2015 (1) TMI 611 - HC - Income Tax

Capital gains tax - dissolution of firm - Transactions not regarded as transfer - appellant sold its assets, worth ₹ 33,02,349/-; the actual sale value thereof is ₹ 1,12,93,389/- - makeover of assets from the firm to its own sister company - Held that - The Tribunal held that the sale took place, before the dissolution of the firm and it is not a case of distribution of assets, contemplated under Section 45 (4) of the Act. The argument on behalf of the appellant that once the case does not fall under Section 45 (4) of the Act, the matter must be left at that, cannot be accepted. The finding that there was no distribution of assets does not lead to a conclusion that there is no transfer at all, particularly when it is not even disputed that the sale as such has taken place, with the participation of the appellant. In the instant case, the consideration in the form of allotment of shares was paid to the partners of the appellant on its instructions. There was no direct transaction between the partners on the one hand and the transferee company, on the other. An attempt is made to apply the concept underlying Clause (xiii) of Section 47 of the Act. Firstly, the provision was not in vogue in the relevant assessment year. Secondly, assuming that the concept was in the offing and in a given case, it may be applied if the facts support. The case of the appellant does not fall into that. It was not a case of succession of the firm by the appellant firm by the transferee company, much less there was any exercise of corporatisation or demutualization, which are essential to attract Clause (xiii) of Section 47 of the Act. The appellant is not able to demonstrate that the figures mentioned by the Assessing Officer are incorrect. Appeal dismissed. - Decided against assessee.

Summary

Issues:
1. Interpretation of Section 45 (1) and Section 45 (4) of the Income Tax Act.
2. Assessment of capital gains tax on transfer of assets.
3. Consideration for transfer in the form of shares.
4. Application of Clause (xiii) of Section 47 of the Act.

Analysis:

Issue 1: Interpretation of Section 45 (1) and Section 45 (4) of the Income Tax Act
The case involved the interpretation of Section 45 of the Income Tax Act, specifically focusing on Sections 45 (1) and 45 (4). The appellant contested the applicability of these sections in relation to the transfer of assets by the firm. The Tribunal held that even if the transaction did not fall under Section 45 (4), it would still be covered by Section 45 (1) of the Act. The court emphasized that the obligation to pay capital gains tax arises upon the transfer of a capital asset, unless exceptions provided in the Act are applicable.

Issue 2: Assessment of capital gains tax on transfer of assets
The Assessing Officer determined that the appellant was liable to pay capital gains tax on the transfer of assets to a company, based on the sale value of the assets. The Commissioner and Tribunal upheld this view, considering it as a transfer of capital assets on the dissolution of the firm. The court noted that the sale occurred before the dissolution, and while the appellant argued against the tax liability, the transaction was deemed as a transfer subject to capital gains tax.

Issue 3: Consideration for transfer in the form of shares
The appellant contended that since the consideration for the assets was paid in the form of shares to the partners, no actual consideration was received by the firm. However, the court held that the manner of payment of consideration, whether in cash or kind, does not affect the levy of capital gains tax. The court emphasized that the value of the consideration, in terms of money, is crucial for tax assessment, regardless of the form in which it was received.

Issue 4: Application of Clause (xiii) of Section 47 of the Act
The appellant attempted to apply Clause (xiii) of Section 47 of the Act, which was not in effect during the relevant assessment year. The court clarified that the case did not involve succession of the firm by the appellant or any corporatization, essential for the application of Clause (xiii). The court found no error in the figures presented by the Assessing Officer and dismissed the appeal, emphasizing that there was no basis for interference with the order under appeal.

In conclusion, the court dismissed the appeal, upholding the assessment of capital gains tax on the transfer of assets by the firm to a company, emphasizing the legal obligations under the Income Tax Act and the applicability of relevant provisions to the transaction in question.