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IN THE INCOME TAX APPELLATE TRIBUNAL
`A' BENCH AHMEDABAD
(BEFORE SHRI A. MOHAN ALANKAMONY, AM AND SHRI KUL BHARAT, JM)
ITA No.223/Ahd/2012
AY: 2008-09
The Income Tax Officer, W-6(4), Vs M/s. Alta Inter-Chem
Room No.505, 5th Floor, Industries, Plot No.286,
Pratyaksh Kar Bhavan, Phase- 2, GIDCM, Vatva,
B/h. Ahmedabad Stock Exchange, Ahmedabad
Ambawadi, Ahmedabad 380 015 P. A. No. ANNFA 1402 H
(Appellant) (Respondent)
Appellant by Shri Rahul Kumar, SR. DR
Respondent by Shri Mukesh M. Patel, AR
Date of hearing: 28-08-2012
Date of pronouncement: 19-10-2012
ORDER
PER A. MOHAN ALANKAMONY: This appeal of the Revenue
is directed against the order of the learned CIT (A)-XI, Ahmedabad in
ITA No.CIT (A)XI/388/W 6(4)/10-11 dated 28.11.2011 for the
assessment year 2008-09.
2. Though the Revenue has raised three grounds, the crux of the
issue is that "the CIT (A) erred in deleting Rs.92, 07,817/- made by
the AO under the head `Capital Gains'."
3. Briefly, the assessment in the case of the assessee firm was re-
opened under section 147 of the Act by issuance of a Notice u/s 148
of the Act on the ground, according to the AO, that during the course
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of assessment proceedings for the AY 2007-98, it was noticed that on
30.3.2007, the assets of the firm consisting of land and building have
been revalued by the assessee in the following manner:
Book value Enhanced value Difference
i. Land 25,36,281 1,18,49,500 93,13,219
ii. Building 22,35,402 21,30,000 (-) 1,05,402
Total 92,07,817
It was, further, observed by the AO that on 16.3.2007, there was a
major change in the share-holding pattern of the firm and five new
partners have been introduced. It was the stand of the AO that this
way, by revaluation of assets, the investments made by the new
partners had appreciated without paying any taxes. It was the case
of the AO that as the assessee had not fulfilled the provisions of s.47
(xiii) of the Act, it was disentitled for exemption and, thus, capital
gains u/s 45(iv) of the Act was attracted in this case. Accordingly, an
addition of Rs.92.07 lakhs was made under the head `capital gains'.
Aggrieved, the assessee had approached the Ld. CIT (A) for relief.
After due consideration of the lengthy and comprehensive submission
of the assessee as recorded in the impugned order under
consideration, the learned CIT (A) had observed thus:
CIT(A)Page-No-13
"2.2.............................................................................................It
is seen that Hon'ble courts including Ahmedabad Tribunal are consistently
taking a stand that in the process of conversion from firm to company transfer is
not involved. Accordingly, appreciation of assets in the process of conversion is
not liable to be taxed under the head `capital gains'.
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2.3. Hon'ble Ahmedabad ITAT in the case of Well Pack Packaging v/s DCIT
reported at 78 TTJ (Ahd) 448 has held that revaluation of depreciable assets and
conversion of partnership firm into company does not lead to incidence of capital
gain in as much as revaluation is made in the hands of the assessee by writing up
the value of assets in the books. In view of the provisions of sections 575, 576
and 577 of the Companies Act, 1956, there is no transfer involved when a
company got itself registered under part IX of the companies Act. In view of this,
there is no question of applicability of provision of section 45 or 50 or any other
provisions of IT Act arise on conversion of a firm into company.
2.4. Hon'ble Bangalore ITAT in the case of ACIT, Mangalore v. Unity Care &
Health Services reported at 106 TTJ (Bang) 1086 has held that to bring to charge
capital gains to tax u/s 45 (iv), what is required is distribution of capital assets on
dissolution of firm or otherwise. It is further held by Hon'ble ITAT that in case
of conversion of firm into Pvt. Ltd. Company, there is neither dissolution of firm
nor distribution of capital asset to partners and, therefore, in such a situation, no
capital gain is chargeable u/s 45(iv) of I. T. Act. in this case, Hon'ble ITAT has
discussed provisions of section 47(xii) vis--vis provisions of section 45(iv).
Hon'ble ITAT observed as under:
`Insertion of section 47 (xi) has not changed this situation. Section 47(xiii)
merely excludes certain transfers from the purview of definition of the
word `transfer' as provided in section 247. To bring to charge capital gain
u/s 45(iv), what is required is distribution of capital asset on dissolution of
firm or otherwise.'
2.5. In the instant case, there is no distribution of capital asset to partners.
There is no dissolution of firm. Partners, who were earlier to register under
the Partnership Act, were registered under the Companies Act and,
accordingly, section 45(iv) would not apply in such a situation. Accordingly,
no capital gain was chargeable in such a situation as there is no distribution
of capital asset on dissolution of firm or otherwise. In the instant case also,
there is no distribution of capital asset on dissolution of firm or otherwise. In
view of above facts, I am of the considered view that in the case of revaluation
of assets and its conversion of firm into Pvt. Ltd company does not attract
provisions of section 45(iv). Accordingly, the addition made by the AO of
Rs.92,07,817/- is ordered to be deleted....."
4. Aggrieved, the Revenue has come up before us with a plea that
the CIT (A) had erred in law in deleting the addition of Rs.92,07,817/-
under the head `capital gains'. It was, further, submitted that the AO
had analyzed the issue in depth and came to a conclusion, by
extensively quoting various judicial pronouncements on a similar
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issue, that the contentions of the assessee were rejected on the
following grounds:
(a) the part IX of the Companies Act, 1956 does not have any
over-riding effect on the provisions of I.T. Act, 1961 &
(b) the assessee failed to produce evidences to prove that the
assessee fulfilling all the four condition of section 47 (xiii) to
ascertain whether the succession of firm by the company is not
a transfer.
4.1 To strengthen his arguments, the learned D R had placed
reliance on the following case laws, namely:
(a) ITO v. Om Namah shivay Builders & Developers (2011) 43 SOT 397;
(b) Goel Udyog v. ACIT (2011) 45 SOT 444 (Del)
4.2 It was, therefore, pleaded that the findings of the CIT (A)
require to be reversed and that of the stand of the AO is to be
restored.
5. On the other hand, the learned A R vociferously supported the
findings of the CIT (A) on this issue. To drive home his point that the
CIT (A) was within his realm to reverse the stand of the AO etc., the
learned AR reposed his confidence on the following case laws:
(i) ITO v. Gulabdas Printers (2010) 4 ITR (Trib) 264 (Ahd);
(ii) Well Pack Packaging v. DCIT(2003) 130 Taxman 215
(Ahd)
(iii) ACIT v. Unity Care & Health Services 2006) 103 ITD
53(Bang)
6. We have carefully considered the rival submissions, diligently
perused the relevant case records and also the case laws quoted by
either party. It was the stand of the AO that if the full contributions of
the partners taken, it was noticed that the shares in the company
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have not been allotted in the same proportion as the capital accounts
of the partners as they stood in the books of the firm on the date of
succession. Therefore, it was the case of the AO, that proviso (b) to
s.47 (xiii) is squarely applicable to the assessee's case which made
the transfer of the assets and liabilities of the firm liable to capital gain
tax. He had also further stated that if it were to be held at the
appellate state that the two capital accounts were indeed separate,
even then the condition prescribed in proviso (c) to s. 47(xiii) was not
met. The said proviso says that the partners of the firm will not
receive any consideration or benefit directly or indirectly, in any form
or manner from the company except by way of allotment of shares.
However, in the present case all the 8 partners' current capital
account has been taken by the company as loan and so reflected in
the balance sheet. Therefore, it was observed by the AO, the
erstwhile partners have received consideration in the form of interest
as well as benefit from the company. Therefore, the succession is hit
by the proviso (c) to s. 47(xiii) also.
6.1 However, the CIT (A) took a divergent view, by taking shelter
on the findings of various judiciary, that in the process of conversion
from the firm to company, transfer was not involved and, therefore,
appreciation of assets in the process of conversion was not liable to
be taxed under the head `capital gains'.
At this juncture, we shall proceed to analyze the judicial views on a
similar issue as under:
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(1) Well Pack Packing v. DCIT ITA No.235/Ahd/2001 dt.22.5.2001:
It was held by the Hon'ble earlier Bench of this Tribunal that since
there was no transfer on conversion of the firm into company under
part IX of the Companies Act, there does not arise any question of
applicability of s.50 or 45 or any other provisions of the Act.
6.2 Aggrieved, the Revenue took up the issue before the Hon'ble
jurisdictional High Court through a reference application. The Tax
Appeal No.368 of 2001 of the Revenue was, however, dismissed by
the Hon'ble Court with an observation that no question of law, much
less substantial question of law arose out of the order of the Tribunal.
The Revenue preferred a SLP before the Hon'ble Supreme Court
against the ruling of the Hon'ble High Court (supra). The Hon'ble
Supreme Court in Civil Appeal No.8569 of 2002 dated 6.5.2008 had
ruled as under:
"We do not agree with the view taken by the High Court. In our opinion, the
questions of law raised by the Revenue before the High Court are substantial
questions of law which arise from the order of the Tribunal. The High Court
should have decided these questions by recording its findings thereon.
Accordingly, the impugned order is set aside. Tax Appeal No.368 of 2001 is
admitted on the aforementioned four questions of law. We request the High
Court to record its findings on these questions. The matter is remitted to the
High Court for a fresh decision on the aforesaid questions in accordance with
law."
As per the Revenue's version, the appeal is still pending before the
Hon'ble jurisdictional High Court for disposal [source: AO's letter
dated 18.6.2012 to the D R]
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(2) The Hon'ble ITAT, Bangalore Bench in the case of ACIT,
Mangalore v. Unity Care & Health Services cited supra had observed
as under:
"When a conversion of a firm into company takes place under the provisions of
Companies Law, such conversion can be construed only as occasioned by
operation of law. Hence, no controversy could arise on the application of that
principle even for purposes of capital gains under section 45(4). By insertion of
section 47(xiii), 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(iii) are complied
with, 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)."
While disposing off of the Revenue's reference application against
the Tribunal's order, the Hon'ble Karnataka High Court had, in ITA
No.3170/2005 dated 5.7.2010, ruled as under:
"(On page 6) 5. In the instant case, it is not in dispute that the assets of the
partnership firm have become the assets of the company. All the partners of the
firm have become the shareholders of the company. In proportion to their shares
in the partnership firm, they have been allotted shares in the company.
Admittedly, no amount is paid in any manner and in any form to the partners. In
that view of the matter, the impugned transaction is not a transfer so as to attract
capital gains under s. 45. Therefore, the Tribunal was justified in setting aside
the order passed by the first appellate authority as well as the assessing authority
and in holding that the transaction in question does not constitute a transfer
under the Act. in that view of the matter, we answer the first substantial question
of law framed, against the revenue and in favour of the assessee......"
(3) In the case of ITO v. Gulabdas Printers (supra), the Hon'ble
earlier Bench of this Tribunal had recorded its findings as under:
"Where a firm becomes a limited company under Part IX of the Companies Act,
1956, section 45(4) is not attracted as the very first condition of transfer by way
of distribution of capital asset is not satisfied.
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In the circumstances, latter part of section 45(4) which refers to computation of
capital gains under section 48 by treating the fair market value of the asset on the
date of transfer, does not apply."
Aggrieved, the Revenue had preferred a reference application before
the Hon'ble jurisdictional High Court in Tax Appeal No.1559 of 2010
which, according to the AO, is still pending for disposal before the
Hon'ble Court [Refer: AO's letter dated 18.6.2012 to the D.R.]
6.3 Let us now analyze the case laws relied on by the Revenue as
under:
(1) ITO v. Om Namah Shivay Builders & Developers:
After analyzing the issue in detail, the Hon'ble Mumbai Tribunal
[(2011) 43 SOT 397] had concluded its findings as under:
"(On page 2) When upon retirement of a partner from partnership of two
partners, the assets were taken over by one partner who continued the business
as a proprietor, there was a dissolution of the firm and therefore, the difference
between the fair market value of the assets and the book value in the books of the
firm was assessable as capital gains in the hands of the firm in terms of s. 45(4)".
We have, with due respects, perused the findings of the Hon'ble
Bench and of the considered view that it has no relevance to the
issue under consideration. In that case, consequent on the
retirement of a partner from the partnership of two partners, the
assets were taken over by another partner who continued the
business as a sole proprietor and, thus, there was a dissolution of the
erstwhile firm whereas in the case under consideration, there was no
dissolution of the firm, but, conversion of the firm into a company.
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Thus, we are of the considered view that the case law relied on by
the Revenue cannot come to its rescue.
(2) Goel Udog v. ACIT (2011) 45 SOT 444 (Del):
The finding of the Hon'ble Tribunal of Delhi `C' Bench is not
applicable to the issue under consideration in the sense that in that
case, on dissolution of firm and distribution of assets to partner
excess of market value over book value with regard to land and
building and plant and machinery has to be assessed as capital gain
as per s.45 (4)". However, the issue before us, as already
mentioned, is on a different footing and, thus, the case law quoted by
the learned D R is clearly distinguishable.
6.4 Taking into account all the facts and circumstances of the issue
as deliberated upon in the fore-going paragraphs, we are of the
considered view that the CIT (A) was justified in deleting the addition
of Rs.92,07,817/- made by the AO under the head ` capital gains'. It
is ordered accordingly.
7. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 19-10-2012
Sd/- Sd/-
(KUL BHARAT) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikanta Deka/-
Lakshmikanta Deka/-
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Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad
1. Date of dictation: 04-10-2012 (direct on computer)
2. Date on which the typed draft is placed before the
Dictating Member: 05-10-12 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the
Dictating Member for pronouncement:
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the
Assistant Registrar for signature on the order:
9. Date of Dispatch of the Order:
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