Case Law Details
This Tax Alert summarises a recent ruling of the Authority for Advance Rulings (AAR) [A.A.R. No. 797 of 2009] in the case of M/s Umicore Finance Luxembourg (Applicant). There was a sale of shares of a company by its shareholders which had received such shares on conversion of a firm into the company, under the provisions of Part IX of the Indian Company Law (ICL).
The issue was whether such sale of shares, in violation of a condition of lock-in period provided in the Indian Tax law (ITL), resulted in the withdrawal of the exemption of capital gains under the ITL. The AAR held that no capital gains arose in the event of conversion of firm into company and, hence, on a subsequent noncompliance of a condition under the ITL, there can be no liability to pay tax on capital gains which did not arise in the first place.
Background
Part IX of the ICL provides for a process under which a firm is conferred with the status of a company by the process of law. Upon registration as a company, all assets and liabilities of the firm would vest in the company (Part IX conversion).
The Bombay High Court (HC) in the case of CIT Vs. Texspin Engg. & Mfg Works [263 ITR 345] (Texspin case) has taken a view that Part IX conversion does not involve transfer from one entity to another and the process merely involves statutory vesting of assets into the fold of the company. Further, the HC held that the firm does not receive any consideration from the company. In the absence of both transfer and receipt of consideration by the firm, the HC held that there is no capital gains tax liability on the firm upon Part IX conversion.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
Is there any Lock in period to hold the shares allotted to the partners at the time of conversion of Firm into a Company?
Pls.throw some light on tax implication if such shares sold after conversion say after 2 years.
Suresh M. Gala