2016 (2) TMI 840 - AT - Income Tax

Partnership to Company Conversion qualifies for Section 80IB Deduction

Upkar International Pvt. Ltd. Versus Income Tax Officer, New Delhi

The ITAT held that the conversion of partnership firms into a limited company and subsequent business operations did not constitute a reconstruction of ... Deduction u/s 80IB - Held that:- We have no hesitation in holding that this is not a case of reconstruction as alleged by the Department. We are unable to concur with the findings of the authorities below and while allowing the grounds of appeal, we direct that the assessee shall be entitled to claim deduction u/s 80IB of the Income Tax Act in the assessment year under consideration. - Decided in favour of assessee Issues Involved:1. Whether the CIT (Appeals) erred in upholding the Assessing Officer's (AO) finding that the assessee was not entitled to deduction under section 80IB of the Income Tax Act, 1961.2. Whether the conversion of partnership firms into a limited company and subsequent business operations constituted a 'reconstruction' of the old business, thus disqualifying the assessee from the deduction under section 80IB.Detailed Analysis:Issue 1: Entitlement to Deduction under Section 80IBThe assessee appealed against the CIT (Appeals)' order, which upheld the AO's decision to disallow the deduction under section 80IB. The AO had previously disallowed the deduction based on information that the assessee did not fulfill the essential conditions required for claiming the deduction. The CIT (Appeals) initially allowed the deduction, but the Revenue challenged this decision before the ITAT. The ITAT remitted the matter back to the AO to examine if the conditions for the deduction were met. Upon reassessment, the AO reiterated that the assessee was not entitled to the deduction, arguing that the newly formed company was a reconstruction of the old business with old machinery, thus violating the provisions of section 80IB(2).Issue 2: Reconstruction of BusinessThe assessee argued that the conversion from a partnership firm to a limited company under Part IX of the Companies Act, 1956, did not constitute a reconstruction of the business. The business was taken over as a going concern with all assets and liabilities, and shares were allotted to the partners equivalent to their capital in the firm. The assessee contended that there was no change in the business operations or ownership rights, and thus, it was not a reconstruction. The Department, however, maintained that the change in ownership structure (from equal profit-sharing partners to directors with different shareholding patterns) and the use of old machinery constituted a reconstruction, disqualifying the assessee from the deduction under section 80IB.Judgment Analysis:Conversion under Part IX of Companies Act:The ITAT examined the nature of the conversion under Part IX of the Companies Act, 1956, noting that the conversion of a partnership firm into a company involves the transfer of all assets and liabilities to the new company without any change in the business operations. The ITAT referred to various judicial precedents, including the cases of Tech Books Electronic Services (P) Ltd. vs ACIT and Kumaran Systems (P) Ltd. vs ACIT, which held that such conversions do not constitute a reconstruction of the business.Reconstruction Definition:The ITAT analyzed the definition and implications of 'reconstruction' in the context of section 80IB. Citing the judgment in CIT Vs. Gaekwar Foam and Rubber Company Ltd., the ITAT noted that reconstruction involves the continuation of the same business by substantially the same persons. The ITAT concluded that the conversion of the partnership firms into a limited company did not alter the business operations or its identity, and thus, did not amount to reconstruction.Conclusion:The ITAT held that the conversion of the partnership firms into a limited company and the subsequent business operations did not constitute a reconstruction of the old business. The ITAT found that the assessee fulfilled the conditions for claiming the deduction under section 80IB and directed that the assessee be entitled to the deduction for the assessment year under consideration.Final Order:The appeal of the assessee was allowed, and the order was pronounced in the open court on 24/02/2016.