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TaxTMI 
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2022 (6) TMI 1276
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....d 09.09.2021, we observe that the Revenue's appeal came for hearing before this Tribunal on 17.08.2020 and directions were given to the ld. D.R. to produce the assessment records and the order of the competent authority shows that the scope of limited scrutiny was large in view of the instructions of Central Board of Direct Taxes. The matter was adjourned to 01.10.2020, 01.01.2021 and 09.02.2021 to produce the assessment records. On 2nd August, 2021, the case was fixed for hearing and further adjourned with the verbal direction. In compliance thereto, the assessee has filed the Cross Objection. On going through the order-sheet dated 02.08.2021, we find that there is no specific direction by this Tribunal directing the assessee to file the Cross Objection. However, looking to the flow of events and the issue involved, we are satisfied with the assessee's submission that delay in filing the Cross Objection is not intentional and the assessee was under the bonafide belief that it was not required to file the Cross Objection. We, therefore, condone the delay of 996 days in filing of the Cross Objection and admit the same for adjudication. 3. The Revenue has raised the following grou....
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....ty premium reserve of Rs.12,87,23,000/- is to be considered as income of the LLP and accordingly added the same to the income of the assessee. The ld. Assessing Officer also disallowed the expenses at Rs.10,00,000/- and the income assessed at Rs.12,97,63,830/-. 6. Aggrieved, the assessee preferred appeal before the ld. CIT(Appeals) raising the issues on merits as well as also raising legal issue through an additional ground that the assessment order framed under section 143(3) of the Act is void, ab initio and illegal as there was no sanction to do the assessment qua the complete scrutiny. However, the ld. CIT(Appeals) did not dealt with the legal issue raised by the assessee. So far as the merits of the case are concerned, ld. CIT(Appeals) deleted both the additions made by the ld. Assessing Officer. 7. Aggrieved, the Revenue is now in appeal before the Tribunal, whereas the assessee has raised the legal ground through its Cross Objection. 8. We will first take up the legal ground raised in the Cross Objection through which the assessee has contended that the case of the assessee was selected for limited scrutiny but the ld. Assessing Officer made the additions beyond the....
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....e of NTPC Limited -vs.- CIT (1998) 229 ITR 383. 12. All the submissions and decisions relied by the ld. Counsel for the assessee only revolve around the ratio that if an Assessing Officer converts the scrutiny from limited scrutiny to complete scrutiny, the same can be done only after getting the necessary approval from the authorities prescribed under the Act. Various circulars cited by the ld. Counsel for the assessee also support this contention. 13. Now before us, the first issue is that whether the ld. Assessing Officer travelled beyond the scope of limited scrutiny or not. In case, the Assessing Officer has not travelled beyond the limited scrutiny, then the issue of getting approval from the competent authority will end and in case it is otherwise, then it needs to be examined that whether the ld. Assessing Officer took approval from the competent authority. 14. Now to examine that whether ld. Assessing Officer exceeded the jurisdiction beyond the scope provided for Limited Scrutiny, we observe that the assessee-LLP filed its first return of income in A.Y. 2015-16 on being converted from Private Limited Company to Limited Liability Partnership, which is the year und....
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....ontribution at Rs.27,00,000/-, reserve & surplus of Rs.12.88 crores (Approx.), unsecured loan of Rs.1.30 crores, investments at Rs.43.90 lakhs, loans and advances at Rs.13.97 crores (approx.) and other current assets and liabilities. In the Profit & Loss Account, only income is interest of Rs.14.29 lakhs and after claiming expenses, net profit of Rs.40,826.50 has been shown. Based on such datas and the certain parameters of the computer system of the Department, assessee's case was selected for limited scrutiny. 18. The first issue is low income in comparison to high loans/advances/investment in shares. The reason is just an indication for the ld. Assessing Officer to examine various aspects. Once the low income is to be examined, it has to be seen in consonance of the higher loans standing in the balance-sheet and in the present case, the interest income is shown only at Rs.14.29 lakhs, whereas the loans and advances are standing to the tune of Rs.13.97 crores. When the ld. Assessing Officer went on to examine this aspect of low income, he then asked the assessee about the investment made during the year because the ld. Assessing Officer wanted to see why the assessee has earne....
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....ting the case of the limited scrutiny and ld. Assessing Officer has not done complete scrutiny of the case and has restricted his scrutiny proceedings only with regard to the two reasons mentioned hereinabove for carrying out limited scrutiny. We, therefore, find no merit in the legal issue raised by the assessee in the Cross Objection. The decisions referred and relied upon by the ld. counsel for the assessee and the Instruction of the CBDT referred in the paper book could have been of any help to the assessee only if Assessing Officer has converted the scrutiny from limited to complete scrutiny, which is not the case before us. The legal issue raised in the Cross Objection filed by the assessee is dismissed. 21. Now we come to the Revenue's appeal. The first issue raised in the Revenue's appeal is that the ld. CIT(Appeals) has erred in deleting the addition for securities premium reserve of Rs.12,87,23,000/-, which is transferred by the erstwhile company to the assessee- LLP upon conversion as a Reserve & Surplus. 22. Brief facts related to the issue are that the assessee- LLP was converted from a Private Limited Company during the financial year 2014-15, i.e. the first yea....
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....d to be the difference between the value recorded in the appellant's books and the value appearing in the erstwhile company's books. It was claimed that on mere conversion of company into LLP, the entire securities premium of the company could not be brought to tax. It was submitted that even the Ld. AO was unable to justify the basis & manner of taxing the entire sum in as much as the relevant provision of the Act under which he sought to tax the entire securities premium of the LLP. 3. On giving due consideration to the facts of the case and the averments made by the Ld. AR of the appellant, I find sufficient force in the arguments put forth by him. It is noted that the erstwhile company M/s Godhuli DealcomPvt Ltd was formed in the FY 2007-08. From the financial statements of the M/s Godhuli Dealcom Pvt Ltd it is observed that the said company had assets & liabilities remained the same upon conversion. The said erstwhile company was thereafter converted by virtue of the LLP agreement dated 02.05.2014 whereby all the assets & liabilities of the erstwhile company vested with the newly formed LLP and the existing shareholders of the company became the partners of th....
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....itions as laid down in Section 47(xiiib) and in that view of the matter the transfer of assets & liabilities to the LLP was exempt and not liable to tax. It is noted that the Ld. AO in his impugned order has made various irrelevant observations with regard to the past history of the erstwhile company which has no bearing whatsoever on the tax liability of the appellant-LLP. From the above provision, it is apparent that in order to avail the benefit of exemption of Section 47(xiiib), the shareholders of the company preceding the conversion has to continue to be the partners of the LLP and their profit sharing ratio should also continue in the same proportion. In the facts involved in the present the case, this fact that the shareholders of the erstwhile company had only continued as partners of LLP remains undisputed by the Ld. AO. Instead it is noted that the Ld. AO has emphasized on irrelevant considerations such as the manner in which the shareholders purchased the shares & the nonavailability of particulars of earlier shareholders of the company to deny the benefit of exemption, which in my considered view is wholly immaterial to ascertain the compliance of the provisions of Sec....
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....hare or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 (6 of 2009): Provided that- (a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership; (b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion; (c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership; (d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of ....
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.... 52 of the Companies Act, 2013 (Chapter IV Share Capital and Debenture) deals with application of premium received on the issue of shares and the same reads as follow:- (1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a "securities premium account" and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company. (2) Notwithstanding anything contained in sub-section (1), the securities premium account may be applied by the company- (a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debenture of the company; (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the c....
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....is a transfer u/s. 2(47) of the Act and provision of section 45 of the Act needs to come into operation. 29. As far as treatment of Security Premium Reserve in the books of newly incorporated LLP is concerned, we observe that Security Premium is not accumulated profit but it is a part of share capital to the extent it was received while issuing in shares by the erstwhile Private Limited Company. Since the Private Limited Company has been converted into a LLP, the only option left for the treatment of the Security Premium Reserve is to bring it to tax in the year in which the Company is converted into LLP. Such Security Premium standing in the balance-sheet at the close of the year before being converted first needs to be brought to tax under the provision of section 56(1) of the Act and then the amount needs to be transferred to Reserve & Surplus and which will thereafter be free for withdrawal by the designated partners of the LLP as per the provision of the Act. 30. We find that the ld. CIT(Appeals) failed to examine this aspect of the Security Premium Reserve, which the ld. Assessing Officer has rightly observed in the assessment order. We also find merit in the finding of....