2014 (4) TMI 308

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....the said amount under "Revaluation Reserve" and on asset side instead of disclosing the said rights under "Investment in shares of M/s Wire & Wireless Satellite Network Pvt Ltd" disclosed it as "Loans and Advances Recoverable". As per AO clearly the said rights has been transferred/relinquished by the assessee in favour of person from whom the said "Loans & Advances" are recoverable, calling for compliance under section 45 by the assessee. 4. On Assessing Officer's query to tax the same as short term capital gains u/s.45, the reply of the assessee was as under :- "The revaluation of asset is not chargeable to tax and since Network Rights has been revalued, the same is not chargeable. Vide submission dated 09/01/2012 the assessee stated as, "the assessee is partner in M/ s Satellite Cable TV Network with profit sharing ratio of 33.33 %, the nature of business of firm is to carry on Cable TV and Advertising Network, over a period of time the business of the firm was picked up and number of cable connections increased. Cable TV network connection is a commercial right of the firm and forms part of the intangible capital asset of the firm. The Firm decided to go in for revaluatio....

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....nto company, by operation of law, and the Firm got the status of the company, by virtue of part IX of the Companies Act. Under part IX of the Companies Act, when a partnership firm is treated as a limited company, the properties of the erstwhile firm vest in the limited company. As established in judicial rulings, there is difference between vesting of the property and distribution of the property. Vesting means the properties of erstwhile firm continues to exists as they are, with the company. Whereas distribution on dissolution pre-supposes division, realization, encashment of assets. In the present case, there is neither division of assets nor any realization of the assets. When there is no official dissolution of the Firm and distribution of assets among the partners, the provisions of s. 45(4) are not applicable to the Firm or to the partners. Even the charging provisions of s. 45(1) are not applicable, since there is absence of word transfer" as envisaged in s. 2(47), as vesting of the properties in the company from the firm is not consequent or incidental to a transfer. It is the statutory vesting of properties in the company as the firm is treated a limite....

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....Chheda (2009) 29 SOT 138 (Mum), dated 29.01.2009 wherein it was held as, Sec. 28(iv)-revaluation of assets by firm before conversion into a Company-Value of Shares received by partners in excess of their capital was not taxable." Assessee further elaborately contended vide submission dated 24.3.2012 regarding non applicability of provisions of Section 45(1), 45(3) and 45(4) of the Act and hence non taxability of the same. The submissions were on the same lines as submission on 9.1.2012 and 23.2.2012. Finally vide letter dated 23.10.2012 the assessee was asked to furnish the Audited Balance Sheet of the company formed after the conversion of the said partnership firm (M/s Satellite Cable Network) for A.Y. 2008-09, 2009-10 and 2010-11 along with a detailed justification of the revaluation reserve created. The assessee duly attended and submitted the details vide submission dated 6.11.2012. "The assessee is partner in M/s Satellite Cable TV Network which transmits TV signals through cable to the ultimate viewers. The subsidiary activity of the firm is to provide advertising service. The firm decided to go in for revaluation of its Cable Network Rights before the induction of new....

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....y the firm or the partner, however, there is no clarity whatsoever as to where he wants to tax and why. The same amount cannot be taxed at both the places. Accordingly, as per learned AR, the reason No.1 recorded by the AO was vague and unsustainable in the law. 6.2 With respect to the second reason noted by the AO, the learned AR submitted that belief of AO was against the well settled legal position as the amount distributed on the revaluation of assets amongst the partners is not at all liable to capital gain tax and for this purpose, reliance was placed on decision of Hon'ble Bombay High Court in the case of Prashant S. Joshi & Anr. Vs. ITO, 324 ITR 154. 6.3 With reference to the third reason recorded by the AO, learned AR contended that assessee had received unsecured loan of Rs.7 lakhs is factually incorrect. Insofar as the balance sheet for the last year and the current year is concerned, it no where indicates such loan was taken by the assessee. It was also argued by the learned AR that the addition made by the AO was beyond scope of the reassessment proceedings. The reason for initiating proceedings u/s.147 of the Act was to tax the receipt on account of alleged dist....

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....he revalued amount to the capital accounts of the partners in their respective sharing ratio does not entail any transfer as defined under section 2(47), reliance was placed on the decision of the coordinate bench in the case of Paru D. Dave, 110 ITD 410 (Mum) and in the case of Fine Developers, 55 SOT 122 (Mum). 8. On the other hand, learned DR relied on the findings recorded by the lower authorities and conclusions drawn by them. 9. We have considered rival contentions, carefully gone through the orders of the authorities below and found from the record that the assessee is one of the partner of partnership firm M/s Satellite Cable TV Network. During the year under consideration, the partnership firm has revalued its capital network rights on 1-5-2007. After revaluation of network right, revaluation reserve was credited to partners' capital account and the assets account was debited in the books of the partnership firm. Assessment of partner was reopened by issue of notice under Section 147 on the plea that assessee has not offered any capital gain on distribution of reserve on the revaluation of the assets of the partnership firm. There is no dispute to the fact that origi....

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.... of partnership firm to the partner within the meaning of Section 2(47), there was only revaluation of the asset of the partnership firm which was in the form of cable TV network rights. The revaluation of the assets by the partnership firm does not attract any capital gain. The revaluation of the assets of the partnership firm and credit of revalued amount to the capital account of the partners in their respective profit sharing ratio does not entail any transfer as defined under Section 2(47) as laid down by the coordinate bench in the case of Paru D. Dave (supra). It is not in dispute that assessee in his individual capacity was not the owner of the cable TV network rights which was owned by the partnership firm. Furthermore, rights were of such nature that it could not be owned by the different individuals in a piecemeal manner. The cable TV network rights was the rights arising out of various agreements entered into by the partnership firm with the outside parties in the course of business for distribution of cable TV signals. Had the partnership firm sold these assets to any third party, the department could have levied tax on such sale consideration. These rights were proper....