Short Summary:
Ministry of Corporate Affairs allowed conversion of Partnership Firm into Company under Companies Act, 2013, for such conversion there is need to prepare a list of documents and required to file the same with ROC in forms like URC-1, INC-32, INC-33 and INC-34 etc. While conversion there is need to consider the implications of income Tax provisions also like Capital Gain. In below-mentioned article author attempt to cover up the provisions of Companies Act and capital gain implication while conversion from Partnership firm into Company.
Background:
Corporatization is the need of the hour. The entire world is gradually drifting towards one global market without any trade barriers between the countries. With the emergence of corporate work culture and promotional startup benefits, a great chunk of entrepreneurs are looking forward to corporatization. This step can be initiated in 2 ways as enumerated below:
1. Incorporation of a new corporate entity.
2. Conversion of existing entity (e.g. LLP/ Partnership Firm) into a Company.
The 2nd option of conversion of Partnership Firm into a corporate entity might be practical for the existing entities to switch over from one mode of business to another. The process of conversion is a step by step procedure, which is a technical process but if handled with expert knowledge may be time and cost saving, as well.
NO CAPITAL GAIN:
The Gujarat High Court (HC) had held in the taxpayer’s case that conversion of a firm into a company was not a transfer (even before section 47(xiii) was introduced) and would not be subject to capital gains tax.
Process for Conversion
Note: Foremost Condition for Conversion is “There should be 7 (seven) or more member in the partnership firm at the time of conversion”. However, MCA has reduced this limit to 2 (Two) under Companies Amendment Act, 2017. This amended provision still not applicable as on 30.04.2018
FIRST STEP:
Hold a meeting of the partners to take assent of the majority of its partners summoned for the purpose of registering the Partnership firm under Section 366 of the Companies Act, 2013. To authorize two or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the Partnership firm as a Company.
Partnership firm has to apply for Availability of the Name in RUN. One of the major advantages is that the business can be run under the same name as that of the partnership (subject to availability of name as per Name Availability guidelines of Companies Act) the words ‘limited’ or ‘private limited’ has to be added.
SECOND STEP:
On obtaining the approval of Name, file the following Form along with required documents with the Registrar of Companies within 20 days from the date of name approval.
List of Documents required filing with Roc:
E-form URC-1
Company required filing e-form URC- 1 along with all the below mentioned documents:
i. A list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them
ii. a list showing the particulars of persons proposed as the first directors of the company
iii. an affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under sub-section (1) of section 164 and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief
iv. a list containing the names and addresses of the partners of the firm
v. in case of a firm, deeds of partnership, bye-laws or other instrument constituting or regulating the company and duly verified in the manner provided in sub-rule (4) and in case the deed of partnership was revised at any time in the past, copies of the principal and all subsequent deeds including the latest deed, along with the certificate of the registration issued by Registrar of firms, in case the firm is registered
vi. a statement of assets and liabilities of the Limited Liability Partnership duly certified by a chartered accountant in practice which is made as on a date not earlier than thirty days of the filing of form no.URC-1
vii. a copy of latest income tax return of the Partnership Firm
viii. an undertaking that the proposed directors shall comply with the requirements of Indian Stamp Act, 1899 (2 of “1899)
ix. the written consent or No Objection Certificate from all the secured creditors of the applicant
x. written consent from the majority of Partners
xi. a statement specifying the following particulars:
o the nominal share capital of the company and the number of shares into which it is divided;
o the number of shares taken and the amount paid on each share;
o the name of the company, with the addition of the word “Limited” or “Private Limited” as the case may require, as the last word or words thereof;
E-form INC- 33 / INC-33 / INC-34
Company required to file e-form INC-32/ INC-33/ INC-34 along with URC-1 as a linked form with all the attachment as required in normal Incorporation of Company like:
xii. MOA & AOA
(Physical in case of more than 7 subscribers otherwise INC-33 and INC-34)
xiii. INC-9
xiv. DIR-2 etc.
Conclusion:
There are various ways of converting a firm to a company, viz; slump sale, itemized sale, admitting the company as a partner, dissolution thereof and on dissolution, business being taken over by the company etc.,
In view of the choices available. Conversion should be made in a manner appropriate to a particular situation and in a way which is most beneficial.
INCOME TAX- CAPITAL GAIN RULINGS ON CONVERSION:
In decision of the Bombay High Court in CIT v Texspin Engineering and Manufacturing Co. (2003) 263 ITR 345 (Bom) has held that such conversion of firm into company by following the route under Part-IX of the Companies Act, 1956, does not occasion capital gains, since there is no transfer involved in such a case. The High Court after considering the provisions of Companies Act, provisions of income tax relating to capital gains and relying on the ratio of Malbar Fisheries Company v CIT (1979) 120 ITR 49 (SC), CIT Vs. George Henderson & Co Ltd (1967) 66 ITR 622 (SC), CIT Vs. Gillanders Arbuthnot & Co (1973) 87 ITR 407 (SC), held that when a firm is registered as a company, as per the procedure prescribed under Part IX of the Companies Act, no capital gains arising to the firm. When a partnership firm is treated as a limited company, under Part IX of the Companies Act, the properties of the erstwhile firm vests in the limited company as they exist. There is no dissolution of the firm. Hence section 45 (1) of the Income Tax Act is not applicable. When shares of the Company are allotted to partners in consideration of capital standing in their accounts in the firm, there is no transfer of capital assets as contemplated under section 2(47)(iii) of the Income Tax Act (i.e. compulsory acquisition, thereof under any law), as partners are getting their own right to share Capital.
In Well Pack Packaging Vs. Dy. CIT (2003) 78 TTJ (Ahd.) 448, also the same view was taken that, corporatization of the firm under the part IX route did not attract liability to Capital Gains in the hands of the firm.
In Vali Pattabhiram Roa v Shri Ramanuja Ginnning & Rice Factory (P) Ltd. (1986) 60 Comp case 568 (AP), the Court has held that there is no transfer under general law if the constitution of the firm is changed to that of a company by registering it under Part IX of the Companies Act, as there shall be statutory vesting of title of all the properties of the firm in the newly incorporated company without any need for a separate conveyance.
QUICK QUESTION - CONVERSION
i. How to file the Conversion form in case of more than 7 partners in the Firm?
In case of more than 7 partners in the Firms at the time of conversion into Company then Company have to file Scan copy of Physically prepared MOA & AOA.
In above-mentioned situation, the company have to file
1. URC-1 and
2. INC-32. No need of INC-33 and INC 34 in the above-mentioned situations.
ii. Whether at the time of Conversion whether Latest Partnership deed shall be attached in the form URC-1?
As per Rules, at the time of Conversion partnership firm have to file “copies of the principal and all subsequent deeds including the latest deed” with the ROC in e-form URC-1
iii. Whether the certificate of registration issued by the Registrar of Firms is Mandatory?
Certificate is mandatory only in the case when the firm is registered with Registrar. In other cases, there is no need to attach certificate.
iv. Whether e-MOA & AOA can be filed in case of MOA & AOA is signed by a person at a place outside of India?
In case of incorporation of a company where any of the subscribers of the MOA/AOA is signing at a place outside India, MOA & AOA shall be filled with INC 32 in the respective format as specified in Table A to J in Schedule I without filing form INC 33 and INC 34. (Means Physical attachment of MOA & AOA in e-form INC 32)
v. How many DIN can be applied through SPICE Form?
Maximum 3 (Three) DIN can be applied through SPICE form.
If the applicant wants to incorporate Company with more than 3 Directors and more than 3 persons doesn’t have DIN. In such situation applicant have to incorporate Company with 3 Directors and have to appoint new directors later on after incorporation.
vi. Whether there is need to file any separate form for PAN & TAN?
No need to file any separate form. Details in relation to Area Code and other details shall be mention in the form INC-32 itself and PAN & TAN shall be generated with Certificate of Incorporation.
CAUTION TO BE TAKEN BY PROFESSIONALS
1. Obtain engagement letter from the subscriber: As per certification in e-form SPICE i.e. INC-32, a professional declares that he has been engaged for the purpose of certification Therefore it is advisable to obtain an engagement letter.
2. Verification of original records pertaining to registered office: As per certification in e-form Spice i.e. INC-32, a professional declares that he has verified all the particulars(including attachments) from original records.
3. Ensure all attachments are clear enough to read: As per certification in e-form Spice i.e. INC-32, a professional declares that all attachments are completely and legibly attached.
4. Ensure registered office of the company is functioning for the business purposes of the company: As per certification in e-form Spice i.e. INC-32, a professional declares that he has personally visited the registered office.
5. Take a declaration to the effect that all the original documents have been handed over after incorporation. Since as per section 7(4) copies all documents/information as originally filed should be preserved at the registered office of the company, therefore a professional should take a declaration while handing over the incorporation documents.
6. MCA Circular 10/2014: According to this circular ROC/RD in case of omission of material fact or submission of false/incomplete/ misleading information can after giving opportunity to explain refer the matter toe-governance division of MCA, which in turn may initiate proceedings under section 447 and/or ask the respective professional institute to take requisite disciplinary action.
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