Aravali Polymers LLP v JCIT (I.T.A. No. 718/Kol. / 2014 dated 27.06.2014) (Kol ITAT)
Background:
A Private Limited Company namely Aravali Polymers Pvt. Ltd. was converted into a Limited Liability Partnership under section 56 of the ertwhile Companies Act and the assessee Aravali Polymers LLP came into existence. After the conversion of the Private Limited Company into the Assessee LLP, 31,84,807 equity shares of the East India Hotels Ltd. was sold by the appellant for an amount of Rs.53,56,69,888/- and the same was offered for taxation as long-term capital gains. After paying the capital gains tax, the assessee had approximately Rs. 49 crores profit. The assessee had also received Reserves and Surplus amounting to Rs.3,06,31,969/- of the Private Limited Company. The assessee had given an amount of Rs.50 crores as interest-free loans to the partners of the LLP. When the assessee filed its return, the assessee had offered the capital gains on the sale of the equity shares of East India Hotels Ltd. and had also claimed exemption under section 47(xiiib).
The AO observed that the assessee had provided interest-free loan to the partners of the assessee-firm out of the Reserve and Surplus received by the assessee firm on the conversion. The AO held that there was violation of the provisions of section 47(xiiib) and consequently held that in view of the provisions of section 47A(4), the amount of profit and gains arising from the transfer of the capital assets or shares is to be profit and gains chargeable to tax on the assessee. The AO adopted the value of the shares in East India Hotels Ltd. held by the Pvt. Limited Company and transferred to the assessee-firm as liable to be valued at market price as on the date of the transfer.
Assessee’s contentions:
- There was no violation of the provisions of section 47(xiiib) in so far as a loan is a receivable and no benefit had been given to the partners.
- Even assuming there was a violation of the proviso to section 47(xiiib), the computation of capital gains as made by the AO was wrong in so far as there is no provision for deeming the market price of the shares or the assets, especially when the asset has been transferred at book value.
- Proviso (c) to section 47(xiiib) states that “the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the Company.”
- Loan having been given to the partners of the assessee-firm who are none other than the shareholders of the erstwhile company, is, in fact, a benefit and such benefit had been given in the form of interest-free loans.
- The assessee having used a part of the Reserves and Surplus, which was transferred from the erstwhile company to the assessee-firm, had been paid directly to the partners of the assessee-firm.
- A reading of the said proviso (c) gives a meaning that both the Company and the Limited Liability Partnership must exist for the shareholders of the Company to receive any consideration. Admittedly, in the present case, the Company does not exist after conversion. Therefore, the question of a violation of Proviso (c) to Section 47(xiiib) does not exist.
- Coming to the proviso (f) to Section 47(xiiib), it bars payment either directly or indirectly to any partner out of the 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.
- It is an interest- free loan coupled with the fact that the loan has been given to its partners in the same ratio as profit sharing shows that the amount has been given directly to the partners out of the balance of the accumulated profits standing in the accounts of the Company on the date of conversion. It clearly shows that there is a violation of proviso (f) to section 47(xiiib).
- A perusal of the provisions of section 47A(4) uses the words “shall be deemed to be the profits and gains chargeable to tax of the successor Limited Partnership”. The words are not “be deemed to be capital gains chargeable”.
- In the computation of capital gains, nowhere in the Act is there provision, more so in section 45, for deeming the sale price in the case of equity shares. The value at which the shares or the assets of the Company Aravali Polymers Pvt. Ltd. was taken over by the Limited Liability Partnership firm, would be the sale price and the cost of acquisition thereof is to be as per books of the erstwhile Company.