- (1.) THIS is an appeal by the assessee against the order of the learned CIT(A), Jammu dt. 29th Jan., 2002, relating to the asst. yr. 1998-99.
(2.) The first three grounds of appeal relate to the legal issue, which are reproduced hereinbelow : "1. That both the CIT(A), Amritsar and the Dy. CIT, CCI, Amritsar have grossly erred in applying the provisions of Section 2(47) r/w Section 45(4) of the IT Act, 1961, to the conversion of the assessee-firm into a company under Section 565 of the companies Act. 2. That both the CIT(A), Amritsar and the Dy. CIT, CCI, Amritsar have failed to appreciate that the case of the assessee was covered by Section 565 of the Companies Act and the conversion of the erstwhile firm into company did not tantamount to "transfer" within the meaning of Section 2(47) of the IT Act, 1961. That both the CIT(A), Amritsar and the learned Dy. CIT, CCI, Amritsar have failed to appreciate that the deed of settlement made on 22nd April, 1997, did not tantamount to any transfer within the meaning of Section 2(47) of the IT Act, 1961." 3. Briefly stated, the facts of the case are that the assessee-firm carried on the business of manufacturing of rice and remains into existence upto 5th May, 1997, on which it was converted into a private limited company in the name of M/s Sachdeva & Sons Industries (P) Ltd. A certificate of incorporation issued by the Registrar of Companies on 5th May, 1997. The assessee-firm was consisted of seven partners. As per the memorandum of association, a deed of settlement was made on 22nd April, 1997, by all the seven partners when they had settled that their 'holding of the subscribed capital in the new company would be in the shape of shares in the company. During the assessment proceedings, the AO required the assessee to explain as to whether the provisions of Section 45(2) were not applicable in its case. He further requested the assessee to intimate the exact address of land worth Rs. 28,45,845 as per balance-sheet dt. 5th May, 1997. He also directed the assessee to supply the details of area of land, date, cost of acquisition and fair market value of the land as at the time of taking over the assets of the firm by the company. In response to above, the assessee had filed written reply on 19th March, 2001 and 27th March, 2001. It was submitted that the assessee-firm consisted of seven partners and was converted into a registered company on 5th May, 1997 and this conversion did not tantamount to a transfer under Section 2(47) of the Act and there was no deemed transfer within the meaning of Section 45(4) of the Act. It was explained that there was no distribution of capital assets and dissolution of a firm in this case, It was stated that there was an automatic vesting and divesting of the assets of the firm because the firm was divested of the assets which in turn were vested in the company. Accordingly, it was submitted that there was no transfer within the meaning of Section 2(47) r/w Section 45(4) of the Act. The AO did not accept the above contention of the assessee and held that the firm M/s Sachdeva & Sons consisted of seven partners and was converted into a company on 5th May, 1997. According to the AO all the assets of the firm were taken over by the company not the depreciated value or the book value. The shares of all the seven persons in the company continued to be the same which they had in the old firm. The AO was of the view that the word "transfer" in relation to the capital asset included any transaction which has the effect of transferring or enabling the enjoyment of the immovable property. He further held that Sub-clause (vi) of Section 2(47) clarifies that such a transaction may be by way of acquiring shares in a company under an agreement or any arrangement or in any other manner whatsoever. He took the view that all the assets of M/s Sachdeva & Sons were transferred when the assessee-firm was converted into company on 5th May, 1997, and all the seven persons of the assessee-firm had acquired the shares in the new company under an agreement dt. 22nd April, 1997, in the same proportion in which they were sharing the profits of the firm. He further noted that all the immovable properties of the assessee-firm had become the properties of the company on that date. He, therefore, took the view that the provisions of Section 45(4) of the Act were clearly applicable in this case, and fair market value of the assets as on 5th May, 1997, was held to be the full value of the consideration received or accruing as a result of the transfer. The AO computed the long-term capital gain on the land at Amritsar at Rs. 41,35,250. Similarly, the long-term capital gain on the land at Delhi came to Rs. 17,51,300. The total amount of capital gain was worked out at Rs. 58,86,550. The AO after allowing business loss of Rs. 4,580 relating to the current year worked out the balance capital gain at Rs. 58,81,970.
(3.) THE assessee carried the matter in appeal to the CIT(A). Before the CIT(A), the assessee filed the written submissions, which is reproduced hereunder: "THE AO did not appreciate the fact that conversion of the erstwhile firm M/s Sachdeva & Sons EOU into a company under Section 565 of the Companies Act, 1956, did not tantamount to transfer within the meaning of Section 2(47) of the IT Act. This conversion does not tantamount to transfer under Section 2(47) of the IT Act, 1961. THEre is also no deemed transfer within the meaning of Section 45(4) of the Act, as no distribution of capital assets on dissolution of a firm has taken place. It is submitted that the same entity viz. M/s Sachdeva & Sons has emerged with a different mantle. A transfer presupposes existence of two parties i.e. a transferor and a transferee before as well as at the time of transfer. THE deed of co-partner is a declaration by a firm to a company which is yet to come into existence. In other words, there is no transferee in existence. It is submitted that under Section 566 of the Companies Act, 1956, there was automatic vesting and divesting of the assets of the firm because the firm was divested of these assets which in turn were vested in the company, Such a vesting and divesting did not tantamount to transfer within the meaning of Section 2(47) of the IT Act, 1961. It is further submitted that no dissolution deed was executed and there was no severance of relationship between the partners. THE firm continues to exist till the incorporation of the company. It is also submitted that assessee-firm had done no revaluation of assets and that the conversion took place at the net book value of the assets. THE provisions of Section 45(4) provide for existence of these conditions before it is made applicable : 1. THEre is a transfer of capital assets. 2 Such transfer is by way of distribution of capital assets. 3. Such distribution is on dissolution of a firm. None of the above conditions is fulfilled in this case and therefore, Section 45(4) is not applicable. It is further submitted that in a similar case of Chaman Lal Setia Exports Ltd. which is being assessed by Dy. CIT, Spl. Range, Amritsar, the above position has been accepted. THE appellant's counsel in this regard placed reliance on the decision of the Tribunal, Mumbai Bench in the case of Texspin Engineering and Manufacturing Works v. Jt. CIT (2001) 70 TTJ (Mum) 789 which Bench has relied upon the decision of Andhra Pradesh High Court in the case of V.P. Rao v. Ramanuja Ginning and -Rice Factory (P) Ltd. 60 Comp. Cas 568 (AP). It is, therefore submitted that in view of decision reported above, there is no transfer within the meaning of Section 2(47) r/w Section 45(4) in the case of the assessee and as such no capital gains had resulted subject to capital gains tax." . 4.1 After considering the submissions made by the assessee, the learned CIT(A) held that: "(a) That there is no dispute about the fact that all the assets in entirety of the firm, M/s Sachdeva & Sons were transferred to the company, M/s Savhdeva & Sons Inds. (P) Ltd. (b) That there cannot be any doubt that on 5th May, 1997, when the new company came into existence, the firm, M/s Sachdeva & Sons ceased to exist. (c) THE only inference that could be drawn from this situation is that the said firm, M/s Sachdeva & Sons was dissolved on 5th May, 1997, by the partners and all the properties of the firm were taken over by the company, M/s Sachdeva & Sons Inds.(P) Ltd. (d) That the said company is a distinct and separate legal entity as distinguished from the assessee firm, M/s Savhdeva & Sons. (e) THE firm, M/s Sachdeva & sons stands dissolved having no existence after 5th May, 1997, although the shareholdings in the new company are in exactly the same proportion as it was with the shares in the partnership firm, yet it cannot be denied that the assets of the firm has been taken over by a distinct legal entity in the form of a company and this act of transfer of assets from the firm to the company is a deliberate act on the part of the partners and this cannot be taken as anything except dissolution of the partnership firm." In view of the above, the learned CIT(A) held that the provisions of Section 45(4) were clearly applicable to the facts of the present case. He, further observed that from the asst. yrs. 1988-89 profit and gains arising from any transfer of the assets are chargeable to tax as income of the firm, an association or BOI of previous year in which the said transfer took place. He further observed that upto the asst. yr. 1987-88, any transfer involving any distribution of capital assets on the dissolution of the firm or BOI was not to be regarded as a transfer for the purposes of capital gains tax levy by virtue of specific provision in this regard as contained in Section 47(ii) as it existed at that time. He further held that although distribution of the assets in the present company are in the same proportion as in the case of the erstwhile firm yet it cannot be said that this does not amount to transfer because the same persons are involved in both the company as well as the firm. It was also held by the CIT(A) that there was a distribution of assets of the dissolved firm amongst the partners in the same proportion as their shares in the erstwhile firm, the shares held by the share-holders in the present company are nothing but the redistribution of the assets of the firm in the form of shares. He also took the view that since the company is a distinct artificial jurisdical person and, therefore, there was clear transfer of assets from partner ship firm to company. He, therefore, rejected the claim of the assessee that the provisions of Section 45(4) of the Act were not applicable.;