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Facts
The assessee, a private limited company, converted into an LLP. The Assessing Officer (AO) treated the conversion as a transfer, attracting capital gains tax under Section 45 of the Income Tax Act, 1961, by invoking Section 47A(4) due to alleged violation of conditions in Section 47(xiiib). The Commissioner (Appeals) upheld the AO's order.
Held
The Tribunal held that Section 47A(4) is for withdrawing an exemption already availed, not for judging initial eligibility. Since the assessee did not claim exemption under Section 47(xiiib), Section 47A(4) was wrongly invoked. The Tribunal also found that while the conversion is a transfer, the computation of capital gains becomes unworkable due to a 'Nil' difference between the book value of assets and liabilities.
Key Issues
1. Whether Section 47A(4) can be invoked to deny exemption for capital gains when exemption was not initially claimed under Section 47(xiiib)? 2. Whether the conversion of a private limited company to an LLP constitutes a transfer attracting capital gains tax under Section 45?
Sections Cited
45, 47(xiiib), 47A(4), 48, 49, 170, 2(47)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
ORDER Per: Smt. Beena Pillai, J.M.: The present appeal arises out of order dated 28/11/2024 passed by National Faceless Appeal Centre (NFAC), Delhi for Assessment Year 2018-19 on following ground of appeal:
1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) has erred in confirming the addition of Rs. 14,58,72,150/- made by learned AO applying section 45 of the Income Tax Act, 1961 (the Act) to conversion of a private limited company into a limited liability partnership (LLP).
2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) has erred in confirming action of learned AO of applying provisions of section 47A(4) of the Act stating that there is violation of condition of section 47(xiiib) ignoring the fact that neither appellant LLP nor the erstwhile private limited company has claimed exemption u/s 47(xiiib) of the Act.
3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) has erred in upholding the action of the learned AO that the conversion of private limited company into LLP would be a taxable transfer chargeable to tax under section 45 of the Act on the ground that conditions laid down under section 47(xiiib) of the Act are not complied with.
4. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) failed to consider that no consideration was received by the private limited company and accordingly the charging provisions of section 45 of the Act would not apply due to the inapplicability of computation provisions under section 48 of the Act.
5. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals)/learned AO both have erred in taking the value of assets without considering the value of liabilities as taxable capital gains.
6. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) (NFAC) has erred in not giving direction to learned AO to reduce the cost of acquisition in computing capital gain.
7. Without prejudice to the above, the conversion of private limited company into LLP in lieu of interest in the LLP given to the shareholders is case of "slump exchange" and therefore, not chargeable to tax.
Without prejudice to the above, section 50B ought to have been invoked and since the undertaking has been transferred at book value, the book net worth would be the fair value of consideration and the cost of acquisition resulting in NIL income.
The assessment order dated 16.04.2021 is bad in law and without jurisdiction having passed under section which is no longer in existence.
The impugned addition is bad in law as the same has been made in the PAN AAGFI7779A of LLP and not as successor in interest of erstwhile company.
11. The appellant craves leave to add, to alter, to amend or to withdraw any or all the grounds of appeal on or before the hearing.”
Brief facts of the case are as under:
AY: 2018-19 ISC Specialty Chemicals LLP 2. The Assessee M/s. ISC Specialty Chemicals LLP was incorporated on 13/06/2017 upon conversion of ISC Specialty Chemical Pvt. Ltd. as per Section 56 of the Limited Liability Partnership (herein after referred to as LLP Act) Act, 2008 The erstwhile private limited company was incorporated to set up manufacturing facility of specialty chemicals and was under the process of setting up its operation and no business activity was carried out till the date of conversion. For the purpose of manufacturing of specialty chemicals, the company acquired tangible assets intangible assets and some asset development was under Capital work in progress and the same were backed by the loans from directors and share capital. 2.1.Assessee submitted that, the prior to the conversion into LLP the erstwhile private limited company filed its return of income with Nil income and did not claim anyexemption us 47 (xiiib) of the Act. Upon the conversion of erstwhile private limited company into LLP, all tangible movable immovable and intangible property, as also, all assets interest, right, privileges, liabilities and obligations, in effect whole of the undertaking was passed to and vested in the LLP, the assessee in the year under consideration. 2.2. Assessee submitted that, theassesseefor the instant year filed its tax return on 19/09/2018 declaring the total income at Rs. Nil 2.4.Order u/s.143 (3) of the Income Tax Act was passed on 16/04/2021 by the National e-Assessment Centre Delhi, wherein addition was made to total income of the assessee, of Rs. 14,58,72,150/- u/s. 45 of the Act.
AY: 2018-19 ISC Specialty Chemicals LLP 2.3 From the details filed by the assessee, the Ld.AO noted that, the assessee violated provisions of section 47(xiiib)of the Act, on conversion of company into LLP, as the LLP did not fulfill all conditions mentioned therein in order to claim exemption from capital gain tax. The Ld.AO noted that, the total value of assets as appearing in the books of account of the erstwhile private limited company amounting to Rs. 14,58,72,150/- exceeds Rs. 5 crores, the condition of section 47(xiiib) stands violated. Thus, the Section 47A(4) comes into play and thereby the value of assets so vested would be regarded as transfer, within the meaning of Section 45 of the Act and subjected to tax as capital gain. Whereas, as per the facts, of the case the exemption benefit of section 47(xiiib)wasnever availed. Section 47A(4) has application only when any of the condition mentioned under section 47(xiiib) is violated. Thus, it pre-supposes the claiming of exemption under section 47(xiiib). Therefore, where exemption under Section 47(xiiib) has not been claimed application of Section 47A(4) is not warranted. Aggrieved, by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A). 3.1 Before the Ld.CIT(A) the assessee submitted that, it had never claimed benefit u/s. 47(xiiib) and therefore, Section 47A(4) had no application to the present facts of the case. The assessee without prejudice also submitted that, even if a transfer was to be assumed to have taken place, then as the assets was transferred as an undertaking on a going concern basis of the company, no separate cost other than the book value was AY: 2018-19 ISC Specialty Chemicals LLP attributed to the individual assets and liabilities of the erstwhile company. Thus, on transfer of capital assets from the erstwhile private limited company to the assessee by virtue of the provisions of Section 47(xiiib)the book value of assets transferred as full value of consideration for the purpose of computation of capital gains under Section 48 of the Act and the Cost u/s 49 will be the book value in the hands of erstwhile private limited company. 3.2.It was submitted that, sincethe assets and liabilities have been vested at the book value the difference will be ZERO and therefore, there is no capital gain in the hands of assessee. Since the difference between the transfer value and the cost of acquisition is Nil, for computing capital gains, the machinery provision becomes unworkable. After, considering various submissions of the assessee the Ld.CIT(A) observed and held as under.
4. I have examined the assessment order, the submissions made by the appellant and the judicial decisions relied upon by the parties. All grounds of appeal
have been discussed together. 4.1 I am in agreement with the view of the Ld.AO in this case.
6. In the assessee's case, there is a violation of condition No.7 provided in section 47(xiiib) of the Act. The asset of the Company as on 12/06/2017 as per the balance sheet of the company were at Rs.14,58,72,149/- which is in clear violation of condition No.7 as per the provisions of Section 47(xiiib) of the Act, which states that the total value of assets as appearing in the books of account of the Company in any of the previous three years does not exceed Rs.5 crores. Thus, the assessee failed to satisfy clause (7) provided under Section 47(xiiib) of the Act, and it is caught under the mischief of Section 47(xiiib) r.w.s.47(4) of the Act. 4.2 The legislative intention for keeping a cap on asset value of Rs.5 crores for allowing Companies to convert into LLP is promote small companies so that they do not spend time and energy in regulatory compliance. A company needs to comply with so many regulations in comparison to an LLP. The asset value of the appellant is more than 5 crores. Hence, the Ld.AO is right in taxing the amount as capital gain. 4.3 The appellant has contended that it has not claimed any benefit. The fact that, it has transferred the amount of asset in book value to the LLP that itself is the benefit. On this issue the Ld.AO has given the following finding:- "Further, regarding the assessee's contention that claims the LLP has not claimed any exemption under section 47(xiib) of the Act, here it is relevant to point out that the department has not proposed to disallow any exemption claimed by the assessee. On the contrary, as the assessee has not offered such capital gain required to be charged u/s. 45 of the Act for taxation as it has failed to satisfy the conditions provided under section 47(xiiib) of the Act, it was proposed to calculate assessee's capital gain on transfer of the assets of the erstwhile company to LLP. If one has to go with the assessee's submissions, section 47(xiiib) will become unworkable." 4.4 The assessee has furnished one case in support of its claim. The facts of that case, is completely different. Hence, it cannot have any persuasive value in this case.” Aggrieved, by the order of the Ld.CIT(A) the assessee is in appeal before this Tribunal.
The Ld.AR at the outset raised various submissions on following issues: “1. Some important issues involved: a. Whether conversion of a "Private Limited Company" into a "Limited Liability Partnership" ('LLP) under the Limited Liability Partnership Act. 2008, is a transfer under the Income-tax Act, 1961 ('the Act') so as to attract section 45(1) of the Act? b. Whether such conversion entails any consideration to be received by the company? c. If the answers to the above are in positive, then how to compute capital gains? d. Whether section 170 of the Act can apply to tax the successor LLP when there is no business carried on by the predecessor and the successor as on the date of succession? 4.1 Before, we analyse above issue, it is necessary to consider primaryadmitted facts that lead to the addition in the hands of the assessee.
AY: 2018-19 ISC Specialty Chemicals LLP ISC speciality Pvt. Ltd. was converted into LLP,the assessee before this Tribunalas on 13/06/2017, u/s.56 of the LLP Act. All the assets and liability of the erstwhile company got vested in the books of the assessee at book value. It is also an admitted fact that, as on 21/06/2017 the company ceased to exits and in lieu of the share of the shareholders,interest in the capital account in the assessee in same proportion as there shareholding were given in the status of partners. The assessee claimed that conversion of company into an LLP u/s.56 of the LLP Act would not amount to transfer within the meaning of section 2(47) and therefore no capital gain can be brought to tax.
4.2 The Ld.AO after verifying the above facts, came to the conclusion that assessee did not fulfil all the mandatory conditions u/s. 47(xiiib)and therefore, the assessee can claim no benefit as per section 47A(4). The Ld.AO thus invoked section 47A(4) to the present facts of the case which is the year of conversion. At this juncture, it is noteworthy to mentioned that the provisions of sub-clause(xiiib)u/s. 47 and sub clause (4) u/s. 47A was inserted by Finance Act, 2010 with effect from 01/04/2011.
4.3 Nowcoming back to the issues raised by the Ld.AR reproduce here in above,a query was raised by the bench, as to why,these were raisedto consider whether the assessee satisfies the requirement u/s.47(xiiib) of the Act, in order to, claim exemption from capital gain u/s. 45 of the Act. 4.3.1The Ld.AR brought to notice of this Bench, decision of Co- ordinate Bench Hon’ble Mumbai, Tribunal in case of ACIT vs. AY: 2018-19 ISC Specialty Chemicals LLP ClerityPower LLPreported in (2018) 100 taxman.com 129. He submitted that, in the said decision Hon’ble Tribunal opined that a transaction involving conversion of a private limited company or unlisted public company to an LLP would amount to “transfer” within the meaning of section 2(47) of the Act. The Ld.AR has furnished written submission during the course of the hearing on this issue which is taken on record. 4.4 In order to analyse the arguments raised by the Ld.AR, it is necessary to analyse the decision of this Hon’bleTribunalin case of ACIT vs. ClerityPower LLP(supra) that is sought to be held as per incurium by the Ld.AR placing reliance of various decisions rendered under the LLP Act. 4.4.1. We have perused the decision of this Hon’ble Tribunalin case of ACIT vs. ClerityPower LLP(supra) in great detail in the light of applicable provisions. The specific observation of this Tribunal is as under:
“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 company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a company into an LLP has definite tax implications. Transfer of assets on conversion attracts levy of capital gains tax. Similarly, carry forward of losses and of unabsorbed depreciation is not available to the successor LLP. It is proposed that the transfer of assets on conversion of a company into an LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain conditions. These conditions are as follows: (i) the total sales, turnover or gross receipts in business of the company do not exceed sixty lakh rupees in any of the three preceding previous years; (ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company; (iii) no consideration other than share in profit and capital contribution in the LLP arises to partners; (iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion; (v) all assets and liabilities of the company become the assets and liabilities of the LLP; and (vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion. 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. It is also proposed that if the conditions stipulated above are not complied with, the benefit availed by the company shall be deemed to be the profits and gains of the successor LLP chargeable to tax for the previous year in which the requirements are not complied with. It is also proposed that the aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed, 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]"
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 therein, shall not be regarded as a 'transfer' for the purposes of Sec. 45 of the Act. Insofar, the reliance placed by the ld. A.R on the judgment of the Hon'ble High Court of Bombay in the case of CIT v. Texspin Engg. & Mfg. Works (supra) is concerned, the same in our considered view is distinguishable on facts. In the case before the Hon'ble High Court, the issue was in context of a partnership firm being treated as a company under the statutory provisions of Part-IX of the Companies Act. It was observed by the Hon'ble High Court that the case before them was as that of a succession of a firm by a company. In context of the aforesaid issue, it was observed that on a firm being treated as a company under Part IX of the Companies Act, there was a statutory vesting of the properties in the company as the firm is treated as a limited company. It was further observed, that on vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is now treated as a company, after a given date. Further, it was observed that when a firm is treated as a company under Part IX, it is a case similar to transmission of assets. In this regard, it would be relevant to point out that that the Hon'ble High Court of Bombay in a subsequent decision in the case of CIT v. Umicore Finance Luxmeborg [2016] 76 taxmann.com 32/244 Taxman 43 (Bom.) has approved an order of the 'Authority for Advance Ruling' (for short 'AAR') passed in the case of Umicore Finance Luxembourg, In re [2010] 323 ITR 25/189 Taxman 250 (AAR - New Delhi). One of the issue before the 'AAR' was as to whether the conversion of a partnership firm to a private limited company under Part IX of the Companies Act, 1956 in September, 2005 was to be regarded as a 'transfer' within the meaning of Sec. 2(47) and other relevant provisions of the Income-tax Act, 1961? The 'AAR' while answering the said issue had observed in its order 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 Texspin Engg. & Mfg. Works (supra). 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 (supra).
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 partnership is defined in Clause 1(b) of the Third Schedule', and reads as under : '1(b). "Convert", in relation to a private company converting into a limited liability partnership, means a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the private company to the limited liability partnership in accordance with this schedule.'
On a perusal of the definition of the term "convert", it can safely be gathered that the conversion of a private company into a LLP involves transfer of the property, assets etc. The ld. A.R has tried to impress upon us that the term "transfer" used in Clause 1(b) of the Third Schedule' cannot be construed and equated as that used in the Transfer of Property Act, 1882. The ld. A.R drawing our attention to Sec. 5 of the Transfer of Property Act, 1882, submitted that "transfer of property" therein meant an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons; and to "transfer property" is to perform such act. The ld. A.R in order to buttress his contention took us through Clause 6(b) of the 'Third Schedule'. It was submitted by the ld. A.R that Clause 6(b) provided that all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company and the whole of the undertaking of the company shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed. In the backdrop of the aforesaid facts, the ld. A.R submitted that as the vesting of the assets of the company in the LLP did not require any further act, thus the term "transfer" used in the definition of the term "convert" in Clause 1(b) of the "Third Schedule" cannot be read as a "transfer" under the Transfer of Property Act, 1882. We have given a thoughtful 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 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 case before us, is differently placed as in comparison to succession of a partnership firm by a company under Part IX of the Companies Act, 1956. Thus, in terms of our aforesaid observations, we are unable to persuade ourselves to subscribe to the contention of the ld. A.R that on the conversion of the company into the assessee LLP no 'transfer' of capital assets was involved. The Cross Objection No. II is dismissed.
We shall now advert to the contention of the ld. A.R that the A.O has wrongly invoked Sec. 47A(4) and taxed the 'capital gains' in the hands of the assessee. It was the contention of the ld. A.R that Sec. 47A(4) would come into play only for withdrawing of an exemption earlier availed by an assessee under Sec. 47(xiiib), and not for judging the eligibility of an assessee as regards the same in the year of claim itself. In the backdrop of his aforesaid contention, it was the case of the ld. A.R that the A.O was in error in invoking Sec. 47A(4) for disallowing the claim of exemption of the assessee in the year of claim itself. We have deliberated at length on the issue under consideration and find substantial force in the contention advanced by the ld. A.R. On a bare perusal of Sec. 47A(4), it can safely be gathered that the same comes into play for the purpose of withdrawing of the exemption of the amount of profits or gains arising from the transfer of a capital asset or intangible assets or share or shares, which had not been charged to tax under section 45 by virtue of conditions laid down in the proviso of Sec. 47(xiiib). Such amount of profits or gains arising from the transfer of a capital asset or intangible assets or share or shares, shall be deemed to be the profits and gains chargeable to tax 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. In our considered view the invocation of Sec. 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 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 predecessor company, as the case may be, chargeable to tax for the previous year in which the requirements are not complied with." On the basis of our aforesaid observations, we are persuaded to subscribe to the claim of the ld. A.R that the lower authorities had erred in invoking Sec. 47A(4) for judging the eligibility of the assessee LLP towards exemption under Sec. 47(xiiib) of the Act. In our considered view, the failure on the part of the assessee to have satisfied Clause (e) of the proviso of Sec. 47(xiiib), would in itself suffice for dislodging the claim of the assessee LLP that the 'transfer' of the capital assets on the conversion of the private limited company into a LLP was not to be regarded as a 'transfer' within the meaning of Sec. 45 of the Act. We are of the considered view that as the issue involved in the case before us does not relate to withdrawing of an exemption earlier availed by the assessee under Sec. 47(xiiib), therefore, there was no occasion for invoking the provisions of Sec. 47A(4) of the Act. Rather, the issue in the case before us pertains to determining of the eligibility of the assessee towards claim of exemption under Sec. 47(xiiib) of the Act. In the backdrop of our aforesaid observations, we are of the considered view that the lower authorities had failed to appreciate that Sec. 47A(4) which could come into play only for revoking an exemption earlier availed by an assessee under Sec. 47(xiiib), could not have been pressed into service for concluding that the assessee LLP was not eligible for claim of exemption under Sec. 47(xiiib) in the year of raising of such claim itself. We thus not being persuaded to subscribe to the invoking of Sec. 47A(4) by the lower authorities, set aside the order of the CIT(A) to the said extent.
We are of the considered view that in terms of our aforesaid observations, the transaction involving conversion of the private limited company to the assessee LLP de hors 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 ie 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. 170(1)(b) of the Act, a 'successor entity' which continues to carry on the business of the person who has been succeeded (hereinafter referred to as "predecessor") shall be liable to be assessed only in respect of the income of the previous year after the date of succession. However, the said liability of a successor entity is subject to an exception carved out in Sec. 170(2), as per which, where the predecessor cannot be found, there the assessment of the income of the previous year in which the succession took place up to the date of succession, and of the previous year preceding that year shall be made on the successor in the like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. Insofar, the term 'Income' is concerned, the same as per the Explanation to Sec. 170 includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession. We thus in terms of our aforesaid observations are of the considered view that though the "Capital gains", if any, involved in the transfer of the capital assets on conversion of the private limited company to the assessee LLP, de hors applicability of Sec. 47A(4) to the facts of the case, would not be liable to be assessed in the hands of the assessee LLP as per Sec. 45 r.w Sec. 5 of the Act, however, the same would be subject to the liability of the AY: 2018-19 ISC Specialty Chemicals LLP assessee LLP (as a successor entity) under Sec. 170 of the Act. The "Cross Objection No. I" of the assessee is disposed off in terms of our aforesaid observations.”
4.4.2. From the above, it is discernible that : A. Conversion of a company into LLP would be a transfer as contemplated under section 2(47) of the Act. B. However, if the conditions specified under section 47(xiiib) are met, an exemption would apply to such transfer from the provisions of section 45 of the Act. 4.4.3. When a company is converted into LLP, there is a transfer of assets from the company to the LLP. The term LLP was incorporated in the Income Tax Act, effective from 01/04/2010. However, assessment years before assessment years 2011-12, following the same taxation scheme as general partnerships, such transactions were held to be taxable in the hands of the entity and exemption from tax in the hands of its partners. An LLP and a general partnership were treated as equivalent. Additionally, conversion from a general partnership firm to an LLP did not have any tax implications if the rights and obligations of the partners remained the same after conversion and if there was no transfer of any asset or liability post- conversion. However, if these conditions were violated, the provisions of section 45 were applicable.
4.4.4. The provision regarding conversion of a private company or an unlisted public company into an LLP was brought on statute with effect from 1st April, 2011 with effect from 01/04/2011, by insertion of clause (xiiib) to section 47 of the Act.
AY: 2018-19 ISC Specialty Chemicals LLP Referring to Memorandum of Finance Bill, 2010 that explained reason for the amendment, the Legislature noted that conversion of a company into an LLP had definite tax implications and the transfer of assets on conversion attracted levy of capital gains tax. It was thus proposed that the transfer of assets on conversion of a company into an LLP in accordance with section 56 and section 57 of the LLP Act, shall not be regarded as transfer for the purposes of capital gains tax under section 45, subject to certain conditions. From perusal of the 'Memorandum' explaining the purpose and intent behind the enactment of sub- section (xiiib) to section 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 vide the Finance Act, 2010 introduced section 47(xiiib) on the statute, with the purpose that the transfer of assets on conversion of a company into a LLP under the LLP Act, subject to fulfilment of the conditions contemplated therein, shall not be regarded as a 'transfer' for section 45. 4.4.5. From the above it is clear that, before insertion of clause (xiiib) to section 47, transfer of a capital asset or intangible asset by a company to an LLP or any transfer of a share or shares held in the company by a shareholder, as a result of conversion of a company into an LLP as per the provisions of section 56 or section 57 of the LLP Act, was a transfer, to which provisions of section 45 regarding charging of capital gains tax were applicable.
AY: 2018-19 ISC Specialty Chemicals LLP 4.4.6.With the insertion of the clause (xiiib) to section 47, it is amply clear that, the required criteria to check the availability of exemption under section 47 upon conversion of a company into LLP is cumulative satisfaction of conditions specified under clause (xiiib) to section 47. (emphasis supplied) 4.5. From the above analysis and discussions, we believe that the arguments advanced by the Ld.AR are not supported by the provisions of the Act. The view expressed by this Tribunal in the case of ACTI vs. Celerity LLP(supra) aligns with the amended provisions of the Act. The Ld.AR completely misconceived the provisions of the Income Tax Act and the Legislature's intention to include clause (xiiib) in section 47 of the Act. He relied heavily on various decisions passed under the LLP Act. No doubt, the LLP Act does not consider the conversion of a company into an LLP to be a transfer at the threshold. However, while considering such transactions under the Income Tax Act, one must take into account all relevant provisions as per Income Tax Act. The Ld.AR is advised to raise arguments with the holistic approach of provisions under the Income Tax Act. We therefore reject the arguments advanced by the Ld.AR raised against the view taken by this Tribunal in case of ACTI vs. Celerity LLP(supra).
We now proceed to consider specific issues raised by the assessee as per the grounds of appeal. Ground no.1 raised by the assessee is general in nature. Hence do not require adjudication.
AY: 2018-19 ISC Specialty Chemicals LLP 5. Ground no.2 - 6are raised by the assessee alleging that, provisions of Section 47A(4) of the Act, cannot be applied to the facts of the case, though there is violation of one of the conditions u/s. 47(xiiib). It is alleged that, neither the erstwhile company nor the assessee post conversion claimed any exemption u/s.47(xiiib) of the Act. It is also alledged that no consideration is received by the assessee and therefore, computation mechanism under section 48 fails. The Ld.AR on this issue submitted as under: “10. Violation of section 47(xiiib) a. Undisputedly, one of the conditions of section 47(xiiib) is violated that the value of the assets exceeds the threshold of Rs. 5 crore. b. However, section 47 provides for exemption for certain transaction from being taxed u/s 45 of the Act. c. If conditions of such provisions are not fulfilled, that would not mean that the transaction will otherwise be considered as "transfer". d. One has to independently look into the ingredients of transfer as defined u/s 2(47) and ingredients of section 45(1). e. As submitted earlier, conversion of company into LLP is not a transfer and therefore, there is no capital gains tax liability u/s 45(1), irrespective of non-fulfillment of conditions of section 47(xiiib). f. Reliance is placed on the judgment in case of [2017] 244 Taxman 43 (Bombay), CIT v. Umicore Finance Luxemborg, wherein despite non-fulfilment of conditions of section 47(xiii), the Hon'ble Court held that conversion of firm into company did not amount to transfer at all. g. Reliance is also placed on the judgment in case of CIT vs. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC). It was, inter alia, held as under "We have already stated earlier that the distribution of assets by a liquidator on the voluntary winding-up of a company cannot constitute sale, transfer or exchange for the purpose of sub- section (1) of section 12B of the Act. If the language of sub-section (1) of section 12B of the Act is clear and does not warrant the inference that distribution of assets on liquidation of a company constitutes sale, transfer or exchange, the said transaction of distribution of assets would not, in our opinion, change its character and acquire the attributes of sale, transfer or exchange, AY: 2018-19 ISC Specialty Chemicals LLP because of the omission of a clarification in the first proviso to sub-section (1) of section 12B of the Act, even though such a clarification was there in the third proviso of the section inserted by the earlier Act (Act 22 of 1947)."
Non-applicability of section 47A(4) a. Section 47A(4) reads as follows: "47A-Withdrawal of exemption in certain cases. … (4) Where any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains 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." b. Section 47A applies to withdraw any exemption claimed u/s 47 of the Act. The same is clear from the title of the section. The same is also clear from section 47A(4) which states that amount of profits or gains not charged u/s 45 by virtue of conditions laid down in the said proviso. In the present, undisputedly, no benefit has been claimed u/s 47 by the company or LLP, therefore, this section would not have any application. c. To this extent, the Mumbai Tribunal decision in case of [2019] 174 ITD 433 (Mumbai), ACIT, 19(1), Mumbai v. Celerity Power LLP is in favour of the assessee (in para 14).”
5.1. On the contrary, Ld.DRrelied on the orders passed by the authorities below. The Ld.DRrelied on the decision of coordinate bench of this Tribunal, in case of ACIT vs. Celerity Power LLP (supra). We have perused the submissions advanced by both sides in light of records placed before us.
In the present facts, undisputedly the Ld.AR in his written submission stated that condition specified under sub clause (ea) of clause (xiiib) of Section 47 is violated, as the value of the assets appearing in the erstwhile companies books of account in the three previous yearsto the year in which conversation took place AY: 2018-19 ISC Specialty Chemicals LLP (the year under consideration) exceed the threshold of Rs.5 crore. Thus, the assessee failed to cumulatively fulfilall the conditionsprescribed under clause (xiiib) of Section 47.
6.1. The issue to be now to be considered is, whether provisions of section 47A(4) could be invoked in the present facts.
It may not be ignored that this is the year under consideration is the year of conversion.
Withdrawal of exemption in certain cases. 47A. (1) Where at any time before the expiry of a period of eight years from the date of the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47,— ………… (4) Where any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains 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. 6.2. It is thus clear that the assesseeloses its benefit of exemption as per section 47A(4) of the Act, andthe conversion would amount to a 'transfer',exigible to capital gains tax under the provisions of section 45.
6.3. The Ld.DRthough relied on the decision of coordinate bench of this Tribunal, in case of ACIT vs. Celerity Power LLP (supra),is not of any assistance to the revenue based on the discussions mentioned above.
AY: 2018-19 ISC Specialty Chemicals LLP We therefore hold that since the assessee admittedly does not satisfy the cumulative conditions under section 47(xiiib) of the Act, the conversion of the erstwhile company into LLP, the assessee before this Tribunal loses its exemption under section 47 of the Act.
Accordingly Ground 2-3 raised by the assessee stands dismissed.
Now on the issue of chargeability of capital gains u/s. 45 of the act,the Ld.AO treated the book value of theassest as on the date of conversation as capital gains in the hands of asseessee. This in our view is not the correct method to determine the capital gains in the hands of the assessee. As per the settled provision of section 48 provides the mode for computation of capital gains must be read will considering the charging provisions u/s. 45 of the Act. We refer to following observation of coordinate bench of this Tribunal in case of ACIT vs. Calerity Power LLP(supra). This Tribunal has considered relevant charging provision to compute Capital gains and how the mechanism fails in facts similar to the one considered in the present cats of the assessee before us.
16. We shall now advert to the issue that as to whether the conversion of a company into a LLP involves any 'capital gain', or not. We may herein observe that the exemption under Sec. 47(xiiib) which contemplates that certain transactions on satisfaction of the conditions therein provided are not to be regarded 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. Insofar, 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 Hon'ble High Court of Bombay in the case of CIT v. Texspin Engg. & Mfg. Works (supra), 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 294/5 Taxman 1 and Navin Jindal v. Asstt. CIT [2010] 320 ITR 708/187 Taxman 283 (SC) had observed that for the purposes of Sec. 48 of the Act, one must keep in mind an important principle, namely, that chargeability and computation has to go hand in hand. In other words, computation is an integral part of chargeability under the Act. Now, under Sec. 48 it is laid down, inter alia, that the income chargeable under the head 'capital gains' shall be computed by deducting from the 'full value of consideration received or accrued' as a result of the transfer, the cost of acquisition of the asset and the expenditure incurred in connection with the transfer. The expression full value of consideration" used in Sec. 48 cannot be construed as the 'market value' of the asset on the date of transfer. As observed by the Hon'ble High Court of Bombay in the case of Texspin Engg. & Mfg. Works (supra), the consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with, viz. money or money's worth, and, therefore, the asset transferred or parted with cannot be the consideration for the transfer. It was further observed that the expression "full value of the consideration" cannot be construed as having a reference to the 'market value' of the asset transferred, and that the said expression only means the full value of the things received by the transferor in exchange for the capital asset transferred by him. Our aforesaid view that 'full value of consideration' used in Sec. 48 cannot be construed as the 'market value' of the asset on the date of transfer is fortified by two judgments of the Hon'ble Supreme Court viz. (i). CIT v. George Henderson and Co. Ltd. [1967] 66 ITR 622 and (ii). CIT v. Gillanders Arbuthnot and Co. [1973] 87 ITR 407 (SC). The Hon'ble Apex Court in the said judgments had observed that the expression 'full value of the consideration' does not mean the 'market value' of the asset transferred, 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' AY: 2018-19 ISC Specialty Chemicals LLP 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/[2012] 204 Taxman 691/[2011] 16 taxmann.com
42. 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 of acquisition, but also to tax the gains arising on transfer of a capital asset inter alia acquired by an assessee under a gift or will as provided under s. 49, by deeming the assessee to have incurred the cost of acquisition. Further, the Hon'ble High Court of Calcutta has in the case of CIT v. Delta Jute Mills [1986] 159 ITR 215/25 Taxman 93 (Cal.) and in CIT v. Budge Budge Amalgamated Mills Ltd. [1980] 122 ITR 561 (Cal.), observed that in case of an amalgamation where the assessee became the owner of the capital asset of the amalgamating company by way of devolution, the cost of acquisition of the amalgamating company was to be considered as the cost of acquisition for computing the capital gains. We thus in terms of our aforesaid observations are in agreement with the view taken by the CIT(A), that though there was a transfer of capital assets from the erstwhile private limited company to the assessee LLP by virtue of the provisions of Sec. 47(xiiib), however, as the difference between the transfer value and the cost of acquisition was Nil, therefore, while computing the 'capital gains' the machinery provision was rendered as unworkable. The Cross-Objection No III is disposed off in terms of our aforesaid observations.
7.1. We do not find any reason to deviate from the above view. Respectfully following the above we are of the opinion that as the difference between the transfer value and the cost of acquisition was Nil, therefore, while computing the 'capital gains' the machinery provision was rendered as unworkable even in the present case of the assessee.
AY: 2018-19 ISC Specialty Chemicals LLP Accordingly, Grounds 4-5 stands allowed. 8. Ground No.6 becomes irrelevant based on the findings hereinabove in respect of Grounds 4-5. 9. Ground no 7-8 is not necessary to be adjudicated as it becomes academic based on the findings hereinabove in respect of Grounds 4-5. In the result the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 28/05/2025