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2023 (8) TMI 1114
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....by the Revenue in all the four appeals are that whether the Ld. CIT(A) is right in deleting the addition made under the head Short Term Capital Gain of the Income Tax Act as follows: ITA Nos. Amount of Disallowance 1506/Ahd/2019 7,96,07,192/- 1507/Ahd/2019 7,80,02,176/- 1508/Ahd/2019 42,71,87,326/- 1509/Ahd/2019 19,65,92,925/- 3. ITA No. 1506/Ahd/2019 is taken as the lead case. Brief facts of the case is that the respondent-assessee is a Private Limited Company and successor of erstwhile Partnership Firm namely M/s. Chanakya Buildcon. Originally M/s.Chanakya Buildcon was constituted on 18.09.2006 with two partners vide Partnership Deed dated 21.09.2006 for carrying out the business to build, develop, residential and commercial properties. This firm purchased a piece of land on 29.10.2007 for a consideration of Rs. 51,33,357/- and included this land in its stock-in-trade. On 23.09.2008, this land was revalued by Government Registered Valuer at Rs. 8,47,41,149/. The difference in price of the land i.e. Rs. 7,96,07,792/- was credited into the Fixed and Current capital accounts of the Partners in their respective profit sharing ratio of the Partnership ....
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.... land and relating activities. The land was a part of stock in trade and appellant had constructed the hotel on the land which was eventually sold after two years. To test the conversion of firm to company qua the land within the conditionality u/s. 47 (xiii) is not justified as the land was held by it (firm as well as companies) as stock in trade which does not fall within the purview of section 45 of the Act. It is undisputed fact that no part of the land was transferred to any partner. As regards the revaluation, the revaluation of stock in trade does not bring any income to the appellant as no one can sell to himself as has been held by the Hon'ble Supreme court In the case of Hind Construction Ltd. reported in (1972) 83 ITR 211 (SC), the relevant part of the judgment is reproduced as below: "The finding of the, Tribunal was that there was no sale either at the time when the assessee inflated the price of the machinery which fell to its share at the time of the division or at the time when the new partnership was created. Same is the finding of the High Court. We agree with these findings. The machinery that fell to the share of the assessee was never sold. Therefo....
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....e successor companies as stock in trade which fact has also not been disputed by the AO and the Ld. Auditors. 8.5 Appellant has also taken another argument that the revaluation of asset and crediting such revaluation surplus in the accounts of the partners do not amount to transfer of a capital asset as long as such partners do not get any interest in such assets which continues to be held by the firm. In the case at hand the land continue to be owned and possessed by the firm and later the successor companies which is an undisputed fact. Appellant also relied upon the judgment of Hon'ble ITAT, Mumbai in the case of D.S. Corporation v. ITO-21(1)(4), ITA Nos. 3526 & 3527/Mum/2012 in support of their contention wherein it has been held as under: "33. To summarise, I am of the view that the partnership firm in the present case continued to exist even after the retirement of Smt. Hemlata Shetty and Shri Sudhakar Shetty from the partnership on 26.03.2006 and 25.05.2006 respectively. There was only a reconstitution of partnership firm on their retirement without there being any dissolution and the land properly acquired by the partnership firm continued to be owned ....
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....ngible act of conferring the exclusive rights over such properties the provisions of section 45(1) or 45(4) cannot be applied upon conversion of the firm into a limited company under Chapter-IX of the Companies Act, 1956." ........................... From the discussion hereinabove it is clear that the appellant firm has revalued the land held by it as stock in trade which continued to be held as such by the succeeding companies upon conversion of the firm into the company, no part of the land was transferred to any of the partners Keeping in view these facts and respectfully following the judgement of various Hon'ble Higher Courts and Tribunals referred supra, the action of AO in treating the impugned land as capital and subjecting the same to the provisions of section 45 and 47 is not found justified. Hence, the addition of Rs. 7,96,07,792/- made under the head capital gains are deleted. AO is directed to delete the same. 8.7 Since the additions under the head capital gains have been deleted by holding the land to be stock in trade appellant will not be entitled to the deduction of this stock in trade on revenue account at a re-valued amount upon sa....
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....sessee reiterated the submissions made before the lower authorities and relied upon the Paper Book and various case laws. The Ld Counsel further submitted that in order to invoke section 45(4) of the Act conditions have to be fulfilled, there was neither transfer of assets by way of distribution of Capital assets nor there was a dissolution of firm. The revaluation of the land held by the assessee firm increased the value but the same has been credited to capital account of the Partners when the assessee firm was converted into Private Limited Company under Part-IX of the Companies Act, 1956. Thus the assets and liabilities of such firm became the assets and liabilities of the Company. Further that shares in Company have been allotted to Partners of erstwhile firm in their profit sharing ratio in the firm. It was further pointed out by the Learned AR that the Partners of the firm have never received any consideration or benefit other than by way of allotment of shares in Company due to such conversion of the assessee firm into Private Limited Company. The Learned Counsel also relied upon the judgment passed in the matter of Alta Interchem Industries reported 20 ITR(T) 103 (Ahd), in....
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....leted the additions on account of capital gain made in the hands of the Partners as he was of the opinion that the applicability of section 47(xiii)(b) at the time of conversion of the Partnership Firms into Companies can be considered only in the hands of the Partnership Firms to which the land belongs. 7.2. This Bench of the Tribunal has considered the above issues in the case of the Partners namely Shri. Jatin Kanubhai Kotadia and Shri. Narendrabhai D Kanani in ITA Nos.1661 & 1682/Ahd/2012 by order dated 23-08-2023 and after considering various High Court judgements and held as follows: "... ...9.2. In the instant case, the shares of the respective shareholders in the respondent-company were defined under the erstwhile Partnership deed. The only change that has taken place on the respondent being transformed into a company was that the shares of the partners were reflected in the form of share certificates. Beyond that, there was no physical 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. This issue is no more res-integra in view of series of Judgemen....
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....ding that the assessee is not liable to any capital gain tax either u/s. 45(1) or 45(4) of the IT Act ? 4)Whether the Income Tax Appellate Tribunal is right in law and on facts of the case in directing to delete the addition of Rs. 1,28,13,831/- ? 3. The facts of the present case are that the respondent-assessee was a partnership firm. On 30th August, 1995, it filed its original return of income in respect of Assessment Year 1995-96 declaring total income of Rs. 1,93,930/-. The said return was processed under Section 143(1)(a) of the Income Tax Act, 1961 on 29th January, 1996. Subsequently, the Assessing Officer noticed that the assessee had revalued the depreciable assets and enhanced the value at Rs. 1,28,13,831/- on 31st July, 1994. it was also noticed by him that the partnership firm was converted into a company under Chapter IX of the Companies Act 1956 and was registered as such under Section 567 of the said Act on 17th October, 1994. It was further observed that while the respondent-assessee had claimed deprecation value of the depreciated assets available on enhancement of the amount of revaluation on the date of conversion as capital gain though there was....
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....ereinbelow. 8. Mr. Divetia has also relied on the decision of the Bombay High Court in the case of Commissioner of Income Tax vs. Texspin Engineering and Manufacturing Works, reported in (2003) 263 ITR 345 and the decision of the Punjab & Haryana High Court in the case of Commissioner of Income Tax v. Rita Mechanical Works, reported in [2012] 344 ITR 544 (P&H), which also takes us to take the same view regarding capital gain. The decision of the Bombay High Court in the case of Commissioner of Income Tax vs. Texspin Engineering and Manufacturing Works, reported in (2003) 263 ITR 345 would ennure for the benefit of the assessee as the same has been considered by the Punjab & Haryana High Court in the case of Commissioner of Income Tax v. Rita Mechanical Works, reported in [2012] 344 ITR 544 (P&H). In that view of the matter, we are unable to take a different view then the one taken by the Tribunal. Therefore, we are not giving any elaborate reasons and all the four questions are answered in favour of the assessee and against the revenue. The present Tax Appeal is dismissed. 9.5. The Hon'ble Gujarat High Court in the case of DCIT Vs. R.L. Kalathia & Co. reported in ....
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..... The inquiry that is now required to be made is as to whether the ingredients of section (4) of section 45 are satisfied in the present case. [Para 18] • The primary requirement for invoking the sub-section (4) is that there has to be distribution of capital assets, which factor is totally missing in the present case as there is no distribution of capital assets either by way of dissolution of the firm or otherwise. [Para 19] • In view of aforesaid, it is held that Tribunal was justified in holding that the sale of business of firm as a going-concern to the company for a consideration of paid-up share capital does not amount to transfer liable to tax as capital gains. [Para 22] 9.6. The Hon'ble Madras High Court in the case of PCIT Vs. Ram Krishnan Kulwant Rai Holdings (P.) Ltd. reported in [2019] 110 taxmann.com 5 (Madras) held as follows: "Section 47, read with section 45 of the Income-tax Act, 1961 Capital gains. Transactions not regarded as transfer (Loan) Assessment year 2009- 10 Assessee was a partnership firm which was converted into a private limited company under Companies Act Assessing Officer noticed that at time of conversion....
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....set and said firm upon receipt of said land also accounted same as a current asset, in instant case section 45(3) would not be applicable merely because said land was converted into fixed asset and revalued in relevant assessment year. Relevant portion of the judgement reads as follows: "... 15. The CIT(A) accepted the contention raised by the assessee. After examining the factual issues it specifically held that revaluation of an asset is not a business transaction resulting in any pecuniary gain which can form subject matter of taxation. Ultimately by a well reasoned order, the CIT(A) allowed the appeal filed by the assessee. Aggrieved by the same, the revenue preferred the appeal before the tribunal. The tribunal firstly considered the validity of the reopening of the assessment under section 147 of the Act. After elaborately considering the facts the tribunal held that, if at all any income accrues or arises owing to such revaluation, it is an issue which had to be dealt with in the assessment of the firm M/s. Salapuria Soft Zone which is the separate taxable entity. After noting the facts the tribunal held that in terms of the section 10 (2A) of the Act partners' ....