Page 325 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes

Did u know? If any of the conditions laid down above are not complied with (say the sole
proprietor sells his share in two years instead of holding on to the shareholding for fi ve
years), the amount of profits or gains arising from the transfer of such capital assets or

intangible assets not charged earlier by virtue of these conditions, shall be deemed to be the

profits and gains chargeable to tax of the successor company for the previous year in which
the requirements are not complied with.
So therefore, if you are a sole proprietor who intends to convert his sole proprietorship into a
private limited company, and also allot shares to yourself, then it is imperative that an agreement
is entered into for such allotment and one of the conditions in the agreement should state that
your shareholding/voting rights will not fall below fifty per cent (50%) in the next fi ve years.

The sole proprietorship is a completely separate legal form from a company and the law does not
provide any process for conversion from one form to the other. Instead, what needs to be done
is:
1. Incorporate a new company. At the point of incorporating the company, you will indicate
that the company is going to take over the business of the sole proprietorship. You must
indicate the date of termination of the business (which can be post-dated up to 3 months).
2. You will need to transfer the business assets and any existing contracts over to the newly
incorporated private company from the old entity.

3. The final step is to terminate the sole proprietorship and inform the Company Registrar
that you have ceased to carry on business as a sole proprietorship.
Self Assessment

Fill in the blanks:
1. All the assets and liabilities of the ……………… concern immediately before its succession
should become the assets and liabilities of the company.
2. Many entrepreneurs start their businesses as a sole proprietorship due to the ………..
compliance requirements.
3. Conversion of a sole proprietorship into a private limited company entails a …………….
within the meaning of the Income Tax Act, 1961.

4. There is a provision under section 47(xiv) of the Income Tax Act, which lays down certain
conditions for exemption from any ……………..

14.2 Conversion of Partnership Firm into Company

Where a firm is converted into a company and as a result of such conversion, the fi rm transfers

any capital asset (whether tangible or intangible) to the company, such transfer will not be
charged to capital gains tax if the following conditions are complied with:

(i) all the assets and liabilities of the firm immediately before its succession should become the
assets and liabilities of the company;
(ii) all the partners of the fi rm immediately before its succession become the shareholders of
the company in the same proportion in which their capital accounts stood before such
succession;

(iii) the partners of the firm do not receive any consideration or benefit (whether direct or

indirect) other than the shares allotted to them by the company;

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