The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the conversion of a company into an LLP constitutes a “transfer” for the purpose of the Income Tax Act, 1961.
The Tribunal further clarified that if the conditions of Section 47 (xiiib) of the Income Tax Act are not satisfied, the transaction is chargeable to ‘capital gains’ under section 45. If the assets and liabilities of the company are vested in the LLP at ‘book values’, there is, in fact, no capital gain.
The assessee was aggrieved by the order of the Assessing Officer that the assessee is liable to pay tax on the conversion of the private limited company, Celerity Power Private Limited, into the LLP, as the same would be a taxable transfer chargeable to tax under Sec. 45 of the Act.
The Tribunal observed that the transaction involving the conversion of the private limited company to the assessee LLP dehors compliance of the conditions contemplated in the proviso to Sec. 47(xiiib), would thus involve ‘transfer’ of the capital assets.
“However, as we have ousted the applicability of the provisions of Sec. 47A(4) to the facts of the case before us, therefore, the ‘deeming fiction‘ therein facilitating assessing of the profits and gains arising from the transfer of the capital assets in the hands of the transferee i.e the assessee LLP would also meet the same fate and thus, would not be principally applicable in the case before us. In the backdrop of the aforesaid facts, the issue involved in the present case boils down to the chargeability of the profits and gains arising from the ‘transfer’ of the capital assets in pursuance to the conversion of a private limited company to the assessee LLP. We are of the considered view that as per Sec. 45 r.w Sec. 5 of the Act, the profits or gains arising from the ‘transfer’ of the capital assets effected in the previous year shall be principally chargeable to income-tax under the head Capital Gains in the hands of the ‘transferor’, as its income of the previous year in which the transfer took place. In the backdrop of our aforesaid deliberations, we are of the considered view that the Capital gains‖, if any, arising from the ‘transfer’ of the capital assets on conversion of the private limited company to the assessee LLP, de hors the applicability of Sec. 47A(4), could not have been principally brought to tax under Sec. 45 as Capital gains‖ in the hands of the assessee LLP,” the Tribunal said.To Read the full text of the Order CLICK HERE