The DCIT, Circle-4(1)(2), Ahmedabad V. Takshashila Realities Pvt. Ltd(erstwhile firm M/s. Takshashila Gruh Nirman), Ahmedabad

ITA 1509/AHD/2019

AI Insights

The case involves multiple appeals by the Revenue against M/s. Takshashila Realities Pvt. Ltd. concerning the reassessment orders for the Assessment Year 2009-10. The core issue was the treatment of revalued land, initially purchased by a partnership firm and later revalued and credited to the partners' capital accounts upon the firm's conversion into a private limited company. The Revenue contended that this revaluation should be treated as a Short Term Capital Gain (STCG), while the assessee argued that the land was part of stock-in-trade and not subject to capital gains tax. The Tribunal's decision relied heavily on precedents and the interpretation of sections 45 and 47 of the Income Tax Act, particularly focusing on the nature of the asset (stock-in-trade vs. capital asset) and the implications of the conversion from a partnership firm to a company.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 114285 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-08-2023
• Assessment Year: 2009-2010
• Appeal Filed On: 03-10-2019
• Other Referred Cases: Hind Construction Ltd. vs. CIT, ITO vs. Orchid Gruh Nirman P. Ltd., DCIT vs. Well Pack Packaging, DCIT vs. R.L. Kalathia & Co., CIT vs. Umicore Finance Luxemborg, CIT vs. United Fish Nets, CIT vs. Rita Mechanical Works, CIT vs. Texspin Engineering and Manufacturing Works, CIT vs. Vision Finstock Ltd., CIT vs. Alta Interchem Industries, CIT vs. Gulabdas Printers
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Share purchase agreement; Question of law; Date of conversion; Fair market value; Valuation report; Set aside; Capital Gains
• Section: 10; 143(3); 2(14); 250; 143(2); 264

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH Before: Shri Waseem Ahmed, Accountant Member And Shri T.R. Senthil Kumar, Judicial Member The DCIT, Circle-4(1)(2), Ahmedabad (Appellant) Vs M/s. Takshashila Realities Pvt. Ltd. (The successor company of Erstwhile Firm M/s. Chanakya Buildcon) Ground Floor, Block-A, Manav Mandir, Nr. Old Aradhana Vidyalaya Cross Road, Maninagar, Ahmedabad PAN : AAFFC1773P (Respondent) The DCIT, Circle-4(1)(2), Ahmedabad (Appellant) Vs M/s. Takshashila Realities Pvt. Ltd. (The successor company of erstwhile firm M/s. Youngster Infrastructure) Ground Floor, Block-A, Manav Mandir, Nr. Old Aradhana Vidyalaya Cross Road, Maninagar, Ahmedabad PAN : AAFFY6537C (Respondent) ITA No: 1506 /Ahd/2019 Assessment Year: 2009-10 ITA No: 1507 /Ahd/2019 Assessment Year: 2009-10 ITA No: 1508/Ahd/2019 Assessment Year: 2009-10 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 2 The DCIT, Circle-4(1)(2), Ahmedabad (Appellant) Vs M/s. Takshashila Realities Pvt. Ltd. (The successor company of Erstwhile Firm M/s. Chanakya Infrastructure) Ground Floor, Block-A, Manav Mandir, Nr. Old Aradhana Vidyalaya Cross Road, Maninagar, Ahmedabad PAN : AAFFC3367B (Respondent) The DCIT, Circle-4(1)(2), Ahmedabad (Appellant) Vs M/s. Takshashila Realities Pvt. Ltd. (The successor company of Erstwhile Firm M/s. TakshashilaGruh Nirman) Ground Floor, Block-A, Manav Mandir, Nr. Old Aradhana Vidyalaya Cross Road, Maninagar, Ahmedabad PAN : AAFFT7413J (Respondent) Assessee Represented: Shri Sudhir Mehta, A.R. Revenue Represented: Shri Pushpendra Singh Chaudhary, CIT & Shri Rakesh Jha, Sr. D.R. Date of hearing : 04-08-2023 Date of pronouncement : 23-08-2023 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:- These four appeals are filed by the Revenue as against the separate appellate orders all dated 09-07-2019 passed by the Commissioner ITA No: 1509/Ahd/2019 Assessment Year: 2009-10 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 3 of Income Tax (Appeals)-8, Ahmedabad arising out of the reassessment orders passed under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2009-10 of the erstwhile Firms. Since common issue is involved in all the four appeals, the same are disposed of by this common order. 2. The solitary ground raised by the Revenue in all the four appeals are that whether the Ld. CIT(A) is right in deleting the addition made under the head Short Term Capital Gain of the Income Tax Act as follows: ITA Nos. Amount of Disallowance 1506/Ahd/2019 7,96,07,192/- 1507/Ahd/2019 7,80,02,176/- 1508/Ahd/2019 42,71,87,326/- 1509/Ahd/2019 19,65,92,925/- 3. ITA No. 1506/Ahd/2019 is taken as the lead case. Brief facts of the case is that the respondent-assessee is a Private Limited Company and successor of erstwhile Partnership Firm namely M/s. Chanakya Buildcon. Originally M/s.Chanakya Buildcon was constituted on 18.09.2006 with two partners vide Partnership Deed dated 21.09.2006 for carrying out the business to build, develop, residential and commercial properties. This firm purchased a piece of land on 29.10.2007 for a consideration of Rs.51,33,357/- and included this land in its stock-in-trade. On 23.09.2008, this land was revalued by Government Registered Valuer at Rs.8,47,41,149/. The difference in price of the land i.e. Rs.7,96,07,792/- was credited into the Fixed and Current capital accounts of the I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 4 Partners in their respective profit sharing ratio of the Partnership firm. Thereafter the Partnership Firm was converted into a Private Limited company on 24-09-2008 under Part-IX of the Companies Act, 1956 under the name and style Ms.Chanakya Buildcon Pvt. Ltd. The fixed capital was converted into equity shares in the ratio of the erstwhile Partner’s share of profit in the company. Later this company M/s. Chanakya Buildcon Pvt. Ltd. merged with present company namely M/s. Takshashila Gruh Nirman Pvt. Ltd. w.e.f. 01.04.2010 pursuant to the Scheme of Arrangement approved by the Hon’ble High Court of Gujarat on 10.05.2012 with effect from Appointed Date namely 01.04.2010. Thereafter the assessee company was planning to enter into Stock market through Initial Public Offer (IPO). In order to make the Balance Sheet strengthen with the market value of land, the assessee company got the revaluation report from recognized Govt. Approved Valuer. 3.1. In the mean time, the erstwhile Firm filed its Return of Income on 26.09.2009 declaring total income of Rs.2,29,378/-. Regular assessment u/s. 143(3) was completed on 23.11.2011 accepting the returned income. Later the assessment was reopened by issuing a notice u/s.148 dated 16.03.2016 on the ground that the provisions of section 47(xiii) of the Act have not been fulfilled by the assessee and thereby made an addition of Rs. 7,96,07,792/- being the difference in the revaluation of land and assessed as Short Term Capital Gain (STCG). 4. Aggrieved against the same, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) held as follows: I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 5 “8.3. ......... On facts there is no dispute that the land was purchased by the firm and included in the stock-in-trade which continued to be treated as such till the hotel was constructed and the cost was capitalised. No part of the land was alienated and no rights were created over such land in favour of any of the partners. From the facts it is also clear that the intention of the appellant was not to run a hotel but to construct and sell the same as is evident from the fact that the hotel was sold after two years, merely because appellant operated the same in the interim because the same could not be sold despite best efforts does not lead to the conclusion that the intention to purchase land was not to hold it (land) as stock-in- trade. Appellant firm was constituted for the purpose of carrying on the business of development of land and relating activities. The land was a part of stock in trade and appellant had constructed the hotel on the land which was eventually sold after two years. To test the conversion of firm to company qua the land within the conditionality u/s. 47 (xiii) is not justified as the land was held by it (firm as well as companies) as stock in trade which does not fall within the purview of section 45 of the Act. It is undisputed fact that no part of the land was transferred to any partner. As regards the revaluation, the revaluation of stock in trade does not bring any income to the appellant as no one can sell to himself as has been held by the Hon'ble Supreme court In the case of Hind Construction Ltd. reported in (1972) 83 ITR 211 (SC), the relevant part of the judgment is reproduced as below: "The finding of the, Tribunal was that there was no sale either at the time when the assessee inflated the price of the machinery which fell to its share at the time of the division or at the time when the new partnership was created. Same is the finding of the High Court. We agree with these findings. The machinery that fell to the share of the assessee was never sold. Therefore, there was no question of the assessee making any profit out of them. No one can sell his goods to himself. A sale contemplates a seller and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and made profits therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner and that as his share of capital be considered as having sold the goods to the partnership. It difficult to appreciate the arguments advanced on behalf of the department that there was a sale either at the time when the assessee showed an inflated price of the machinery that fell to its share at the division or when that machinery was used as I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 6 the capital of the new firm of which he was a partner. We see no substance in Appeal No. 1287 (NT) of 1971. This appeal is accordingly dismissed with costs." 8.4. The Hon'ble ITAT Kolkata in the case of ITO v. Orchid Gruh Nirman P. Ltd. reported in (2016) 74 Taxmann.com 187 (Kol-Trib.) examined the issue of taxability of land brought in by the partner in the firm which was later re-valued by the firm, the head note of the said judgment is as below. "Section 45, read with sections 10/2A) and 147, of the Income-tax Act, 1961-Capital gains-Chargeable as (Firm, in case of - Assessment year 2008-09 - Assessee- company was one of four partners in a firm - A land was brought in firm by partners as inventory/current assets - Firm revalued said land - Amount of revaluation were credited in current accounts of partners in their profit sharing ratio - Assessing officer made reassessment and brought credited amount as income chargeable to tax as short term capital gain - It was found that Firm did not sell any part of land and no fax advantage of any kind was sought to be derived thereby - Whether section 45(3) is applicable only in respect of a capital asset and, thus, where a land was brought in a firm as current asset and said firm upon receipt of land also accounted for it as a current asset, section 45(3) could not be invoked - Held, yes - Whether since on revaluation assessee did not make any short-term capital gain under section 45(3) addition on account of such revaluation was not sustainable - Held, yes [Paras 27 and 30] [In favour of assessee]" In the case at hand the land continued to be held by the successor companies as stock in trade which fact has also not been disputed by the AO and the Ld. Auditors. 8.5 Appellant has also taken another argument that the revaluation of asset and crediting such revaluation surplus in the accounts of the partners do not amount to transfer of a capital asset as long as such partners do not get any interest in such assets which continues to be held by the firm. In the case at hand the land continue to be owned and possessed by the firm and later the successor companies which is an undisputed fact. Appellant also relied upon the judgment of Hon'ble ITAT, Mumbai in the case of D.S. Corporation v. ITO-21(1)(4), ITA Nos. 3526 & 3527/Mum/2012 in support of their contention wherein it has been held as under: I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 7 “33. To summarise, I am of the view that the partnership firm in the present case continued to exist even after the retirement of Smt. Hemlata Shetty and Shri Sudhakar Shetty from the partnership on 26.03.2006 and 25.05.2006 respectively. There was only a reconstitution of partnership firm on their retirement without there being any dissolution and the land properly acquired by the partnership firm continued to be owned by the by the said firm even after reconstitution without any extinguishment of rights in favour of the retiring partners. The retiring partners did not acquire any right in the said property and what they got on retirement was only the money equivalent to their share of revaluation surplus (enhanced portion of the asset revalued) which was credited to their capital accounts. There was thus no transfer of capital asset by way of distribution of capital asset either on dissolution or otherwise within the meaning of section 45(4) read with section 2(14) of the Act. I also hold that the money equivalent to enhanced portion of the assests re-valued does not constitute capital asset within the meaning of section 2(14) and the payment of the said money by the assessee firm to the retiring partners cannot give rise to capital gain under section 45(4) read with section 2(14) of the Income Tax Act, 1961. I accordingly agree with the view taken by the ld. Judicial Member and answer both the question referred under section 254(4) of the Act in the negative and in favour of the assessee.” 8.6. Furthermore, appellant has also contended before the AO as well as in the present proceedings that without prejudice to the contention that the revaluation of closing stock in trade does not attract the provision of section 45 and consequently, the conditionalities of section 47, the conversion of a firm in the company under part -IX of the companies Act 1956 does not amount to transfer of a capital asset held by the firm as such. Appellant relied on the following judgments in support of this contention: (ii) DCIT vs. Well Pack Packaging- Tax Appeal No. 368 of 2001 (Gujarat High Court)-order dated 03.12.2014. (iii) DCIT vs. R.L. Kalathia & Co.- (2016) 381 ITR 180 (Guj) (iv) CIT vs. Umicore Finance Luxemborg - (2016) 76 Taxman.com 32 (Bom-HC) (v) CIT vs. United Fish Nets - (2014) 50 taxmann.com 267 (AP-HC) (vi) CIT vs. Rita Mechanical Works - (2012) 344 ITR 544 (P&H) I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 8 (vii) CIT vs. Texspin Engineering and Manufacturing Works- (2003) 263 ITR 345 (Bam.) Particular emphasis was placed on the judgment of Hon'ble High Court of Gujarat in the case of Well Pack Packaging referred supra wherein the Hon'ble jurisdictional High Court have held that in absence of any tangible physical transfer of properties or intangible act of conferring the exclusive rights over such properties the provisions of section 45(1) or 45(4) cannot be applied upon conversion of the firm into a limited company under Chapter-IX of the Companies Act, 1956.” ........................... From the discussion hereinabove it is clear that the appellant firm has revalued the land held by it as stock in trade which continued to be held as such by the succeeding companies upon conversion of the firm into the company, no part of the land was transferred to any of the partners Keeping in view these facts and respectfully following the judgement of various Hon'ble Higher Courts and Tribunals referred supra, the action of AO in treating the impugned land as capital and subjecting the same to the provisions of section 45 and 47 is not found justified. Hence, the addition of Rs.7,96,07,792/- made under the head capital gains are deleted. AO is directed to delete the same. 8.7 Since the additions under the head capital gains have been deleted by holding the land to be stock in trade appellant will not be entitled to the deduction of this stock in trade on revenue account at a re-valued amount upon sale. Hence, AO is directed to verify the records and in case, subsequently, appellant has claimed the re-valued amount as the cost of land in its accounts the same is to be restricted to the sum of Rs.51,33,357/- i.e. the value at which the partners have introduced the land in the firm. 8.8 In addition to the contention that provisions of section 47(xiii) of the Act do not cover within their ambit the stock in trade upon conversion of the firm into a company, appellant has also asserted that all the conditions stipulated in section 47(xiii) are fulfilled. As per the appellant the entire fixed Capital of the partner was converted into equity shares of the company vis. Chanakya Buildcon Pvt. Ltd.; upon amalgamation the same equity was converted into the equity shares of M/s. Takshashila Gruh- Nirman Pvt. Ltd. the total liability of all four firms succeeded by four amalgamating companies qua the partners is maintained in M/s. I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 9 Takshashila Gruh Nirman Pvt. Ltd. However, since for the reasons elaborated herein above I have held that the provisions of section 45 and 47(xii) are not applicable to the stock in trade this assertion of the appellant becomes infructuous. 8.9 Appellant further contended that upon revaluation of the land additions have also been made in the hands of the partners also since, the additions under the head capital gains have been deleted hereinabove, the assertions of the appellant becomes infructuous. In the result, Ground No. 1 and 2 of the appeal are allowed.” 5. Aggrieved against the same, the Revenue is in appeal before us. 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 made by the Assessing Officer on account of STCG 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 the provisions of sections 45 and 47(xii) are not applicable to the stock in trade is not acceptable and pleaded to restore the order passed by the Assessing Officer and allow the Revenue appeals. 6. 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 various case laws. The Ld Counsel further submitted that in order to invoke section 45(4) of the Act conditions have to be fulfilled, there was neither transfer of assets by way of distribution of Capital assets nor there I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 10 was a dissolution of firm. The revaluation of the land held by the assessee firm increased the value but the same has been credited to capital account of the Partners when the assessee firm was converted into Private Limited Company under Part-IX of the Companies Act, 1956. Thus the assets and liabilities of such firm became the assets and liabilities of the Company. Further that shares in Company have been allotted to Partners of erstwhile firm in their profit sharing ratio in the firm. It was further pointed out by the Learned AR that the Partners of the firm have never received any consideration or benefit other than by way of allotment of shares in Company due to such conversion of the assessee firm into Private Limited Company. The Learned Counsel also relied upon the judgment passed in the matter of Alta Interchem Industries reported 20 ITR(T) 103 (Ahd), in the matter of Gulabdas Printers reported in 4 ITR(T) 264 (Ahd), Well Pack Packaging reported in 130 Taxman 215 (Ahd). All these judgments laid down the ratio in favour of the assessee on the point of law and therefore relied upon the order passed by the Learned CIT(A). 7. 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. 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 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 11 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. 7.1. 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 01-04-2010 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 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 12 of the Partnership Firms into Companies can be considered only in the hands of the Partnership Firms to which the land belongs. 7.2. This Bench of the Tribunal has considered the above issues in the case of the Partners namely Shri. Jatin Kanubhai Kotadia and Shri. Narendrabhai D Kanani in ITA Nos.1661 & 1682/Ahd/2012 by order dated 23-08-2023 and after considering various High Court judgements and held as follows: “... ...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 issue 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. I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 13 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 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 14 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. Mr. 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 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 15 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 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 16 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 I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 17 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.” 8. It is further seen from the Ld CIT[A] order that has referred to Kolkata Bench decision in the case of ITO -Vs- Orchid Gruh Nirman Pvt. Ltd. reported in [2016] 74 Taxmann.com 187. Now the Revenue’s Appeal is also dismissed by the Kolkata High Court in the case of PCIT -Vs- Orchid Gruh Nirman Pvt. Ltd. reported in [2022] 134 taxmann.com 281 (Calcutta) observing that Section 45(3) would be applicable only in respect of a capital asset; thus, where a land was brought in a firm at its cost as current asset and said firm upon receipt of said land also accounted same as a current asset, in instant case section 45(3) would not be applicable merely because said land was converted into fixed asset and revalued in relevant assessment year. Relevant portion of the judgement reads as follows: “... 15. The CIT(A) accepted the contention raised by the assessee. After examining the factual issues it specifically held that revaluation of an asset is not a business transaction resulting in any pecuniary gain which can form subject matter of taxation. Ultimately by a well reasoned order, the CIT(A) allowed the appeal filed by the assessee. Aggrieved by the same, the revenue preferred the appeal before the tribunal. The tribunal firstly considered the validity of the reopening of the assessment under section 147 of the Act. After elaborately considering the facts the tribunal held that, if at all any income accrues or arises owing to such revaluation, it I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 18 is an issue which had to be dealt with in the assessment of the firm M/s. Salapuria Soft Zone which is the separate taxable entity. After noting the facts the tribunal held that in terms of the section 10 (2A) of the Act partners' share in the total income of the firm is not to be included in the total income of the partner. Therefore, it was held that the there was no reason for initiating proceedings under section 147 of the Act. With regard to the applicability of section 45(3) of the Act, the tribunal after considering the books of account of the firm recorded the following factual findings:- The books of account of the said firm for the financial year ended March 31, 2006 clearly reflected the receipt of the said land by it by way of capital contribution from three of its partners as also the value thereof with corresponding credit to the partners' capital accounts. The land upon purchase was shown by the said three companies as part of their current assets. The said firm upon receipt of the said land during the financial year ended March 31, 2006 also accounted for it as a current asset. The partners transferred the said land at cost. As such, there was no profit in the hands of the partners upon transfer of the said land to the said firm. Section 45(3) of the Act is applicable only in respect of a capital asset. The said provision has no application in the instant case since what was transferred by the partners was a current asset and not a capital asset. Section 45(3) of the Act did not come into operation for the assessment year 2008-09 by reason of conversion of the developed land and building into fixed assets by the said firm or due to revaluation by the said firm of the asset so converted during the previous year ended March 31, 2008. Section 45(3) of the Act is applicable in the year of transfer by the partner of his capital asset to the partnership firm by way of capital contribution. In the instant case, the year of transfer was the financial year ended March 31, 2006. The ITO was wholly unjustified in invoking section 45(3) which had no application in the assessment year 2008-09 or for that matter in the assessment year 2006-07. Even otherwise, section 45(3) seeks to determine the capital gains with reference to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to be the full value of consideration received or accruing to the partner as a result of the transfer of the capital asset to the firm. Thus, section 45(3) does not seek to substitute by any other figure the value agreed between the partners at which the asset is transferred by a partner to the firm. 16. With regard to the revaluation, tribunal re-appreciated the facts which were considered by the CITA. With regard to the development of the area in question, as to how there was steep rise in the value of the properties and the state government revised the guideline value for the purpose of stamp duty several times between 2004-07 and after noting the price rise the tribunal held notwithstanding the said fact in accordance with the accounting principles the land held as inventory was shown at its cost and therefore it cannot be said that undervaluation was done by the assessee as alleged by the Assessing Officer. I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 19 17. Furthermore on facts the tribunal agreed with CIT(A) that after conversion of inventory into fixed asset the firm revalued the developed land including construction thereon in order to bring it in line with the current market value to justify the business assistance secured by the firm from the banks to extent of nearly Rs. 250 crores. Therefore, on facts the tribunal concluded that the revaluation was not a colourable device. 18. Furthermore on facts it was held that there was no withdrawal by the partners from capital accounts and therefore there cannot be any income liable to tax in their hands. 19. After having given our anxious consideration to the entire matter we find that a thorough examination of the factual position has been done by the CIT(A) and the tribunal as well. We find no questions of law, much less substantial questions of law arises for consideration in this appeal. In the result, the appeals are dismissed. No costs. 9. Respectfully following the above judicial precedents we have no hesitation in confirming the order of the order of the Ld CIT[A] who deleted the additions made by the assessing officer. Thus the grounds raised by the Revenue are devoid of merits and the same are hereby dismissed. 10. In the result, the appeals filed by the Revenue in ITA Nos. 1506 to 1509/Ahd/2019 are hereby dismissed. Order pronounced in the open court on 23 -08-2023 Sd/- Sd/- (WASEEM AHMED) (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad : Dated 23/08/2023 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- I.T.A Nos. 1506 to 1509/Ahd/2019 A.Y. 2009-10 Page No DCIT Vs. Takshashila Realities Pvt. Ltd. 20 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद