Question 1: (Capital Gain)

The founders of a Start-up company sold 51% of their equity stake in a company to a strategic buyer in FY 2023-24. The total consideration for transfer of shares was agreed at Rs. 25 crores

As per the terms of the deal, the founders are required to stay with the company for next 5 years after which their balance stake would be purchased. The founders are eligible for an additional consideration of Rs 5 crores at the end of the third year provided the revenue projections as per business plan are met.

• While filing the tax return for 2024-25, and computing capital gains, what should be the total value of consideration – should it be Rs. 25 crores or Rs. 30 crores?
• If Rs. 5 crores is not to be taxed in year 1, should it be taxed in the year of 2027/28 of actual receipt or should the original return be revised after the earn out is received?
• Can any exemption be claimed against earn out of Rs. 5 crore, 3 years investment time limit from the original share transfer date would be Over?

Answer

• While filing the tax return for F.Y. 2023- 24 i.e. for A.Y 2024/25, and computing capital gains, total value of consideration should be taken at Rs. 25/- crores. As balance of Rs. 5 crores would be due and accrue only at the end of three year i.e. March 31, 2027. As the founders are eligible for this additional consideration at the end of thirty year provided the revenue projections as per the business plan are met, even though the founders are confident of meeting the business projections.
• Yes, it would be taxed in the A.Y. 2027/28, as the amount would be due to them on fulfillment of business plan, irrespective of receipt of the amount.
• No benefit u/s. 80IAC would be available. It is available only for any of the three consecutive years out of ten years beginning from the year in which the eligible start up is incorporated.

Question No. 2: (Conversion of company into LLP)

ABC Private Limited has annual turnover of more than Rs. 60 Lakhs in last 3 preceding financial years and wants to convert into LLP. The assets and liabilities of the company will be recorded at book value in the books of LLP. The Board of Directors (BOD) of ABC Private Limited seek following clarifications:

1. Examine the tax implications in the hands of the company.
2. Applicability of section 50C and Section 50CA if assets of ABC Private Limited includes immovable property and securities held as capital asset,
3. Whether there will be any tax implication in the hands of shareholders if there are good amount of accumulated profit in the company?

Answer

1. From the query it is clear that annual turnover of ABC Pvt. Ltd is more than Rs. 60/- lakhs . Hence benefit of exemption u/s. 47(xiiib) is not available. So when ABC Pvt. Ltd converts into LLP, it would liable to tax under section 45 of the Act.
2. If there is any immovable property being land or building or both, then, S. 50C would apply. Similarly, if ABC Pvt. Ltd sold any securities, then, section 50CA would be applicable. So, on conversion section 58 of the Limited Liability Partnership Act 2008 would be applicable, as Cl. 1(b) of the Third Schedule to LLP Act defines the meaning of term ‘convert’ which would read as under:“Convert” in relation to a private company converting into Limited Liability Partnership means a transfer of the property, assets, interests, right, privileges, liabilities, obligation and the undertaking of the private company to Limited Liability Partnership in accordance with this schedule”</em >

   Thus it is not vesting of the assets but transferring the assets and therefore decisions in CIT v. Texspin Engg & Mfg works [263 ITR 345 (Bom) would not be applicable and the company would liable to pay tax on capital gains.

3. Once the company is liable to pay tax u/s. 45 of the Act, restrictions u/s. 47 (xiiib) are not applicable. Therefore, the erstwhile shareholders can withdraw the amount out of accumulated profits, after conversion into LLP.

Question No. 3 (Section 80EEA)

The Finance Act (No. 2) 2019 inserted S. 80EEA to allow deduction of interest on loan taken for acquiring a residential house property. Section inter alia requires that the stamp duty value does not exceed Rs. 45 lakhs.

Whether a person would be entitled to claim S. 80EEA benefit if he has acquired the residential house for Rs. 50 lakhs, if the Ready Reckoner value of the flat Rs. 42 lakhs?

Answer

On literal reading it is possible to claim deduction of interest on loan taken for acquiring a residential house property whose stamp duty value does not exceed Rs. 45/- lakhs even though the cost of the residential property was Rs. 50/- lakhs

On comparison with Section 80EE with this section, you will notice that section 80EE state “the value of residential house property………..” while this section states “the stamp duty value of residential house property …………………”

Therefore, it is possible to claim deduction of interest of loan for acquiring residential house property whose stamp duty or ready reckoner value is Rs. 42/- lakhs, though cost was Rs. 50/- lakhs.