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TMI Blog2000 (12) TMI 896X X X X Extracts X X X X X X X X Extracts X X X X ..... issued to the company by the Registrar of Companies on 8th Nov., 1995, certifying that the company has been incorporated effective from that date. 3. The firm filed its return of income for the period ending 7th Nov., 1995. While making the assessment under s. 143(3), the AO was of the view that the provisions of s. 45(4) were attracted and that the firm was liable to capital gains. In short, it was his view that there was a distribution of the assets of the firm on dissolution or otherwise within the meaning of the said provision and the fair market value of the assets on the date of the distribution shall be taken to be the full value of the consideration for the transfer. He proceeded to compute the capital gains at ₹ 9,00,000, being the difference between the market value, which he estimated, of the assets and the WDV of the assets. 4. The AO, in the course of the assessment order, remarked that the provisions of s. 45(1) are also attracted as there was an extinguishment of the rights of the firm over the assets transferred to the company which fell within the definition of the word transfer under s. 2(47)(ii). 5. On appeal, the CIT(A) upheld the assessment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its purpose need not detain us because the learned counsel for the assessee fairly submitted that two views are possible, one view being that the sub-section itself contains a sort of an in-built definition when it says transfer....by way of distribution (italicised is ours). Thus, even assuming that there is an in-built definition of the word transfer roping in the act of distribution of capital assets on the dissolution of the firm or otherwise and again, as stated earlier, assuming that there was a dissolution of the firm by operation of law, still the requirement that there should be a distribution of the capital assets of the firm has not been fulfilled in the case before us. What has really happened is that the firm as such has ceased to own the assets from the date of incorporation as a joint-stock company and from that date it is the joint-stock company which became the owner of the assets. It is common ground that no conveyance deed was executed by the firm or the partners on its behalf in favour of the company transferring the ownership of the assets. That was indeed unnecessary and is taken care of by s. 575 of the Companies Act which provides that on incorporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention under the income-tax law, for, as far back in CIT vs. A.W. Figgies Co. (1953) 24 ITR 405(SC) Hon'ble Justice Mahajan, speaking for the Supreme Court held that the technical view of the nature of a partnership, under the English law or Indian law, cannot be taken in applying the law of income-tax, that the position under the income-tax law is somewhat different , that under the IT Act a firm can be charged as a distinct assessable entity as distinct from its partners who can be assessed individually and further that the firm as such is a separate and distinct, unit for purposes of assessment (see p. 409). The Act of 1961 also maintains the same position. It is only in recognition of this position that s. 45(4) makes the firm liable for capital gains in the event of a distribution of the capital assets amongst the partners on dissolution. 11. We, therefore, hold that there is no distribution of capital assets, actual, notional or symbolic, amongst the partners of the firm and therefore, s. 45(4) is not attracted. 12. Mr. Kedia then raised the alternative argument that s. 45(1) is attracted as there was an extinguishment of the firm's rights over the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets for a single day during the year was sufficient to entitle the assessee to depreciation. It was also contended that the conditions of s. 43(6)(c)(i)(B) relied upon by the AO were not fully satisfied. Reliance was placed on the judgment of the Madras High Court in A.M. Ponnurangurn Mudaliar vs. CIT (1997) 140 CTR (Mad) 589: (1997) 228 ITR 454(Mad). It was also contended that it cannot be said that the assets were either sold or discarded or demolished or destroyed during the previous year as contemplated by s. 43(6)(c)(i)(B). There were also no moneys payable in respect of the assets as envisaged by Expln. 4 to s. 43 r/w Explanation below sub-s. (4) of s. 41. It was submitted that the language of s. 43(6)(c)(i)(B) was identical with that employed in s. 34(2)(ii) which was omitted from 1st April, 1988, and, therefore, the interpretation placed by the Madras High Court in the decision cited supra on s. 34(2)(ii) must be applied to the interpretation of s. 43(6)(c)(i)(n). Attention was also drawn to the following Supreme Court judgments : 1. CIT vs. Artex Mfg. Co. (1997) 141 CTR (SC) 290: (1997) 227 ITR 260(SC); and 2. CIT vs. Electric Control Gear Mfg. Co. (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mr. Kedia that since s. 45(4) deemed the market value of the assets as the full value of the consideration the provisions of s. 43(6)(c)(i)(B) are attracted cannot be accepted. Instead, we have to see if there is a sale, discard etc. of the assets. Now each one of these words has a different connotation. The vesting of the title in the assets in the company by virtue of s. 575 of the Companies Act is by operation of law and not as a result of any act of sale, discard, demolishing or destruction of the assets in question. As we have already seen, there is no requirement of a formal conveyance deed and in fact there was no conveyance executed by the firm or partners in favour of the company. Further, there are no moneys payable for the sale etc. Explanation 4 to s. 43(6) in this connection says that the expressions sold and moneys payable shall have the meanings assigned to them by the Explanation below s. 41(4). When we turn to the Explanation, we find that neither the definition of sold nor that of moneys payable can be said to rope in the present case. The definition indicates that the moneys must be in the form of monetary consideration. There has been no sale of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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