Urgent!!!

In case of conversion of partnership into co. if u want to be away from capital gain tax of such transfer then u have to comply the provisions of section 47 of the income tax act...

please correct ur question

TRANSACTIONS NOT REGARDED AS TRANSFER.(There fore there will not be any capital gain if following conditions satisfied)

 (xiii) Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset or intangible asset to the company :

Provided that -   (a) All the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company;

(b) All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession;

(c) The partners of the firm do 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; and

(d)  The aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their share holding continues to be as such for a period of five years from the date of the succession;

Capital Gains u/s 45 on the immovable and movable properties and intangibles also being transferred.

However the above is applicable only if the properties are allienated and transferred and partners appropriate the capital gains. If the company is succeeding the entire business of the partnership firm, then as per Section 47, it will not be regarded as a transfer provided:-

1) All Assets and Liabilities of the firm become that of the company. Nothing should be allienated. Even the partners capital contribution or liabilities.

2) All the partners of the firm at time of succession should become shareholder of the company in same proportion as the firm.

3) The only consideration to be received by partners are shares in the company.

4) The shareholding of the partners collectively in the company should not be less than 51% of voting power and there is a lock in period of 5 years and under no circumstances should their voting power be diluted below 51% in these 5 years.

5) If the firm is member of stock exchange, SEBI approval is required for the corporatisation.

If at any time in 5 years the voting power of these partnersis diluted below 51% or any of them transfer their shares, the Capital Gains not charged to the firm on immovable or movable properties as Capital Gains u/s 45 at time of succession will be charged as gains in the Profit and Loss Account of the Succeding Company in the previous year when the dilution or transfer of the shares took place. Refer Setion 47A.

As far as Depreciable Assets are concerned, they are transferred @ wdv and depreciation continues as usual. No revaluation takes place. However for these buildings where you have depreciation (for eg. you take land from State Industrial Dev Corp and construct on it), the Capital Gain Calculated (that is not being charged to tax) at the time of succession will be based on Stamp Duty Value  at time of assignment of balance period of lease or if ownership property then conveyance or wdv whichever is more but your depreciation continues only on the wdv of structure  or building without any change as per the IT Act. For Companies Act you will have to calculate as applicable. The basic principle is the firm has to be succeeded as a going concern.

Agree....

Ya...simple1 to go through.

Only remember that Taxable Capital Gain has to be calculated in the hand of the firm but no tax is to be paid. However, on violation of condition COMPANY will be paying the tax on that amount at normal rates and not the rates for LTCG. The logic is they want the properties, especially the immovable ones to remain encumbered to the tax department. No point of going after the partners by the ITD without any property in their hands after firm ceases to exist. Same when proprietorship is converted to private limited.

Stamp duties are payable to state goverment on immovable properties (whether by conveyance of freehold or ownership property or assignment of remainder period of lease in case of leasehold properties like MIDC and GIDC etc.) and movable properties like shares and securities etc that are getting transferred on succession to the company. Get the valuation adjudicated before transfer and if necessary raise a dispute if valued excessively as this will be the basis on which income tax department is foregoing tax.

 What is the income tax effect if an agricultural land is converted into non-agricultural land?

 Agricultural land is not a capital asset (only if situated in rural area) even if not used for agricultural porpuse....................so converting does not matter........................correct me someone if I am wrong.

Converting it does not matter as you are converting the usage of the land .But once NA then you will be paying all Panchayat Dues for NA land and transfer will be capital after making NA.