Tax is a wide term which covers many aspects within its ambit. Every assessee, be it a sole proprietor, company, firm or a LLP is required to pay tax under the Income tax Act. Tax not only creates burden for an assessee but sometimes proves to be beneficial for assesses. Various tax concessions and reliefs have been provided by the Government.

When any company or firm is being converted into any other form of business entity several tax benefits are being provided in that respect. Similarly, on conversion of a Partnership firm into a Company various tax benefits have been provided which can be availed by the transferor and the transferee company.

Conversion of Firm into Company – No capital Gain Tax

When a firm is being converted into a company and the firm transfers its capital assets (whether tangible or intangible) to the company, such transfers will not be charged to capital gains tax if the following conditions are satisfied:

• All the assets and liabilities of the firm immediately before its succession should become the assets and liabilities of the company.
• All the partners of the firm immediately before its succession becomes the shareholders of the company in the same proportion as their capital accounts stood before its succession.
• The partners of the firm do not receive any consideration or benefits (whether direct or indirect) other than the shares allotted to them by the company.
• The partner’s aggregate shareholding in the company is not less than 50 % of the total voting powers in the company and their shareholding should continue to remain so for a period of 5 years from the date of succession.

Carry forward & set-off of loss & unabsorbed depreciation in case of re-organization of business – If a firm is succeeded by a company fulfilling the conditions mentioned above, then the accumulated losses and unabsorbed depreciation of the predecessor firm shall be allowed to carry forward and set- off by the successor company.

Where any condition s mentioned above are not complied within any subsequent years, the set- off of loss or allowance for depreciation made in any previous year in the hands of the successor company shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.