Query No. 1: [Notice to non-existing company is invalid]
A company got converted and succeeded into an LLP in 2014. The Assessing Officer issued a notice u/s. 148 of the Act in the name of the company for reopening its case for the A.Y. 2011-12 within the time permissible under the law. The LLP has raised the objection against the reopening that since the company is not in existence, no proceedings lie in absence of any such provision of the Act. Will the objection succeed? Can the situation be different if the notice u/s. 148 had been issued in the name of successor i.e., LLP?
Answer
Yes, the objection is sustainable.
Section 58(4) of The Limited Liability Partnership Act, 2008 reads as under:
“Notwithstanding anything contained in any other law for the time being in force, on and from the date of registration specified in the certificate of registration issued under the Second Schedule, the Third Schedule or the Fourth Schedule, as the case may be, –
(a) there shall be a limited liability partnership by the name specified in the certificate of registration registered under this Act;
(b) all tangible (movable or immovable) and intangible property vested in the firm or the company, as the case may be, all assets, interest rights, privileges, liabilities, obligations, relating to the firm or the company, as the case may be, and the whole of the undertaking of the firm or the company, as the case may be, shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; and
(c) the firm or the company, as the case may be, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be:.
Similarly, para 6 of the Third Schedule i.e. conversion from Private Company into Limited Liability Partnership provides as under:
“Effect of registration – on and from the date of registration specified in the certificate of registration issued under paragraph 4 –
(a) there shall be limited liability partnership by the name specified in certificate of registration registered under this Act;
(b) all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company and the whole of the undertaking of the company shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; and
(c) the company shall be deemed to be dissolved and removed from the records of the Registrar of Companies.
In BDR Builders and Developers Pvt. Ltd. v. ACIT [397 ITR 529], Delhi High Court has held that notice issued after order of the court approving amalgamation in name of non-existent transferred company is invalid. On the same logic notice issued in the name of erstwhile company is also invalid. Therefore contention of the LLP is sustainable.
Yes, if the notice u/s. 148 had been issued in the name of successor i.e., LLP the situation would have been different.
Query No. 2: [Gift of shares by one company to another company]
What are tax implication u/s. 56(2)(viia) in respect of gift of shares by one company to another company? Would it make difference if both companies have common shareholders? If all the shareholders are relatives with each other as defined u/s. 56 would the answer be different?
Answer
Section 2(31) of the Income-tax Act, 1961 defines “person”, which includes a company. A company is a separate juristic entity distinct from its shareholders. Thus company is taxable entity distinct from its shareholders. Section 56(2)(viia) applies to unlisted company, so if one unlisted company receives a gift of shares of unlisted company from another unlised company this section would be applicable.
So, receipts of shares of unlisted company by way of gift from another unlisted company without consideration would be taxable at full aggregate fair market value, if it exceeds fifty thousand rupees, irrespective of common shareholders in both the company. The fair market value has to be determined as per Rule 11UA of the Income tax Rules, 1962.
Query No. 3: [Share application money u/s. 68]
AO made addition u/s. 68 in respect of share application money received by the assessee in the very first year of its incorporation. Whether AO could have made such addition in spite of the fact that assessee had practically done no business so as to generate any such income? What proof is required for proving the genuineness of the transaction? What shall be the scenario where share application money is received from tainted entities? What is the effect of finding that promoters / directors of assessee-company later on acquired the very shares at discounted rates from such share holders?
Answer
Yes, AO has right to make addition of share application money received by the assessee in very first year of incorporation, irrespective of the fact, whether the assessee has done business or not, on the basis of proviso inserted by the Finance Act, 2012 w.e.f. April 1, 2013 i.e., assessment year 2013-14.
The said proviso reads as under:
“Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee- company shall be deemed to be not satisfactory, unless –
(a) The person, being a resident in whose name such credit is recorded in the books of such company also offer an explanation about the nature and source of such sum so credited; and
(b) Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.
In the case of a company the following are the propositions of law under section 68. The assessee has to prima facie prove:
i) The identity of the creditors / subscriber;
ii) The genuiness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels;
iii) The credit worthiness of financial strength of the creditor / subscriber;
iv) If relevant details of the assessee or PAN identity of the creditor / subscriber are furnished to the Department along with the copies of shareholders’ register, share application forms, share transfer register etc.; it would constitute acceptable proof or acceptable explanation by the assessee.
v) Therefore Department would not be justified in drawing an adverse inference only because the creditor / subscriber is tainted.
vi) Later on, when promoters / directors acquired the share at discounted rate from such shareholder / subscriber, then, the acquirers have to prove the value and genuiness of the transaction.
Query No. 4: [Gift by a member to HUF]
Gift to HUF by members:
a) What will be the tax implications of a gift by cheque (sum of money), given by a member to the HUF?
b) Whether the member will be considered as a relative as defined in explanation to clause (vii) of section 56(2) and consequently the gift not considered as income from other sources for the HUF as per section 56(2)(x)(a)?
Answer
A gift by a member to HUF is not taxable as per section 56(2)(vii) read with Explanation to section 56(2)(x). Section 56(2)(vii)(e) provides “relative means” –
(i) In case of an individual –
a) Spouse of the individual;
b) Brother and sister of the individual
c) Brother or sister of the spouse of the individual
d) Brother or sister of either of the partners of the individual
e) Any lineal ascendant or descendant of the individual
f) Any lineal ascendant of descendant of the spouse of the individual
g) Spouse of the person referred to in items (b) to (f) and
(ii) In case of Hindu Undivided Family, any member thereof
Query No. 5: [Sum of money attracts section 64(2)]
Whether clubbing provisions of section 64(2) can be said to be applicable to the HUF in respect of sum of money received without consideration as the wordings in the section relate to only property? Can it be said that the sum of money received is separate from the property envisaged in section 64(2)?
Answer
Yes, Normally property has been understood in widest possible terms. The Explanation 1 to section 64(2) clarifies that the word “property” has been defined very widely. Property includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method such other property. Therefore “any sum of money” is property.
As per section 64(2) when an individual being a member of the HUF, then clubbing provisions will apply as follows:
(a) Before partition of the HUF, entire income from such property will be clubbed with the income of the transferor.
(b) After partition of the HUF, such property is distributed among the members of the family, in such case income derived by spouse from such property will be clubbed with the income of individual and will be charged to tax in his hands.