S. H. KAPADIA, J. :- Being aggrieved by the order of the Tribunal dated 11-12-2000 in Appeal No. 5814/BOMl99, the Department has come by way of appeal under section 260A of the Income-tax Act for the Assessment Year 1996-97 with the following questions of law for our opinion.

(i). Whether on the facts and in the circumstances of the case, the Hon.

ITAT was justified in holding that the provisions of section 45(1) and (4) are not attracted even though there was transfer of assets from the firm to the newly constituted company on conversion of firm to company and part (IX) of the Companies Act, 1956?"

(ii) Whether on the facts and in the circumstances of the case and in law, the Hon. ITAT was justified in directing to allow depreciation for the year even though the W.D.V. of the block of the assets at the end of the year was NIL as per the provisions of section 32 read with section 43(6)(c)(1)(b) of the Act?"

Facts :-

2. A firm by the name M/s Texspin Engineering and Manufacturing Works was engaged in the business of manufacturing ball bearings. The said firm filed its return of income for the period 1-4-1995 upto 7-11-1995 stating that it had been thereafter converted into a Limited Company. The return of the remaining period from 7-11-1995 to 31-3-1996 was filed by the Limited Company at Ahmedabad. While examining the return of income filed by the assessee, it was observed that the assessee firm had filed its return of income upto 7-11-1995. On enquiry, the AO was informed that the Partnership Firm was converted into a Limited Company under Part IX of the Companies Act, 1956. No capital gain was shown in the return of income. Therefore, the assessee firm as asked to show cause why capital gain has not been shown under section 45(4) of the Income Tax Act. The assessee firm was also directed to submit market value of the assets for computation of capital gains under section 45(4) of the Income Tax Act. In reply, the assessee firm contended that in order to apply section 45(4), two conditions were required to be fulfilled viz. (i) dissolution of the Partnership Firm and (ii) distribution of the assets of the Partnership Firm and since, there was no dissolution of the Partnership Firm, section 45(4) was not attracted. This argument was rejected buy the AO, who took the view that there was a transfer of the capital assets by way of distribution and such transfer was on dissolution of the firm and, therefore, profits or gains from such transfer became chargeable to tax under section 45(4) of the Act. Further, for the purposes of computation of capital gains under section 48 of the Act, the AO took into account written down value as on 1-4-1995 of the assets which stood transferred in favour of the Company. Accordingly, the AO computed the capital gains on the difference between the market value and the written down value of the assets transferred to the Company to the tune of Rs. 9 lacs.

There is one more point which needs to be mentioned. During the Assessment Year in question, the assessee claimed depreciation of Rs. 27,67,0001- which was disallowed on the ground that on vesting of the assets in the Company, there was a sale. That, when the firm was converted into a Limited Company under Part IX of the Companies Act, there was a sale of assets and therefore, at the end of the Accounting Year ending 31-3-1996, no assets existed as the entire assets stood transferred and, therefore, the AO disallowed the claim for depreciation. Being aggrieved by the Assessment Order, the matter was carried in appeal to the Commissioner of Income Tax (Appeals), who confirmed the order of the AO. Being aggrieved, the assessee carried the matter in appeal to the Tribunal, which took the view on Question No.1 that section 45(4) was not applicable as there was no distribution of capital assets amongst the partners of the firm on vesting of their capital assets of the firm in the Company. That, section 45(1) was also not attracted as no con