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TMI Blog2010 (3) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... to company under Part IX of the Companies Act would lead to realization of profits or gains on account of transfer of capital assets. But, S.47A(3) does not achieve the desired objective, as the language of the said Provision now stands. Section 47A(3) only emphasizes the obvious, that is to say, the profits and gains resulting from the transfer of capital asset chargeable under the Provisions of the Act.. To judge whether this prerequisite is fulfilled or not, we have to go back to the basic provisions, namely Section 45(1) and Section 48 and S.47-A(3) cannot be read as a ‘stand alone’ provision. no capital gains accrued or arose at the time of conversion of partnership firm into a private limited company under Part IX of the Companies Act and therefore, notwithstanding the non-compliance with clause (d) of proviso to Section 47(xiii) of the Income Tax Act, by reason of premature transfer of shares, the said company is not liable to pay capital gains tax. - 797 OF 2009 - - - Dated:- 12-3-2010 - Mr. Justice P.V. Reddi and Mr. J. Khosla, JJ. RULING (By Hon'ble Chairman) 1. This application is filed under section 245Q(1) of the Income-tax Act, 1961 by a non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership were revalued by a Chartered Accountant of Mumbai for Rs. 5 crores as against the net worth of the business of Rs. 3, 05,896/- shown in the account books of the partnership firm. The excess value of the assets of Rs. 4,96,94,104/- resulting from revaluation was credited to the respective partners' accounts. The asset-wise details of the revalued assets are given in the application. It is stated that the revaluation increased the partners' capital notionally and it continued to be so till the conversion of firm into company in August, 2005. It is clarified that at the time of registration of the wholly owned subsidiary of applicant company under Part-IX of the Companies Act, 1956 on 13.09.2005, the partners of the erstwhile firm were the same as the share holders of the said company, having share holdings identical with the profit sharing ratio of the 7 partners. The authorized share capital of Anandeya was increased to Rs.2 crores divided into 20 lacs equity shares of Rs. 10/- each. As on the date of purchase of shares by the applicant company on 1st July, 2008, its total issued and paid up capital was Rs.1,55,00,000/- divided into 15,50,000 shares of Rs.10/- each and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is pointed out that the net worth of the company as on the date of conversion was the same as it was in the hands of the erstwhile firm and there was no increase in the said value. 5. Before proceeding further, we shall refer to the relevant provisions of Part- IX of the Companies Act and the Income-tax Act. COMPANIES AUTHORISED TO REGISTER UNDER THIS ACT 565. (1) With the exceptions and subject to the provision contained in this section,- (a) xx xx xx xx xx xx xx xx xx (b) any company formed after the date aforesaid, whether before or after the commencement of this Act, in pursuance of any Act of Parliament other than this Act or of any other Indian law (including a law in force in a part B State), or of any Act of Parliament of the United Kingdom or Letters Patent in force in India, or being otherwise duly constituted according to law, and consisting of seven or more members; may at any time register under this Act as an unlimited company, or as a company limited by shares, or as a company limited by guarantee; and the registration shall not be invalid by reason only that it has taken place with a view to the company's being wound up: xx xx xx xx xx xx xx xx xx ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48 , the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. Section 47 lays down that nothing contained in section 45 shall apply to the transfers specified therein. We are concerned with clause (xiii) in that section which reads thus: Clause (xiii) of Section 47 Nothing contained in section 45 shall apply to the following: (xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company: Provided that (a) all the assets and liabilities of the firm [or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied) 8. Thus, by virtue of the premature transfer, the transferor company which succeeded the firm has forfeited the protection given under section 47(xiii). It cannot seek the aid of that provision in order to get out of the net of taxation. Was there a transfer of capital assets? Did any profit or gain arise from such transfer? It may be noticed here that sub-section (3) of section 47A under which the transferor company has forfeited its claim to seek exclusion uses the words "the amount of profits or gains arising from the transfer of such capital assets or intangible assets". It presupposes that there was a transfer of capital asset and that certain profit or gain resulted therefrom which has not been charged to tax earlier. It is this aspect which needs to be dealt with. 9. The reasons for enacting section 47(xiii) together with sub-section (3) of section 47A by the Finance Act of 1998 as seen from Notes on clauses are: "Under the existing provision of the Income-tax Act, business reorganizations have definite tax implications. Transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation are not available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resort can only be had to sub-section (3) of Section 47A to deny the benefit of exclusion under the substantive part of Section 47(xiii). So, we have to closely look at the language of sub-section (3). What is the consequence provided for by Section 47A(3)? The consequence is that the amount of profits or gains arising from the transfer of such capital asset not charged [emphasis supplied] under Section 45 shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the non-compliance of the conditions in the proviso to cl.(xiii) had taken place. It must be noted that the deeming in sub-section (3) of Section 47(A) is not absolute. What is deemed to be the profits and gains of the successor company is the amount of profits or gains arising from the transfer of such capital asset not charged earlier. If no profits or gains arose earlier when the conversion of the firm into a company took place or if there was no transfer at all of the capital assets of the firm at that point of time, the deeming provision under Section 47A(3) cannot be invoked to levy the capital gains tax. 11. Assuming that a process of transfer of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not become richer or pocketed any surplus money or moneys' worth by becoming shareholders of the newly incorporated Company. 11.2 In the case of Texspin Engg.Mfg. Works [263 ITR 345] the issue was viewed from another angle i.e. from the stand point of Section 48 of the Act in a case of similar conversion of a firm into a company. On the facts similar to the present case, it was held by the Bombay High Court that the very asset transferred or parted with cannot be the consideration for transfer and therefore the market value of that asset cannot enter into computation of capital gain. "Full value of Consideration" cannot therefore be attributed to the transaction. The legal position was stated thus by S.H. Kapadia J. speaking for the Division Bench of High Court: "Even assuming for the sake of argument that there is a transfer of a capital asset under section 45(1) because of the definition of the word "transfer" in section 2(47)(iii), even then we are of the view that the liability to pay capital gains tax would not arise because section 45(1) is required to be read with section 48, which provides for mode of computation. These two sections are required to be read together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee ought to succeed because the firm can be assessed only if the full value of the consideration is received by the firm or if it accrues to the firm. In the present case, the company had allotted shares to the partners of the erstwhile firm, but that was in proportion to the capital of the partners in the erstwhile firm. That allotment of shares had no correlation with the vesting of the properties in the limited company under Part IX of the Act." It was further observed: "If one reads section 45(1) with section 48, it is clear that the former is a charging section and if that section is applicable, the computation has to be done under section 48, which only refers to deductions from the full value of consideration received or accruing. Section 48 does not empower the Assessing Officer to take the market value as the full value of consideration as in the case of section 45(4). In the circumstances, even if we were to hold that vesting amounts to transfer, the computation is not possible because it has been laid down in the above judgment of the Supreme Court that full consideration cannot be construed to mean the market value of the asset transferred. The Legislature, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act. In such cases, the company succeeds the firm. Generally, in the case of a transfer of a capital asset, two important ingredients are : existence of a party and a counter-party and, secondly, incoming consideration qua the transferor. In our view, when a firm is treated as a company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the limited company. It is no doubt true that all properties of the firm vest in the limited company on the firm being treated as a company under Part IX of the Companies Act, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of properties in the company as the firm is treated as a limited company. On the vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is now treated as a company, after a given date. In the circumstances, in our view, there is no transfer of a capital asset as contemplated by section 45(1) of the Act." 12.1 Though these observations were made in the context of Section 45(4), the ratio of the decision would equally apply to the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X
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