Whether finding that there was no distribution of assets leads to conclusion that there was no transfer of assets at all - NO: HC

THE issue before the Bench is - Whether finding that there was no distribution of assets leads to conclusion that there was no transfer of assets at all. NO is the answer.

Facts of the case

The assessee, a partnership firm, was undertaking the activity of analyzing chemical compounds and pollutants. The firm is a part of group of establishments, by name Bhagavati Ana Labs Limited. A search was conducted in the parent organization and a show cause notice was issued to the assessee u/s 158BD. Thereafter, the AO took the view that the assessee underdisclosed the sales consideration of its assets to another company, and therefore, it was liable to pay the capital gains tax. The assessee argued that the consideration for the assets was paid in the form of shares to the respective partners, however, the AO took the view that the obligation to pay capital gains tax arose on account of the transfer of capital by way of distribution of capital assets, on the dissolution of the firm. That view was upheld by the CIT(A). The Tribunal, however, held that the sale took place, before the dissolution of the firm and it is not a case of distribution of assets, contemplated u/s 45 (4) of the Act. However, the Tribunal held that even if the transaction does not fall under Section 45(4) of the Act, it would get attracted by Section 45(1) of the Act.

Having heard the parties, the High Court held that,

++ the argument on behalf of the appellant that once the case does not fall under Section 45(4) of the Act, the matter must be left at that, cannot be accepted. The finding that there was no distribution of assets does not lead to a conclusion that there is no transfer at all, particularly when it is not even disputed that the sale as such has taken place, with the participation of the appellant;

++ the second ground urged by the appellant is with reference to the manner of payment of consideration. It does not make much of difference as to whether the consideration paid in the form of money or otherwise or whether it was paid to someone other than the transferor; in the context of levy of capital gains tax. Either the transferor may receive the entire consideration directly or may instruct the transferee to pay the consideration to a third party. Either way, it would be payment to the transferor, from the point of view of Section 45 of the Act. Added to that, the consideration may be in terms of money, or in the form of an alternative property, or shares of the transferee company. What becomes the substratum, in this regard, would be the consideration, in terms of money value. Once the money value of the asset is fixed, the tax is to be paid thereon notwithstanding the fact that the actual consideration was paid in different form, albeit, to a third party. In the instant case, 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 on the one hand and the transferee company, on the other.