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2016 (12) TMI 360 - BOMBAY HIGH COURT

2016 (12) TMI 360 - BOMBAY HIGH COURT - TMI - Conversion of the partnership firm into a Private Limited Company - premature transfer of shares - revocation of exemption from Capital gains tax - Held that:- AAR has in a very reasoned Order, has taken a view that no capital gains accrued or attracted at the time of conversion of the partnership firm into a Private Limited Company. In part IX of the Companies Act, therefore, notwithstanding the non-compliance with clause (d) of the proviso of Secti .....

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he transaction in question cannot be faulted. It is also to be noted that even immediately after such conversion in question from the partnership firm into a Private Limited Company, the assessment with regard to the income of the new Company as well as of the respective partners were filed and there was no objection or grievances raised by the Assessing Officer that any capital gains had to be paid on account of the incorporation of the Company in terms of the said provisions. The transfer of s .....

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ion 47(xiii), the exemption from capital gains enjoyed by the Assessing firm upon conversion into a Private Limited Company, ceases to be in force cannot be accepted. We have already examined that there are no capital gains which have accrued on account of such incorporation. In such circumstances, we find that the said contention of the learned Counsel appearing for the Petitioner that in view of the transfer of the capital assets or intangible assets, there are capital gain tax payable by the .....

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d ruling in terms of the said depreciation. Considering the said observations and taking note of the findings of the learned AAR, we find that there is no case made out for interference by this Court under Article 226 of the Constitution of India. The Petitioners were given an opportunity by the learned AAR and the contentions raised were duly considered whilst passing the impugned Orders. We find no reason to interfere in the impugned Orders passed by the learned AAR. - WRIT PETITION NO. 510 OF .....

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f Income Tax (AAR). 3. Briefly, it is the contention of the Petitioners, that the Respondent is a non-resident Company incorporated under the laws of Luxembourg and it is the holding of its wholly owned subsidiary M/s. Anandeya Zinc Oxides Pvt. Ltd. (Anandeya in short), an Indian Company assessed with ACIT, Margao. It is further their case that the said Respondent purchased 15,49,500 shares of ₹ 10/- each or 99.96% of the shares of Anandeya and the balance 500 shares of ₹ 10/- each w .....

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further their contention that the firm set up a plant for manufacture of high purity white seal zinc oxide of annual capacity 5000 tones per annum and the plant commenced production in April 1995 and was converted into 100% export oriented unit in 1996. The Assets of the partnership was revalued for ₹ 5 crores as against the net worth of the business of ₹ 3,05,896/- relevant to the assessment year 1998-1999. The excess of the revaluation of assets of ₹ 4,96,94,104/- was credit .....

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on conversion into limited company ceased to be in force. It is further their case that the non resident Respondent M/s. Umicore Finance Luxenbourg, acquired shares of M/s. Anandeya and was not connected in any way to the transaction which had taken place on 13.09.2005. Therefore, it is the case of the Petitioners that the transaction on 13.09.2005 was not within the purview of Section 245N(a)(i)(ii) or (iii) and the Order of the AAR is without jurisdiction. It is further their contention that t .....

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aggrieved by the said assessment, the Petitioners have filed the above Petition. 4. Upon hearing the learned Counsel appearing for the Petitioner and the Respondents who have reiterated the contentions raised in the Writ Petition and the findings of the AAR in the impugned Order, we shall proceed to examine the contentions sought to be raised by the Petitioners herein. 5. The undisputed facts in the present Petition are that the Respondents entered into a share purchase Agreement on 01.07.2008 w .....

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nto a Company, there is no sale/extinguishment of any rights and no transfer of asset as envisaged in Section 45(1) of the Income Tax Act, can be stated to have taken place and, as such, even the provisions of Section 47(xiii)(d) are in violation, it does not attract capital gains to the Respondent's subsidiary because Section 47(xiii) applies only to firm that are succeeded by the company by sale. But, however, it is the contention of the Petitioner that Section 2(47) of the Income Tax Act, .....

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AAR in the impugned Order has noted that on 09.10.2009, the Respondents have clarified that whilst converting the partnership firm into a Company, there was no revaluation of the assets and the assets and liabilities of the firm as also the partners, capital and current accounts were taken at their book value in the accounts of the Company. It is also pointed out that the first year audited accounts of the Company for the period 13.09.2005 to 31.03.2006, were also filed and found that the net wo .....

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, and shall be deemed to be the income of the previous year in which the transfer took place. Section 47 lays down that nothing contained in section 45 shall apply to the transfers specified therein. We are concerned with clause (xiii) in that section which reads thus: Clause (xiii) of Section 47 Nothing contained in section 45 shall apply to the following: (xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the .....

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; (b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession; (c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (d) the aggregate of the shareholding in the company of the partners of the firm is not less .....

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ther clause (d) requires to be satisfied. The learned AAR has rightly pointed out that the first part of clause (d) has been satisfied but, however, it is noted by the learned AAR the requirements of second part of clause (d) i.e. the shareholding of 50% or more should continue to be as such for the period of five years from the date of succession, has not been fulfilled in the instant case by reason of the transfer of shares by the Indian Company to the Applicant before the expiry of five years .....

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r section 45 by virtue of conditions laid down in the provision to clause (xiii) or the proviso to clause (xiv) of section 47 shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements of the proviso to clause (xiii) or the proviso to clause (xiv), as the case may be, are not complied with. 9. Subsection(3) of Section 47A under which the transfer Company has forfeited its claim to seek exclusion uses the word the amount .....

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use was inserted with effect from April 1, 1999. Therefore, we are not concerned with the amendment. However, it provides a clue to the legislative intent. In our opinion, this clause has been introduced with effect from April 1, 1999, in order to encourage more and more firms become limited companies. It also indicates the diference between transfer and transmission. Basically, when a firm is treated as a company under Part IX, it is a case similar to transmission. This is amply made clear by c .....

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ther pointed out that if no profit or gains arise earlier when the conversion of the firm into a Company took place or if there was no transfer at all of the capital assets of the firm at the point of time, the deeming provision under Section 47A(3) cannot be inducted to levy the capital gain stakes. The learned AAR further found that the shares allotted to the partners of the existing firm consequent upon the registration of the firm as a Company, did no give rise to any profit or gains. It is .....

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ting firm. The learned AAR also took support in the Judgment reported in 263 ITR 345 in the case of Texspin Engg. Mfg. Works, where the issue was viewed from another angle i.e. from the stand point of Section 48 of the Act in a case of similar conversion of a firm into a company. It is further noted that the full value of consideration cannot be attributed to the transaction. The learned AAR also noted that the Apex Court has held that the provisions of Section 48 has to be read as an integral p .....

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rlying the said judgment still holds good. Though we are not included to express a final opinion on the point of transfer, we would like to say this much: Section 47(xiii) read with Section 47A(3) cannot be construed to introduce a fiction to the effect that the income which is not liable to be taxed under the other provisions of the Chapter on capital gains can be deemed to be capital gains, if the violation of conditions take place. May be, these provisions were introduced on a supposition tha .....

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ave to go back to the basic provisions, namely Section 45(1) and Section 48 and S.47- A(3) cannot be read as a 'stand alone' provision. 13. In the light of the above discussion, it is ruled that no capital gains accrued or arose at the time of conversion of partnership firm into a private limited company under Part IX of the Companies Act and therefore, notwithstanding the noncompliance with clause (d) of proviso to Section 47(xiii) of the Income Tax Act, by reason of premature transfer .....

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of the Companies Act, therefore, notwithstanding the non-compliance with clause (d) of the proviso of Section 47(xiii) of the Income Tax Act by premature transfer of shares, the said Company is not liable to pay capital gains tax. These findings have been arrived at essentially looking into the fact that there was revaluation of assets at the time of conversion of the firm M/s. Anandeya Zinc Oxides Private Limited. The said finding of fact has not been disputed by the learned Counsel appearing f .....

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id on account of the incorporation of the Company in terms of the said provisions. The transfer of shares in favour of the Respondent by the erstwhile partners who were shareholders of M/s. Anandeya Zinc Oxides Private Limited and such partners/share holders are liable to pay capital gains even if acceptable, would not affect the decision passed by the learned AAR whilst coming to the conclusion that there were no capital gains at the time of incorporation of the new Company by the said partners .....

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he transfer of the capital assets or intangible assets, there are capital gain tax payable by the transferee Company, cannot be accepted. As pointed out herein above, there was no capital gains payable at the time of the incorporation of the Company from the erstwhile partnership firm. 13. The next contention of the learned Counsel appearing for the Petitioner is that the application under Section 245(N) of the Respondents itself was not maintainable. The main submission on that aspect is that t .....

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. The learned AAR whilst dealing with such aspect has rightly observed in the Order dated 06.07.2009 at para 6 thus : 6. It seems to us that the application is maintainable having regard to the wider language of sub-clause (i) of section 245N(a) in contrast with the language employed in sub-clause (ii). There is no specific requirement in sub-clause (i) that determination should relate to the tax liability of an on-resident. Going by the averments of the applicant, it is clear that the capital g .....

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allowed under section 245R92) and posted for hearing on merits on 11th August, 2009. 15. Considering the said aspect and as looking into the question as reformulated, the question as to whether capital gains are liable to be paid or not in terms by the transferee Company being a non resident Company, the Respondent herein, would be a matter which would come within the scope of advanced ruling in terms of the said depreciation. 16. In this context, the High Court of Madras in the Judgment report .....

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6ITR169(SC) that the court is concerned with the legality of the procedure followed and not the validity of the order and the courts under judicial review are concerned not with the decision but with the decision-making. The relevant portion of the judgment of the Supreme Court in this regard is as follows (page 623 of 201 ITR): The scope of enquiry, whether by the High Court under Article 226 or by this court under Article 136 is also the same whether the order of the Commission is contrary to .....

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e Bench comprising himself and S.R. Pandian J., observed that, in such a case, this court is 'concerned with the legality of the procedure followed and not with the validity of the order'. The learned judge added 'judicial review is concerned not with the decision but with the decisionmaking process'. Reliance was placed upon the decision of the House of Lords in Chief Constable of North Wales Police v. Evans [1982] 1 WLR 1155 (HL). Thus, the appellate power under Article 136 was .....

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