Deduction u/s 80IA allowed on conversion of firm into company – SC upheld High Court order

Deduction 80IA allowed on conversion of partnership firm into company under Part IX of Companies Act 1956. Supreme Court upheld HC Order

ABCAUS Case Law Citation:
ABCAUS 3286 (2020) (03) SC

Important case law relied upon by the parties:
Giridhar G. Yadalam vs. Commissioner of Wealth Tax & Anr (2015) 17 SCC 664

In the instant case, appeal were filed by the Revenue against the judgment passed by the High Court in allowing the deduction u/s 80IA of the Income Tax Act, 1961 (the Act) to the respondent company which came into existence as a result of conversion of erstwhile partnership firm into a Private Limited Company under Part IX of the Companies Act, 1956 (the Companies   Act).

The said partnership firm had entered into an agreement with the PWD Department of the State Government for   construction of road and collection of road/toll tax.

Later, the firm was converted into a private limited company under Part IX of the Companies Act. On said conversion of the firm into company, an intimation was given to the Chief Engineer P.W.D. who noted the change and cancelled the registration of the firm and granted a fresh registration code to the assessee ­Company.  

For the relevant assessment year, the ­Company claimed deduction u/s 80­IA of the Act. The Assessing Officer (AO) declined that claim but his decision was reversed by the Commissioner of Income­ Tax (Appeals). The Income Tax Appellate Tribunal (ITAT)confirmed the decision of the   CIT(A) following its own decision in the case of the   assessee­ Company for the preceding Assessment Year   The matter travelled to High Court to examine as to whether the company fulfilled the condition of sub­Section (4)(i)(b) of Section 80­IA of the Act.

In view of the provisions of the Section 80IA of the Act, the High Court upheld the view taken by the ITAT and observed that by operation   of law, there was statutory transformation of the Firm into the Company whereby the rights and liabilities of the Company, and the assets, went to the Company. Even in case of transfer, the   transferee is entitled to deduction with effect from the date of transfer.

Deduction u/s 80IA on conversion of firm into company

The Hon’ble Supreme Court observed that an explicit request was made   by the firm to P.W.D. to allow the partnership firm to change its constitution and consequently change of name in the agreement after converting the firm into a company with the existing partners as its Directors. The Chief Engineer being the appropriate authority of the State, took note of the request made by the erstwhile partnership firm and informed the said firm that its offer was accepted subject to terms and conditions specified in that regard.      It was only after this interaction, an agreement was entered into between the PWD and the erstwhile   partnership firm, in which the communication sent by the   Chief Engineer was made part of the agreement.     Notably, after the conversion of the partnership firm into a company under Part IX of the Companies Act, the PWD had noted the change and provided fresh registration code to the assessee­ Company.

Explaining the effect of the conversion of partnership firm into a company under Part IX of the Companies Act, the Hon’ble Supreme Court pointed out that section 575 of the Companies Act 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. The firm ceases to exist and assumes the status of a company after its registration as a company.

The Hon’ble Supreme Court stated that a  priori, it must   follow that on the said conversion, the business is   carried on by the enterprise owned by a company registered in India and the agreement entered into   between the erstwhile partnership firm and the State Government, by legal implication, assumes the character   of an agreement between the company registered in   India and the State Government for developing/  maintaining and operating/developing, maintaining and operating a new infrastructure facility.

The Hon’ble Supreme Court stated the assessee company fulfilled the stipulations for the purpose of considering compliance of clause (a) of Section 80­IA(4)(i) as the registered firm was converted into a company   before the commencement of the AY.

As regards clause (b) of Section 80­IA(4)(i) with respect to the agreement with Central/State Government, the Hon’ble Supreme Court opined that an agreement was   initially executed between the erstwhile partnership firm   and the State Government, but with clear understanding   that as and when the partnership firm is converted into a   company, the name of the company in the agreement so executed be recorded recognising the change.  The agreement itself mentioned that   the firm as party to   the agreement was meant to include its successors and   assignee. Further, the State Government had granted sanction to the company and the original agreement entered into with the firm automatically stood converted in favour of the assessee­ Company being the successor of   the firm. Thus even the stipulation in clause (b)of Section   80­IA(4)(i) was fulfilled by the assessee ­Company.

Accordingly, the Hon’ble Supreme Court dismissed the appeal filed by the Income Tax Department.

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