ITO 33 (1)(2), MUMBAI vs. BRIZEAL REALTORS AND DEVELOPERS LLP, MUMBAI

The present appeal is filed by the Revenue against the order dated 13/12/2019 passed by the ld. Commissioner of Income Tax (Appeals) – 45, Mumbai [in short, the Ld. CIT(A)] for A.Y. 2016-17.

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 2 ITA No. 1403/M/2020

2. On the facts and in the circumstance of the case and in law 2. On the facts and in the circumstance of the case and in law 2. On the facts and in the circumstance of the case and in law whether the Ld. CIT(A) erred in not appreciating of the facts whether the Ld. CIT(A) erred in not appreciating of the facts whether the Ld. CIT(A) erred in not appreciating of the facts M/s. BRIZEAL REALTORS AND DEVELO M/s. BRIZEAL REALTORS AND DEVELOPERS LLP has not PERS LLP has not fulfilled all the conditions prescribed u/s. 47 (xiiib) of the fulfilled all the conditions prescribed u/s. 47 (xiiib) of the fulfilled all the conditions prescribed u/s. 47 (xiiib) of the income Tax Act as while accounting for the Goodwill, M/s. income Tax Act as while accounting for the Goodwill, M/s. income Tax Act as while accounting for the Goodwill, M/s. BRIZEAL REALTORS AND DEVELOPERS LLP should have BRIZEAL REALTORS AND DEVELOPERS LLP should have BRIZEAL REALTORS AND DEVELOPERS LLP should have credited the amount goodwill of Rs.48,35,00,000/ credited the amount goodwill of Rs.48,35,00,000/ credited the amount goodwill of Rs.48,35,00,000/- to 'Capital Reserve' but the assessee LLP has credited the said amount of but the assessee LLP has credited the said amount of but the assessee LLP has credited the said amount of the Partner's current account. the Partner's current account.

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 3 ITA No. 1403/M/2020

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 5 ITA No. 1403/M/2020 Rules, 2009[in short, “the LLP Rules”] [in short, “the LLP Rules”]. After completion of . After completion of necessary procedure under the LLP Act, the company got converted necessary procedure under the LLP Act, the company got converted necessary procedure under the LLP Act, the company got converted into LLP and was issued a certificate of conversions dated into LLP and was issued a certificate of conversions dated into LLP and was issued a certificate of conversions dated 17/03/2016 by ROC bearing Certificate No. 17/03/2016 by ROC bearing Certificate No. AAF-9714. By virtue of 9714. By virtue of said conversion under the LLP Act and operation of relevant said conversion under the LLP Act and operati said conversion under the LLP Act and operati sections all the assets, interest, rights, privileges, liabilities, sections all the assets, interest, rights, privileges, liabilities, sections all the assets, interest, rights, privileges, liabilities, contractual and legal obligation and duties of the company and contractual and legal obligation and duties of the company and contractual and legal obligation and duties of the company and whole of the undertaking of the company have been vested in the whole of the undertaking of the company have been vested in the whole of the undertaking of the company have been vested in the LLP with effect from the date of conversion, w LLP with effect from the date of conversion, without any f ithout any further assurance, act or deed assurance, act or deed. Accordingly, all the assets and liabilities of . Accordingly, all the assets and liabilities of the company immediately before the conversion were duly recorded the company immediately before the conversion were duly recorded the company immediately before the conversion were duly recorded in the books of the LLP. The contention of the assessee is that at in the books of the LLP. The contention of the assessee is that at in the books of the LLP. The contention of the assessee is that at the time of conversion of the comp the time of conversion of the company into LLP, there were no any into LLP, there were no intangibles of any nature including Goodwill standing in the intangibles of any nature including Goodwill standing in the intangibles of any nature including Goodwill standing in the Balance Sheet of the Company and accordingly, on the date of Balance Sheet of the Company and accordingly, on the date of Balance Sheet of the Company and accordingly, on the date of conversion at the time of recording assets and liabilities in the conversion at the time of recording assets and liabilities in the conversion at the time of recording assets and liabilities in the books of the LLP, no Goodwill was record books of the LLP, no Goodwill was recorded by the LLP. The only ed by the LLP. The only assets and liabilities that were recorded were those standing in the assets and liabilities that were recorded were those standing in the assets and liabilities that were recorded were those standing in the books of the Company. As regards the purpose of recognition of books of the Company. As regards the purpose of recognition of books of the Company. As regards the purpose of recognition of Goodwill later in the books of LLP after conversion date, the Goodwill later in the books of LLP after conversion date, the Goodwill later in the books of LLP after conversion date, the assessee explained that since the comm assessee explained that since the commencement of the SRA encement of the SRA project, project, project, assessee assessee assessee had had had incurred incurred incurred huge huge huge rental rental rental expenses expenses expenses to to to accommodate eligible slum dwellers and enormous efforts to accommodate eligible slum dwellers and enormous efforts to accommodate eligible slum dwellers and enormous efforts to evacuate ineligible slum dwellers to undertake the construction evacuate ineligible slum dwellers to undertake the construction evacuate ineligible slum dwellers to undertake the construction activity. However, due to inability to pump in further funds and the activity. However, due to inability to pump in further fun activity. However, due to inability to pump in further fun

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 6 ITA No. 1403/M/2020 resultant delay in the completion of the SRA project, the partners of resultant delay in the completion of the SRA project, the partners of resultant delay in the completion of the SRA project, the partners of the LLP decided to admit a new partner with adequate expertise in the LLP decided to admit a new partner with adequate expertise in the LLP decided to admit a new partner with adequate expertise in execution of real estate project and also infusion of necessary funds execution of real estate project and also infusion of necessary funds execution of real estate project and also infusion of necessary funds to expedite the completion of the SRA p to expedite the completion of the SRA project. In contemplation of roject. In contemplation of admission of new partner, the designated partners of the LLP admission of new partner, the designated partners of the LLP admission of new partner, the designated partners of the LLP decided to assess the value of Goodwill and therefore appointed an decided to assess the value of Goodwill and therefore appointed an decided to assess the value of Goodwill and therefore appointed an independent valuer. Based on the report obtained from a valuer independent valuer. Based on the report obtained from a valuer independent valuer. Based on the report obtained from a valuer dated 30/03/2016, the assessee record dated 30/03/2016, the assessee recorded the Goodwill of Rs. ed the Goodwill of Rs. 48,35,00,000/- in its books of accounts of LLP. Further, the in its books of accounts of LLP. Further, the in its books of accounts of LLP. Further, the contention of the assessee is that the said Goodwill is recorded only contention of the assessee is that the said Goodwill is recorded only contention of the assessee is that the said Goodwill is recorded only in books of LLP and not added in the block of assets for the income in books of LLP and not added in the block of assets for the income in books of LLP and not added in the block of assets for the income tax purposes. Thus, the WDV of the tax purposes. Thus, the WDV of the block of assets of the block of assets of the predecessor company and that of the assessee LLP continues to be predecessor company and that of the assessee LLP predecessor company and that of the assessee LLP the same.

6.1 However, the Assessing Officer did not accept the contentions However, the Assessing Officer did not accept the contentions However, the Assessing Officer did not accept the contentions of the assessee and concluded that the provisions of section of the assessee and concluded that the provisions of section of the assessee and concluded that the provisions of section 47(xiiib) of the Act were vio 47(xiiib) of the Act were violated for the reasons as under: lated for the reasons as under:-

(i) The assessee LLP was formed on 17/03/2016 and it has The assessee LLP was formed on 17/03/2016 and it has The assessee LLP was formed on 17/03/2016 and it has been fairly admitted that the assessee had incurred huge been fairly admitted that the assessee had incurred huge been fairly admitted that the assessee had incurred huge rental expenses to accommodate eligible slum dwellers and rental expenses to accommodate eligible slum dwellers and rental expenses to accommodate eligible slum dwellers and enormous efforts to evacuate ineligible slum dwellers t enormous efforts to evacuate ineligible slum dwellers t enormous efforts to evacuate ineligible slum dwellers to undertake the construction activity and this was admittedly undertake the construction activity and this was admittedly undertake the construction activity and this was admittedly done prior to 17/03/2016 by the predecessor company and done prior to 17/03/2016 by the predecessor company and done prior to 17/03/2016 by the predecessor company and not by the present assessee LLP. Thus, the Goodwill which not by the present assessee LLP. Thus, the Goodwill which not by the present assessee LLP. Thus, the Goodwill which M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 7 ITA No. 1403/M/2020 has been now recognised in the books of the assessee LLP is has been now recognised in the books of the assessee LLP is has been now recognised in the books of the assessee LLP is by their own admissi by their own admission a pre-existing intangible asset, the existing intangible asset, the book value of which is NIL. book value of which is NIL. (ii) The purpose of recognizing Goodwill in books of accounts of The purpose of recognizing Goodwill in books of accounts of The purpose of recognizing Goodwill in books of accounts of assessee LLP that it was resorted to in contemplation of assessee LLP that it was resorted to in contemplation of assessee LLP that it was resorted to in contemplation of admission of a new partner who would infuse funds in the admission of a new partner who would infuse funds in the admission of a new partner who would infuse funds in the SRA project is SRA project is misconceived and could have been easily misconceived and could have been easily done by issuing shares in the predecessor company. done by issuing shares in the predecessor company. done by issuing shares in the predecessor company. However, that would not result into giving any benefit or However, that would not result into giving any benefit or However, that would not result into giving any benefit or paying the amounts to the shareholders of the predecessor paying the amounts to the shareholders of the predecessor paying the amounts to the shareholders of the predecessor company. The very purpose of colourable device o company. The very purpose of colourable device o company. The very purpose of colourable device of conversion of an existing company to LLP, valuing and conversion of an existing company to LLP, valuing and conversion of an existing company to LLP, valuing and accounting of the pre accounting of the pre-existing intangible assets in the form existing intangible assets in the form of Goodwill post conversion was to fraudulently pass the of Goodwill post conversion was to fraudulently pass the of Goodwill post conversion was to fraudulently pass the benefits and pay the shareholders of predecessor company benefits and pay the shareholders of predecessor company benefits and pay the shareholders of predecessor company without paying legitimate without paying legitimate tax due on such ultimate tax due on such ultimate purpose. (iii) The Goodwill is valued by the valuer after considering The Goodwill is valued by the valuer after considering The Goodwill is valued by the valuer after considering “tremendous “tremendous “tremendous efforts”, efforts”, efforts”, procedural procedural procedural and and and implementation implementation implementation reasons, extensive efforts, project synopsis, extensive effort reasons, extensive efforts, project synopsis, extensive effort reasons, extensive efforts, project synopsis, extensive effort and time, huge rental expenses and enormous efforts and time, huge rental expenses and enormous efforts and time, huge rental expenses and enormous efforts, time factor and so on, which clearly show that the Goodwill is factor and so on, which clearly show that the Goodwill is factor and so on, which clearly show that the Goodwill is nothing but a pre existing intangible asset which was nothing but a pre existing intangible asset which was nothing but a pre existing intangible asset which was valued at NIL in the books of predecessor company but valued at NIL in the books of predecessor company but valued at NIL in the books of predecessor company but valued at Rs. 48,35,00,000/ valued at Rs. 48,35,00,000/-.

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 8 ITA No. 1403/M/2020 (iv) The assessee LLP has recorded this Goodwill in their The assessee LLP has recorded this Goodwill in their The assessee LLP has recorded this Goodwill in their books of account by crediting the partner’s current account of account by crediting the partner’s current account of account by crediting the partner’s current account instead of crediting the same to the Capital Reserve instead of crediting the same to the Capital Reserve instead of crediting the same to the Capital Reserve Account. The assessee LLP has thus violated the condition Account. The assessee LLP has thus violated the condition Account. The assessee LLP has thus violated the condition (c) and (f) of section 47(xiiib). (c) and (f) of section 47(xiiib). (v) Finally, the Assessing Officer placed reliance on t Finally, the Assessing Officer placed reliance on t Finally, the Assessing Officer placed reliance on the decision of of of Celerity Celerity Celerity Power Power Power of of of Mumbai Mumbai Mumbai ITAT ITAT ITAT (ITA (ITA (ITA no. no. no. 3637/Mum/2015) and Mc. Dowell &Co. Ltd. v. CTO 3637/Mum/2015) and Mc. Dowell &Co. Ltd. v. CTO 3637/Mum/2015) and Mc. Dowell &Co. Ltd. v. CTO (1985)(3) SCC 230 (SC 5 member Bench). (1985)(3) SCC 230 (SC 5 member Bench).

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 9 ITA No. 1403/M/2020 made u/s. 45 of the Act for the clear violation of the provisions of made u/s. 45 of the Act for the clear violation of the provisions of made u/s. 45 of the Act for the clear violation of the provisions of section 47(xiiib) of the Act. section 47(xiiib) of the Act.

“47. Nothing contained in Nothing contained in section 45 shall apply to the following transfers shall apply to the following transfers :—

(xiiib) any transfer of a capital asset or intangible asset by a private (xiiib) any transfer of a capital asset or intangible asset by a private (xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred company or unlisted public company (hereafter in this clause referred company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a company) to a limited liability partnership or any transfer of a company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of share or shares held in the company by a shareholder as a result of share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in conversion of the company into a limited liability partnership in conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the accordance with the provisions of section 56 or section 5 accordance with the provisions of section 56 or section 5 Limited Liability Partnership Act, 2008 (6 of 2009): Limited Liability Partnership Act, 2008 (6 of 2009):

Provided that— —

(a) all the assets and liabilities of the company immediately before all the assets and liabilities of the company immediately before all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited the conversion become the assets and liabilities of the limited the conversion become the assets and liabilities of the limited liability partnership; liability partnership;

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 10 ITA No. 1403/M/2020

(b) all the all the shareholders of the company immediately before the shareholders of the company immediately before the conversion become the partners of the limited liability partnership conversion become the partners of the limited liability partnership conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the and their capital contribution and profit sharing ratio in the and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their limited liability partnership are in the same proportion as their limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion; ding in the company on the date of conversion; ding in the company on the date of conversion;

(c) the shareholders of the company do not receive any the shareholders of the company do not receive any the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form consideration or benefit, directly or indirectly, in any form consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and or manner, other than by way of share in profit and or manner, other than by way of share in profit and capital contribution in the limited li capital contribution in the limited liability partnership; ability partnership;

(d) the aggregate of the profit sharing ratio of the shareholders of the aggregate of the profit sharing ratio of the shareholders of the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less the company in the limited liability partnership shall not be less the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from than fifty per cent at any time during the period of five years from than fifty per cent at any time during the period of five years from the date of conversion; the date of conversion;

(e) the total sales, turnover or gross receipts in the business of the the total sales, turnover or gross receipts in the business of the the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the company in any of the three previous years preceding the company in any of the three previous years preceding the previous year in which the conversion takes place does not previous year in which the conversion takes place does not previous year in which the conversion takes place does not exceed sixty lakh rupees; exceed sixty lakh rupees;

(ea) the total value of the assets as appeari (ea) the total value of the assets as appearing in the books of account ng in the books of account of the company in any of the three previous years preceding the of the company in any of the three previous years preceding the of the company in any of the three previous years preceding the previous year in which the conversion takes place does not previous year in which the conversion takes place does not previous year in which the conversion takes place does not exceed five crore rupees; and exceed five crore rupees; and (f) no amount is paid, either directly or indirectly, to any no amount is paid, either directly or indirectly, to any no amount is paid, either directly or indirectly, to any partner out o partner out of balance of accumulated profit standing in f balance of accumulated profit standing in the accounts of the company on the date of conversion for the accounts of the company on the date of conversion for the accounts of the company on the date of conversion for a period of three years from the date of conversion. a period of three years from the date of conversion. a period of three years from the date of conversion.

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 11 ITA No. 1403/M/2020

Explanation.—For the purposes of this clause, the expressions "private For the purposes of this clause, the expressions "private For the purposes of this clause, the expressions "private company" and "unlisted public company" and "unlisted public company" shall have the meanings company" shall have the meanings respectively assigned to them in the Limited Liability Partnership Act, respectively assigned to them in the Limited Liability Partnership Act, respectively assigned to them in the Limited Liability Partnership Act, 2008 (6 of 2009); 2008 (6 of 2009);

[emphasis supplied] [emphasis supplied] 9.1 The relevant findings of the ld. CIT(A) is as under: The relevant findings of the ld. CIT(A) is as under: The relevant findings of the ld. CIT(A) is as under:-

“4.18 Only dispute is with regard to the clauses (c) an 4.18 Only dispute is with regard to the clauses (c) an 4.18 Only dispute is with regard to the clauses (c) and (f) above. Clause (c) lays down that the shareholders of the Clause (c) lays down that the shareholders of the Clause (c) lays down that the shareholders of the company do not receive any consideration or benefit, directly or company do not receive any consideration or benefit, directly or company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in indirectly, in any form or manner, other than by way of share in indirectly, in any form or manner, other than by way of share in profit profit profit and and and capital capital capital contribution contribution contribution in in in the the the limited limited limited liability liability liability partnership. It has to be taken note that in the clauses (a) to (f) rship. It has to be taken note that in the clauses (a) to (f) rship. It has to be taken note that in the clauses (a) to (f) of the proviso placed under section 47(xib) of the Act, the word of the proviso placed under section 47(xib) of the Act, the word of the proviso placed under section 47(xib) of the Act, the word shareholders is used in some conditions and in some conditions shareholders is used in some conditions and in some conditions shareholders is used in some conditions and in some conditions the word 'partners' is used. The usage of different words by the the word 'partners' is used. The usage of different words by the the word 'partners' is used. The usage of different words by the statute to address the same persons cannot be lost sight of. tatute to address the same persons cannot be lost sight of. tatute to address the same persons cannot be lost sight of. The condition (c) starts with the word 'shareholders of the The condition (c) starts with the word 'shareholders of the The condition (c) starts with the word 'shareholders of the company. Shareholders of the company existed till the date of company. Shareholders of the company existed till the date of company. Shareholders of the company existed till the date of conversion of the company ie 17.03.2016 in this case. Once the conversion of the company ie 17.03.2016 in this case. Once the conversion of the company ie 17.03.2016 in this case. Once the certificate of registration from RoC is received for conversion to of registration from RoC is received for conversion to of registration from RoC is received for conversion to LLP, they(the shareholders) cease to be shareholders of the LLP, they(the shareholders) cease to be shareholders of the LLP, they(the shareholders) cease to be shareholders of the company and become partners of the LLP with their share of company and become partners of the LLP with their share of company and become partners of the LLP with their share of capital in the LLP. As can be seen from the Balance sheet of the capital in the LLP. As can be seen from the Balance sheet of the capital in the LLP. As can be seen from the Balance sheet of the erstwhile compan erstwhile company as on 16.03.2016 and that of the LLP as on y as on 16.03.2016 and that of the LLP as on 17.03.2016, total share capital in the company was Rs. 17.03.2016, total share capital in the company was Rs. 17.03.2016, total share capital in the company was Rs. 1,61,00,000 of all the share holders, it became the share 1,61,00,000 of all the share holders, it became the share 1,61,00,000 of all the share holders, it became the share capital of Rs. 1,61,00,000 of the same persons as partners in capital of Rs. 1,61,00,000 of the same persons as partners in capital of Rs. 1,61,00,000 of the same persons as partners in M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 12 ITA No. 1403/M/2020 the LLP. They (shareholders) have no the LLP. They (shareholders) have not received any thing more t received any thing more than their share capital in the LLP on the date of conversion. It than their share capital in the LLP on the date of conversion. It than their share capital in the LLP on the date of conversion. It is also seen that there is no time period/limit that is mentioned is also seen that there is no time period/limit that is mentioned is also seen that there is no time period/limit that is mentioned in clause (c). Actually, usage of the word 'shareholders in clause (c). Actually, usage of the word 'shareholders in clause (c). Actually, usage of the word 'shareholders of the company' itself restricts the time company' itself restricts the time limit of operation of this limit of operation of this condition till the date of conversion or the date of conversion, condition till the date of conversion or the date of conversion, condition till the date of conversion or the date of conversion, because the shareholders are shareholders of the company till because the shareholders are shareholders of the company till because the shareholders are shareholders of the company till the date and time the company exists. In this case the the date and time the company exists. In this case the the date and time the company exists. In this case the shareholders of the company are shareholders o shareholders of the company are shareholders of the company f the company till 17.03.2016. So as on the date of 17.03.2019, the till 17.03.2016. So as on the date of 17.03.2019, the till 17.03.2016. So as on the date of 17.03.2019, the shareholders received the capital in the LLP as per their shareholders received the capital in the LLP as per their shareholders received the capital in the LLP as per their shareholding in the company and nothing more. Therefore, the shareholding in the company and nothing more. Therefore, the shareholding in the company and nothing more. Therefore, the condition (c) operates only till the date of conversion i.e. condition (c) operates only till the date of conversion i.e. condition (c) operates only till the date of conversion i.e. 17.03.2016 and it is clear from the balance sheets pre 16 and it is clear from the balance sheets pre 16 and it is clear from the balance sheets pre conversion and post conversion that the shareholders have not conversion and post conversion that the shareholders have not conversion and post conversion that the shareholders have not received any consideration or benefit directly or indirectly. received any consideration or benefit directly or indirectly. received any consideration or benefit directly or indirectly. Therefore, I am of the considered opinion that there is no Therefore, I am of the considered opinion that there is no Therefore, I am of the considered opinion that there is no violation of the condition violation of the condition (c) of section 47 (xilib) as sought to be (c) of section 47 (xilib) as sought to be argued by the AO in the assessment order. argued by the AO in the assessment order.

4.19 Clause (f) of the section 47(xib) lays down that no amount 4.19 Clause (f) of the section 47(xib) lays down that no amount 4.19 Clause (f) of the section 47(xib) lays down that no amount is paid, either directly or indirectly, to any partner out of is paid, either directly or indirectly, to any partner out of is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the balance of accumulated profit standing in the accounts of the accounts of the company on the date of conversion for a period of three vears company on the date of conversion for a period of three vears company on the date of conversion for a period of three vears from the date of conversion. This clause uses the terms 'the from the date of conversion. This clause uses the terms 'the from the date of conversion. This clause uses the terms 'the partner of LLP' and • accumulated profits standing in the partner of LLP' and • accumulated profits standing in the partner of LLP' and • accumulated profits standing in the accounts of the company on the date of conversion'. It is accounts of the company on the date of conversion'. It is accounts of the company on the date of conversion'. It is seen that accumulated profits are negative (Rs.1,46,535) in the that accumulated profits are negative (Rs.1,46,535) in the that accumulated profits are negative (Rs.1,46,535) in the company before the date of conversion. The same amount of company before the date of conversion. The same amount of company before the date of conversion. The same amount of M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 13 ITA No. 1403/M/2020 negative balance is appearing in the LLP as on the date of negative balance is appearing in the LLP as on the date of negative balance is appearing in the LLP as on the date of conversion. It is noticed from the records that no amount was conversion. It is noticed from the records that no amount was conversion. It is noticed from the records that no amount was paid directly paid directly or indirectly to any partners of the LLP as on the or indirectly to any partners of the LLP as on the date of conversion. It has to be noted that the condition date of conversion. It has to be noted that the condition date of conversion. It has to be noted that the condition prescribes that the such prohibition on distribution of prescribes that the such prohibition on distribution of prescribes that the such prohibition on distribution of accumulated profits extends to three years from the date of accumulated profits extends to three years from the date of accumulated profits extends to three years from the date of conversion. The AO in the asse conversion. The AO in the assessment argued that the goodwill ssment argued that the goodwill brought into the books of the LLP on 30.03.2016 was actually brought into the books of the LLP on 30.03.2016 was actually brought into the books of the LLP on 30.03.2016 was actually the accumulated profit of the company which was not the accumulated profit of the company which was not the accumulated profit of the company which was not mentioned in the books of the company or appearing at NIL mentioned in the books of the company or appearing at NIL mentioned in the books of the company or appearing at NIL value in the books of the company. She sought to brin value in the books of the company. She sought to brin value in the books of the company. She sought to bring in 'capital reserve' as part of entries the appellant is supposed to 'capital reserve' as part of entries the appellant is supposed to 'capital reserve' as part of entries the appellant is supposed to pass while bringing the goodwill into pass while bringing the goodwill into books of LLP as per her books of LLP as per her interpretation. She argued that the 'capital reserve' in the interpretation. She argued that the 'capital reserve' in the interpretation. She argued that the 'capital reserve' in the entries supposed to be passed is actually the accumulated entries supposed to be passed is actually the accumulated entries supposed to be passed is actually the accumulated profits' of the erstwhile company. This interpretation of the AO its' of the erstwhile company. This interpretation of the AO its' of the erstwhile company. This interpretation of the AO appears to be a fig of imagination and against the very provisio appears to be a fig of imagination and against the very provisio appears to be a fig of imagination and against the very provisio she wanted to apply against the appellant. The clause (f) uses she wanted to apply against the appellant. The clause (f) uses she wanted to apply against the appellant. The clause (f) uses the phrase 'out of balance of accumulated profit standing in the the phrase 'out of balance of accumulated profit standing in the the phrase 'out of balance of accumulated profit standing in the accounts of the company on the date of conversion'. The word counts of the company on the date of conversion'. The word counts of the company on the date of conversion'. The word 'balance of accumulated profits' has qualification 'standing in 'balance of accumulated profits' has qualification 'standing in 'balance of accumulated profits' has qualification 'standing in the accounts of the company on the date of conversion'. the accounts of the company on the date of conversion'. the accounts of the company on the date of conversion'. Therefore, no new item, much less the presumed to be existing Therefore, no new item, much less the presumed to be existing Therefore, no new item, much less the presumed to be existing item can be bro item can be brought into the books contradicting the phrase ught into the books contradicting the phrase accumulated profits standing as on the date of conversion'. As accumulated profits standing as on the date of conversion'. As accumulated profits standing as on the date of conversion'. As already mentioned above, the accumulated profit (Reserves and already mentioned above, the accumulated profit (Reserves and already mentioned above, the accumulated profit (Reserves and surplus) in the company is negative as on the date of surplus) in the company is negative as on the date of surplus) in the company is negative as on the date of conversion. Use of the word 'sta conversion. Use of the word 'standing in the accounts of the nding in the accounts of the company' removes all the doubts about the amount to be company' removes all the doubts about the amount to be company' removes all the doubts about the amount to be M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 14 ITA No. 1403/M/2020 adopted and there is no scope for introducing any amount from adopted and there is no scope for introducing any amount from adopted and there is no scope for introducing any amount from anywhere much less any amount which is not in the books of anywhere much less any amount which is not in the books of anywhere much less any amount which is not in the books of the company on the date of conversion. the company on the date of conversion. Therefore, I Therefore, I am of the considered opinion that there is no violation of clause (f) of considered opinion that there is no violation of clause (f) of considered opinion that there is no violation of clause (f) of section 47(xilib) of the Act as argued by the AO. section 47(xilib) of the Act as argued by the AO. Further in view Further in view of the above, the argument of the AO regarding the entries of the above, the argument of the AO regarding the entries of the above, the argument of the AO regarding the entries supposed to be passed by the assessee is not relevant. supposed to be passed by the assessee is not relevant. supposed to be passed by the assessee is not relevant.

4.20 AO placed reliance on McDowell & Co. Ltd Vs CTO, 4.20 AO placed reliance on McDowell & Co. Ltd Vs CTO, 4.20 AO placed reliance on McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230 to state that there is a colourable reported in 1985(3)SCC 230 to state that there is a colourable reported in 1985(3)SCC 230 to state that there is a colourable device in the case. In the said case the Court held that Tax device in the case. In the said case the Court held that Tax device in the case. In the said case the Court held that Tax planning may be legitimate if it is within the framework of law, planning may be legitimate if it is within the framework of law, planning may be legitimate if it is within the framework of law, but colourabl but colourable devices cannot be part of tax planning. I am of e devices cannot be part of tax planning. I am of the opinion that the conversion of the Company into LLP as per the opinion that the conversion of the Company into LLP as per the opinion that the conversion of the Company into LLP as per the provisions of the LLP Act, 2008 and commercial decision the provisions of the LLP Act, 2008 and commercial decision the provisions of the LLP Act, 2008 and commercial decision taken after such conversion cannot be seen as a colourable taken after such conversion cannot be seen as a colourable taken after such conversion cannot be seen as a colourable device. Further in this device. Further in this context. Apex Court have held that it is context. Apex Court have held that it is open for everyone to arrange its affairs in a manner so as to open for everyone to arrange its affairs in a manner so as to open for everyone to arrange its affairs in a manner so as to reduce its tax liabilities to the minimum, and such tax planning reduce its tax liabilities to the minimum, and such tax planning reduce its tax liabilities to the minimum, and such tax planning shall not be considered to be shall not be considered to be illegitimate, provided it is within illegitimate, provided it is within the framework of law. the framework of law. Scheme of tax planning has been Scheme of tax planning has been explained by the Hon'ble Supreme Court in the case of Azadi explained by the Hon'ble Supreme Court in the case of Azadi explained by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan [2003] 263 ITR 706 (SC), wherein it was held Bachao Andolan [2003] 263 ITR 706 (SC), wherein it was held Bachao Andolan [2003] 263 ITR 706 (SC), wherein it was held that the decision in McDowell's case cannot be read as laying that the decision in McDowell's case cannot be read as laying that the decision in McDowell's case cannot be read as laying down that every attempt at tax planning is down that every attempt at tax planning is illegitimate, or that illegitimate, or that every transaction or arrangement which is perfectly permissible every transaction or arrangement which is perfectly permissible every transaction or arrangement which is perfectly permissible under the law, but has the effect of reducing the tax burden of under the law, but has the effect of reducing the tax burden of under the law, but has the effect of reducing the tax burden of the assessee must not be looked upon with dis the assessee must not be looked upon with dis the assessee must not be looked upon with dis-favour. AO further placed reliance on the cases CIT Vs Sri further placed reliance on the cases CIT Vs Sri Meenakshi Mills Meenakshi Mills

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 15 ITA No. 1403/M/2020

Ltd., AIR 1967 SC 819, Life Insurance Corporation of India v. Ltd., AIR 1967 SC 819, Life Insurance Corporation of India v. Ltd., AIR 1967 SC 819, Life Insurance Corporation of India v. Escorts Ltd. (1986) 1 SCC 264 and Juggilal Kamlapat v. Escorts Ltd. (1986) 1 SCC 264 and Juggilal Kamlapat v. Escorts Ltd. (1986) 1 SCC 264 and Juggilal Kamlapat v. CIT AIR 1969 SC 932 to argue that AO is entitled to lift the veil of AIR 1969 SC 932 to argue that AO is entitled to lift the veil of AIR 1969 SC 932 to argue that AO is entitled to lift the veil of the corporate entity and pay regard to the economic re the corporate entity and pay regard to the economic re the corporate entity and pay regard to the economic realities behind the legal façade. | have carefully gone through the behind the legal façade. | have carefully gone through the behind the legal façade. | have carefully gone through the decisions relied by the AO. This is a case where conversion of decisions relied by the AO. This is a case where conversion of decisions relied by the AO. This is a case where conversion of the Company into LLP has taken place as per the provisions of the Company into LLP has taken place as per the provisions of the Company into LLP has taken place as per the provisions of the LLP Act 2008. The RoC has issued the certificate for such the LLP Act 2008. The RoC has issued the certificate for such the LLP Act 2008. The RoC has issued the certificate for such conversion on 17.03.2016. The Income tax Act was amended in nversion on 17.03.2016. The Income tax Act was amended in nversion on 17.03.2016. The Income tax Act was amended in consonance with the enactment of LLP Act 2008 to provide that consonance with the enactment of LLP Act 2008 to provide that consonance with the enactment of LLP Act 2008 to provide that the subject to certain condition laid down in section 47 (xib), the the subject to certain condition laid down in section 47 (xib), the the subject to certain condition laid down in section 47 (xib), the capital gains are not taxable on such conversion of the capital gains are not taxable on such conversion of the capital gains are not taxable on such conversion of the Company into Company into LLP. Assessee apparently has satisfied all the Assessee apparently has satisfied all the conditions. However, suggesting the entries supposed to have conditions. However, suggesting the entries supposed to have conditions. However, suggesting the entries supposed to have been passed by bringing in 'capital reserve' which was not been passed by bringing in 'capital reserve' which was not been passed by bringing in 'capital reserve' which was not there in the books of the erstwhile company, is against the there in the books of the erstwhile company, is against the there in the books of the erstwhile company, is against the principles of Interpretation principles of Interpretation of the laws. The clause (f) is very of the laws. The clause (f) is very clear in specifying the words 'out of balance of accumulated clear in specifying the words 'out of balance of accumulated clear in specifying the words 'out of balance of accumulated profit standing in the accounts of the company as on the date of profit standing in the accounts of the company as on the date of profit standing in the accounts of the company as on the date of conversion'. Interpretation of such unambiguous terms by conversion'. Interpretation of such unambiguous terms by conversion'. Interpretation of such unambiguous terms by reading in new words, giving an unin reading in new words, giving an unintended interpretation is tended interpretation is against the spirit of the law. This kind of reading in new words against the spirit of the law. This kind of reading in new words against the spirit of the law. This kind of reading in new words into the provision is not allowed in law and much less it can be into the provision is not allowed in law and much less it can be into the provision is not allowed in law and much less it can be called "lifting of corporate veil'. Reliance is placed on the "lifting of corporate veil'. Reliance is placed on the "lifting of corporate veil'. Reliance is placed on the decision of the Apex Court in the case decision of the Apex Court in the case of Keshavii Ravi & Co of Keshavii Ravi & Co reported at 183 ITR 1 (SC), where in the Hon'ble Apex Court reported at 183 ITR 1 (SC), where in the Hon'ble Apex Court reported at 183 ITR 1 (SC), where in the Hon'ble Apex Court held that as long as there held that as long as there is no ambiguity in the statutory s no ambiguity in the statutory language, resort to any interpretative process to unfold the language, resort to any interpretative process to unfold the language, resort to any interpretative process to unfold the legislative intention becomes impermissible. Therefor legislative intention becomes impermissible. Therefor legislative intention becomes impermissible. Therefore, it is held

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 16 ITA No. 1403/M/2020 that the case laws relied by the AO with regard to lifting of that the case laws relied by the AO with regard to lifting of that the case laws relied by the AO with regard to lifting of corporate veil is not relevant to the facts of the case. corporate veil is not relevant to the facts of the case. corporate veil is not relevant to the facts of the case.

4.21 Keeping in view the totality of facts and circumstances of 4.21 Keeping in view the totality of facts and circumstances of 4.21 Keeping in view the totality of facts and circumstances of the case as discussed in above paragraphs, I am of the the case as discussed in above paragraphs, I am of the the case as discussed in above paragraphs, I am of the considered opinion that the appellant has complied with all the considered opinion that the appellant has complied with all the considered opinion that the appellant has complied with all the conditions laid down in the proviso placed under section conditions laid down in the proviso placed under section conditions laid down in the proviso placed under section 47(xiib) of the Act particularly there is no violation of clauses (c) 47(xiib) of the Act particularly there is no violation of clauses (c) 47(xiib) of the Act particularly there is no violation of clauses (c) and (f) as sought to be argued by the AO. Therefore, the and (f) as sought to be argued by the AO. Therefore, the and (f) as sought to be argued by the AO. Therefore, the assessee is not liable to tax on conversion of company into LLP is not liable to tax on conversion of company into LLP is not liable to tax on conversion of company into LLP as per LLP Act 2008. The AO is therefore, directed to delete the as per LLP Act 2008. The AO is therefore, directed to delete the as per LLP Act 2008. The AO is therefore, directed to delete the addition of Rs.48,35,00,000 made in the assessment order. The addition of Rs.48,35,00,000 made in the assessment order. The addition of Rs.48,35,00,000 made in the assessment order. The appellant gets relief. These grounds are allowed appellant gets relief. These grounds are allowed.”

9.2 On going through t On going through the factual matrix of the case, the moot he factual matrix of the case, the moot point for deciding here is that whether the partners of the assessee here is that whether the partners of the assessee here is that whether the partners of the assessee LLP had actually benefitted either directly or indirectly on LLP had actually benefitted either directly or indirectly on LLP had actually benefitted either directly or indirectly on conversion of the predecessor company into LLP or not which has conversion of the predecessor company into LLP or not which has conversion of the predecessor company into LLP or not which has been alleged by the As been alleged by the Assessing Officer. It is a trite principle in law sessing Officer. It is a trite principle in law that the conditions stipulated under the Act should be strictly that the conditions stipulated under the Act should be strictly that the conditions stipulated under the Act should be strictly construed and adhered to. Further, it is also a trite principle in law construed and adhered to. Further, it is also a trite principle in law construed and adhered to. Further, it is also a trite principle in law that no new words can be incorporated in the statute which can that no new words can be incorporated in the statute which can that no new words can be incorporated in the statute which can give unintended interpretation against the spirit of the law. The ended interpretation against the spirit of the law. The ended interpretation against the spirit of the law. The allegation of the Assessing Officer is that the conditions in clause (c) allegation of the Assessing Officer is that the conditions in clause (c) allegation of the Assessing Officer is that the conditions in clause (c) and (f) of section 47(xiiib) of the Act and (f) of section 47(xiiib) of the Act being that no direct or indirect that no direct or indirect benefit should be passed on to the shareholders in any form or benefit should be passed on to the shareholders in any benefit should be passed on to the shareholders in any manner, other than by way of share of profit and capital contribution manner, other than by way of share of profit and capital contribution manner, other than by way of share of profit and capital contribution

M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 17 ITA No. 1403/M/2020 in the LLP and that no amount be paid either directly or indirectly to in the LLP and that no amount be paid either directly or indirectly to in the LLP and that no amount be paid either directly or indirectly to any of the partner out of balance of accumulated profits standing in any of the partner out of balance of accumulated profits standing in any of the partner out of balance of accumulated profits standing in the accounts of the company on the da the accounts of the company on the date of conversion for a period of te of conversion for a period of 3 years ; are violated as the Goodwill of Rs. 48,35,00,000/ are violated as the Goodwill of Rs. 48,35,00,000/ are violated as the Goodwill of Rs. 48,35,00,000/- has been credited to the partners current account post conversion. In been credited to the partners current account post conversion. In been credited to the partners current account post conversion. In this regard, we find that the partners of the assessee LLP and the this regard, we find that the partners of the assessee LLP and the this regard, we find that the partners of the assessee LLP and the erstwhile shareholders of erstwhile shareholders of the predecessor company can be the predecessor company can be considered to have obtained any benefit directly or indirectly only if considered to have obtained any benefit directly or indirectly only if considered to have obtained any benefit directly or indirectly only if the same fits into the specific conditions prescribed. We find that the same fits into the specific conditions prescribed. We find that the same fits into the specific conditions prescribed. We find that the ld. CIT(A) have duly considered that the the ld. CIT(A) have duly considered that the clause (c) operates only clause (c) operates only till the date of conversion i.e. 17/03/2016 and it is clear from the f conversion i.e. 17/03/2016 and it is clear from the f conversion i.e. 17/03/2016 and it is clear from the balance sheets pre conversion and post conversion that the balance sheets pre conversion and post conversion that the balance sheets pre conversion and post conversion that the shareholders have not received any consideration or benefit directly shareholders have not received any consideration or benefit directly shareholders have not received any consideration or benefit directly or indirectly. Further, as regards clause(f) refers to amount paid to Further, as regards clause(f) refers to amount paid to Further, as regards clause(f) refers to amount paid to the partner of LLPout of the balance of the accumulated profits partner of LLPout of the balance of the accumulated profits partner of LLPout of the balance of the accumulated profits standing in the accounts of the company on the date of conversion, standing in the accounts of the company on the date of conversion, standing in the accounts of the company on the date of conversion, which in the present case cannot be said to be violative in view of which in the present case cannot be said to be violative in view of which in the present case cannot be said to be violative in view of the fact that the commercial expediency explained by the assessee the fact that the commercial expediency explained by the ass the fact that the commercial expediency explained by the ass has not been controverted by the Assessing Officer and who cannot has not been controverted by the Assessing Officer and who cannot has not been controverted by the Assessing Officer and who cannot step into the shoes of the assessee to decide and direct as to how step into the shoes of the assessee to decide and direct as to how step into the shoes of the assessee to decide and direct as to how the assessee should conduct its state of affairs. Also, the condition the assessee should conduct its state of affairs. Also, the condition the assessee should conduct its state of affairs. Also, the condition prescribed relates to the balance of accumulate prescribed relates to the balance of accumulated profits as on date d profits as on date of conversion out of which amount is paid to the partner, however, of conversion out of which amount is paid to the partner, however, of conversion out of which amount is paid to the partner, however, since the accumulated profits did not include the amount of since the accumulated profits did not include the amount of since the accumulated profits did not include the amount of Goodwill in the books of the predecessor company, there cannot be Goodwill in the books of the predecessor company, there cannot be Goodwill in the books of the predecessor company, there cannot be M/s Brizeal Realtors and Development LLP zeal Realtors and Development LLP 18 ITA No. 1403/M/2020 said to be any violation of clause (f) eit said to be any violation of clause (f) either. Hence, merely on her. Hence, merely on presumptions of the Assessing Officer, additions cannot be presumptions of the Assessing Officer, additions cannot be presumptions of the Assessing Officer, additions cannot be sustained which the ld. CIT(A) have categorically dealt with sustained which the ld. CIT(A) have categorically dealt with sustained which the ld. CIT(A) have categorically dealt with considering all the aspects of the case. considering all the aspects of the case.

9.3 Accordingly, the the grounds of appeal of the revenue are grounds of appeal of the revenue are dismissed.