9911796707
TMI Blog2006 (1) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... account of admission of three new partners to the appellant-firm." 2. The main grievance of the assessee is that the Assessing Officer has charged capital gains on the firm on the pretext that there is a transfer of assets by the firm at the time of its restructuring. The facts of the case are that return was filed by the firm on 29-9-1997 and it was processed, accordingly. The firm was constituted on 21-3-1981. Subsequently, the Assessing Officer noted that the assessee-firm was liable to capital gains. There were three partners in the assessee-firm, viz., Mr. Sharad A. Doshi, Mr. Vikram A. Doshi and Mr. Vineet A. Doshi. The assets of the firm were revalued and assessee-firm was converted into a private limited company on 22-10-1996. According to the Assessing Officer, on revaluation of the assets on conversion of firm into company, the firm was liable to pay tax on capital gains. The case was reopened under section 147/148. The assets of the firm were revalued on 15-1-1996. The assessee-firm held tenancy right in a property being plot No. 14, Lalwani Industrial Estate, Wadala, Mumbai. The tenancy rights, which was valued at nil prior to revaluation, was valued at Rs. 401.3 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-letting to M/s. Atco Industries vide agreement dated 1-4-1996 was illegal. Though the said premise was sub-let for a period of 11 months, it was renewed after every 11 months and continued thereafter. Thus, the security deposit of Rs. 450 lakhs was still remained deposit with assessee-company. According to the Assessing Officer, it is not possible that tenancy rights valued at Rs. Nil as on 1-4-1989 would appreciate to Rs. 401.3 lakhs as on 15-1-1996. 5. The Assessing Officer then applied the provisions of section 45(4) and held that the assessee has transferred an asset to the company for a sum of Rs. 416.5 lakhs and, therefore, there are short-term capital gains on that sum. According to him, the conversion took place in the year relevant to assessment year 1997-98. Therefore, the short-term capital gains are taxable in the year. 6. Before the CIT(A), it was submitted that conversion of firm into company on 22-10-1996 does not amount to transfer or distribution of its assets. Therefore, provisions of section 45(4) are not applicable at all. According to learned AR, there was no distribution of capital asset belonging to firm and when a partner firm is converted into a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the distribution of capital assets belonging to the firm has not been satisfied because in the absence of definition of the word 'transfer' as including the distribution of capital on the dissolution of the firm may have two possible views. One view is an in-built definition of the word 'transfer' roping in the Act of distribution of capital asset on the dissolution of the firm or otherwise and again assuming that there was dissolution of firm by operation of law, is still requirement that there should be distribution of capital asset of the firm has not been fulfilled. According to appellant what has really happened is that when firm was converted into company all the assets and liabilities of the firm became the company's assets and liabilities and, therefore, there was no distribution of capital asset in specific accounts of partners. However, I am not agreeable to the contention of learned AR. In view of the recent decisions of Hon'ble Bombay High Court in case of CIT v. A.N. Naik Associates 265 ITR 347 wherein it was held that profits and gains arising from the transfer of capital assets by a firm to a partner on dissolution or otherwise would be chargeable as the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greeable with the Assessing Officer that the short-term capital gains has arisen on 23-10-1996 when the firm was converted into Private Ltd. Company. In conclusion, I direct the Assessing Officer to work out the long-term capital gains in the hands of the appellant-firm which has arisen on 1-4-1996 on account of the distribution of the capital assets amongst 3 partners of the appellant-firm and restitution of the firm on 1-4-1996 which is covered by the expression 'otherwise' under section 45(4) of the Income-tax Act, 1961." 7. The main thrust of the order of the CIT(A) is that :-- (i)There is transfer of asset in the form of tenancy right, which was received by partners in rupee terms. (ii)There is a distribution of asset - money has gone to partners. (iii)The word "otherwise" used in section 45(4) takes into consideration not only the cases of dissolution of the firm but also the cases of subsisting partnerships. (iv)The reconstitution of the firm is covered by the word "otherwise". 8. Against this the learned AR submitted that the CIT(A) has misunderstood the provisions of section 45(4) and has committed an error in not following the decision of Jurisdictional High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is transfer of an asset and money has been withdrawn by the old partners. This is covered by words "otherwise" under section 45(4). He relied on the decision in CIT v. A.N. Naik Associates [2004] 265 ITR 3461 (Bom.) referred by CIT(A) in his order. 10. We have carefully considered the rival submissions, material on record and case-laws cited by the parties. Let us analyse what are the events that took place and whether there is only transfer on any of these dates and if yes, of what are to whom and whether provisions of section 45(4) are applicable on any of the events : (1)15-1-1996 : Asset in the form of tenancy right was created in the firm it was valued at Rs. 401.03 lakhs. Other assets were revalued at Rs. 18.6 lakhs as against book value of Rs. 3.80 lakhs. Difference between book value and valued on revaluation was credited equals in current account of three parties. (2)1-4-1996 : The firm was reconstituted. Four new partners were inducted. Total capital of the firm was kept at Rs. 1 lakh. Sub-tenancy rights were created and given to the company "Atco" which was also a newly admitted partner. In lieu of it, "Atco" paid Rs. 450 lakhs to the firm. The existing partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the firm was reconstituted and four new partners were inducted there is no transfer of any capital asset. On reconstitution of the firm, there is no transfer of asset as held in Kunnamkulam Mill Board's case (supra) as under :-- "What is postulated under section 45(4) of the Income-tax Act, 1961, is that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm would be chargeable to tax as the income of the firm. Ownership of property does not change with the change in the constitution of the firm. As long as there is no change in ownership of the firm and its properties, for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital assets. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of a surviving partner because he had no specific right with respect to the properties of the firm. What transpires is that the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases. When a partnership is reconst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the firm. Tenancy right is a right to use a property and if such right is given to some one else, that too at a cost, then such right, though technically not a tenancy right in the hands of "ATCO" vis-a-vis the landlord of the property but it is a tenancy right vis-a-vis the assessee. Creation and allocation of sub-tenancy right in favour of "Atco" is clearly a transfer at a cost within the meaning of section 45(4). This amount was distributed by the firm to the old partners. The money received by the firm from "Atco" is the sale consideration of sub-tenancy right. This is clearly a transfer within the meaning of section 2(47). Event No. 5 : On 1-4-1996 : When the old partners withdrew the money, the withdrawal of such money cannot be said to transfer of capital asset. For the sake of argument, even if withdrawal of money from the firm is treated as a transfer, still there will not be a capital gain as book value and fair market value of such money remains the same. Event No. 6 : On 22-10-1996 : When the firm was converted into a company, it was only a succession of the firm by a company as held in section 170 of the I.T. Act. It is also so held by Hon'ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation and held that the vesting of the capital assets in the company did not amount to sale. On appeal : Held, (i) that this was a case of a partnership firm being treated as a company under the provisions of Part IX of the Companies Act. Section 45(4) was not attracted in the case of the assessee because the very first condition of transfer by way of distribution of capital assets was not satisfied. In the circumstances, the second condition treating the fair market value of the asset on the date of transfer did not arise. In the case of a transfer of a capital asset, the two important ingredients are : existence of a party and counterparty and, secondly, incoming consideration qua the transferor. When a firm is treated as a company the two conditions are not attracted. There was no conveyance of the property executable in favour of the limited company. On the vesting of all the properties statutorily in the company, the firm was treated as a company, after a given date. In the circumstances, there was no transfer of a capital asset as contemplated by section 45(1). Even if it was assumed that there was a transfer of a capital asset under section 45(1) because of the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m to "Atco". There is no dispute with the proposition highlighted by the CIT(A) that section 45(4) can be invoked if there is a transfer of asset by way of distribution on dissolution of the firm or otherwise. This 'otherwise' would include reconstitution of the firm or even formation of a company. To this extent the inference drawn by CIT(A) is right. But he ignored that sub-tenancy rights were transferred by firm to "Atco". It is a transfer of capital asset by way of distribution. Even though, section 47(xiii) has been enacted with effect from 1-4-1999 by Finance (Amendment) Act, 1998 to exempt from the definition of transfer, the take over of the firm by a company, but with certain conditions. In fact company law treats a firm as an un-incorporated company. Section 575 of the Companies Act provided that all the properties movable and immovable belonging to a firm on its registration shall vest in a company on its registration as a company. Therefore, even without the provisions of section 47(xiii), there will not be a transfer of asset when the firm is incorporated as a company. Section 47(xiii) has been enacted only to recognize what it already existed. It does not mean that ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
