CONVERSION OF PROPRIETORY CONCERN IN TO PARTNERSHIP FIRM

The non-applicability of CG is only if prop concern converted into Pvt. Ltd. Company.That too entire asset and liability of proprietor should become that of pvt. ltd.co. Proprietor should hold 51% shares for 5 years. refer to Section 47. You cannot detach only the immovable property. All balance sheet liabilities and assets (stocks etc) creditors and debtors are to be assumed by new company as on date. It has to be transferred as a going concern and 51% shares has to remain for 5 years with the proprietor. If it is diluted below this in the interim say after 3 to 4 years, the liability of CG tax is of the company as company is in possession of all properties. When you read section 45 it is clearly stated partnership firm or AOP  not being a company. However, section 47 specifies company. Therefore it will have to be Pvt. Ltd. Co.

The new company has to make its MOA with the main objective being of the business what proprietorship concern does and it has to be then doing the business like manufacturing etc. Later one can make ammendments to do other businesses as well.

The ITO under whose jurisdiction proprietor was filing returns, upon transfer taking place, will not accept the individual returns of the proprietor. That has to be filed at same ITO of the Pvt. Ltd. Company. Usually, there is a notice as such put up at ITOs where individual file the return that they should file in charge of private limited company if they are director there. The ITO usually scrutinises both returns as he has to satisfy himself of continuity of concern as company and also no other enrichment to proprietor arising from the transfer. If the proprietor has taken loan from any of the other director or their family members, that is viewed adversely. They disallow this  on grounds of advance money being paid for transfer of shares at a later date. Now from 1/10/2009 all this is also affected.

Accordingly, it is proposed to amend the provisions of section 49 of the Income-tax Act to provide that in case of conversion of sole proprietorship or firm into a company which is not regarded as a transfer, the cost of acquisition of asset in the hands of the company would be the same as that in the hand of the sole .

Where transfer of an asset from one person to another is not regarded as a transfer under section 47, then, for the purpose of computation of capital gains, the cost of the asset in the hands of the successor under section 49 is taken as that of the predecessor. Certain transactions like transfer of assets by a sole proprietorship or a firm to a company on conversion are not regarded as transfer under the provisions of section 47(xiv) and section 47(xiii). While computing capital gains on subsequent sale of such assets by the company, there is no reference in the provisions of section 49 with regard to the cost to be taken for such assets.

During Conversion of Proprietorship to Partnership firm... with assets and liability except which are doubtful to the new partnership firm(to the new partner) belongs to proprietorship.....What will be treatment of those Unsecured Loan and Sundry Creditors in the balance sheet of Proprietorship ???