ORDER
M.V.R. Prasad, J.M.
1. These three appeals are filed by the assessee. They are directed against separate orders of the CGT(A)-III, Hyderabad, dt. 28th Jan., 2000, for the asst. yr 1992-93. As common points are involved in these appeals, they are being disposed of by this common order, for the sake of convenience.
2. Smt. A Uma Devi is wife of Dr. A.J. Prasad, and Smt. Kavita Prasad is. their daughter. They were having shares in Hyderabad Batteries, a closely-held limited company, and its subsidiary. They formed a partnership witnessed by a deed dt. 11th Nov., 1991, and they introduced their various sharesholdings in various companies, such as Hyderabad Batteries as their capital. The following shares, at face value, were brought into the firm, M/s Beaver Engineering, at the inception of the firm :
dr A.J. Prasad
Rs.
HBL Ltd.
23,16,000
HBL Aircraft Batteries Ltd.
1,000
Plumac Power Systems Ltd.
2,000
Nagadhara Engg. Ltd.
20,300
23,39,300
Mrs. A. Uma Devi
HBL Ltd.
2,91,000
HBL Aircraft Batteries Ltd.
1,000
Pilazeta Batteries Ltd.
10,000
3,02,000
Ms. Kavita Prasad
HBL Ltd.
2,59,000
2,59,000
Grand Total
29,00,300
The shares allotted to the original three partners in the profits/losses of the firm are as under :
Dr. A.J. Prasad 80 Percent Mrs. A. Uma Devi 10 Percent Ms. A Kavita Prasad 10 Percent It may be observed that the profit-sharing ratio is more or less proportionate to their capital contributions.
3. Subsequently, there was a change in the constitution of the firm on 26th Dec., 1991, and four more persons, individuals, were taken as partners. This partnership of seven persons was converted into a limited company, which was registered on 30th March, 1992, under Part-IX of the Companies Act, 1956. By virtue of this conversion, the firm, M/s Beaver Engineering changed its legal form and has become M/s Beaver Engineering (P) Ltd. and all the assets belonging to the firm as on the date of incorporation of the company have become vested in the company by virtue of Section 575 of the Companies Act. The
partners of the firm got the shares of M/s Beaver Engineering (P) Ltd. against the actual credit balance appearing in their accounts in the books of the firm.
4. For the valuation date, 31st March, 1991, the three appellants disclosed for wealth-tax purposes, the break-up value of their shares in various companies, like M/s HBL Ltd. which were introduced, as mentioned before, by way of capital into the firm, M/s Beaver Engineering. For the subsequent valuation date, i.e., 31st March, 1992, they disclosed the value of their equity holding in M/s Beaver Engineering (P) Ltd. at cost price or face value. Thus, while as on 31st March, 1991, the value of the shares of the three appellants in M/s HBL Ltd. and its subsidiaries, were shown at break-up value and they were subsequently introduced by way of capital into M/s Beaver Engineering firm, at Rs. 2,75,70,289, the value of the collective holdings of the three appellants in M/s Beaver Engineering (P) Ltd. as on 31st March, 1992, was shown only at cost at Rs. 29,00,300. The huge difference between the value of the shareholdings of the three appellants as on 31st March, 1991, and the value of the shares as on 31st March, 1992, prompted the AO to initiate the gift-tax proceedings under Section 4(1)(a) of the GT Act. He found that there is a substantial difference between the break-up value of the shares held by the three appellants in Hyderabad Batteries Ltd. and other companies; and their face value, at which they were introduced as capital into the firm, M/s Beaver Engineering. The details of the shares introduced by way of capital by the three partners, and the values at which they were introduced are furnished in para 2 above, and they were also noted by the CGT(A) in his detailed order in the case of Dr. A.J. Prasad, in para 2(ii) thereof. The break-up value of those shares in as under :
“1.Dr. A.J. Prasad :
Name of the company
No. of shares
Face value of shares (Rs.)
Break-up value as per WT
Rs.
HBL Ltd.
2316
1,000
9608
2,22,52,128
HBL Aircarft-Batteries Ltd.
100
10
9.7
970
Nagadhara Engineering Ltd.
2030
10
.10.38
21,071
Plumac Power Systems Ltd.
200
10
2. A. Uma Devi :
HBL Ltd.
291
1.000
9608
27,95.928
HBL Aircraft Batteries Ltd.
100
10
9.7
970
Pilazeta Batteries Ltd.
1.000
10
10.75
10,750
28,07,648
3. A. Kavita Prasad .
HBL Ltd.
259
1,000
968
24,88,472
Total (1+2+3)
2,75,70,289″
5. As mentioned above, the AO has brought the difference between the breakup value of the shares offered for wealth-tax purposes as on 31st March, 1991, and the face value of the shares, at which they were introduced into the firm M/s Beaver Engineering as capital, to tax as deemed gift under Section 4(1)(a) of the
GT Act, The differences so brought to tax in the cases of these three appellants are as under :
“Dr. A.J. Piasad
Name of company
No. of shares
Break-up value
Total breakup
value
Transfer value
Difference
HBL
2,316
9608.00
2,22,52,128
23,16,000
1,99,36,128
NEL
2,030
10.38
21,071
20,300
771
4,346
2,22,73,199
23,36,300
1,99,36,899
Sffit. A. Uma Devi
HBL
291
9608.00
27,95,928
2,91,000
25,04,928
PEL
1,000
10.75
10,750
10,000
750
1,291
28,06,678
3,01,000
25,05,678
Ms. A. Kavita
HBL
259
9608.00
24,88,472
2,59,000
22,29,472
259
24,88,472
2,59,000
22,29,472….”
The above differences of Rs. 1,99,36,899 in the case of A.J. Prasad; of Rs. 25,05,678 in the case of Smt. A. Uma Devi and of Rs. 22,29,472 in the case of Ms. A. Kavita were brought to tax as deemed gift under Section 4(1)(a) of the GT Act.
6. When the matter reached the CIT(A), in the course of a remand report dt. 4th Nov., 1999, filed before the CIT(A), the AO made an volte face and contended that there was deemed gift on account of the transfer of shares from the firm, M/s Beaver Engineering, to the company, M/s Beaver Engineering (P) Ltd. He gave up the earlier stand that the deemed gift was on account of introduction at face value of the shares of the three appellants into the firm as their capital contributions, and took up the stand that it was by way of transfer of assets to the limited company. M/s Beaver Engineering (P) Ltd. on the conversion of the earlier firm, M/s Beaver Engineering, under Chapter-IX of the Companies Act, as mentioned hereinabove. In other words, he contended that the deemed gift was the difference between the break-up value of the shares of M/s Beaver Engineering (P) Ltd. and their face value. He also invoked, both in the assessment orders and in the remand report, the decision of the apex Court in the case of McDowell & Co. Ltd, v. CTO (1985) 154 ITR 148 (SC) and contended that the entire scheme of floating a firm initially and its subsequent conversion was only with a view to avoid wealth-tax by the three appellants in question, and capital gains by the firm. The CGT(A) agreed with the AO and held that the conversion of the firm into a limited company, as mentioned before, and the issue of shares of the company to the three appellants involved a deemed gift, as contended by the AO.
7. Before us, the learned counsel for the assessee assailed the orders of the Revenue authorities from various angles. Firstly, it is mentioned that the AO was completely off the mark in thinking that the decision of the apex Court in the case of Sunil Siddhaithbhai v. GIT (1985) 156 ITR 509 (SC) which was relied on before him, was not applicable to the facts of the
case, simply because there is an amendment in the provisions of Section 4(1)(a) in terms of which, the value of the property transferred has to be determined in the manner laid down in Schedule II of the GT Act. The provisions of Section 4(1)(a), after the said amendment, to the extent relevant for our purpose, reads as under :
4. “Gifts to include certain transfers–(1) For the purpose of the Act :
(a) where property is transferred otherwise than for adequate consideration, the amount by which the value of the property as on the date of the transfer and determined in the manner laid down in Sch. II, exceeds the value of the consideration shall be deemed to be a gift by the transferor;
Provided…..”
By the said amendment by the Finance (No. 2) Act, 1991 w.e.f. 1st April, 1992, the underlined words (italicised in print) in the above extract, were substituted for the words ‘market value of the property at the date of the transfer’.
8. The AO observed on p. 5 of his order that contribution of an asset by a partner to a firm is a transfer of property. He also mentioned that the apex Court in the cited case of Sunil Siddharthbhai (supra) and other High Courts in similar cases have held that the consideration for such a transfer is unascertainable until the dissolution of the partnership, and, therefore, it is not possible to determine the adequacy of the consideration received for the transfer of the asset. He, however, held that the said decision of the apex Court is not applicable in the present case because of the above amendment to Section 4(1)(a). His observations in this context are as under:
“The above observations were given by the Supreme Court and other High Courts, considering the wording used in the provision of Section 4(1)(a) before 1st April, 1992. However, w.e.f. 1st April, 1992, the value of the property as on the date of transfer can be determined very well according to the procedure laid down in Schedule-II. Schedule. II provides that the value of an unquoted shares in any company other than an investment company shall be determined in the manner set out in Sub-rule (2). The Sub-rule (2) of Rule 5 provides method of determining of value of the equity shares on the basis of break-up value of unquoted equity shares. Further an amount equal to 80 per cent of break-up value so determined shall be the value of unquoted equity shares for the purposes of this Act.
16. From the above it would be clear that from 1st April, 1992, the value of the property transferred can very well be determined. Therefore, the provision of Section 4(1)(a) whenever applicable can be applied.”
In the light of the above observations, the AO proceeded to hold that the benefit of the said decision of Supreme Court in Sunil Siddharthbhai (supra) cannot be extended to the assessee, and accordingly, he brought the difference between the break-up value of the shares transferred to the firm and their face value credited in the books of the firm as deemed gift under Section 4(1)(a). The learned counsel for the assessee assailed the stand of the AO as totally invalid. He mentioned that even after the said amendment of Section 4(1)(a), while the value of the asset transferred has to be ascertained in terms of Sch. n, the value of the consideration received for the transferred asset still remains unascertainable in the light of the decision of the apex Court in Sunil Siddharthbhai (supra). The AO has not made any attempt to determine the consideration received for the
assets transferred, and actually, in the light of the said decision of the apex Court, such consideration remains unascertainable; and so long as the consideration remains unascertainable, it is not possible to hold that the consideration received was inadequate; and without such a finding of inadequacy of consideration received, the AO has no jurisdiction at all to assume deemed gift in terms of Section 4(1)(a) of GT Act.
9. Next, the learned counsel for the assessees contended that when the CGT(A) came to the conclusion that there was no transfer to the firm, which was the basis for the assumption of a deemed gift, by the AO in his order, he should have simply deleted the additions, instead of trying to defend the order of the AO on a consideration which was alien to the assessment order, like that there was a transfer of assets by the appellants through the firm, M/s Beaver Engineering to the company, viz. M/s Beaver Engineering (P) Ltd. This was not at all the stand of the AO in the assessment orders in question. The learned counsel referred to a saving in Malayalam which poses the question ‘when the handle and the blade are removed, what is left in the knife ?’ When the AO gave up the case of transfer of assets to the firm, the learned counsel queried as to what is left in the assessment orders in question. The change of the stand by the AO during the remand report knocked off the bottom of the assessment orders and so, it is contended that the CIT(A) should not have gone into the question whether the transfer of assets to the company, as mentioned above, involved a deemed gift.
10. Even if the transfer of assets to the company has to be considered, it is contended that it does not take the case of the Revenue far. The question still remains as to what exactly is the consideration received for the shares of Hyderabad Batteries Ltd. etc. held by the appellants, which were transferred to the company, M/s Beaver Engineering (P) Ltd. as its assets, through the medium of a dissolved firm. In fact, the appellants secured the shares of M/s Beaver Engineering (P) Ltd. in return for the shares of Hyderabad Batteries Ltd. etc. which were held by them earlier if the shares of Hyderabad Batteries, etc. are valued by break-up value method, the same procedure should be adopted to ascertain the value of the shares of M/s Beaver Engineering (P) Ltd. allotted to the appellants on the dissolution of firm. If such procedure is adopted, the value of consideration would equal the value of the assets transferred and so, there would not be any deemed gift at all. The learned counsel for the assessee conceded that the appellants erred in returning the value of the shares of M/s Beaver Engineering Co.. Ltd. as on 31st March, 1992, at face value instead of break-up value. It is, however, explained that this is an error committed by the three appellants in question, while filing their wealth-tax returns for the asst. yr. 1992-93. That error, however, cannot give a handle to the Department to saddle the appellants with the imposition of tax in relation to deemed gifts, as done by the AO. If there is an understatement of wealth as on 31st March, 1992, it is simply a case for the Revenue for making proper wealth-tax assessment. It is thus contended that the observations of the AO that the appellants have adopted a ruse to avoid wealth-tax is baseless. It is simply a case of committing an error in the filing of the wealth-tax return for the asst. yr. 1992-93, and it involved no ruse at all. Adverting to the comment of the AO
that the firm, M/s Beaver Engineering has sought to avoid capital gains tax, by getting itself dissolved and getting it converted into a limited company, the learned counsel for the assessee pleaded that if there is any escapement of capital gains tax, which is doubtful, it is a case only for starting proceedings against the firm, to levy tax in relation to correct capital gains. But, that does not arm the Revenue to saddle the appellants with deemed gifts. It is also argued that the action of the AO in invoking the decision of the apex Court in the case of McDowell (supra) is also misconceived because the assessee has not adopted any colourable device with a view to evade tax. It is explained that M/s Hyderabad Batteries Ltd. in which the three appellants held controlling/substantial interest executed some defence contracts, and so, it was not a correct medium for them to do consultancy work, which Dr. A.J. Prasad wanted to undertake. So, the appellants were forced to float the firm, M/s Beaver Engineering to undertake consultancy work. But, as the American clientale of the firm wanted to deal only with a corporate entity, the firm had to be dissolved and converted into limited company. It is contended that the AO never questioned the assessee as to the exact commercial exigency that prompted the conversion of the firm into a limited company, and without such interrogation, be came to the conclusion that the firm was a bogus entity. In the circumstances, the decision of the apex Court in the case of McDowell (supra) was applied on the basis of that conclusion. He contended in short that the ratio of the Supreme Court decision in McDowell (supra) has been wrongly applied.
11. The learned Departmental Representative on the other hand, relied on the orders of the Revenue authorities and contended that the appellants have floated a bogus firm, and got it converted into a limited company, only with a view to avoid wealth-tax of the three appellants and the capital gains tax pf the firm.
12. We see no basis for the deemed gifts brought to tax by the AO in the cases of the three appellants. We are in entire agreement with the contentions of the learned counsel for the assessee that the decision of the apex Court in the case of Sunil Siddharthbhai (supra) clearly applies to the facts of the case. The appellants herein have introduced their assets by way of capital into the firm, M/s Beaver Engineering. The assets being shares in a specified limited company, have been introduced at face value. That does not mean that the consideration received by them is inadequate. The apex Court observed, considering similar circumstances in the case of Sunil Siddharthbhai (supra), as per the relevant portion of the headnote as follows :
“Where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of Section 45 of the IT Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest.
The consideration for the transfer of the personal assets is the right which accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with his retirement from the partnership, to get the value of his
share in the net partnership assets as on the date of the dissolution or retirement after deduction of liabilities and price charges. The credit entry made in the partner’s capital account in the books of the partnership does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner’s share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate before hand what will be the position in terms of monetary value of a partner’s share on that date. As the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his consideration to its capital cannot fall within the terms of Section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in Section 45, such a case must be regarded as falling outside the scope of capital gains taxation allegation.
…….”
From the above remarks of the apex Court, it is clear that when the personal assets of the partner are introduced by way of capital into a firm, there is clearly a transfer, but the consideration received for the transfer cannot be evaluated. The credit entry made in the partners’ capital account does not represent the true value of the consideration. It is only a notional entry. The mistake committed by the AO is to take the notional entry as representing the value of the consideration received for the assets introduced by the partners into the firm as their capital contributions. The AO ignored the decision of the apex Court in the case of Sunil Siddharthbhai (supra), on the basis that the amendment to Section 4(1)(a) of the GT Act has changed the situation. We have already referred to the said amendment. The said amendment prescribes a specified procedure for ascertaining the value of the asset instead of going by the market value. The amendment enjoins the adoption of its value as determined in Schedule II of the GT Act. This is only one limb of the computation required to invoke the provisions of Section 4(1)(a). The other limb is to quantify the consideration received and to compare the consideration received with the value of the asset as determined under Sch. II. It has to be seen that the said amendment has in no way dispensed with the condition of quantifying the consideration received to arrive at a finding of its adequacy or inadequacy. If the consideration can not be evaluated, it goes without saying that there can not be a finding that the said consideration was either adequate or inadequate. It must be held that the consideration received is unascertainable in the light of the said decision of the apex Court and we have already extracted the relevant portion of the
headnote of the judgment. So, we are of the view that the assessee is clearly entitled to be extended the benefit of the decision of the apex Court in the case of Sunil Siddhaithbhai (supra). Possibly, having become aware of this weakness in his stand, the AO made a volte face in the course of proceedings before the CGT(A) and shifted his stand to say that there is an element of deemed gift because of the transfer of the assets not. to the firm, but to a limited company as mentioned hereinabove. We are of the view that once the very basis of the assessment order is gone, the CGT(A) ought to have allowed the relief on this ground alone. He, however, opted to uphold the assessment order on altogether a different ground. The question now is, whether even on this alternative ground, we can hold that there are deemed gifts. Again, we find merit in the contention of the learned counsel for the assessees that even assuming that what has to be considered is the transfer of assets to the limited company, there is no basis for coming to the conclusion that the said transfer of assets to the limited company through the medium of dissolved firm involved any deemed gift. If the value of the assets transferred, viz., shares in Hyderabad Batteries Ltd., etc. are to be valued as per break-up value method, similar procedure has to be adopted for valuing the consideration received for the transfer, i.e, the equity shares in M/s Beaver Engineering Co. received by the three appellants. For this proposition, we need not go by any further than the recent decision of the Supreme Court in the case of Reva Investment (P) Ltd. v. CGT (2001) 249 ITR 337 (SC), wherein the earlier decision of the Hon’ble Gujarat High Court in that case reported in CGT v. Reva Investment (P) Ltd. (1999) 239 ITR 224 (Guj) has been reversed. In the impugned orders before us, the CGT(A) relied on the decision of the Hon’ble Gujarat High Court in Reva Investments (supra). That was a case, where the assessee was allotted some shares of a limited company for the transfer of jewellery to the said company. The question was with regard to method of valuation of the shares of the limited company, viz., whether the jewellery should be taken into account or it should be excluded for arriving at the value of the shares as per break-up value method. Reversing the view taken by the Hon’ble Gujarat High Court, Hon’ble Supreme Court held that the jewellery should be included for arriving at the value of the shares. As per the relevant portion of the headnote, the apex Court observed as under :
“Held, reversing the decision of the High Court, that since the subsidiary companies had no other asset, whatever was the value of the jewellery as determined by the Department was in fact the value of the shares transferred by the subsidiaries to the assessee. The real value of the shares was the market value of the jewellery viz., Rs. 13,91,350.
Section 4(1)(a) has to be construed in a broad commercial sense and not in a narrow sense. If the transaction in values transfer of certain property in lieu of certain other property received, then the process of evaluation of the two items of property should be similar and if, on such evaluation it is found that there is appreciable difference between the value of the properties then the transaction will be taken as ‘deemed gift’. It is to be found that the transaction was on the inadequate consideration and the parties deliberately showed the valuation of the two properties as the same to evade tax. Such a conclusion cannot be
drawn merely because according to the AO there is some difference between the valuation of the property transferred and the consideration received.”
In the light of the above decision of the apex Court, it is clear that to ascertain the adequacy of the consideration received by the three appellants herein in return for the transfer of the assets to the limited company, the shares allotted to the three appellants by M/s Beaver Engineering (P) Ltd. have to be valued on the same break-up value method adopted to value the transferred assets in question. On this basis, the consideration received will be equal to the value of the assets transferred. So there is no inadequacy of consideration received, so as to attract the deeming provisions of Section 4(1)(a) of the GT Act.
13. The stand of the AO that the floating of the firm, M/s Beaver Engineering, and its conversion into a limited company is to avoid wealth-tax in the hands of the three appellants, has no substance. As rightly admitted by the learned counsel for the assessee, the appellants should have returned the value of the shareholdings in M/s Beaver Engineering (P) Ltd. as on 31st March ,1992 on break-up value method, and not at their cost of face value. This is a mistake committed by the three appellants in the filing of their wealth-tax returns, and it is for the AO to make the correct wealth-tax assessment. That does not however, lead to the conclusion that the floating of the firm, M/s Beaver Engineering, and its subsequent conversion into a limited company, was only for the purpose of avoiding wealth-tax liability in the hands of the appellants M/s Beaver Engineering as a firm, came into existence from 1st April, 1991, though the deed was executed only on 11th Nov., 1991. So, as on 31st March, 1991, the assessee were holding only shares in Hyderabad Batteries Ltd. and their subsidiaries, which were duly returned for wealth-tax purposes on the basis of break-up value method. By the next valuation date, viz. 31st March, 1992, the above firm got converted into a limited company, and so, as on that date, viz., 31st March, 1992, the holdings of the three appellants herein were only the shares in the said limited company, which were duly offered for wealth-tax assessment, but incorrectly, at cost or face value. As already mentioned, this mistake in the mode of returning the value of equity shares held by the three appellants does not lead to the conclusion that the firm itself was a ruse. We have already indicated the commercial considerations that prompted the floating of the firm initially, and its subsequent conversion into a limited company. We need not traverse this ground again. The alternative allegation that the firm was dissolved and converted into a limited company only to avoid capital gains tax in the hands of the firm also does not seem to have any basis. As contended by the learned counsel for the assessee, in the light of the decision of the jurisdictional High Court in the case of Vali Pattabhirama Rao and Anr. v. Sri Ramanuja Ginning and Rice Factory (P) Ltd. and Ors. (1986) 60 Comp Cas 568 (AP) a copy of which is filed before us, there is a statutory vesting of the assets of the firm in the limited company. When a firm is converted into a limited company under Section 275 of the Companies Act, there is automatic statutory vesting of the assets into the company, and no conveyance is required. The relevant observations of the jurisdictional High Court as comparing the provisions of the present Companies Act, 1956, with the corresponding provision of Indian Companies Act, 1913, are as under :
“The word “company” occurring in Section 263 is not a company registered under the Act. It is used in the sense of a group, assembly or AOP. In fact, throughout the Act the word “company” was used in several sections in the general sense of AOPs. In fact, Section 11 of the present Companies Act (s. 4 of the previous Act) itself which enacted the prohibition of associations exceeding a certain members for carrying on trade starts saying that no company or association or partnership consisting of more than ten members shall be formed. Section 253 of the previous Act corresponds to Section 565 of the present Act. Section 565(1)(b) of the present Act corresponds to Section 253(1)(ii) of the 1913 Act, which permits any company otherwise duly constituted according to law consisting of seven or more members to be registered as a company. A partnership must be one such. This is made clear by the provisions of Section 255 of the 1913 Act (present Act Section 567) and Section 256 of the 1913 Act (present Act Section 568) whereunder a deed of partnership has to be filed before the registrar before seeking the registration. Hence, a partnership which was (Part-9) of the present Act) and the vesting is provided by Section 263 of the 1913 Act (s. 565 of the present Act). The provision is mandatory and there will be statutory vesting in the corporation so incorporated under the provisions of the Companies Act. The registrar is bound to give a certificate of registration under Section 262 (present Section 574) which is a conclusive proof of incorporation, vide Section 36 of the present Act that corresponds to Section 24 of the previous Act. Hence, it is clear that no conveyance is necessary when a partnership is converted and registered as a company. However, it is not possible to acquire such title statutorily under this section if the previous firm purports to convey title to the company in which event a separate deed of conveyance is necessary. Thus, we hold that if the constitution of the partnership firm is changed into that of a company by registering it under Part 9 of the present Act (Part 8 of the previous Act), there shall be statutory vesting of title of all the property of the previous firm in the newly incorporated company without any need for a separate conveyance. A similar view was taken in Ramadundary Ray v. Syamendra Lal Ray ILR (1947) 2 Cal 1.”
As the vesting of the assets of the firm in the limited company in terms of Section 574 and Section 575 of the Companies Act, 1956, is statutory, it appears that there is no transfer involved on the conversion of the firm into a company. Consequently, as no transfer is involved, there is no liability to capital gains tax, on the firm, M/s Beaver Engineering, on its conversion into a limited company. So, the observations of the AO that the floating of the firm and its conversion are only a ruse to avoid capital gains tax on the part of the firm, seem to oe without substance. At any rate, if there is any liability to capital gains tax on the firm, it is for the AO to initiate appropriate proceedings in this regard in the case of the firm. Further, as rightly contended by the learned counsel for the assessee, and as we have already mentioned, there is no material at all to hold that either the floating of the firm or its subsequent dissolution and conversion into a limited company, is a ruse adopted to avoid either wealth-tax liability in the cases of the three appellants or capital gains tax liability in the case of the firm. So, we are of the view that the decision of the apex Court in the case of McDowell. (supra) is not at all attracted to the facts of the present case.
14. Further, as contended by the learned counsel for the assessee before us, to hold that the floating of the firm, M/s Beaver Engineering and its dissolution and conversion into a corporate entity, are only a ruse on the part of the appellants, and thus to invoke the ratio of the apex Court in the case of McDowell (supra), is self-defeating for a gift-tax assessment, we agreed with the following remarks of the learned counsel for the assessee in his written submissions filed before us :
“Actually, invoking McDowell ratio is self-defeating for a gift-tax assessment. The assessment requires a transfer and Section 4(1)(a) requires that the transfer is for inadequate consideration. If McDowell is invoked the logical conclusion would be that there is no transfer at all, since this is only a device. If there is no transfer, there is no gift or deemed gift.”
The learned counsel for the assessee, further, urged crisply that the AO holds on the one hand that the firm is bogus; and on the other that it is avoiding capital gains tax. He called it a case of double speak. We are inclined to agree.
15. The learned CGT(A) referred to the concept of pith and substance of the transaction. The learned counsel for the assessee mentioned that this is a concept used in the context of legislative competence, and has no application in the context of commercial dealings. Again we agree with the learned counsel.
16. The CGT(A) observed in the impugned order, that according to the AO, the transfer was not to the firm, but to the company, M/s Beaver Engineering (P) Ltd. We have gone through the assessment orders, and we do not find any basis for this conclusion of the first appellate authority. On the other hand, it is evident that according to the AO, the transfer he has in mind while invoking the provisions of Section 4(1)(a) of the GT Act, was the transfer of the assets to the firm. His conclusions in para 25 of his orders of assessment, read as under :
“25. In view of the above discussion, it would be clear that there was an element of deemed gift in transfer of the share capital of the assessee in the company, M/s H.B. Ltd. as a capital contribution into a firm as a partner. The assessee has transferred his share holding at par value whereas value of the property transferred as per Schedule II of GT Act was much more high as determined below. Accordingly, the provision of Section 4(1)(a) of GT Act, 1958 is applicable.”
In the light of the above categorical finding of the AO, it is futile for the CGT(A) to pretend that the AO, while invoking the provisions of Section 4(1)(a) of the Act, had in mind the transfer of assets to the limited company, and not to the firm.
17. As we have based our decision on the judgments of the apex Court and jurisdictional High Court, we do not find it necessary to refer to the ratio of any of the decisions relied upon by the learned counsel for the assessee or referred to by the Revenue authorities. To our mind, the decisions relied upon by the Revenue authorities have no application to the facts of the present cases. To put the matters simply, the appellants herein had, as on 31st March; 1991, certain shares in Hyderabad Batteries Ltd. and its subsidiaries. As on 31st March, 1992, they ceased to hold those shares, but the said shares are substituted by their holdings in M/s Beaver Engineering (P) Ltd. The values of
both the sets of shares, if valued on the same break-up value method, would more or less match with each other. In such a situation, where is the scope for any element of gift or deemed gift by the appellant-donors to any body or any entity” It should be remembered that the shares the appellants had in the firm, M/s Beaver Engineering, were proportionate to their capital contributions. Same is the position with regard to their subsequent shareholdings in M/s Beaver Engineering (P) Ltd. So, there cannot be any allegation of inadequate consideration, so as to attract the provisions of Section 4(1)(a) of the GT Act.
18. For the foregoing reasons, we find merit in the present appeals of the assessees, and the impugned assessments have no legs to stand. They are accordingly cancelled.
19. In the result, all the three appeals of the assessees are allowed.