TaxTMI 
TaxTMI 
2016 (5) TMI 422
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....herwise" occurring in section 45 of the Income-tax Act has to be read "ejusdemgeneris" with the expression "dissolution of a firm or body or association of persons" or it has to be read with the word "transfer of capital assets" by way of distribution of capital assets ? 1.3 Whether omission of clause (2) of section 47 "any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons" by the Finance Act, 1987 with effect from April 1, 1988, would lead to the conclusion that any transaction resulting in distribution on dissolution of a firm would amount to "transfer" in terms of section 47 ? 2. This appeal has been preferred by the assessee under section 260A of the Income-tax Act, 1961 (hereinafter will be referred to as "the Act"), challenging the orders passed by the Income-tax Appellate Tribunal, in I.T.A. No. 1457/Mds/1997 and C.O. No. 133/Mds/1997, dated September 29, 2004. Brief facts : 3. The appellant, erstwhile registered firm, is engaged in the business of training and trading of software. The appellant-firm was constituted in the year 1988, vide deed of partnership, dated October 20, 1988, and consisted of o....
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.... The Income-tax Appellate Tribunal allowed the appeal, holding that the transfer of assets of a partnership firm, without dissolution, to a private limited company falls within the expression "otherwise" (as contemplated under section 45(4) of the Act) and therefore, the appellant is liable to pay tax. Challenging the same, the assessee is on appeal, raising the following substantial questions of law : "(a) Whether the Income-tax Appellate Tribunal is right in law in holding that the capital gains is attracted, when existing business of the appellant-firm was taken over by a company and the entire interest of the partners in the firm is converted into equity shares in pro portion, in a newly formed private limited company, in which, the partners of the firm are the only shareholders ? (b) Whether the Income-tax Appellate Tribunal is right in law in finding that section 45(4) of the Act is attracted in case where the taking over of the partnership firm as a whole as a going concern by a private limited company amounts to transfer of capital assets even when no consideration has been received within the meaning of section 48 of the Income-tax Act, 1961 ? (c....
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....come-tax Appellate Tribunal, is the issue agitated by the Revenue, consequently, whether the Income-tax Appellate Tribunal is right in saying that, as the issue was not raised before the Commissioner of Income-tax (Appeals), the Tribunal can decline to entertain this ground. 7.2 This issue is squarely answered by the decision of the hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) ; [1999] 157 CTR 249 (SC), in which, it has been held that, the Tribunal is not confined only to issues arising out of the appeal before the Commissioner of Income-tax and that, it has jurisdiction to examine a question of law, which arises from the facts, as found by the authorities below and having a bearing on the tax liability of the assessee. Therefore, the finding of the Income-tax Appellate Tribunal that this issue (reopening of assessment) does not arise out of the order of the Commissioner of Income-tax (Appeals) and hence, we decline to entertain this ground, is not correct. Therefore, there is no legal impediment to raise the substantial questions of law (c), (d) and (e), pertaining to reopening of assessment. 8. However, the learned counsel for ....
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....nd therefore, the assessee is not liable to pay any tax on capital gains. The further contention is that section 45(4) will be applicable only when the firm is dissolved or when there is distribution of assets and not otherwise. 11. The case of the respondent/Revenue is that, when the partnership firm (without dissolution) get transformed into a private limited company, the process involves the transfer of asset and that it would fall within the expression "otherwise", as contemplated under section 45(4) of the Income-tax Act and therefore, the assessee is liable to pay tax on the capital gains on the transfer of assets. 12. In order to appreciate, the contentions raised on both sides, it is necessary to look into the definition of transfer under section 2(47), and also section 45(4) and section 47(13) of the Income-tax Act, dealing with capital gains. 13. In order to appreciate, the contentions raised on both sides, it is necessary to look into the definition of transfer under section 2(47), and also section 45(4) and section 47(13) of the Income-tax Act, dealing with capital gains. 13.1. Section 2(47) of the Income-tax Act, 1961 (as amended by the Finance Act, 2013), ....
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....ital assets ; (ii) such transfer should be on dissolution of the firm or otherwise. 13.3. Section 47 of the Income-tax Act deals with the transactions not regarded as transfer. The opening sentence of section 47 reads that, nothing contained in section 45 shall apply to the following transfers : . . . "(xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company : . . . Clauses (xiii) to (xv) of section 47 of the Income-tax Act have been inserted by the Finance (No. 2) Act, 1998, w.e.f. April 1, 1999." 14. In support of the contention that there is no dissolution of the partnership and therefore, there is no transfer of capital assets and hence, the assessee is not liable to pay tax on capital gains, the learned counsel for the assessee relied upon the following decisions : (i) CIT v. Texspin Engg. and Mfg. ....
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....ually in the judgment of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) ; 2 Taxman 409. In the present case, therefore, we are of the view that section 45(4) is not 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." (ii) Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, 59 (SC). ". . . it seems to us clear that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property. Or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution, the firm's rights in the partnership assets are extinguished. The firm as such has no separate ri....
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....e company not to the firms, but to the individuals, who were partners of the erstwhile firm and became shareholders of the company, the provisions of section 45 of the Act will not be applicable." (v) CIT v. United Fish Nets [2015] 372 ITR 67 (T&AP). "When there is no tangible act of physical transfer of properties and intangible act of conferring exclusive right vis-a-vis and item of property on the erstwhile shareholder, there is no transfer. The basic tenets of transfer of assets has been lighted in the decision which reads as under (page 72 of 372 ITR) : What constitutes distribution of assets under section 45(4) of the Act was explained by the Bombay High Court in Texspin Engineering and Manufacturing Works's case (supra). Incidentally, the facts of that case are identical with those in the present case. There also an existing firm was transformed into a company under Part IX of the Indian Companies Act. When dealing with the identical situation, wherein the Assessing Officer proposed to levy capital gains tax, the Bombay High Court held (page 352 of 263 ITR) : 'In this case, the erstwhile firm has been treated as a limited company by virt....
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....cal distribution of assets in the form of dividing them into parts, or allocation of the same to the respective partners or even distributing the monetary value thereof. In our view, the judgment of the Bombay High Court squarely covers the facts of the case and the orders passed by the Appellate Commissioner and the Tribunal accords with the same. The appeal is accordingly dismissed." (vi) L. K. S. Gold House (P.) Ltd. v. L. K. S. Gold Palace Application No. 376 of 2004 and C. S. No. 934 of 2003-[2005] 57 SCL 362 (Mad). "The question that arose in the above case was, whether inasmuch as plaintiff-company had come to be incorporated under Part IX, after complying with all relevant requirements and registered as such, there was a statutory vesting under section 575 of all assets of erst while partnership company into private limited company registered under the Act, meaning thereby that no transfer was involved. It was held, there being, neither transferor nor transferee, whose presence alone would mean that there was a transfer, there was no transfer and that "Conversion of a firm into a private limited company, under Part IX of the Companies Act, 1956, statutorily vest....
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....able to the facts of this case. (ii) CIT v. A. N. Naik Associates [2004] 265 ITR 346, 359 (Bom) : ". . . As noted earlier on behalf of the assessee it has been con tended that the expression 'otherwise' would have to be read 'ejusdemgeneris' with 'dissolution of partnership or body of individuals' and for that purpose reliance was placed on a judgment of the Division Bench in CIT v. Trustees of Abdulcadar Ebrahim Trust [1975] 100 ITR 85 (Bom). Section 45 is a charging section. The purpose and object of the Act of 1987 was to charge tax arising on distribution of capital assets of firms which otherwise was not subject to taxation. If the language of sub-section (4) is construed to mean that the expression 'otherwise' has to partake of the nature of dissolution or deemed dissolution, then the very object of the amendment could be defeated by the partners, by distributing the assets to some partners who may retire. The firm then would not be liable to be taxed thus defeating the very purpose of the Amending Act . . . Therefore, if the object of the Act is seen and the mischief it seeks to avoid, it would be clear that the intention of Parlia....
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....emove a provision, which provided 'no transfer', there is no need for any further amendment to section 2(47) of the Act as argued before us. In our view, despite no amendment to section 2(47), in the light of removal of clause (ii) of section 47, transaction certainly would call for tax at the hands of the authorities." This decision is not applicable to the facts of this case. The Finance Act, 2001, has amended clause (xiii) of section 47 of the Income-tax Act to provide that any transfer of a capital asset, from an association or persons or body of individuals to a company, under a scheme of corporatisation of a recognized stock exchange, shall not be regarded as transfer for the purpose of capital gains tax. The proviso to clause (xiii) has also been amended to provide that this one time exemption from capital gains tax is available only if all the assets and liabilities of stock exchange immediately before the succession, become the assets and liabilities of corporatised stock exchange, and the scheme of corporatisation is approved by the Securities and Exchange Board of India. The very purpose of one time exemption was towards facilitating corporatisation of stoc....
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....at book value." (vii) CIT v. Gurunath Talkies [2010] 328 ITR 59 (Karn) ; [2010] 189 Taxman 171 (Karn) : "This decision deals with the effect of reintroduction of sub-section (3) and (4) of section 45 with effect from April 1, 1988 and that the assets held by the original partners vested in new partners and that the amount invested by new partners paid to the retiring partners was liable to capital gains under section 45(4) and that there was a transfer of capital assets within the meaning of section 2(47)." (viii) CIT v. Kumbazha Tourist Home (Dissolved) [2010] 328 ITR 600 (Ker) ; [2010] 190 Taxman 40 (Ker) : "In this case, on the dissolution of the partnership, the land and building were distributed among the partners of the dissolved firm and it was held that the transaction fell under section 45(4) of the Act which attracted capital gains." So far as decision Nos. 6, 7 and 8 are concerned, the portion extracted itself would reveal that the reported cases are distinguish able on facts. 15.2 There is no case law supporting the proposition that even in cases of subsisting partners of a partnership firm transferring assets to a private limited company, ....