Facts

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 under Part IX of the Companies Act, 1956. 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 assessment year 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 (see Chetak Enterprises P.  Ltd. v.  Asst. CIT [2006] 281 ITR (AT) 162 (Jodhpur)). 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.

Issue

What is the effect of conversion of  partnership  firm  into  a  company under Part IX of the Companies Act? Whether deduction under section 80IA is available to   the assessee company post conversion when the agreement for construction of infrastructure facility wasentered into by the erstwhile partnership firm.

Views

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 states 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 will not be allowed if a partnership firm carries on the specified business.

Held

Supreme Court dismissed the department’s appeal and held that the assessee was entitled to deduction under section 80IA. Supreme Court observed that as     per section 575 of the Companies Act, on conversion of a partnership firm into a company under Part IX of the Companies Act all properties of the firm statutorily vest in the company without any need for a conveyance. Post  conversion of firm into company, the earlier agreement entered into between the erstwhile partnership firm and the State Government for construction of road, by legal implication, would be treated as an agreement between the assessee company and the State Government. The assessee company, therefore, satisfied the requirements of section 80IA(4)(i). (AY. 2002-03) (CA No. 1764 of 2010 dt. 5-3-2020)

Editorial: in CIT v. Texspin Engg. & Mfg. Works (2003) 263 ITR 345 (Bom) (HC) has held that when a firm is converted into a  company under Part  IX  of the Companies Act, 1956, there is no transfer of capital asset as contemplated by section 45 but a statutory vesting of all properties in the company. Bombay High Court observed that “on the vesting of all the properties statutorily in the company, the cloak given to the firm is replaced by a different cloak and the same firm is     now treated as a company.”

“Man is a product of his thoughts.

What he thinks, he becomes.”

– Mahatma Gandhi