10 December 2010
As we are know there are two methods of converting a Partnership firm into Pvt Limited company.
1) One is formation of Private Limited Company, which inturn acquires the partnership firm
2) Conversion of Partnership Firm as per provisions of Part IX, of the companies Act.
My question are
1) whether capital gain tax exempt in both the above cases or only in case 2
2) Whether minimum number of partners need to be 7 for converting partnership firm into private limited company under provisions of Part IX, of companies Act.
20 July 2024
Let's address your questions regarding the conversion of a partnership firm into a private limited company under different methods:
### 1. Capital Gains Tax Exemption
**a) Formation of Private Limited Company (Method 1):**
- **Capital Gains Tax (CGT) Exemption**: Under Section 47(xiii) of the Income Tax Act, 1961, capital gains arising from the transfer of capital assets by a partnership firm to a company in consideration of allotment of shares in that company are exempt from capital gains tax. - This exemption applies as long as the conditions specified under Section 47(xiii) are met, which generally include that all partners of the partnership firm become shareholders of the company in the same proportion as their partnership interests.
**b) Conversion under Part IX of the Companies Act (Method 2):**
- **Capital Gains Tax (CGT) Exemption**: Similarly, under Section 47(xiiib) of the Income Tax Act, capital gains arising from the transfer of capital assets by a firm to a company as a result of succession of the firm by the company are exempt from capital gains tax. - This exemption is applicable when a partnership firm is succeeded by a company and all assets and liabilities of the firm immediately before the succession become the assets and liabilities of the company.
**Conclusion on Capital Gains Tax Exemption:** - Both methods of converting a partnership firm into a private limited company (either by formation or under Part IX of the Companies Act) enjoy capital gains tax exemption under specific provisions of the Income Tax Act, 1961. - Therefore, capital gains tax exemption is available in both cases, not just under Method 2.
### 2. Minimum Number of Partners for Conversion under Part IX
Under the provisions of Part IX of the Companies Act, which deals with the registration of companies with charitable objects or objects not for profit, there is no requirement for a minimum number of partners to be 7 for converting a partnership firm into a private limited company.
**Part IX specifically pertains to:** - Companies formed for promoting commerce, art, science, religion, charity, or any other useful object, and not for profit. - Companies not distributing profits or declaring dividends to its members.
**Conversion Process under Part IX:** - This method allows for the partnership firm to be succeeded by the company, and all assets and liabilities are transferred to the company. This is typically done through an arrangement where the partnership firm ceases to exist, and the company continues with the same objectives and activities.
**Key Points:** - **Capital Gains Tax Exemption:** Available under both methods (Formation of Pvt Ltd Company and Conversion under Part IX). - **Minimum Number of Partners:** Not applicable under Part IX for converting into a private limited company.
For specific legal and tax advice tailored to your circumstances, it's recommended to consult with a qualified chartered accountant or legal advisor who can provide detailed guidance based on the latest provisions and regulations applicable to your case.
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