By TIOL News Service

MUMBAI, AUG 03, 2017: THE ISSUE BEFORE THE COURT IS - Whether revaluation of satellite rights by a partnership firm upon its mere conversion into a private limited company, would attract capital gains, when there was no transfer as defined u/s 47 of I-T Act. NO is the verdict.

Facts of the case:

The Revenue preferred the present appeal challenging the action of ITAT in reversing the order of CIT(A) whereby it was held that the revaluation of satellite rights in the account of partners inter-se would give rise to capital gains. The satellite rights were the property of partnership till the date of the conversion whereas transfer of satellite rights to the incorporated company was not from the erstwhile firm but from the partners of the firm. This aspect which was rightly considered by the AO and the CIT(A) had been lost sight of by the Tribunal, thereby arriving at an erroeneous conclusion.

On appeal, the HC held that,

++ it has been observed by the Tribunal that there is neither distribution of assets nor any realization of assets. There is no dissolution of the firm nor distribution of assets of the firm amongst the partners. No transfer of assets has taken place. It is further observed that the partnership firm was converted into a private limited company and the satellite rights thereafter vests with the company. The revaluation of the assets by the partnership firm would not attract any capital gain. There was no transfer as defined under Section 47 of the Act. The Tribunal relied on the judgment of this court in the case of Commissioner of Income Tax vs. Texspin Engineering and Manufacturing Works - 2003-TIOL-369-HC-MUM-IT which has observed that: "....Section 45(4) clearly stipulates that there should be transfer by way of distribution of capital assets. Under Part IX of the Companies Act, when a Partnership Firm is treated as a Limited Company, the properties of the erstwhile firm vests in the Limited Company. The question is whether such vesting stands covered by the expression "transfer by way of distribution" in Section 45(4) of the Act. There is a difference between vesting of the property, in this case, in the Limited Company and distribution of the property. On vesting in the Limited Company under Part IX of the Companies Act, the properties vest in the company as they exist...." Hence, in view of the above, no substantial question of law arises.

(See 2017-TIOL-1467-HC-MUM-IT)