Prajakta DeshpandeFacts of the Case
On 13.09.2005, M/s. Anandeya was incorporated as a Private Limited Company succeeding erstwhile firm M/s. Anandeya Zinc Oxides whose conversion into a Private Limited Company was effected under part IX of the Indian Companies Act, 1956. It is further their case that on the date of the conversion, the partners of the erstwhile firm continued as shareholders having shareholding identical with profit sharing ratio of the partners. Respondent is a non-resident Company incorporated under the laws of Luxembourg and purchased 100% of the shares of Anandeya through share purchase agreement dated 01.07.2008 which was completed 12.08.2008.
The respondent filed an application before the AAR seeking a ruling on question as to whether notwithstanding the non-compliance with clause (d) of proviso to section 47(xiii), WHETHER it was liable to pay capital gain tax?
The AAR noted that section 47(xiii) specifically excludes different categories of transfers from the purview of capital gains taxation but it is subject to fulfilling the conditions laid down clauses (a) to (d). The fact that conditions (a) to (c) are satisfied, is not in dispute but, however, the question is whether clause (d) requires to be satisfied.
The AAR has rightly pointed out that the first part of clause (d) has been satisfied but, however, it is noted by the AAR the requirements of second part of clause (d) i.e. the shareholding of 50 per cent or more should continue to be as such for the period of five years from the date of succession, has not been fulfilled in the instant case by reason of the transfer of shares by the Indian Company to the respondent before the expiry of five years.
Being aggrieved by the said assessment, the Petitioners have filed the above Petition.
Question of law
- Whether Capital Gain tax is applicable for above mentioned Transfer of Assets? If yes whether it can be paid by respondent Company i.e transferee Company?
- Whether application under section 245N of the assesse was maintainable?
- The AAR further found that the shares allotted to the partners of the existing firm consequent upon the registration of the firm as a Company, did not give rise to any profit or gains. It is further noted that by such reconstitution of the Company under part IX of the Companies Act, the assets automatically get vested in the newly registered Company as per the statutory mandate contained under section 575 of the Companies Act. It is further found that it cannot be said that the partners have made any gains or received any profits assuming that there was a transfer of capital assets. It was also noted that worth of the shares of the company was not different from the interest of partners in the existing firm. Hence there is no capital gain tax liability at the time of conversion. These findings have been arrived at essentially looking into the fact that there was no revaluation of assets at the time of conversion of the firm ‘A2’.
- There are no capital gains which have accrued on account of such incorporation. Hence The contention of the revenue that in view of the violation of clause (d) of section 47(xiii), the exemption from capital gains enjoyed by the assessing firm upon conversion into a private limited company, ceases to be in force cannot be accepted.
- As contention of the petitioner is that application under Section 245(N) of the Respondents itself was not maintainable, as the Respondents not being parties to the transaction but There is no specific requirement in sub-clause (i) of sec 245N that determination should relate to the tax liability of a non-resident. Going by the averments of the applicant, it is clear that the capital gain tax issue arising in the case of the acquired Indian company has a direct and substantial impact on the applicant’s business in view of the stipulations in share purchase agreement.
Decision by Bombay High Court
Bombay High Court did not find any infirmity in order of AAR so the Petition stands rejected.
Date of Judgment/Order : 25th Nov. 2016
