Section 45(1) — the law in short
What the courts have decided on section 45(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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CIT v Texspin Engg & Mfg Works
High CourtHelps taxpayer
My partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains tax on the market value of the assets. Is that right?
No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting on a Part IX conversion is not distribution: vesting takes the properties across as they stand, while distribution presupposes division, realisation and appropriation. Section 45(1) also failed, both because a firm treated as a company is a case of transmission with no counterparty and no incoming consideration, and because even if there were a transfer, full value of consideration in section 48 means what the transferor gets, not the market value of what he parts with.
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CIT v Texspin Engineering & Manufacturing Works
High CourtHelps taxpayerValidity unconfirmed
Our partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains on the market value of the assets. Is that right?
No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that neither section 45(4) nor section 45(1) was attracted. Section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting under Part IX is not distribution, which presupposes division, realisation and appropriation of the proceeds. Section 45(1) fails because there is no party and counterparty and no consideration coming to the firm: the same entity simply exchanges one cloak for another. And even if vesting were a transfer, section 48 allows only the consideration actually received or accrued, not market value, which is deemed only by section 45(4). Depreciation was also allowed.
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.