2009 (7) TMI 149 - AAR - Income Tax

Maintainability of application for advance ruling Question raised in application was that Whether the conversion of partnership firm as a private limited company under Part IX of the Companies Act 1956 will be regarded as transfer within the meaning of section 2(47) and other relevant provisions of the Income-tax Act 1961 ? If so will it give rise to capital gains liable to income-tax consequent upon the transaction entered into by the applicant of buying the shares of the said company in and making it its wholly owned subsidiary by reason of the provision in proviso (d) to section 47(xiii)? - 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-c1ause (i) that determination should relate to the tax liability of a non resident. Going by the averments of the applicant it is clear that the capital gains tax issue arising in the case of the acquired Indian company has a direct and substantial impact on the applicant s business in view of the stipulations in the share purchase agreement. Sub-clause (i) has to be construed in a wider sense and moreover a remedial provision shall be liberally construed. We are therefore of the view that the question raised by the applicant falls within the definition of advance ruling under section 245N (a) of the Act.

Summary

Issues:
1. Whether a non-resident applicant can seek "advance ruling" regarding tax liability of an Indian company under section 245N(a) of the Income-tax Act, 1961.
2. Whether the conversion of a partnership firm into a private limited company constitutes a transfer under section 2(47) of the Act, leading to capital gains tax liability.

Issue 1:
The judgment pertains to an application filed under section 245Q(1) of the Income-tax Act, 1961 by a foreign company incorporated in Luxembourg. The applicant entered into a transaction to purchase the entire equity share capital of an Indian Private Limited company. The applicant raised concerns about potential capital gains tax liability due to a breach of conditions regarding shareholding of the partners of the Indian company. The Authority for Advance Rulings examined whether a non-resident applicant can seek an "advance ruling" under section 245N(a) regarding the tax liability of an Indian company. The applicant argued that the determination sought directly impacts its business due to stipulations in the share purchase agreement. The Authority, after considering the broader language of section 245N(a)(i) and the direct impact on the applicant's business, allowed the application, noting that the question raised falls within the definition of "advance ruling."

Issue 2:
The second issue addressed in the judgment concerns the conversion of a partnership firm into a private limited company under Part IX of the Companies Act, 1956. The question raised was whether this conversion constitutes a transfer under section 2(47) of the Income-tax Act, 1961, leading to potential capital gains tax liability. The applicant sought a determination on the tax implications arising from the transaction of buying shares of the Indian company and making it a wholly owned subsidiary. The Authority analyzed the implications of the conversion and the subsequent transaction on capital gains tax liability. It was concluded that the issue raised by the applicant falls within the definition of "advance ruling" under section 245N(a) of the Act. The application was allowed to proceed for further hearing on the merits, scheduled for a later date.

In summary, the judgment addressed the issues of seeking an "advance ruling" by a non-resident applicant regarding tax liability of an Indian company and whether the conversion of a partnership firm into a private limited company triggers capital gains tax liability. The Authority allowed the application to proceed, considering the direct impact on the applicant's business and the broader interpretation of the relevant provisions of the Income-tax Act, 1961.