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Tax Publishers Conversion of partnership into firm - one partner suing the firm citing forgery - additions proposed under section 68 in the hands of the firm thereto *Facts:* Assessee was a private limited company was formed on 22-03-2011as an outcome of an existing partnership firm Natesan brothers which existed since 1985. On 31-03-2010 it was decided mutually that one of the partner would retire from the firm and then the company would be floated. Arising out of a business transfer agreement (BTA) w.e.f. 01-04-2011 therafter the company took over a portion of the assets and liabilities of the erstwhile firm at their book values. One partner by name Mr. Natesan did not agree to join the company and also sued the firm citing forgery of his signature on the said business transfer agreement. The AO citing that the firm was ineligible for capital gains exemption and disputes between the partners and as all the partners did not join the company and all the assets and liabilities did not get transferred to the company made additions of the entire assets transferred without considering its corresponding liabilities in the hands of the company as deemed income under section 68 which was not adequately explained by the assessee. On appeal the CIT(A) dropped the addition citing there was no revaluation of the assets and the transfer was at book values and neither did the firm claim any capital gain exemption. Besides, the balances of the partners were all in debit and they have subscribed to the share capital of the company subsequently as well. There being no malafide intent no addition was possible under section 68 as the basis of invocation itself was incorrect. On appeal by the revenue - Held against the revenue that the addition under section 68 was uncalled for. *Ed. Note:* It is actually a good tax planning avenue for certain firms who have accumulated debit balances in large amounts and still have some good revenue models to spin off the revenue into a newer entity and leave the rest of the erstwhile entity to deal with the past mishaps. As long as the transfers are at book value/fair value as per law there is no capital gains liability possible as seen in this case. *Case:* Dy. CIT v. Fridgehouse Retail (P) Ltd. 2023 TaxPub(DT) 5563 (Cochin-Trib)

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Conversion of partnership into firm - one partner suing the firm citing forgery - additions proposed under section 68 in the hands of the firm thereto

Facts:

Assessee was a private limited company was formed on 22-03-2011as an outcome of an existing partnership firm Natesan brothers which existed since 1985. On 31-03-2010 it was decided mutually that one of the partner would retire from the firm and then the company would be floated. Arising out of a business transfer agreement (BTA) w.e.f. 01-04-2011 therafter the company took over a portion of the assets and liabilities of the erstwhile firm at their book values. One partner by name Mr. Natesan did not agree to join the company and also sued the firm citing forgery of his signature on the said business transfer agreement. The AO citing that the firm was ineligible for capital gains exemption and disputes between the partners and as all the partners did not join the company and all the assets and liabilities did not get transferred to the company made additions of the entire assets transferred without considering its corresponding liabilities in the hands of the company as deemed income under section 68 which was not adequately explained by the assessee. On appeal the CIT(A) dropped the addition citing there was no revaluation of the assets and the transfer was at book values and neither did the firm claim any capital gain exemption. Besides, the balances of the partners were all in debit and they have subscribed to the share capital of the company subsequently as well. There being no malafide intent no addition was possible under section 68 as the basis of invocation itself was incorrect. On appeal by the revenue -

Held against the revenue that the addition under section 68 was uncalled for.

Ed. Note: It is actually a good tax planning avenue for certain firms who have accumulated debit balances in large amounts and still have some good revenue models to spin off the revenue into a newer entity and leave the rest of the erstwhile entity to deal with the past mishaps. As long as the transfers are at book value/fair value as per law there is no capital gains liability possible as seen in this case.

Case: Dy. CIT v. Fridgehouse Retail (P) Ltd. 2023 TaxPub(DT) 5563 (Cochin-Trib)