Conversion Of Company Into LLP – Applicability Of Section 43CA

CA Rohan Sogani has explained in detail the provisions of law relating to conversion of a company into a LLP with particular emphasis on section 43CA and its impact on stock-in-trade held by a Real Estate Developer. He has referred to all the important judgements on the issue. The effect of the Income Computation and Disclosure Standards (ICDS) relating to valuation of inventory has also been explained

Limited Liability Partnership (LLP), as a form of business entity, has been in existence in India since 2009, with the enactment of the Limited Liability Partnership Act, 2008 (LLP Act). LLP is viewed as an alternative corporate business vehicle that provides the benefit of limited liability and also allows its members the flexibility of organizing their internal structure, as a partnership, based on a mutually arrived agreement. LLP form of business entity offers operational flexibility and tax efficiency in certain specific cases. Based on these benefits large number of existing companies are now converting themselves into LLPs.

Conversion of company into LLP invokes number of provisions under the Income Tax Act, 1961 (ITA). However, the present article is apropos applicability of Section 43CA on Stock In Trade, held by a company (Real Estate Developer), in the form of land or building, on its conversion into LLP.

1. CONVERSION OF COMPANY INTO LLP – CONCEPT

1.1. Companies Act, 1956/2013, as well as LLP Act, allows conversion from entity registered under one law to get itself converted and registered under the other law. Thus, under such laws a company can be converted into LLP and vice-versa. This has been provided for the purpose of business reorganization by migrating from one law to another, such as from Companies Act, 2013 to LLP Act and vice-versa.

1.2. LLP Act, under Section 56, read with the Third Schedule, provides for conversion of Private Companies into LLPs. Similarly, Section 55 and Section 57 provide for conversion of Firm and Unlisted Public Company, respectively, into LLP.

1.3. Similarly, Part I of Chapter XXI, from Section 366 to 374, of the Companies Act, 2013 provides for conversion of Firms/LLPs to Companies under the said Act. This Part I corresponds to the erstwhile Part IX provisions under the Companies Act, 1956. Thus, migration from Companies Act, 2013 to LLP Act, 2008 and vice versa is possible under the respective laws.

1.4. Under Section 366 of Companies Act, 2013, a LLP/Firm can be converted into a company. Further, Section 368, provides that all property, movable and immovable (including actionable claims), belonging to the LLP shall pass to and vest in a company, on the date of its registration, pursuant to this Part (i.e Part I).

1.5. Similar to Section 368 of Companies Act, 2013, Section 58 of LLP Act provides for registration and effect of conversion. Sub-section (4) of Section 58 provides that 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, Third or 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, interests, 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.

1.6. Sub-Clause (b) of Clause (1) of the Third Schedule, to the LLP Act, defines the term “convert”, in relation to a Private Limited Company converting into a LLP, to mean transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of a private company to the limited liability partnership in accordance with this schedule.

1.7. The Third Schedule further lays down various scenarios, wherein, upon conversion of a company into LLP, as per Section 56 of the LLP Act, all the assets/liabilities shall be transferred to and shall vested in the LLP. This includes all tangible (movable and immovable) and intangible assets, rights, interests etc, along with liabilities or obligations relating to the company.

1.8. Clause (7), of the Third Schedule, contemplates transfer and vesting of properties without any further assurance, act or deed upon conversion. It confers automatic transfer and vesting of properties in the LLP by operation of law and notwithstanding anything contained in any other law for time being in force.

1.9. Thus, in normal course, in case of an immovable property, owned by company, upon conversion would automatically stand transferred to and vest in the LLP. There would not be any requirement of separate instrument of transfer, conveyance or assignment. In such case, LLP is only required to take all necessary steps to notify the concerned authority of the conversion and of the particulars of the LLP in such medium and form as the authority may determine.

1.10. Apart from this, the Third Schedule also ensures continuity in terms of the existing contracts, pending proceedings before any Court, Tribunal or any other authority, employment contracts etc, when the company is converted into LLP. Accordingly whatever is pending or entered by the company in the past shall vest in the name of the LLP. This is clearly to bring about continuity in the working of the company, after getting converted into LLP.

1.11. Status Of Company after Conversion: As per clause (c) of Sub-section 4 of section 58 of the LLP Act, read with Sub-Clause (c) of Clause 6 of Third Schedule, a company getting converted into LLP shall be deemed to have been dissolved and subsequently removed from the records of the Registrar of Companies. The same fate is followed on the Website of Ministry of Corporate Affairs, wherein, when a company is converted into LLP, its status is shown as “Converted into LLP”.

2. CONVERSION OF FIRM INTO COMPANY – JUDICIAL PRECEDENCE

2.1. As discussed, hereinbefore, Part I of Chapter XXI, of Companies Act, 2013 (Corresponding to Part IX of the Companies Act, 1956) provides for conversion of Firms/LLPs to Companies. Section 368 of the Companies Act, 2013, which is pari materia to erstwhile Section 575 of the Companies Act, 1956, deals with passing of and vesting of the immovable property in the company, upon its conversion from firm/LLP.

2.2. Andhra Pradesh High Court in the matter of Vali Pattabhirama Rao and Ors. Vs Sri Ramanuja Ginning and Rice Factory P. Ltd. and Ors. AIR 1984 AP 176, held that if the constitution of the partnership firm is changed into that of a company by registering it under Part IX of Companies Act, 1956, there shall be statutory vesting of title of all the property of the previous firm in the newly incorporated company without any need for a separate conveyance. Relevant para of the aforementioned judgment is set out hereunder:-

“…Thus, we hold that if the constitution of the partnership firm is changed into that of a company by registering it under Part 9 of the present Act (Part 8 of the previous Act), there shall be statutory vesting of title of all the property of the previous firm in the newly incorporated company without any need for a separate conveyance. A similar view was taken in Ramasundari Ray v. Syamendra Lal Ray ILR [1947] Cal 1….”

2.3. Supreme Court in the case of Chetak Enterprises Private Limited, Civil Appeal No. 1764 of 2010, vide its recent order dated 5.03.2020 answered the following Question :-

“what is the effect of conversion of partnership firm into a company under Part IX of the Companies Act?”

Supreme Court, giving reference of Section 575 of the Companies Act, 1956 held that

“It is 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 can 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, vest in the company and the firm is succeeded by the company. The firm ceases to exist and assumes the status of a company after its registration as a company..”

2.4. Bombay High Court in the case of Texspin Engg. & Mfg. Works [2003] 263 ITR 345 (Bom), rendered in the context of conversion of a firm into a company, held that in case of a transfer of a capital asset, two important ingredients are:-

• Existence of a party and a counter party, and

• Incoming consideration qua the transferor

It was held by the Bombay High Court that such type of conversion is a statutory vesting of all properties of the firm to the company and such vesting is not consequent or incidental to a "transfer" as required for the purpose of Section 45(1) of the ITA. Punjab and Haryana High Court in the case of Rita Mechanical Works [2012] 344 ITR 544 (P&H) and Gujarat High Court in the case of K.L.Kalathia and Co. [2016] 381 ITR 180 (Guj.) concurred with the view of Bombay High Court.

2.5. Therefore, upon registration of a firm/LLP as a company under the statutory provisions of the Companies Act, 2013/1956, the company succeeds the firm/LLP in its business, and all the properties of the firm statutorily are vested in the company.

3. WHETHER CONVERSION UNDER PART IX/CHAPTER XXI (FIRM/LLP TO COMPANY) DIFFERENT FROM CONVERSION UNDER SECTION 56 OF LLP ACT (COMPANY TO LLP)

3.1. Now the question arises, whether statutorily, conversion of Company into LLP under Section 56, read with Third Schedule, of the LLP Act is akin to conversion of Firm/LLP into Company under Part IX (Companies Act, 1956) or under Chapter XXI (Companies Act, 2013).

3.2. If the answer is in affirmative, then the same principles of statutory vesting, of properties, as stated hereinbefore, shall apply with equal force, in case of conversion from Company in LLP.

3.3. In this regard, one needs to look at the wordings ascribed by the legislature in the Companies Act, 2013/1956 and the LLP Act related to conversion from one entity to another and vesting of properties thereon:-

Companies Act, 2013/1956

LLP Act

Section 368/575 : 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.

Section 58(4) : all tangible (movable or immovable) and intangible property vested in the firm or the company, as the case may be, all assets, interests, 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

3.4. The only major difference which appears in the aforementioned two sections is that in case of conversion of Firm/LLP into company, under Companies Act, the properties of the Firm/LLP shall pass to and vest in the company, whereas, in case of conversion of Company into LLP the properties shall to transferred to and vest in the LLP.

3.5. The words “pass to” and “transferred to” cannot be given a different connotation, especially when in both the cases the properties ultimately “vest in” the converted company/LLP. In both the Acts (Companies Act, 2013 – Chapter XXI and LLP Act – Section 58(4)(c)) the entity getting converted, be it company or LLP/Firm, ceases to exist under that law and simultaneously, at the same point in time, without a blink, gets registered under the other law. The words “pass to” and “transferred to” cannot be read in isolation, but only in the company of the words “Vest in”.

3.6. Thus, the words “pass to” and “transferred to” in the company of “vest in” whether referred under Section 368 of Companies Act, 2013 (Section 575 of Companies Act, 1956) or under Section 58(4)(b) of the LLP Act denote “statutory vesting” of property in the newly formed entity by way of conversion. The view is fortified from the legal position that in all these cases of business reorganization, the entity ceases to exist in one law and gets registered in the other law. (Companies Act, 2013/1956 to LLP Act and vise-versa)

4. TRANSFER – CONNOTATION THEREOF

4.1. Under general parlance, transfer is always understood to be transfer of legal title or ownership. For a transfer to take place there should be existence of transferor and transferee simultaneously. Thus, there has to be a party and a counter party for a transfer to culminate. Also, transfer has to be for a consideration, which shall pass on from the transferee to the transferor, in lieu of such transfer.

4.2. ITAT, Bangalore Bench in case of Unity Care and Health Services [2006] 103 ITD 53 (Bang-ITAT) held that the word "transfer" pre-supposes existence of transferor and transferee simultaneously.

4.3. Section 5 of the Transfer of Property Act, 1882, provides definition of “Transfer of Property” to mean an act by which a living person conveys property, in the present or in future to one or more other living persons, or to himself, or to himself and one or more other living persons and to transfer property is to perform such act. In this section “living person” includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or body of individuals.

4.4. As per Transfer of Property Act, 1882, conveying of property involves creation of new title or interest in favour of the transferee [Official Assignee Madras vs Tehmina Dinshaw Tehrani, AIR 1972 Mad 187]. In conveyance, through the instrument of transfer, the title or rights are conveyed to the transferee for the first time. Simultaneously, the transferor is divested of such right conveyed.

4.5. Though normally the transferor and the transferee would be two separate individuals or group of individuals, the expression “or to himself” in Section 5 indicates that there may be a situation where the transferor and the transferee can be the same person. No person can transfer the property to himself in the same capacity, but if that person transfers property in one capacity to himself and receives it in some other capacity, then, such transfer is permissible. A person may thus convey land to, or vest land in himself, in some other capacity. An apt illustration of it is that a person creating a trust can transfer the property in his individual capacity to himself as a trustee.

4.6. Sale is also defined under the Transfer of Property Act, 1882 as a transfer of ownership in exchange for a price paid or promised or part paid or paid promised. An owner has three basic rights over his property, a right or title, an exclusive right to possess and enjoy the property and an exclusive right to alienate it. In a sale of property all these rights are conveyed by the owner with his free consent in favour of the transferee who is called a buyer. No rights remain with the seller and the transfer of this totality of rights is called an absolute transfer.

4.7. Essentially, Sale as per the Transfer of Property Act, 1882 consists of four essential elements: (1) Parties to the sale ; (ii) Subject matter of Sale ; (iii) Price and (iv) Mode of executing a sale.

4.8. Thus, for any transfer or sale to take place, existence of two parties, i.e. a transferor/seller and the transferee/buyer is the foremost requirement.

4.9. In the context of conversion of Company into LLP, since there is conversion of the same entity from being registered under Companies Act, 2013 and thereafter gets simultaneously registered under the LLP Act, there is, in substance absence of two parties i.e. the transferor and transferee at the same point of time.

4.10. The position would be different where the company incorporated had come into existence even while the firm existed and a separate agreement of transfer was entered into between the directors of the company and partners of the firm. [Stewart & Co. Ltd. v. C. Machertech, AIR 1963 Cal 198 (DB)]

5. SECTION 43CA AND ITS APPLICABILITY

5.1. Finance Act, 2013 inserted Section 43CA, under the ITA, w.e.f FY 2013-14, introducing the provisions for taxability of transfer of immovable property (land or building or both) held in the nature of Stock in Trade, on the same lines which were applicable for immovable property held in the nature of “Capital Asset” under section 50C of the ITA.

5.2. Section 43CA, similar to Section 50C, creates a deeming fiction to substitute Stamp Duty Value of the asset with the actual sale consideration to compute profits or gains arising on transfer of asset, when actual sale consideration is less than the stamp duty value.

5.3. Language of sub section (1) of Section 43CA requires such substitution of sale consideration for the purpose of computing profits and gains accruing as a result of transfer of the asset. It is therefore evident that unless the “transfer” of asset takes place, provision of Section 43CA cannot be applied. Also, sub section (1) of Section 43CA states about “consideration received or accruing” as result of transfer. Thus, for applicability of Section 43CA the two limbs to be satisfied are

(i) there has to be transfer, and

(ii) such transfer should result into consideration being received or accrued.

5.4. The term ‘transfer’ is defined in an inclusive manner in Section 2(47) of the ITA. The definition clarifies that the same is in relation to ‘Capital Assets’ only. By implication, therefore, such definition cannot be used for transfer visualized in section 43CA, in respect of Stock in Trade.

5.5. Therefore, for the purpose of Section 43CA, definition of the term “transfer” provided under section 2(47) cannot be applied. Instead, the term ‘transfer’ will be required to be understood in a commercial sense. As provisions of section 43CA apply while computing income under the head ‘Profits and Gains of Business or Profession’, it is possible to contend that the term ‘transfer’ will have to be interpreted having regard to the method of accounting regularly employed. Even meaning under general parlance of the word “transfer” can also be ascribed for Section 43CA

5.6. Thus, the concept of transfer as has been set out hereinbefore would be applicable for the purpose of Section 43CA. Since, conversion of company into LLP and vesting of assets thereof, in accordance with Section 58 of the LLP Act, is not transfer, even in commercial sense, there would not be any applicability of Section 43CA.

5.7. Even otherwise, inclusive definition of Transfer, as set out in Section 2(47) of the ITA brings into its fold certain transactions which may not be transfer in the normal parlance, for example – transactions referred to in Section 53A of the Transfer of Property Act, 1882. The said enlarged inclusive definition also does not bring “conversion” to be in the fold of “transfer”. Accordingly, even looked at in the background of definition of transfer under Section 2(47) ITA, conversion cannot be termed as transfer.

6. STAMP DUTY AND OTHER ASPECTS? WHETHER POSITION OF STATUTORY VESTING EFFECTED?

6.1. After considering the aforementioned legal position apropos conversion of Company into LLP, question of Stamp Duty should, therefore, ideally not arise in such cases. The Ministry of Corporate Affairs has with respect to the Question on Stamp Duty upon conversion from other business structures and if there was stamp duty exemption in case of conversion, clarified through an FAQ (available on the MCA Website) that since Stamp Duty is the subject reserved for the States, the LLP Act does not contain any provision for treatment of Stamp Duty issues and that the Stamp Duty payable will depend upon the relevant Stamp Act prescribed by the State Government/Union Territory.

6.2. Since, the law related to Stamp Duty is majorly the domain of the State Government, the question whether conversion of company into LLP and any instrument created thereof would attract Stamp Duty will have to be ascertained from the point of the provisions set out in the respective State Laws. Thus, although the conversion of company into LLP may be a statutory vesting in accordance with the Companies Act or the LLP Act, the same shall be chargeable to Stamp Duty, if provided specifically in the State Act.

6.3. However, charge, if any, of Stamp Duty doesn’t affect the aforementioned proposition that conversion of company into LLP is not transfer and any asset been vested from the company into LLP is on account of statutory vesting.

6.4. Also, on conversion of Company into LLP, the new entity will have to apply to for new TAN/PAN but this is due to change of legal status on account of conversion.

7. PROVISION OF SECTION 47 – WHETHER HAVING ANY BEARING?

7.1. Section 47 of the ITA sets out certain transactions which are not regarded as transfer. Thus, any transaction which otherwise is covered in the ambit of transfer, as set out in Section 2(47), by way of Section 47 is taken outside the purview of transfer.

7.2. Section 47(xiiib) specifically refers to conversion of company into LLP in accordance with section 56 of the LLP Act. One may argue that in case of conversion of Company into LLP and transfer of assets thereof, other than those covered in the exceptions in Section 47(xiiib) should be included in the ambit of transfer.

7.3. However, for any transaction to be chargeable to Capital Gains, the same should be first covered in the definition of transfer as set out in Section 2(47) of the ITA. On perusal of the definition of transfer it is seen that none of the limbs cover conversion from Company into LLP and vise-versa within the ambit of transfer. Moreover, Madras High Court in E.I.D. Parry Ltd. (1988) 174 ITR 11 (Mad) held that "transfer" in section 2(47) envisages two persons, transferor and transferee, and there cannot be a transfer of an asset by a person in favour of himself.

7.4. As stated hereinbefore, there are certain transactions which are not exactly transfer, but since they have been specifically included in the definition under 2(47) they are regarded as transfer, for example – transactions referred to in Section 53A of the Transfer of Property Act, 1882.

7.5. Thus, it appears that although there has been specific exclusion which has been created under law, in case of conversion from Company into LLP in terms of Section 47(xiiib), but specific inclusion in the definition of transfer for such type of conversion is missing.

7.6. Nevertheless, sticking to the issue at hand, apropos applicability of Section 43CA on conversion of company into LLP, irrespective of whether the conditions are met of Section 47(xiiib), at no point in time Section 43CA can be made applicable. This is for the reason that Section 43CA falls under the head Profits and Gains of Business & Professions. Also Section 47(xiiib) and Section 45 are only with reference to Capital and Intangible Asset and not with respect to Stock in Trade.

8. CONSIDERATION RECEIVED OR ACCRUED

8.1. The other limb also to be satisfied, for application of provisions of section 43CA is that such transfer should result into “consideration received or accrued”.

8.2. The term ‘consideration’ is not defined in the ITA. It is generally understood as the price or money actually paid by the purchaser of the property. The Bombay High Court and the Kerla High Court in Keshub Mahindra v. CGT [1968] 70 ITR 1 and CGT v Smt C K Nirmala 215 ITR 156 respectively held that the term “consideration” in the absence of a definition under the Direct Taxes would carry the meaning as defined in the Indian Contract Act. The Indian Contract Act broadly refers consideration to mean, “a promise, an act or abstinence”. Such act, abstinence or promise could be past, present or future. Such consideration may also move from a third party. Consideration could consist of “an interest, right, loss, detriment, responsibility, or forbearance given, suffered or undertaken by the other”.

8.3. In case of conversion from Company into LLP, stock in trade, in the form of immovable property, gets vested in the LLP from the company, there is no consideration which has flown from LLP to company. LLP becomes the owner of stock in trade is in lieu of statutory vesting and not on account of any purchase or sale transaction.

8.4. Thus, in the absence of any outflow of consideration, whether cash or in kind or in the form of any accrual the test for applicability of section 43CA fails.

9. CELERITY POWER LLP [2019] 174 ITD 433 (MUMBAI) – EFFECT THEREOF

9.1. ITAT Mumbai Bench, in the case of Celerity Power LLP (Supra) held that conversion of company into LLP involves “transfer” of the property, assets etc and thus, subject to the conditions prescribed u/s 47(xiiib), would be chargeable to Capital Gains.

9.2. In this regard, ITAT referred to the definition of the term “Convert”, as provided in Third Schedule of the LLP Act. ITAT held that in the case of succession of a Partnership Firm by a Company as per Part IX, there is only "vesting" of the property of the partnership firm in the company from the date of its registration as per Section 575 of the Companies Act, 1956. Thus, it concluded that conversion of a Company into a LLP, is differently placed as in comparison to succession of a partnership firm by a company under Part IX of the Companies Act, 1956.

9.3. In this regard, one needs to again refer to Section 58 of the LLP Act on “Registration and Effect of Conversion”. Clause (b) of Subsection (4) of Section 58 clearly states that all tangible (movable or immovable) and intangible property “vested” shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed.

9.4. Connotation of the word “transfer” as set out in the definition of “Convert” in the Third Schedule cannot be given a meaning as set out in Section 2(47) of the ITA. Although, the word "transfer" is a word of very wide meaning and includes every transaction whereby a party divests himself or is divested of a portion of his interest, that interest subsequently vesting or being vested in other party. However, "transfer" in section 2(47) envisages two persons, transferor and transferee, and there cannot be a transfer of an asset by a person in favour of himself.

9.5. As per the Third Schedule to the LLP Act, Sub-Clause (c) of Clause 6, a company, on conversion into LLP and its subsequent registration, shall be deemed to be dissolved and removed from the record of the Registrar of Companies. This means that pursuant to conversion, the company shall be deemed to be dissolved and there shall be another entity taking birth which shall be an LLP. Thus, there would not be a point were both Company and LLP are in existence and the property is transferred between them.

9.6. Also, in Section 58(4)(b) read with Sub-Clause (b) to Clause 6 of the Third Schedule, it has been stated that the assets “shall be transferred to shall vest” in the LLP. Thus, the word transfer cannot be read in isolation with the word vesting. The transfer in this case is only in pursuance to the vesting of the assets on conversion from Company in LLP, for the reason that one entity dies statutorily resulting into re-birth of another entity.

9.7. Also as per Clause (7) when the company is converted into LLP there doesn’t need to be a fresh registration process of the property which is to be undertaken. The newly formed LLP only has to intimate the relevant authority. However, the registration process might differ from one state to another. What needs to be seen is that under the LLP law, no fresh registration is envisaged for the reason that in substance it is the same entity which is owning the asset, with only the difference that earlier it was registered in one law, i.e. Companies Act, 2013, however, subsequently, it got itself registered in another law i.e. the LLP Act. It is similar to a position wherein one individual being a Citizen of India, surrender Indian Citizenship and gets Citizenship of USA.

9.8. As discussed hereinbefore term “transferred to and vest in” as used in LLP Act cannot be given a different meaning as given to “shall pass to and vest” under the Companies Act, 1956/2013.

9.9. In the order, ITAT has mentioned that in case of Conversion of Company into LLP, if the cumulative conditions as set out in Section 47(xiiib) are not met, will be considered as transfer. However, no specific observation has been made as to whether such conversion would fall in the definition given in Section 2(47) of the ITA. The determinative section for any transaction to considered as a transfer is Section 2(47) and thereafter once included, if falling in Section 47 would again be excluded from the purpose of chargeability of Capital Gains.

9.10. Sticking to the issue at hand, in my understanding the decision of ITAT Mumbai Bench shall not have any bearing on the issue of applicability of Section 43CA on conversion from company into LLP for the following reasons:-

• Section 43CA is applicable to Stock in Trade and not Capital Asset.
• Definition of transfer as per Section 2(47) is not applicable as only applicable to capital assets.
• Connotation of the word Transfer has to considered under general parlance or as given in the Transfer of Property Act, 1882.

10. IMPACT OF INCOME COMPUTATION AND DISCLOSURE STANDARD

10.1. Income Computation and Disclosure Standards (ICDS) – II on Valuation of Inventory, specifies the treatment of valuation of inventory in case of certain dissolution. It is specified therein that in case of dissolution of Partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the Net Realizable Value.

10.2. Thus, the applicability of said clause of ICDS will only arise in case the partnership firm, AOP or BOI is dissolved. Whereas, in the instant case, the Company is converted into an LLP and hence such clause of ICDS shall not be applicable.

10.3. The term dissolution is quite distinct from conversion. In the case of dissolution, simultaneous birth of another entity is not necessary. Dissolution brings the life of one entity to an end and the assets and liabilities are distributed to the respective claimants. As against this, conversion is not an end to the life of an entity, it continues with registration under the other law and accordingly assets and liabilities are not distributed to the respective claimants.

10.4. For the aforementioned reasons, even the ratio laid down by Supreme Court in the case of ALA Firm [1991] [1991] 189 ITR 285 (SC) shall not be applicable.

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