Full exemption is allowed in respect of capital gains on the conversion of a partnership firm into a company, under Section 47(xiii). Thus, it is provided that where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset, or intangible assets to the company, the entire capital gains would be exempt from tax provided the following conditions are full field:
All the assets and liabilities of the firm relating to business immediately before the succession become the assets and liabilities of the company;
All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession;
The partners of the firm do not receive any consideration or benefit directly or indirectly in any form or manner other than by way of allotment of shares in the company: and
The aggregate of the shareholding in the company of partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of succession. This has been extended to a stock exchange converted into a company, as per SEBI approval for de mutualisation or corporatization where the transaction would not be treated as “transfer” under Section 47(xiiia) from the A.Y. 2004- 2005.