Conversion of sole proprietor into company

[RAJESH SANGHVI]

If a sole proprietor having its business as a builder desires to convert his business into a Pvt Ltd company. At what values should the closing stock of land be transfered to the company ? If it has to be tfd at market value, the will it amount to taxable business income for the sole proprietor. The sole proprietor will get more than 50% shares of the new company. Can the sole proprietor get salary from the company later.

[Rama Krishana]

To avail the benefit of exemption from capital gain on transfer in pursuance to conversion from sole proprietorship firm to company, you need to comply with the following conditions of section 47 of the Income Tax Act, 1961

(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;

AI Summary

Conversion exemption on sole proprietorship to company requires transfer of all business assets and share-only consideration.
To obtain capital gain exemption on succession of a sole proprietorship by a company, all business assets and liabilities immediately before succession must become the company's assets and liabilities; the proprietor must hold not less than fifty percent of total voting power and retain that shareholding for five years; and the proprietor must receive no consideration or benefit other than allotment of shares. The closing stock of land must be included among transferred assets to satisfy the conditions.