2016 (2) TMI 348 - AT - Income Tax

Appellate Tribunal: Proprietary Business to Company Conversion Qualifies for Tax Exemption

The Appellate Tribunal upheld the decision of the Commissioner of Income Tax (A), ruling that the conversion of a proprietary business into a private ... Scope of ‘transfer’ u/s 47(xiv) - whether the assessee’s transaction of converting his proprietary business into a private limited company is outside the scope of ‘transfer’ as provided under Section 47(xiv) of the Act and therefore not liable to be taxed under the head long term capital gains? - Held that:- CIT (A) has made a categorical finding in his order that the entire transaction is nothing but the conversion of assessee’s proprietorship concern as a going concern into a private limited company wherein the assessee is holding 51% of share capital with voting power immediately after conversion. The entire assets and liabilities of the assessee’s proprietorship concern are absorbed by the resultant private limited company. The assessee has also complied with the provisions of section 47(xiv) of the Act in all respects. Considering these facts which could not be controverted by the Revenue we are of the view that the entire transaction falls outside the ambit of Section-45 of the Act. Further, provisions of section 50B of the Act will not be applicable in the present case before us because this transaction is not slump sale as envisaged under the provisions of the Act. In these circumstances, we fully agree with the decision of the Ld. CIT (A) and accordingly, uphold his order. - Decided against revenue Issues:Revenue's appeal against the order of the Commissioner of Income Tax regarding the taxation of long term capital gains arising from the conversion of a proprietary business into a private limited company.Analysis:The Revenue contested the decision of the Commissioner of Income Tax (A) regarding the taxability of long term capital gains arising from the conversion of a proprietary business into a private limited company. The Revenue argued that the assessee's transaction should be considered a 'transfer' under Section 47(xiv) of the Income Tax Act, thus making it liable for taxation. The Assessing Officer had taxed the goodwill taken over by the private limited company at Rs. 3.47 crores, as it was considered a slump sale under Section 50B. However, the Commissioner of Income Tax (A) disagreed, stating that the transaction fell within the exemption provided by Section 47(xiv) as the entire business was transferred to the company, and the consideration received was only in the form of shares. The Commissioner highlighted that the assessee's shareholding in the company was over 50%, meeting the statutory requirements for exemption. Additionally, the Commissioner refuted the Assessing Officer's view that the goodwill was self-generated, explaining that it was a result of expenses capitalized in the books. The Commissioner concluded that no capital gains were applicable in this case.The Appellate Tribunal, after considering the arguments of both parties and examining the facts, upheld the decision of the Commissioner of Income Tax (A). The Tribunal agreed that the transaction did not fall under Section 45 of the Act and that Section 50B did not apply as it was not a slump sale. The Tribunal concurred with the Commissioner's analysis that the transaction qualified for exemption under Section 47(xiv) due to the transfer of the entire business to the private limited company and the compliance with shareholding requirements. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the decision of the Commissioner of Income Tax (A) regarding the non-taxability of the long term capital gains arising from the conversion of the proprietary business into a private limited company.In conclusion, the Tribunal's judgment clarified that the conversion of the proprietary business into a private limited company, meeting the conditions of Section 47(xiv) of the Income Tax Act, did not attract taxation under the head of long term capital gains. The decision emphasized the importance of examining the specific statutory provisions and factual circumstances to determine the tax implications of such transactions.