Case Law Details
AAR Ruling: No capital gains are accrued or arisen at the time of conversion of partnership into a private limited company under Part IX of the Companies Act, irrespective of subsequent change in the shareholding of such company [Umicore Finance Luxembourg (AAR No. 797 of 2009)].
Facts: Umicore Finance Luxembourg (applicant), incorporated in Luxembourg, was the holding company of its wholly owned subsidiary, Anandeya Zinc Oxides Pvt. Ltd. (Anandeya), an Indian company. Anandeya was incorporated as a private limited company on 13 September 2005 under Part IX and sect6ion 565 of the Companies Act. All the assets and liabilities of the partnership firm, Anandeya Oxides that had been carrying on business w.e.f. 13 September 2005 got vested in Anandeya.
Anandeya Oxides had set up a plant for the manufacture of high purity white seal zinc oxide in 1994 and was converted into a 100% export oriented unit in 1996. The assets of the partnership were revalued for Rs. 5 crores as against the net worth of the business of Rs. 3,05,896 shown in books of account as on 31 March 1998. The excess value of the assets resulting from revaluation was credited to the respective partners’ accounts. On conversion of partnership into a private limited company under Part IX of the Companies Act, the partners of the erstwhile partnership were the same as the shareholders of the company, Anandeya, having share holdings identical with the profit sharing ratio of the 7 partners. There was no revaluation of the assets and liabilities at the time of conversion. Even since the registration of the partnership as company from 13 September 2005, the aggregate of the share holding of the erstwhile partners of the firm in the company has never been less than 51% of the total voting power in the company.
The applicant has acquired entire share capital of Anandeya on 12 August 2008.
The Finance (No. 2) Act, 1998 inserted sub-section (xiii) to section 47 of the Income tax Act (Act) w.e.f. 1 April 1999 which provides that any transfer of a capital asset or intangible asset by a partnership firm to a company as a result of succession of the firm by a company in the business carried on by the firm is not regarded as ‘transfer’, subject to the fulfilment of certain conditions, amongst them one of the conditions is that the aggregate of the shareholding in the company of the partners of the partnership should not be less than 50% of the total voting power in the company and their shareholding should be continued for a period of 5 years from the date of succession. In terms of section 47A, if any of these conditions are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of section 47(xiii) shall be deemed to be the profits and gains chargeable to tax in the hands of a successor company.
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