2010 (10) TMI 685 - AT - Income Tax

Factory Building Transfer Taxable Under Income-tax Act: Appeal Partially Allowed for Recalculation

New Gujarat Tin Printing Works Versus Income-tax Officer, Ward 5(4)

The Tribunal found that the transfer of the factory building constituted a taxable event under the Income-tax Act, resulting in a short-term capital gain. ... Addition – STCG - The Learned Assessing Officer noticed that the said Ratanpur factory building which was withdrawn by the partner at a written down value of Rs. 34,64,745 was valued by a Registered Valuer for Rs. 3,22,65,000 for the purpose of new firm and the company – AO submitted that another important aspect which was overlooked was that the valuation done by Abbasi and Abbedin Tinwala comprised of land which was in their individual ownership and the factory building which was owned by the firm - . The Learned Authorised Representative of the assessee submitted that there was no dissolution of the firm and hence there was no transfer of assets - if a transaction falls within the ambit of the above stated definition of transfer then irrespective of the fact whether the transaction is a transfer within the Transfer of Property Act, 1881 or not, the income accrued on such transaction is chargeable to Income-tax Act under section 45(4) of the Act Thus, in view of the above in our considered view the fair market value of the Ratanpur factory building as on 1-4-2000 which was distributed by the assessee firm to its two partners was Rs. 86,15,894 and accordingly, the short term capital gain in the hands of the assessee firm under section 45(4) will be difference between Rs. 86,15,894 and the written down value of Rs. 34,64,745 which is Rs. 51,51,149 – Appeal is partly allowed Issues Involved:1. Re-opening and re-assessment of the appellant's case.2. Addition of short-term capital gain amounting to Rs. 2,88,00,255.3. Referral to Valuation cell for property valuation.4. Consideration of fresh valuation report and other arguments made by the appellant.Detailed Analysis:Issue 1: Re-opening and Re-assessment- The appellant did not press this ground of appeal during the hearing, leading to its dismissal as not pressed.Issue 2: Addition of Short-term Capital Gain- The Assessing Officer (AO) noticed that two partners withdrew the Ratanpur Factory building from the firm and introduced it into another firm on the same day, later converting it into a private limited company. The building, initially valued at Rs. 34,64,745, was revalued at Rs. 3,22,65,000 by a Registered Valuer.- The AO held that this withdrawal constituted a transfer liable to tax under section 45(4) of the Income-tax Act, resulting in a short-term capital gain of Rs. 2,88,00,255.- The Commissioner of Income-tax (Appeals) upheld the AO's decision, stating that the valuation was consistent with the value used by the new firm and the private limited company for depreciation purposes.Issue 3: Referral to Valuation Cell- The appellant argued that the AO should have referred the case to the District Valuation Officer for determining the fair market value. The appellant also contended that the valuation included the cost of land, which was not owned by the firm.- The Commissioner of Income-tax (Appeals) rejected this argument, noting that the valuation report was prepared by the partners and used consistently in subsequent transactions, including the issuance of shares and claiming of depreciation by the private limited company.Issue 4: Consideration of Fresh Valuation Report and Other Arguments- The appellant submitted a fresh valuation report showing a lower value for the factory building and argued that the AO ignored this report and other relevant facts, such as the land being owned individually by the partners.- The Commissioner of Income-tax (Appeals) did not accept the fresh valuation report, emphasizing the consistency of the original valuation report across multiple transactions and the lack of necessity for further valuation.Conclusion:- The Tribunal found that the transfer of the factory building met the definition of 'transfer' under section 2(47) of the Income-tax Act, and the provisions of section 45(4) applied, making the capital gain taxable.- The Tribunal noted that the fair market value of the factory building should be Rs. 86,15,894, excluding the value of the land, and directed the AO to recompute the short-term capital gain accordingly, reducing it to Rs. 51,51,149.- The appeal was partly allowed, modifying the lower authorities' orders to reflect the revised capital gain calculation.