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Commissioner of Income Tax, Udaipur v. M/s Chetak Enterprises Pvt. Ltd.

Civil Appeal · 2020 INSC 279Decided 5 Mar 2020
Civil Appeal No. 1764 of 2010
Justice A.M. Khanwilkar · Justice Dinesh Maheshwari

Background

A partnership firm built and operated a toll road for the Rajasthan government under an agreement, and shortly before the road was inaugurated, the firm was converted into a private limited company under the Companies Act. The company then claimed a tax deduction under Section 80-IA of the Income Tax Act (available to companies operating infrastructure facilities under government agreements), but the tax assessing officer denied the claim, arguing the agreement was originally with the firm, not the company, and that the eligibility conditions weren't met. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal both ruled in the company's favour, and the Rajasthan High Court upheld that view, prompting the tax department's appeal to the Supreme Court.

Decision Breakdown

The Court held that when a partnership firm converts into a company under Part IX of the Companies Act, all its properties, rights, and liabilities automatically vest in the new company by operation of law: no fresh conveyance or re-execution of contracts is needed. Since the firm had informed the government from the outset (even before signing the original agreement) that it intended to convert into a company, and the government had acknowledged this and granted fresh registration to the company, the agreement was legally treated as continuing with the company as successor. The company was found to satisfy both conditions under Section 80-IA(4)(i), being a company-owned enterprise and having a qualifying agreement with the state government, and was therefore entitled to the tax deduction. The appeal was dismissed.

Lesson Learnt

When a business is converted from a partnership firm into a company, existing government contracts and the legal benefits tied to them (such as tax deductions) automatically pass to the new company, provided the conversion and the government's acknowledgment of it are properly documented: there is no need to execute a fresh agreement.

Official source (sci.gov.in)View Judgment (PDF)

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