Assessment in Name of Non-Existent LLP Held Invalid; Depreciation on Goodwill from Court-Approved Amalgamation Allowed

Background and Appeal Overview

The dispute in KIFS International LLP Vs DCIT (ITAT Ahmedabad) arose from an assessment framed under Section 143(3) of the Income Tax Act 1961 for Assessment Year 2016-17. The assessee contested:

  1. The legality of the assessment order passed in the name of an entity that had ceased to exist due to conversion into a Limited Liability Partnership (LLP).
  2. The disallowance of depreciation under Section 32(1) on goodwill that emerged pursuant to a High Court sanctioned scheme of amalgamation.

The assessee was originally set up as a private limited company. A composite scheme of arrangement and amalgamation involving group entities was approved by the Hon’ble Gujarat High Court. Pursuant to this scheme, and with effect from 15.03.2016, the amalgamated company was converted into an LLP. Despite this, the Assessing Officer (AO) passed the assessment order dated 30.12.2018 in the name of the erstwhile private limited company, even while recording in the same order that the entity had already become an LLP.

On the merits, the assessee had recognised goodwill of Rs. 308.87 crore on amalgamation and claimed depreciation under Section 32(1) treating such goodwill as an intangible asset. The AO denied the depreciation claim on multiple grounds including allegation of colourable device and absence of real cost.

The Tribunal examined both issues: (i) jurisdictional validity of the assessment, and (ii) eligibility of depreciation on goodwill.

Corporate Restructuring and Conversion into LLP

Group Structure and Scheme of Arrangement

Three entities forming part of the KIFS group were central to the restructuring:

  • KIFS Securities Pvt Ltd. (KSPL) – incorporated on 27.01.1995 under the Companies Act 1956; engaged in stock broking, depository participant services, portfolio management and also functioning as a holding company for the group.
  • KIFS Trade Capital Private Ltd. (KTCPL) – incorporated on 29.10.2012 for investment advisory activities.
  • KIFS International Pvt Ltd. (KIPL) – originally incorporated on 27.12.2007 as Dev Tradelink Pvt Ltd., later renamed as KIFS International Pvt Ltd., with focus on commodities business.

All three companies were closely held and controlled by members of the same family group (KIFS group). A composite scheme of arrangement under Sections 391 to 394 of the Companies Act 2013 was placed before the Hon’ble Gujarat High Court involving:

  • Slump sale of the stock broking undertaking of KSPL to KTCPL; and
  • Amalgamation of the remaining business undertakings of KSPL into KIPL.

The Hon’ble Gujarat High Court sanctioned the scheme vide order dated 21.12.2015, with the following appointed dates:

  • 31.03.2015 for slump sale of the stock broking undertaking of KSPL to KTCPL; and
  • 01.04.2015 for amalgamation of other undertakings of KSPL with KIPL.

Subsequently, with effect from 15.03.2016, KIPL (the amalgamated company) was converted into an LLP, namely KIFS International LLP.

Assessment Proceedings in the Name of Erstwhile Company

For AY 2016-17, scrutiny assessment proceedings were undertaken under Section 143(3). The AO passed the assessment order dated 30.12.2018 in the name of KIFS International Pvt Ltd., even though that company had already converted into an LLP with effect from 15.03.2016.

Importantly, the AO himself recorded in the assessment order that:

“KIFS International P Ltd. was converted to Limited Liability Partnership (LLP) with effect from 15.03.2016.”

Thus, the Revenue was fully aware that the original private limited company had ceased to exist on the date of passing the assessment order. Nonetheless, the assessment was framed in the name of the non-existent company and not in the name of the LLP.

Ground on Jurisdiction: Assessment on Non-Existent Entity

Assessee’s Contention

The assessee challenged the validity of the assessment on the ground that:

  • The order was passed on a non-existent entity (the erstwhile private limited company) after its conversion into LLP.
  • Conversion and status change were duly noted by the AO in the assessment order itself.
  • Jurisdiction to assess lies only against a “person” in existence under Section 2(31) of the Income Tax Act 1961; once the company is converted or amalgamated, the old entity ceases to exist in law.
  • Participation or errors by the assessee (including filing returns or appeals in the old name) cannot confer jurisdiction where it does not exist.

Reliance was placed on the decision of the Hon’ble Gujarat High Court in P.V. Doshi Vs CIT 113 ITR 22, which reiterates that jurisdiction cannot rest on consent, conduct or waiver when statutory preconditions to assume jurisdiction are absent.

Revenue’s Argument

The Department contended that:

  • The assessee itself filed original and revised returns of income in the name of the erstwhile private limited company.
  • Correspondence during assessment, appeal before the CIT(A) and even the appeal before the ITAT initially used the old name.
  • Having projected itself as the company during the proceedings, the assessee could not later dispute the validity of assessment framed in that name.

The Revenue thus argued that the assessee’s conduct effectively validated the assessment, or at least attracted the curative provisions of Section 292B.

Tribunal’s Findings on Jurisdiction

The Tribunal carefully analysed the factual matrix and the settled legal position.

  1. Non-existence recognised by the AO himself
    The assessment order explicitly recorded that KIFS International Pvt Ltd. had been converted into an LLP with effect from 15.03.2016. Therefore, on 30.12.2018 (date of assessment order), the company no longer existed.