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TMI Blog2012 (11) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(47). Where a firm becomes a limited company under Part IX of the Companies Act, 1956, section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital asset is not satisfied.In the circumstances, latter part of section 45(4) which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not apply - in favour of assessee. - ITA No.223/Ahd/2012 - - - Dated:- 19-10-2012 - SHRI A. MOHAN ALANKAMONY, AND SHRI KUL BHARAT, JJ. Appellant by Shri Rahul Kumar, SR. DR Respondent by Shri Mukesh M. Patel, AR O R D E R PER A. MOHAN ALANKAMONY: This appeal of the Revenue is directed against the order of the learned CIT (A)-XI, Ahmedabad in ITA No.CIT (A)XI/388/W 6(4)/10-11 dated 28.11.2011 for the assessment year 2008-09. 2. Though the Revenue has raised three grounds, the crux of the issue is that the CIT (A) erred in deleting Rs.92, 07,817/- made by the AO under the head Capital Gains . 3. Briefly, the assessment in the case of the assessee firm was reopened under section 147 of the Act by issuance of a Notice u/s 148 of the Act on the ground, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise on conversion of a firm into company. 2.4. Hon ble Bangalore ITAT in the case of ACIT, Mangalore v. Unity Care Health Services reported at 106 TTJ (Bang) 1086 has held that to bring to charge capital gains to tax u/s 45 (iv), what is required is distribution of capital assets on dissolution of firm or otherwise. It is further held by Hon ble ITAT that in case of conversion of firm into Pvt. Ltd. Company, there is neither dissolution of firm nor distribution of capital asset to partners and, therefore, in such a situation, no capital gain is chargeable u/s 45(iv) of I. T. Act. in this case, Hon ble ITAT has discussed provisions of section 47(xii) vis- -vis provisions of section 45(iv). Hon ble ITAT observed as under: Insertion of section 47 (xi) has not changed this situation. Section 47(xiii) merely excludes certain transfers from the purview of definition of the word transfer as provided in section 247. To bring to charge capital gain u/s 45(iv), what is required is distribution of capital asset on dissolution of firm or otherwise. 2.5. In the instant case, there is no distribution of capital asset to partners. There is no dissolution of firm. Partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by either party. It was the stand of the AO that if the full contributions of the partners taken, it was noticed that the shares in the company have not been allotted in the same proportion as the capital accounts of the partners as they stood in the books of the firm on the date of succession. Therefore, it was the case of the AO, that proviso (b) to s.47 (xiii) is squarely applicable to the assessee s case which made the transfer of the assets and liabilities of the firm liable to capital gain tax. He had also further stated that if it were to be held at the appellate state that the two capital accounts were indeed separate, even then the condition prescribed in proviso (c) to s. 47(xiii) was not met. The said proviso says that the partners of the firm will not receive any consideration or benefit directly or indirectly, in any form or manner from the company except by way of allotment of shares. However, in the present case all the 8 partners current capital account has been taken by the company as loan and so reflected in the balance sheet. Therefore, it was observed by the AO, the erstwhile partners have received consideration in the form of interest as well as benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Law, such conversion can be construed only as occasioned by operation of law. Hence, no controversy could arise on the application of that principle even for purposes of capital gains under section 45(4). By insertion of section 47(xiii), it cannot be said that the conversion of a firm into a company under part IX is to be first treated as dissolution of firm within the meaning of section 45(4) and only if condition as contained in section 47(iii) are complied with, the exemption will be available. Section 47(xiii) applies only to a case of transfer by sale, but there is no authority for capital gain at all in the absence of a transfer under Part IX of the Companies Act inasmuch as such conversions do not fall within the definition of transfer under section 2(47). While disposing off of the Revenue s reference application against the Tribunal s order, the Hon ble Karnataka High Court had, in ITA No.3170/2005 dated 5.7.2010, ruled as under: (On page 6) 5. In the instant case, it is not in dispute that the assets of the partnership firm have become the assets of the company. All the partners of the firm have become the shareholders of the company. In proportion to their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by another partner who continued the business as a sole proprietor and, thus, there was a dissolution of the erstwhile firm whereas in the case under consideration, there was no dissolution of the firm, but, conversion of the firm into a company. Thus, we are of the considered view that the case law relied on by the Revenue cannot come to its rescue. (2) Goel Udog v. ACIT (2011) 45 SOT 444 (Del): The finding of the Hon ble Tribunal of Delhi C Bench is not applicable to the issue under consideration in the sense that in that case, on dissolution of firm and distribution of assets to partner excess of market value over book value with regard to land and building and plant and machinery has to be assessed as capital gain as per s.45 (4) . However, the issue before us, as already mentioned, is on a different footing and, thus, the case law quoted by the learned D R is clearly distinguishable. 6.4 Taking into account all the facts and circumstances of the issue as deliberated upon in the fore-going paragraphs, we are of the considered view that the CIT (A) was justified in deleting the addition of Rs.92,07,817/- made by the AO under the head capital gains . It is o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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