued that the conversion did not amount to a transfer as defined under Section 2(47) and that there was no deemed transfer within the meaning of Section 45(4). The CIT(A) upheld the AO's view, stating that the firm ceased to exist upon conversion, and all assets were taken over by the new company, thus constituting a transfer.

However, the Tribunal, referencing the Bombay High Court's decision in CIT vs. Texspin Engg. & Mfg. Works, concluded that the conversion of a firm into a company under Part IX of the Companies Act did not constitute a transfer. The Tribunal emphasized that such a conversion involved statutory vesting of properties without any conveyance or transfer. It was held that the provisions of Section 45(4) were not applicable as there was no distribution of assets among partners; instead, the business continued under a different legal entity. Consequently, the Tribunal allowed the assessee's appeal on this ground.

2. Determination of Fair Market Value of Land:
The assessee challenged the AO's determination of the fair market value of land situated at Amritsar and Delhi. The AO had valued the land at Amritsar at Rs. 9,00,000 per acre and the land at Delhi at Rs. 1,000 per square yard. The assessee argued that the AO failed to consider the larger size of the land, which typically has a lower per-unit value compared to smaller plots. Additionally, the assessee contended that the AO did not provide sufficient evidence to support the determined values and that the fair market value as of 1st April 1981 should have been higher.

Since the Tribunal allowed the appeal on the legal issue of the applicability of Section 45(4), it deemed the valuation issue academic and did not provide specific findings on this matter.

3. Chargeability of Interest under Sections 234A, 234B, and 234C:
The assessee also contested the chargeability of interest under Sections 234A, 234B, and 234C. Both parties agreed that this issue was consequential in nature. The Tribunal held that the chargeability of interest would depend on the final outcome of the preceding issues and thus disposed of this ground accordingly.

Conclusion:
The Tribunal allowed the appeal partly, primarily on the ground that the conversion of the firm into a private limited company did not constitute a transfer under Section 2(47) read with Section 45(4) of the IT Act, 1961. Consequently, the issue of capital gains tax did not arise. The remaining issues, including the determination of fair market value and chargeability of interest, were either deemed academic or consequential.