TaxTMI 
TaxTMI 
2003 (5) TMI 217
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....objecting in holding that there is no transfer of capital asset and deleting the addition of Rs. 80 lakhs being capital gain computed by the AO. 3.1 The brief facts of the case are that the assessee filed its return on 31st Oct., 1993, declaring an income of Rs. 11.52 lakhs. The assessee was carrying on the business of manufacturing and trading of power cable. The firm was originally constituted in 1968-69. The constitution of the firm was changed from time to time, as some of the partners were retired and joined. During the year under consideration, the firm got itself converted into a company under the name and style of KEI. Industries Ltd. This conversion was made as limited company under Chapter IX of the Companies Act. As a result of the formula of the aforesaid company, the business of the firm with all its assets and liabilities got automatically vested in the company. Before conversion into company, the firm revalued its land and factory building, which was adopted at Rs. 80 lakhs and Rs. 10 lakhs, respectively, based upon the valuation report of the registered valuer. However, the assessee-firm did not charge depreciation on the enhanced value of land and factory building....
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....not a case of transfer. The CIT(A) has considered that whether the firm can be registered as a limited company under Chapter IX of the Companies Act, and what is the scope of meaning of s. 575 of the Companies Act and what is the meaning of the word "transfer" under the provisions of ss. 2(47) and 54(5) (sic) of the Act, and what is the legal position before insertion of s. 45(4) of the IT Act and whether automatic vesting of the assets and liabilities in the new company will amount to transfer of asset, and what is the scope of s. 45(4) of the Act that whether distribution of assets is a must. After discussing all these provisions of law in detail and placing reliance on various case law, reported in E.I.D. Parry Ltd. vs. CIT (1988) 98 CTR (Mad) 49 : (1988) 174 ITR 11 (Mad) and in the case of Maharajadhiraj Sir Kameshwar Singh vs. CIT (1963) 48 ITR 483 (Pat), the CIT(A) held that there is no transfer of capital asset from the firm to the company and, therefore, the provisions of s. 112 of the IT Act r/w s. 45(4) cannot be applied, and accordingly it was held that the AO wrongly brought the amount to capital gain. Thus, the addition made by the AO was deleted. Now the Department is....
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....findings of the Hon'ble apex Court is that if there was a transfer of shares but the person has got no consideration within the meaning of s. 48, then in that case no profit or gain accrued to him for the purpose of s. 45 of the Act. It was further observed by the Hon'ble Court that where the entire bundle of rights from the transferor has been made and rights of the transferor have not reduced, then in that case also provisions of s. 45 are not applicable. However, it has been observed by the apex Court that if the rights of the person are reduced in transferring the assets to another person, then of course it tantamounts to transfer of interest. 3.6 In the present case, undisputedly the assets and liabilities of the erstwhile firm were converted into company as a whole and all the partners of the firm were allotted shares of the company in equal proportion which was in the firm. Therefore, the interest of the partners was not reduced in any way, neither any amount was paid separately to the firm or the partners on account of goodwill or on account of revaluation of assets. Therefore, the provisions of s. 45(4) of the IT Act r/w s. 112 of the Act are not applicable on the facts o....
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....nsmission. Basically, when a firm is treated as a company under Part IX, it is a case similar to transmission. This is amply made clear by cl. (xiii) to s. 47, which states that where a firm is succeeded by a company in the business, the transaction shall not be treated as a transfer. The expression "transfer of a capital asset" in s. 45(1) is required to be r/w s. 2(47)(ii) which states that transfer in relation to a capital asset shall include extinguishment of any rights therein. In certain cases of reconstitution of firms and introduction of new partners, there is a resultant extinguishment of the rights in the capital assets proportionately. In order to get over this controversy and keeping in mind the object of encouraging firms being treated as companies, the controversy is resolved by the legislature by introducing cl. (xiii) in s. 47 w.e.f. 1st April, 1999. When a partnership firm is treated as a company under the statutory provisions of Part IX of the Companies Act, the company succeeds the firm. Generally, in the case of a transfer of a capital asset, two important ingredients are : existence of a party and a counter-party and, secondly, incoming considering qua the tra....