Wednesday, July 2, 2014

S. 47(xiiib)/ 47A(4): Giving of interest-free loans to partners of the LLP does not contravene Proviso (c), though it contravenes Proviso (f), to s. 47(xiiib). Capital gains have to be computed on the book value of assets transferred & not on market value

Aravali Polymers LLP vs. JCIT (ITAT Kolkata)

A private limited company namely Aravali Polymers Pvt. Ltd was converted into a Limited Liability Partnership (LLP) u/s 56 of the Companies Act and the assessee, Aravali Polymers LLP, came into existence. As per s. 58(4) of the Companies Act, the whole of the undertaking of the company stood transferred to and vested in the LLP and the company was deemed to be dissolved. One of the main assets in the company was shares of East India Hotels Ltd. The assessee also received Reserves and Surplus of Rs.3 crore of the company. The assessee gave an amount of Rs.50 crores as interest- free loan to the partners of the LLP in the same proportion as their shareholding in the company on the date of conversion. After the conversion of the company into the LLP, the said shares were sold. The resultant capital gains were offered to tax as long-term capital gains. The assessee claimed that the transfer of the assets by the company to the LLP was exempt u/s 47(xiiib). The AO held that by giving interest-free loans to the partners in the same proportion as their shareholding in the company on the date of conversion, the assessee had contravened proviso (c)& (f) to s. 47(xiiib) and that the exemption granted by s. 47(xiiib) was not available. He held that u/s 47A(4), the transfer of the said shares of EIH by the company to the LLP on conversion was assessable to tax on the basis of the market value of the shares on the date of conversion into the LLP. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD.
 
(i) Proviso (c) to s. 47 (xiiib) bars the shareholders of the company from receiving any consideration or benefit in any form or manner other than by way of a share in the profit and capital contribution in the LLP. This means that both the company and the LLP must exist for the shareholders of the company to receive any consideration. As, in the present case, the company does not exist after conversion, the question of a violation of Proviso (c) to s. 47(xiiib) does not arise;
 
(ii) As regards proviso (f) to s. 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. Here, the loans given by the assessee to its partners has been paid out of the Reserves and Surplus of the erstwhile Company. This is a clear violation of proviso (f) to s. 47(xiiib). The result is that exemption in s. 47(xiiib) is not available;
 
(iii) However, the AO’s action of invoking s. 47A(4) and of computing capital gains by adopting the market value of the shares on the date of conversion is not correct. S. 47A(4) applies to a case where the exemption u/s 47(xiiib) is available and the conditions laid down in the proviso are not complied with. However, as in the present case, the AY under appeal is the year on which the conversion took place and in that year itself, the conditions prescribed for the benefit of s. 47(xiiib) were not complied with and consequently the provisions of s. 47(xiiib) were not available to the assessee, s. 47A(4) is not attracted. Under s. 45, the market value of the asset transferred cannot be deemed to be the ‘consideration’. As the shares were transferred at the book value, the capital gains have to be computed on the basis that the book value is the consideration received for the transfer by way of conversion.