conversion of partnership firm into a private limited company

[AJIT Tiwary]

Dear Expert,

one of my client is going to conversion/takeover to/by a private limited company. firm make its valuation, my concern is that whether we allot the equity share at par or at a premium. as discuss with some one, one said that we need to take valuation of firm firstly and issue the share at premium and other said there is no need to take valuation of firm and equity share will be allotted on net asset basis. i need suggestion on that whether we issue equity share at par i.e net asset basis or at premium

further, if i allot the share at premium whether capital gain will be arises or not? and if i issue the share at premium then share premium will be reflected in reserve and surplus but what will be treatment in assets side.

pls suggest

[Charu Tyagi]

Conversion of partnership firm into company

1. Issue of shares - share can be issue at premium and such premium amount will become part of reserves.

2. Value of shares - On the net assets basis

3. Treatment of transfer as Capital Gain ? - Section 47(xiii) of the Income Tax Act, provides certain condition by which conversion of partnership firm into company does not amount to transfer and therefore no "CAPITAL GAIN"
Conditions -

a) All of the assets & liabilities transfer to company.

b) All of the partners become shareholders in the proportion of their capital standing on the date of succession.

c) Consideration to partners - only allotment of shares of company.

d) Total voting power of the partners in company should not be lass than 50% during 5 years from the date of succession.
 

AI Summary

Conversion of partnership into company: shares can be issued at premium and tax neutrality follows if statutory conditions met. Shares issued on conversion may be at par or at a premium, with any premium credited to reserves; valuation is on a net asset basis. Conversion can be tax-neutral under Section 47(xiii) if all assets and liabilities transfer to the company, partners become shareholders proportionate to their capital, consideration is only shares, and partners retain requisite voting control for the continuity period.