Conversion of Proprietorship firm into Pvt. company

[PANKAJ GROVER]

In case, a Proprietorship firm registered under VAT at Delhi and Noida, gets itself converted into a Private Limited Company then what are the consequences of the same ? Also, is it attracts any liability on fixed assets and taxable goods ?

[YAGAY and SUN]

In this scenario, the principle of "On Going Concern" will be applicable. Hence, there would not any tax be applicable.

[Vivek Harsh]

Transactio not regarded as transfer

Sec 47(xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company :

Provided that—

       (a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

       (b) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and

       (c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

 

If above procedure is followed no liability under Income tax act

 

[DEV KUMAR KOTHARI]

There is transfer of business undertaking by which say  P proprietor  ceases to be proprietor and P P. ltd  succeeds the business on incorporation of company and becomes proprietor of busines undertaking.

There will be no sale of goods in ordinarly course of business of dealer P, ratter P Pltd will sell goods as dealer. Therefore, there should not be liability of VAT. However, exact applicable provisions need to be examined.

The modus operandi of succession of business of proprietary concern by company also need to be examined. 

AI Summary

Ongoing concern principle preserves tax continuity on conversion to private company if succession conditions and shareholding continuity are met.
Conversion of a sole proprietorship into a private company is treated as succession of business; under the ongoing concern principle it ordinarily does not create VAT liability and, for income-tax, may be a transaction not regarded as transfer if all assets and liabilities vest in the company, the transferor's shareholding meets required continuity thresholds and the transferor receives no consideration except shares.