COMMISSIONER OF INCOME TAX Vs. RITA MECHANICAL WORKS

JUDGEMENT

(1.) This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act") against the order dated 28-4-2000, Annexure A-3, passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (in short "the Tribunal") in ITA No, 2/Chd/1999 for the assessment year 1995-96, has been filed by the revenue-Appellant.

(2.) Facts as narrated in the appeal are that M/s Rita Mechanical Works, Ludhiana, the Respondent-firm, which during the relevant year was engaged in the business of manufacturing sewing machines and its spare parts, filed its return for the assessment year 1995-96 declaring income of Rs. 54,31,400, on 31-10-1995. The Respondent re-evaluated its assets on 31-3-1994 and on the basis of the report of valuer enhanced the value of the assets to the tune of Rs. 3,27,38,045, i.e. Rs. 2,51,49,229 in respect of land and building and Rs. 75,88,816 in respect of plant and machinery. The profit accruing on the above amount was credited to the capital accounts of the partners as per their profit sharing ratios. The existence of the Respondent, however, came to an end on 31-3-1995 and the co-partners of the firm made a deed of settlement dated 28-3-1995 whereby they mutually settled their holdings of the subscribed capital amongst themselves as members of the joint stock company and also agreed to take over certain number of shares of the newly constituted limited company in the name and style of M/s Rita Machines (India) Ltd. as per agreement dated 29-3-1995. No separate dissolution deed was prepared or executed and the Respondent stood dissolved with effect from 31-3-1995. The transfer of capital assets took place by way of distribution within the meaning of Section 45(4) of the Act, and the profit and gain arising therefrom, were liable to be charged as capital gains.

(3.) The assessing officer after examining the entire situation framed assessment under Section 143(3) of the Act, vide order dated 11-3-1998 (Annexure A-l) at an income of Rs. 3,96,94,499 and while doing so, the assessing officer observed that as the assets and liabilities of the old firm had been taken over by the newly established company, there was relinquishment/extinguishment of right by the firm which is to be treated as transfer in terms of Section 2(47) of the Act. It was further observed that under the circumstances, the transaction of taking over the assets of firm by the company and allotment of shares to the erstwhile partners do constitute "transfer" chargeable to tax under Section 45 of the Act. The assessing officer, after invoking provisions of Section 45(4) read with Section 50 of the Act, charged short-term capital gain on an amount of Rs. 3,27,32,628 and made disallowance on account of depreciation of Rs. 7,38,042 on the ground that the firm ceased to exist on 31-3-1995.