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Carry forward of losses

prabhaaas (Company Secretary and Cost Accountant) (116 Points)

13 June 2015

A partnership firm was converted into a private limited company under Chapter XX1 – Part I of the Companies Act 2013 – Section 366 to Section 378 without any change in the constitution- seven partners continuing to be Directors of the new company.

I have the following queries

Is it possible to reduce the number of members later by share transfer ?

The Company had carried forward losses in its erstwhile constitution – Partnership firm and hence will any change in the constitution result in denial of carry forward losses to the Company so formed by conversion ?

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3 Replies

Pratiksha Dhaker (CA FINAL) (97 Points)
Replied 13 June 2015

In case of Private co. minimum no. of members should be Two. So it is possible to reduce the no. of member in company.

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Vishal Goel (Chartered Accountant) (1688 Points)
Replied 22 August 2015

Hello
Generally, the person incurring the loss is only entitled to carry forward the loss to be adjusted in subsequent year(s). However, in certain cases of reconstitution of the business like amalgamation, demerger, conversion of proprietary firm into company or conversion of partnership firm into company, etc., the reconstituted entity is entitled to carry forward the unadjusted loss of predecessor entity (provided that conditions specified in this regard are satisfied).

Vishal Goel (Chartered Accountant) (1688 Points)
Replied 22 August 2015

The following conditions must be satisfied:

All the assets and liabilities of the firm immediately before its succession should become the assets and liabilities of the company.
All the partners of the firm immediately before its succession becomes the shareholders of the company in the same proportion as their capital accounts stood before its succession.
The partners of the firm do not receive any consideration or benefits (whether direct or indirect) other than the shares allotted to them by the company.
The partner’s aggregate shareholding in the company is not less than 50 % of the total voting powers in the company and their shareholding should continue to remain so for a period of 5 years from the date of succession.

Where any condition s mentioned above are not complied within any subsequent years, the set- off of loss or allowance for depreciation made in any previous year in the hands of the successor company shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.