Shilpi Vashistha & Neena Sharma

In a recent order of the Mumbai Income tax Appellate Tribunal (‘ITAT’) in the case of Assistant Commissioner of Income tax- 19(1), Mumbai Vs. M/s Celerity Power LLP (ITA No. 3637/Mum/ 2015), the ITAT has held that conversion of private limited company into Limited liability partnership (‘LLP’) would be treated asa ‘transfer’ as per the provisions of the Income tax Act, 1961 (‘the Act’) if the exemption conditions specified in section 47(xiiib) of the Act, are not cumulatively satisfied. However, no capital-gain shall arise upon such a conversion if the assets/liabilities were transferred at book value.

As per Income tax provisions, any company with turnover less than 60 lakhs can convert into LLP, without any tax implications, subject of course to, fulfilment of other exemption conditions. However, in view of the earlier judgment of Mumbai High Court in the case of CIT Vs. Texspin Engg. & Mfg. Works[1], eventhe companies with higher turnover, were taking a position to not consider such a conversion as a ‘transfer’, and thus, were seeking protection from tax liability. The recent order of ITAT may challenge this position and may lead to re-opening of assessments and revision of earlier orders, including adversely impacting the on-going assessments. The conversion into LLP at value higher than the book value may lead to significant capital gains tax liability. 

One of the interesting observations made by ITAT is that the tax liability on said transaction would be the liability of the successor LLP as the company has ceased to exist. Further, the ITAT also denied the benefit to carry forward the business losses and depreciation, to successor LLP, if the exemption conditions, as specified in section 47(xiiib) are not satisfied. The ITAT allowed the successor LLP to make a fresh claim of deduction u/s 80IA, stating that filing of audit report etc (a requisite for claiming deduction) can be filed at any stage, during assessment/ appellate proceedings, as the same is procedural and directory in nature.

[1] (2003) 263 ITR 345 (Bom), the Mumbai High Court had held that conversion of partnership firm into company will not considered a ‘transfer’ and hence, will not be subject to capital gains tax.

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