The following won’t be recognized as ‘transfer’, and hence, no capital gain to be arise on the same:
-Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership.
-Any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership as per Section 56/57 of the Limited Liability Partnership Act, 2008.
And for availing above such exemption, the following conditions need to be satisfied:
- Assets and Liabilities: All the concerned assets as well as liabilities of the company directly before the conversion become the assets and liabilities of such limited liability partnership.
- Shareholders/ Capital Contribution on conversion: a) All the shareholders of the company immediately before the conversion become the partners of the limited liability partnership. b) The capital contribution and profit-sharing ratio of the shareholders in the limited liability partnership will be at the same proportion as was their shareholding in the company on the date of conversion.
- No other benefits to shareholders: The shareholders of the company not to receive any consideration or benefit, directly or indirectly, in any form or manner, except as per shares in profit and capital contribution in the limited liability partnership.
- Profit Sharing Ratio post conversion: The aggregate of the profit-sharing ratio of the shareholders of the company in the limited liability partnership at any time has to be at least fifty per cent during the period of five years from the date of conversion.
- Turnover Limit: The total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does should not exceed sixty lakh rupees.
- Value of Assets: The total value of the assets as are given in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place should not exceed five crore rupees.
- Accumulated Profit: No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company for a time period of three years from the date of conversion.
Exemption shall be available only if the conversion satisfies all the below mentioned conditions –
- The above-mentioned exemptions is only in relation to capital assets and not any other assets like inventory.
- The limit on turnover is to restrict the tax benefit of this clause to smaller entities which will render a big section of companies willing to convert as ineligible.
- Size of assets is an additional factor to look after the eligibility of the company to claim benefit.
Where benefit is taken under section 47(xiiib) of Income Tax Act, during such conversion, and at later stage, there is non-compliance of condition regarding ‘Profit Sharing Ratio’ or ‘Accumulated Profit’, then the benefit that has been availed now will be charged to tax in the manner as given below –
- Capital Gains exempted of the predecessor company will become income of LLP by way of capital gain in the year in which non-compliance takes place, and
- Capital Gains exempted of the shareholder of the predecessor company on transfer of shares at the time of conversion shall become income by way of capital gain in the year in which non-compliance takes place.
Where any of the conditions specified above are not complied with, exemption from capital gains shall not be available. The conditions should be satisfied at the time of conversion. And also, one important thing to keep in mind is that MAT credit of the company is not allowed to be carried forward in the hands of LLP on conversion of company into LLP.