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TMI Blog2023 (1) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LLP ] engaged in construction activities. The assessee LLP filed its return of income on 10.10.2016 declaring total income of Rs. NIL. The case was selected for scrutiny and statutory notices under the Income Tax Act, 1961 [in short, the Act ] were issued and complied. In the assessment completed, the Assessing Officer made an addition of Rs. 48,35,00,000/- u/s. 45 of the Act under the head Capital Gains for violation of conditions u/s. 47(xiiib) of the Act on conversion of a private limited company into the assessee LLP. Aggrieved by the said addition, the assessee preferred appeal before the ld. CIT(A) who allowed the appeal in favour of the assessee by deleting the said addition. Aggrieved by the order of the ld. CIT(A), the Revenue has preferred this appeal. 5. The ground no. 1 and 2 of the appeal filed by the Revenue relates to the addition of Rs. 48,35,00,000/- 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) of the Act. 6. Briefly, the facts of the case qua the issue involved is that during the assessment proceedings, the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her assurance, act or deed. Accordingly, all the assets and liabilities of the company immediately before the conversion were duly recorded in the books of the LLP. The contention of the assessee is that at the time of conversion of the company into LLP, there were no intangibles of any nature including Goodwill standing in the Balance Sheet of the Company and accordingly, on the date of conversion at the time of recording assets and liabilities in the books of the LLP, no Goodwill was recorded by the LLP. The only assets and liabilities that were recorded were those standing in the books of the Company. As regards the purpose of recognition of Goodwill later in the books of LLP after conversion date, the assessee explained that since the commencement of the SRA project, assessee had incurred huge rental expenses to accommodate eligible slum dwellers and enormous efforts to evacuate ineligible slum dwellers to undertake the construction activity. However, due to inability to pump in further funds and the resultant delay in the completion of the SRA project, the partners of the LLP decided to admit a new partner with adequate expertise in execution of real estate project and also in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, time factor and so on, which clearly show that the Goodwill is nothing but a pre existing intangible asset which was valued at NIL in the books of predecessor company but valued at Rs. 48,35,00,000/-. (iv) The assessee LLP has recorded this Goodwill in their books of account by crediting the partner's current account instead of crediting the same to the Capital Reserve Account. The assessee LLP has thus violated the condition (c) and (f) of section 47(xiiib). (v) Finally, the Assessing Officer placed reliance on the decision of Celerity Power of Mumbai ITAT (ITA no. 3637/Mum/2015) and Mc. Dowell Co. Ltd. v. CTO (1985)(3) SCC 230 (SC 5 member Bench). 7. The ld. CIT(A) however, did not find favour with the view taken by the Assessing Officer which according to him appeared to be a fig of imagination and against the law. The ld. CIT(A) held that the commercial expediency in valuing Goodwill cannot be ignored merely on the theory of presumptions. 8. The ld. Departmental Representative appearing for the revenue challenged the decision of the ld. CIT(A) and argued that the whole state of affairs of the assessee LLP have been manipulated per se merely to come out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion; (e) the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; (ea) the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees; and (f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. Explanation.-For the purposes of this clause, the expressions private company and unlisted public company shall have the meanings respectively assigned to them in the Limited Liability Partnership Act, 2008 (6 of 2009); [emphasis supplied] 9.1. The relevant findings of the ld. CIT(A) is as under:- 4.18 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as sought to be argued by the AO in the assessment order. 4.19 Clause (f) of the section 47(xib) lays down that no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion. This clause uses the terms 'the partner of LLP' and accumulated profits standing in the accounts of the company on the date of conversion'. It is seen that accumulated profits are negative (Rs. 1,46,535) in the company before the date of conversion. The same amount of negative balance is appearing in the LLP as on the date of conversion. It is noticed from the records that no amount was paid directly or indirectly to any partners of the LLP as on the date of conversion. It has to be noted that the condition prescribes that the such prohibition on distribution of accumulated profits extends to three years from the date of conversion. The AO in the assessment argued that the goodwill brought into the books of the LLP on 30.03.2016 was actually the accumulated profit of the company which was not mentioned in the books of the company or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is within the framework of law. Scheme of tax planning has been explained by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan [2003] 263 ITR 706 (SC), wherein it was held that the decision in McDowell's case cannot be read as laying down that every attempt at tax planning is illegitimate, or that every transaction or arrangement which is perfectly permissible under the law, but has the effect of reducing the tax burden of the assessee must not be looked upon with disfavour. AO further placed reliance on the cases CIT Vs Sri Meenakshi Mills Ltd., AIR 1967 SC 819, Life Insurance Corporation of India v. Escorts Ltd. (1986) 1 SCC 264 and Juggilal Kamlapat v. CIT AIR 1969 SC 932 to argue that AO is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal facade. I have carefully gone through the decisions relied by the AO. This is a case where conversion of the Company into LLP has taken place as per the provisions of the LLP Act 2008. The RoC has issued the certificate for such conversion on 17.03.2016. The Income tax Act was amended in consonance with the enactment of LLP Act 2008 to provide that the subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be incorporated in the statute which can give unintended interpretation against the spirit of the law. The allegation of the Assessing Officer is that the conditions in clause (c) and (f) of section 47(xiiib) of the Act being that no direct or indirect benefit should be passed on to the shareholders in any form or manner, other than by way of share of profit and capital contribution in the LLP and that no amount be paid either directly or indirectly to any of the partner out of balance of accumulated profits standing in the accounts of the company on the date of conversion for a period of 3 years; are violated as the Goodwill of Rs. 48,35,00,000/- has been credited to the partners current account post conversion. In this regard, we find that the 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. We find that the ld. 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 sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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