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Income Tax on "conversion" of firm into Pvt Ltd

15 November 2022

From income tax angle there is no capital gains tax on "conversion" of a firm into PVT LTD Co (transfer of assets and liabilities including fixed assets). My query is what is the treatment for stock? Will there be tax on transfer of stock held as stock in trade from firm to pvt ltd at the time of "conversion"? Please quote relevant sections of IT Act.

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2 Replies

sabyasachi mukherjee (27849 Points)
Replied 16 November 2022

Conversion of a firm to pvt. limited

assets and liabilities will be taken over in normal circumstances.
NO CAPITAL GAIN IMPLICATION UNDR ORDINARY CIRCUMSTANCES.

Anoop Campbell (25 Points)
Replied 16 November 2022

Thanks.

I agree that this transfer is covered under section 47 and hence there will be no capital gains tax arising. However, I am specifically referring to trading stock and trading stock is not capital asset. If it is not a capital asset then CAPITAL GAIN in any case is not applicable.

I am seeking clarification on trading stock. There is a view that trading stock is not covered under section 47 and will have to be transferred at market value and the firm will have to pay income tax on the difference between market value and cost price. Can you please clarify this?