2003 (5) TMI 217 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on depreciation & capital gains, no liability in firm-to-company conversion

KRISHNA ELECTRICAL INDUSTRIES. Versus DEPUTY COMMISSIONER OF INCOME TAX.

The Tribunal dismissed both appeals, upholding the CIT(A)'s decisions. The depreciation claim issue was resolved when the CIT(A) directed the AO to allow ... Capital gains Issues Involved:1. Depreciation claim by the assessee.2. Transfer of capital asset and capital gains computation by the Department.Issue-wise Detailed Analysis:1. Depreciation Claim by the Assessee:The only ground in the appeal of the assessee was the non-allowance of depreciation amounting to Rs. 8,58,226. During the hearing, the counsel for the assessee stated that this issue was initially not decided by the CIT(A), prompting the appeal to the Tribunal. However, the assessee subsequently filed an application under section 154 before the CIT(A), who then directed the AO to allow the depreciation as per law. Consequently, the appeal of the assessee became infructuous and was dismissed.2. Transfer of Capital Asset and Capital Gains Computation by the Department:The Department's appeal objected to the CIT(A)'s decision that there was no transfer of a capital asset and the deletion of an addition of Rs. 80 lakhs as capital gain computed by the AO.2.1 Facts of the Case:The assessee, engaged in the business of manufacturing and trading power cables, filed its return declaring an income of Rs. 11.52 lakhs. The firm, originally constituted in 1968-69, converted into a company named KEI Industries Ltd. under Chapter IX of the Companies Act during the assessment year 1993-94. Before conversion, the firm revalued its land and factory building based on a registered valuer's report but did not charge depreciation on the enhanced value. The AO considered this conversion a transfer under section 2(47) of the IT Act and proposed assessing short-term capital gain under section 50.2.2 Assessee's Argument:The assessee argued that the conversion did not constitute a transfer, as all assets and liabilities merged with the company, and all partners of the firm became shareholders in the company. They cited section 575 of the Companies Act and various case laws, asserting no capital gain liability as there was no transfer but merely a conversion of the firm into a company.2.3 CIT(A)'s Decision:The CIT(A) concluded that section 45(4) was not applicable as the firm was converted into a company, not transferred. The CIT(A) analyzed the meaning of 'transfer' under sections 2(47) and 54(5) and the legal position before the insertion of section 45(4). They referred to case laws like E.I.D. Parry Ltd. vs. CIT and Maharajadhiraj Sir Kameshwar Singh vs. CIT, concluding no transfer of a capital asset occurred, thus section 112 read with section 45(4) was not applicable, and the AO's addition was deleted.2.4 Tribunal's Analysis:The Tribunal supported the CIT(A)'s decision, noting the company was registered under Chapter IX of the Companies Act, indicating no physical transfer of assets but an automatic vesting. The Tribunal referenced the Supreme Court's decision in Sunil Siddarthbhai vs. CIT, which discussed the transfer of property and consideration under section 48. The Tribunal also cited the Bombay High Court's decision in CIT vs. Texspin Engineering & Manufacturing Works, which held that section 45(4) was not applicable in such conversions as there was no distribution of capital assets on dissolution.2.5 Conclusion:The Tribunal confirmed the CIT(A)'s order, agreeing there was no transfer and thus no capital gain liability. The appeal by the Department was dismissed.Judgment:Both appeals, by the assessee and the Department, were dismissed. The Tribunal upheld the CIT(A)'s decisions on both issues, concluding no depreciation claim issue remained and no capital gain arose from the conversion of the firm into a company.