TaxTMI 
TaxTMI 
2018 (12) TMI 190
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.... Celerity Power Co. Pvt. Ltd. 2. On the facts and 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....
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.... the 'set off' of brought forward loss of Rs. 5,79,93,084/-, had shown its returned income at Rs. Nil. Subsequently, the case of the assessee 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 ....
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....nversion took place was not to exceed Rs. 60 lac. It was observed by the A.O that the turnover of the erstwhile company in the F.Y 2009-10 was Rs. 8,87,08,620/-. 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 '....
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.... such, the claim of deduction under the said statutory provision would be available for the residual term to the new owner i.e the successor entity. The 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 erstw....
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....n the hands of the assessee. The ld. A.R in support of his aforesaid contentions relied on the judgment of the Hon'ble High Court of Bombay in CIT v. Texspin 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'....
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.... merely providing for the same in Sec. 47(xiiib) was not sufficient, and the same could safely be held to be legislative misfire. In support of his said contention 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 t....
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.... caught under the mischief of Sec. 47(xiiib) r.w.s 47A(4), therefore, there was a 'transfer' of the capital assets from the erstwhile company to the assessee 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....
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....he 'transfers' referred to in the said statutory provision would not be chargeable to income-tax under the head "Çapital gains" under Sec. 45 of the Act. In other words, though the transactions referred to in Sec. 47 are 'transfers', 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....
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.... in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place. It is further proposed that the actual cost of the block of assets in the case of the successor LLP shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion. It 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 co....
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....that the question whether vesting by operation of law would be a 'transfer' had not been decided by the Hon'ble High Court of Bombay in its decision in the case of CIT v. Texspin Engg. & Mfg. Works [2003] 263 ITR 345 (Bom). In the backdrop of the said observations, the 'AAR' had observed that they were not inclined to express a final opinion on the point of '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....
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....ul consideration to the contention of the ld. A.R, and are unable to persuade ourselves to subscribe to the same. Interestingly, we find that as Sec. 5 of the Transfer of property Act, 1882 states that "to transfer property" is to perform such act, therefore, in our considered view, the "transfer" of the property by the company to the LLP as per Clause 6(b) of the Third Schedule' would in itself 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 ....
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..... 47A(4) can be better understood by bifurcating the same into two parts viz. (i). there are profits or gains from the transfer of capital assets or intangible assets or share or shares which are not charged under Sec. 45 by virtue of conditions laid down in the proviso to Sec. 47(xiiib); and (ii). such profits or gains from the transfer of a capital asset or intangible assets or share or shares shall be deemed 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 o....
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....s compliance of the conditions contemplated in the proviso to Sec. 47(xiiib), would thus involve 'transfer' of the capital assets. However, as we have ousted the applicability of the provisions of Sec. 47A(4) to the facts of the case before us, therefore, the 'deeming fiction' therein facilitating assessing of the profits and gains arising from the transfer of the capital assets in the hands of the transferee 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 bac....
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....d as a 'transfer', cannot be construed as a fiction to the effect that the income which is not liable to be taxed under the other provisions of the chapter of 'capital gains' can be deemed to be capital gains, if the conditions contemplated in Sec. 47(xiiib) are not satisfied. In so far, for determining that as to whether on the failure to satisfy the conditions provided in Sec. 47(xiiib), the conversion 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 Ho....
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....ransferred, but it shall mean the price bargained for by the parties to the transaction. We thus in terms of our aforesaid observations are persuaded to subscribe to the view of the CIT(A), that as the assets and liabilities of the erstwhile private limited company had got vested in the assessee LLP at their 'book values', a fact which has not been negated, hence such 'book value' could only be regarded as 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 Cour....
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....ny other provision of this Act, 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: 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 lo....
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....ng to do with the 'carry forward' of losses, which is the creature of a specific statute in the form of the Income-tax Act, 1961. We are of the considered view that Sec. 72A(6A) which entitles a LLP to 'carry forward' the losses of the erstwhile private limited company, is in clear and loud terms preconditioned by a statutory requirement that the assessee should have complied with the conditions of the proviso to clause (xiiib) 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 ....
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....1) which was issued in context of Sec. 84, which corresponded to the then Sec. 80J and the present Sec. 80-IA. 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 restricted w.e.f 01.04.2007 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 not in a case 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 persu....
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....ure and the same can be filed at the appellate stage. It is also worth noting that before the Tribunal, the complete details were disclosed in respect of the production in second unit. As regards the claim under s. 80-IA(2) the statements have been found to be supported by the data and figures and the Tribunal has found that proper books of accounts were maintained and were audited and the audit reports in prescribed forms were filed." A similar view that filing 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 power....