Capital gain

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SURENDRA CHOPRA (Querist)
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08 December 2011 A firm revalued its land at Rs. 5000000/- as against its book value of Rs. 500000/- and in October 2008 firm was converted into a private limited company by following the conditions prescribed u/s 47(xiii). In April 2011 said land was sold by the company at Rs. 4500000/-. As per my view campany had a Short term capital loss of Rs. 500000/- because its cost of acquisition is Rs. 5000000/- and there is no reference in S.49 for taking cost to previous owner in such cases. There is a tribunal decision also on this point. Can you provide your view point with citation of judgement please

CA MANOJ GUPTA

CA MANOJ GUPTA (Expert)
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09 December 2011 In the case of Gulabdas Printers :(2010) 035 (II) ITCL 0626 :(2010) 004 ITR (Trib) 0264 (Ahd-Trib) held that In the present case there was neither dissolution of firm nor transfer of assets of the firm. In this case the previous year ended on 6-1-1994 for the assessment year 1994-95 and the firm was converted into a private limited company. Before the conversion the assets were revalued at market price as on 1-4-1992. This partnership firm consists of six partners and was engaged in the business of printing and lamination. The assets of the firm was revalued at market price as on 1-4-1992 and thereafter a seventh partner was introduced with effect from 1-10-1993 by the partnership deed dated 12-10-1993. Subsequently, the firm was converted into a company by the name "G Flexipack Industries Ltd." on 6-10-1994 and the certificate of commencement of business was given on 12-1-1994 by the Registrar of Companies. These seven partners were allotted shares worth of Rs. 35 lakhs in their profit sharing ratio and the balance Rs. 97 lakhs was credited to the capital account. There was no change in profit sharing ratio in the hands of the firm. In view of the above provisions of section 45(4), the transfer of capital asset by way of distribution of capital assets on the dissolution of a firm, etc. profits or gains arising from such transfer is charged under section 45(4), which is newly inserted by the Finance Act, 1987, with effect from 1-4-1988, takes care of a situation where profits or gains arise on dissolution of firm. [Para 9] Under section 45(4), two conditions are required to be satisfied, viz., transfer by way of distribution of capital assets, and, secondly, such transfer should be on dissolution of the firm or otherwise. Once these twin conditions are satisfied then, in that event, for the purposes of computation of capital gains under section 48, the market value on the date of the transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. Where a firm becomes a limited company under Part IX of the Companies Act, 1956, section 45(4) is not attracted as the very first condition of transfer by way of distribution of capital assets is not satisfied. In the circumstances, latter part of section 45(4), which refers to computation of capital gains under section 48 by treating the fair market value of the asset on the date of transfer, does not arise. In the present case neither there is dissolution of firm nor transfer of assets of the firm, rather it is purely a case of conversion of firm into company and accordingly the provisions of section 45(4) will not apply. In view of the above discussion, the order of Commissioner (Appeals)is upheld and this issue of the revenue|s appeal is dismissed. [Para 10]

That case was related to 45(4) but no adverse inference was taken ag firm.
In view of section 49 there is no provision for taking actual cost to P ownrer which is there in case of conversion into LLP
It appears your view is correct

CA MANOJ GUPTA
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