9911796707
TMI Blog2001 (11) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------- "Dr. A.J. Prasad HBL Limited Rs. 23,16,000 HBL Aircraft Batteries Ltd. Rs. 1,000 Plumac Power Systems Ltd. Rs. 2,000 Nagadhara Engg. Ltd. Rs. 20,300 ------------------ Rs. 23,39,300 ------------------ Mrs. A. Uma Devi HBL Limited Rs. 2,91,000 HBL Aircraft Batteries Ltd. Rs. 1,000 Pilazeta Batteries Ltd. Rs. 10,000 ------------------ Rs. 3,02,000 ------------------ Ms. Kavita Prasad HBL Limited Rs. 2,59,000 ------------------ Rs. 2,59,000 ------------------------ Grand total Rs. 29,00,300....." The shares allotted to the original three partners in the profits/losses of the firm are as under:-- Dr. A.J. Prasad 80% Mrs. A. Uma Devi 10% Ms. A. Kavita Prasad 10% ------------------------------------------------------------------------------------ It may be observed that the profit-sharing ratio is more or less proportionate to their capital contributions. 3. Subsequently, there was a change in the constitution of the firm on 26-12-1991 and four more persons, individuals, were taken as partners. This partnership of seven persons was converted into a limited company, which was registered on 30-3-1992 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------- Name of the No. of Face Break-up company shares Value of Value as shares per W.T. ------------------------------------------------------------------------------------ HBL Limited 2316 Rs. 1,000 9608 Rs. 2,22,52,128 HBL Aircraft 100 Rs. 10 9.7 Rs. 970 Batteries Ltd. Nagadhara Engineer- 2030 Rs. 10 10.38 Rs. 21,071 ing Ltd. Plumac Power Systems Ltd. 200 Rs. 10 - - ------------------------------------------------------------------------------------ 2. A. Uma Devi: HBL Limited 291 Rs. 1,000 9608 Rs. 27,95,928 HBL Aircraft 100 Rs. 10 9.7 Rs. 970 Batteries Ltd. Pilazeta Batteries Limited 1000 Rs. 10 10.75 Rs. 10,750 ------------------------------------------------------------------------------------ Rs. 28,07,648 ------------------------------------------------------------------------------------ 3. A. Kavita Prasad: HBL Limited 259 Rs. 1,000 968 Rs. 24,88,472 ------------------------------------------------------------------------------------ Total (1+2+3) Rs. 2,75,70,289...." ------------------------------------------------------------------------------------ 5. As mentioned above, the Assessing Officer has brought the difference between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence between the break-up value of the shares of M/s. Beaver Engineering (P.) Ltd. and their face value. He also invoked, both in the assessment orders and in the remand report, the decision of the Apex Court in the case of McDowell & Co. Ltd v. CTO [1985] 154 ITR 148, and contended that the entire scheme of floating a firm initially and its subsequent conversion was only with a view to avoid wealth-tax by the three appellants in question, and capital gains by the firm. The Commissioner (Appeals) agreed with the Assessing Officer and held that the conversion of the firm into a limited company, as mentioned before, and the issue of shares of the company to the three appellants involved a deemed gift, as contended by the Assessing Officer. 7. Before us, the learned counsel for the assessee assailed the orders of the Revenue authorities from various angles. Firstly, it is mentioned that the Assessing Officer was completely off the mark in thinking that the decision of the Apex Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, which was relied on before him, was not applicable to the facts of the case, simply because there is an amendment in the provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value of the property transferred can very well be determined. Therefore, the provision of section 4(1)(a) whenever applicable can be applied." In the light of the above observations, the Assessing Officer proceeded to hold that the benefit of the said decision of Supreme Court in Sunil Siddharthbhai's case cannot be extended to the assessee, and accordingly, he brought the difference between the break-up value of the shares transferred to the firm and their face value credited in the books of the firm as deemed gift under section 4(1)(a). The learned counsel for the assessee assailed the stand of the Assessing Officer as totally invalid. He mentioned that even after the said amendment of section 4(1)(a), while the value of the asset transferred has to be ascertained in terms of Schedule-II the value of the consideration received for the transferred asset still remains unascertainable in the light of the decision of the Apex Court in Sunil Siddharthbhai's case. The Assessing Officer has not made any attempt to determine the consideration received for the assets transferred, and actually, in the light of the said decision of the Apex Court, such consideration remains unascertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellants on the dissolution of firm. If such procedure is adopted, the value of consideration would equal the value of the assets transferred and so, there would not be any deemed gift at all. The learned counsel for the assessee conceded that the appellants erred in returning the value of the shares of M/s. Beaver Engineering Co. Ltd. as on 31-3-1992 at face value instead of break-up value. It is, however, explained that this is an error committed by the three appellants in question, while filing their wealth-tax returns for the assessment year 1992-93. That error, however, cannot give a handle to the Department to saddle the appellants with the imposition of tax in relation to deemed gifts, as done by the Assessing Officer. If there is an understatement of wealth as on 31-3-1992, it is simply a case for the Revenue for making proper wealth-tax assessment. it is thus contended that the observations of the Assessing Officer that the appellants have adopted a ruse to avoid wealth-tax is baseless. It is simply a case of committing an error in the filing of the wealth-tax return for the assessment year 1992-93, and it involved no ruse at all. Adverting to the comment of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellants herein have introduced their assets by way of capital into the firm, M/s. Beaver Engineering. The assets being shares in a specified limited company, have been introduced at face value. That does not mean that the consideration received by them is inadequate. The Apex Court observed, considering similar circumstances in the case of Sunil Siddharthbhai, as per the relevant portion of the head-note as follows-- "Where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 of the Income-tax Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest. The consideration for the transfer of the personal assets is the right which accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with his retirement from the partnership, to get the value of his share in the net partnership assets as on the date of the dissolution or retirement after deduction of liabilities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the situation. We have already referred to the said amendment. The said amendment prescribes a specified procedure for ascertaining the value of the asset instead of going by the market value. The amendment enjoins the adoption of its value as determined in Schedule-II of the Gift-tax Act. This is only one limb of the computation required to invoke the provisions of section 4(1)(a). The other limb is to quantify the consideration received and to compare the consideration received with the value of the asset as determined under Schedule-II, It has to be seen that the said amendment has in no way dispensed with the condition of quantifying the consideration received to arrive at a finding of its adequacy or inadequacy. If the consideration cannot be evaluated, it goes without saying that there cannot be a finding that the said consideration was either adequate or inadequate. It must be held that the consideration received is unascertainable in the light of the said decision of the Apex Court and we have already extracted the relevant portion of the head-note of the judgment. So, we are of the view that the assessee is clearly entitled to be extended the benefit of the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the relevant portion of the head-note, the Apex Court observed as under-- "Held, reversing the decision of the High Court, that since the subsidiary companies had no other asset, whatever was the value of the jewellery as determined by the Department was in fact the value of the shares transferred by the subsidiaries to the assessee. The real value of the shares was the market value of the jewellery viz., Rs.13,91,350. Section 4(1)(a) has to be construed in a broad commercial sense and not in a narrow sense. If the transaction involves transfer of certain property in lieu of certain other property received, then the process of evaluation of the two items of property should be similar and if, on such evaluation it is found that there is appreciable difference between the value of the properties then the transaction will be taken as 'deemed gift'. It is to be found that the transaction was on the inadequate consideration and the parties deliberately showed the valuation of the two properties as the same to evade tax. Such a conclusion cannot be drawn merely because according to the Assessing Officer there is some difference between the valuation of the property transferred and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the commercial considerations that prompted the floating of the firm initially, and its subsequent conversion into a limited company, we need not traverse this ground again. The alternative allegation that the firm was dissolved and converted into a limited company only to avoid capital gains tax in the hands of the firm also does not seem to have any basis. As contended by the learned counsel for the assessee, in the light of the decision of the jurisdictional High Court in the case of Vali Pattabhirama Rao v. Sri Ramanuja Ginning & Rice Factory (P.) Ltd. [1986] 60 Comp. Cas. 568 (AP) a copy of which is filed before us, there is a statutory vesting of the assets of the firm in the limited company. When a firm is converted into a limited company under section 575 of the Companies Act, there is automatic statutory vesting of the assets into the company, and no conveyance is required. The relevant observations of the jurisdictional High Court as comparing the provisions of the present Companies Act, 1956 with the corresponding provisions of Indian Companies Act, 1913, are as under-- "The word 'company' occurring in section 263 is not a company registered under the Act. It is used i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ray v. Syamendra Lal Ray ILR [1947] 2 Cal. 1." As the vesting of the assets of the firm in the limited company in terms of section 574 and section 575 of the Companies Act, 1956, is statutory, it appears that there is no transfer involved on the conversion of the firm into a company. Consequently, as no transfer is involved, there is no liability to capital gains tax, on the firm, M/s. Beaver Engineering, on its conversion into a limited company. So, the observations of the Assessing Officer that the floating of the firm and its conversion are only a ruse to avoid capital gains tax on the part of the firm, seem to be without substances At any rate, if there is any liability to capital gains tax on the firm, it is for the Assessing Officer to initiate appropriate proceedings in this regard in the case of the firm. Further, as rightly contended by the learned counsel for the assessee, and as we have already mentioned, there is no material at all to hold that either the floating of the firm or its subsequent dissolution and conversion into a limited company, is a ruse adopted to avoid either wealth-tax liability in the cases of the three appellants or capital gains tax liability in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HB Ltd., as a capital contribution into a firm as a partner. The assessee has transferred his share holding at par value whereas value of the property transferred as per Schedule II of the Gift-tax Act was much more high as determined below. Accordingly, the provision of section 4(1)(a) of Gift-tax Act, 1958 is applicable." In the light of the above categorical finding of the Assessing Officer, it is futile for the Commissioner (Appeals) to pretend that the Assessing Officer, while invoking the provisions of section 4(1)(a) of the Act, had in mind the transfer of assets to the limited company, and not to the firm. 17. As we have based our decision on the judgments of the Apex Court and jurisdictional High Court, we do not find it necessary to refer to the ratio of any of the decisions relied upon by the learned counsel for the assessees or referred to by the Revenue authorities. To our mind, the decisions relied upon by the Revenue authorities have no application to the facts of the present cases. To put the matters simply, the appellants herein had, as on 31-3-1991 certain shares in Hyderabad Batteries Ltd. and its subsidiaries. As on 31-3-1992 they ceased to hold these shares, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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