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from India Tax & Regulatory Services
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Tribunal holds that section 47(xiii) also covers transfer by a firm of
capital assets to an existing company
August 19, 2019
In brief
Recently1, the Ahmedabad bench of the Income-tax Appellate Tribunal (Tribunal) held that there is no requirement under section 47(xiii) of the Income-tax Act, 1961 (Act) that a firm should be ‘converted’
into a company. Further, the Tribunal also allowed the successor company’s claim for depreciation on technical know-how and trademark.
In detail
Facts
The taxpayer (an existing company) succeeded two partnership firms and had acquired the firm’s assets and liabilities as they stood in the balance sheet immediately before succession. The taxpayer had issued its shares as consideration to the partners of the firms.
There was a change in constitution of the firms and new partners were added to the firms immediately before the succession.
The taxpayer claimed that no capital gains arose on such succession as it complied with the provisions of section 47(xiii) of the Act.
1 ITA No. 2701/ AHD/ 2011
The assets included self- generated technical know- how and trademark which were valued at Nil by the firms. Based on the valuation report, the taxpayer had considered cost of acquisition of such assets and claimed depreciation thereon.
The Tax Officer (TO) rejected the taxpayer’s claim for exemption under section 47(xiii) of the Act, and determined capital gains on transfer of land by the firm.
The TO considered the value of intangibles as ‘Nil’
and rejected the depreciation claim.
On appeal, the First Appellate Authority deleted the addition on account of transfer of land
and the disallowance of depreciation.
Issues before the Tribunal
Whether the taxpayer was eligible to claim exemption under section 47(xiii) of the Act?
Whether the taxpayer was eligible to claim
depreciation on intangible assets on the basis of cost determined by the taxpayer?
Revenue’s contentions
The taxpayer is not eligible to claim exemption under section 47(xiii) of the Act on the following grounds:
An existing company has succeeded the firm.
Same proportion of shareholding is not
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achieved as intangibles are valued at ‘Nil’
There has been a change in the constitution of the firms immediately before succession.
Gain on transfer of land from the firms is taxable in the hands of the taxpayer, being the successor.
The claim of depreciation was rejected on the following grounds:
Valuation of intangible assets was assessed as
‘Nil’.
The brand cannot fetch any goodwill as the nature of business of the firms and the taxpayer was same and the brand name was in common use.
Valuation of the intangibles is highly inflated.
Taxpayer’s contentions
All the conditions prescribed under section 47(xiii) are complied with and the transaction should not be subject to capital gains tax.
The claim for depreciation was to be allowed on the following grounds:
The intangible assets were developed by the partnership firms over a period of years and are
2 DCIT v. Suyash Laboratories Limited [2016] 65 taxmann.com 217 (Mumbai – Trib.)
crucial for the taxpayer’s business.
The intangible assets were recognised on the basis of valuation report of a qualified chartered accountant.
The assets were acquired for a consideration in form of issue of shares.
Tribunal’s ruling
The benefit of exemption under section 47(xiii) of the Act cannot be denied and capital gain on transfer of land cannot be liable to tax on the following grounds:
There is no requirement under section 47(xiii) of the Act for firm to be converted into a
company. It is sufficient if an existing company acquires all assets and liabilities and complies with the conditions laid under section 47(xiii) of the Act.
The valuation of technical know-how and
trademarks as ‘Nil’ does not violate conditions specified under section 47(xiii) of the Act.
There is no prohibition under the Act on introduction of new partners before the date of succession. Such introduction does not create an estoppel on
operation of exemption provided under section 47(xiii) of the Act.
The claim for depreciation was allowed on the following grounds:
There is no dispute about cost of acquisition incurred by the taxpayer which was allocated on the basis of a valuation report.
If the TO disagreed with the valuation of the intangibles, he should have referred it to the departmental Valuation Officer, which was not done in this case.
The Tribunal also relied on the judgment of the Mumbai bench of the Tribunal2 and observed that depreciation on revalued assets could not be disallowed if the assets are acquired in terms of section 47(xiii) of the Act.
The takeaways
This ruling distinguishes cases of conversion and succession under the Act and provides clarity on interpretation of conditions specified in section 47(xiii) of the Act.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
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