TMI Blog2019 (8) TMI 1641X X X X Extracts X X X X X X X X Extracts X X X X ..... the cumulative fulfillment of the prescribed conditions has not been satisfied. Therefore, the transaction is a 'transfer' exigible to capital gains tax under the provisions of section 45 of the Act. In view of the specific provisions and also considering the judicial pronouncements as discussed earlier, we have no hesitation in ruling that conversion of the equity shares held by the shareholders in Domino India into partnership interest in Domino LLP, consequent upon the conversion of the company into LLP, was a transfer within the meaning of section 2(47) of the Act. Whether computation provision fails? - On the conversion of a company into a LLP, the shares in the hand of the share-holders of the company are converted into capital in the LLP. Thus, the shareholders relinquish their shareholding in the company and acquire capital in the LLP in the same proportion as was the shareholding in the private limited company. The full value of the consideration received/accrued to each shareholder, as a result of relinquishment of shares, will be the Value of the Capital in the newly formed LLP for the purpose of computation of Capital Gains under section 48 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of consideration for the transfer of shares is his partnership interest in the LLP which might be equal to the value of shareholder's fund in the company - to work out the capital gains, the cost of acquisition of the shares incurred by the shareholder has to be reduced from this full value of consideration. The transaction will certainly give rise to capital gain as one has to reduce the cost of acquisition of the shares from the full value of consideration. Therefore, even if the value of partner's interest in the LLP is equal to the value of shareholder's interest in the company, it does give rise to taxable capital gain in the hands of the shareholder. Ruling:- (1) The conversion of the equity shares held by the Applicant shareholder in Domino India into partnership interest in Domino LLP, consequent upon the conversion of Domino India into a Limited Liability Partnership, was a transfer within the meaning of section 2(47) of the Act. (2) On conversion of Domino India into Domino LLP, the computation provision under section 48 of the Act are workable and capable of being implemented for working out the capital gains arising in the hands of the Applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship consequent upon the conversion of Domino India into a Limited Liability Partnership, would be regarded as a transfer of those shares within the meaning of section 2(47) of the Act? (2) On the facts and in the circumstances of the case, on conversion of Domino India into a Limited Liability Partnership, whether the computation provision under section 48 of the Act are workable and capable of being implemented, or whether the said provisions would breakdown and fail? (3) On the facts and in the circumstances of the case, as the value for the partners' right or interest in the proposed Limited Liability Partnership cannot be said to be more than the value of the shareholders' interest in the private limited company, would the transaction give rise to any taxable capital gain? Submissions of the Applicant 3. At the outset the Applicant's learned counsel informed that an approval was obtained by the Applicant for conversion of Domino India into LLP in May 2012 subject to certain conditions. Based on the approval from FIPB and meeting the conditions mentioned therein, Domino India was subsequently converted into Domino Printech LLP: ( Domino LLP ) vide cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LLP, the shares do not continue to exist and ownership in such shares is also not transferred to any other person. It was, therefore, contended that the transaction of parting with the shares did not constitute 'relinquishment' of shares and was not within the purview of 'transfer'. 5. As regards the fourth limb of the transfer extinguishment of rights the Applicant contended that extinguishment means where a right in one is being merged or consolidated with another. The term signifies existence of two entities where a right in one is either merged or consolidated in another. In the present case of the Applicant, there was a conversion of a private limited company into a LLP and the LLP came into existence only when company ceased to exist. Therefore, there was no merger or consolidation of the right of the company in the LLP; rather it was a substitution of shareholding with proportionate partnership interest. It was fairly conceded by the Applicant that the Supreme Court in the case of CIT v. Grace Collis [2001](115 Taxman 326) had observed that the rights of the shareholders in the shares of amalgamating company stand extinguished upon the amalgamation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y into an LLP took place, or if there was no transfer at all of the capital asset in the hands of the shareholder at that point of time, the deeming provisions under section 47A(4) cannot be invoked to levy the capital gains tax. The Appellant relied upon the ruling of the AAR in the case of Umicore Finance Luxembourg, (323 ITR 25) (AAR-New Delhi) in support of this contention. 7. The Ld. Counsel for the Appellant drew our attention to legal consequences and implications of conversion of a private limited company into a LLP under the provisions of the LLP Act of 2008 and took us through the sections 55 to 57 of the LLP Act which deal with the: (a) Conversion of an existing partnership firm into a LLP (Section 55); (b) Conversion of an existing private company into a LLP (section 56); and, (c) Conversion of an unlisted public company into a LLP (section59). It was submitted that the LLP Act regards the conversion of an existing partnership firm into a LLP as being conceptually and legally on exactly the same footing as the conversion of a private limited company into a LLP. Both these types of conversions are governed in the very same manner by section 58(4) of the LL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the company under Chapter IX and, therefore, even if one were to assume that there was a transfer, it would not give rise to a taxable capital gain. It was also held that there was no consideration received by or accruing to the transferor firm as a result of the transfer, within the meaning of section 48 of the IT Act. The Applicant submitted that this decision directly and squarely covers the present case as the provisions of Chapter IX of the Companies Act, 1956 are in parimateria with the provisions of the LLP Act. The Applicant further submitted that the judgment of the Bombay High Court in the case of Texspin was followed in a number of cases and accordingly reliance was placed on the following decisions:- (a) United Fish Nets (A.P. High Court) - 372 ITR 67 (b) Umicore - (AAR) 189 Taxmann 250/323 ITR 25 (c) Umicore - (Bombay High Court) 291 CTR 174 (d) Unity Care - (Bangalore ITAT) 103 ITD 53 (e) Ravishankar R. Singh (Mumbai Tribunal) 45 taxmann.com 359 (f) Ravishankar R. Singh (Mumbai HC) (ITA 207 of 2015) (g) CADD Centre (Madras HC) 65 Taxmann.com 291 9. It was further submitted that the decision of Grace Collis (supra) relied upon by the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Supreme Court in the case of CIT v. Grace Collis [2001] (115 Taxman 326)(SC), wherein it was held that amalgamation amounts to transfer of shares in the hand of shareholders. Reliance was also placed on the decision of the Supreme Court in the case of Kartikeya V. Sarabhai v. Commissioner of Income-Tax [1997] (94 Taxman 164)(SC). It was held in that case that reduction in face value of preference share was proportional extinguishment of right. Further, reliance was also placed on the judgement of the Hon'ble Supreme Court in the case of Anarkali Sarabhai v. Commissioner of Income-tax [1997](90 Taxman 509)(SC) wherein it was held that redemption of preference shares was relinquishment and there was no requirement that asset must continue to exist. 12. The revenue has submitted that the present transaction was also covered under the term 'exchange' as the two persons involved were the Applicant shareholder and the LLP, and the capital asset being exchanged was equity share holding with LLP interest. It was submitted that the shareholder had surrendered its interest in the equity holding of the company and the LLP in turn had given him the interest in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was partnership interest which was higher in value than the face value of the equity shares. The specific submission made by the revenue on the value of partner's interest is as under: The Applicant has not given statement of account as on date of dissolution 28th Nov 2016. As on 31st March 2016 share capital was 4.08 crore and reserves and surplus were 197.8 crore. And this too at book value. Thus even at book value there is consideration flowing of 201.9 crore against investment of 4.08 crore. This would only increase when market value of assets is taken. Hence, the market value of assets (less liability) of the company would be the consideration at the date of transfer (28th Nov 2016). It is against this market value (arrived at under section 50D) of asset transferred that the applicant got partnership interest. Rejoinder of the Applicant 16. On the issue of deeming fiction of transfer as contended by the revenue the Applicant submitted that the statutory deeming provision was considered by Hon'ble Bombay High Court in the case of Texspin (supra) and specifically held that the conversion of firm into a company constituted a mere changing of cloak which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act are workable and capable of being implemented. It will be, therefore, relevant to first examine the provisions of the I.T. Act in respect of definition of transfer and the charging of capital gain on transfer of a capital asset. Whether transfer? 18. The provision of section 2(47) of the Act defines transfer as under: (47) transfer , in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. In fact the Applicant's shareholding in Domino India was replaced by the partnership interest in Domino LLP. On conversion of a company into LLP, the company is dissolved and removed from the records of the Registrar of Companies. The provision of section 58(4) of the LLP Act provides as under: (4) Notwithstanding anything contained in any other law for the time being in force, on and from the date of registration specified in the certificate of registration issued under the Second Schedule, the Third Schedule or the Fourth Schedule, as the case may be,- (a) there shall be a limited liability partnership by the name specified in the certificate of registration registered under this Act; (b) all tangible (movable or immovable) and intangible property vested in the firm or the company, as the case may be, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, as the case may be, and the whole of the undertaking of the firm or the company, as the case may be, shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; and (c) the firm or the company, as the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset as contemplated by Section 45(1) of the Act in this case. However, while giving this finding the Hon'ble Court had not considered the amendments brought vide insertion of clause (xiii) to Section 47 of the Act vide Finance (No. 2) Act 1998 which provided that where a Firm is succeeded by a company then such transaction shall not be regarded as transfer, subject to fulfilment of certain conditions. The concerned year involved in this case was A.Y. 1996-97, which was prior to the said amendment, and, therefore, the Court deliberately did not consider that amendment. To reproduce from the order: 6. As stated above, in this case we are concerned with the assessment year 1996-97. Therefore, in this case, we are not concerned with clause (xiii) inserted by Finance (No. 2) Act, 1998 in section 47 under which it is provided that where a Firm is succeeded by a company in the business carried on by it as a result of sale or otherwise, of any capital assets, then such transaction shall not be regarded as transfer. This clause was inserted with effect from 1st April, 1999. Therefore, we are not concerned with that amendment. 22. It was held by the Hon'ble Court in this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47 which was in respect of conversion of the Company into LLP. Thus, the decision of Texspin rather enunciates the principle that there was extinguishment of the rights in the capital assets on reconstitution of firm and introduction of new partners. 24. The finding that there was statutory vesting of properties in the Company and the cloak given to the Firm was replaced by a different cloak and there was no transfer of a capital asset as contemplated by Section 45(1) of the Act is not found applicable in this case for the following reasons: (i) The issue decided in the case of Texspin was capital gains in the hands of the Firm and not its partners. We are not concerned with the capital gain arising in the hands of firm or the company. The capital gain to be considered in the present case is in the hands of the shareholder of the company and not in the hands of the company or the firm. Therefore, the ratio of this decision cannot be applied to decide the capital gain in the hand of shareholder. (ii) The conversion of a company into a LLP is differently placed in comparison to succession of a partnership firm by a company. The provisions of LLP Act specifically provides fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitutes transfer under the provisions of the Act. The deeming provision of Explanation-2 of section 2(47) stipulates for transfer on disposing of or parting with an asset or any interest therein, and the extinguishment of the shareholder's interest in the shareholding of the company on its conversion into LLP is certainly covered under the ambit of this deeming provision. 26. The Hon'ble Supreme Court has held in the case of Grace Collis (supra) that the expression 'extinguishment of any rights therein' as occurring in section 2(47)(ii) of the Income-tax Act extends to mean extinguishment of rights independent of or otherwise than on account of transfer. Accordingly, it was held that there was transfer of shares of amalgamating company within meaning of section 2(47), read with section 47(vii) of the Act. To quote from the order: 15. We have given careful thought to the definition of 'transfer' in section 2(47) and to the decision of this Court in Vania Silk Mills (P.) Ltd.'s case (supra) . In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Grace Collis was distinguished by the Special Bench of ITAT in the case of Bennett Coleman Co. Ltd. [14 taxmann.com 1 (Mum)]. It was held by the Ld. ITAT in this case that the assessee did not receive any consideration for reduction of share capital. The number of shares held by the assessee was reduced to 50% but nothing had moved from the side of the company to the assessee. It was on these facts that it was held that until and unless consideration was present, the computation mechanism of section 48 was not workable. It was, therefore, held that loss arising on account of reduction of share capital cannot be subjected to provision of Section 45 read with section 48 and accordingly such loss was not allowed as capital loss. The fact that even extinguishment of rights in a particular asset would amount to transfer was never disputed in this decision. 28. In the case of Kartikeya V Sarabhai (supra) the Apex Court had held that reduction of share capital by company paying a part of the capital by reducing face value of its share would result in extinguishment of proportionate right in shares held by shareholders and the amount paid by the company to shareholder on reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability after conversion. However, if there was a violation of these conditions, the provisions of section 45 was applicable. The provision regarding conversion of a private company or an unlisted public company into a limited liability partnership (LLP) was brought on statute with effect from 1st April, 2011 by insertion of clause (xiiib) to section 47 of the Act, which is as under: 47. Nothing contained in section 45 shall apply to the following transfers: (xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the 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 conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 (6 of 2009): Provided that- (a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership; (b) all the shareholders of the company immediately before the conversion become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a company into an LLP had definite tax implications and the transfer of assets on conversion attracted levy of capital gains tax and it was 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, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain conditions. We find from perusal of the 'Memorandum' explaining the purpose and intent behind the enactment of sub-section (xiiib) 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 vide the Finance Act, 2010 introduced Sec. 47(xiiib) 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 fulfillment of the conditions contemplated therein, shall not be regarded as a 'transfer' for the purposes of Sec. 45 of the Act. In the instant case the cumulative fulfillment of the prescribed conditions has not been satisfied. Therefore, the transaction is a ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not satisfied in this case. Thus, the transaction was squarely covered u/s 45 of the Act and was liable for capital gains tax. 34. The provision of section 47A(4) of the Act stipulates for charging capital gains tax on failure to comply with the conditions prescribed in clause (xiiib) of section 47 of the Act as under: (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. In the instant case the requirement of the proviso to Section 47(xiiib) was not complied in the year of conversion of the company into LLP itself. Therefore, the profit or gain arising in the hand of the shareholder was chargeable to capital gains tax in his hand in the year of conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 48 of the Act. The receipt of bonus share, if any, will not have any cost since it is out of the reserves of the company. 36. The full value of consideration received by the Applicant shareholder in the instant case will be the value of capital/partnership interest in the LLP. The revenue has pointed out that the consideration received in the form of partnership interest in LLP was certainly higher than the face value of the equity shares foregone. As against share capital of ₹ 4.08 crores as on 31st March 2016, the reserves and surplus were ₹ 197.08 crores and accordingly the revenue worked out the book value of the partnership interest at least to the extent of ₹ 201.90 crores as against investment in share capital of ₹ 4.08 crores only. According to revenue the full value of consideration of the shares will be much higher if their market value is taken as prescribed under section 50D of the Act, which stipulates as under: 50D. Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany at the same price at which it was acquired by the shareholder. Further, the cost of acquisition may vary from person to person. If a shareholder had acquired the shares at market value higher than the face value of the shares his cost of acquisition will certainly be higher than another shareholder who acquired it on face value. Therefore, the value of partnership interest in LLP cannot be taken as cost of acquisition of shares. The cost of acquisition of shares will remain the price at which the shares were acquired by the shareholder. 38. The Applicant has also contended that no consideration was accruing or arising to the transferor company which was dissolved and ceased to exist. Further that there would be no taxable gain considering that the amount or value of the capital account balance in the books of account of the firm would be exactly the same as the amount of share capital and reserves in the books of account of the erstwhile company. When a company is converted into LLP, the capital gain arises not only in the hands of the company but also its shareholders. The contention of the Applicant might be applicable and may have to be considered while working out the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f consideration, as in the case of section 45(4). Under the circumstances it was held that the computation was not possible under the provision of section 45(1) of the Act. Thus, the precise issue involved in this case was computation of capital gains tax u/s 45(1) vis- -vis 45(4) of the Act, in the context of which the decision was rendered. The provision of section 50D of the Act was also not on statute when this decision was given. Further, this decision was not in the context of capital gains in the hands of the shareholders of the company converted into LLP. Therefore, the ratio of this decision cannot be applied to the facts of the present case. 41. The Applicant has also relied upon the decision of this Authority in the case of Umicore Finance Luxemborg (supra). The issue involved in that case was capital gains arising at the time of conversion of partnership firm into a private limited company under Part IX of the Companies Act. Section 47(xiii) specifically excluded such transfer from the purview of capital gains taxation, subject to the fulfillment of the conditions laid down in clauses (a) to (d). In that case the requirement in the second part of clause (d) i.e. shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or gain as the value of shares was equal to the value of the sum total of their interest in the firm might be applicable in the case of the company which is converted into LLP but the same cannot be extended to the capital gain arising in the hands of shareholders of the erstwhile company. Further this ruling was delivered by relying upon the decision of Hon'ble Bombay High Court in the case of Texspin (supra) and as already discussed earlier the ratio of the said decision cannot be applied to the facts of the present case. The Hon'ble Bombay High Court had upheld this ruling by endorsing that transferee company was not liable to pay capital gains tax. However, in the present case we are not concerned with the capital gain arising in the hand of the transferee LLP or the transferor company but in the hand of the shareholder. Therefore, the decision in the case of Umicore also does not come in the way of charging capital gains in the hands of the shareholder. 43. In the case of United Fish Nets (supra) relied upon by the Applicant, the firm was converted into a company and it was held by the A.P. High Court that section 45(4) was not attracted as the very first condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on the earlier decision in the case of Texspin and the Hon'ble court only held that no substantial question of law arose. 46. In the case of United Breweries Ltd. [325 ITR 485 (Karnataka)] the assessee has renounced right to subscribe to shares in favour of general public for no consideration and it was held by the Hon'ble Court that there was no transfer by the transferor and the loss claim by the assessee as a result of such renunciation was not allowable as capital loss. Thus, the facts of this case were totally different and the ratio of this decision is not applicable to the present case. 47. In the case of Aravali Polymers LLP [47 taxmann.com 335 (Kolkata-Trib.)] the facts were identical as the company was converted into LLP and all the conditions as stipulated in proviso to Section 47(xiiib) were not fulfilled. It was held that in such circumstances, section 45 comes into play and capital gain in respect of the transfer of assets by the company to the LLP was to be computed for which the matter was restored to the A.O. It was also held that as the shares were transferred at the book value, the capital gains had to be computed on the basis that the book valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gain? 50. The Applicant has contended that it can be said to have gained from the conversion of the company into a LLP only in case the worth of the partnership interest was greater than the worth of the equity shares held in the company. It was submitted that shareholder's fund include share capital, reserves surplus and money received against share warrants; and the accounting principles recognize the reserves and surpluses as part of shareholder's fund. On conversion of the company into LLP, the shareholder's right to shareholder's fund got converted into their partnership right and the interest in the LLP. It was further submitted that if all the shareholders got partnership interest in the LLP equal to their right in the shareholder's fund in the company then there would be no profit or gain accruing to such shareholders pursuant to conversion of the company into LLP. 51. In the present case we are concerned that the capital gains arising in the hand of the shareholder and not in the hand of the erstwhile company. The value of total shareholder's fund as appearing in the books of the company might be equal to the value of total partners ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
