In the Ana Labs vs. Deputy Commissioner of Income Tax, the High Court of Andhra Pradesh held that where the assessee firm sold its assets to a company and said transaction did not fall under section 47(xiii), assessee was liable to pay capital gains tax.

Facts of the case:

The appellant was a partnership firm. It was undertaking the activity of analyzing chemical compounds and pollutants. The firm was a part of group of establishments, Bhagavati Ana Labs Limited. A search was conducted in the premises of the parent company. After the search, show cause notice under section 115BD was issued. As per the notice, the appellant was required to file return for the block period of 1988-89 to 97-98. In response to the notice, the appellant filed returns showing NIL income.

While processing of the returns, the Assessing Officer noticed that appellant sold its assets, worth Rs.33,02,349/-; the actual sale value thereof is Rs.1,12,93,389/- and that it is liable to pay the capital gains tax on Rs.79,91,040. The appellant on this argued that the transferee company had only allotted some shares to the partners of the firm and no transfer as such had taken place. The Assessing Officer held that said transaction was covered by section 45(4) and the assessee was liable to pay the capital gains tax.

Aggrieved by that, the appellant filed an appeal before the Commissioner of Income Tax (Appeals). The appeal was rejected. Thereafter, the appellant appealed to the Tribunal.

The Tribunal upheld the order of the Assessing Officer holding that even if the transaction did not fall under section 45(4), it would get attracted by section 45(1).

Aggrieved by the order, the appellant appealed to the High Court.

It was held that:

The High Court noticed that the consideration in the form of allotment of shares was paid to the partners of the appellant on its instructions. There was no direct transaction between the partners and the transferee-company.

Section 47 (xiii) states that any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualization or corporatization of a recognized stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company

Provided that—

(a) all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company;

(b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and

(d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

(e) the demutualization or corporatization of a recognized stock exchange in India is carried out in accordance with a scheme for demutualization or corporatization which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]

It was not a case of succession of the firm by the appellant firm by the transferee company, much less there was any exercise of corporatization or demutualization, which are essential to attract section 47 (xiii). The appellant is not able to demonstrate that the figures mentioned by the Assessing Officer are incorrect.

Thus, the High Court upheld the order of the AO and concluded that the said transaction was not covered under section 47 (xiii). Thus, the transaction was liable to capital gain.

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