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2023 (1) TMI 959 - AT - Income TaxCapital gain on conversion of a Private Limited Company into LLP - Addition on account of asset being goodwill brought into books of accounts after conversion of a Private Limited Company into LLP holding that there is a violation of provisions of section 47(xiiib) - CIT(A) held that the commercial expediency in valuing Goodwill cannot be ignored merely on the theory of presumptions - As per DR if the corporate veil is lifted, one can clearly gather that the assessee has merely adopted a colourable device to avoid tax as whole state of affairs of the assessee LLP have been manipulated per se merely to come out of the conditions stipulated in the provisions of section 47(xiiib) - whether the partners of the assessee LLP had actually benefited either directly or indirectly on conversion of the predecessor company into LLP or not which has been alleged by the Assessing Officer? HELD THAT - Partners of the assessee LLP and the erstwhile shareholders of the predecessor company can be considered to have obtained any benefit directly or indirectly only if the same fits into the specific conditions prescribed. CIT(A) have duly considered that the clause (c) operates only till the date of conversion i.e. 17/03/2016 and it is clear from the balance sheets pre conversion and post conversion that the shareholders have not received any consideration or benefit directly or indirectly. As regards clause(f) refers to amount paid to the partner of LLP out of the balance of the accumulated profits standing in the accounts of the company on the date of conversion, which in the present case cannot be said to be violative in view of the fact that the commercial expediency explained by the assessee has not been controverted by the AO and who cannot step into the shoes of the assessee to decide and direct as to how the assessee should conduct its state of affairs. Also, the condition prescribed relates to the balance of accumulated profits as on date of conversion out of which amount is paid to the partner, however, since the accumulated profits did not include the amount of Goodwill in the books of the predecessor company, there cannot be said to be any violation of clause (f) either. Hence, merely on presumptions of the AO, additions cannot be sustained which the ld. CIT(A) have categorically dealt with considering all the aspects of the case. Grounds of appeal of the revenue are dismissed
Issues Involved:
1. Deletion of addition of Rs. 48,35,00,000/- under Section 45 read with Section 47(xiiib) of the Income Tax Act. 2. Compliance with conditions prescribed under Section 47(xiiib) of the Income Tax Act regarding conversion from a private limited company to an LLP. Issue-wise Detailed Analysis: 1. Deletion of Addition of Rs. 48,35,00,000/-: The Revenue challenged the deletion of Rs. 48,35,00,000/- added by the Assessing Officer (AO) under the head "Capital Gains" for alleged violation of Section 47(xiiib) of the Income Tax Act upon conversion of a private limited company into an LLP. The AO argued that the goodwill amounting to Rs. 48,35,00,000/- introduced in the books of the LLP was not present in the block of assets of the predecessor company, thus violating the conditions of Section 47(xiiib). The AO concluded that the recognition of goodwill was a pre-existing intangible asset valued at NIL in the books of the predecessor company, and the conversion was a colorable device to avoid tax. However, the CIT(A) found that the commercial expediency in valuing goodwill could not be ignored merely based on presumptions and deleted the addition, which was upheld by the Tribunal. 2. Compliance with Conditions under Section 47(xiiib): The Tribunal examined whether the assessee LLP violated the conditions stipulated under Section 47(xiiib) of the Act, which exempts certain transfers from being regarded as "transfer" of a capital asset. The conditions in question were: - Clause (c): Shareholders of the company should not receive any consideration or benefit other than by way of share in profit and capital contribution in the LLP. - Clause (f): No amount should be paid to any partner out of the balance of accumulated profit standing in the accounts of the company on the date of conversion for three years from the date of conversion. The CIT(A) held that: - For Clause (c), the shareholders received only their share capital in the LLP and nothing more, thus no violation occurred. - For Clause (f), the accumulated profit in the company was negative, and no amount was paid to any partners out of accumulated profits. The goodwill recorded post-conversion was not part of the accumulated profits as on the date of conversion. The Tribunal agreed with the CIT(A) that the commercial expediency explained by the assessee was not controverted by the AO and that the AO's presumptions could not sustain the additions. The Tribunal emphasized that the conditions under the Act should be strictly construed and adhered to and that no new words could be incorporated into the statute to give unintended interpretations against the spirit of the law. Conclusion: The Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s decision to delete the addition of Rs. 48,35,00,000/-. The Tribunal found no violation of the conditions under Section 47(xiiib) of the Act, and the commercial decisions taken post-conversion were not considered colorable devices to avoid tax. The Tribunal emphasized the importance of adhering to the specific conditions prescribed under the Act and not making additions based on presumptions.
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