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TMI Blog2014 (4) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of revaluation reserve to partners’ capital account does not amount to transfer of partnership firm’s assets to the individual partner. During continuation of partnership, partners do not have separate rights over the assets of firm in addition to interest in the share of profits – the rights were property of partnership firm till the date of conversion into the company by operation of law as per Part IX of the Companies Act - Relying upon CIT Vs. Texspin Engineering and Manufacturing Works [2003 (3) TMI 56 - BOMBAY High Court] - Section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied – thus, the latter part of Section 45(4), which refers to computation of capital gains u/s 48 by treating fair market value of the asset on the date of transfer, does not arise - there was no merit in the action of the lower authorities for brining gains on revaluation under the tax net on revaluation of assets of partnership firm, which was distributed to the partner and partnership firm was converted into company by operation of law under Part IX of the Companies Act – Decided partly in favour of Assessee. - ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Chartered Engineers and approved Government Registered Valuers. They have submitted the Valuation Report, stating that the Valuation of the Cable TV Network Rights of Finn is arrived at Rs.31.50 crore as on 1st May, 2007 by using Discounted Cash Flow method. They have furnished in their Valuation Report the various factors which are considered by them, in arriving at the above valuation. Consequent upon receiving the Valuation Report from the Approved Valuer, the Firm incorporated the revaluation value of Rs.31.50 crore of the Cable TV Network Rights, in the Books of Accounts on 1st May, 2007 debiting the Cable TV Network Rights and crediting the Revaluation Reserve Account. The Revaluation Reserve Account was transferred to capital accounts of the Partners, by crediting Rs.10.50 crore each to their respective capital accounts. Further, the Partnership Firm was converted into a Private Limited Company, under the provisions of Part IX of the Companies Act, 1956 w.e.f 7th January, 2008 vide the Certificate of Incorporation issued by the Registrar of Companies. The partners, became the members of the Company as subscribers to the Memorandum and Articles of Association of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of properties is involved in the process. Hence, there is no question of transfer involved in the process. So, when the provisions of s. 45(4) and s. 2. (47) are not specifically applicable in the present case, capital gains cannot be charged under s. 45(4). Further the provisions of s. 45(1) also is not applicable, since there is no transfer of assets from Firm to company and hence there is no question of any capital gains to be brought under tax net, within the meaning of either s. 45(1). 3.2 The assessee also submitted the judgment of CIT v Texspin Engg. Manufacturing Works (2003) 180 CTR (Born) 497: (2003) 63 ITR 345 (Born): (2003) 129 Taxman 1 (Born) placing reliance on the conclusion as drawn by the assessee from the said judgment which is as follows: Conversion of partnership firm into company under part IX of the Companies Act, did not attract the provisions of s. 45(4) as there was no distribution of capital assets on dissolution; provisions of s. 45(1) also could not be applied as the vesting of the properties of the firm in the company was not consequent or incidental to a transfer as contemplated by s. 45(1) . 3.3 The assessee further contended in the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, Mumbai, who are the Chartered Engineers and approved Government Registered Valuers. They have submitted the Valuation Report, stating that the Valuation of the Cable TV Network Rights of Firm is arrived at Rs.31.50 Crore as on 1st May, 2007 by using Discounted Cash Flow method. They have furnished in their Valuation Report the various factors which are considered by them, in arriving at the above valuation. Consequent upon receiving the Valuation Report from the Approved Valuer, the Firm incorporated the revaluation value of Rs.31.S0 Crore of the Cable TV Network Rights, in its Books of Accounts on 1st May, 2007 by debiting the Cable TV Network Rights Account and crediting Revaluation Reserve Account . The balance of Rs.31.50 Crore in Revaluation Reserve Account in the Firm was credited to the Current Account of three partners of the Firm equally i.e. Rs.10.50 Crore each on 31st May, 2007 by passing the following accounting entry: Revaluation Reserve Account Dr.31.5 cr. Rajeev B Gavi Current Capital A/c. Cr. 10.5 cr. Ravishankar R Singh Current Capital A/c. Cr. 10.5 cr. Prakash Patrick Dsouza Current Capital A/c. Cr.10.5 cr. Latter on Satellite Cable TV N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions made by the assessee. However, while computing income in the order passed u/s.143(3), the AO has brought to tax short term capital gain alleged to have received on 7-1-2008 upon transfer of individual asset to the limited company. As per learned AR, the reopening was made by the AO to bring to tax a particular income, however, in the reassessment order another income was brought to tax, which is impermissible in law as held by the Hon ble Bombay High Court in the case of CIT Vs. Jet Airways (I) ltd., 331 ITR 236. Accordingly, it was argued that the AO ingenuinely wanted to add some basis for reopening the completed proceedings. In view of the above, it was submitted that reopening was bad in law on more than one count and the same was requested to be quashed. 6.4 With regard to the merit of the addition, it was contended by the learned AR that revaluation of assets of partnership firm in the form of cable TV network rights were made as per the valuation report given by a chartered engineer and Government approved valuer. The revalution was carried out by passing necessary general entries in the books of the firm. After revaluation of assets of firm, the revaluation r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording reasons as discussed at para 6 hereinabove, the AO has issued notice u/s.148. In view of these reasons and considering the fact that return of assessee was just processed u/s.143(1), there is nothing wrong in the initiation of reassessment proceedings. Accordingly, ground taken by the assessee challenging the validity of reopening u/s.147 is dismissed. 9.1 On merits of the addition, we found that merely on the basis of crediting of revaluation reserve to partners capital account was treated by the AO as capital gains in the hands of the assessee, who is a partner in M/s Satellite Cable TV Network. In the present case, there is neither division of assets nor any realsiation of assets. Since there is no official dissolution of the firm and distribution on assets of the firm among the partners, even the provisions of Section 45(4) will not be applicable to the firm or to the partner. Furthermore, since there is absence of word transfer as envisaged under Section 2(47), the charging provisions of Section 45(1) will not be applicable, since the vesting of property in the company from the firm is not consequent to a transfer, however, it is statutory vesting of properties in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X of the Companies Act. After conversion of the partnership firm into the private limited company by operation of law, the TV cable network rights became the property of the company as per provisions of Section 575 of the Companies Act, which prescribes the provisions concerning the conversion of partnership firm into company. This issue of taxing such gain u/s.45(4) has been decided by the Hon ble jurisdictional High Court in the case of CIT Vs. Texspin Engineering and Manufacturing Works, 263 ITR 345. The precise observation of the Hon ble High Court was as under :- In this case, the erstwhile firm has been treated as a Limited Company by virtue of Section 575 of the Companies Act. It is not in dispute that in this case, the erstwhile firm became a Limited Company under Part IX of the Companies Act. Now, Section 45(4) clearly stipulates that there should be transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a Partnership Firm is treated as a Limited Company, the properties of the erstwhile firm vests in the Limited Company. The question is whether such vesting stands covered by the expression transfer by way of distribution in Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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