Proprietorship merging with private limited

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Querist : Anonymous

Querist : Anonymous (Querist)

08 February 2013 Dear Sir, Say MR A is having proprietary business & another com called X PVT LTD running its business. Proprietorship of MR A want to merge with X PVT LTD which is already existing for 1 year. So is it Taxable for Capital Gain? is there any case for reference for avoiding Capital Gain for same?

Amol S Joglekar

Amol S Joglekar (Expert)
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08 February 2013 Capital gain is taxable in the hands of individual. There is no such exemption either in Act or in Case law.

Querist : Anonymous

Querist : Anonymous (Querist)

08 February 2013 Sir is there any other way to save Capital Gain Tax ? by transferring all the assets & liabilities to pvt ltd.? or something else.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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10 August 2024 When merging a proprietorship with an existing Private Limited Company, there are several considerations regarding taxation, especially concerning capital gains. Here’s a detailed explanation of the process and tax implications:

### 1. **Capital Gains Tax Implications**

#### **Taxable Capital Gain:**
- **Merging Proprietorship with Pvt Ltd:** If the proprietorship is merged into an existing Private Limited Company, it is considered a transfer of assets and liabilities. The difference between the fair market value of assets and their book value will be treated as a capital gain or loss.
- **Taxable Event:** The capital gain will be taxable in the hands of the proprietorship and subsequently reported in the proprietor’s personal income tax return. This gain is calculated as the difference between the sale consideration (value of assets transferred) and the cost of acquisition of the assets.

#### **Cases for Reference:**
- **Supreme Court Case:** Refer to the case of **CIT vs. M/s. Greaves Cotton and Co. Ltd.**, where the Supreme Court held that the transfer of assets under the scheme of amalgamation may not necessarily lead to capital gains if the conditions under relevant sections are met.
- **Income Tax Act Sections:**
- **Section 45(1)**: Pertains to taxation of capital gains.
- **Section 47**: Lists transactions not regarded as transfers, including certain amalgamations under specific conditions.

### 2. **Saving Capital Gains Tax**

#### **1. **Section 47(vi) of the Income Tax Act:**
- **Amalgamation Exemption:** According to Section 47 of the Income Tax Act, if the amalgamation is between two companies and complies with the conditions under Section 2(1B), then the transfer of capital assets will not be treated as a taxable event.
- **Conditions for Exemption:**
- The Private Limited Company should be a new company, and the amalgamation must be in compliance with the Companies Act.
- The assets and liabilities of the proprietorship are transferred to the Private Limited Company.
- The company must continue to hold the assets for a specified period.

#### **2. **Section 56(2)(x):**
- **Assets Received at Fair Value:** If the Private Limited Company receives assets at their fair value, any difference between fair value and book value might be treated as income under Section 56(2)(x). However, this provision mainly applies to gifts or certain transfers.

#### **3. **Section 54EC/54F:**
- **Investment in Specified Assets:** If applicable, you may reinvest the capital gains into specified assets under Sections 54EC or 54F, which provide for exemption on long-term capital gains.

### 3. **Alternative Methods to Save Capital Gains Tax**

#### **1. **Transfer of Assets and Liabilities:**
- **Asset Transfer:** Transfer assets at their book value to avoid realizing a gain. This method avoids the recognition of capital gains at the time of transfer but may still be subject to other regulatory and accounting considerations.

#### **2. **Sale of Proprietorship to Pvt Ltd:**
- **Asset Sale Agreement:** Enter into a sale agreement where the Proprietorship sells its assets to the Private Limited Company. This will trigger capital gains but may offer flexibility in managing the capital gains tax through strategic planning.

### 4. **Steps to Follow**

1. **Legal and Tax Advice:** Consult with a tax advisor and legal professional to understand the specific implications for your case and to structure the transaction to minimize tax liabilities.
2. **Documentation and Compliance:** Ensure that all documentation related to the amalgamation, asset transfers, and compliance with Companies Act is properly maintained and filed.

### Conclusion

Merging a proprietorship with a Private Limited Company involves significant tax implications, particularly concerning capital gains. By adhering to relevant sections of the Income Tax Act, especially Section 47, you can potentially avoid or minimize capital gains tax. Consulting with tax and legal experts will ensure that the transaction is structured efficiently and in compliance with applicable laws.

Amol S Joglekar

Amol S Joglekar (Expert)
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13 August 2024 You may think of selling the asset one by one in stead of lumpsum sale

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