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- Income Tax
- Jul 01, 2022
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Taxability of Securities Premium Reserve transferred to a LLP by erstwhile private limited company upon conversion
► Date : Jun 30, 2022
Kolkata ITAT, in the case of I.T.A. No. 2307/KOL/2018 M/s. Income Tax Officer Vs. Godhuli Dealcom LLP, examined the issue of taxability of the Securities Premium Reserve transferred to a LLP by erstwhile private limited company upon conversion. In the case , Revenue had preferred an appeal against the order of CIT(A) who ordered for the deletion of the addition made by Assessing officer (AO). AO in his assessment order had made an addition of the security premium of Rs.12,87,23,000/- in the hands of Assessee LLP holding that the securities premium cannot be transferred under the head “Reserve & Surplus” of the newly incorporated LLP and is to be considered as income of the LLP. The assessee-LLP, i.e. Godhuli Dealcom LLP (in short ‘GDLLP’) was converted from a Private Limited Company during the financial year 2014-15, i.e., the first year after incorporation of LLP. In the balance-sheet of LLP, reserve and surplus of Rs.12,87,23,000/- is appearing which was security premium reserve of the erstwhile Private Limited Company namely Godhuli Dealcom Private Limited (GDPL) . AO has treated the same as income of the assessee for the year under appeal Taxability of the securities premium reserve of Rs. 12,87,23,000/- which stood transferred by the erstwhile company to the assessee-LLP upon conversion ITAT observed that GDPL was incorporated on 05.03.2008 and regularly filed return of income till A.Y. 2014-15 .On 16.04.2014, Godhuli Dealcom Private Limited was converted to Godhuli Dealcom LLP and a Certificate of Registration on conversion was issued by the Ministry of Corporate Affairs and all the assets and liabilities of the GDPL became the assets and liabilities of GDLLP. Conversion of Private Limited Company to a Limited liability partnership is governed by the provision of section 47(xiiib). In the current case, if assessee does not fall under the proviso (a) to (f) to section 47(xiiib), then the said transaction is not to be treated as transfer u/s. 2(47) of the Act. But in case, any of the conditions is not fulfilled, then the said transfer will have to be examined in the light of 2(47) r.w.r.t. section 45. Further as per the Exception (a) in proviso to section 47(xiiib), all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP. ITAT observed that as per the Balance Sheet of GPDL, security premium reserve was standing as on 31.03.2014 and it was brought forward from preceding year. Genuineness of the security premium reserve has not been disputed. Earlier in GDLLP security premium reserve has been treated as reserve and surplus. However the said security premium reserve has been shown as “Reserve and Surplus” in the newly formed LLP in the subsequent year. ITAT noted that provision u/s section 52 of the Companies Act, 2013 which deals with application of premium received on the issue of shares, does not provide for distribution of the Security Premium to the shareholders of the company. In the instant case, since the Security Premium Reserve of the erstwhile Company was a liability and not eligible to be distributed as dividend to its shareholders, the same needs to carry the same characteristic in the converted LLP. But in the newly formed LLP, the Security Premium Reserve has been shown under the head “Reserve & Surplus”, which for the purpose of ‘GDLLP’ is a profit available for distribution to its designated partners after three years from the date of said conversion. Since the nature of liability of Security Premium Reserve is not the same to the nature of liability shown in Reserve & Surplus in the newly formed LLP, the assessee’s case falls under the proviso (a) to Section 47(xiiib). Further, since all the assets and liabilities are not converted into assets and liabilities of the Limited Liability Partnership, the said conversion is a transfer u/s. 2(47) of the Act and provision of section 45 of the Act needs to come into operation. Security Premium is not accumulated profit but it is a part of share capital to the extent it was received while issuing in shares by the erstwhile Private Limited Company . Since the Private Limited Company has been converted into a LLP, the only option left for the treatment of the Security Premium Reserve is to bring it to tax in the year in which the Company is converted into LLP. Such Security Premium standing in the balance sheet at the close of the year before being converted first needs to be brought to tax under the provision of section 56(1) of the Act and then the amount needs to be transferred to Reserve & Surplus and which will thereafter be free for withdrawal by the designated partners of the LLP as per the provision of the Act. ITAT found merit in the finding of the AO for the reason that this issue of examining the treatment of Security Premium Reserve is possible only while examining the case of the assessee for the year in which such conversion takes place because if it is not examined in the year of conversion and the balance of Reserve & Surplus converted from the Security Premium Reserve is transferred to Reserve & Surplus Account and carried forward to subsequent years, then it will not be easy for the revenue authorities to track such adjustment. Thus, in view of the options available for utilization of Security Premium Reserve as per the provision of section 52 of the Companies Act, 2013 and in absence of clear-cut provisions for treatment of such Security Premium Reserve which though is a liability not available for distribution to shareholders of the Private Limited Company, but once the conversion takes place, its treatment in the LLP is only possible by way of treating such Security Premium as income of the LLP under section 56(1) of the Act as “income from the other sources” and to be brought to tax by crediting it in the Profit & Loss Account and debiting the Security Premium Reserve Account, which will bring the Security Premium Reserve balance as NIL and the Reserve & Surplus will be the income shown under section 56(1) of the Act and it will be brought to tax in the year when the Private Limited Company is converted into LLP and in the instant case, i.e. A.Y. 2015-16 for which the AO has rightly made the addition for the Security Premium Reserve of the erstwhile Private Limited at Rs.12,87,23,000/- as income of the newly incorporated LLP. ITAT reversed the finding of the CIT(A) and confirm the addition made by the AO. Order of CIT(A) quashed and addition made by AO upheld. Ground Raised by Revenue is allowed Security Premium is not accumulated profit but it is a part of share capital to the extent it was received while issuing in shares by the erstwhile Private Limited Company. Thus, in view of the options available for utilization of Security Premium Reserve as per the provision of section 52 of the Companies Act, 2013 and in absence of clear-cut provisions for treatment of such Security Premium Reserve which though is a liability not available for distribution to shareholders of the Private Limited Company, the only option left for the treatment of the Security Premium Reserve is to bring it to tax as income of LLP under section 56(1) of the Act as “income from the other sources” and then the amount needs to be transferred to Reserve & Surplus and which will thereafter be free for withdrawal by the designated partners of the LLP as per the provision of the Act.Facts of the Case
Question
Decision
Verdict
Crux of Case Law
► Tags : #ITAT #IncomeTaxAct1961 #IncomeTax #ConversionofCompanytoLLP #TreatmentofSecuritiesPremium #TaxabilityofSecuritiesPremium
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