TaxTMI 
TaxTMI 
2016 (1) TMI 581
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....to tax as capital gains?" 3. The assessment year is 1996-97 and the relevant accounting period is the financial year 1995-96. The assessee, a partnership firm, was engaged in the business of construction work as Builder/Developer/Contractor. The return of income came to be filed for the period relevant to assessment year 1996-97, wherein the assessee declared income of Rs. 7,56,060/- a major part of which included profit from construction work. Along with the computation of income annexed to the return of income, balance sheet and list of fixed assets as per Schedule 4 were submitted. 4. In the note below the said Schedule 4 with regard to fixed assets, a note was given as below: "2. Land has been revalued during the year and reserves created credited to Partner's Capital A/c. 3. The firm was having Shopping Center at Sarita Society, Bhavnagar, the cost of which was not recorded in the earlier year. During 95/96 the asset known as Sarita Shopping Centre is revalued with Land & Building for Rs. 1,16,40,000/- and during 95/96 same amount is considered as assets of the firm. The revaluation reserve is credited to old partners Capital A/c. in ratio of Profit Sha....
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....en seventeen partners who represented both the partnership firm and the intended formation of joint stock Company in the name of M/s. Kalathia Engineering & Construction Ltd. incorporated on February 16, 1996 with a view to convert the firm into a company. The company was incorporated with the same objects to deal in land, building, construction, etc. There was a further stipulation as sale consideration of the business of the firm transferred to the company by allotment of paid up share capital of Rs. 2,00,00,000/- (Rupees two crores) with reference to 20,00,000 shares of Rs. 10/- each. 8. The assessee after revaluing the asset at Rs. 1,16,40,000/- credited the partners' capital account in the ratio of their share. The firm got converted into a limited company by the name of M/s. Kalathia Engineering & Construction Ltd. and the shares to the extent of revaluation had been allotted to the partners in the firm or the Directors of the Limited Company. All the assets and liabilities of the firm upon its registration as a company under Chapter IX of the Companies Act, 1956 came to be taken over by M/s. Kalathia Engineering & Construction Ltd. For the land which was acquired in asses....
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....s further of the view that this income is also chargeable under section 28(iv) of the Act. The Assessing Officer held that since this benefit had arisen for the first time or such assets had been brought for the first time, its value is taxable and accordingly considered Rs. 1,16,40,000/- as the income of the assessee and added the same to its total income. Alternatively, the Assessing Officer observed that in this transaction the assessee has transferred an asset where the cost of acquisition is nil for a consideration of Rs. 1,16,40,000/- for Sarita Shopping Centre and for the land which had acquisition value of Rs. 12,00,000/- for a consideration of Rs. 65,00,000/-. The consideration received from Kalathia Engg. & Const. Co. Ltd. is in the form of shares of the company in the ratio of share holding in the company which is the same as the profit sharing ratio in the firm. He, accordingly, worked out the capital gain as follows: A) Sarita Shopping Centre Sale consideration Rs. 1,16,40,000/- Less: Cost of acquisition Rs. NIL Capital Gain Rs. 1,16,40,000/- The Assessing Officer treated the same as short term capital gain as the a....
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....iled in the order passed by the Commissioner (Appeals) were raised. The written submissions were forwarded to the Assessing Officer for his comments thereon. The Assessing Officer in his remarks inter alia submitted that within a period of fifteen years from the date of acquisition of lease hold rights vide lease deed dated 18th July, 1980, a benefit or perquisite had accrued to the assessee which arose from its business. He also stated that the transfer of assets from the assessee firm to the company was a transfer in accordance with section 2(17)(vi) which was liable to capital gains tax under section 45(4) of the Act. He, therefore, observed that the provisions for charging capital gains were applicable to the said transactions as the assessee firm and the company were two separate entities. 12. The Commissioner (Appeals), after considering the material on record, found that the assessee had acquired the asset of lease hold interest in the two plots on which shops and godowns were subsequently built on 18th July, 1980. It was only on 16th February, 1996 on which date the assessee firm was succeeded to a company known as M/s Kalathia Engineering & Construction Limited that the....
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....3. The assessee carried the matter in further appeal before the Tribunal, which allowed the appeal by holding thus: "17. We have duly considered the rival contentions and the material on record. In view of the decision in the case of Texspin Eng. (supra) [decision of the Tribunal in Texspin Engineering & Manufacturing Works, 70 TTJ 789], this ground need not detain us too long. Firstly, it is not clear from the order of the revenue authorities as to under which sub-section of sec. 45, the amounts have been treated as capital gains. The authorities below have taxed it as capital gains on the ground that there was transfer of assets from the firm to the company. Therefore, it can be assumed that this must have been treated as a transfer u/s.45(1) of the Act. But, as held by the Tribunal in the case of Texspin (supra), capital gains can be brought to assessment only, if the full value of the consideration is received by or accrues to the transferor. The consideration in the instant case is stated to be allotment of shares though the shares were issued by the company not to the firm but to its partners. Even if we consider that the shares somehow represented the consideration,....
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....vides that notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. It was submitted that in the present case Sarita Shopping Centre has been revalued and brought to the books of the firm and hence section 45(2) of the Act can be clearly invoked upon the sale and at least the revaluation cost minus cost of acquisition will have to be brought to tax. Thus, the capital asset has been converted into stock in trade and thereafter transferred to the company and hence, in view of section 45(2) read with section 2(47)(iv), that amount was exigible to capital gains tax. Also land which was acquired in the assessment year 1995-96 at the val....
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....fficer placed reliance upon the decision of the Supreme Court in Commissioner of Income-tax v. B.M. Kharwar, (1969) 72 ITR 603 and held that tax was payable under section 41(2) on the surplus amount, that is, the difference in the written down value of the plant, machinery and dead stock as per the assessee's books and the value of the same as revalued by Hargovandas Girdharlal. The Appellate Commissioner, on appeal, held that the surplus was assessable under the head "Capital Gains" and not "Business". The Tribunal in the appeals filed by the assessee as well as the revenue, rejected the contention of the assessee that the principle of mutuality was applicable and consequently the surplus was not liable to tax; and on the question as to if the surplus was found to be taxable, whether it should be taxed under section 41(2) or under the head of "Capital Gains" held that the surplus was taxable under section 41(2) of the Act. At the instance of the assessee, the Tribunal inter alia referred the following questions for the opinion of the High Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the principle of mutuality....
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....at for the purpose of applying section 45, there has to be a transfer within the meaning of the Act. Strong reliance was placed upon the decision of the Bombay High Court in Commissioner of Income-tax v. Texspin Engg. & Mfg Works, (2003)263 ITR 345 (Bom), wherein the court held that the expression "transfer of a capital asset" in section 45(1) is required to be read with section 2(47)(ii) which states that transfer in relation to a capital asset shall include extinguishment of any rights therein. The court observed that in the case before it, it was concerned with a Partnership Firm being treated as a Company under the statutory provisions of Part IX of the Companies Act. In such cases, the Company succeeds the Firm. Generally, in the case of a transfer of capital asset, two important ingredients are: existence of a party and a counter party and, secondly, incoming consideration qua the transferor. The court was of the view that when a Firm is treated as a Company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the Limited Company. It is no doubt true that all the properties of the Firm vest in the Limited Company on the Fi....
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....: "18. In Artex Mfg. Co.1 this Court found that a valuer was appointed, that valuer submitted his valuation report in which itemised valuation was carried out and on that basis the consideration was fixed at Rs. 11,50,400. Therefore, the sale consideration had been arrived at after taking into account the value of plant, machinery and dead stock as computed by the valuer and, consequently, it was held that the surplus arising on the sale was taxable under Section 41(2) of the Act and not as capital gains. In the circumstances, the judgment of this Court in Artex Mfg. Co.1 is not applicable to the present case. 19. Further, this Court in CIT v. Electric Control Gear Mfg. Co.3 has held that whether the business of the assessee stood transferred as a going concern for slump sale price, in the absence of evidence on record as to how the slump price stood arrived at, Section 41(2) had no application. It is interesting to note that the judgment in Electric Control Gear Mfg. Co.3 is given by the same Bench which decided the case of Artex Mfg. Co.1 In fact, both the judgments are reported one after other in 227 ITR at pp. 260 and 278 respectively. 20. In the pres....
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.... held that the charging section and the computation provisions together constitute an integrated code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45. In the present case, the banking undertaking, inter alia, included intangible assets like goodwill, tenancy rights, manpower and value of banking licence. On facts, we find that item wise earmarking was not possible. On facts, we find that the compensation (sale consideration) of Rs. 10.20 crore was not allocable item wise as was the case in Artex Mfg. Co.1 25. For the aforestated reasons, we hold that on the facts and circumstances of this case, which concerns Assessment Year 1970-1971, it was not possible to compute capital gains and, therefore, the said amount of Rs. 10.20 crore was not taxable under Section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside." 15.4 It was accordingly submitted that without prejudice to the contention that there is no transfer, even if there is a transfer, it is a slump sale and section 45 would not apply to the present case as the entire undertaking has been transferred as a going concern. 15.5 Reliance was pl....
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....t the principle of mutuality is attracted. It was submitted that in the present case, the assessee contends that the transaction is not at all exigible to tax on the ground of mutuality, whereas in Artex Mfg. Co. v. Commissioner of Income-tax, (1981) 131 ITR 559, this High Court has held that the principle of mutuality would not apply in that case. Under the circumstances, the principle of mutuality would not be applicable to the facts of the present case. 16.1 It was submitted that the decision of the Bombay High Court in Commissioner of Income-tax v. Texspin Engineering and Manufacturing Works (supra) may not be accepted as this court's observation regarding mutuality has not been taken into consideration. It was contended that to the extent of mutuality the decision of the Gujarat High Court in Artex Mfg. Co. v. Commissioner of Income-tax stands confirmed by the Supreme Court, that firm and company are distinct entities. It was argued that the Bombay High Court in Commissioner of Income-tax v. Texspin Engineering and Manufacturing Works does not consider words "or otherwise" appearing in section 45(4). To that extent the view taken by the Bombay High Court is not correct. ....
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....e Assessing Officer has held that there was short term capital gain in respect of Sarita Shopping Centre as well as the land, whereas the Commissioner (Appeals) has held that there was long term capital gain in respect of Sarita Shopping Centre and short term capital gain in respect of the land. The question that, therefore, requires to be addressed is as to whether the provisions of section 45 of the Act are attracted in the facts of the present case. For the purpose of attracting sub-section (1) of section 45 of the Act profit or gain should have arisen from the transfer of a capital asset. Sub-section (2) of section 45 of the Act provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of t....
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....tion 48 deals with mode of computation. It, inter alia, lays down that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer and the cost of acquisition of the asset. Therefore, under Section 45(4), two conditions are required to be satisfied viz. transfer by way of distribution of capital assets and secondly, such transfer should be on dissolution of the firm or otherwise. Once these two conditions are satisfied then, in that event, for the purposes of computation of capital gains under Section 48, the market value on the date of the transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer. Now, according to the Assessing Officer, in this case, on vesting of the properties of the firm in the Limited Company, there was a transfer by way of distribution of capital assets. Further, according to the Assessing Officer, on vesting of the properties of the firm in the company, there was a resultant dissolution of the firm. Therefore, according to the Assessing Officer, both the conditions under Sec....
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....ot attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, the latter part of Section 45(4), which refers to computation of capital gains under Section 48 by treating fair market value of the asset on the date of transfer, does not arise. [B] On Section 45(1) 6. As stated above, in this case we are concerned with the assessment year 1996-97. Therefore, in this case, we are not concerned with clause (xiii) inserted by Finance (No. 2) Act, 1998 in Section 47 under which it is provided that where a Firm is succeeded by a company in the business carried on by it as a result of sale or otherwise, of any capital assets, then such transaction shall not be regarded as transfer. This clause was inserted with effect from 1st April, 1999. Therefore, we are not concerned with that amendment. However, it provides a clue to the legislative intent. In our opinion, this clause has been introduced with effect from 1st April, 1999 in order to encourage more and more Firms becoming Limited Companies. It also indicates the difference between transfer and transmission. Basically, when a Firm is treated as a com....
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....tion qua the transferor. In our view, when a Firm is treated as a Company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the Limited Company. It is no doubt true that all properties of the Firm vests in the Limited Company on the Firm being treated as a Company under Part IX of the Companies Act, but that vesting is not consequent or incidental to a transfer. It is a statutory vesting of properties in the Company as the Firm is treated as a Limited Company. On vesting of all the properties statutorily in the Company, the cloak given to the Firm is replaced by a different cloak and the same Firm is now treated as a Company, after a given date. In the circumstances, in our view, there is no transfer of a capital asset as contemplated by Section 45(1) of the Act . Even assuming for the sake of argument that there is a transfer of a capital asset under Section 45(1) because of the definition of the word "transfer" in Section 2(47)(iii), even then we are of the view that liability to pay capital gains would not arise because Section 45(1) is required to be read with Section 48, which provides for mode of computation. These two ....
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....o succeed because the Firm can be assessed only if the full value of the consideration is received by the Firm or if it accrues to the Firm. In the present case, the Company had allotted shares to the Partners of the erstwhile Firm, but that was in proportion to the capital of the Partners in the erstwhile Firm. That allotment of shares had no correlation with the vesting of the properties in the Limited Company under Part lX of the Act. Lastly, Section 45(1) and Section 45(4) are mutually exclusive. Under Section 45(4) in cases of transfer by way of distribution and where such transfer is as a result of dissolution, the department is certainly entitled to take the full market value of the asset as full value of consideration provided there is transfer by distribution of assets. In this case, we have held that there is no such transfer by way of distribution and, therefore, Section 45(4) is not applicable. This deeming provision, regarding full value of consideration, is not there in Section 45(1) read with Section 48. If one reads Section 45(1) with Section 48, it is clear that the former is a charging section and if that section is applicable, the computation has to be done under....