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TMI Blog2014 (9) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... cancelled. (2) For that the CIT(A) erred in not discussing and deciding at all grounds no. 4 to 8 and as such the order passed by him is arbitrary, erroneous, illegal and perverse. (3) For that the CIT(A) erred in holding that the provisions of section 47(xiiib) of the Income Tax Act, 1961 (in short "the Act") have not been complied with and as such the capital gains tax exemption on conversion of a private limited company to an LLP was not available to the appellant. (4) For that advancing of loans to the partners cannot tantamount to distribution and/or payment to the partners and the provisions of clause (c) and (f) of proviso to section 47(xiiib) of the Act were not attracted due to such advance made to the partners and CIT(A) should have held that the benefit under section 47(xiiib) of the Act was available to the appellant. (5) For that CIT(A) did not appreciate the fact that the cost at which the shares of EIH Ltd. were acquired by the appellant on conversion was accepted by the AO in the order of assessment for the purpose of computing capital gains returned by the appellant and as such the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 4. In the course of hearing, it was submit ted by the ld. Counsel for the assessee that the Ground No. 1 of the assessee's appeal is not pressed. Consequently, Ground No. 1 of the assessee's appeal stands dismissed. 5. It was the further submission by the ld. Counsel for the assessee that a Private Limited Company namely Aravali Polymers Pvt. Ltd. was converted into a Limited Liability Partnership under section 56 of the Companies Act and the assessee Aravali Polymers LLP came into existence on August 13, 2010. It was the submission that as per the provisions of section 58(4) of the Companies Act, all the tangible, movable, immovable and intangible property as also all assets, interest, rights, privileges, liabilities and obligations, in effect whole of the undertaking of Aravali Polymers Pvt. Ltd. stood transferred to and vested in the appellant M/s. Aravali Polymers LLP and Aravali Polymers Pvt. Ltd. was deemed to be dissolved. It was the submission that the main assets in the Pvt. Limited Company Aravali Polymers Pvt. Ltd. was 31,80,000 shares of East India Hotels Ltd. It was the submission that after the conversion of the Private Limited Company into the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission that no benefit having been received by the shareholders of the erstwhile company and no amount was paid to any partner out of the balance of the accumulated profits standing in the accounts of the Company as on the date of the conversion. It was the further submission that even assuming there was a violation of the proviso to section 47(xiiib), the computation of capital gains as made by the Assessing Officer was wrong in so far as there is no provision for deeming the market price of the shares or the assets, especially when the asset has been transferred at book value. There was no provision for deemed cost in respect of the assets transferred and it was only the actual value on which the asset was transferred which could be considered. It was also the al ternate submission that even assuming a value is provided to the asset, then it is that value which would have been considered as a cost acquisition in the hands of the assessee, especially when the said asset representing shares of East India Hotels Ltd. had been sold by the assessee and capital gains had also been offered to tax and that calculation of the capital gains had been accepted by the Assessing Officer, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act, 2008 w.e. f. 12th August, 2010. 12.08.2010 relates to the assessment year 2011-12, which is the year under appeal. Aravali Polymers Pvt. Ltd. held 31,84,807 shares of East India Hotels Ltd., which was transferred to the assessee- firm. Aravali Polymers also had Reserves and Surplus to an extent of Rs. 3,06,65,298/- as on 12.08.2010, the date of conversion into the appellant firm. The appellant firm had sold 3,00,000 shares received by it of East India Hotels Ltd. for a consideration of Rs. 53,56,69,888/- and the assessee-firm had paid capital gains tax on the same and was left with about Rs. 49.3 crores. (ii) The assessee-firm had given interest-free loans to its partners to an extent of Rs. 50 crores. The loan was given to the partners in the same ratio as that of profit sharing. 8. 8. with these facts it would be worthwhile to extract the provisions of Section 47(xiiib) along with the proviso thereunder, which is as under: - 47(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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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". 9. A perusal of the proviso (c) to section 47(xiiib), the first question that comes to mind is that the assessee has made a claim under section 47(xiiib), the Assessing Officer denies such a claim. Once the Assessing Officer has denied the assessee's claim of section 47(xiiib) in the initial year itself, will the provision of section 47A(4) come into play or is it directly under the control of section 45 in respect of the levy of capital gains. Admittedly the assessee has given a loan to the erstwhile shareholders. However, the proviso (c) to section 47 talks of the shareholders of the Company to not-receive any consideration or benefit directly or indirectly in any form or manner other than by way of shares in profit and capital contribution in the Limited Liability Partnership. A reading of the said proviso (c) gives a meaning that both the Company and the Limited Liability Partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 47(xiiib) were not available to the assessee, then where is the non-compliance of the proviso to section 47(xiiib) to at tract 47A(4). It is in such circumstances that section 45 comes into play as section 47(xiiib) itself is not applicable to the assessee. 12. A perusal of the provisions of section 45 of the Income Tax Act shows the levy of capital gains to be on the profits or gains arising from the transfer of capital asset effected in the previous year. Admittedly, the erstwhile Company Aravali Polymers Pvt. Ltd. converted into a partnership firm Aravali Polymers LLP, a Limited Liability Partnership firm. This took place on 12.08.2010 being the assessment year under appeal. This conversion of the Pvt. Limited Company into a Limited Liability Partnership does not have the protection of section 47(xiiib) in the assessee's case. Consequently the capital gain on the same is liable to be considered. In the computation of capital gains, nowhere in the Act is there provision, more so in section 45, for deeming the sale price in the case of equity shares. The value at which the shares or the assets of the Company Aravali Polymers Pvt. Ltd. was taken over by the Limited Liab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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