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TMI Blog2016 (12) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... tely after such conversion in question from the partnership firm into a Private Limited Company, the assessment with regard to the income of the new Company as well as of the respective partners were filed and there was no objection or grievances raised by the Assessing Officer that any capital gains had to be paid on account of the incorporation of the Company in terms of the said provisions. The transfer of shares in favour of the Respondent by the erstwhile partners who were shareholders of M/s. Anandeya Zinc Oxides Private Limited and such partners/share holders are liable to pay capital gains even if acceptable, would not affect the decision passed by the learned AAR whilst coming to the conclusion that there were no capital gains at the time of incorporation of the new Company by the said partnership firm. The contention of the Petitioner that in view of the violation of clause (d) of Section 47(xiii), the exemption from capital gains enjoyed by the Assessing firm upon conversion into a Private Limited Company, ceases to be in force cannot be accepted. We have already examined that there are no capital gains which have accrued on account of such incorporation. In such circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm M/s. Anandeya Zinc Oxides whose conversion into a Private Limited Company was effected under part IX of the Indian Companies Act, 1956. It is further their case that on the date of the conversion, the partners of the erstwhile firm continued as shareholders having share holding identical with profit sharing ratio of the partners. It is further their contention that the firm set up a plant for manufacture of high purity white seal zinc oxide of annual capacity 5000 tones per annum and the plant commenced production in April 1995 and was converted into 100% export oriented unit in 1996. The Assets of the partnership was revalued for ₹ 5 crores as against the net worth of the business of ₹ 3,05,896/- relevant to the assessment year 1998-1999. The excess of the revaluation of assets of ₹ 4,96,94,104/- was credited to the respected partners account. The firm, however, continued to claim, the depreciation value of the asset prior to the revaluation for the purpose of computation of income under the Income Tax Act, 1961. It is further their case that the Respondent-Company acquired the shareholding of Ms/. Anandeya and, therefore, has violated the provisions of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not attract capital gains to the Respondent's subsidiary because Section 47(xiii) applies only to firm that are succeeded by the company by sale. But, however, it is the contention of the Petitioner that Section 2(47) of the Income Tax Act, 1961, is an inclusive provision and transfer by modes other than those that are presently listed, can also be included in the definition of transfer. It is further pointed out that as in the present case where a distinct legal identity it such as a private limited company has succeeded a collection of partners, namely the firm, which has no separate legal identity can be brought into the inclusive provision of transfer under Section 2(47) of the Income Tax Act. 6. Dealing with this aspect, the AAR in the impugned Order has noted that on 09.10.2009, the Respondents have clarified that whilst converting the partnership firm into a Company, there was no revaluation of the assets and the assets and liabilities of the firm as also the partners, capital and current accounts were taken at their book value in the accounts of the Company. It is also pointed out that the first year audited accounts of the Company for the period 13.09.2005 to 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains taxation but it is subject to fulfilling the conditions laid down Clause (a) to (d). The fact that conditions (a) to (c) are satisfied, is not in dispute but, however, the question is whether clause (d) requires to be satisfied. The learned AAR has rightly pointed out that the first part of clause (d) has been satisfied but, however, it is noted by the learned AAR the requirements of second part of clause (d) i.e. the shareholding of 50% or more should continue to be as such for the period of five years from the date of succession, has not been fulfilled in the instant case by reason of the transfer of shares by the Indian Company to the Applicant before the expiry of five years. It is further noted that the effect of transgression of the conditions laid down in clause (xiii) is set out in Section 47A(3). Section 47A (3) reads thus : 47A Withdrawal of exemption in certain cases. (1) (2) xx xx xx xx xx xx xx xx (3) Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the partners of the existing firm consequent upon the registration of the firm as a Company, did no give rise to any profit or gains. It is further noted that by such reconstitution of the Company under part IX of the Companies Act, the assets automatically gets vested in the newly registered Company as per the statutory mandate contained under Section 575. It is further found that it cannot be said that the partners have made any gains or received any profits assuming that there was a transfer of capital assets. It was also noted that worth of the shares of the partnership was not different from the interest of partners in the existing firm. The learned AAR also took support in the Judgment reported in 263 ITR 345 in the case of Texspin Engg. Mfg. Works, where the issue was viewed from another angle i.e. from the stand point of Section 48 of the Act in a case of similar conversion of a firm into a company. It is further noted that the full value of consideration cannot be attributed to the transaction. The learned AAR also noted that the Apex Court has held that the provisions of Section 48 has to be read as an integral part of the charging provision in Section 45. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership firm into a Private Limited Company. In part IX of the Companies Act, therefore, notwithstanding the non-compliance with clause (d) of the proviso of Section 47(xiii) of the Income Tax Act by premature transfer of shares, the said Company is not liable to pay capital gains tax. These findings have been arrived at essentially looking into the fact that there was revaluation of assets at the time of conversion of the firm M/s. Anandeya Zinc Oxides Private Limited. The said finding of fact has not been disputed by the learned Counsel appearing for the Petitioners and, as such, the finding of the learned AAR that there was no capital gains in the transaction in question cannot be faulted. It is also to be noted that even immediately after such conversion in question from the partnership firm into a Private Limited Company, the assessment with regard to the income of the new Company as well as of the respective partners were filed and there was no objection or grievances raised by the Assessing Officer that any capital gains had to be paid on account of the incorporation of the Company in terms of the said provisions. The transfer of shares in favour of the Respondent by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 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 245N9a) of the Act. Accordingly, the application is allowed under section 245R92) and posted for hearing on merits on 11th August, 2009. 15. Considering the said aspect and as looking into the question as reformulated, the question as to whether capital gains are liable to be paid or not in terms by the transferee Company being a non resident Company, the Respondent herein, would be a matter which would come within the scope of advanced ruling in terms of the said depreciation. 16. In this context, the High Court of Madras in the Judgment reported in (2009) 222 CTR (Mad) 270 in the case of Anurag Jain vs. Authority for Advance Rulings anr.. has observed at paras 19, 20 and 24 thus : 19. In that judgment, while dealing with the juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar manner. Even if the interpretation placed by the Commission on the said deeds is not correct, it would not be a ground for interference in these appeals, since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act. It is equally clear that the interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in proceedings relating to other assessment years. 20. Applying the said judicial dictum laid down by the Supreme Court to the facts of the present case even assuming that the first respondent authority has not interpreted the associated employment agreement which on fact forms part of the share purchase agreement in the proper manner, it is certainly not open to this court to go into the correctness or otherwise or validity or otherwise of the findings given by the first respondent. ... 24. Hence, it is not necessary for this court to give any finding as to the jurisdiction of this court under Article 226 of the Constitution of India. 17. Considering the said observations and taking note of the findings of the learned AAR, we find that there is no case made out f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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