TaxTMI 
TaxTMI 
2018 (12) TMI 190
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....nd in the circumstances of the case and in law. the Ld. CIT(A) has erred in not confirming the value of consideration received as computed by the A.O for the purpose of Capital Gain u/s 47A(4) of the Income Tax Act, 1961. 3. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in allowing the assessee's claim of deduction u/s 80-IA of the I.T. Act. 1961 without appreciating that the assessee has failed to furnish form 1OCCB during the course of assessment proceedings, despite being required to furnish the same by the A.O. 4. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the A.O is restored. 5. The appellant craves leave to amend or alter or add a new ground which may be necessary." The assessee on the other hand has raised before us the following cross-objections : "Cross-Objection 1 : 1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO of charging capital gains under section 45 of the Act in the hands of the successor assessee LLP by invoking the provisions of section 47A of the Act. 2. The cross-objector pray....
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.... was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that the assessee had acquired the status as that of a LLP with effect from 28.09.2010, and resultantly its financial year under consideration was spread over the period 28.09.2010 to 31.03.2011. It was observed by the A.O that prior to 28.09.2010 the assessee undertaking was being run by a private limited company viz. M/s Celerity Power Pvt. Ltd. The A.O noticed that for the earlier period i.e 01.04.2010 to 27.09.2010 relevant to the A.Y 2010-11 the 'return of income' was filed in the name of M/s Celerity Power Pvt. Ltd. In the backdrop of the aforesaid facts, it was noticed by the A.O that from 28.09.2010 the entire business, assets and liabilities of the aforesaid company were transferred to the assessee viz. M/s Celerity Power LLP. The A.O was not persuaded to subscribe to the contention of the assessee that the conversion of the company viz. M/s Celerity Power Pvt. Ltd. into M/s Celerity Power LLP did not involve any 'transfer' of the property, assets, liabilities etc. Further, the alternate submissions of the asses....
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....8,620/-. The CIT(A) observed that as the assessee had failed to satisfy clause (e) of the proviso to Sec. 47(xiiib), thus, it was caught under the mischief of Sec. 47(xiiib) r.w.s 47A(4). However, the CIT(A) was in agreement with the claim of the assessee, that as there was absence of any consideration involved in the transaction of conversion of the private limited company into a LLP, therefore, the machinery for computation of 'capital gain' contemplated in Sec. 48 was rendered as unworkable. Still further, the CIT(A) was also of the view that as the entire undertaking of the erstwhile company got vested into the LLP, therefore, no separate cost other than the 'book value' could be attributed to the individual assets and liabilities. On the basis of his aforesaid observations, the CIT(A) concluded that the 'book value' could only be regarded as the 'full value of consideration' for the purposes of Sec. 48 of the Act. In sum and substance, the CIT(A) was of the view that even though there was a 'transfer' of the assets from the erstwhile private limited company to the assessee LLP by virtue of the provisions of Sec. 47(xiiib), however, as th....
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....CIT(A) while concluding as hereinabove took support of the CBDT letter F.No. 15/5/63 (A-1) which was issued in context of Sec. 84, and corresponded to the then Sec. 80J and the present Sec. 80IA. Further, it was also observed by the CIT(A) that the embargo made available on the statute by sub-section (12A) of Sec. 80IA, which w.e.f 01.04.2007 restricted the entitlement of the successor company towards claim of deduction under the said statutory provision, was applicable only in the case of an amalgamated/demerged company, and had no application in a case where a private limited company was converted into a LLP. On the basis of his aforesaid deliberations the CIT(A) partly allowed the appeal. 5. The revenue being aggrieved with the order of the CIT(A) has carried the mater in appeal before us. Further, the assessee is also before us as a cross-objector. The ld. Departmental representative (for short 'D.R') took us through the facts of the case. It was submitted by the ld. D.R that as the sales in the business of the erstwhile company was more than Rs. 60 lac in the period contemplated under clause (e) of Sec. 47(xiiib), therefore, the A.O had rightly held that the conversio....
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....spin Engg. & Mfg. Works [2003] 263 ITR 345 (Bom) and that of the Hon'ble High Court of Gujarat in DCIT v. R.C Kalathia & Co. [2016] 381 ITR 0180 (Guj). The ld. A.R rebutting the observations of the lower authorities submitted, that as the assessee in the present case had neither claimed nor was ever allowed the exemption under Sec. 47(xiiib), therefore, the issue of withdrawal of the same by invoking Sec. 47A would not arise at all. In order to drive home his aforesaid contention the ld. A.R relied on the judgment of the Hon'ble High Court of Bombay in the case of CIT v. Umicore Finance Luxemborg [2016] 76 taxmann.com 32 (Bom). The ld. A.R taking support of the judgment of the High Court in the case of Umicore Finance Luxemborg (supra) submitted, that even otherwise Sec. 47(xiiib) r.w Sec. 47A cannot be construed to read a fiction, to the effect that the income which is not liable to be taxed as capital gains can be deemed as 'capital gains'. The ld. A.R further referring to Sec. 58(4) and the Third schedule' to the Limited Liability Partnership Act, 2008 submitted, that on conversion from a private limited company to LLP, all tangible and intangible property of....
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....ention the ld. A.R relied on the judgments of the Hon'ble High Court of Bombay in Elphinstone Spg. & Wvg. Mills Co. Ltd. v. CIT [1955] 28 ITR 811 (Bom) and The Deccan Cement Products Co. (1957) 8 STC 100 (Bom). The ld. A.R further submitted, that the CIT(A) after duly appreciating the facts of the case had rightly allowed the claim of deduction of the assessee under Sec. 80-IA of the Act. It was submitted by the ld. A.R that as the assessee in its revised 'return of income' had disclosed a loss, therefore, for the said reason it had not raised a claim of deduction under Sec. 80-IA. It was submitted by him that the Audit report in Form No. 10CCB was filed by the assessee in the course of the appellate proceedings before the CIT(A). 7. The ld. D.R rebutting the aforesaid contentions of the counsel for the assessee submitted, that as the conversion of the company into a LLP involved two separate and distinct entities, thus, it was incorrect on the part of the ld. A.R to state that in the absence of co-existence of the 'transferor' and 'transferee' the transaction could not be brought to tax under the head 'Çapital gains'. The ld. D.R relied ....
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....ee LLP. However, it was further observed by him that as the assets and liabilities of the erstwhile company had got vested with the assessee LLP at the 'book value', thus as the difference between the transfer value and the cost of acquisition of the said assets was Nil, therefore, the machinery provision for computing the 'capital gains' under Sec. 48 was rendered as unworkable,. The assessee has assailed before us the order of the CIT(A) to the extent he had concurred with the A.O, and had concluded that the conversion of the erstwhile company into the assessee LLP involved a 'transfer' within the meaning of the charging section i.e Sec. 45 of the Act. 10. We find that Sec. 47(xiiib) of the Act, as had be made available on the statute by the Finance Act, 2010 w.e.f 01.04.2011 reads as under : "47. Transactions not regarded as transfer.- Nothing contained in section 45 shall apply to the following transfers,- (xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the....
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.... however, the same subject to cumulative satisfaction of the conditions contemplated in the respective sub-sections would fall beyond the sweep of chargeability to income-tax as 'Capital gains' under Sec. 45 of the Act. 11. We thus are of the considered view that the transaction involving conversion of a private limited company or unlisted public company to a LLP as contemplated in Sec. 47(xiiib) would though be a 'transfer', however, the same on cumulative satisfaction of conditions (a) to (f) of the proviso to Sec. 47(xiiib) would not be chargeable to 'capital gains' under Sec. 45 of the Act. Our aforesaid view stands fortified from a perusal of the 'Memorandum' explaining the Finance Act, 2010, which reads as under (relevant extract) : "Conversion of a private company or an unlisted public company into a limited liability partnership (LLP): The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the same lines as applicable to partnership firms. Section 56 and section 57 of the Limited Liability Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter referred as co....
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.... is also provided that the cost of acquisition of the capital asset for the successor LLP shall be deemed to be the cost for which the predecessor company acquired it. Credit in respect of tax paid by a company under section 115JB is allowed only to such company under section 115JAA. It is proposed to clarify that the tax credit under section 115JAA shall not be allowed to the successor LLP. These amendments are proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. [Clauses 8, 11, 13, 18, 19, 20, 22, 29]" 12. We find from a perusal of the 'memorandum' explaining the purpose and intent behind the enactment of sub-section (xiiiib) to Sec. 47, that prior to its insertion, the 'transfer' of assets on conversion of a company into a LLP attracted levy of "capital gains" tax. The legislature in all its wisdom had vide the Finance Act, 2010 made Sec. 47(xiiib) available on the statute, with the purpose that the transfer of assets on conversion of a company into a LLP in accordance with the Limited Liability Partnership Act, 2008, subject to fulfilment of the conditions contemplated ....
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....9;transfer', and in the said context had stated as under : "No final opinion is expressed in regard to the question whether on the registration of company under Part IX of the Companies Act, there was 'transfer' of capital assets." Thereafter, the 'AAR' had concluded that as no profit or gain had arisen at the time of conversion of the partnership firm into a company, hence there were no 'capital gains' chargeable to tax in the hands of the assessee. We find that the aforesaid order of the 'AAR' had thereafter been approved and held to be a reasoned order by the Hon'ble High Court of Bombay in CIT v. Umicore Finance Luxmeborg [2017] 244 Taxman 43 (Bom). 13. In so far, in the case before us, the issue therein involved pertains to conversion of a private limited company to a LLP. As per Sec. 56 of the Limited Liability Partnership Act, 2008, a private limited company may convert into a limited liability partnership in accordance with the provisions of Chapter X of the Limited Liability Partnership Act, 2008 and the Third Schedule'. We find that the term "convert", in relation to a private company converting into a limited liability par....
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....f satisfy the requirement of Sec.1 of the Transfer of property Act, 1882. Be that as it may, we are of the considered view that the scope of the term "transfer" has to be read in context of the Income-tax Act, 1961, and cannot be narrowed down to that defined in the Transfer of Property Act, 1882. In this regard, it would also be relevant and pertinent to point out that unlike the conversion of a private limited company into a LLP (as is the issue before us), in the case of succession of a partnership firm by a company as per Part IX, there is only "vesting" of the property of the partnership firm in the company from the date of its registration as per Sec. 575 of the Companies Act, 1956, which reads as under: "575. Vesting of property on registration - All property, movable and immovable (including actionable claims), belonging to or vested in a company at the date of its registration in pursuance of this part, shall, on such registration, pass to and vest in the company as incorporated under this Act for all the estate and interest of the company therein" In the backdrop of our aforesaid observations it can safely be concluded that conversion of a company into a LLP as in the....
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....med to be chargeable to tax of the successor limited liability partnership or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with. We are of the considered view that from a plain literal interpretation of the aforesaid statutory provision i.e Sec. 47A(4), it can safely be gathered that the same comes into play only for the purpose of withdrawing an exemption earlier availed by an assessee under Sec. 47(xiiib), and deeming the same as the profits and gains of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with. Our aforesaid view is fortified from a perusal of the 'Notes on Clauses' of the Finance Act, 2010, which in context of the aforesaid statutory provision, reads as under (relevant extract): "12.4 The Act has been amended to provide that if the conditions stipulated above are not complied with, the benefit availed by the company or by the shareholders, shall be deemed to be the profits and gains of the successor LLP or the shareholder of the prede....
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....sferee i.e the assessee LLP would also meet the same fate and thus, would not be principally applicable in the case before us. In the backdrop of the aforesaid facts, the issue involved in the present case boils down to the chargeability of the profits and gains arising from the 'transfer' of the capital assets in pursuance to conversion of a private limited company to the assessee LLP. We are of the considered view that as per Sec. 45 r.w Sec. 5 of the Act, the profits or gains arising from the 'transfer' of the capital assets effected in the previous year shall be principally chargeable to income-tax under the head "Capital gains" in the hands of the 'transferor', as its income of the previous year in which the transfer took place. In the backdrop of our aforesaid deliberations, we are of the considered view that the "Capital gains", if any, arising from the 'transfer' of the capital assets on conversion of the private limited company to the assessee LLP, de hors the applicability of Sec. 47A(4), could not have been principally brought to tax under Sec. 45 as 'Capital gains' in the hands of the assessee LLP. Further, we find that as per Sec....
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....of the company into a LLP would involve any 'capital gain', the charging provision in Sec. 45 has to be looked into. Admittedly, the conversion of the assets and liabilities of the erstwhile company to the assessee LLP in the case before us took place as per the Limited Liability Partnership Act, 2008 at the 'book value' itself. Rather, as the entire undertaking of the erstwhile company got vested into the LLP, therefore, no separate cost other than the 'book value' was attributable to the individual assets and liabilities. As per the settled position of law, the provisions of Section 48 which provides for the mode of computation of the capital gains has to be read as an integral part of the charging provision in Section 45 of the Act. The Hon'ble High Court of Bombay in the case of CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345 (Bom), has observed that the said two sections viz. Sec. 45 and Sec. 48 are to be read together, as the charging section and the computation section constitute one package. Also, the Hon'ble Supreme Court in the case of CIT v. B.C Srinivasa Setty [1981] 128 ITR 294 (SC) and Navin Jindal & Ors. v. ACIT [2010] 320 ITR 708....
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....s the 'full value of consideration' for the purpose of computation of 'capital gains' under Sec. 48 of the Act. The Grounds of appeal Nos. 1 and 2 raised by the revenue are dismissed. 17. In so far, the cost of acquisition of the assets of the erstwhile company are concerned, as per Sec. 49(1)(iii), where the capital assets becomes the property of the assessee by succession, inheritance or devolution, the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property had acquired the same. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Bombay in the case of CIT v. Manjula J. Shah [2013] 355 ITR 474 (Bom). In the said order, it was observed by the Hon'ble High Court in context of a capital asset that was acquired by the assessee by way of a gift from her daughter [one of the mode of acquisition under Sec. 49(1)], that if one reads Explanation 1(i)(b) to Sec. 2(42A) together with ss. 48 and 49, it becomes absolutely clear that the object of the statute is not merely to tax the 'capital gains' arising on transfer of a capital asset acquired by an assessee by incurring the cost....
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....ly: Provided that if any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in which such conditions are not complied with." On a perusal of the aforesaid statutory provision i.e Sec. 72A(6A) as had been made available on the statute by the Finance Act, 2010 w.e.f 01.04.2011, it stands revealed that where a private limited company is succeeded by a LLP, then the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation was effected, and other provisions of this Act relating to 'set off' and 'carry forward' of loss and allowance for depreciation shall apply accordingly. However, there is an innate requirement that the condition laid down in the proviso to clause (xiiib) of section 47 are fulfi....
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....) of section 47. In the backdrop of our aforesaid observations, we are of the considered view that as the claim of the assessee LLP as regards 'carry forward' of the loss of the erstwhile private limited company, de hors satisfaction of the conditions laid down in the proviso to clause (xiiib) of section 47, clearly militates against the aforesaid statutory provision, thus, the same cannot be accepted. Our aforesaid view is further fortified from a perusal of the 'Memorandum' explaining the Finance Act, 2010, which in context of the issue under consideration, reads as under (relevant extract): "It is also proposed to allow carry forward and set-off of business loss and unabsorbed depreciation to the successor LLP which fulfils the above mentioned conditions." We thus in terms of our aforesaid observations find no infirmity in the order of the CIT(A), who in our considered view, after taking cognizance of the fact that the assessee had failed to satisfy the conditions laid down in the proviso to clause (xiiib) of section 47 had rightly declined the 'carry forward' of the losses of the erstwhile company by the assessee LLP. The order of the CIT(A) to the sa....
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....se where a private limited company was converted into a LLP. 21. We have given a thoughtful consideration to the issue before us, and after necessary deliberations find ourselves as being in agreement with the view taken by the CIT(A) who has allowed the claim of deduction of the assessee under Sec. 80-IA of the Act. On a perusal of the ground of appeal raised by the revenue in context of the issue under consideration, we find that the order of the CIT(A) has been assailed before us only on the ground that he has erred in allowing the assesses claim of deduction under Sec. 80-IA, without appreciating that the assessee had failed to furnish 'Form 10CCB' during the course of the assessment proceedings. We are unable to persuade ourselves to accept the said contention of the revenue. On a perusal of the order of the CIT(A), it stands revealed that as the assessee was under a bonafide belief that it was eligible to 'set off the losses of the erstwhile private limited company and, therefore, as upon setting off of such losses its total income was Nil, thus for the said reason had not raised a claim of deduction under Sec. 80-IA in its 'return of income' for the year....
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....of an 'audit report' is procedural and directory in nature, and the same could also be validly filed by the assessee at the appellate stage, had been taken by the Hon'ble High court of Gujarat in CIT v. Gujarat Oil and Allied Industries [1993] 201 ITR 325 (Guj) and the Hon'ble High Court of Punjab & Haryana in CIT v. Jaideep Industries [1989] 180 ITR 81 (P&H). In so far, the admission of the 'additional evidence' by the CIT(A) is concerned, we find that the Hon'ble High Court of Bombay in the case of Smt. Prabhavati S. Shah v.CIT [1998]231 ITR 1 (Bom), has held that if a documentary evidence is necessary to decide the controversy, the CIT(A) should admit it or call for it pursuant to its powers under Sec. 250(4) of the Act. We find that in the case before us, the CIT(A) observed that as the assessee remained under a bonafide belief that it was eligible to 'carry forward' and 'set off the losses of the erstwhile company, was thus for the said reason prevented by sufficient cause from producing the 'audit report' before the A.O within the meaning of sub-clauses (b) & (c) of sub-rule (1) of Rule 46A of the Income-tax Rules, 1962. In the ....