This deals with the definition of transfer under Capital Gains
The definition says that when a proprietorship concern is succeeded by a company it doesnot amount to transfer under the capital gain net and hence this transaction is not taxable.( If the three conditions in the act are satisfied)
Now let us suppose Mr A is owning a proprietorship concern, book value of the business is, say, 10 crores. Mr A is an honest and ethical person and is unwilling to swindle any justified amount of tax payable to the Government. He is interested to enhancing his NET WORTH by making this book entry, if you call it so.
He converts his proprietorship concern into a private limited company, Say A ltd...at a consideration of 50 crores all payable in equity shares of A Ltd.( to keep in line with the definition of Transfer under the Act). Now as a requirement he needs atleast another director, his wife with equity shares of say 5 Crores.
His indivisual net worth( considering he had nothing but the business) shall now become 45 Crores..In his individual B/S he shall show inv. in Shares of A ltd Rs 45 Crores, without any liability of tax...
Now, for the company, it has revalued and acquired the prop. firm and so net assets shall show a figure of 50 crores instead of 10 crores..
So, this book entry shall enhance the netwoth of Mr A by 4.5 times without much effort..I accept that the company maynot be allowed to charged depriciation at the revalued figures, but as I mentioned earlier he doesnot wanna swindle any legally payable account.
I am anxiously waiting for a break through to this... otherwise Banks beware before you believe on a networth statement..
CAclubindia
