Addition u/s 45 unsustainable as commercial expediency not contravened

ITO Vs Brizeal Realtors and Developers LLP (ITAT Mumbai)

ITAT Mumbai held that addition u/s 45 under the head “Capital Gains” for violation of conditions u/s. 47(xiiib) of the Act on conversion of a private limited company into the assessee LLP unsustainable as commercial expediency not contravened by AO.

Facts-The assessee is a Limited Liablity Partnership [in short, “LLP”] engaged in construction activities. The case was selected for scrutiny and statutory notices under the Income Tax Act, 1961 were issued and complied. In the assessment completed, AO made an addition of Rs. 48,35,00,000/ – u/s. 45 of the Act under the head “Capital Gains” for violation of conditions u/s. 47(xiiib) of the Act on conversion of a private limited company into the assessee LLP. Aggrieved by the said addition, the assessee preferred appeal before the ld. CIT(A) who allowed the appeal in favour of the assessee by deleting the said addition. Aggrieved by the order of the ld. CIT(A), the Revenue has preferred this appeal.

Conclusion- We find that the partners of the assessee LLP and the erstwhile shareholders of the predecessor company can be considered to have obtained any benefit directly or indirectly only if the same fits into the specific conditions prescribed. We find that the ld. CIT(A) have duly considered that the clause (c) operates only till the date of conversion i.e. 17/03/2016 and it is clear from the balance sheets pre conversion and post conversion that the shareholders have not received any consideration or benefit directly or indirectly. Further, as regards clause(f) refers to amount paid to the partner of LLPout of the balance of the accumulated profits standing in the accounts of the company on the date of conversion, which in the present case cannot be said to be violative in view of the fact that the commercial expediency explained by the assessee has not been controverted by the Assessing Officer and who cannot step into the shoes of the assessee to decide and direct as to how the assessee should conduct its state of affairs. Also, the condition prescribed relates to the balance of accumulated profits as on date of conversion out of which amount is paid to the partner, however, since the accumulated profits did not include the amount of Goodwill in the books of the predecessor company, there cannot be said to be any violation of clause (f) either. Hence, merely on presumptions of the Assessing Officer, additions cannot be sustained which the ld. CIT(A) have categorically dealt with considering all the aspects of the case.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

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