TMI Blog2022 (6) TMI 1276X X X X Extracts X X X X X X X X Extracts X X X X ..... of the issue and facts attached to it. Low income in comparison to high loans/advances/investment in shares - The reason is just an indication for Assessing Officer to examine various aspects. Once the low income is to be examined, it has to be seen in consonance of the higher loans standing in the balance-sheet and in the present case, the interest income is shown only at Rs.14.29 lakhs, whereas the loans and advances are standing to the tune of Rs.13.97 crores. AO went on to examine this aspect of low income, he then asked the assessee about the investment made during the year because the ld. Assessing Officer wanted to see why the assessee has earned low income when there are huge loans and advances. When AO was examining the loans and advances, he came to know that this is the first year of incorporation and the LLP has been converted from the company. AO asked the assessee about the source of investment. Then based on this question, the assessee submitted that the source is the share capital and security premium of the erstwhile company before being converted to LLP and the ld. AO went on to examine the issue of security premium reserve. Second reason for high inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 2(47) of the Act as the proviso (a) to (e) of section 47(xiiib) of the Act are not attracted. In the instant case, clause (a) of the proviso to section 47(xiiib) needs to be examined. Since the Security Premium Reserve of the erstwhile Company was a liability and not eligible to be distributed as dividend to its shareholders, the same needs to carry the same characteristic in the converted LLP. But in the newly formed LLP, the Security Premium Reserve has been shown under the head Reserve Surplus , which for the purpose of GDLLP is a profit available for distribution to its designated partners after three years from the date of said conversion. Now since the nature of liability of Security Premium Reserve is not the same to the nature of liability shown in Reserve Surplus in the newly formed LLP, in our considered view, the assessee s case falls under the proviso (a) and since all the assets and liabilities are not converted into assets and liabilities of the Limited Liability Partnership, the said conversion is a transfer u/s. 2(47) of the Act and provision of section 45 of the Act needs to come into operation. As far as treatment of Security Premium Reserve in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Company is converted into LLP and in the instant case, i.e. A.Y. 2015-16 for which the ld. Assessing Officer has rightly made the addition for the Security Premium Reserve of the erstwhile Private Limited as income of the newly incorporated LLP. We, therefore, reverse the finding of the ld. CIT(Appeals) and confirm the addition made by the ld. Assessing Officer and allow Ground No. 1 raised by the Revenue. Disallowance of expenses - Disallowance includes disallowance of rent and the remaining balance towards salary and other expenditure - So far as the rent expenditure is concerned, the assessee has filed the details of rent paid to Munush Chand HUF which are incurred in cash at Rs.1,72,000/- , which is below the limit provided u/s 194I of the Act. This disallowance of rent expenditure is deleted. As regards the remaining sum same relates to salary expenditure but no details of the same have been filed before the lower authorities. We direct the assessee to furnish the necessary details before the ld. Assessing Officer and if ld. Assessing Officer is satisfied, he can allow the claim in accordance with law. Thus Ground No. 2 is partly allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee-LLP upon conversion as a taxable profit. 2. Moreover there was no substantial increase in business activity. But there were substantial increase in salary and rent without deduction of any professional tax or no tax deducted at source. 4. The assessee in its Cross Objection before the Tribunal has raised the following grounds: 1. That Id. CIT(A) erred in not adjudicating the additional ground taken by the appellant-LLP. 2. That the case of the assessee was selected for limited scrutiny but the AO made additions beyond the scope of limited scrutiny without taking approval of the competent authority and therefore the Id. CIT(A) should have quashed those additions made beyond the scope of limited scrutiny. 5. Brief facts of the case are that the assessee is a Limited liability Partnership (in short LLP ) and stated to be engaged in the business of buying and selling of merchandise and commission agent. The LLP was incorporated during the year under appeal and its first return of income was filed on 07.09.2015 declaring income of Rs.12,616/-. The case of the assessee was selected for limited scrutiny through CASS for the following two reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee referred to paper book dated 29.06.2021, the Instruction No.20/2015 dated 29.12.2015, Instruction No. 5/2016 dated 14.07.2016 and Notification No. DGIT(Viz.)/HQ/81/2017-18 dated 30.11.2017. Reliance has also been placed on the following four decisions in support of the contention that without necessary approval, the ld. Assessing Officer cannot go for complete scrutiny as the instant case is selected for limited scrutiny:- (1) Sanjeev Kumar Khemka vs.- Pr. CIT ITA No.1361/KOL/2016 (Judgment dated 02.06.2017) at pages 1-12; (2) Chengamari Tea Co. Ltd. vs.- ACIT (ITA No.812/KOL/2019 (Judgment dated 31.01.2020) at pages 13-21; (3) JDB Finance vs.- DCIT (ITA No.127/GAU/2019 (judgment dated 16.09.2020) at pages 22-28; (4) Sonali Hemant Bhavsar vs.- Pr. CIT (ITA No.742/M/2019 (Judgment dated 17.05.2019) at pages 29-42 10. Per contra, learned Departmental Representative (in short ld. D.R.) referred to the paper book dated 17.02.2022 in which a letter dated 05.04.2021 issued by the ITO, Ward-34(1), Kolkata addressing the ld. CIT(DR), ITAT-1, Kolkata is enclosed stating that the Assessing Officer raised the inquiry only with regard to the reasons for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison to High Loan/Advances/investment in shares; (ii) High interest expenditure against new capital added in work-in-progress or addition made to fixed assets. 15. We need to appreciate the fact that limited scrutiny is carried out with the assistance of computers and is based on the datas filled by the assessee in their IT return certain parameters inserted by the Department in the computer software, which helps to pin points/captures certain aspects of the financial transactions of an assessee, comparing the same with the previous years datas like increase and decrease in turnover/profits/loans/fixed assets/capital, low profit rates, vis-a-vis high turnover and various others permutations. Based on such information through the computer software, the case is selected for limited scrutiny. 16. Once a case is selected for limited scrutiny, though the role of the ld. Assessing Officer is confined to examine the issues for which the case is selected for limited scrutiny but then the Assessing Officer has to go into the depth of such issue and minutely examine the facts attached thereto. The ld. Assessing Officer just cannot casually examine the issue and come to the conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee about the source of investment. Then based on this question, the assessee submitted that the source is the share capital and security premium of the erstwhile company before being converted to LLP and the ld. Assessing Officer went on to examine the issue of security premium reserve. 19. Similar is the case for the second reason for high interest expenditure against new capital added in work - in-progress or addition made to fixed assets and the catch words are high interest expenditure, new capital added which in this case is partner s capital and Reserve Surplus (Security Premium Reserve). Though the reasons are not very specific but it is also a fact that any detailed questionnaire is not supplied to the Assessing Officer as to what he needs to examine for a particular reason. There are few catchy words in the reasons which are only supplied to the ld. Assessing Officer and thereafter ld. Assessing Officer needs to decide at his own end to examine a particular reason. On overall examining the financial statements of the LLP, erstwhile Private Limited Company, the reasons for selecting the case for limited scrutiny which covers various aspects of the assessee includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Ld. Assessing Officer has treated the same as income of the assessee for the year under appeal. 23. Before us, ld. D.R. vehemently argued supporting the order of the ld. Assessing Officer. 24. Per contra, ld. counsel for the assessee relied on the submissions made before the ld. CIT(Appeals), referred to the paper book containing 39 pages filed on 14.07.2020 and heavily relied on the following finding of the ld. CIT(Appeals), who has deleted the said addition observing as follows:- 1. I have carefully considered the submissions furnished by the Ld. AR of the appellant and the observations findings recorded by the Ld. AO. The facts involved in this case are in narrow compass. The assessee-LLP was formed by virtue of LLP agreement dated 02.05.2014. M/s Godhuli Dealcom Pvt Ltd, an erstwhile company was converted into the assessee-LLP. In terms of the LLP agreement all the assets liabilities of the erstwhile company was transferred to the converted LLP and the shareholders of the company continued as the Partners of the LLP. For the relevant year the assessee filed its return of income declaring total income of Rs. 12,616/-. The conversion of the company into LLP was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred 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 the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion; (c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership; (d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untenable on facts in law. I also find force in the alternate claim of the Ld. AR that under no circumstance could any adverse view be drawn in the hands of the appellant who was the transferee in the present case. Undeniably the transferor was the erstwhile company and therefore no adverse view could be drawn against the appellant-LLP even if the exemption u/s 47(xiiib) was denied. 6. Overall therefore, I hold that the Ld. AO gross erred in assessing the securities premium reserve of Rs. 12,87,23,000/- which stood transferred by the erstwhile company to the appellant-LLP upon conversion as the taxable profit of the appellant and the same is hereby deleted. This ground is therefore allowed . 25. We have heard the rival contentions, perused the relevant records placed before us. In Ground No. 1, the grievance of the revenue is that the ld. CIT(Appeals) has erred in deleting the addition made by the Assessing Officer taxing the reserve and surplus as income of the LLP, which was previously shown as security premium reserve in the erstwhile Private Limited Company GDPL before being converted to LLP. 26. We find that the company named Godhuli Dealcom Private Limited (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees; and ( f ) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. 27. So far as the case in hand is concerned, we find that if the case of assessee does not fall under the proviso (a) to (f), then the said transaction is not to be treated as transfer u/s. 2(47) of the Act. But in case, any of the conditions is not fulfilled, then the said transfer will have to be examined in the light of 2(47) r.w.r.t. section 45 of the Act. On perusal of the above exceptions in light of the facts of the instant case, we find that exception (a) is worth examining. Exception (a) in proviso to section 47(xiiib) of the Act contemplates that all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the Limited liability partnership. Now looking to the balance-sheet as on 31.03.2014 of GDPL, we find that under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es under section 133,- ( a ) in paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or ( b ) in writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or ( c ) for the purchase of its own shares or other securities under section 68. 28. On going through section 52 of the Companies Act, 2013, we find that there are specific provisions for the application of Security Premium received by the Company on the issue of its share capital, but nowhere in the provision of section 52 of the Companies Act, 2013 states that the Security Premium can be distributed as income to its shareholders. Now in the instant case, the assessee has claimed that all the assets and liabilities of the erstwhile Private Limited Company GDPL has been converted into assets and liabilities of newly incorporated GDLLP and the said conversion is not a transfer u/s. 2(47) of the Act as the proviso (a) to (e) of section 47(xiiib) of the Act are not attracted. In the instant case, clause (a) of the proviso to section 47(xiiib) needs to be examined. Since the Security Premium Reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Surplus Account and carried forward to subsequent years, then it will not be easy for the revenue authorities to track such adjustment. 31. We, therefore, under the given facts and circumstances of the case in view of the options available for utilization of Security Premium Reserve as per the provision of section 52 of the Companies Act, 2013, absence of clear-cut provisions for treatment of such Security Premium Reserve which though is a liability not available for distribution to shareholders of the Private Limited Company, but once the conversion takes place, its treatment in the LLP is only possible by way of treating such Security Premium as income of the LLP under section 56(1) of the Act as income from the other sources and to be brought to tax by crediting it in the Profit Loss Account and debiting the Security Premium Reserve Account, which will bring the Security Premium Reserve balance as NIL and the Reserve Surplus will be the income shown under section 56(1) of the Act and it will be brought to tax in the year when the Private Limited Company is converted into LLP and in the instant case, i.e. A.Y. 2015-16 for which the ld. Assessing Officer has rightly mad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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