Conversion of firm to company for consideration of paid up share capital doesn’t amount to transfer

ITO Vs Jatin Kanubhai Kotadia (ITAT Ahmedabad)

ITAT Ahmedabad held that Sale/ conversion of business of assessee-firm as a going concern to company for consideration of paid up share capital does not amount to transfer liable to tax as capital gains.

Facts- Yougstar Infrastructure is a Partnership Firm constituted on 7.11.2006 with five partners, including the two respondents herein. The business of the Partnership Firm was of dealing in land, development thereof, carrying out commercial and residential construction work and to carry out other related activities. One of the Partners brought into the partnership two pieces of land as his capital. Thus capital account in the books of the firm was credited by an amount of Rs.2,11,41,990/-. The profit sharing ratio was 50% to the Partner who brought in the land as Capital contribution and the remaining four Partners profit sharing ratio was 12.5% each.

This Partnership was re-constituted by a deed dated 01-05-2008 by admitting three more Partners with effect from 01-05-2008. The profit sharing ratio was 20% each to the Partner who brought in the land originally and three newly admitted Partners. Remaining four original Partners profit sharing ratio was 5% each. The land of the Partnership Firm was got revalued on 10.08.2008 by an Approved Registered Valuer and the value of the land was arrived at Rs.7,80,02,176/-.

Subsequently, the Partnership firm was converted into Private Limited Company on 23.09.2008. All the Partners of the erstwhile Partnership firm were allotted shares of the company in proportion to the Fixed Capital held by them in the erstwhile firm. The current capital, attributable to the share received on account of revaluation of land, was converted into unsecured loans in respective names of the shareholders of the Company.

AO held that M/s. Yougstar Infracon Pvt. Ltd. allotted share worth Rs. 12 Lakhs. The shares were allotted out of the amount credited in the Capital Account with the erstwhile Partnership firm; therefore the Respondent/Assessee had utilized the profit on revaluation credited to his account for purchase of shares. The assessee’s contention that it is only a book entry and not actual profit was not accepted by the AO and thereby he held that the Respondent/assessee earned income on revaluation of land; but he did not follow the provisions prescribed u/s. 47(xiii)(b) at the time of conversion of the Firm into Company; thus the assessee earned Rs.39,00,109/- and Rs.5,12,62,479/- from the above mentioned companies respectively and therefore the total of the said sums amounting to Rs.5,51,62,588/- was being assessed as casual and non-recurring income in view of Section 2(24) read with section 28 of the Act and added as the income of the assessee.

CIT(A) deleted the addition made by AO. Being aggrieved, revenue has preferred the present appeal.

Conclusion- The Hon’ble Gujarat High Court in the case of DCIT Vs. R.L. Kalathia & Co. held that Sale of business of assessee-firm as a going concern to company for consideration of paid up share capital does not amount to transfer liable to tax as capital gains.

Held that the addition made on account of capital gain on revaluation of land made in the hands of the Partners are not sustainable in law and the Grounds raised by the Revenue are devoid of merits. Thus the appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These two appeals are filed by the Revenue as against separate appellate orders both dated 03-05-2012 passed by the Commissioner of Income Tax (Appeals)-XX, Ahmedabad arising out of assessment orders passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y.) 2009-10 in the respective assessee’s case. The Respondent assessee’s are Partners in the Partnership Firms, since the issue of revaluation amount credited in the respective Partner’s Capital [Respondent’s] account in the Partnership Firms is common in both the assessee’s cases, therefore the same are disposed of by this common order.

2. ITA No.1661/Ahd/2012 is taken as the lead case and Brief facts of the case are as follows:

a. Yougstar Infrastructure is a Partnership Firm constituted on 7.11.2006 with five partners, including the two respondents herein. The business of the Partnership Firm was of dealing in land, development thereof, carrying out commercial and residential construction work and to carry out other related activities. One of the Partners (other than the Respondent herein) brought into the partnership two pieces of land as his capital. Thus capital account in the books of the firm was credited by an amount of Rs.2,11,41,990/-. The profit sharing ratio was 50% to the Partner who brought in the land as Capital contribution and the remaining four Partners profit sharing ratio was 12.5% each.

b. This Partnership was re-constituted by a deed dated 01-05-2008 by admitting three more Partners with effect from 01-05-2008. The profit sharing ratio was 20% each to the Partner who brought in the land originally and three newly admitted Partners. Remaining four original Partners profit sharing ratio was 5% each. The land of the Partnership Firm was got revalued on 10.08.2008 by an Approved Registered Valuer and the value of the land was arrived at Rs.7,80,02,176/-. The difference amount between the original value and the value on revaluation was credited to the respective Partner’s Capital accounts in their profit sharing ratio. In the process, the Respondent’s Capital Account was credited by an amount of Rs.39,00,109/-.

c. Subsequently, the Partnership firm was converted into Private Limited Company on 23.09.2008. All the Partners of the erstwhile Partnership firm were allotted shares of the company in proportion to the Fixed Capital held by them in the erstwhile firm. The current capital, attributable to the share received on account of revaluation of land, was converted into unsecured loans in respective names of the shareholders of the Company.

(d) Chanakya Infrastructure is another Partnership firm executed on 12.02.2007 with 10 Partners including the two respondents herein. The business of the Partnership firm was that of dealing in land, development thereof, carrying out commercial and residential construction work and to carry out other relating activities. Five of the Partners (other than the two Respondents herein) brought in five pieces of land into the Partnership firm. In consideration of the said land brought in, the Capital Accounts of three partners were credited by Rs.1,03,036/- each and two partners capital accounts were credited by Rs.1,28,133/- each. The profit sharing ratio was 10% each to the above mentioned partners. Out of the remaining five partners, three partners share was 12% each and two persons share was 7% each. Thus Respondent’s share of profit was 12%.

[e] The land brought in the Partnership Firm was got revalued by an Approved Registered Valuer on 10.8.2008. According to the revaluation report, the value of land was Rs.42,71,87,326/- The difference between the original value and the value on revaluation was credited to the Partner’s Capital Accounts in proportion to their profit sharing ratio. In the process, the Respondent’s Capital Account was credited by an amount of Rs.5,12,62,479/-, Subsequently, the Partnership Firm was converted into Private Limited Company on 23.09.2008. All the Partners of the erstwhile firm were allotted shares of the company in proportion to the fixed capital held by them in the erstwhile firm. The current capital, attributable to the share received on account of revaluation of land, was converted into unsecured loans in respective names of the share holders of the Private Limited Company.

3. With this factual back ground, while passing the assessment order, the Ld Assessing Officer held that M/s. Yougstar Infracon Pvt. Ltd. and M/s. Chanakya Infracon Pvt. Ltd. allotted shares worth Rs. 12 lakhs and Rs.35 lakhs respectively to the Assessee herein. The shares were allotted out of the amount credited in the Capital Account with the erstwhile Partnership firm; therefore the Respondent/Assessee had utilized the profit on revaluation credited to his account for purchase of shares. The assessee’s contention that it is only a book entry and not actual profit was not accepted by the AO and thereby he held that the Respondent/assessee earned income on revaluation of land; but he did not follow the provisions prescribed u/s. 47(xiii)(b) at the time of conversion of the Firm into Company; thus the assessee earned Rs.39,00,109/- and Rs.5,12,62,479/- from the above mentioned companies respectively and therefore the total of the said sums amounting to Rs.5,51,62,588/- was being assessed as casual and non-recurring income in view of Section 2(24) read with section 28 of the Act and added as the income of the assessee.

4. Aggrieved against the assessment order the assessee filed an appeal before Ld Commissioner of Income Tax [Appeals] it was contented that as per the definition of “income” u/s. 2(24) of the Act, it deals with real income and not fictional income; income does not accrue or arise on revaluation of assets; entries in books of accounts are not conclusive; a mere book keeping entry cannot be income unless income actually resulted; thus revaluation is only book entry resulting in increasing the Capital Account; in support of his claim reliance was placed on the case laws Tuticorin Alkali Chemicals and Fertilizers Ltd. -Vs- CIT reported in 227 ITR 172 (SC), CIT -Vs-Hazarimal Milapchand Surana reported in 262 ITR 573 (Rajasthan), Kerala Small Industries Development Corporation Ltd. -Vs- CIT reported in 270 ITR 452 (Ker.), etc and therefore, impugned addition is not in accordance with law. It was further contended that even if it was to be held that profit arises on revaluation of assets, the resultant profit is assessable only in the hands of the Partnership Firm and not in the hands of the Partners for the reason that share in profit of Partnership firm is exempt u/s.10(2A) of the Act. After considering the above submissions of the Assessee, the Ld CIT[A] deleted the additions made by the AO observing as follows:

“… 4.5. In the light of the above discussion, the issue for consideration is whether any income arose on revaluation of land and in whose hands the income is assessable. In the assessment order, AO held that the amounts credited to appellant’s capital account in the books of the two firms on revaluation of firm’s land was to be treated as income of casual and non-recurring nature in the hands of the partner. In this connection, it is seen that some of the examples of casual and non­recurring income are as follow:-

A person serving independent assignment with UNO receiving money on authoring some articles, winnings from lotteries, winnings from contest from writing a caption; etc.

Further, it has been held in various judicial pronouncements that even if a receipt was casual and non-recurring in nature, if it was arising from carrying on business or profession, then the taxability of the receipt is to be considered as income from business or profession. In the instant case, there is no disputing the fact that the receipt arose from carrying on the business. Thus, even if the receipt is to be treated as income, it has to be done so under the head income from business. Therefore, I am not in agreement with the AO’s finding that the receipt is assessable as casual and non-recurring income. As regards the assessability of the receipt u/s. 28 as business income, it is to be noted that the land was the stock-in-trade of the firm. On revaluation of the land, entries were passed in the books of accounts. Since, there was no sale of stock-in-trade, it cannot be said that the income arose. Even if it was to be held that the income arose on revaluation, the income is assessable in the hands of the firm to which the land belongs. Further, as contended by the Ld. A.R., the share of income received by partner from a firm is exempt u/s.10(2A) of the Act. Since the limited question for consideration in this appeal is regarding the assessability in the hands of the partner, without going into issue of assessability of the receipt in the hands of the firm, it can be safely concluded that the share from said receipt is not assessable in the hands of the partners.

Regarding assessability of the receipt under the head capital gains also, the issue will have to be considered in the hands of the firm. In the assessment order, AO made an observation that appellant did not follow the norms prescribed u/s. 47(xiii)(b) of the Act. In this connection, it is to be noted that Section 47 deals with “transactions not regarded as transfer”. According to Clause-(xiii) of the said Section, any transfer of a capital asset or intangible asset by a firm to a company was not to be held as transfer, subject to fulfilling certain conditions laid therein.

Thus, the applicability of the said section will have to be considered in the hands of the firm and it has no applicability on the issue of assessability in the hands of the partners. Impugned receipt cannot be assessed in the hands of the appellant under the head ‘Capital gains’. Another aspect to be considered is whether the impugned receipt attracts the provisions of Section 56(1)(vi) or (vii). The said section is applicable where any sum of money is received without consideration or any immovable property is received without consideration. In the instant case, the revaluation of the land of the firms was done two years after the constitution of the partnership. Since the business of the firm was being carried on and share in revaluation was received by the appellant in due course of business, it cannot be said that the share was received without consideration. Further as discussed at the beginning of this para, since the receipt was in the course of business, the assessability will have to be seen under the head “income from business”. Thus, impugned receipt cannot be assessed under ‘income from other sources”. Therefore, I am of the considered view that impugned receipt cannot be considered as income of the appellant. The addition made is not in accordance with law. It is deleted. This ground of appeal is deleted.”

5. Aggrieved against the appellate order the Revenue is in appeal before us raising the following Grounds of Appeal in ITA No. 1661/Ahd 2012 in the case of Shri Jatin Kanubhai Kotadia as follows:

1. The Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.5,51,62,588/- made by the Assessing Officer being difference between the costs of lands and revalued amounts credited to the Appellant’s capital account in the partnership firm.

1.2 The decision of the Ld.CIT(A) is vague and not specific on the treatment of asset being revalued land. There is no finding that the firm has accounted for this gain and offered for tax. Mere claim of exemption u/s 10(2A) by the appellant partner is not acceptable.

2. It is therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent.

6. The Grounds of Appeal raised by the Revenue in ITA No. 1682/ Ahd/2012 in the case of Shri Narendrabhai D Kanani reads as follows:

1. The Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.5,51,62,588/- made by the Assessing Officer being difference between the costs of lands and revalued amounts credited to the Appellant’s capital account in the partnership firm.

1.2 The decision of the Ld.CIT(A) is vague and not specific on the treatment of asset being revalued land. There is no finding that the firm has accounted for this gain and offered for tax. Mere claim of exemption u/s 10(2A) by the appellant partner is not acceptable.

2. It is therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent.

7. The Ld. CIT DR Sri P.S. Chaudhary appearing for the Revenue in support of the Grounds raised by the Revenue submitted that the CIT[A] is not correct in deleting the addition of Rs.5,51,62,588/-made by the Assessing Officer being difference between the costs of lands and revalued amounts credited to the Assessee’s capital account in the partnership firm. Further there is no specific finding that the Partnership firm has accounted for this gain and offered for taxation. Thus the Ld CIT[A] erred in deleting the addition on the ground that mere claim of exemption u/s 10(2A) by the partner is not acceptable and pleaded to restore the order passed by the Assessing Officer and allow the Revenue appeals.

8. Per contra Ld Counsel Mr. Sudhir Metha appearing for the assessee reiterated the submissions made before the lower authorities and relied upon the Paper Book and following case laws:

a. Tax Appeal No. 485 of 2017 in the case of CIT -Vs- Vision Finstock Ltd [Gujarat H C]

b. Tax Appeal No. 368 of 2001 in the case of DCIT Vs. Well Pack Packaging [Gujarat HC]

c. DCIT Vs. R.L. Kalathia & Co. reported in [2016] 66 com 249 (Guj.)

d. PCIT Vs. Ram Krishnan Kulwant Rai Holdings (P.) Ltd. reported in [2019] 110 com 5 (Madras)

e. CADD Centre Vs. ACIT reported in [2016] 65 com 291 (Madras).

9. We have given our thoughtful consideration and perused the materials available on record including the paper books and case laws filed by the assessee. It is undisputed fact that revaluation of lands had taken place during the financial year 2008-09 in the case of erstwhile Partnership firms, wherein the Respondent/assessee is one of the Partner. It is further noticed that the increased value of land was reflected as ‘Current Capital’ of the Partners on credit side of the balance sheet of the firms. Thereafter, the above Partnership firms had been converted to the Private Limited Companies with effect from 23-09-2008 and the capital account appearing in the Partnership Firms (revaluation reserve) has been transferred to ‘Unsecured Loan’ received from the shareholders. Thereafter, the above converted companies amalgamated with M/s. Takshashila Gruh Nirman Pvt. Ltd. with effect from 01-04-2010.

9.1. It is seen from records that when the Partnership Firms were converted into four companies, at that time entire Capital and Reserves were not converted into equity of the company, but rather the Revaluation Reserve was converted into unsecured loans in the hands of share holders namely erstwhile Partners. It is further seen that after merger from five different companies, no revaluation has been done either in the hands of erstwhile companies or in the hands of M/s. Takshashila Gruh Nirman Pvt. Ltd. The merger was approved by the Hon’ble High Court of Gujarat vide order dated 30-03-2012 in Company Application no. 263 of 2011 under section 391 to 394 of the Companies Act, 1956 from the appointed date, namely 01-04­2010 and the effective date of 25-05-2012. The transfer and vesting at para 3 clearly pointed out that the undertaking of the transferor companies shall be transferred to and vested in the transferee company as a going concern and undertaking was to include all assets and interest of the transferee companies further all debts, liabilities, contingent liabilities and obligations of every kind of the transferor companies were now to be discharged by the transferee company. Based on the above facts the Ld CIT (Appeals) deleted the additions on account of capital gain made in the hands of the Partners as he was of the opinion that the applicability of section 47(xiii)(b) at the time of conversion of the Partnership Firms into Companies can be considered only in the hands of the Partnership Firms to which the land belongs.

9.2. In the instant case, the shares of the respective shareholders in the respondent-company were defined under the erstwhile Partnership deed. The only change that has taken place on the respondent being transformed into a company was that the shares of the partners were reflected in the form of share certificates. Beyond that, there was no physical distribution of assets in the form of dividing them into parts, or allocation of the same to the respective partners or even distributing the monetary value thereof. This isuue is no more res-integra in view of series of Judgements by various High Courts including Jurisdictional High Court wherein SLP filed were dismissed by Hon’ble Supreme Court as follows:

9.3. In CIT Vs. Vision Finstock Ltd. in TA No. 485/2017 (Guj) held as follows:

“… 2. To put briefly, Revenue seeks to tax the consideration received by the respondent-assessee as partner of the two firms upon reevaluation and distribution of the partnership assets as short term capital gain. CIT (Appeals) in a detailed judgment, reversed the order of the Assessing Officer holding that if at all the transaction was held to be sham, the additions can be made in the case of the firm and not the partners. The Commissioner (Appeals) also noted that in case of one of the partnership firms, the Assessing Officer had made such addition. In other words, now to tax the partner also would amount to double taxation. The Tribunal, while confirming the view of the CIT (Appeals), further noted that in case of other partners, the Assessing Officer had had not made the addition. CIT (Appeals) had exercised revisional powers under section 263 which order was set aside by the Tribunal.

3. Considering such facts, we do not find any question of law arising. Tax Appeal is dismissed.”

9.4. In Tax Appeal No. 368 of 2001 in the case of DCIT Vs. Well Pack Packaging jurisdictional High Court held as follows:

“… 2. At the outset, it is to be noted that this Court has dismissed the appeal at the threshold and the matter was carried before the Apex Court by the Revenue and the Apex Court has remitted the matter back to this Court for a fresh decision on the following substantial questions of law in accordance with law.

1) Whether the Income Tax Appellate Tribunal is right in law and on the facts of the case in holding that revaluation of the assets of the assessee firm and subsequent conversion of the firm into Limited Company under Chapter IX of the Companies Act who has taken over such assets at the enhanced value will not result into any capital gain liability under the IT Act ?

2) Whether the Income Tax Appellate Tribunal is right in law and on facts of the case in holding that there is no transfer involved when the assessee gets itself registered under Para IX of the Companies Act, 1957 ?

3)Whether the Income Tax Appellate Tribunal is right in law and on facts of the case in holding that the assessee is not liable to any capital gain tax either u/s. 45(1) or 45(4) of the IT Act ?

4)Whether the Income Tax Appellate Tribunal is right in law and on facts of the case in directing to delete the addition of Rs. 1,28,13,831/- ?

3. The facts of the present case are that the respondent-assessee was a partnership firm. On 30th August, 1995, it filed its original return of income in respect of Assessment Year 1995-96 declaring total income of Rs.1,93,930/-. The said return was processed under Section 143(1)(a) of the Income Tax Act,1961 on 29th January, 1996. Subsequently, the Assessing Officer noticed that the assessee had revalued the depreciable assets and enhanced the value at Rs. 1,28,13,831/- on 31st July, 1994. it was also noticed by him that the partnership firm was converted into a company under Chapter IX of the Companies Act 1956 and was registered as such under Section 567 of the said Act on 17th October, 1994. It was further observed that while the respondent-assessee had claimed deprecation value of the depreciated assets available on enhancement of the amount of revaluation on the date of conversion as capital gain though there was a transfer of assets from the partnership firm in the hands of the company which is a separate entity. Thereafter, proceedings under Section 148 of the Act for reassessment were initiated and thereafter a notice under Section 143(2) of the Act was issued. After considering the explanation of the respondent-assessee, the Assessing Officer determined the total income of the respondent assessee at Rs. 1,30,07,761/-. The respondent assessee disputed the impugned addition and filed an appeal before the CIT(A) which was dismissed and the addition was confirmed.

….. ….

6. Heard the learned advocates appearing for the parties and considered the submissions. Learned advocate Mr. Divatia submits that the same question came up for consideration before the Andhra Pradesh High Court in the case of Commissioner of Income Tax vs. United Fish Nets in Income Tax Tribunal Appeal No. 100 of 2002, wherein, interpretation of Sec. 45 was made and the questions of law formed raised herein were also the subject matter of decision in the said appeal. In para-14, the Andhra Pradesh High Court has held as under:

“14. The underlined portion, in a way, signifies the basic tenets of transfer of assets. The distribution must result in some tangible act of the physical transfer of properties or the intangible act of conferring exclusive rights vis.a.vis an item of property on the erstwhile shareholder. Unless these or other legal correlatives take place, it cannot be inferred that there was any distribution of assets. In the instant case, the shares of the respective shareholders in the respondent-company were defined under the partnership deed. The only change that has taken place on the respondent being transformed into a company was that the shares of the partners were reflected in the form of share certificates. Beyond that, there was no physical distribution of assets in the form of dividing them into parts, or allocation of the same to the respective partners or even distributing the monetary value thereof. In our view, the judgment of the Bombay High Court squarely covers the facts of the case and the orders passed by the Appellate Commissioner and the Tribunal accords, with the same. The appeal is accordingly dismissed.”

7. All these four questions are governed by the below mentioned decisions which are applicable in all force as discussed hereinbelow.

8. Divetia has also relied on the decision of the Bombay High Court in the case of Commissioner of Income Tax vs. Texspin Engineering and Manufacturing Works, reported in (2003) 263 ITR 345 and the decision of the Punjab & Haryana High Court in the case of Commissioner of Income Tax v. Rita Mechanical Works, reported in [2012] 344 ITR 544 (P&H), which also takes us to take the same view regarding capital gain. The decision of the Bombay High Court in the case of Commissioner of Income Tax vs. Texspin Engineering and Manufacturing Works, reported in (2003) 263 ITR 345 would ennure for the benefit of the assessee as the same has been considered by the Punjab & Haryana High Court in the case of Commissioner of Income Tax v. Rita Mechanical Works, reported in [2012] 344 ITR 544 (P&H). In that view of the matter, we are unable to take a different view then the one taken by the Tribunal. Therefore, we are not giving any elaborate reasons and all the four questions are answered in favour of the assessee and against the revenue. The present Tax Appeal is dismissed.

9.5. The Hon’ble Gujarat High Court in the case of DCIT Vs. R.L. Kalathia & Co. reported in [2016] 66 taxmann.com 249 (Guj.) held that Sale of business of assessee-firm as a going concern to company for consideration of paid up share capital does not amount to transfer liable to tax as capital gains as follows:

• The question that requires to be addressed is as to whether the provisions of section 45 are attracted in the facts of the present case. For the purpose of attracting sub-section (1) of section 45 profit or gain should have arisen from the transfer of a capital asset. Sub-section (2) of section 45 provides that the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to tax as his income of the previous year in which such stock-in- trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital assets.
• Insofar as invocation of sub-section (2) of section 45 is concerned, while the Assessing Officer has briefly referred to the said provision in his order, no factual foundation has been laid down in that regard to establish that the said properties had been brought into the books as stock-in- trade. On the contrary the assessee has maintained that the said properties were always treated as capital assets and were never converted into stock-in-trade.
• Under the circumstances, in the absence of any factual foundation having been laid in that regard, the question of invoking sub-section (2) to section 45 would not arise. Sub-section (4) of section 45 provides that the profits or gains arising from the transfer of a capital assets by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. The inquiry that is now required to be made is as to whether the ingredients of section (4) of section 45 are satisfied in the present case. [Para 18]
• The primary requirement for invoking the sub-section (4) is that there has to be distribution of capital assets, which factor is totally missing in the present case as there is no distribution of capital assets either by way of dissolution of the firm or otherwise. [Para 19]
• In view of aforesaid, it is held that Tribunal was justified in holding that the sale of business of firm as a going-concern to the company for a consideration of paid-up share capital does not amount to transfer liable to tax as capital gains. [Para 22]

9.6. The Hon’ble Madras High Court in the case of PCIT Vs. Ram Krishnan Kulwant Rai Holdings (P.) Ltd. reported in [2019] 110 taxmann.com 5 (Madras) held as follows:

“Section 47, read with section 45 of the Income-tax Act, 1961 Capital gains. Transactions not regarded as transfer (Loan) Assessment year 2009-10 Assessee was a partnership firm which was converted into a private limited company under Companies Act Assessing Officer noticed that at time of conversion of firm into private company, shares were allotted to partners of firm and apart from that certain amount was given as credit of loan to partners in same preposition as their share capital of firm Assessing Officer opined that it was a deviation stipulated under section 47(xiii) for exemption from capital gains and, therefore, made addition towards short term capital gains – Tribunal, however, deleted addition made by Assessing Officer – Whether in case of conversion of partnership firm into private company, unless and until first condition of transfer by way of distribution of assets is satisfied, section 45(4) will not be attracted Held, yes Whether, since, in instant case, there was no transfer by way of distribution of assets, Tribunal was justified in holding that there was no violation of conditions stipulated in section 47(xiii) and, thus, impugned addition was rightly deleted – Held, yes [Para 14] [In favour of assessee]”

9.7. The Hon’ble Madras High Court in the case of CADD Centre Vs. ACIT reported in [2016] 65 taxmann.com 291 (Madras) held as follows:

“Section 2(47), read with sections 45 and 47(xiii), of the Income-tax Act, 1961- Capital gains – Transfer (Conversion of partnership firm into company) – Whether when a partnership firm is transformed into a limited company with no change in the number of partners and extent of property, there is no transfer of assets involved and hence, there is no liability to pay tax on capital gains – Held, yes [Para 16] [In favour of assessee]”

10. Respectfully following the above judicial precedents and the facts in the present case the addition made on account of capital gain on revaluation of land made in the hands of the Partners are not sustainable in law and the Grounds raised by the Revenue are devoid of merits. Therefore the appeals filed by the Revenue are hereby dismissed.

11. In the result, the appeals filed by the Revenue in ITA Nos. 1661 & 1682/Ahd/2012 are hereby dismissed.

Order pronounced in the open court on 23-08-2023