Wp/510/2010 Of The Commissioner Of Income Tax v. M/S. Umicore Finance Luxembourg

IN THE HIGH COURT OF BOMBAY AT GOA WRIT PETITION NO. 510 OF 2010 1. The Commissioner of Income Tax, Having office at Aayakar Bhavan, Patto Plaza, Panaji Goa …Petitioner V e r s u s M/s Umicore FinanceLuxemborg, C/o M/s Anandeya Zinc Oxides Pvt. Ltd.Plot No. 23, GIDC,Sancoale Industries Estate,Zuarinagar,Goa-403726 …Respondent Ms. Asha Desai, Advocate for the Petitioner. Mr. S. R. Wadhwa, Advocate with Mr. S. M. Singbal, Advocate for theRespondents. Coram :-F. M. REIS, NUTAN D. SARDESSAI, JJ. thReserved for Judgment on: 11 August, 2016 Judgment to be pronounced on : 25th November, 2016 Heard Ms. Asha Desai, learned Counsel appearing for thePetitioner and Mr. Wadhwa, learned Counsel appearing for the Respondent. 2.The above Petition filed by the Commissioner of Income Tax,inter alia, takes exception to the Order dated 12.03.2010 and 15.06.2010passed by the Addl. Commissioner of Income Tax (AAR). 3.Briefly, it is the contention of the Petitioners, that the Respondentis a non-resident Company incorporated under the laws of Luxembourg andit is the holding of its wholly owned subsidiary M/s. Anandeya Zinc OxidesPvt. Ltd. (Anandeya in short), an Indian Company assessed with ACIT,Margao. It is further their case that the said Respondent purchased15,49,500 shares of Rs.10/- each or 99.96% of the shares of Anandeya andthe balance 500 shares of Rs.10/- each was purchased by the Respondent.It is further their case that on 13.09.2005, M/s. Anandeya was incorporatedas a Private Limited Company succeeding erstwhile firm M/s. Anandeya ZincOxides whose conversion into a Private Limited Company was effectedunder part IX of the Indian Companies Act, 1956. It is further their case thaton the date of the conversion, the partners of the erstwhile firm continued asshareholders having share holding identical with profit sharing ratio of thepartners. It is further their contention that the firm set up a plant formanufacture of high purity white seal zinc oxide of annual capacity 5000tones per annum and the plant commenced production in April 1995 and wasconverted into 100% export oriented unit in 1996. The Assets of thepartnership was revalued for Rs. 5 crores as against the net worth of thebusiness of Rs.3,05,896/- relevant to the assessment year 1998-1999. Theexcess of the revaluation of assets of Rs.4,96,94,104/- was credited to therespected partners account. The firm, however, continued to claim, thedepreciation value of the asset prior to the revaluation for the purpose ofcomputation of income under the Income Tax Act, 1961. It is further their case that the Respondent-Company acquired the shareholding of Ms/.Anandeya and, therefore, has violated the provisions of Section 47(xiii)(d)read with Section 474A(3) of the Income Tax Act, 1961. Hence, theexemption from capital gains enjoyed by the assessee firm upon conversioninto limited company ceased to be in force. It is further their case that the nonresident Respondent M/s. Umicore Finance Luxenbourg, acquired shares ofM/s. Anandeya and was not connected in any way to the transaction whichhad taken place on 13.09.2005. Therefore, it is the case of the Petitionersthat the transaction on 13.09.2005 was not within the purview of Section245N(a)(i)(ii) or (iii) and the Order of the AAR is without jurisdiction. It isfurther their contention that the application for recall of admission order cameto be rejected and by ruling the AAR was pleased to hold that there were nocapital gains accrued or arose at the time of conversion of partnership firminto a private limited company under part IX of the Companies Act and,therefore, notwithstanding the non-compliance with clause (d) of theprovision to Section 47(xii) of the Income Tax Act, by reason of prematuretransfer of shares the said company is not liable to pay capital gains tax.Being aggrieved by the said assessment, the Petitioners have filed the abovePetition. 4.Upon hearing the learned Counsel appearing for the Petitionerand the Respondents who have reiterated the contentions raised in the WritPetition and the findings of the AAR in the impugned Order, we shall proceed to examine the contentions sought to be raised by the Petitioners herein. 5.The undisputed facts in the present Petition are that theRespondents entered into a share purchase Agreement on 01.07.2008 withAnandeya Zinc Oxides Private Limited for the purchase of 15,50,000 sharesof Rs.10/- each representing 100% equity shares which was completed on12.08.2008. The said M/s. Anandeya Zinc Oxides Private Limited wasincorporated as Private Limited Company on 13.09.2005 succeedingerstwhile firm M/s. Anandeya Zinc Oxides and such conversion was affectedon 13.09.2005 under part IX of the Indian Companies Act 1956. It is thecontention of the Respondent-Company that when a firm is converted into aCompany, there is no sale/extinguishment of any rights and no transfer ofasset as envisaged in Section 45(1) of the Income Tax Act, can be stated tohave taken place and, as such, even the provisions of Section 47(xiii)(d) arein violation, it does not attract capital gains to the Respondent's subsidiarybecause Section 47(xiii) applies only to firm that are succeeded by thecompany by sale. But, however, it is the contention of the Petitioner thatSection 2(47) of the Income Tax Act, 1961, is an “inclusive provision” andtransfer by modes other than those that are presently listed, can also beincluded in the definition of transfer. It is further pointed out that as in thepresent case where a distinct legal identity it such as a private limitedcompany has succeeded a collection of partners, namely the firm, which hasno separate legal identity can be brought into the inclusive provision of 6. Dealing with this aspect, the AAR in the impugned Order has noted that on 09.10.2009, the Respondents have clarified that whilstconverting the partnership firm into a Company, there was no revaluation ofthe assets and the assets and liabilities of the firm as also the partners,capital and current accounts were taken at their book value in the accountsof the Company. It is also pointed out that the first year audited accounts ofthe Company for the period 13.09.2005 to 31.03.2006, were also filed andfound that the net worth of the Company as on the date of conversion wasthe same as it was in the hands of the erstwhile firm and there was noincrease in such value. 7.Section 45(1), 47, 47A and 48 of the Income Tax Act, reads thus : Section 45(1): Capital gains. Dealing with this aspect, the AAR in the impugned Order has noted that on 09.10.2009, the Respondents have clarified that whilstconverting the partnership firm into a Company, there was no revaluation ofthe assets and the assets and liabilities of the firm as also the partners,capital and current accounts were taken at their book value in the accountsof the Company. It is also pointed out that the first year audited accounts ofthe Company for the period 13.09.2005 to 31.03.2006, were also filed andfound that the net worth of the Company as on the date of conversion wasthe same as it was in the hands of the erstwhile firm and there was noincrease in such value. 7.Section 45(1), 47, 47A and 48 of the Income Tax Act, reads thus : Section 45(1): Capital gains. 45.(1) Any profits or gains arising from the transfer of acapital asset effected in the previous year shall, save asotherwise provided in sections 54, 54B, 54D, 54E,54EA, 54EB, 54F, 54G and 54H, be chargeable toincome-tax under the head “Capital gains”, and shall bedeemed to be the income of the previous year in whichthe transfer took place. Section 47 lays down that nothing contained in section 45 shallapply to the transfers specified therein. We are concerned with clause (xiii)in that section which reads thus: Clause (xiii) of Section 47 Nothing contained in section 45 shall apply to thefollowing: (xiii)any transfer of a capital asset or intangibleasset by a firm to a company as a result of successionof the firm by a company in the business carried on bythe firm, or any transfer of a capital asset to acompany in the course of demutualisation orcorporatisation of a recognised stock exchange inIndia as a result of which an association of persons orbody of individuals is succeeded by such company:Provided that (a) all the assets and liabilities of the firm [or of theassociation of persons or body of individuals] relatingto the business immediately before the successionbecome the assets and liabilities of the company; (b) all the partners of the firm immediately before thesuccession become the shareholders of the companyin the same proportion in which their capital accountsstood in the books of the firm on the date of thesuccession; (c) the partners of the firm do not receive anyconsideration or benefit, directly or indirectly, in anyform or manner, other than by way of allotment ofshares in the company; and (d) the aggregate of the shareholding in the companyof the partners of the firm is not less than fifty per centof the total voting power in the company and theirshareholding continues to be as such for a period offive years from the date of the succession; 8.The learned AAR further noted that Section 47(xiii) specificallyexcludes different categories of transfers from the purview of capital gainstaxation but it is subject to fulfilling the conditions laid down Clause (a) to (d).The fact that conditions (a) to (c) are satisfied, is not in dispute but, however,the question is whether clause (d) requires to be satisfied. The learned AARhas rightly pointed out that the first part of clause (d) has been satisfied but,however, it is noted by the learned AAR the requirements of second part ofclause (d) i.e. the shareholding of 50% or more should continue to be assuch for the period of five years from the date of succession, has not beenfulfilled in the instant case by reason of the transfer of shares by the IndianCompany to the Applicant before the expiry of five years. It is further notedthat the effect of transgression of the conditions laid down in clause (xiii) isset out in Section 47A(3). Section 47A (3) reads thus : 47AWithdrawal of exemption in certain cases. (3) Where any of the conditions laid down in theproviso to clause (xiii) or the proviso to clause 47AWithdrawal of exemption in certain cases. (3) Where any of the conditions laid down in theproviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with, theamount of profits or gains arising from thetransfer of such capital asset or intangible assetnot charged under section 45 by virtue ofconditions laid down in the provision to clause(xiii) or the proviso to clause (xiv) of section 47shall be deemed to be the profits and gainschargeable to tax of the successor company forthe previous year in which the requirements ofthe proviso to clause (xiii) or the proviso toclause (xiv), as the case may be, are notcomplied with. 9.Subsection(3) of Section 47A under which the transfer Companyhas forfeited its claim to seek exclusion uses the word “the amount of profitor gains arising from the transfer of such capital asset or intangible assets”.It is further noted that to attract such provision, it presupposes a transfer.The learned AAR has also noted at para 9.1 thus : “9.1. In the case of CIT v/s Texspin Engg. & Mfg.Works, the learned Judges of the Bombay HighCourt while dealing with Section 45 have given thelegislative background for introducing Section46(xiii) and the basic postulates of this provision inthe following words:- “This clause was inserted with effectfrom April 1, 1999. Therefore, we are notconcerned with the amendment.However, it provides a clue to thelegislative intent. In our opinion, thisclause has been introduced with effect from April 1, 1999, in order to encouragemore and more firms become limitedcompanies. It also indicates thediference between transfer andtransmission. Basically, when a firm istreated as a company under Part IX, it isa case similar to transmission. This isamply made clear by clause (xiii) ofsection 47, which states that where afirm is succeeded by a company in thebusiness, the transactions hall not betreated as a transfer. Now, thisamendment has been made in section47 in view of the controversy arising onsection 45(1) read with section 2(47)(ii).” 10.The learned AAR has also noted that the consequences ofviolation of those conditions have been specifically laid down in sub-section(3) of Section 47A which was also introduced by the same Finance Act. It isfurther pointed out that if no profit or gains arise earlier when the conversionof the firm into a Company took place or if there was no transfer at all of thecapital assets of the firm at the point of time, the deeming provision underSection 47A(3) cannot be inducted to levy the capital gain stakes. Thelearned AAR further found that the shares allotted to the partners of theexisting firm consequent upon the registration of the firm as a Company, didno give rise to any profit or gains. It is further noted that by suchreconstitution of the Company under part IX of the Companies Act, theassets automatically gets vested in the newly registered Company as per thestatutory mandate contained under Section 575. It is further found that itcannot be said that the partners have made any gains or received any profits assuming that there was a transfer of capital assets. It was also noted thatworth of the shares of the partnership was not different from the interest ofpartners in the existing firm. The learned AAR also took support in theJudgment reported in 263 ITR 345 in the case of Texspin Engg. Mfg.Works, where the issue was viewed from another angle i.e. from the standpoint of Section 48 of the Act in a case of similar conversion of a firm into acompany. It is further noted that the full value of consideration cannot beattributed to the transaction. The learned AAR also noted that the ApexCourt has held that the provisions of Section 48 has to be read as an integralpart of the charging provision in Section 45. The learned AAR has furtherobserved at para 12.1 and 13 thus : assuming that there was a transfer of capital assets. It was also noted thatworth of the shares of the partnership was not different from the interest ofpartners in the existing firm. The learned AAR also took support in theJudgment reported in 263 ITR 345 in the case of Texspin Engg. Mfg.Works, where the issue was viewed from another angle i.e. from the standpoint of Section 48 of the Act in a case of similar conversion of a firm into acompany. It is further noted that the full value of consideration cannot beattributed to the transaction. The learned AAR also noted that the ApexCourt has held that the provisions of Section 48 has to be read as an integralpart of the charging provision in Section 45. The learned AAR has furtherobserved at para 12.1 and 13 thus : “12.1 Though these observations were made inthe context of Section 45(4), the ratio of thedecision would equally apply to the present case.However, the question whether vesting byoperation of law would be transfer has not beendecided in that case. True, the decision inTexspin was rendered without taking resort toSection 47(xiii) and the Proviso thereto. But, thebasic reasoning underlying the said judgment stillholds good. Though we are not included toexpress a final opinion on the point of transfer,we would like to say this much: Section 47(xiii)read with Section 47A(3) cannot be construed tointroduce a fiction to the effect that the incomewhich is not liable to be taxed under the other provisions of the Chapter on capital gains can bedeemed to be capital gains, if the violation ofconditions take place. May be, these provisionswere introduced on a supposition that theconversion of the firm into company under PartIX of the Companies Act would lead to realizationof profits or gains on account of transfer ofcapital assets. But, S.47A(3) does not achievethe desired objective, as the language of the saidProvision now stands. Section 47A(3) onlyemphasizes the obvious, that is to say, the profitsand gains resulting from the transfer of capitalasset chargeable under the Provisions of the Act.To judge whether this prerequisite is fulfilled ornot, we have to go back to the basic provisions,namely Section 45(1) and Section 48 and S.47-A(3) cannot be read as a 'stand alone' provision.13. In the light of the above discussion, it is ruledthat no capital gains accrued or arose at the timeof conversion of partnership firm into a privatelimited company under Part IX of the CompaniesAct and therefore, notwithstanding the non-compliance with clause (d) of proviso to Section47(xiii) of the Income Tax Act, by reason ofpremature transfer of shares, the said companyis not liable to pay capital gains tax. No finalopinion is expressed in regard to the questionwhether on the registration of company underPart IX of the Companies Act, there was 'transfer'of capital assets.” 11.On perusal of the said observations, we find that the learnedAAR has in a very reasoned Order, has taken a view that no capital gainsaccrued or attracted at the time of conversion of the partnership firm into aPrivate Limited Company. In part IX of the Companies Act, therefore,notwithstanding the non-compliance with clause (d) of the proviso of Section47(xiii) of the Income Tax Act by premature transfer of shares, the saidCompany is not liable to pay capital gains tax. These findings have beenarrived at essentially looking into the fact that there was revaluation of assetsat the time of conversion of the firm M/s. Anandeya Zinc Oxides PrivateLimited. The said finding of fact has not been disputed by the learnedCounsel appearing for the Petitioners and, as such, the finding of the learnedAAR that there was no capital gains in the transaction in question cannot befaulted. It is also to be noted that even immediately after such conversion inquestion from the partnership firm into a Private Limited Company, theassessment with regard to the income of the new Company as well as of therespective partners were filed and there was no objection or grievancesraised by the Assessing Officer that any capital gains had to be paid onaccount of the incorporation of the Company in terms of the said provisions.The transfer of shares in favour of the Respondent by the erstwhile partnerswho were shareholders of M/s. Anandeya Zinc Oxides Private Limited andsuch partners/share holders are liable to pay capital gains even if acceptable,would not affect the decision passed by the learned AAR whilst coming to the conclusion that there were no capital gains at the time of incorporation of thenew Company by the said partnership firm. 12.The contention of the Petitioner that in view of the violation ofclause (d) of Section 47(xiii), the exemption from capital gains enjoyed by theAssessing firm upon conversion into a Private Limited Company, ceases tobe in force cannot be accepted. We have already examined that there areno capital gains which have accrued on account of such incorporation. Insuch circumstances, we find that the said contention of the learned Counselappearing for the Petitioner that in view of the transfer of the capital assets orintangible assets, there are capital gain tax payable by the transfereeCompany, cannot be accepted. As pointed out herein above, there was nocapital gains payable at the time of the incorporation of the Company fromthe erstwhile partnership firm. 13.The next contention of the learned Counsel appearing for thePetitioner is that the application under Section 245(N) of the Respondentsitself was not maintainable. The main submission on that aspect is that theRespondents not being parties to the transaction, the question of seeking anadvance ruling at the instance of the Respondents is not covered underclause (i) (ii) and (iii) of Section 245(N)(a) of the said Act. To examine suchaspect, clause (i) of Section 245N(a) of the said Act defines advance rulingas thus : (a) “Advance ruling” means - (i)a determination by the Authority inrelation to a transaction which hasbeen undertaken or is proposed to beundertaken by a non-residentapplicant.” 14.The learned AAR whilst dealing with such aspect has rightlyobserved in the Order dated 06.07.2009 at para 6 thus : (a) “Advance ruling” means - (i)a determination by the Authority inrelation to a transaction which hasbeen undertaken or is proposed to beundertaken by a non-residentapplicant.” 14.The learned AAR whilst dealing with such aspect has rightlyobserved in the Order dated 06.07.2009 at para 6 thus : “6.It seems to us that the application ismaintainable having regard to the widerlanguage of sub-clause (i) of section 245N(a)in contrast with the language employed insub-clause (ii). There is no specificrequirement in sub-clause (i) thatdetermination should relate to the tax liabilityof an on-resident. Going by the averments ofthe applicant, it is clear that the capital gaintax issue arising in the case of the acquiredIndian company has a direct and substantialimpact on the applicant's business in view ofthe stipulations in share purchase agreement.Sub-clause (i) has to be construed in a widersense and moreover a remedial provisionshall be liberally construed. We are,therefore, of the view that the question raisedby the applicant falls within the definition of 'advance ruling' under section 245N9a) of theAct. Accordingly, the application is allowedunder section 245R92) and posted forhearing on merits on 11[th] August, 2009. 15.Considering the said aspect and as looking into the question asreformulated, the question as to whether capital gains are liable to be paid ornot in terms by the transferee Company being a non resident Company, theRespondent herein, would be a matter which would come within the scope ofadvanced ruling in terms of the said depreciation. 16.In this context, the High Court of Madras in the Judgmentreported in (2009) 222 CTR (Mad) 270 in the case of Anurag Jain vs.Authority for Advance Rulings & anr.. has observed at paras 19, 20 and24 thus : “19. In that judgment, while dealing with thejurisdiction of the High Court under Article226of the Constitution of India apart fromthat of the Supreme Court under Article 136,the Supreme Court has confirmed withapproval the earlier judgment in R.B.Shreeram Durga Prasad and FatehchandNursing Das v.Settlement CommissionMANU/SC/0429/1989[1989]176ITR169(SC)that the court is concerned with the legalityof the procedure followed and not the validity of the order and the courts under judicialreview are concerned not with the decisionbut with the decision-making. The relevantportion of the judgment of the SupremeCourt in this regard is as follows (page 623 of201 ITR): The scope of enquiry, whether by theHigh Court under Article 226or bythis court under Article 136is alsothe same whether the order of theCommission is contrary to any of theprovisions of the Act and if so, apartfrom ground of bias, fraud and malicewhich, of course, constitute aseparate and independent category,hasitprejudicedthepetitioner/appellant. Reference in thisbehalf may be had to the decision ofthis court in R.B. Shreeram DurgaPrasad and Fatehchand Nursing Dasv.SettlementCommissionMANU/SC/0429/1989:[1989]176ITR169(SC) , which toowas an appeal against the orders oftheSettlementCommission.Sabyasachi Mukharji J., speaking forthe Bench comprising himself andS.R. Pandian J., observed that, insuch a case, this court is 'concernedwith the legality of the procedurefollowed and not with the validity ofthe order'. The learned judge added'judicial review is concerned not withthe decision but with the decision-making process'. Reliance was placedupon the decision of the House ofLords in Chief Constable of NorthWales Police v. Evans [1982] 1 WLR1155 (HL). Thus, the appellate powerunder Article 136was equated withthe power of judicial review, wherethe appeal is directed against the orders of the Settlement Commission.For all the above reasons, we are ofthe opinion that the only ground uponwhich this court can interfere in theseappeals is that the order of theCommission is contrary to theprovisions of the Act and that suchcontravention has prejudiced theappellant. The main controversy inthese appeals relates to theinterpretation of the settlement deedsthough it is true, some contentions oflaw are also raised. The Commissionhas interpreted the trust deeds in aparticular manner. Even if theinterpretationplacedbytheCommission on the said deeds is notcorrect, it would not be a ground forinterference in these appeals, since awrong interpretation of a deed oftrust cannot be said to be a violationof the provisions of the Income TaxAct. It is equally clear that theinterpretation placed upon the saiddeeds by the Commission does notbind the authorities under the Act inproceedings relating to otherassessment years. 20.Applying the said judicial dictum laiddown by the Supreme Court to the facts of thepresent case even assuming that the firstrespondent authority has not interpreted theassociated employment agreement which onfact forms part of the share purchaseagreement in the proper manner, it is certainlynot open to this court to go into thecorrectness or otherwise or validity orotherwise of the findings given by the firstrespondent. ... 24. Hence, it is not necessary for thiscourt to give any finding as to thejurisdiction of this court under Article 226 ofthe Constitution of India.” 17.Considering the said observations and taking note of the findingsof the learned AAR, we find that there is no case made out for interference bythis Court under Article 226 of the Constitution of India. The Petitioners weregiven an opportunity by the learned AAR and the contentions raised wereduly considered whilst passing the impugned Orders. We find no reason tointerfere in the impugned Orders passed by the learned AAR. As such, thePetition stands rejected. NUTAN D. SARDESSAI, J. F. M. REIS, J. arp/*