Conversion of Partnership firm into private limited company.
This query is : Resolved
25 April 2025
I’m converting a partnership firm into a private limited company. The firm has capital of Rs. 2.5 Cr. After conversion, can the company be incorporated with authorised capital of Rs. 10 Lakhs and the remaining Rs. 2.4 Cr treated as an unsecured loan from the partners (who will be directors/shareholders)? Will this affect the exemption under Section 47(xiii) of the Income Tax Act?
27 April 2025
Yes, you can incorporate the company with an authorized capital of Rs. 10 lakhs and treat the remaining Rs. 2.4 Cr as an unsecured loan from the partners (now directors/shareholders). This is legally permissible under the Companies Act, 2013, provided proper documentation (loan agreements, interest terms, etc.) is maintained.
Section 47(xiii) provides that transfer of assets from a partnership firm to a company (as part of succession) is not treated as a "transfer" (hence, no capital gains tax) if:
All assets and liabilities of the firm are transferred to the company.
All partners become shareholders of the company in the same proportion.
The partners receive only shares (no other consideration, including loans).
If the Rs. 2.4 Cr is recorded as a loan (instead of being converted into equity), the tax exemption under Section 47(xiii) may be at risk because:
The exemption requires that partners receive only shares—not loans or other consideration.
The loan could be seen as "additional consideration", potentially disqualifying the exemption.
Section 47(xiii) provides that transfer of assets from a partnership firm to a company (as part of succession) is not treated as a "transfer" (hence, no capital gains tax) if:
All assets and liabilities of the firm are transferred to the company.
All partners become shareholders of the company in the same proportion.
The partners receive only shares (no other consideration, including loans).
If the Rs. 2.4 Cr is recorded as a loan (instead of being converted into equity), the tax exemption under Section 47(xiii) may be at risk because:
The exemption requires that partners receive only shares—not loans or other consideration.
The loan could be seen as "additional consideration", potentially disqualifying the exemption.
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03 May 2025
"Sir, in light of the requirement under Section 47(xiii) that partners must receive only shares (and not any other consideration like loans), what practical options are available to ensure we comply with the tax exemption conditions while also managing the high stamp duty cost that would arise if we increase the authorized capital to Rs. 2.5 crore?"
03 May 2025
1. Incorporate in a State with Lower Stamp Duty.
2. Use Preference Shares to Reduce Authorized Capital Needs.
3. Issue Shares at a Premium. .... can be considered with its pros & cons...
2. Use Preference Shares to Reduce Authorized Capital Needs.
3. Issue Shares at a Premium. .... can be considered with its pros & cons...
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