Capital gains on violation of sec.47(xiv)

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Hello friends,

I require your professional guidance on a particular issue.

There is a proprietory concern getting converted to a private limited company. The company is availing the exemption u/s 47(xiv) of I.T act. One of the primary conditions for availing the exemption is that the proprietor should hold minimum 50% of the shareholding for 5 years in the newly formed company. However, the newly formed company is raising private equity in a while whereby the shareholding of the proprietor will be diluted to below 50% before 5 years. Hence, capital gains will arise.

My question is :

1. Is there any specific provision which states that during the conversion, the assets and liabilities should be transferred at any specific value?

2. When 47(xiv) exemption gets withdrawn and capital gains become applicable, on what value will the capital gains be calculated? lets say the assets and liabilities are transferred at book value.

FYI, the capital in the new company is formed to the extent of the net worth of the proprietor concern. 

Also, kindly provide the relevant provisions which sheds light on these issues.

Thanks in advance,

Kaushik Lakshmanan, ACA

Replies (1)

If book values are adopted as the notional transfer cost, no capital gains will arise, provided the consideration is equal to the net asset value. But if the balancesheet of the prop concern contained immovable property, then the AO can estimate the FMV either on his own or by refrring to valuation officer. Therefore it would be better that you estimate a fair market value of such assets on your own while calculating capital gains

 

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