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P a g e |8 C.O No.2/Mum/2016 (Arising out of ITA No. 3637/Mum/2015 Asst. Commissioner of Income Tax Vs. M/s Celerity Power LLP

6. Per contra, the ld. Authorised representative (for short ‗A.R') for the assessee Shri. Yogesh Thar submitted, that the conversion of the erstwhile company into a LLP did not involve any ‗transfer'. The ld. A.R fairly admitted that clause (e) of the proviso to Sec. 47(xiiib) was not satisfied by the assessee. In support of his contention that no ‗transfer' was involved in the aforesaid transaction, the ld. A.R relied on the judgment of the Hon'ble High Court of Bombay in CIT Vs. Texspin Engg. & Mfg. Works (2003) 263 ITR 345 (Bom). It was further submitted by the ld. A.R that as no consideration was involved in the transaction of conversion of the erstwhile private limited company into the assessee LLP, hence the machinery proviso for computing the ‗capital gains' was rendered as unworkable. Alternatively, it was submitted by the ld. A.R that even if there was a ‗transfer', then what was transferred was the ‗undertaking' which had no determinable cost of acquisition, therefore, on the said count also no ‗capital gain' was chargeable in the hands of the assessee. The ld. A.R in support of his aforesaid contentions relied on the judgment of the Hon'ble High Court of Bombay in CIT Vs. Texspin Engg. & Mfg. Works (2003) 263 ITR 345 (Bom) and that of the Hon'ble High Court of Gujarat in DCIT Vs. R.C Kalathia & Co. (2016) 381 ITR 0180 (Guj). The ld. A.R rebutting the observations of the lower authorities submitted, that as the assessee in the present case had neither claimed nor was ever allowed the exemption under Sec. 47(xiiib), therefore, the issue of withdrawal of the same by invoking Sec. 47A would not arise at all. In order to drive home his aforesaid contention the ld. A.R relied on the judgment of the Hon'ble High Court of Bombay in the case of CIT Vs. Umicore Finance Luxemborg (2016) 76 taxmann.com 32 (Bom). The ld. A.R taking support of the judgment of the High Court in the case of Umicore Finance Luxemborg (supra) submitted, that even otherwise Sec. 47(xiiib) r.w Sec. 47A cannot be construed to read a fiction, to the effect that the income which is not liable to be taxed as capital gains can be deemed as ―capital gains‖. The ld. A.R further referring to Sec. 58(4) and the ‗Third schedule' to the Limited Liability Partnership Act, 2008 submitted, that on conversion from a private limited company to LLP, all tangible and P a g e |9 C.O No.2/Mum/2016 (Arising out of ITA No. 3637/Mum/2015 Asst. Commissioner of Income Tax Vs. M/s Celerity Power LLP intangible property of the company is transferred to and stands vested in the LLP. It was submitted by the ld. A.R that as per Clause 6(b) of the ‗Third schedule', on the grant of registration as LLP under Clause 4, all the tangible, intangible property including assets, interests etc. stands vested in the LLP without any further assurance, act or deed. On the basis of his aforesaid deliberations, it was submitted by the ld. A.R that the term ―transfer‖ used in the Limited Liability Partnership Act, 2008 cannot be construed as a ‗transfer' within the meaning of the Transfer of property Act, 1882. It was submitted by the ld. A.R that the conversion of a company into a LLP involved only a change of cloak, and the same by no means could be construed as a ‗transfer' either under the Transfer of Property Act, 1882 or the Income-tax Act, 1961. The ld. A.R submitted that even otherwise as no consideration had either accrued, or was received by the transferor, thus the said transaction even on the said ground could not be taxed as ‗capital gains'. Alternatively, it was the contention of the ld. A.R that even if a transfer was to be assumed to have taken place, then as the asset which was transferred was an ―undertaking‖ as a going concern of the company, which had no determinable cost of acquisition, therefore, the mechanism to charge capital gains under Sec. 48 was in itself rendered unworkable. The ld. A.R further submitted that non-satisfaction of the conditions of the proviso to Sec. 47(xiiib) would not automatically lead to taxing of the transaction under consideration. Rather, it was the contention of the ld. A.R that as the assessee had not availed the exemption under Sec. 47(xiiib), therefore, the lower authorities were in error in invoking Sec. 47A(4), as the same would come into play only for withdrawal of an exemption that was earlier claimed by an assessee. It was submitted by the ld. A.R that in absence of appropriate charging section and appropriate computation section, mere ineligibility for claim of exemption in Sec. 47(xiiib) cannot lead to creation of a charge. It was averred by the ld. A.R that if the legislature in all its wisdom had intended to create a charge, then merely providing for the same in Sec. 47(xiiib) was not sufficient, and the same could safely be held to be legislative misfire. In support of his said contention the ld. A.R relied on the judgments of the Hon'ble High Court of Bombay in Elphinstone Spg.

― 1(b). ―Convert‖, in relation to a private company converting into a limited liability partnership, means a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the private company to the limited liability partnership in accordance with this schedule.‖ On a perusal of the definition of the term ―convert‖, it can safely be gathered that the conversion of a private company into a LLP involves transfer of the property, assets etc. The ld. A.R has tried to impress upon us that the term ―transfer‖ used in Clause 1(b) of the ‗Third Schedule' cannot be construed and equated as that used in the Transfer of Property Act, 1882. The ld. A.R drawing our attention to Sec. 5 of the Transfer of Property Act, 1882, submitted that ―transfer of property‖ therein meant an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons; and to ―transfer property‖ is to perform such act. The ld. A.R in order to buttress his contention took us through Clause 6(b) of the ‗Third Schedule'. It was P a g e | 17 C.O No.2/Mum/2016 (Arising out of ITA No. 3637/Mum/2015 Asst. Commissioner of Income Tax Vs. M/s Celerity Power LLP submitted by the ld. A.R that Clause 6(b) provided that all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company and the whole of the undertaking of the company shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed. In the backdrop of the aforesaid facts, the ld. A.R submitted that as the vesting of the assets of the company in the LLP did not require any further act, thus the term ―transfer‖ used in the definition of the term ―convert‖ in Clause 1(b) of the ―Third Schedule‖ cannot be read as a ―transfer‖ under the Transfer of Property Act, 1882. We have given a thoughtful consideration to the contention of the ld. A.R, and are unable to persuade ourselves to subscribe to the same. Interestingly, we find that as Sec. 5 of the Transfer of property Act, 1882 states that ―to transfer property‖ is to perform such act, therefore, in our considered view, the ‗transfer' of the property by the company to the LLP as per Clause 6(b) of the ‗Third Schedule' would in itself satisfy the requirement of Sec.1 of the Transfer of property Act, 1882. Be that as it may, we are of the considered view that the scope of the term ―transfer‖ has to be read in context of the Income-tax Act, 1961, and cannot be narrowed down to that defined in the Transfer of Property Act, 1882. In this regard, it would also be relevant and pertinent to point out that unlike the conversion of a private limited company into a LLP (as is the issue before us), in the case of succession of a partnership firm by a company as per Part IX, there is only ―vesting‖ of the property of the partnership firm in the company from the date of its registration as per Sec. 575 of the Companies Act, 1956, which reads as under:

15. We are of the considered view that in terms of our aforesaid observations, the transaction involving conversion of the private limited company to the assessee LLP de hors 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 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. Further, we find that as per Sec. 170(1)(b) of the Act, a ‗successor entity' which continues to carry on the business of the person who has been succeeded (hereinafter referred to as ―predecessor‖) shall be liable to be assessed only in respect of the income of P a g e | 21 C.O No.2/Mum/2016 (Arising out of ITA No. 3637/Mum/2015 Asst. Commissioner of Income Tax Vs. M/s Celerity Power LLP the previous year after the date of succession. However, the said liability of a successor entity is subject to an exception carved out in Sec. 170(2), as per which, where the predecessor cannot be found, there the assessment of the income of the previous year in which the succession took place up to the date of succession, and of the previous year preceding that year shall be made on the successor in the like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. In so far, the term ―Income‖ is concerned, the same as per the Explanation to Sec. 170 includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession. We thus in terms of our aforesaid observations are of the considered view that though the ―Capital gains‖, if any, involved in the transfer of the capital assets on conversion of the private limited company to the assessee LLP, de hors applicability of Sec. 47A(4) to the facts of the case, would not be liable to be assessed in the hands of the assessee LLP as per Sec. 45 r.w Sec. 5 of the Act, however, the same would be subject to the liability of the assessee LLP (as a successor entity) under Sec. 170 of the Act. The "Cross Objection No. I" of the assessee is disposed off in terms of our aforesaid observations.

19. We have deliberated on the contention of Mr. Yogesh Thar, ld. counsel for the assessee, that as per Sec. 58(4) of the Limited Liability Partnership Act, 2008, which deals with effect of conversion of a private limited company into a LLP, there is a non-obstante clause which provides that notwithstanding anything contained in any other law for the time being in force, all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company shall be transferred to and shall vest in the LLP without any further assurance, act or deed. The ld. A.R has tried to impress upon us that on the basis of the superseding effect of Sec. 58(4) of the Limited Liability Partnership Act, 2008, on conversion the assessee LLP also stood vested with the right to ‗carry forward' the losses of the erstwhile private limited company. We have given a thoughtful consideration to the issue under consideration and are unable to persuade ourselves to accept the same. We find ourselves as being in agreement with the view taken by the CIT(A), that sub-section (4) of Sec. 58 of the Limited Liability Partnership P a g e | 26 C.O No.2/Mum/2016 (Arising out of ITA No. 3637/Mum/2015 Asst. Commissioner of Income Tax Vs. M/s Celerity Power LLP Act, 2008 is only in context of the tangible and intangible property, interests, rights etc., and has nothing to do with the ‗carry forward' of losses, which is the creature of a specific statute in the form of the Income- tax Act, 1961. We are of the considered view that Sec. 72A(6A) which entitles a LLP to ‗carry forward' the losses of the erstwhile private limited company, is in clear and loud terms preconditioned by a statutory requirement that the assessee should have complied with the conditions of the proviso to clause (xiiib) of section 47. In the backdrop of our aforesaid observations, we are of the considered view that as the claim of the assessee LLP as regards ‗carry forward' of the loss of the erstwhile private limited company, de hors satisfaction of the conditions laid down in the proviso to clause (xiiib) of section 47, clearly militates against the aforesaid statutory provision, thus, the same cannot be accepted. Our aforesaid view is further fortified from a perusal of the ‗Memorandum' explaining the Finance Act, 2010, which in context of the issue under consideration, reads as under (relevant extract):