Conversion or Succession of Entities Not Regarded as Transfer
Introduction
Transfers of capital assets during the conversion or succession of entities are not considered “transfer” under Section 47 of the Income-tax Act, subject to specific conditions. If conditions are not complied with, the exemption shall be withdrawn.
Key Transactions Exempt from Capital Gains
- Succession of Firm by Company [Section 47(xiii)]
- All business assets and liabilities of the firm must be transferred to the company.
- All partners shall become shareholders in the successor company and shall be allotted shares in proportion to their respective capital balances in the firm.
- Partners must hold at least 50% of the company’s voting power for 5 years.
- The Partners of the firm should not receive any consideration or benefit, directly or indirectly, other than by the way of allotment of shares (equity or preference shares) in the company.
- Conversion of Unlisted Company into LLP [Section 47(xiiib)]
- Turnover should not exceed 60 lakhs, and assets should not exceed Rs. 5 crores in any of the 3 previous years.
- All company assets and liabilities must become those of the LLP.
- All shareholders of the company become partners of the LLP in the same proportion as their shareholding on the conversion date.
- The shareholders’ aggregate profit-sharing ratio in the LLP remains at least 50% for 5 years from the conversion date.
- The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the LLP.
- For three years post-conversion, no partner receives any amount from the company’s accumulated profits as on the conversion date, directly or indirectly.
- Succession of Proprietary Concern by Company [Section 47(xiv)]
- The entire business must devolve upon the company.
- The company should take over all the assets and liabilities of the proprietary concern.
- Sole proprietor must hold at least 50% voting power in the company for 5 years.
- Sole proprietor must not receive any consideration other than shares in the company.
- Corporatisation of Recognised Stock Exchanges [Section 47(xiii)]
Transfer of capital assets by an AOP/BOI to a company during demutualisation or corporatisation of a recognised stock exchange is not treated as a transfer, subject to conditions:
- All assets and liabilities of the AOP/BOI must transfer to the company;
- All members of the AOP or BOI before the succession become shareholders of the company;
- Members of the AOP/BOI receive no consideration or benefit, directly or indirectly, other than shares allotted by the company;
- AOP/BOI members must hold at least 50% voting power in the company, maintained for 5 years from succession; and
- Demutualisation/corporatisation must be SEBI-approved.
Withdrawal of Exemption
If any of the prescribed conditions are violated, the capital gains earlier treated as exempt shall be deemed as income and become taxable in the year of such non-compliance, in the hands of the successor company or LLP, or the shareholder of the predecessor company, as applicable.