Direct Tax Amicus: December 2018

Conversion of company to LLP - Capital gains tax implications
By Prerana Priyanshu
Conversion into Limited Liability Partnership (LLP) is becoming a popular choice for many existing companies. One of the crucial aspects on taxability of a company on conversion into an LLP is whether conversion amounts to transfer for the purpose of capital gains tax under Section 45 of the Income-tax Act, 1961. The issue was recently discussed by the ITAT Mumbai in the case ACIT v. Celerity Power LLP. The primary contention of the assessee was that on conversion into LLP, all tangible and intangible property of the company shall not be transferred but vest with the LLP. The ITAT, however, ruled that conversion of a company to LLP is a ‘transfer’, and if conditions under clause (a) to (f) of the proviso to Section 47(xiiib) are not fulfilled, the newly formed LLP is chargeable to capital gains tax under Section 45. It also ruled that there would be no capital gains tax payable in the case before it as the assets were transferred at book value. According to the author, the conversion is not ‘transfer’ as there is no transfer of assets from one person to another, and that there are no two counter parties as the process of conversion only alters the status....

Notification

• Conditions to be fulfilled for conversion of branch of foreign banks to Indian subsidiaries, notified
• CBDT issues a directive widening the scope of enquiry in limited scrutiny cases

Ratio decidendi

• Gain on sale of shares allotted under ESOP while assessee was a non-resident not to be taxed as perquisite but as capital gain - ITAT Chennai
• Set-off allowed on administrative policy decision cannot be under taxable income - ITAT, Delhi
• Advertising expenses incurred on own volition for purpose of business though as per group policy: Not an international transaction - ITAT, Chandigarh
• Incidental benefit to group concern is not a bar for deduction under Section 37(1) - ITAT Chandigarh
• TDS to be deducted on mark-up and not on reimbursement of salaries for manpower supply - ITAT, Delhi
• Accrual of income in respect of services – Proportionate completion method to be followed - Delhi High Court
• Interest on loans to AE when losses sustained by latter, not to be nil rated - ITAT Mumbai