INCOME TAX ACT, 1961

Section 45(4)

Capital gains - Applicability of provision of section 45(4) - Firm converted into company - Revalued land value vested in company and shares were allotted to partners of erstwhile firm

Assessee firm had revalued one of its assets being the land value of Rs. 50,83,617 as on 1-4-2010 to Rs. 29,40,31,218 on the basis of valuation report made by the Government Registered Valuer, whereby and whereunder the said property was valued at Rs. 29,38,68,000 on 5-1-2011. Therefore, there was an increase in the value of land to the tune of Rs. 28,87,84,000 due to its revaluation credited to the partners capital account in the profit sharing ratio. The assessee firm got converted into Private Ltd. Co. Succeeding company, thereafter allotted shares worth Rs. 28,87,84,000 on account of distribution of capital assets as per section 45(4). However, plea of the assessee that the assessee-firm converted into (P.) Ltd. Company under Part-IX of the Companies Act, 1956, whereupon the property of the erstwhile firm vested in the company thus the same was not covered by the expression of transfer by way of distribution under section 45(4) and was not found tenable by the AO. He, therefore, finalized the assessment by making an addition of Rs. 3,26,02,919 as STCG and Rs. 25,46,06,987 as LTCG which was, in turn, deleted by the CIT(A).Held: The only event took place during the year under consideration, i.e., January 2011 is 'revaluation of land' and on 1-4-2011 'conversion of firm into company' took place, i.e., assessment year 2012-13, the subsequent year. The AO treated the 'revaluation of assets' and brought to tax but such 'revaluation of assets' cannot be treated as 'transfer' within the meaning of section 2(47). In that view of the matter, the very footing of the AO was incorrect since 'conversion from firm to company' took place in assessment year 2012-13 and not in assessment year 2011-12. Charging of capital gain, therefore, was thus totally unjustified. The further contention of the AO that the capital gain arose on distribution of assets, i.e., land to the partners by the assessee's firm due to revaluation of assets and thereby subsequent allotment of shares to the erstwhile partners was sought to be evaded against the provision and intent of the law was not correct. The difference between “vesting of property” and “distributions of property” as discussed above does not permit section 45(4) to be invoked. In the instant case, since there was no sale or conveyance from the firm to the company, the partner's capital had not increased on account of sale on capital asset but it is only on account of revaluation of asset. The capital had been increased because of such conversion. The properties of the partnership firm have been vested with the company where all the assets and liabilities of the erstwhile firm also vested with the present company. There was no justification to hold that there was any transfer of asset and thus question of liability to pay tax on capital gain on the assessee firm does not and cannot arise at all. There was, therefore, no infirmity in the order passed by the CIT(A).

Relied:Alta Interchem Industries (2013) 20 ITR (T) 103 (Ahd) : 2013 TaxPub(DT) 261 (Ahd-Trib), Gulabdas Printers (2010) 4 ITR(T) 264 (Ahd) : 2010 TaxPub(DT) 1462 (Ahd-Trib), Well Pack Packaging (2009) 309 ITR 338 (SC) : (2009) 174 Taxman 102 (SC) : 2009 TaxPub(DT) 512 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2008-09 & 2011-12

INCOME TAX ACT, 1961

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