2023 (10) TMI 1052 - AT - Income Tax

Appeal partially allowed: No capital gain liability from partnership conversion; depreciation disallowed for asset transfer value.

The Tribunal's order on 5th October 2023 partially allowed the appeal for A.Y. 2009-10, ruling in favor of the assessee. The Hon'ble Bombay HC and AAR ... Short term capital gain on conversion of partnership firm into a Private Limited Company - HELD THAT:- AAR ruled in favour of the assessee that no liability towards the capital gain was attracted on the assessee acquiring the full share capital of the company. This was done through its order dated 12-03-2010. Revenue’s writ petition before the Hon’ble Bombay High Court [2016 (12) TMI 360 - BOMBAY HIGH COURT], thereby, affirming the view point of the AAR. The effect of the affirmation of the ruling by the Hon’ble High Court is that no liability is attracted towards the capital gain - whether short term or long term. Resultantly, the depreciation allowed has to be withdrawn. In view of this, Ground No.1 of the assesses’ appeal against the disallowance of depreciation on the transfer value of the asset is dismissed and Ground No.2 against the gain on transfer of technical know-how being treated as short term capital gain to the extent of Rs. 2.00 crore, as against the without prejudice claim of the assessee of the same being long term capital gain, is also dismissed as having become infructuous. The assessee’s additional ground about no liability towards capital gain is allowed. Issues involved:The judgment involves the assessment years 2009-10 and 2010-11, where the main issue revolves around the treatment of short term capital gain on the conversion of a partnership firm into a Private Limited Company under Part IX of the Companies Act, 1956.A.Y.2009-10:The assessee contested the assessment of short term capital gain on the conversion of a partnership firm into a Private Limited Company. The facts revealed that the partnership firm, M/s. Anandeya Zinc Oxides Pvt. Ltd., was succeeded by M/s. Anandeya Zinc Oxides Pvt. Ltd., a Private Limited Company. The Revenue argued that the acquisition of shares by a non-resident company violated the provisions of the Income Tax Act, leading to the imposition of capital gain tax. However, the Authority for Advance Ruling (AAR) and the Hon'ble Bombay High Court ruled in favor of the assessee, stating that no liability towards capital gain was attracted. Consequently, the disallowance of depreciation and the treatment of gain on transfer as short term capital gain were dismissed. The appeal against the disallowance of depreciation was rejected, and the additional ground about no liability towards capital gain was allowed.A.Y.2010-11:In this assessment year, the only issue raised was the disallowance of depreciation on the transfer value of assets. The judgment followed the precedent set by the Hon'ble Bombay High Court, affirming the AAR ruling, resulting in a decision against the assessee. Therefore, the appeal for the A.Y. 2010-11 was dismissed.Order:The Tribunal pronounced the order on 5th October 2023, partially allowing the appeal for A.Y. 2009-10 and dismissing the appeal for A.Y. 2010-11.