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of <h1>Conversion of partnership to company doesn't trigger capital gains tax</h1> <h3>The Commissioner of Income Tax, Goa Versus M/s Umicore Finance Luxemborg, C/o M/s Anandeya Zinc Oxides Pvt. Ltd.</h3> The Commissioner of Income Tax, Goa Versus M/s Umicore Finance Luxemborg, C/o M/s Anandeya Zinc Oxides Pvt. Ltd. - TMI Issues Involved:1. Jurisdiction of the AAR.2. Applicability of Section 47(xiii)(d) and Section 47A(3) of the Income Tax Act, 1961.3. Determination of capital gains tax liability upon conversion of a partnership firm into a private limited company.4. Validity of the AAR's ruling on the non-applicability of capital gains tax.Detailed Analysis:1. Jurisdiction of the AAR:The Petitioners contended that the application under Section 245(N) of the Respondents was not maintainable, arguing that the Respondents, not being parties to the transaction, could not seek an advance ruling under clauses (i), (ii), and (iii) of Section 245(N)(a). The AAR observed that the application was maintainable under sub-clause (i) of Section 245N(a), which allows for a determination by the Authority in relation to a transaction undertaken or proposed by a non-resident applicant. The AAR held that the capital gains tax issue had a direct and substantial impact on the non-resident applicant's business, thus falling within the scope of an advance ruling.2. Applicability of Section 47(xiii)(d) and Section 47A(3) of the Income Tax Act, 1961:The Petitioners argued that the Respondent-Company violated Section 47(xiii)(d) by prematurely transferring shares, thus nullifying the capital gains tax exemption. Section 47(xiii) exempts transfers of capital assets upon the succession of a firm by a company, provided certain conditions are met, including maintaining a minimum shareholding for five years. The AAR noted that while the first part of clause (d) was satisfied, the second part was not, due to the premature transfer of shares. However, the AAR concluded that the deeming provision under Section 47A(3), which presupposes a transfer, could not be invoked as no profit or gains arose from the conversion.3. Determination of Capital Gains Tax Liability:The AAR found that no capital gains accrued or arose at the time of the conversion of the partnership firm into a private limited company. The assets and liabilities were taken at book value, and there was no revaluation or profit realization. The AAR referenced the case of CIT v/s Texspin Engg. & Mfg. Works, which clarified that converting a firm into a company under Part IX of the Companies Act is akin to transmission, not transfer. Consequently, the conversion did not attract capital gains tax.4. Validity of the AAR's Ruling:The AAR concluded that the conversion did not result in any capital gains, and thus, the non-compliance with clause (d) of Section 47(xiii) did not trigger capital gains tax liability. The High Court upheld the AAR's findings, noting that the assets' revaluation at the time of conversion was not disputed. The Court also observed that the assessment of the new company and partners post-conversion did not raise any capital gains tax issues. The Petitioners' contention that the exemption ceased due to the violation of clause (d) was rejected, as no capital gains were payable at the time of incorporation.Conclusion:The High Court found no reason to interfere with the AAR's ruling, as the Petitioners' contentions were duly considered and addressed. The Petition was rejected, affirming that no capital gains tax was applicable on the conversion of the partnership firm into a private limited company.
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