Transfer of Assets

The assets can be sold by the proprietorship  to the partnership firm on the market value or book value of the assets. The capital gains shall be booked according to provisions of Income tax based on the facts and figures in the books of proprietorship concern. The partnership firm will purchase the assets and start claiming depreciation as per Income Tax act. The concept of half or full depreciation shall be applied keeping in mind the date of sale/purchase.

In second case, there is no technical issue involved. The proprietorship concern shall vacate the building after paying all the dues. And partnership firm will enter into a rent agreement with the landlord for using the building and all the terms and condistions shall be decided accordingly. Both the transactions are different and no connection with each other.

I gave these views on the basis of that the proprietor is not or not going to be a partner in the partnership firm. Otherwise in that case these transactions may be rout through his/her capital or some other way.

Whether there will be any document proving that proprietor has vacated the building?

The proprietorship will continue and a new partnership firm will come into existence.

The proprietor will be partner for 40% share in the partnership firm.

No specific documents required. But you can write the matter on a plain paper on get it signed by both the parties that all the dues has been cleared and the building is vacated from such and such date.

If the proprietor is a partner also then these financial transactions can be done through capital also. He can transfer the assets into partnership concern as capital also.

If the proprietor transfers his immovable property to the firm as a capital, the market value as determined by the stamp duty officer will be used for calculating the CG tax in the hands of the PARTNERSHIP FIRM if that is higher than the capital recorded for the proprietor in the partnership firm. The CG Tax for the partnership firm will be on FMV or Capital value credited to the partner whichever is higher reduced by the cost of acquisition to the partner / indexed cost of acquisition to the partner depending on whether holding is for more than or less than 36 months by the partner before transferring to the firm. It is important to note that in all such cases, the partnership firm or pvt. ltd. company that receives the immovable or movable property as capital is the one who has the responsibility of paying CG Tax. However in case the proprietor takes 51% or more shares in the firm, then the liability is not on the firm but I am not sure about the liability of the proprietor transferring the asset.. I have come across such instances in industrial properties like MIDC or GIDC being converted to Partnership or Pvt. Ltd. Company. However, it will be in order to examine such cases on merit basis to avoid grief at a later date. I will refer to the documents that I have for such transfers and let you know. These were done a few years back but I do not notice much changes in the Act. there are also stipulations of how much time (lock in)  the person should remain in the firm or the share holding should remain majority.

If you get other opinions that are suitable to you, then that will be good. If you still want I will go and ask facts from those who did this transaction as I vaguely remember that this matter had become an issue and almost soured the deal.

It seems the situation was as follows for the immovable property.

If the proprietor has 51% share in the new entity then no CG Tax subject to lock in period of 5 years. If at any time in the 5 years the shares are diluted below this level, then the COMPANY or FIRM pays the tax.

If the shares are below 51%, the CG based on MV or consideration value (allotment of share in firmor company) whichever is higher is takn for calculating CG Tax at hands of the PROPRIETOR and not firm or company.

Stamp duty is payable at timeofconveyance at the FMV or transfer value (consideration) whichever higher. It is recommended not to allot shares more than the FMV arrived at by the Stamp Officer.

Do note that this kind of skirting of provisions has been totally plugged since October 1, 2009 where on Immovable Property and on Shares there is IFOS if inadequate considerations. Some people infact  transferred all the shares before 30/9 in the Pvt. Ltd. Company and opted to pay the CG Tax of the proprietor as that was working out cheaper.therefore use this provision only if you want to corporatise a family business where usually the father can make a pvt. ltd.company or maybe llp (that'ssometing new and I am not sure of advantages for business entities).

thank you sir.... who has to pay CG tax... since the transfer is from an individual to a firm... the gain is getting only to individual... then why need to pay tax by a firm..

The firm pays the tax only if the proprietors (transferors) share holding in the firm drops to below 51% during the lock in period to maintain >51% shares. If at time of transfer the share of proprietor was below 51%, proprietor would have paid the CG Tax as applicable on that transaction.

The flow is proprietor was exempted from CG tax on account of holding more than 51% shares in the transferee entity (firm or company). The CG arises to firm or company only if the share falls below 51% during lock in period. After the lock in period the CG is no longer on the property transfer done by the proprietor. The CG however would contnue to be as per applicable laws for shares. However, now this route is of no relevance as it is plugged effective 1/10/2009.

Thank you sir......

sunil sir ,

the transfer of assets from proprietorship to a firm attracts sec 45(3) , whereby the proprietorship has to pay tax on ne profits or gains arising deron , nd the full value of consideration wd b the value recorded in the books of partnership.

You are right Dharmesh. I confused with Pvt. Ltd. Company per section 47. Section 47 states that section 45 does not apply to:-

(xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :

Provided that

(a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

(b) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and

(c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

Normally, no one converts a proprietorship to a firm especially with outsiders due to unlimited liability. This clause was inserted to help Banks and State Financial institutes having Proprietor NPAs or sub standard assets to standardise their assets by bringing in a strong partner to hold 49 % shares and inject money to revive such units.

In areas around metropolitan cities this got misused as land prices shot up too much and rather than using this provision for reviving industry it got misused for sale of property. Now it is plugged effective 1/10/2009.

Remember that stamp duty and registration is payable to the state government. When this clause was inserted stamp duty on assignment of remainder period of lease used to be 10% of MV on such lease hold land. Now it is 5% of MV. Normally these are 99 year lease property and assignment has to be made to the Pvt. Ltd. Company for the remainder period of lease. The State Industrial Corporation may also charge a premium as per its rules. These are all payable. You are only locking in your Capital Gain tax liability into the new entity for 5 years on condition of 51% holding. Once this is crossed, no CG tax will arise. Just consider this transaction to be Central Government foregoing revenue to help the State Corporation or Bank to wriggle out of its misadventure.

This has to be on principals of a going concern. The new entity has to take the liabilities of the existing proprietorship even of sundry creditors against purchase and expenses as well as all the sales tax dues or other government dues arising during normal course of business of the proprietor.

Honestly, I myself was never aware of this provision. When I was scouting for a sick unit for a foreigner from one of these State Financial Corporations, they gave me an entire formula of how to go about getting the entire property within 5 years. Foreigners usually do not like such deals of staying connected for 5 years and the entire suggestion was thrown away and I also discarded whatever plain paper printouts were available for such transactions otherwise I would have scanned it and uploaded it. My memory had got triggered because I read the reference of 40% by the writer Shamita and I did recollect few people actually acquiring and running such sick industries. However, they will have problem in valuations when they wish to buy out the partners in total with these new provisions effective 1/10/09

If Proprietorship concern is taken over by pvt ltd company than in what manner transfer should be affected so that CG is not leviable.