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Conversion of partnership firm as company

If a partnership firm is converted into a limited company, should all the assets and liabilities be transferred to the company so as to be eligible for exemption under Sec. 47(xiii) of the Act. If certain assets and

/ or liabilities are retained by the firm, and the remaining assets or liabilities are transferred to the company, will the firm lose the benefit under Sec. 47?

Sec. 47(xiii) provides for exemption for capital gains tax on transfer of capital assets from the firm to the company subject to the conditions listed in the proviso. But the threshold condition is that, the transfer should have arisen as a result of succession of the firm by a company.

Succession ordinarily means, that the business passes as going concern. It, however, does not mean that all the assets of the firm should be transferred, because it is possible, that succession of the firm is in respect of business alone and where there is more than one business in respect of any one of the businesses.

Where some assets or some liabilities of business are not taken over, there is scope for disallowance of exemption under Sec. 47(xiii), unless it could be shown that the asset or liability left out does not form part and parcel of such business.

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