TaxTMI 
TaxTMI 
2005 (6) TMI 209
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....10-2000 corresponding to the assessment year 2001-02 on 31-10-2001 declaring a total loss of Rs. 13,93,613/-. The above return was processed under section 143(1) on 26-3-2002. Subsequently, the case was taken up for scrutiny by issuing notices under sections 143(2) and 142(1) of the Act. It is stated that the partnership firm was converted into a private limited company, known as Unity Care and Health Services Pvt. Ltd. with effect from 3-10-2000, in accordance with a revised Partnership Deed, which was drawn up on 7-9-2000. The above conversion of the partnership firm into a private limited company is stated to have been done under Chapter IX of the Companies Act. The appellant firm had revalued its assets at Rs. 20,03,21,670/- as against the written down value of the same at Rs. 3,96,67,634/- as on 30-9-2000, that is, prior to its conversion into a private limited company. The appellant had advanced various arguments before the Assessing Officer in support of its contention that there was no 'transfer' in the conversion of the partnership firm into a private limited company under Chapter IX of the Companies Act as well as under the provisions contained in the Income-tax A....
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.... 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 dale 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 section 45(4) stood satisfied and, therefore, he was entitled to take the fair market value of the asset on the date of the transfer to be the full value of the consideration received as a result of the transfer. It is for this reason that the Assessing Offic....
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....e date of transfer, does not arise". Shri Sarangan further submitted that even section 45(1) is held not applicable in such a situation. Though provisions of section 47(xiii) were not subsisting during the assessment year in appeal before Hon'ble Bombay High Court, the same are brought on the statute book with effect from 1-4-1999 and the present assessment year is being 2001-02. Even under the provisions of section 47(xiii), the conversion of partnership firm into a company do not attract capital gain. Learned CIT(A) erred in holding that conversion of firm into a company do not amount to succession and hence exemption available under section 47(xiii) will not apply. Since there is no transfer between a firm and a company, neither section 45(1) nor 45(4) applies and even if it is held that there is a transfer, by virtue of section 47(xiii), the capital gain is not chargeable to tax. He further submitted that at any rate since there is also transfer of land, the transfer thereof does not give rise to short-term capital gain as computed by the Assessing Officer. 5. Learned DR Shri Rajguru strongly relied upon the appellate order. He firstly submitted that at first instance....
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....anies Act, 1956, is not a company registered under the Act. It is used in the sense of a group, assembly or association of persons. In fact, the word 'company' is used in several sections of the Act in the general sense of association of persons. In fact, section 11 of the present Act (section 4 of the 1913 Act) itself, which enacts the prohibition of associations exceeding a certain members from carrying on trade, starts with saying that no company, association or partnership consisting of more than ten members shall be formed. Section 253 of the 1913 Act corresponds to section 565 of the 1956 Act. Section 565(1)(6) of the 1956 Act corresponds to section 253(1)(ii) of the 1913 Act, which permits any company otherwise duly constituted according to law consisting of seven or more members to be registered as a company. A partnership must be one such. This is made clear by the provisions of section 255 of the 1913 Act (section 568 of the 1956 Act) whereunder a deed of partnership has to be tiled before the Registrar before seeking the registration. Hence, a partnership which was treated as a company for the purpose of the Companies Act can be registered under Part 8 of the 191....
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....When the firm comes to an end, the company takes birth. Thus, in the present case, up to 2-10-2000, the partners were registered under the Partnership Act. On 3-10-2000, the partners are registered under the Companies Act. The word 'transfer', presuppose existence of transferor and transferee simultaneously. In the present case, if we hold that the firm is transferor, the transferee is not in existence. If it can be held that the transferee is the Company which came in existence on 3-10-2000 the firm i.e., the transferor is not in existence in 3-10-2000. Thus, it is not the case of transfer by one person to another; it is merely a change under the Act under which the persons are registered to carry on the business. The decision of Hon'ble Bombay High Court is squarely applicable. We do not find any reason to hold any other view than that taken by Hon'ble Bombay High Court. 6.1 It is not the case that section 45(1) can be invoked to tax the capital gain in the present situation. The interest of a partner in a firm is not an interest in any specific item of the partnership property. It is a right to obtain his share of profits from time to time during the subsisten....
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....inciple even for purposes of capital gains under section 45(4) of the Act. By insertion of section 47(xiii) in the Act, it cannot be said that the conversion of a firm into a company under Part IX is to be first treated as dissolution of firm within the meaning of section 45(4) and only if condition as contained in section 47(xiii) are complied, the exemption will be available. Section 47(xiii) applies only to a case of transfer by sale, but there is no authority for capital gain at all in the absence of a transfer under Part IX of the Companies Act inasmuch as such conversions do not fall within the definition of transfer under section 2(47) of the Act. Section 45(4) would have application only when there is distribution of assets to the partners so that its application cannot be justified, firstly because it can apply only, when there is transfer and secondly only when there is distribution of assets to the partners. This is neither in the conversion of a firm into a company. It is also seen that section 47(xiii) is also complied with if it is held that there is transfer of capital asset to a company. All the clauses of section 47(xiii) are fulfilled and thus even if it is held t....