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December 26, 2020

When a partnership firm is converted into a company, is the latter eligible for the benefits of Section 80IA?

by CA Shivam Jaiswal in Income Tax

When a partnership firm is converted into a company, is the latter eligible for the benefits of Section 80IA?

The Income Tax Act provides certain deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. under Section 80-IA. According to the said section, where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any eligible, a deduction of 100% of the profits and gains derived from such business for 10 consecutive assessment years shall be allowed in computing the total income of the assessee.

The deduction may, at the option of the assessee, be claimed by him for any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone or generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines.

Let us refer to the case of CIT v. Chetak Enterprises Pvt Ltd (2020), where the issue under consideration was whether deduction under section 80IA is available post conversion when the agreement for construction of infrastructure facility was entered into by the erstwhile partnership firm.

Facts of the Case:

  • Chetak Enterprises, a partnership firm, entered into an agreement with the Government of Rajasthan for construction of road and collection of road/toll tax.
  • The construction of road was completed on 27th March, 2000.
  • The partnership firm was converted into a private limited company Chetak Enterprises (P) Ltd. on 28th March, 2000.
  • Assessee company intimated the fact of conversion to the Chief Engineer (Roads), PWD which was noted and fresh registration code was granted to the assessee company.
  • The road was inaugurated on 1st April 2000 and the assessee company started collecting toll tax.
  • For the AY 2002-03, the assessee claimed deduction under section 80-IA of the Income-tax Act, 1961.
  • The Assessing Officer denied the claim.
  • The CIT (Appeals) allowed the claim and the Tribunal confirmed this following its decision in the case of the assessee for the assessment year 2001-02.
  • On appeal by the Department on the question whether the Tribunal was right in finding that the assessee fulfilled the conditions of sub-section (4)(i)(b) of section 80-IA, the High Court upholding the view taken by the CIT (Appeals) and the Tribunal, dismissed the appeal.
  • Aggrieved with the order of the High Court, Revenue appealed before the Supreme Court (SC)

Observations of SC on effects of conversion into a company

  • The Memorandum of Association of the assessee−Company revealed the main object as conversion of the partnership firm into a company limited by shares and continue the partnership business under the name and style of M/s. Chetak Enterprises including all its assets, movables and immovables, rights, debts and liabilities in connection therewith.
  • Before the agreement was executed with the erstwhile partnership firm, it was clearly understood that the partnership firm would in due course be converted into a registered limited company.
  • That is evident from the communication addressed to the Chief Engineer at the time of replying to the notice inviting bids.
  • An explicit request was made to allow the partnership firm to change its constitution and consequently change of name in the agreement after converting the firm into a company with the existing partners as its Directors.
  • The Chief Engineer being the appropriate authority of the State, took note of the request made by the erstwhile partnership firm and informed the said firm that its offer was accepted subject to terms and conditions specified in that regard.
  • According to Section 575 of the Companies Act, 1956, all property, movable and immovable (including actionable claims), belonging to or vested in a company at the date of its registration in pursuance of this Part, shall, on such registration, pass to and vest in the company as incorporated under this Act for all the estate and interest of the company therein.
  • It was manifest that all properties, movable and immovable (including actionable claims) belonging to or vested in a company at the date of its registration would vest in the company as incorporated under the Act.
  • In other words, the property acquired by a promoter could be claimed by the company after its incorporation without any need for conveyance on account of statutory vesting.
  • On such statutory vesting, all the properties of the firm, in law, vested in the company and the firm was succeeded by the company.
  • The firm ceased to exist and assumed the status of a company after its registration as a company.

Observations of SC on whether assessee fulfilled the provisions of Section 80-IA or not

  • 80IA(4)(i) of the Act inter-alia provides that section 80-IA applies to an enterprise carrying on the business of (i) developing (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility.
  • The said section further stated that the enterprise should be owned by a company registered in India and that such company should have entered into an agreement for developing/maintaining/operating a new infrastructure facility with the Central/ State Government/local authority.
  • In other words, deduction under the section would not be allowed if a partnership firm carried on the specified business.
  • The Company had qualified for the deduction under Section 80−IA being an enterprise carrying on the stated business pertaining to infrastructure facility and owned by a Company registered in India on the basis of the agreement executed with the State Government to which the respondent/assessee−Company has succeeded in law after conversion of the partnership firm into a company.

Supreme Court dismissed the department’s appeal and held that the assessee was entitled to deduction under section 80IA.

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