Conversion of Proprietorship into Partnership Firm

[ROHIT GOEL]

Dear Sirs,

One of our client intends to convert their existing Proprietorship firm into a partnership concern. Their existing balance sheet consists of Immovable properties, Computers and other office equipments. As per planned process of transfer, entire business will be transferred as such and assets will be contributed as Capital in the said firm at their book values.

As per Clause 4(c) of Schedule-2 of the CGST Act, 2017, in case a business is transferred as a going concern, the transfer of assets would not result in a supply. However, I do not think going concern is defined in the Act. Therefore, do you believe such transfer at book values of all assets would suffice the condition of going concern?

Further, I believe as per section 18(3) of the Act r.w. Form ITC-02, the ITC as of date of transfer could be transferred. Are there any restrictions to the same as to what nature of ITC could not be transferred?

Your guidance will be highly valued.

[Rajagopalan Ranganathan]

Sir,

Please refer to rule 41 of CGST rules, 2017 for the answers you require. The rule is reproduced below:

41. Transfer of credit on sale, merger, amalgamation, lease or transfer of a business. - (1) A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02 electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee :

Provided that in the case of de-merger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the de-merger scheme.

[Explanation. - For the purpose of this sub-rule, it is hereby clarified that the “value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.]

(2) The transferor shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

(3) The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the unutilized credit specified in FORM GST ITC-02* shall be credited to his electronic credit ledger.

(4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

[DR.MARIAPPAN GOVINDARAJAN]

Your view on your both points is correct.

[KASTURI SETHI]

The following case law is worth reading.

2018 (13) G.S.T.L. 221 (A.A.R. - GST) = 2018 (5) TMI 1651 - AUTHORITY FOR ADVANCE RULING - KARNATAKA IN RE : RAJASHRI FOODS PVT. LTD.

[KASTURI SETHI]

2019 (22) G.S.T.L. 293 (A.A.R. - GST) = 2019 (2) TMI 1080 - AUTHORITY FOR ADVANCE RULING, HARYANAIN RE : B.M. INDUSTRIES

AI Summary

Going concern transfer of a business can avoid supply classification while enabling transfer of unutilized GST credit under prescribed procedures. Conversion of a proprietorship into a partnership transferred as a going concern is not a supply under Schedule II clause 4(c) if the transaction constitutes a functioning business transfer. Rule 41 requires FORM GST ITC-02 to be filed for transfer of unutilized ITC, a CA/cost accountant certificate confirming provision for liabilities, and transferee acceptance on the portal for credit to be credited; transferred inputs and capital goods must be recorded by the transferee and de-merger apportionment follows asset value.