My company converted into an LLP and never met all the s.47(xiiib) conditions. The AO has taxed the capital gain in the LLP's hands under s.47A(4). Can he do that in the very year of conversion?
No. s.47A(4) is a withdrawal provision: it operates only to take back an exemption that was actually availed under s.47(xiiib), and cannot be used to test eligibility in the year of the conversion itself. Where the conditions were never satisfied there is a transfer, but the gain is chargeable under s.45 read with s.5 in the hands of the transferor company, not deemed into the successor LLP by s.47A(4) — though the LLP remains exposed as a successor under s.170.
Decided by the ITAT (Shri G.S. Pannu, Vice President and Shri Ravish Sood, Judicial Member) on 2018-11-16, reported as ITA No. 3637/Mum/2015 with C.O. No. 2/Mum/2016, ITAT 'J' Bench Mumbai. It bears on section 47(xiiib), section 47A(4), section 45, section 170, section 170(2), section 72A(6A), section 80-IA of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
This is the single most common s.47A dispute in LLP conversions, and the AO's usual route is exactly the one the Tribunal shut down — invoke s.47A(4) against the LLP in the year of conversion because a condition (usually the Rs.60 lakh turnover ceiling or the asset ceiling) was breached from day one. The distinction is between a condition that fails at the outset, where s.47 simply never applied and there is nothing to withdraw, and a condition that fails later, which is what s.47A(4) is written for. The relief is not complete: the Tribunal expressly held the LLP still answers under s.170, and it separately refused the carry forward of the predecessor's losses because s.72A(6A) is conditioned on compliance with the same proviso. So the assessee wins on the deeming fiction and loses on the losses.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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M/s Celerity Power Pvt. Ltd. was converted into M/s Celerity Power LLP with effect from 28.09.2010, the entire business, assets and liabilities of the company passing to the LLP. For the period 01.04.2010 to 27.09.2010 a return had been filed in the name of the company; the LLP's first previous year ran from 28.09.2010 to 31.03.2011. The Assessing Officer held that the conversion involved a transfer, that the conditions in the proviso to s.47(xiiib) were not satisfied, and that under s.47A(4) the benefit availed by the company was to be deemed the profits and gains of the successor LLP; on an estimate he added Rs.1,76,50,566 as capital gains in the LLP's hands under s.47A(4). He also refused the carry forward of the erstwhile company's depreciation loss of Rs.5,79,93,084 and refused the s.80-IA deduction because Form 10CCB had not been filed with the return. The assessee's alternative case was that any capital gain could only be taxed in the hands of the erstwhile company. The CIT(A) partly allowed the appeal, and the Revenue appealed with the assessee cross-objecting.
The appeal of the Revenue was dismissed and the cross-objections of the assessee were partly allowed (para 24). On a plain literal reading, s.47A(4) comes into play only to withdraw an exemption earlier availed under s.47(xiiib) and to deem it the income of the successor LLP or the shareholder of the predecessor company for the previous year in which the proviso is not complied with; it is not a provision for judging eligibility in the year of claim itself (para 14). With s.47A(4) ousted, the deeming fiction that would have put the gain in the transferee's hands falls with it, and the gain on a conversion that does not comply with the proviso is chargeable under s.45 read with s.5 in the hands of the transferor — subject, however, to the LLP's liability as a successor entity under s.170 (para 15). The carry forward of the predecessor company's loss was refused: s.72A(6A) is expressly preconditioned on compliance with the proviso to s.47(xiiib), the assessee had failed to satisfy those conditions cumulatively, and s.58(4) of the LLP Act 2008 does not carry losses across (paras 18 and 19).
The Tribunal bifurcated s.47A(4) into its two limbs — (i) profits or gains not charged under s.45 by virtue of the conditions in the proviso to s.47(xiiib), and (ii) those profits deemed chargeable in the hands of the successor LLP or the shareholder of the predecessor company for the previous year in which the proviso is not complied with. Limb (i) presupposes an exemption that was in fact taken; without it the deeming in limb (ii) has nothing to operate on (para 14). Having ousted s.47A(4), the Tribunal returned to first principles: s.45 read with s.5 charges the gain to the transferor for the previous year in which the transfer took place, so it could not principally be assessed as capital gains in the LLP's hands; but s.170(1)(b) makes the successor assessable for income after the date of succession, s.170(2) makes the successor assessable for the earlier period where the predecessor cannot be found, and the Explanation to s.170 brings a gain accruing from the transfer of the business within 'income' (para 15). On the losses, the Tribunal read s.72A(6A) with its proviso, noted that the sub-section was inserted by the Finance Act 2010 with effect from 01.04.2011, and held the entitlement is conditioned on cumulative compliance with the proviso to s.47(xiiib); the non-obstante clause in s.58(4) of the LLP Act 2008 vests property, rights and liabilities but has nothing to do with carry forward of losses, which is the creature of the Income-tax Act (paras 18 and 19).
We are of the considered view that from a plain literal interpretation of the aforesaid statutory provision i.e Sec. 47A(4), it can safely be gathered that the same comes into play only for the purpose of withdrawing an exemption earlier availed by an assessee under Sec. 47(xiiib), and deeming the same as the profits and gains of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with.
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Handle my notice → Ask a CA on WhatsAppNo. s.47A(4) is a withdrawal provision: it operates only to take back an exemption that was actually availed under s.47(xiiib), and cannot be used to test eligibility in the year of the conversion itself. Where the conditions were never satisfied there is a transfer, but the gain is chargeable under s.45 read with s.5 in the hands of the transferor company, not deemed into the successor LLP by s.47A(4) — though the LLP remains exposed as a successor under s.170. This was decided by the ITAT (Shri G.S. Pannu, Vice President and Shri Ravish Sood, Judicial Member) and bears on section 47(xiiib), section 47A(4), section 45, section 170, section 170(2), section 72A(6A), section 80-IA of the Income Tax Act 1961. It is reported as ITA No. 3637/Mum/2015 with C.O. No. 2/Mum/2016, ITAT 'J' Bench Mumbai. This is the single most common s.47A dispute in LLP conversions, and the AO's usual route is exactly the one the Tribunal shut down — invoke s.47A(4) against the LLP in the year of conversion because a condition (usually the Rs.60 lakh turnover ceiling or the asset ceiling) was breached from day one. The distinction is between a condition that fails at the outset, where s.47 simply never applied and there is nothing to withdraw, and a condition that fails later, which is what s.47A(4) is written for. The relief is not complete: the Tribunal expressly held the LLP still answers under s.170, and it separately refused the carry forward of the predecessor's losses because s.72A(6A) is conditioned on compliance with the same proviso. So the assessee wins on the deeming fiction and loses on the losses. If it applies to you, the first step is this: Fix the date each s.47(xiiib) condition failed. If it failed on the date of conversion itself, argue that s.47 never applied, so there is no exemption for s.47A(4) to withdraw.
M/s Celerity Power Pvt. Ltd. was converted into M/s Celerity Power LLP with effect from 28.09.2010, the entire business, assets and liabilities of the company passing to the LLP. For the period 01.04.2010 to 27.09.2010 a return had been filed in the name of the company; the LLP's first previous year ran from 28.09.2010 to 31.03.2011. The Assessing Officer held that the conversion involved a transfer, that the conditions in the proviso to s.47(xiiib) were not satisfied, and that under s.47A(4) the benefit availed by the company was to be deemed the profits and gains of the successor LLP; on an estimate he added Rs.1,76,50,566 as capital gains in the LLP's hands under s.47A(4). He also refused the carry forward of the erstwhile company's depreciation loss of Rs.5,79,93,084 and refused the s.80-IA deduction because Form 10CCB had not been filed with the return. The assessee's alternative case was that any capital gain could only be taxed in the hands of the erstwhile company. The CIT(A) partly allowed the appeal, and the Revenue appealed with the assessee cross-objecting. The matter was decided on 2018-11-16 by the ITAT (Shri G.S. Pannu, Vice President and Shri Ravish Sood, Judicial Member). On those facts the ITAT held as follows. The appeal of the Revenue was dismissed and the cross-objections of the assessee were partly allowed (para 24). On a plain literal reading, s.47A(4) comes into play only to withdraw an exemption earlier availed under s.47(xiiib) and to deem it the income of the successor LLP or the shareholder of the predecessor company for the previous year in which the proviso is not complied with; it is not a provision for judging eligibility in the year of claim itself (para 14). With s.47A(4) ousted, the deeming fiction that would have put the gain in the transferee's hands falls with it, and the gain on a conversion that does not comply with the proviso is chargeable under s.45 read with s.5 in the hands of the transferor — subject, however, to the LLP's liability as a successor entity under s.170 (para 15). The carry forward of the predecessor company's loss was refused: s.72A(6A) is expressly preconditioned on compliance with the proviso to s.47(xiiib), the assessee had failed to satisfy those conditions cumulatively, and s.58(4) of the LLP Act 2008 does not carry losses across (paras 18 and 19).
The Tribunal bifurcated s.47A(4) into its two limbs — (i) profits or gains not charged under s.45 by virtue of the conditions in the proviso to s.47(xiiib), and (ii) those profits deemed chargeable in the hands of the successor LLP or the shareholder of the predecessor company for the previous year in which the proviso is not complied with. Limb (i) presupposes an exemption that was in fact taken; without it the deeming in limb (ii) has nothing to operate on (para 14). Having ousted s.47A(4), the Tribunal returned to first principles: s.45 read with s.5 charges the gain to the transferor for the previous year in which the transfer took place, so it could not principally be assessed as capital gains in the LLP's hands; but s.170(1)(b) makes the successor assessable for income after the date of succession, s.170(2) makes the successor assessable for the earlier period where the predecessor cannot be found, and the Explanation to s.170 brings a gain accruing from the transfer of the business within 'income' (para 15). On the losses, the Tribunal read s.72A(6A) with its proviso, noted that the sub-section was inserted by the Finance Act 2010 with effect from 01.04.2011, and held the entitlement is conditioned on cumulative compliance with the proviso to s.47(xiiib); the non-obstante clause in s.58(4) of the LLP Act 2008 vests property, rights and liabilities but has nothing to do with carry forward of losses, which is the creature of the Income-tax Act (paras 18 and 19). In the words reproduced by the source cited on this page: "We are of the considered view that from a plain literal interpretation of the aforesaid statutory provision i.e Sec. 47A(4), it can safely be gathered that the same comes into play only for the purpose of withdrawing an exemption earlier availed by an assessee under Sec. 47(xiiib), and deeming the same as the profits and gains of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with."
It was decided by the ITAT on 2018-11-16 and is reported as ITA No. 3637/Mum/2015 with C.O. No. 2/Mum/2016, ITAT 'J' Bench Mumbai. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 47(xiiib), section 47A(4), section 45, section 170, section 170(2), section 72A(6A), section 80-IA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal of the Revenue was dismissed and the cross-objections of the assessee were partly allowed (para 24). On a plain literal reading, s.47A(4) comes into play only to withdraw an exemption earlier availed under s.47(xiiib) and to deem it the income of the successor LLP or the shareholder of the predecessor company for the previous year in which the proviso is not complied with; it is not a provision for judging eligibility in the year of claim itself (para 14). With s.47A(4) ousted, the deeming fiction that would have put the gain in the transferee's hands falls with it, and the gain on a conversion that does not comply with the proviso is chargeable under s.45 read with s.5 in the hands of the transferor — subject, however, to the LLP's liability as a successor entity under s.170 (para 15). The carry forward of the predecessor company's loss was refused: s.72A(6A) is expressly preconditioned on compliance with the proviso to s.47(xiiib), the assessee had failed to satisfy those conditions cumulatively, and s.58(4) of the LLP Act 2008 does not carry losses across (paras 18 and 19). It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 47(xiiib), section 47A(4), section 45, section 170, section 170(2), section 72A(6A), section 80-IA of the Income Tax Act 1961, and was decided by Shri G.S. Pannu, Vice President and Shri Ravish Sood, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Read the proviso to s.47(xiiib) as it stood in the year of YOUR conversion — the clause was inserted by the Finance Act 2010 and the conditions have been added to since. Do not rely on the department's archived /w/section-47 pages: they do not carry clause (xiiib) at all. If the exemption is out, put the charge where s.45 read with s.5 puts it — on the transferor company as the transferor — and press that the LLP is not the person in whose hands the gain arises. Meet the s.170 point separately: s.170(1)(b) confines the successor to income after the date of succession, and s.170(2) applies only where the predecessor cannot be found. Do not assume the loss carry forward survives. s.72A(6A) requires cumulative compliance with the same proviso, and s.58(4) of the LLP Act 2008 will not carry losses across — it deals with property, rights and liabilities, not with a creature of the Income-tax Act. Keep the s.80-IA claim alive independently: the deduction attaches to the undertaking, and the audit report point is separable.
Validity check could not be completed. Validity check could not be completed. The Revenue carried the matter to the Bombay High Court: indiankanoon /doc/34244975/ is a Prothonotary and Senior Master's list dated 08.11.2019 in Pr. Commissioner of Income Tax-19 v. Celerity Power LLP directing removal of office objections on the appeal, so an appeal was filed, but I located no decision of the Bombay High Court on the merits. The same reading of s.47A — that it can only be invoked if s.47 was pressed into service in the first place — was reached independently by the Punjab and Haryana High Court in Pr. CIT-2 Chd v. Mobisoft Tele Solutions P. Ltd. (22.02.2018), para 14, in the context of s.47(xiv) and s.47A(3). No decision doubting or overruling this order was located. Separately, the conditions in the proviso to s.47(xiiib) have been added to since AY 2011-12; the statutory text applied here is the text as it stood for that year. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The cause title on the indiankanoon rendering shows Assessment Year 2011-12, but paragraph 1 of the order records the s.143(3) order dated 19.03.2014 as being 'for Assessment Year 2010-11', while paragraph 3 describes the LLP's first financial year as 28.09.2010 to 31.03.2011 (i.e. AY 2011-12). Take AY 2011-12, which is what the reasoning turns on. I retrieved and read paragraphs 3, 5, 14, 15, 18, 19, 23 and 24 verbatim, plus the cross-objection grounds; I did not retrieve paragraphs 16, 17 and 20 to 22, so the full route from the paragraph 15 reasoning to the dismissal of the Revenue's grounds is not reproduced here. Some commentary reports a further holding that the s.48 computation machinery fails because the vesting was at book value; I could NOT verify any such passage in the order and it is not relied on here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal of the Revenue was dismissed and the cross-objections of the assessee were partly allowed (para 24). On a plain literal reading, s.47A(4) comes into play only to withdraw an exemption earlier availed under s.47(xiiib) and to deem it the income of the successor LLP or the shareholder of the predecessor company for the previous year in which the proviso is not complied with; it is not a provision for judging eligibility in the year of claim itself (para 14). With s.47A(4) ousted, the deeming fiction that would have put the gain in the transferee's hands falls with it, and the gain on a conversion that does not comply with the proviso is chargeable under s.45 read with s.5 in the hands of the transferor — subject, however, to the LLP's liability as a successor entity under s.170 (para 15). The carry forward of the predecessor company's loss was refused: s.72A(6A) is expressly preconditioned on compliance with the proviso to s.47(xiiib), the assessee had failed to satisfy those conditions cumulatively, and s.58(4) of the LLP Act 2008 does not carry losses across (paras 18 and 19).
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