The Principal Commissioner Of Income Tax, Central-2, Chennai-34 v. M/S.ram Krishnan Kulwant Raiholdings Pvt. Ltd

In the High Court of Judicature at Madras Dated : 16.7.2019 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.391 of 2019 The Principal Commissioner of Income Tax, Central-2, Chennai-34 ...Appellant Vs M/s.Ram Krishnan Kulwant RaiHoldings Pvt. Ltd.,NO.108, Nungambakkam High Road,Chennai-34. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 againstthe order dated 29.10.2018 made in ITA.No.1047/Chny/2018 on thefile of the Income Tax Appellate Tribunal, Chennai 'A' Bench forthe assessment year 2009-10, against the order dated 11/01/2018in ITA.NO.273/16-17 on the file of the Commissioner of IncomeTax(Appeals)18 No.46, Mahatma Gandhi Road, Nungambakkam,Chennai-34 against the Assessment order dt.30/06/16 on the fileof Assistant Commissioner of Income Tax Central Circle 2(3),Chennai-34 in PA/GIR NO.AAECR2215B. For Appellant : Mr.T.R.Senthilkumar, SSCFor Respondent: Mr.R.Sivaraman We have heard Mr.T.R.Senthilkumar, learned Senior StandingCounsel for the appellant – Revenue and Mr.R.Sivaraman, learnedcounsel appearing for the respondent – assessee. 2. This appeal filed by the Revenue under Section 260A of theIncome Tax Act, 1961 (for short, the Act) is directed againstthe order dated 29.10.2018 made in ITA.No.1047/Chny/2018 on thefile of the Income Tax Appellate Tribunal, Chennai 'A' Bench(hereinafter called the Tribunal) for the assessment year 2009-10. 3. The Revenue has filed this appeal by raising the followingsubstantial questions of law : “i. Whether the Appellate Tribunal iscorrect in law in holding that there is noviolation of the conditions stipulated inSection 47(xiii) of the Income Tax Actwithout taking cognizance of the fact thatthe partners of the erstwhile firm derivedbenefit other than allotment of shares byway of loan credits in their favour onconversion of the partnership firm into aprivate limited company ?ii. Whether the Tribunal was correct inplacing reliance on the Madras High Court'sdecision in the case of CADD Centre Vs. ACIT[reported in 383 ITR 258], when the vitaldistinguishing factor viz benefit derived bypartners of erstwhile firm other thanallotment of shares in the succeedingcompany is not available in the relied uponcase ? Andiii. Whether the Tribunal was legallyjustified in holding that capital gains taxcannot be levied in the hands of theassessee company, which succeeded to theassets and liabilities of the partnershipfirm ?” 4. The issue, which falls for consideration, is as to whetherthere has been any violation of the conditions stipulated underSection 47(xiii) of the Act. 5. The assessee is a private limited company, which filedits return of income on 30.9.2009 admitting an income ofRs.12,44,401/-. Originally, the assessee was a partnership firmand it was converted into a private limited company under theCompanies Act. The partnership firm revalued its assets on30.11.2008 and in the revaluation, the value of the assets wasincreased to the extent of Rs.1,17,24,04,974/-, but the bookvalue of the assets on date of revaluation was Rs.52,16,526/-. 6. Subsequently, the assessment was reopened and completed on30.6.2016 under Sections 143(3) read with 147 of the Act. TheAssessing Officer held that the total revalued value of thecapital accounts of all the four partners stood atRs.1,17,32,87,069.51 Ps, that the shares were alloted to thepartners of the firm for a total amount of Rs.10,00,000/- and that the balance of Rs.1,17,22,87,070/- was given as credit ofloan to the partners of the erstwhile firm in the sameproportion as their share capital of the firm. Thus, theAssessing officer held that this was a deviation stipulatedunder Section 47(xiii) of the Act for exemption from capitalgains and therefore, made an addition of Rs.1,17,22,87,070/-towards short term capital gains and demanded tax thereon. that the balance of Rs.1,17,22,87,070/- was given as credit ofloan to the partners of the erstwhile firm in the sameproportion as their share capital of the firm. Thus, theAssessing officer held that this was a deviation stipulatedunder Section 47(xiii) of the Act for exemption from capitalgains and therefore, made an addition of Rs.1,17,22,87,070/-towards short term capital gains and demanded tax thereon. 7. Aggrieved by the order passed by the Assessing Officer,the assessee preferred an appeal before the Commissioner ofIncome Tax (Appeals)-18, Chennai [for brevity, the CIT(A)], who,by order dated 11.1.2018, dismissed the appeal. On furtherappeal, the Tribunal, by the impugned order, allowed theassessee's appeal and the Revenue is before us challenging theorder passed by the Tribunal by raising the aforementionedsubstantial questions of law. 8. After hearing the parties, in our considered view, the CIT(A) did not take into consideration the specific ground raisedby the assessee contending that the Assessing Officer erred intreating the registration of the partnership firm to a companyunder Part IX of the Companies Act, 1956 does not amount to aconversion of a partnership firm into a company as contemplatedunder Section 47(xiii) of the Act. The CIT(A) also did not takenote of the fact that post conversion of the partnership firminto a company, the total balance in capital account of all thepartners stood at Rs.1,17,32,87,070/-, that consequently, shareswere allotted to the partners of the firm for a total amount ofRs.10 lakhs and that the balance of Rs.1,17,22,87,070/- wasgiven as to the credit to the partners of the erstwhile firm inthe same proportion as in the firm. 9. The assessee specifically stated that upon conversion of afirm into a joint stock company under the provisions of Part IXof the Companies Act, 1956, the assets and liabilities werevested into the company by virtue of law and that there was notransfer of assets. It was further contended that there was nodissolution of the firm or distribution of assets amongpartners, which is a condition precedent to tax the transactionunder Section 45(4) of the Act. In support of their contention,the assessee referred to various decisions of the Tribunal andthe High Courts. 10. However, the CIT(A) opined that the shares worth ofRs.10 lakhs were given as credit of loan to the partners of theerstwhile firm in the same proportion and that this has to betreated to fall foul of the condition stipulated in Section 47(xiii) of the Act. 11. We find that the CIT(A) did not take into considerationthe legal issue involved i.e. when a firm is succeeded by acompany with no change either in the number of members or in thevalue of assets with no dissolution of the firm and nodistribution of assets with change in legal status alone,whether there is a 'transfer' as contemplated under Sections 2 (47) and 45(4) of the Act. This issue was rightly decided by theTribunal by taking into consideration the decision of a DivisionBench of this Court in the case of CADD Centre Vs. ACIT[reported in (2016) 383 ITR 258], in which, the decision of aDivision Bench of the Bombay High Court in the case of CIT Vs.Texspin Engineering and Manufacturing Works [reported in (2003)263 ITR 345], was taken into consideration. 12. At this juncture, it will be worthwhile to extract therelevant portion in the decision in the case of CADD Centre,which reads as hereunder : (47) and 45(4) of the Act. This issue was rightly decided by theTribunal by taking into consideration the decision of a DivisionBench of this Court in the case of CADD Centre Vs. ACIT[reported in (2016) 383 ITR 258], in which, the decision of aDivision Bench of the Bombay High Court in the case of CIT Vs.Texspin Engineering and Manufacturing Works [reported in (2003)263 ITR 345], was taken into consideration. 12. At this juncture, it will be worthwhile to extract therelevant portion in the decision in the case of CADD Centre,which reads as hereunder : “The question is whether such vestingstands covered by the expression transfer byway of distribution in Section 45(4) of theAct. There is a difference between vesting ofthe property, in this case, in the LimitedCompany and distribution of the property. Onvesting in the Limited Company under Part IXof the Companies Act, the properties vest inthe company as they exist. On the other hand,distribution on dissolution presupposesdivision, realisation, encashment of assetsand appropriation of the realised amount asper the priority like payment of taxes to theGovernment, BMC etc., payment to unsecuredcreditors etc. This difference is veryimportant. This difference is amply broughtout conceptually in the judgment of theSupreme Court in the case of MalabarFisheries Co. Vs. CIT [1979] 120 ITR 49. Inthe present case, therefore, we are of theview that Section 45(4) is not attracted asthe very first condition of transfer by wayof distribution of capital assets is notsatisfied. In the circumstances, the latterpart of Section 45(4), which refers tocomputation of capital gains under Section48 by treating fair market value of the asseton the date of transfer, does not arise.” 13. The endeavor of Mr.T.R.Senthilkumar, learned SeniorStanding Counsel before us is by laying emphasis on the factthat the shares worth of Rs.10 lakhs were given to the partners,that the remaining was given as credit of loan to the partnersof the erstwhile firm in the same proportion as their sharecapital of the firm and that this is a deviation from theconditions stipulated under Section 47(xiii) of the Act. 14. In our considered view, the legal position having beenwell settled that when vesting takes place, it vests in thecompany as they exist. Therefore, unless and until the firstcondition of transfer by way of distribution of assets issatisfied, Section 45(4) of the Act will not be attracted. Therefore, in the facts and circumstances of the case, we findthat there is no transfer by way of distribution of assets.15. Mr.T.R.Senthilkumar, learned Senior Standing Counsel forthe Revenue would contend that the decision in the case of CADDCentre is distinguishable on facts, as the Court held that therewas no distribution of assets, but only taking over of assets ofthe firm to the company. 16. However, the vital difference is that shares worth ofRs.10 lakhs alone were allotted and that the remaining was givenas credit of loan to the partners of the erstwhile firm in thesame proportion as their share capital of the firm. In ourconsidered view, what is required to be considered is the effectof vesting as held in the case of Texspin Engineering andManufacturing Works, which followed the decision of the Hon'bleSupreme Court in the case of Malabar Fisheries Co. Vs.CIT [reported in (1979) 120 ITR 49] and there can be nodistribution of assets when a partnership firm vests in acompany under Part IX of the Companies Act, 1956. Thus, we areof the view that the Tribunal rightly followed the decision inthe case of CADD Centre. 17. For the above reasons, the above tax appeal filed by theRevenue is dismissed and the substantial questions of law areanswered against the Revenue. No costs. Sd/- Assistant Registrar(CS V)//True Copy// Sub Assistant RegistrarTo 1.The Income Tax Appellate Tribunal, Chennai 'A' Bench. 17. For the above reasons, the above tax appeal filed by theRevenue is dismissed and the substantial questions of law areanswered against the Revenue. No costs. Sd/- Assistant Registrar(CS V)//True Copy// Sub Assistant RegistrarTo 1.The Income Tax Appellate Tribunal, Chennai 'A' Bench. 2.The Commissioner of Income Tax(Appeals)18No.46, Mahatma Gandhi Road,Nungambakkam, Chennai-34. 3.The Assistant Commissioner of Income Tax Central Circle2(3),Nungambakkam,Chennai-34. +1cc to Mr.T.R.Senthil Kumar, Advocate sr.60560+1cc to Mr.R.Sivaraman, Advocate sr.60878 nrl(co)nr 30/08/2019 https://hcservices.ecourts.gov.in/hcservices/