Case Note & Summary
The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961 against an order of the Income Tax Appellate Tribunal (ITAT) dated 15.10.2024 in ITA No.692/Bang/2024 for Assessment Year 2017-18. The assessee, M/s Atria Wind (Kadambur) Pvt Ltd, was originally a partnership firm named M/s Perpetual Investments, which was converted into a private company under the Karnataka Compulsory Conversion of Partnership Firms into Companies Act, 2014. During the conversion, all assets and liabilities were transferred to the company. The Assessing Officer (AO) treated this conversion as a 'transfer' under Section 2(47) of the Act and added ₹1,91,95,68,251/- as capital gains, determining total income at ₹1,89,11,81,757/-. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who confirmed the AO's order. The assessee then appealed to the ITAT, which allowed the appeal, holding that the conversion did not constitute a transfer. The Revenue appealed to the High Court. The High Court, after hearing the parties, noted that the issue was covered by the Supreme Court's decision in Commissioner of Income Tax v. Texspin Engg. & Mfg. Works, (2003) 11 SCC 284, which held that conversion of a partnership firm into a company under a statutory scheme does not amount to a transfer. The court found no substantial question of law and dismissed the appeal, upholding the ITAT's order.
Headnote
A) Income Tax - Capital Gains - Transfer - Section 2(47) read with Section 47(xiii) of the Income Tax Act, 1961 - Conversion of partnership firm into company - The issue was whether conversion of a partnership firm into a private company under the Karnataka Compulsory Conversion of Partnership Firms into Companies Act, 2014 amounts to a 'transfer' of capital assets. The court held that such conversion does not constitute a transfer under Section 2(47) as it is a statutory conversion and not a transfer of assets. The exemption under Section 47(xiii) applies, and no capital gains tax is attracted. (Paras 1-5)
B) Income Tax - Substantial Question of Law - Section 260A of the Income Tax Act, 1961 - The court found that the issue was covered by the decision of the Supreme Court in Commissioner of Income Tax v. Texspin Engg. & Mfg. Works, (2003) 11 SCC 284, and thus no substantial question of law arose. The appeal was dismissed. (Para 5)
Issue of Consideration
Whether the conversion of a partnership firm into a private company under the Karnataka Compulsory Conversion of Partnership Firms into Companies Act, 2014 constitutes a 'transfer' within the meaning of Section 2(47) of the Income Tax Act, 1961, thereby attracting capital gains tax.
Final Decision
Appeal dismissed. No substantial question of law arises. ITAT order upheld.
Law Points
- Conversion of partnership firm to company not a transfer under Section 2(47) of Income Tax Act
- 1961
- Section 47(xiii) exemption applies
- no capital gains tax liability
- substantial question of law not arising
Case Details
2020 LawText (KAR) (09) 49
Vibhu Bakhru, Chief Justice, C M Joshi, Justice
Sri. Y V Raviraj, Advocate for appellants
The Pr. Commissioner of Income Tax, Central, Bengaluru and The Deputy Commissioner of Income Tax, Central Circle-2(4), Bengaluru
M/s Atria Wind (Kadambur) Pvt Ltd, Bengaluru
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Nature of Litigation
Appeal by Revenue under Section 260A of Income Tax Act against ITAT order allowing assessee's appeal on capital gains addition.
Remedy Sought
Revenue sought to set aside ITAT order and confirm CIT(A) order upholding AO's addition of capital gains.
Filing Reason
Revenue aggrieved by ITAT order holding that conversion of partnership firm into company does not constitute transfer under Section 2(47).
Previous Decisions
AO added capital gains of ₹1,91,95,68,251/-; CIT(A) confirmed; ITAT allowed assessee's appeal.
Issues
Whether conversion of partnership firm into private company under Karnataka Compulsory Conversion of Partnership Firms into Companies Act, 2014 constitutes 'transfer' under Section 2(47) of Income Tax Act, 1961.
Submissions/Arguments
Revenue argued that conversion entails transfer of assets and attracts capital gains tax.
Assessee argued that conversion is statutory and not a transfer, relying on Supreme Court decision in Texspin Engg.
Ratio Decidendi
Conversion of a partnership firm into a company under a statutory scheme does not amount to a 'transfer' under Section 2(47) of the Income Tax Act, 1961, and thus no capital gains tax is attracted. The issue is covered by the Supreme Court's decision in Commissioner of Income Tax v. Texspin Engg. & Mfg. Works.
Judgment Excerpts
The Revenue has filed the present appeal under Section 260-A of the Income Tax Act, 1961, impugning an order dated 15.10.2024 passed by the learned Income Tax Appellate Tribunal in ITA No.692/Bang/2024 in respect of assessment year 2017-18.
The assessee had filed the said appeal before the learned ITAT, impugning an order dated 30.03.2022 passed by the Commissioner of Income Tax (Appeals)-15, Bengaluru under Section 153A read with Section 143(3) of the Act in respect of the AY 2017-18.
The assessment made was premised on a search conducted in the office premises of the assessee, on 17.12.2020, under Section 132 of the Act.
The Assessing Officer determined the total income of the assessee at ₹1,89,11,81,757/-.
The said determination was based on an addition of a sum of ₹1,91,95,68,251/- made on account of capital gains.
During the previous year relevant to AY 2017-18, a partnership firm namely M/s. Perpetual Investments, was converted into a private company.
The said conversion entailed the transfer of the entire assets and liabilities from the partnership firm to the assessee company.
Whereas the assessee claimed that the conversion of the partnership firm to a company, did not entail transfer of its capital assets as envisaged under Section 2 (47) of the Act; the AO did not accept the same and held that the conversion amounted to transfer.
The learned ITAT allowed the appeal.
The controversy is covered by the decision of the Supreme Court in the case of Commissioner of Income Tax v. Texspin Engg. & Mfg. Works, (2003) 11 SCC 284.
In view of the above, we find that no substantial question of law arises for consideration.
The appeal is, accordingly, dismissed.
Procedural History
Search under Section 132 on 17.12.2020; notice under Section 153A issued; AO passed assessment order adding capital gains; assessee appealed to CIT(A) who confirmed; assessee appealed to ITAT which allowed; Revenue appealed to High Court under Section 260A.
Acts & Sections
- Income Tax Act, 1961: Section 2(47), Section 47(xiii), Section 132, Section 153A, Section 143(3), Section 260A
- Karnataka Compulsory Conversion of Partnership Firms into Companies Act, 2014:
