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TMI Blog2018 (10) TMI 1708X X X X Extracts X X X X X X X X Extracts X X X X ..... apital as loan, therefore, there was indirect benefit to the shareholders and erstwhile partners. The question arises for consideration is whether there was any transfer on revaluation? Revaluation of existing asset of the partnership firm by itself does not amount to any transfer as held by the Madras High Court in CADD Centre [ 2016 (5) TMI 422 - MADRAS HIGH COURT] after considering the provisions of Section 47(xiii) of the Act, held that Section 47(xiii) applies only to a case of transfer by sale. Moreover, Section 45(4) would apply only when there is distribution of asset to the partners. In view of this judgment of Madras High Court, there is no violations of the conditions stipulated in Section 47(xiii) of the Act. If we accept that the difference between the revaluation and book value credited in the capital account of the erstwhile partners in the same proportion as their capital as a loan amounts to indirect benefit to the erstwhile partners, under the scheme of Income-tax Act, capital gain tax cannot be levied on the assessee-company. Under the scheme of Income-tax Act, only transferor is liable to pay tax on capital gain. In the case before us, the assessee-company succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of revaluation was ₹52,16,526/-. According to the Ld. counsel, the difference between the book value of the asset and the revaluation was given credit as loan from the partners' capital account in the same proportion as their respective capital in the partnership firm. On conversion of partnership firm into a private limited company, the present assessee before this Tribunal, the balance in the capital account of all the shareholders / partners was ₹117,32,87,070/-. Consequently, according to the Ld. counsel, shares were allotted to the partners of the firm for a total amount of ₹10 lakhs each and the balance amount of ₹117,22,87,070/- was given credit to the partners of erstwhile firm in the same proportion as their capital in the firm. Therefore, according to the Ld. counsel, after the partnership firm was converted into private limited company, the shares and the value of the revaluation of asset was given credit on the same proportion as their capital in the partnership firm. 3. Shri D. Anand, the Ld.counsel for the assessee, further submitted that even though notice under Section 153C of the Act was issued on 26.09.2014 to the erstwhile partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed material belongs to erstwhile partnership firm. Therefore, he initiated proceeding under Section 153C of the Act. Having initiated the proceeding under Section 153C of the Act, according to the Ld. counsel, the Assessing Officer is expected to take the same to the logical conclusion. However, the Assessing Officer dropped the proceeding initiated under Section 153C of the Act, therefore, according to the Ld. counsel, the assessment framed by the Assessing Officer under Section 143(3) read with Section 147 of the Act cannot stand in the eye of law. According to the Ld. counsel for the assessee, admittedly there was a search and proceedings were initiated under Section 153C of the Act, therefore, the provisions of Section 143(3) and 147 are ousted, in view of express language employed by Parliament in Section 153A and 153C of the Act. 5. Coming to the merit of the appeal, the Ld.counsel for the assessee submitted that the Assessing Officer found that there was a transfer of property on conversion of partnership firm into a private limited company. According to the Ld. counsel, the assessee private limited company was a successor to the erstwhile partnership firm. The shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stood on the date of revaluation. According to the Ld. counsel, the same credit on the date of revaluation continued even after the succession to the assessee-company in the same proportion. Therefore, according to the Ld. counsel for the assessee, the third condition of Section 47(xiii) of the Act are not violated. In other words, according to the Ld. counsel, Section 47(xiii) is not violated. According to the Ld. counsel, there was no benefit received by the shareholders or the erstwhile partners either directly or indirectly. 7. Placing reliance on the judgment of Madras High Court in CADD Centre v. ACIT (2016) 383 ITR 258, the Ld.counsel submitted that in the case before the Madras High Court as in the case before us, the private limited company succeeded to the assets and liabilities of the partnership firm. All the partners of the firm immediately before the succession became the shareholders of the company in the same proportion in which their capital stood in the books of the firm on the date of succession. As in the case before us, according to the Ld. counsel, the assets of the partnership firm were revalued and the partnership firm business along with assets and liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets and liabilities of the partnership firm is the assessee. Therefore, according to the Ld. counsel, the assessee-company is not liable to capital gain tax even if it is construed as transfer of capital asset. Therefore, according to the Ld. counsel, the CIT(Appeals) is not justified in confirming the order of the Assessing Officer. 9. On the contrary, Shri S. Bharath, the Ld. Departmental Representative, submitted that admittedly there was a search operation in the case of SBQ Steels Ltd. on 26.09.2012 and document relating to formation of assessee-company converting the partnership firm was found and the Assessing Officer issued notice on 26.09.2014 under Section 153C of the Act calling upon the assessee to file return of income within fifteen days. On verification of the return filed by the assessee before the date of search, according to the Ld. D.R., it was found that the assessee has disclosed the revaluation of asset and formation of the company in the return of income. Therefore, according to the Ld. D.R., all the information were available before the Assessing Officer before the date of search. Hence, the Assessing Officer had to initiate proceeding only under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstwhile partners of the partnership firm were also allotted shares in the same proportion in which their capital accounts stood on the date of succession. The only dispute is with regard to credit of difference between the revaluation value and book value of the asset as loan in the capital account of the partners. This credit of difference in the revaluation of asset in the capital account of the partners is claimed by the Revenue as indirect form of getting benefit by the partners other than by way of allotment of shares in the company. It is not in dispute that asset of the partnership firm was revalued and the difference in revaluation and the book value was credited in the books of the partnership firm as loan in the capital account of the partners in the same proportion in which their capital account stood on the date of revaluation. The question arises for consideration is whether there was any transfer of asset within the meaning of Section 2(47) and 45(4) of the Act? 12. This issue was examined by the Madras High Court in the case of CADD Centre (supra). In the case before Madras High Court, a partnership firm engaged in the business of training and trading of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. The question here is, when there is no dissolution at all of the partnership firm, whether there is transfer of capital assets and consequently, whether there is a liability to pay tax on capital gains. On facts, the finding is that there is no dissolution of partnership firm. It is not in doubt that, in case of dissolution of partnership firm, there is transfer of assets and consequently, the assessee is liable to pay tax on capital gains. 18. It would be appropriate to quote the decision in Asst. CIT v. Unity Care and Health Services [2006] 286 ITR (AT) 121 (Bang) ; [2006] 106 TTJ 1086 (Bang.), whereunder, in a similar fact situation, it has been held that when a partnership firm is transformed into a company, there is no transfer of capital asset, as the transfer is by operation of law and the relevant observation reads as under (page 130 of 286 ITR (AT)) : "When a conversion of a firm into company takes place under the provisions of the company law, such conversion can be construed only as occasioned by operation of law. Hence, no controversy can arise on the application of this principle even for purposes of capital gains under section 45(4) of the Act. By inser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital as it stood in the books of the firm on the date of succession, there was no transfer at all. Hence, there is no question of levy of tax on capital gain would arise for consideration at all. 14. The main contention of the Revenue is that on revaluation of the asset of the erstwhile partnership firm, the difference between revaluation and book value was credited in the capital account of the respective partners in the same proportion of their capital as loan, therefore, there was indirect benefit to the shareholders and erstwhile partners. The question arises for consideration is whether there was any transfer on revaluation? Revaluation of existing asset of the partnership firm by itself does not amount to any transfer as held by the Madras High Court in CADD Centre (supra). The Madras High Court, after considering the provisions of Section 47(xiii) of the Act, held that Section 47(xiii) applies only to a case of transfer by sale. Moreover, Section 45(4) would apply only when there is distribution of asset to the partners. In view of this judgment of Madras High Court, there is no violations of the conditions stipulated in Section 47(xiii) of the Act. 15. For ar ..... 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