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 :
(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