2017 (8) TMI 192 - HC - Income Tax

Capital gain - transfer u/s 2(47) - revaluation of the satellite rights - Held that - There is neither distribution of assets nor any realization of assets. There is no dissolution of the firm nor distribution of assets of the firm amongst the partners. No transfer of assets has taken place. It is further observed that the partnership firm was converted into a private limited company and the satellite rights thereafter vests with the company. The revaluation of the assets by the partnership firm would not attract any capital gain. There was no transfer as defined under Section 47 of the Act.

Summary

Issues:
1. Assessment of capital gains on revaluation of satellite rights in a partnership firm.
2. Determination of whether the conversion of a partnership firm into a private limited company constitutes a transfer of assets.
3. Interpretation of Section 45(4) of the Income Tax Act in the context of partnership firm conversion into a limited company.

Analysis:
1. The appeal concerned the Assessment Year 2008-09 and revolved around the revaluation of satellite rights in a partnership firm. The appellant argued that the revaluation would result in capital gains, while the respondent contended that no transfer of assets occurred as the assets of the partnership firm were vested with the company without distribution or dissolution of the firm.

2. The High Court analyzed the Tribunal's decision and observed that no distribution or realization of assets took place during the conversion of the partnership firm into a private limited company. The court noted that the assets of the partnership firm automatically vested in the company upon conversion, and there was no transfer of assets as defined under Section 47 of the Income Tax Act.

3. The court referred to the judgment in the case of Commissioner of Income Tax vs. Texspin Engineering and Manufacturing Works to interpret the application of Section 45(4) in the context of partnership firm conversion. The judgment highlighted the distinction between vesting of property in a limited company and distribution of assets upon dissolution. It emphasized that in cases of conversion, where assets automatically vest in the company, the condition of transfer by way of distribution of capital assets under Section 45(4) is not satisfied, thus not attracting capital gains tax implications.

4. Based on the analysis and interpretation of the relevant provisions and case law, the court concluded that no substantial question of law arose in the present case. Therefore, the appeal was dismissed, and no costs were awarded. The judgment clarified the tax treatment concerning the revaluation of assets during the conversion of a partnership firm into a private limited company, emphasizing the non-applicability of capital gains tax in such scenarios.