TaxTMI 
TaxTMI 
2003 (3) TMI 56
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....iation for the year even though the written down value of the block of the assets at the end of the year was nil as per the provisions of section 32 read with section 43(6)(c)(i)(B) of the Act?" Facts: A firm by the name Texspin Engineering and Manufacturing Works was engaged in the business of manufacturing ball bearings. The said firm filed its return of income for the period April 1, 1995, up to November 7, 1995, stating that it had been thereafter converted into a limited company. The return of the remaining period from November 7, 1995, to March 31, 1996, was filed by the limited company at Ahmedabad. While examining the return of income filed by the assessee, it was observed that the assessee-firm had filed its return of income up to November 7, 1995. On enquiry, the Assessing Officer was informed that the partnership firm was converted into a limited company under Part IX of the Companies Act, 1956. No capital gain was shown in the return of income. Therefore, the assessee-firm was asked to show cause why capital gain has not been shown under section 45(4) of the Income-tax Act. The assessee-firm was also directed to submit market value of the assets for computation of cap....
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....ets in the company did not amount to sale and, therefore, the conditions of section 43(6)(c)(i)(B) were not satisfied. In the circumstances, the Tribunal allowed the claim for depreciation. Being aggrieved by the decision of the Tribunal, the matter has come in appeal before us under section 260A of the Income-tax Act. Arguments: Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, contended that on vesting of the properties of the firm in the limited company, the partners of the erstwhile firm became shareholders of the company. That, on such vesting, the erstwhile firm stood dissolved. That, on such vesting, every asset of the firm was taken over by the limited company. That, on the vesting, the firm ceased to exist. That, as a result of the vesting, the company became the owner of all the properties of the firm and in lieu thereof, shares were allotted to the partners by the company. He, therefore, contended that, in this case, section 45(4) was applicable. In the alternative, he contended that on dissolution of the firm, there was extinguishment of all the rights of the firm in the capital assets and, therefore, there was a transfer as contemplated un....
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....l for the assessee, submitted that under section 45(4) of the Act, two conditions are required to be satisfied. Firstly, there must be a transfer by way of distribution of capital assets and secondly, that, such transfer should be either on account of dissolution of the firm or otherwise. Mr. Patil contended that in this case, there was no transfer because under Part IX of the Companies Act, the firm is merely treated as a company statutorily. He submitted that under Part IX of the Companies Act, the same entity, viz., the firm is treated as a company and, therefore, there was no transfer as contemplated by section 45(4) of the Act. He further contended that in this case, the first condition to attract section 45(4) is that there should be a transfer by way of distribution of capital assets. He contended that vesting of capital assets in the limited company did not amount to distribution of capital assets. In the circumstances, section 45(4) was not applicable. Mr. Patil further contended that even section 45(1) was not attracted in this case because section 45(1) contemplates accrual of profits or gains from transfer of a capital asset. He contended that under Part IX of the Comp....
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....year. He contended that depreciation is to be calculated on actual costs or written down value. He contended that in the present case, the Department has invoked section 43(6)(c)(i)(B) to justify its conclusion that in the case of block of assets, the written down value has got to be adjusted by deduction of monies payable in respect of any asset falling within the block of assets, which is sold, discarded, demolished or destroyed during the previous year. He contended that in the present case, none of the conditions are applicable. He contended that vesting was not a sale as construed by the Department. He, therefore, contended that section 43(6)(c)(i)(B) was not attracted. In this connection, he also relied upon the judgment of the Madras High Court in the case of A.M. Ponnurangam Mudaliar v. CIT [1997] 228 ITR 454 and the judgment of the Andhra Pradesh High Court in the case of CIT v. Bhanodaya Industries [2002] 253 ITR 350. Findings: (A) On section 45(4): In this matter, we are concerned with the assessment year 1996-97. Section 45(1) is a charging section as far as capital gains is concerned. Under section 45(4), profits arising from the transfer of a capital asset by way o....
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.... as stated, computation under section 45(4) read with section 48 would arise only if the aforestated two conditions are satisfied to attract section 45(4). In this case, the erstwhile firm has been treated as a limited company by virtue of section 575 of the Companies Act. It is not in dispute that in this case, the erstwhile firm became a limited company under Part IX of the Companies Act. Now, section 45(4) dearly stipulates that there should be a transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a partnership firm is treated as a limited company, the properties of the erstwhile firm vests in the limited company. The question is whether such vesting stands covered by the expression "transfer by way of distribution" in section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the limited company and distribution of the property. On vesting in the limited company under Part IX of the Companies Act, the properties vest in the company as they exist. On the other hand, distribution on dissolution pre-supposes division, realisation, encashment of assets and appropriation of the realised amount as per the....
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....ion 2(47)(ii) which states that transfer in relation to a capital asset shall include extinguishment of any rights therein. The moot point which arose on an interpretation of section 45(1) in numerous matters was that on extinguishment of the rights in the capital assets, there was a transfer and in certain cases of reconstitution of firms and introduction of new partners, there was 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 clause (xiii) in section 47 with effect from April 1, 1999. Now, in the present case, it is argued on behalf of the Department before the Tribunal, for the first time, that in this case, on the vesting of the properties of the erstwhile firm in the limited company, there was a transfer of capital assets and, therefore, it was chargeable to income-tax under the head "Capital gains" as, on such vesting, there was extinguishment of all right, title and interest in the capital assets qua the firm. We do not find any merit in this argument. In the pre....
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....part of section 45(4) is not there in section 45(1). Therefore, one has to read the expression "full value of the consideration received/accruing" under section 48 de hors section 45(4) and if one reads section 48 with section 45(1) de hors section 45(4) then the expression "full value of consideration" in section 48 cannot be the market value of the capital asset on the date of transfer. In such a case, we have to read the said expression in the light of the two judgments of the Supreme Court in the case of CIT v. George Henderson and Co. Ltd. [1967] 66 ITR 622 and in the case of CIT v. Gillanders Arbuthnot and Co. [1973] 87 ITR 407 in which it has been held that the expression "full value of the consideration" does not mean the market value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that the consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with, viz., money or money's worth, and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer and, therefore, the expression "full value of the consider....
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....neither section 45(1) nor section 45(4) stand attracted. (C) On disallowance of claim for depreciation: In this case we are concerned with the assessment year 1996-97. Section 32 provides for allowance of depreciation in respect of assets owned by the assessee and used for the purpose of the business. Prior to April 1, 1988, the allowance was subject to conditions prescribed in section 34. At that time, section 34(2)(ii) provided that no depreciation shall be allowed in respect of assets sold, discarded, demolished or destroyed. After April 1, 1988, section 34(2)(ii) is succeeded by section 43(6)(c)(i)(B). There is no difference in the phraseology between section 34(2)(ii) and section 43(6)(c)(i)(B). According to the Department, on April 1, 1995, the assets stood in the name of the former firm, but on November 8, 1995, they stood transferred by virtue of vesting to the limited company and, therefore, on March 31, 1995, the assets were not owned by the assessee, because they were transferred during the year to the limited company and in the circumstances, the assessee was not entitled to claim depreciation. An identical point arose before the Madras High Court in the case of A.M. ....