Section 68 Not Applicable for Breach of Section 47(xiiib)(f) | ITAT

Case Details: ITO vs. NICAF LLP - [2025] 175 taxmann.com 1001 (Mumbai-Trib.)

Judiciary and Counsel Details

• Vikram Singh Yadav, Accountant Member & Ms Kavitha Rajagopal, Judicial Member
• Nishit Gandhi, Adv. for the Appellant.
• Leyaqat Ali Aafaqui, Sr AR. for the Respondent.

Facts of the Case

The assessee firm was engaged in trading and installing carpets and floor coverings. During the relevant assessment year, it was converted to a Limited Liability Partnership (LLP) from a private limited company. The assessee filed its return of income for the relevant assessment year.

During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had transferred the share capital and reserves to the partners’ capital account in the LLP. He held that the assessee had violated the conditions of Section 47(xiiib)(f) as it cannot take any amount directly or indirectly to any partner out of the accumulated profit for 3 years from the date of conversion. Accordingly, he treated it as unexplained credit under Section 68 and made additions to the assessee’s income.

The CIT(A) deleted the AO’s additions. Aggrieved by the order, the AO filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that the AO had specifically mentioned that the assessee had violated the conditions of Section 47(xiiib)(f) but proceeded to make additions under Section 68. Section 68 is specifically for credits in the books of the assessee for which the assessee offers no explanation as to the nature and source to the satisfaction of the AO. In the instant case, the issue was not about credits found in the assessee’s books of accounts, but rather the allegation that the assessee firm, upon conversion to LLP, transferred the share capital, reserves, and surplus to the partners’ accounts. It is quite evident that the nature and source of the credit are not unexplained.

Further, the AO also erred in making the addition in the hands of the assessee. Even assuming that there was a transfer, the credit is in the partners’ account and not in the assessee’s account. The Tribunal held that it was not justified in upholding the addition made by the AO under section 68, where none of the ingredients of the said provision are attracted in the present case.

The violation of the condition prescribed under section 47(xiiib)(f) is only with regard to the computation of capital gain under section 45 on certain transfers of a capital asset. The AO failed to provide a finding on the issue of whether the alleged transfer would be liable for capital gain, and that it must be in the hands of the transferor. Therefore, the Tribunal upheld the order of CIT(A) deleting the impugned addition.

List of Cases Referred to

• Asstt. CIT v. Celerity Power LLP [2018] 100 taxmann.com 129/[2019] 174 ITD 433 (Mumbai) (para 6).