COMMISSIONER OF INCOME-TAX vs. RILTA MECHANICAL WORKS

ITA/5/2001HC Punjab & HaryanaPHHC01042093200123 August 2010Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE ADARSH KUMAR GOEL12 pages
AI SummaryDismissed

What were the facts?

The assessee, M/s. Rita Mechanical Works, Ludhiana, filed its return for assessment year 1995-96 declaring an income of Rs. 54,31,400. The firm re-evaluated its assets on 31.3.1994, enhancing their value. The profit from this re-evaluation was credited to the partners' capital accounts. The firm ceased to exist on 31.3.1995, with its co-partners forming a new Joint Stock Company, M/s. Rita Machines (India), Limited, on 29.3.1995, and agreeing to take over shares. The Assessing Officer treated the transfer of assets to the company as a transfer under Section 2(47) and charged short-term capital gains under Section 45(4) read with Section 50. The CIT(A) dismissed the assessee's appeal but differed on the nature of capital gain, treating it as long-term. The ITAT, in its order dated 28.4.2000, deleted the addition on account of capital gains for AY 1995-96 and allowed depreciation.

What did the High Court hold?

The High Court held that when a firm is converted into a company under Part IX of the Companies Act, 1956, there is no dissolution of the erstwhile firm and the company is formed with the same partners as shareholders. The vesting of assets in the limited company is a statutory vesting, not consequent to a transfer. Therefore, the conditions for a transfer under Section 45(1) (existence of a party and counter-party, and incoming consideration) are not met. Even if Section 2(47)(ii) is considered, Section 45(1) read with Section 48 requires consideration for computation, which is absent in this statutory vesting. Section 45(4) is mutually exclusive and applies to distribution of capital assets due to dissolution. The Court noted that Finance (No.2) Act, 1998, with effect from 1.4.1999, incorporated Section 47(xiii) exempting such transfers. The Court distinguished the cases relied upon by the Revenue. Regarding depreciation, the authorities below found that the firm continued until 3.4.1995, the date of incorporation of the company, and not 31.3.1995 as contended by the Revenue. Therefore, the assessee was entitled to depreciation for the period up to 31.3.1995 for AY 1995-96. Questions 1 and 2 were answered against the Revenue, and Question 3 was also answered against the Revenue.

What were the issues?

1. Whether on the facts and in the circumstances of the case and on proper interpretation of the provisions of section 45(4) read with section 2(47) of the I.T. Act, the ITAT was right in law in holding that taking over of the assets of the firm by a Company and allotting Shares to the Partners of the firm as per their holding in the firm does not give rise to Profit chargeable to Capital Gain u/s 45(4) of the Act. 2. Whether on the facts and in the circumstances of the case the ITAT was right in holding that capital gain arisen relates to assessment year 1996-97 instead of assessment year 1995-96 whereas Co-partner in the Company agreed to receive share allotment in the erstwhile company as per agreement dated 29.3.1995, though the Company was incorporated on 3.4.1995 in Papers only. 3. Whether on the facts and in the circumstances of the case the ITAT was right in allowing depreciation to the Firm which stood dissolved on 31.3.1995? Assessee's contentions (implied from the facts and the Tribunal's decision): There was no dissolution of the firm; distribution on dissolution is not a transfer; for a transfer, there must be a transferor and a transferee; the case involved a change in status from an unregistered company to a registered company, with assets vesting in the successor company without a transfer, thus Section 45(4) was not applicable. Revenue's contentions (implied from the appeal): The taking over of assets by the company and allotment of shares to partners constituted a transfer giving rise to capital gains under Section 45(4) read with Section 2(47). The capital gain arose in assessment year 1995-96. The firm stood dissolved on 31.3.1995, disentitling it to depreciation.

Which sections of the Income-tax Act were involved?

Section 260A,Section 45(4),Section 2(47),Section 45,Section 50,Section 45(1),Section 48,Section 47(xiii)

AI-generated summary — verify with the full judgment below

Income-tax Appeal No.5 of 2001 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Appeal No. 5 of 2001 Date of decision: 24.9.2010 Commissioner of Income-tax (Central), Ludhiana --- Appellant Versus M/s. Rita Mechanical Works, Ludhiana --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Mr. Rajesh Katoch, Advocate for the appellant. Mr. S.K. Mukhi, Advocate assisted by Ms. Jyoti, Advocate for the respondent. --- AJAY KUMAR MITTAL, J.

1.

This appeal under section 260A of the Income Tax Act, 1961, (in short “the Act”) against the order dated 28.4.2000, Annexure A-3, passed by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (in short “the Tribunal”) in Income-tax Appeal No. 2/Chandi/99 for the assessment year 1995-96, has been filed by the Revenue-appellant.

2.

Facts as narrated in the appeal are that M/s. Rita Mechanical Works, Ludhiana, the respondent-firm, which during the relevant year was engaged in the business of manufacturing sewing machines and its spare parts, filed its return for the assessment year 1995-96 declaring income of Rs

The order continues below.

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