Amount paid to Partner of LLP out of balance of Accumulated Profits due to Commercial Expediency Not Taxable as “Capital Gain”, No violation of S. 47(xiiib)(f): ITAT [Read Order]

LLP - Accumulated - Profits - Taxable - Capital - Gain - S47(xiiib)(f) - ITAT - TAXSCAN

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) removed the Assessing Officer’s addition and determined that the sum given to the LLP partner from the remaining Accumulated Profits due to Commercial Expediency was not taxable as “Capital Gain.”

Additionally, it was decided that there was no breach of section 47(xiiib)(f) of the 1961 Income Tax Act.

Briefly the facts of the case are that the assessee is a Limited Liability Partnership [LLP] engaged in construction activities. The assessee LLP filed its return of income declared total income of Rs. NIL.

During the assessment, the Assessing Officer (AO) made an addition of Rs. 48,35,00,000 under section 45 of the Income Tax Act, 1961 under the heading “Capital gains”  for violation of conditions under section 47(xiiib) of Income Tax Act on the conversion of private limited company into the assessee LLP.

The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [(CIT(A)] where the authority ruled in favour of assessee and deleted the addition. However, the revenue preferred an appeal before the Tribunal.

The AO noticed that intangible assets being “Goodwill” amounting to Rs. 48,35,00,000 was introduced in the books of the LLP which was not there in the block of assets of the erstwhile Private Limited Company.

Accordingly, a show cause notice was issued to the assessee LLP as to why the addition of Rs. 48,35,00,000 should not be made in its hands for violation of conditions prescribed in section 47(xiiib) of Income Tax Act.

The Departmental Representative of the Revenue contested the decision of the former CIT(A) and claimed that the assessee LLP’s entire state of affairs had been deliberately manipulated to avoid the requirements of section 47(xiiib) of Income Tax Act. However, if the principle of substance over form is applied and the corporate veil is lifted, it becomes clear that the assessee had only used a colorable device to evade taxes, according to this argument.

The bench of Sandeep Singh Karhail and Om Prakash Kant observed 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.

Regarding clause (f), which refers to the sum paid to the LLP partner from the balance sheet of the accumulated profits in the company’s accounts as of the conversion date, it cannot be said that it violated the law in the current instance given that the AO has not disputed the assessee’s explanation of the commercial expediency, opined the bench.

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