Tax Management with reference to – ‘Conversion of Firm / Sole Proprietorship to Company'

Conversion of Firm / Sole Proprietorship to Company

Transfer of a capital asset or intangible asset on conversion of Firm into a Company is not treated as Transfer if following conditions are satisfied and hence not Capital Gain arises. Conditions are:

(a)        all the assets and liabilities of the firm  [or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets and liabilities of the company;

(b)        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;

(c)        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

(d)        the aggregate of the shareholding in the company of the 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 5 years from the date of the succession;

Transfer of a capital asset or intangible asset on conversion of sole Proprietorship Concern  into a Company is not treated as Transfer if following conditions are satisfied and hence not Capital Gain arises. Conditions are:

(a)        all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

(b)        the shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the company and his shareholding continues to so remain as such for a period of 5 years from the date of the succession; and

(c)        the sole proprietor does 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;

(d)        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;

1. Where there has been reorganisation of business,

2. whereby, a firm is succeeded by a company or a proprietary concern is succeeded by a company ,

3. the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be,

4. shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose of previous year in which business reorganization was effected and

5. other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingl

Provided that if any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) to section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor company, shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.

The above exemption shall be withdrawn in following case :

1. Where any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with, then  

2. the amount of profits or gains arising from the transfer of such capital asset or intangible asset,

3. shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements of the proviso to clause (xiii) or the proviso to clause (xiv), as the case may be, are not complied with.