The Assessee has raised three questions before the AAR, whether conversion of Domino India in to a limited liability partnership, would be regarded as a transfer of shares within the meaning of section 2 (47) of the Act.

Whether on conversion computation provision under section 48 of the Act are workable and capable of being implemented, or whether the said provisions would breakdown and fail.

Whether as the value for the partner’s right or interest in the proposed limited liability partner cannot be said to be more than the value of the share holders’ interest in the private limited liability company, would the transaction give rise to any taxable capital gains.

AAR held that   the inclusive definition of “transfer” in section 2(47) of the Act covered the extinguishment of the shareholder’s interest on conversion of the company into a limited liability partnership in its ambit. The rights of the assessee in the shares in the Indian company were extinguished on its conversion into a limited liability partnership. The extinguishment of such right was a transfer under the provision of section 2(47)(ii) of the Act. That the assessee had admitted that clause (e) of the proviso to clause (xiiib) of section 47 which stipulated that total sales, turnover or gross receipts in the business of the company in any of three previous years preceding the previous year in which the conversion took place should not exceed Rs.60 lakhs, was not satisfied in this case. Therefore, the “transfer” was exigible to capital gains tax under the provisions of section 45 of the Act. In terms of section 47A(4) of the Act since the requirement of the proviso to section 47(xiiib) was not complied with in the year of conversion of the company into a limited liability partnership, the profits or gains arising in the hands of the shareholder were chargeable to capital gains tax in its hands in that year itself.  That even if the assets of the company were transferred to the limited liability partnership at their book value, the value of the partnership interest in the limited liability partnership would be certainly more than the face value of the shares forgone by the assessee considering the reserves and surpluses transferred. The full value of consideration of the shares forgone by the assessee could be worked out from the accounts of the limited liability partnership and the erstwhile company. If the value of the partnership interest could not be ascertained or determined for any reason, then the fair market value thereof had to be taken as stipulated under section 50D of the Act.  That the value of partnership interest in the limited liability partnership could not be taken as the cost of acquisition of shares. The cost of acquisition of the shares would remain the price at which the shares were acquired by the shareholder. That the computation mechanism under section 45 read with section 48 of the Act was workable and capable of being implemented in the present case. The full value of consideration for the purpose of computation of capital gains would be the value of the assessee’s partnership interest in the limited liability partnership and the cost of acquisition of shares would be the amount paid by the assessee at the time of purchase of shares. The assessee’s partnership interest in the limited liability partnership was capable of being evaluated on commercial and accounting principles and if this could not be done, its fair market value had to be taken as stipulated under section 50D of the Act.  That the precise asset of the shareholder that got extinguished on the conversion of a company into a limited liability partnership was his specific shareholding in the company, which was different and distinct from the shareholder’s fund as appearing in the books of the company. The reserves and surpluses remained the property of the company as long as they were not distributed to the shareholders as dividend and could not be equated as part of shareholder interest to work out the capital gains in the hands of the shareholders. Further, even if the value of the total shareholder’s fund in the company was equal to the value of the total partnership interest in the limited liability partnership, it did not have an impact on the capital gains arising in the hands of the shareholder. The capital gains had to be worked out by deducting the “cost of acquisition” of the shares from the “full value of consideration” of the shares. The transaction would certainly give rise to capital gains in the hands of the shareholder. (AAR No. 1290 of 2012 dt.23-8.2019)