2005 (6) TMI 209 - AT - Income Tax

Tribunal: No Capital Gains Tax on Firm's Conversion to Pvt Ltd; Upholds Disallowance of Commission Payments.

Assistant Commissioner Of Income-tax Circle-2 (1), Mangalore. Versus Unity Care And Health Services.

Assistant Commissioner Of Income-tax Circle-2 (1), Mangalore. Versus Unity Care And Health Services. - ITD 103, 053, TTJ 106, 1086, (2006) 286 ITR (AT) ... Issues Involved:1. Charging of capital gain invoking provisions of section 45(4) of the Income-tax Act.2. Disallowance of commission paid of Rs. 1,53,000/-.3. Allowance of depreciation on assets on a pro rata basis.Detailed Analysis:1. Charging of Capital Gain Invoking Provisions of Section 45(4):The primary issue revolves around whether the conversion of a partnership firm into a private limited company constitutes a 'transfer' under section 45(4) of the Income-tax Act, thereby attracting capital gains tax. The assessee argued that the conversion did not involve a transfer of assets and thus should not attract capital gains tax. They relied on the decision of the Bombay High Court in the case of Texspin Engg. & Mfg. Works, which held that such a conversion does not amount to a transfer by way of distribution of capital assets. The CIT(A) disagreed, holding that the conversion amounted to the dissolution of the firm and thus invoked section 45(4), making the market value of the assets transferred equivalent to the value of shares received by the partners. The Tribunal, however, sided with the assessee, stating that the conversion under Part IX of the Companies Act did not constitute a transfer as there was no distribution of capital assets nor dissolution of the firm. They emphasized that both entities (firm and company) do not exist simultaneously, thus no transfer occurs.2. Disallowance of Commission Paid of Rs. 1,53,000/-:The assessee claimed a deduction for commission paid to individuals who helped procure students for their School of Nursing. The CIT(A) disallowed this claim due to a lack of supporting evidence. The Tribunal upheld this disallowance, emphasizing that the burden of proof for the genuineness of the claim rests on the assessee, which they failed to meet.3. Allowance of Depreciation on Assets on a Pro Rata Basis:The revenue challenged the allowance of depreciation on the assets on a pro rata basis, arguing that once the assets were transferred to the company, the firm was no longer entitled to claim depreciation. The CIT(A) allowed the depreciation on a pro rata basis, stating that the firm is entitled to depreciation for the period the assets were used by it. The Tribunal upheld this view, citing the 5th Proviso to section 32(1) of the Income-tax Act, which mandates that depreciation should be apportioned between the predecessor and successor based on the number of days the assets were used by each.Conclusion:The Tribunal ruled in favor of the assessee on the issue of capital gains, holding that no transfer occurred during the conversion of the firm into a company, thus no capital gains tax was chargeable. They upheld the disallowance of the commission paid due to lack of evidence. Finally, they confirmed the allowance of depreciation on a pro rata basis, dismissing the revenue's appeal on this ground. The assessee's appeal was partly allowed, and the revenue's appeal was dismissed.