NICAF LLP v. ITO

Case snapshot

Sections / provisions: 115BBE; 47(xiiib); 68

Questions before the Court / Tribunal

• Company-to-LLP conversion and mere book entry in partners' capital: The reported order distinguishes a book entry in partners' capital from an actual payment/benefit for purposes of the conversion conditions and deletes the resulting unexplained-credit addition on the reported facts.

Material facts and background

passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2017-18. 2. The solitary ground of appeal raised by the revenue challenges the order of ld. CIT(A) on deletion of addition of Rs. 2,71,66,500/- made by the learned Assessing Officer ('ld. A.O.' for short) u/s. 68 r.w.s. 115BBE of the Act as unexplained credit as being without considering the provisions of Section 47(xiiib)(f) of the Act. 3. Brief facts of the case are that the assessee firm is engaged in the business of trading and installation of carpets and floor coverings dealing in variety of tufted carpets, rugs, wooden floorings. The assessee also undertakes installation, reinstallation and cleaning of carpets and floorings. The assessee had filed its return of income dated 29.09.2017 declaring total income at Rs. (-38,274) and the same was processed u/s. 143(1) of the Act. The assessee’s case was selected under CASS for limited scrutiny and notices u/s. 143(2) and 142(1) of the Act were duly issued and served upon the assessee. The ld. AO observed that NICAF Private Limited is converted to NICALF LLP w.e.f. 2.12.2016, where in the balance sheet of NICALF, it was...

ITA No. 1880/Mum/2025 & C.O. No. 86/Mum/2025(A.Y. 2017-18) NICAF LLP

the assessee and made an addition of Rs. 2,71,66,498/- to the total income of the assessee u/s. 68 r.w.s. 115BBE of the Act, thereby determining total income at Rs. 2,71,66,500/-, vide assessment order dated 30.12.2019, u/s. 143(3) of the Act. 4. Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 18.12.2024, deleted the impugned addition on the ground that on perusal of the documentary evidences, it is observed that there has been no direct or indirect payment made to the partners’ account from the LLP towards the accumulated profit for a period of 3 years and therefore held that Section 47(xiiib)(f) of the Act is not attracted as the transfer of the capital asset by private limited company to LLP has been tax neutral and as per the conditions specified in proviso (a) to (f) of the Section 47(xiiib)(f) of the Act. 5. The revenue is in appeal before us, challenging the impugned order of the ld. CIT(A). 6. The learned Departmental Representative ('ld. DR' for short) for the revenue contended that the assessee has credited the entire reserves and surplus to the capital accounts of the partners in the LLP which violates the conditions...

Appellant / assessee submissions

7. The learned Authorised Representative ('ld. AR' for short) for the assessee on the other hand controverted the said fact and contended that the assessee has not paid any amount to its partners directly or indirectly from REC bonds out of the accumulated profits as per the financials of the company as on date of conversion for a period of 3 years. The ld. AR further stated that the same is corroborated from the bank statement of the partners. The ld. AR iterated that Section 68 was wrongly invoked by ld. AO, where there has been no unexplained credit found in the account of the assessee firm and even otherwise, assuming that there was transfer the same has to be taxed in the hands of the partners and not the assessee firm. The ld. AR relied on the order of ld. CIT(A). 8. We have heard the rival submissions and perused the materials available on record. The moot issue that requires adjudication is whether the addition made u/s. 68 r.w.s. 115BBE by the ld. AO has to be upheld or whether the ld. CIT(A) was right in deleting the impugned addition. It is observed that in the balance sheet of NICALF, the share capital and the reserves and surplus was Rs.11,95,410/- and...

Revenue / respondent submissions

the assessee and made an addition of Rs. 2,71,66,498/- to the total income of the assessee u/s. 68 r.w.s. 115BBE of the Act, thereby determining total income at Rs. 2,71,66,500/-, vide assessment order dated 30.12.2019, u/s. 143(3) of the Act. 4. Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 18.12.2024, deleted the impugned addition on the ground that on perusal of the documentary evidences, it is observed that there has been no direct or indirect payment made to the partners’ account from the LLP towards the accumulated profit for a period of 3 years and therefore held that Section 47(xiiib)(f) of the Act is not attracted as the transfer of the capital asset by private limited company to LLP has been tax neutral and as per the conditions specified in proviso (a) to (f) of the Section 47(xiiib)(f) of the Act. 5. The revenue is in appeal before us, challenging the impugned order of the ld. CIT(A). 6. The learned Departmental Representative ('ld. DR' for short) for the revenue contended that the assessee has credited the entire reserves and surplus to the capital accounts of the partners in the LLP which violates the conditions...

Court / Tribunal analysis and reasoning

the assessee and made an addition of Rs. 2,71,66,498/- to the total income of the assessee u/s. 68 r.w.s. 115BBE of the Act, thereby determining total income at Rs. 2,71,66,500/-, vide assessment order dated 30.12.2019, u/s. 143(3) of the Act. 4. Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 18.12.2024, deleted the impugned addition on the ground that on perusal of the documentary evidences, it is observed that there has been no direct or indirect payment made to the partners’ account from the LLP towards the accumulated profit for a period of 3 years and therefore held that Section 47(xiiib)(f) of the Act is not attracted as the transfer of the capital asset by private limited company to LLP has been tax neutral and as per the conditions specified in proviso (a) to (f) of the Section 47(xiiib)(f) of the Act. 5. The revenue is in appeal before us, challenging the impugned order of the ld. CIT(A). 6. The learned Departmental Representative ('ld. DR' for short) for the revenue contended that the assessee has credited the entire reserves and surplus to the capital accounts of the partners in the LLP which violates the conditions...

7. The learned Authorised Representative ('ld. AR' for short) for the assessee on the other hand controverted the said fact and contended that the assessee has not paid any amount to its partners directly or indirectly from REC bonds out of the accumulated profits as per the financials of the company as on date of conversion for a period of 3 years. The ld. AR further stated that the same is corroborated from the bank statement of the partners. The ld. AR iterated that Section 68 was wrongly invoked by ld. AO, where there has been no unexplained credit found in the account of the assessee firm and even otherwise, assuming that there was transfer the same has to be taxed in the hands of the partners and not the assessee firm. The ld. AR relied on the order of ld. CIT(A). 8. We have heard the rival submissions and perused the materials available on record. The moot issue that requires adjudication is whether the addition made u/s. 68 r.w.s. 115BBE by the ld. AO has to be upheld or whether the ld. CIT(A) was right in deleting the impugned addition. It is observed that in the balance sheet of NICALF, the share capital and the reserves and surplus was Rs.11,95,410/- and...

9. On a bare perusal of the said provision, it is evident that Section 47 provides for a certain situation which does not amount to transfer for the purpose of determining the capital gain as per Section 45 of the Act. Further, clause (xiiib) states that when there is a transfer of capital or intangible asset by a private company or unlisted public company to a limited liability partnership or were there is a transfer of shares held in

the company by a shareholder, as a result of conversion of the company into limited liability partnership as per Section 56 or 57 or Limited Liability Partnership Act, 2008, then the same again would not amount to a transfer as per Section 45 of the Act, provided the conditions specified in sub clause (a) to (f) are not violated by the assessee. The said clause (f) specifically states that there can be no payment directly or indirectly to any partner out of the accumulated profit standing in the accounts of the company as on the date of conversion which is prohibited for a period of 3 years from the date of conversion. 10. From the above, it is evident that Section 47 pertain only to transfer for the purpose of Section 45 which is for determining the capital gain on profits or gains arising from such transfer of a capital asset. In the present case in hand, though the ld. AO has specifically mentioned that the assessee has violated the conditions u/s. 47(xiiib)(f) of the Act, he has proceeded to make addition u/s. 68 of the Act, which is specifically for credits in the books of the assessee for which the assessee offers no explanation as to the nature and source to the...

Operative decision and relief

the company by a shareholder, as a result of conversion of the company into limited liability partnership as per Section 56 or 57 or Limited Liability Partnership Act, 2008, then the same again would not amount to a transfer as per Section 45 of the Act, provided the conditions specified in sub clause (a) to (f) are not violated by the assessee. The said clause (f) specifically states that there can be no payment directly or indirectly to any partner out of the accumulated profit standing in the accounts of the company as on the date of conversion which is prohibited for a period of 3 years from the date of conversion. 10. From the above, it is evident that Section 47 pertain only to transfer for the purpose of Section 45 which is for determining the capital gain on profits or gains arising from such transfer of a capital asset. In the present case in hand, though the ld. AO has specifically mentioned that the assessee has violated the conditions u/s. 47(xiiib)(f) of the Act, he has proceeded to make addition u/s. 68 of the Act, which is specifically for credits in the books of the assessee for which the assessee offers no explanation as to the nature and source to the...

Authorities and precedents appearing in the judgment

• ACIT vs. Celerity Power LLP

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Company-to-LLP conversion and mere book entry in partners' capital. The operative result is classified as Operative order controls. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Company-to-LLP conversion and mere book entry in partners' capital. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Build a transaction-level evidence file: confirmations, bank trail, invoices, ledger, tax/GST records and counter-party material rather than relying on a generic explanation.
• Where the addition depends on a third-party statement or investigation report, record the request for the relied material and cross-examination at the earliest stage.
• Keep registration, audit-report, Form 10/10B/10BB and filing timestamps together; many exemption disputes are procedural and depend on when the form existed versus when it was uploaded.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

Read / download the clean local judgment copy

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