Dy. CIT v. Mahesh M. Chheda
A.Y. : 1999. Dated : 29-1-2009
S. 28(iv) — Revaluation of assets by firm before conversion
into a Company — Value of shares received by partners in excess of their
capital was not taxable.
The assessee was a partner in a firm which revalued its
assets before conversion into a Company which allotted shares to the partners
of the firm against their revalued capitals. The Assessing Officer taxed the
value of shares received by the partners in excess of their capital before the
revaluation of assets by the firm as value of perquisite or benefit arising to
the partners in terms of S. 28(iv). The CIT(A) upheld the assessment order.
The Tribunal, relying on the decision of the Gujarat High
Court in CIT v. Smt. Chetanaben B. Sheth, (1993) 203 ITR 24, deleted
the addition. The Tribunal noted as under :
1. One of the conditions necessary for applicability of
S. 28(iv) is that the benefit or perquisite sought to be taxed must be
arising in the course of business carried on.
2. The Gujarat High Court has held in the above-mentioned
case that the amount received by an assessee-partner of a firm towards
valuation of goodwill and assets of the firm at the time of retirement from
the firm does not attract provisions of S. 28(iv), since the same cannot be
said to be a perquisite arising from the business and that even otherwise it
would not partake the character of income. Besides the above, increase in
capital of a partner as a result of revaluation of assets of the firm has no
nexus with the business of firm and, therefore, it cannot be brought within
the ambit of S. 28(iv). Therefore, the provisions of S. 28(iv) could not be
applied to bring the sum in question to tax in the hands of the partners of
the firm.
On the issue whether there was any capital gains as a
result of increase in capital of the partners consequent to revaluation of
assets of the firm, the Tribunal noted as under :
1. The stand taken by the Revenue in the grounds of
appeal was that partner’s interest in the firm was transferred to the
Company at a higher value and, hence, the benefit should be taxed in the
hands of the partners. It had been further contended in the grounds of
appeal that the definition of ‘transfer’ as given in S. 2(47) is an
inclusive definition and, therefore, de hors the provisions of S.
45(4) capital gains can be brought to tax in the hands of the partners.
2. There was no transfer whatsoever by the partners. It
was the firm which got converted into a Company. On such conversion, capital
gain on such transfer could be brought to tax only in the hands of firm and
not in the hands of the partner. This was clear from the provisions of S.
45(4). Consequently, no ‘capital gain’ arose in the hands of the partners by
reason of revaluation of assets of the firm and the consequent increase in
capital account of the partners of the firm.
3. Transfer by the firm or consequent succession of the
firm by a Company should not be brought to tax in view of the provisions of
S. 47(xiii). The fact that such transfer and the resultant capital gains
could not be brought to tax was no ground to explore the possibility of
taxing capital gain in the hands of partners on the ground that there was
capital gain consequent to revaluation of assets and increase in capital of
the partners.
