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2022 (1) TMI 942 - AT - Income TaxChange of Private Limited company to Limited liability partnership firm - succession to business - Disallowance of expenses - CIT deleted the disallowance and reducing the same from the closing work-in-progress carried forward to the next AY. 2014-15 - Scope of provisions of section 47(iii)(b) - CIT(A) has given the finding that two different returns should have been filed. One for the tenure of the company and second for the tenure of the LLP - HELD THAT - We note that the order of Ld.CIT(A) is full of conjectures and surmises. Despite observing that there should have been two returns of income, one for the period of company and one for the period of LLP and despite also observing that the AO of the company may be different, he has treated the same as procedural and also assumed jurisdiction over the said possible, AO and allowed the appeal. In our considered opinion, non filing of return for proper period and not in appropriate status is not at all a procedural mistake, it is quite substantial mistake. CIT(A) cannot make a hypothetical order depending upon the order of assumed AO for the company. In our considered opinion, on the facts and circumstances of the case matter needs to be remitted to the file of AO. The AO shall examine the issue afresh keeping in light of the finding of the Ld.CIT(A) that there should have been two returns for the period and for the part of the period the AO may not have jurisdiction. Furthermore, the provision of section 170 dealing with succession to business otherwise than on death has to be kept in mind by the AO. Accordingly, we direct the at the AO to examine the issue as per law without being influenced by other observation of the Ld.CIT(A) as above. Needless to add, assessee should be granted adequate opportunity of being heard. Revenue Appeal is allowed for statistical purpose.
Issues:
- Disallowance of expenses and reduction from closing work-in-progress carried forward to the next assessment year. - Conversion of a company into a limited liability partnership (LLP) and its tax implications. - Jurisdictional issues related to different assessing officers for the company and LLP. - Procedural lapses in filing separate returns for the company and LLP. Analysis: 1. Disallowed Expenses and Work-in-Progress: - The Assessing Officer (AO) disallowed expenses of ?8,00,22,424 in the hands of the assessee LLP, reducing the closing work-in-progress. The AO initiated a penalty under section 271(1)(c) for furnishing inaccurate particulars. - The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, emphasizing that the expenses were properly accounted for in the LLP's return, and there was no evidence of falsity or inflation in the expenses. The disallowance was overturned, allowing the carry forward of work-in-progress. 2. Conversion to LLP and Tax Implications: - The conversion of the company to an LLP raised issues regarding the filing of separate returns for the company's tenure and the LLP's tenure. - The CIT(A) noted that the LLP cannot show transactions for the period when it was not in existence, highlighting the need for distinct returns for each entity's operational periods. 3. Jurisdictional Challenges: - The judgment highlighted jurisdictional challenges, indicating that different assessing officers may handle the company and LLP assessments. - The AO's decision to disallow expenses incurred before conversion, without evidence of falsity or inflation, was deemed unjustified. The AO's jurisdictional limitations were emphasized, questioning the basis for disallowing expenses in the LLP's hands. 4. Procedural Lapses and Remittance to AO: - The judgment critiqued the procedural lapse of not filing separate returns for the company and LLP, emphasizing the need for distinct filings. - The matter was remitted to the AO for fresh examination, considering the need for separate returns and the application of relevant tax provisions. The AO was directed to reevaluate the issue without being influenced by previous observations. 5. Outcome for AY 2014-15: - The addition in the assessment year 2014-15, linked to the disallowed expenses in the prior year, was also deleted by the CIT(A) based on the findings for AY 2013-14. - The issue for AY 2014-15 was remitted to the AO, aligning with the decision for the preceding assessment year. In conclusion, the judgment addressed various complexities arising from the conversion of a company to an LLP, emphasizing the need for proper tax compliance, distinct filings, and jurisdictional clarity. The decision underscored the importance of factual evidence in assessing expenses and work-in-progress, directing a fresh examination by the AO to ensure legal compliance and fair assessment.
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