Law: Income Tax Act, 1961

Section: 2(47)

Section 2(47) of the Income-tax Act, 1961 - Capital gains - Transfer (Sale of partnership business as going concern to company) - Assessment year 1996-97 - Whether, 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, yes [In favour of assessee] [Paras 18,19 and 22] FACTS â–  The assessee, a partnership firm, was engaged in the business of construction work as builder/developer/contractor. â–  During relevant year, assessee-firm after revaluing its assets, credited partners capital account in the ratio of their shares in firm. Thereupon, the assessee firm got converted into a limited company by the name of 'K' Ltd. and the shares to the extent of revaluation of assets were allotted to the partners in the firm as the directors of the Limited company. â–  The Assessing Officer took a view that capital gain arising from transfer of assets of assessee-firm to company 'K' was liable to tax under section 45. â–  The Commissioner (Appeals) upheld order of Assessing Officer. â–  The Tribunal, however, held that transaction in question could not be brought within ambit of either section 45(1) or section 45(4). Accordingly, the Tribunal deleted the impugned addition. â–  On revenue's appeal: HELD â–  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…