P.V. Reddi, J. (Chairman) -
(1.) THIS application is filed under Section 245Q(1) of the Income -tax Act, 1961 by a non -resident Company which has purchased the entire shareholding of an Indian company. The following question (as recast) arises for consideration:
On the facts and in the circumstances of the case, whether the conversion of partnership firm as a private limited company under Part -IX of the Companies Act, 1956 in September, 2005 will be regarded as transfer within the meaning of Section 2(47) and other relevant provisions of the Income -tax Act, 1961? If so, will it give rise to capital gains liable to income -tax consequent upon the transaction entered into by the applicant of buying the shares of the said company in August, 2008 and making it its wholly owned subsidiary by reason of the provision in Clause (d) of proviso to Section 47(xiii) of the Act?
(2.) THE following is the summary of facts stated in the application.
The applicant is a company incorporated under the laws of Luxembourg, having its registered office in Luxembourg. It is the holding company of its wholly owned subsidiary Anandeya Zinc Oxides Pvt. Ltd. ('Anandeya' in short), an Indian company. It purchased 15,49,500 shares of Rs. 10/ - each or 99.96% of the shares of M/s Anandeya and the balance 500 shares of Rs. 10/ - each were purchased by its nominee, Umicore Finance, Belgium. It entered into a Share Purchase Agreement with the five shareholders holding the entirety of shares in Anandeya on 17.2.2008. Anandeya was also a party to it. Thus, the applicant purchased the entire share holdings in Anandeya and the transfer of shares was completed by 12th August, 2008. Anandeya thus became the wholly owned subsidiary of the applicant.
2.1 Anandeya, the wholly owned subsidiary of the applicant, was incorporated as a private limited company on 13.09.2005 under Part -IX, and more particularly Section 565 of the Indian Companies Act, 1956. All the assets and liabilities of the partnership firm -Anandeya Oxides that had been carrying on business w.e.f. 30.11.1993, got vested in Anandeya.
2.2 In 1994, the firm - Anandeya Oxides - set up a plant for the manufacture of high purity white seal zinc oxide of annual capacity of 5000 tonnes per annum. The plant was located in Sancole Industrial Estate close to Marmugoa Port. The plant commenced commercial production in April, 1995 and was converted into 100% export oriented unit in 1996. As at 31st March, 1998 relevant to the A.Y. 1998 -99, the assets of the partnership were revalued by a Chartered Accountant of Mumbai for Rs. 5 crores as against the net worth of the business of Rs. 3, 05,896/ - shown in the account books of the partnership firm. The excess value of the assets of Rs. 4,96,94,104/ - resulting from revaluation was credited to the respective partners' accounts. The asset -wise details of the revalued assets are given in the application. It is stated that the revaluation increased the partners' capital notionally and it continued to be so till the conversion of firm into company in August, 2005. It is clarified that at the time of registration of the wholly owned subsidiary of applicant company under Part -IX of the Companies Act, 1956 on 13.09.2005, the partners of the erstwhile firm were the same as the share holders of the said company, having share holdings identical with the profit sharing ratio of the 7 partners. The authorized share capital of Anandeya was increased to Rs. 2 crores divided into 20 lacs equity shares of Rs. 10/ - each. As on the date of purchase of shares by the applicant company on 1st July, 2008, its total issued and paid up capital was Rs. 1,55,00,000/ - divided into 15,50,000 shares of Rs. 10/ - each and they were beneficially owned by the five shareholders (who were the erstwhile partners).
2.3 The applicant states that ever since the registration of the partnership firm as Company from 13th September, 2005, the aggregate of the share holding of the erstwhile partners of the firm in the Company has never been less than fifty per cent of the total voting power in the company in that one of the partners, namely, M/s Sankeya Chemicals (P) Ltd. had always more than 50% of the voting power in the company.
2.4 The applicant further states that if the shareholding of the erstwhile partners in the Company - Anandeya had remained intact or did not fall short of 50% of the total voting power of the company for a period of 5 years, the question of paying capital gains tax would never have arisen. However, in view of the transfer of shares before the expiry of 5 years, the condition in Clause (d) of proviso to Section 47(xiii) has been violated, prima facie giving rise to the liability on the part of the said Company to pay capital gains tax. The parties to the Share Purchase Agreement have entertained a doubt in this regard and stipulated a condition in the Agreement that the Indian company shall pay Rs. 50 lacs to the income -tax department as advance payment towards the possible liability of capital gains arising in the A.Y. 2009 -10 and furnish proof of payment to the sellers, namely, the shareholders.
It is the contention of the applicant that the registration of the firm as a Company under Part -IX of the Companies Act and the consequent vesting of assets in the Company did not amount to transfer nor any capital gain had arisen within the meaning of Section 45 read with Section 48 of the Income -tax Act and therefore irrespective of the violation of the condition laid down in clause(d) of the proviso to Section 47(xiii), the liability to pay capital gains cannot be fastened on the company, namely, Anandeya.
(3.) THE applicant in its additional statement of facts submitted on 9.10.2009 has clarified that while converting the partnership firm into a company, there was no revaluation of the 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 accounts of the company. The first year's audited accounts of the Company for the period 13.9.2005 to 31 .3.2006 have been filed before us. It is pointed out that the net worth of the company as on the date of conversion was the same as it was in the hands of the erstwhile firm and there was no increase in the said value.;