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Facts
The assessee, an LLP formed from the conversion of a company, challenged additions made by the AO and confirmed by the CIT(A) related to the conversion. The AO made additions on account of the difference in capital reserves and asset values between the erstwhile company and the LLP, alleging violations of Section 47(xiiib) of the Income Tax Act, 1961.
Held
The Tribunal found that the issues required factual verification. The Tribunal deemed it fit to remand the issues back to the Assessing Officer for a de novo assessment, allowing the assessee to present its case and evidence.
Key Issues
Whether the conversion of a company into an LLP satisfied the conditions of Section 47(xiiib) of the Income Tax Act, and whether the additions made on account of differences in capital reserves and asset values were justified. The issue of proper opportunity for the assessee to present its case was also raised.
Sections Cited
47(xiiib), 250, 143(1), 143(2), 142(1), 143(3), 143(3A), 143(3B), 47
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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
(Assessment Year: 2018-19) PCG Jubilant Tradepharm LLP Income Tax Officer, 3(2), Thane 235, Swastik Plaza, Near Voltas Ashar IT Park, Thane (W) – 400604. Switchgear, Pokhran Road No. 2, Thane Vs. (West) – 400601. PAN/GIR No. AAVFP6387L (Appellant) : (Respondent) Assessee by : Shri. Mihir Naniwadekar (Virtually appear) Respondent by : Shri. Leyaqat Ali, SR. DR. Date of Hearing : 20.06.2025 Date of Pronouncement : 27.06.2025 O R D E R Per Kavitha Rajagopal, J M: This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals) Delhi (‘ld. CIT(A)’ for short), National Faceless Appeal Centre (‘NFAC’ for short) passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2018-19.
The assessee has raised the following grounds of appeal:
1. The Id. CIT(A) / NFAC erred in confirming addition of Rs.1,81,972 on account of conversion of erstwhile company into an LLP, without appreciating that the conversion of company to LLP was not a transfer in the eyes of law. Further, in any event, difference between the value of capital balances in the balance sheet of the company and the LLP arose only due to the Id. AO having compared the values in the balance sheet on different dates.
(A.Y. 2018-19) PCG Jubilant Tradepharm LLP 2. The Id. CIT(A) / NFAC erred in confirming addition of Rs. 15,12,688 on account of difference in asset side of balance sheet of erstwhile company and new LLP, without appreciating that the conversion of company into LLP was not a transfer in the eyes of law. Further, in any event, the difference arose due to the Id. AO having compared the values in the balance sheet on different dates.
3. The Id. CIT(A) / NFAC erred in holding that ground 1, 6 and 7 of the Appellant's appeal were 'general' and not adjudicating on the same, without appreciating that the same were pertinent and required to be adjudicated as the Id. AO had erred in bringing the relevant amounts to tax under the head 'income from other sources”
Brief facts of the case are that the assessee firm is engaged in the business of manufacturing, selling and marketing pharma recipients, specialty chemicals, fine chemicals edible coating polymers, other polymers, inputs of pharma related products, bulk drugs and chemicals, edible lake colours, addable iron oxide colour addable natural colours and other inputs for pharmaceutical, confectionery and food industries. The assessee had e-filed its return of income dated 30.10.2018, declaring total income at Rs. Nil. (loss of Rs. 1,01,850/-) and had filed revised return dated 30.11.2018, declaring income of Rs. Nil (loss of Rs. 1,01,850/-). The return of income was processed u/s. 143(1) of the Act, dated 09.04.2019. The assessee’s case was selected for scrutiny and notices u/s. 143(2) and 142(1) of the Act were issued and served upon the assessee. It is observed that the assessee firm was converted into LLP as per Section 47(xiiib) of the Act which according to the learned Assessing Officer ('ld. A.O.' for short) has not fulfilled the specify conditions as per the said provision. The ld. AO had passed the assessment order u/s. 143(3) r.w.s. 143(3A) and 143(3B) of the Act dated 12.04.2021, determining total income at Rs. 16,94,660/-, after making additions on the difference in capital reserve of the erstwhile company and the assessee firm amounting to Rs. 1,81,971/- and addition of Rs. 15,12,688/- being the deficiency in the value of (A.Y. 2018-19) PCG Jubilant Tradepharm LLP assets, in the balance sheet of the assessee firm and in the balance sheet of the erstwhile company.
Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 28.10.2024, upheld the order of the ld. AO, thereby dismissing the appeal of the assessee on the ground that the assessee has failed to substantiate its claim with supporting documentary evidences.
The assessee is in appeal before us, challenging the impugned order of the ld. CIT(A).
Ground no. 1 pertains to the addition of Rs. 1,81,972/- on account of the difference in the capital reserve of the erstwhile company and the assessee firm on conversion of erstwhile company into an LLP and ground no. 2 pertains to the addition of Rs. 15,12,688/- being the difference in the value of asset in the balance sheet of the assessee firm and the balance sheet of the erstwhile company.
The learned Authorised Representative ('ld. AR' for short) for the assessee contended that there has been no violation of condition specified in Section 47(xiiib) of the Act as there has been no transfer made directly or indirectly to any partner out of the accumulated profits standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion. The ld. AR further stated that the assessee has not claimed exemption u/s. 47(xiiib) of the Act and as such there is no violation of the said provision. The ld. AR further contended that the difference in the assets was only Rs. 1,78,753.63/- as against Rs. 15,12,688/- as determined by the ld. AO and the same is towards the depreciation charged on the fixed assets, the amount recovered out of other non-current assets, the change in cash and bank balances on (A.Y. 2018-19) PCG Jubilant Tradepharm LLP account of transactions of intervening period and the expenses incurred on LLP before conversion. The ld. AR submitted that these aspects were not looked into by the lower authorities and prayed that the same may be remitted back to the file of ld. AO for verification of the above facts.
The learned Departmental Representative (ld. DR for short) on the other hand controverted the same and stated that the assessee has failed to substantiate its claim by relevant documentary evidences.
We have heard the rival submissions and perused the materials available on record. It is observed that M/s. Pharmaceutical Coatings Private Limited (PCPL) which is the erstwhile company got converted to M/s. Pharmaceutical Coatings LLP (PCLLP) i.e., the assessee company w.e.f. 05.03.2018 and thereafter was renamed as M/s. PCG Jubilant Trade Pharm LLP w.e.f. 05.06.2018. The ld. AO observed that the assessee company has declared total sales/turnover, gross receipts of more than Rs. 60,000/- during F.Y. 2014-15 and 2016-17 which according to the ld. AO was violating the conditions specified in clause (e) of Section 47(xiiib) of the Act which should be less than Rs. 60 lacs. The ld. AO also observed that the accumulated profit of M/s. PCPL was Rs. 19,01,36,316.30/- as on the date of conversion which is on 05.03.2018 and post conversion it was Rs. 3,05,24,959.90/- which was withdrawn from partner’s current account till 31.03.2020 which again violates clause (f) of Section 47(xiib) of the Act, where no amount can be paid either directly or indirectly to any partner out of the balance of accumulated profit as on date of conversion for a period of 3 years from the date of conversion standing in accounts of the company. The ld. AO held that the (A.Y. 2018-19) PCG Jubilant Tradepharm LLP conversion of a company does not exempt the same from capital gain u/s. 47 of the Act, where the ld. AO worked out the difference in liabilities which is mentioned herein under: In the balance sheet of the erstwhile company the assessee has shown the following entries- 1. Share capital 1,00,00,000.00 2. Reserves and surplus 19,01,36,316.30 Total 20,01,36,316.30 In the balance of current assessee firm, the assessee has shown the following entries: - Partners Capital A/c Hemant P. Pradhan 93,72,000 Shilpa H. Pradhan 6,28,000 Total 1,00,00,000 Partners Current Account Hemant P. Pradhan 17,81,41,879.78 Shilpa H. Pradhan 1,18,12,464.81 Total 18,99,54,344.59 10. The ld. AO made an addition on the difference in the capital reserves of erstwhile company and the assessee firm aggregating to Rs. 1,81,972/- (20,01,36,316.30 - 19,99,54,344.59) as the firm was not allowed to withdraw the said amount from the reserves and surplus as per the provisions of Section 47(xiib) of the Act. The ld. CIT(A) upheld the said addition on the ground that the assessee has failed to substantiate its claim that the ld. AO has made a comparison of the closing balance of M/s. PCPL as on 04.03.2018 with the closing balance of M/s. PCLLP as on 31.03.2018 and worked out the difference of the same instead of comparing the closing balance of the PCPL as on 04.03.2018 with that of the opening balance of PCLLP as on 05.03.2018 ignoring the fact that there has been various other transaction which had taken place during the intervening period between 05.03.2018 to 31.03.2018 recorded in the books of accounts (A.Y. 2018-19) PCG Jubilant Tradepharm LLP of the assessee. The assessee tabulated the reason for variation in the amount of company on 31.03.2018 as compared to 05.03.2018 which is tabulated as herein under: Particulars Capital A/c. Current A/c (Rs.) Total (Rs.) (Rs.) Vested from PCPL as 1,00,00,000.00 19,01,36,316.30 20,01,36,316.30 on 05.03.2018 Introduced during the 0.00 15,750.00 15,750.00 year Net Loss 0.00 1,01,849.63 1,01,849.63 Drawings 0.00 95,872.08 95,872.08 Closing balance as on 1,00,00,000.00 18,99,54,344.59 19,99,54,344.59 31/03/2018 11. The ld. AR further stated that the reduction in the current account balance is due to charging loss of the firm to the current account without any change in the balance in the capital account of the partners and the said loss of the firm when charged to partner’s capital or current account is not withdrawal as per Section 47(xiiib) of the Act. The ld. AR further contended that the partners have withdrawn the same for personal expenses as they do not have any other business activity, where they were paid monthly remuneration of Rs. 1.50 lacs by the erstwhile company which is paid in the course of the business and not against the accumulated profit. The ld. AR relied on the decision of the Jurisdictional High Court in the case of CIT vs. Texspin Engg. & Mfg Works (263 ITR 345) and the also the decision of the Coordinate Bench in the case of Unity Care and Health Services (103 ITD 53) and in the case of Asst. CIT vs. CIT vs. Celerity Power LLP (100 taxmann.com 129).
The ld. DR controverted this and stated that the same is in violation of Section 47(xiiib) of the Act, where the ld. AO as well as the ld. CIT(A) has rightly upheld the addition (A.Y. 2018-19) PCG Jubilant Tradepharm LLP made towards the withdrawal of the said amount from the reserves and surplus to the partners’ account.
Ground no. 2 pertains to the addition made on the difference in the asset value, where the ld. AO observed that the assessee firm has shown lesser value of assets in the balance sheet when compared to that of the balance sheet of the erstwhile company amounting to Rs. 15,12,688/-. The ld. CIT(A) upheld the addition made by the ld. AO on the ground that the assessee has failed to substantiate its claim by any documentary evidences. The assessee’s claims that the difference in the asset is on account of the comparing the balance sheet of the erstwhile company as on 04.03.2018 and the LLP as on 31.03.2018 which are tabulated herein under: Particulars Balance as per Balance as per Reduction Company as on LLP as on (Rs.) 04/03/2018 31/03/2018 Fixed Assets 6,41,328.37 5,90,771.00 50,557.37 Investments 3,01,30,394.25 3,01,30,394.25 0.00 Long Term Loans & 8,87,71,705.00 8,87,71,705.00 0.00 Advances Other Non Current Assets 5,061.00 0,00 5,061.00 Current Assets 8,10,41,310.60 8,08,30,490.34 2,10,820.26 Preliminary & Preoperative 0.00 87,685,00 (87,685.00) Expenses Total 20,05,89,799.22 20,04,11,045.59 1,78,753.63 (A.Y. 2018-19) PCG Jubilant Tradepharm LLP 14. The net difference of the asset as per the assessee’s contentions is only Rs. 1,78,753.63/- and not Rs. 15,12,688/- and the reason for the difference in the asset according to the assessee is tabulated herein under: Particulars Amount (Rs) Main Reasons Fixed Assets 50,557.37 Depreciation Charged Other Non-Current 5,061.00 Amount Recovered Assets Current Assets 2,10,820.26 Change in cash and bank balances on account of transactions of intervening period from 05/03/201 8 to 31/03/201 8. Change in prepaid expenses and IDS on account of transactions of intervening period from 05/03/2018 to 31/03/2018. Preliminary (87,685.00) Expenses incurred on LLP before & Preoperative incorporation. Expenses (to the extent not written off) Total 1,78,753.63
The ld. AR for the assessee contended that the assessee was not given sufficient opportunity to establish its claim before the ld. AO and the same was also not considered by the first appellate authority. As the issues in hand requires factual verification as to whether there has been any transfer directly or indirectly to the partner’s account from the balance of accumulated profit of the company for a period of 3 years from the date of conversion and that the reason for the deficiency in the value of assets in the balance sheet of the assessee firm and the erstwhile company is due to the reasons stated by the assessee has to be reexamined in light of the contention of the assessee. For this, we deem it fit to remand all these issues back to the file of ld. AO to (A.Y. 2018-19) PCG Jubilant Tradepharm LLP verify the same and pass a de novo assessment on the merits and in accordance with law. The assessee is directed to strictly comply with the proceedings before the ld. AO. and to furnish all relevant documentary evidences in support of its claim as prayed before us. By adhering to the principles of natural justice and in the interest of justice dispensation, we hereby remand these issues to the file of ld. AO.