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Company to LLP: what the company is charged on when the clause fails
Part 2 of four. The defence that has actually succeeded on a non-compliant company to limited liability partnership conversion attacks the computation rather than the charge: where the undertaking vests at book value, book value is the full value of consideration for section 48, and where that figure equals cost the difference is nil. This Part sets out that reasoning and the step in it where the Department should attack, the three deeming provisions that defeat the nil result and the answer to them that no Bench has heard, a worked example with figures, the Revenue's unlitigated answers in section 50D and section 56(2)(x), the profit on stock in trade, self-generated goodwill, and what the limited liability partnership starts with.
In short
Where the assets of a private company vest in a limited liability partnership at book value, the Tribunal has held that book value is the full value of consideration for section 48 and cannot be displaced by market value, so that where that figure equals cost the difference is nil and the computation machinery is unworkable: ACIT v. Celerity Power LLP, ITA No. 3637/Mum/2015, 16 November 2018, followed in ISC Specialty Chemicals LLP v. ITO, ITA No. 457/Mum/2025, 28 May 2025. That result is narrower than it is usually reported to be. It holds only where the asset is carried at what was paid for it and no deeming provision reaches it. Section 50C on land or building, section 43CA on land or building held as stock and section 50 on a depreciable block each produce a real gain on the Department's reading, and section 43CA applies whether or not the clause is satisfied because stock in trade is outside the clause either way. Whether those three can operate at all where no consideration is attributable to the individual asset has never been decided. The Revenue has two further answers no Bench has ruled on, section 50D and section 56(2)(x), from whose exclusion list clause (xiiib) is absent.
The argument that has actually won is not that a conversion is no transfer. It is that the computation does not work.
Where the undertaking vests in the limited liability partnership at book value, the Tribunal has held that book value is the full value of consideration for section 48, so that where that figure equals cost the difference is nil and the machinery is unworkable. That reasoning is sound and it is narrower than it is usually reported to be. It holds for assets carried at what was paid for them and reached by no deeming provision. On the balance sheet of an operating company that is the exception rather than the rule.
This Part works through what the company is actually charged on: the book value reasoning and the step in it where the Department should attack, the three deeming provisions that defeat the nil result, the answer to them that no Bench has heard, a worked example with figures, the Revenue’s two unlitigated answers in sections 50D and 56(2)(x), stock in trade, goodwill, and what the limited liability partnership starts with. Part 1 deals with whether there is a transfer at all and whether section 47A(4) applies; Part 3 with the shareholder’s charge; Part 4 with what is lost and with procedure.
Key points
- The company’s gain is nil only where the assets vest at book value, that figure equals cost, and no deeming provision reaches the asset. On an operating company’s balance sheet that is the exception.
- Section 50C on land or building, section 43CA on land or building held as stock, and section 50 on a depreciable block each defeat the nil result on the Department’s reading. Section 43CA applies whether or not the clause is satisfied, because stock is outside the clause either way.
- Whether those three can operate at all where no consideration is attributable to the individual asset has never been decided, and it decides the case for most real estate and manufacturing companies.
- Tax written down value and book value are different numbers and diverge for ordinary reasons. Where they have diverged, section 50 computes a short term gain with no indexation and no section 54F against it.
- The Revenue has two answers no Bench has ruled on: section 50D, which deems fair market value where consideration is unascertainable, and section 56(2)(x), from whose exclusion list clause (xiiib) is absent.
- Stock in trade is outside the clause altogether and is taxed as business profit under section 28. For a trader, a manufacturer or a developer that is where most of the balance sheet sits.
- Self-generated goodwill is not protected by the absence of a cost. Section 55(2)(a) supplies a cost of nil, so the machinery works and the gain is the whole of any consideration identified. Recognising goodwill in the successor’s opening books creates a charge out of nothing.
- The successor’s own cost and holding period rest on provisions that are themselves keyed to clause (xiiib), so they are at risk on the same reasoning that defeats the exemption.
- The worked example in this Part sets the costs against the reason for converting, which is the recurring rate saving: about 25.168 per cent in a company plus tax on the dividend, against 34.944 per cent in a limited liability partnership with the partner’s share exempt under section 10(2A). Where profits are reinvested rather than distributed the comparison reverses.
The four parts of this article
- Part 1: is it a transfer, and does section 47A(4) apply
- Part 2: what the company is charged on (you are here)
- Part 3: the shareholder’s charge, and breach after a valid conversion
- Part 4: what is lost, procedure and the 2025 Act
The decisions referred to throughout. Four Tribunal decisions are directly in point, and they are the only authority there is: Aravali Polymers LLP v. JCIT, ITA No. 718/Kol/2014, 27 June 2014 (Kolkata); ACIT v. Celerity Power LLP, ITA No. 3637/Mum/2015, 16 November 2018, (2019) 174 ITD 433 (Mumbai); ISC Specialty Chemicals LLP v. ITO, ITA No. 457/Mum/2025, 28 May 2025 (Mumbai); and Padmaja Rajesh Harve v. ACIT, ITA No. 5343/Mum/2025, 22 January 2026 (Mumbai). A Delhi Bench decision on the turnover threshold, AVA Landmark LLP, ITA No. 7233/Del/2018, 23 August 2022, is taken in Part 1, which introduces all five. No High Court and no Supreme Court has decided the merits of section 47(xiiib) or section 47A(4), so every proposition in this series rests on Tribunal authority or on the text.
What the company is taxed on: book value as the full value of consideration
This is the argument that works, and it is worth understanding precisely why, because it is narrower than it is usually reported to be.
Celerity Power sets it out at paragraph 16, reproduced in ISC Specialty Chemicals. The starting point is that section 48 is not a separate machinery bolted onto section 45 but part of a single code, and that chargeability and computation go hand in hand. The Tribunal relied on Texspin for the proposition that sections 45 and 48 are to be read together as one package, and on CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 and Navin Jindal v. Asstt. CIT [2010] 320 ITR 708 for the principle that computation is an integral part of chargeability.
It then addressed what the consideration actually was:
Admittedly, the conversion of the assets and liabilities of the erstwhile company to the assessee LLP in the case before us took place as per the Limited Liability Partnership Act, 2008 at the ‘book value’ itself. Rather, as the entire undertaking of the erstwhile company got vested into the LLP, therefore, no separate cost other than the ‘book value’ was attributable to the individual assets and liabilities.
and why market value could not be substituted:
The expression “full value of consideration” used in Sec. 48 cannot be construed as the ‘market value’ of the asset on the date of transfer.
following Texspin and, in the Supreme Court, CIT v. George Henderson and Co. Ltd. [1967] 66 ITR 622 and CIT v. Gillanders Arbuthnot and Co. [1973] 87 ITR 407, which hold that the expression means the price bargained for by the parties and not the market value of the asset transferred.
The cost side is dealt with at paragraph 17. Where the capital assets become the property of the assessee by succession, section 49(1)(iii) deems the cost of acquisition to be the cost for which the previous owner acquired them, a rule set out at section 49, and the Tribunal fortified that with CIT v. Manjula J. Shah [2013] 355 ITR 474 on reading Explanation 1(i)(b) to section 2(42A) together with sections 48 and 49, and with CIT v. Delta Jute Mills [1986] 159 ITR 215 (Cal.) and CIT v. Budge Budge Amalgamated Mills Ltd. [1980] 122 ITR 561 (Cal.) on amalgamation, where the amalgamating company’s cost is taken as the cost for computing the gain.
There is a step in that reasoning worth exposing, because it is where the Department should attack. The consideration is the book value at which the undertaking vested. The cost is the previous owner’s cost under section 49(1)(iii). Those are two different measures, and they produce a nil difference only where the book value happens to equal the original cost. Where assets have been written up at any time, or where the written down value and the book value have diverged, the difference is not nil and there is a gain to compute. The decisions proceeded on findings that the figures matched; nothing in them makes that a rule.
Two further things about that cost side have to be said, because the analysis later in this Part cuts across it. The first is whose cost is in issue. Section 49(1)(iii) supplies a cost where the asset became the property of the assessee by succession, and the Tribunal reached for it in Celerity Power because the computation before it was being made on the limited liability partnership as the assessee. On the company’s own limb the cost is the company’s own cost of acquisition, which is simpler and produces the same answer wherever the books carry the asset at what was paid for it.
The second is more awkward, and it is the sharpest hole in the subject. Section 49(1)(iii)(e) is keyed to “such transfer as is referred to in clause (xiiib) of section 47”, so if the Revenue runs the argument that the sub-clause fails with the clause, which it is entitled to run and which open question 9 below sets out, the successor is left with no statutory cost provision at all. That does not help the Revenue. A charge with no cost provision is the true B.C. Srinivasa Setty case, and this is where the Tribunals’ use of that decision needs stating precisely. They invoked it for the proposition that computation is an integral part of chargeability, which is a legitimate use of it. They did not hold, and it is not authority for, the proposition that a nil arithmetical result is the same thing as an absent cost rule. Where a cost rule exists, whether section 49(1)(iii)(e), the company’s own cost, or the nil cost that section 55(2)(a) supplies for goodwill, Srinivasa Setty has nothing to say and the machinery works. That distinction matters again in the goodwill section below, where it cuts against the assessee.
Put the two together, on those findings, and the result is arithmetic:
as the difference between the transfer value and the cost of acquisition was Nil, therefore, while computing the ‘capital gains’ the machinery provision was rendered as unworkable.
Now the narrowing, which matters more than the holding. Every step of that reasoning depends on the assets having vested at book value and on no separate cost being attributable to individual assets. That was a finding of fact in Celerity, which the Tribunal recorded had “not been negated”. It was a finding of fact in ISC Specialty Chemicals, which simply followed. And it is the premise on which Aravali directed the Assessing Officer to take the take over value as the sale price and the books of the erstwhile company as the cost.
A conversion where the assets are revalued, where the partners’ capital accounts are credited with more than book value, or where a separate consideration is identified for a particular asset, is not this case. The gain is then the difference between that higher figure and the book cost, and it is chargeable. The proposition that a non-compliant conversion produces no tax is not a proposition of law; it is the consequence of a set of facts.
Three deeming provisions that defeat the nil result, and the answer to them
The computation reasoning assumes that the only figures in play are the ones in the books. For three classes of asset that is not so. Each of the three deems a figure by force of statute rather than by inference, which puts them on a different footing from section 50D, taken below. Each of them also has an answer, which has never been put to a Bench and is taken after the three are set out.
Land or building held as a capital asset: section 50C. Where the consideration for the transfer of a capital asset being land or building or both is less than the value adopted or assessable by the stamp valuation authority, that value is deemed to be the full value of consideration for section 48. Section 47 works by disapplying section 45 altogether, so where clause (xiiib) is satisfied nothing arises; where it fails, section 45 applies and section 50C applies with it. The only relief is the tolerance in the third proviso, which disapplies the deeming where the stamp duty value does not exceed one hundred and ten per cent of the consideration, and the reference to a Valuation Officer under section 50C(2), available where the assessee claims the stamp value exceeds fair market value and has not disputed that value in appeal or revision. On a book value conversion of a company owning appreciated real estate, the stamp duty value will exceed the book figure by a wide margin and there is a real gain.
Land or building held as stock in trade: section 43CA. Where an asset other than a capital asset, being land or building or both, is transferred for a consideration less than the stamp duty value, that value is deemed to be the full value of consideration, not for section 48 but for the purpose of computing the profits and gains from the transfer of the asset. The hundred and ten per cent tolerance is in the first proviso to section 43CA(1), and section 43CA(2) applies section 50C(2) and (3) so far as may be. This provision does not depend on clause (xiiib) failing. Stock in trade is outside the clause whether or not the conditions are met, as the section on stock below explains, so section 43CA operates on every conversion of a company holding land or building as stock, compliant or not. For a real estate company it is the single largest exposure on a conversion and it sits outside the capital gains analysis entirely.
Depreciable assets: section 50. Where a depreciable asset forming part of a block is transferred, the excess of the consideration, reduced by the expenditure incurred wholly and exclusively in connection with the transfer, over the written down value of the block at the beginning of the year plus additions during it is deemed to be a short term capital gain, and section 50(2) deals with the case where the block ceases to exist because all its assets have gone, which is what happens on a conversion. Section 50 modifies sections 48 and 49, so it operates only where section 45 is engaged, which is precisely the position when clause (xiiib) fails.
That last provision deserves emphasis, because it is the Revenue’s strongest answer on the company limb and it is not section 50D. Tax written down value under section 43(6) and book value are different numbers, and they diverge for ordinary reasons: book depreciation rates, additional depreciation under section 32, capital expenditure disallowed in one system and not the other, any revaluation. Where they have diverged, the premise that no separate cost is attributable to individual assets fails on the facts, the gain is computed block by block, and it is short term, with no indexation and no section 54F against it. The finding in Celerity Power that the figures matched was a finding about that company’s accounts, not a rule of law.
So the honest statement of the company’s position is narrower than the one usually taken from these decisions. Where the undertaking consists of assets whose book value equals their cost and no deeming provision reaches them, the gain is nil. Where it includes land or building, or a depreciable block whose tax and book figures differ, it is not.
The answer to all three, which no Bench has heard. Each of the three provisions operates on a consideration received or accruing for the particular asset. Section 50C compares the consideration for the transfer of that land or building with the stamp value of that land or building. Section 43CA does the same for that item of stock. Section 50 deducts the written down value of the block from the consideration for the assets of that block. The finding in Celerity Power is precisely that no separate consideration is attributable to the individual assets and liabilities, because what vested was an undertaking and not a collection of items. If that is right, there is no item figure for section 50C to compare, and it is at least arguable that there is no value adopted or assessable by the stamp valuation authority in respect of such transfer either, because there is no instrument and no transfer of that land presented for stamping. The same objection meets section 50, and on stock it meets section 43CA.
The Revenue has two replies. The word “assessable” was put into section 50C by the Finance (No. 2) Act, 2009 for exactly the transfer that is never presented for registration, which is an answer to the no-instrument point on its own terms. And an assessee who relies on the book value of the undertaking as the consideration cannot in the same breath deny that the same books supply a figure for each asset within it; the figures are in the schedule of fixed assets. The point is undecided, and it decides whether the article’s central reassurance holds at all for a company whose balance sheet is real estate and plant. It is the question an adviser should expect to meet on the company limb.
What it looks like in numbers
Take a company with share capital of Rs. 1,00,000, subscribed in 2010 by two individual shareholders at Rs. 50,000 each, and reserves of Rs. 8,00,00,000. Its books carry assets of Rs. 12,00,00,000, of which Rs. 2,00,00,000 is debtors and cash, and liabilities of Rs. 3,99,00,000, so its net worth is Rs. 8,01,00,000. Turnover last year was Rs. 18 crore, so clause (e) fails, and the book assets exceed five crore rupees, so clause (ea) fails as well. Section 47(xiiib) was never available. The assets and liabilities vest in the limited liability partnership at book value and nothing is revalued. The capital assets other than the block are carried at what was paid for them; the block is carried net of book depreciation, which has run slower than tax depreciation, so its book value is above its written down value. The partners’ capital accounts are credited with the net worth, Rs. 4,00,50,000 each.
| Asset in the books | Book value | The other figure | What is charged |
|---|---|---|---|
| Residual capital assets, at cost | Rs. 1,00,00,000 | cost Rs. 1,00,00,000 | Nil, on the Celerity Power reasoning |
| Land, held as a capital asset | Rs. 2,00,00,000 | cost Rs. 2,00,00,000, stamp duty value Rs. 9,00,00,000 | Section 50C: long term gain of Rs. 7,00,00,000 |
| Plant, one depreciable block | Rs. 3,00,00,000 | written down value Rs. 2,20,00,000 | Section 50: short term gain of Rs. 80,00,000 |
| Land held as stock in trade | Rs. 4,00,00,000 | stamp duty value Rs. 6,00,00,000 | Section 43CA: business profit of Rs. 2,00,00,000 |
Three warnings travel with that table before any arithmetic is done on it. All three deemed figures assume the Revenue wins the question set out in the previous section and listed below as open question 16, whether sections 50C, 43CA and 50 can operate at all where no consideration is attributable to the individual asset. There is no authority either way. On the assessee’s case the second, third and fourth rows read nil along with the first, and the company has no charge on the conversion at all; it still loses its minimum alternate tax credit, and the accumulated losses dealt with in Part 4, so even then the conversion is not free. The table also carries no line for section 56(2)(x) in the limited liability partnership’s hands, because no honest figure can be put on an untested charge. On the Department’s item by item approach the exposure there would be Rs. 7,00,00,000 on the land, which is the same appreciation it has already charged to the company under section 50C in the row above, against which the limited liability partnership would at least get a cost under section 49(4). It would not reach the stock, because “property” for section 56(2)(x) means a capital asset of the assessee and land taken in as stock in trade is not one. And the table shows gross charges. What is actually paid depends on the set offs, and they do not work the way they are usually assumed to.
The company carries brought forward business loss of Rs. 1,00,00,000, unabsorbed depreciation of Rs. 50,00,000 and minimum alternate tax credit of Rs. 40,00,000. The unabsorbed depreciation is not a loss the assessee can direct anywhere. Section 32(2) adds it to the current year’s depreciation allowance and deems it part of that allowance, so it is deducted in computing business income before any question of setting off against another head can arise. There is business income here, the section 43CA profit, so the Rs. 50,00,000 is absorbed in it and never reaches either capital gain, bringing that profit down to Rs. 1,50,00,000. The brought forward business loss then goes against the same business income under section 72(1)(i), reducing it to Rs. 50,00,000, and it cannot touch the capital gains at all. Both capital gains stand in full. The minimum alternate tax credit of Rs. 40,00,000 is extinguished by section 115JAA(7) and cannot be set against any of it.
So the company is charged on a long term gain of Rs. 7,00,00,000 at twelve and a half per cent, which is Rs. 87,50,000 of tax before surcharge and cess, and on income of Rs. 1,30,00,000 at its normal rate, being the short term gain of Rs. 80,00,000 and business income of Rs. 50,00,000. It loses the credit of Rs. 40,00,000 outright. Each shareholder is charged on Rs. 4,00,50,000 less the Rs. 50,000 subscribed in 2010, a long term gain of Rs. 4,00,00,000, at twelve and a half per cent, Rs. 50,00,000 of tax each and Rs. 1,00,00,000 between them, with section 54F available to them because they are individuals. Every step of that shareholder computation, the cost, the long term character, the rate and the confinement of section 54F to an individual or Hindu undivided family, is established in Part 3.
Four features of that arithmetic are worth dwelling on. The nil result holds for exactly one row of the table, and that row is the smallest number in it. The Rs. 1,50,00,000 of losses was absorbed here only because the conversion itself threw up business income; a company with no stock in trade, and so no section 43CA profit, has nothing for the allowance or the loss to be absorbed in and forfeits both while still paying on the two capital gains. The Rs. 7,00,00,000 charged on the land and the Rs. 2,00,00,000 charged on the stock are deemed figures that reach nobody: the books still carry those assets at what was paid for them, so the shareholders’ capital accounts are not larger by a rupee of either, and no provision gives the limited liability partnership a stepped up cost for them. That is not double taxation of one gain, which is a different problem taken in Part 1; it is tax on a gain nobody received. And the example credits the partners with the full net worth, when the company’s own tax on the conversion, well over a crore of rupees here, should have been provided for in the closing balance sheet before the accounts were drawn; that provision would have reduced the net worth credited and with it each shareholder’s gain.
Against all of that, the number the client is actually deciding on. The costs in this series are one time. The reason for converting is recurring, and the comparison belongs on the same page as the hazards. On the rates in the Finance Act, 2025, a domestic company that has opted into section 115BAA pays twenty two per cent plus a ten per cent surcharge and four per cent cess, an effective 25.168 per cent, and the shareholder then pays on the dividend at his own slab rate, so for a promoter on the top rate the combined burden on profits taken out is a little over half. A firm or limited liability partnership pays thirty per cent, with a twelve per cent surcharge above one crore rupees of total income and four per cent cess, an effective 34.944 per cent, and a partner’s share in the total income of the firm is exempt in his hands under section 10(2A), so nothing further is payable on taking the money out. On distributed profits the limited liability partnership is materially cheaper year after year, and that recurring saving is what the one time costs above are buying.
Three qualifications belong with the comparison. A limited liability partnership has no concessional rate regime to opt into, so 34.944 per cent is a floor and not a ceiling, and remuneration and interest to partners are deductible only within section 40(b) and only as the agreement authorises. Where the business reinvests rather than distributes, the comparison reverses: 25.168 per cent retained inside a company beats 34.944 per cent retained inside a limited liability partnership, and the conversion destroys value. And section 10(2A) exempts the partner’s share of the firm’s total income, not his remuneration or interest, which remain chargeable under section 28(v). The arithmetic of whether to convert is the present value of the recurring saving against the one time cost, computed on the client’s own distribution policy, and it should be done before any of the hazards in this series are reached. Those are the Finance Act, 2025 rates; for a tax year beginning on or after 1 April 2026 the rates are governed by the Finance Act, 2026 read with the Income-tax Act, 2025, and should be checked rather than assumed.
The Revenue’s two answers: section 50D and section 56(2)(x)
Neither of the decisions that found the machinery unworkable had to deal with the two provisions a Departmental Representative would now run first, and a treatment of the machinery argument that leaves them out is only giving half the case.
Section 50D. Where the consideration received or accruing as a result of a transfer is not ascertainable or cannot be determined, the fair market value of the asset on the date of transfer is deemed to be the full value of consideration. It was inserted by the Finance Act, 2012 with effect from 1 April 2013, and it was inserted precisely to close the gap that B.C. Srinivasa Setty opened. The Revenue’s submission writes itself: if the assessee’s case is that there is no ascertainable consideration for an undertaking that vests by operation of law, section 50D supplies one, and it supplies fair market value rather than book value. The provision has its own page at section 50D.
The answer, and it is a good one, is that section 50D operates only where consideration is unascertainable. That is not what Celerity Power and ISC Specialty Chemicals held. They held that the consideration is ascertainable and is the book value at which the undertaking vested, following George Henderson and Gillanders Arbuthnot that full value of consideration means the price bargained for and not market value. A provision that supplies a figure where none can be found does not displace a figure that has been found. No decision applying section 50D to a conversion under clause (xiiib) could be located, so the point is open, and it is the single most likely ground on which the computation defence will eventually be tested.
If a figure is in fact needed, how is it found? Nothing in the Act or the Rules answers that for a conversion, and the gap is itself an argument. Section 50D says only that the fair market value on the date of transfer is deemed to be the full value of consideration. It contains no prescribing power and refers to no rule, and no rule has been made for it, so fair market value would fall to be established on ordinary valuation evidence, with “fair market value” taking its general meaning in section 2(22B). Contrast the slump sale: section 50B(2)(ii) expressly says the fair market value is to be calculated “in the prescribed manner”, and rule 11UAE was made for it, fixing the higher of a net asset figure and a consideration figure as at the date of the slump sale. Parliament provided machinery for the closest analogue and provided none here, which supports the view that no valuation of the undertaking was contemplated on a clause (xiiib) conversion at all. No rule prescribing a manner for section 50D could be located, which is a statement about what could be found and not a statement that none exists.
The Revenue’s answer is that the silence proves nothing. Section 50D supplies a standard, not a method, and fair market value is proved on evidence in several places in the Act where no manner is prescribed, the fair market value as at 1 April 2001 substituted under section 55(2)(b) being the obvious example: no rule has ever quantified that, and it is established by valuation evidence every day. Machinery exists too. Section 55A lets the Assessing Officer refer the valuation of a capital asset to a Valuation Officer where he is of opinion that the value claimed is less than its fair market value, which answers the submission that there is no way of arriving at the figure.
Section 56(2)(x). This is the sharper threat, because it does not depend on defeating the computation argument at all; it accepts it. If the limited liability partnership has received property for a consideration less than its fair market value, the difference is its income under section 56(2)(x), and the nil gain at the company’s end is the Department’s evidence that it did.
The first proviso to section 56(2)(x) excludes transactions not regarded as transfer under sixteen clauses of section 47, being clauses (i), (iv), (v), (vi), (via), (viaa), (vib), (vic), (vica), (vicb), (vid), (vii), (viiac), (viiad), (viiae) and (viiaf). Clause (xiiib) is not among them. The provision is set out at section 56(2)(x). So even a fully compliant conversion is not expressly carved out of section 56(2)(x), and a non-compliant one certainly is not.
The assessee has three answers, and a fourth that is better than all of them. The first is that what vests is an undertaking as a whole, not “property” of a kind specified in section 56(2)(x), whose definition of property is a closed list of capital assets of the assessee, immovable property, shares and securities, jewellery and the like; a going concern passing by statutory vesting is not within it, although individual items of property within it may be. The second is that there is no “receipt without consideration or for inadequate consideration”, because the consideration is the partnership interest conferred on the shareholders, which is the whole scheme of the conversion. The third is that the clause is aimed at gratuitous transfers and cannot sensibly be applied to a statutory vesting in which the same persons own the same business before and after.
The fourth, and the best of them, is this. The clauses omitted from that list include not only clause (xiiib) but clause (xiii) and clause (xiv) as well, the whole family of reorganisation provisions. A list that leaves out all three is more plausibly a list built around different concerns than a considered decision to charge every conversion to tax under section 56(2)(x).
Against that, the Department will not charge “an undertaking”. It will charge item by item, which is how the clause is drafted: the immovable property at its stamp duty value, the shares and securities at the value prescribed by rule 11UA, and so on through the specified list. That makes the exposure concrete rather than theoretical, and it is not answered by saying that what vested was a going concern.
Three things temper it and one closes a limb of it. The clause is only partly prescribed: it takes the stamp duty value for immovable property and rule 11UA for shares and securities, and prescribes nothing for anything else, which is most of an undertaking. For immovable property it carries a tolerance in section 56(2)(x)(b)(B), under which the clause bites only where the excess of the stamp duty value over the consideration is more than the higher of fifty thousand rupees and ten per cent of the consideration; note that the tolerance is measured on the excess, and that the limb for a receipt without consideration, sub-item (A), carries no percentage tolerance at all but only a fifty thousand rupee floor on the stamp duty value. That tolerance answers the case of property bought recently and carried at close to its stamp value. It answers nothing where property has appreciated: on the figures in the worked example above the excess is three and a half times the consideration.
And where the clause does bite on a capital asset, the exposure is a timing cost rather than a permanent one, which is a point nowhere in the commentary. Section 49(4) provides that where any sum has been charged to tax under section 56(2)(vii), (viia) or (x), the cost of acquisition of that property is deemed to be the value which has been taken into account for the purposes of that clause. So a limited liability partnership charged on the difference gets a cost equal to the figure charged, and recovers it on a later transfer of the asset. The relief is confined to capital gains: section 49(4) supplies a cost of acquisition and does not supply actual cost under section 43(1) or feed the block under section 43(6), so a charge on a depreciable asset is not recovered through depreciation.
One limb of section 56(2)(x) can be closed outright, and it is the one clients ask about. The partners receive rights under section 42 of the Limited Liability Partnership Act. “Property” for this clause means, in the words of clause (d) of the Explanation to section 56(2)(vii) which clause (x) adopts, “the following capital asset of the assessee”, and then a closed list: immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art and bullion, extended by the Explanation to clause (x) to include a virtual digital asset. Two things follow. An interest in a partnership is not in the list. So whatever happens on the entity side, the shareholders are not exposed under section 56(2)(x) on the receipt of what they get. And the governing words “capital asset of the assessee” are a stronger answer on the entity side than any of the three above: stock in trade taken into the limited liability partnership’s books as stock is not a capital asset of the limited liability partnership, so the largest single item on a real estate company’s balance sheet is outside the clause altogether, however the undertaking point is decided.
None of this has been tested in this setting. It should be on the risk register of every conversion, compliant or not.
Does the machinery fail on the shares as well?
The computation argument has so far been run for the company limb only. Its logic applies with at least equal force to the share limb, and the article would be one sided if it did not say so.
If “full value of consideration” means the price bargained for and not the market value of what is given up, what exactly was bargained for the shares that were extinguished on conversion? The shareholder received rights under section 42 of the Limited Liability Partnership Act. No price was negotiated for the shares, no instrument records one, and nothing in the Act deems one for this transfer. On the reasoning of Celerity Power and Aravali, applied symmetrically, the shareholder’s computation should fail for the same reason the company’s did.
In Padmaja Rajesh Harve the point was not taken. Both sides proceeded on the footing that there was a chargeable gain and argued only about its character, so the Tribunal fixed the consideration at the credit of Rs. 8,28,41,514 without being asked where that figure came from as a matter of section 48. A later Bench, with the point properly argued, might find the figure harder to justify.
Against that, the Revenue has two strong replies. The first is section 50D again, and it is stronger here: if the consideration for the shares genuinely cannot be determined, fair market value is deemed to be it, which on these facts is likely to be the net worth represented by the reserves. The second is that the consideration is determinable and is the value of the partnership rights received, which in an ordinary conversion mirrors the capital and current account credits, so there is a figure and the machinery works.
The practical consequence is that the shareholder’s defence is not the mirror image of the company’s. It is available, it has never been run, and it carries the risk that succeeding on it invites section 50D and a fair market value figure that is worse than the credit actually taken.
Stock in trade, which the book value defence does not touch
Everything said so far about the company’s charge concerns capital assets. Section 45 charges gains on the transfer of a capital asset, and section 47(xiiib) exempts the transfer of “a capital asset or intangible asset”. Inventory is neither.
For a trading company, a manufacturer with substantial finished goods, or a real estate company holding land and work in progress as stock, whose position is taken further in the redevelopment developer series, that is not a technicality; it is where most of the balance sheet sits. The transfer of stock in trade to the limited liability partnership is a business transaction, and the profit on it falls under section 28 and is computed in the ordinary way. It is outside section 47(xiiib) altogether, so it is outside the clause whether or not the conditions are met, and the machinery reasoning in Celerity Power has nothing to say about it, because that reasoning is built on sections 45, 48 and 49.
Five points follow for the file. First, a conversion that transfers stock at book value is a transfer between entities under common control at cost, and the question is whether the Assessing Officer can substitute market value. Subject always to section 43CA where the stock is land or building or both, dealt with above, which supplies the substitution by statute and makes the question academic for a real estate company, the orthodox answer in the older authorities on dissolution and distribution is that he cannot simply substitute market value for a genuine transaction, but that line of cases was decided in different statutory conditions and cannot be assumed to survive untested.
Second, the profit is business income of the stub period, which matters more than it looks. It is the only income on a typical conversion against which the company’s brought forward business loss can be set off, under section 72(1)(i), and it is the income in which unabsorbed depreciation is absorbed under section 32(2) before any other head is reached. That is the point worked through in the example above, and it is why a company with no stock is worse off than one with stock on the same balance sheet total.
Third, the valuation question has two layers and only one of them is open. Where the stock is land or building or both, section 43CA supplies the substitution and there is nothing to argue. Where it is anything else, inventory has to be valued in accordance with section 145A, at the lower of cost and net realisable value, and the Assessing Officer’s power to go behind a transfer at book value rests on the general law rather than on any deeming provision. That is where the older authorities matter and where the point is genuinely undecided.
Fourth, the successor’s cost of the stock is nowhere provided for. Section 43C, which supplies a cost rule for assets acquired on an amalgamation or under a gift, will or partition and later sold as stock in trade, does not reach a conversion. So the limited liability partnership’s cost is simply the figure at which the stock was taken into its books, and where section 43CA has deemed a higher consideration at the company’s end, nothing makes that higher figure the successor’s cost. The same appreciation is then taxed twice, once as the company’s section 28 profit and again on the limited liability partnership’s own sale. There is no answer to that in the statute; the practical course is to take the stock in at the deemed figure and be ready to justify it.
Last, and most simply, the key points of any advice on a conversion should state the split between capital assets and stock, because the reassuring proposition that the company’s gain is usually nil is a proposition about capital assets only.
Goodwill and other intangibles
Clause (xiiib) exempts the transfer of “a capital asset or intangible asset”, so intangibles are squarely in issue when it fails, and they behave differently from everything else.
Self-generated goodwill has no cost. Section 55(2)(a) gives the cost of goodwill of a business or profession as the purchase price where it was bought, the previous owner’s purchase price in the section 49(1) cases, and “in any other case, shall be taken to be nil”. The Finance Act 2023 extended the same treatment to any other intangible asset or right with effect from assessment year 2024-25. There is a proviso to be read with the clause: where depreciation under section 32(1) was obtained on goodwill in any previous year preceding the previous year relevant to assessment year 2021-22, the depreciation so obtained is reduced from the purchase price, so a company that bought goodwill and wrote it down has a reduced cost and not the price it paid.
This is commonly put as the true B.C. Srinivasa Setty case, with the machinery argument at its strongest. That is wrong, and wrong in the Revenue’s favour. Section 55(2)(a) supplies a cost of nil, and a statutory nil cost is a cost: it is what makes the machinery workable, and Srinivasa Setty applied only because no cost provision existed at all. Once any consideration is identified, the gain on goodwill is the whole of it. The assessee’s answer is the narrower one, that the books record no consideration attributable to goodwill, and the Revenue’s route past it is section 50D, which is precisely the gap that provision was inserted to close. So the exposure on self-generated goodwill is not the smallest item in the undertaking; it is potentially the largest, and it is wholly unprotected by cost.
Recognition is the trap, because it hands the Revenue the figure it would otherwise have to establish. If goodwill or an intangible is recognised in the limited liability partnership’s opening books at a value, that value is consideration against a nil cost, the gain is the whole of it, and no resort to section 50D is needed. A conversion that takes the opportunity to put a number on the brand has created a charge out of nothing.
There is also no longer any reason to do it. The Finance Act 2021 took goodwill of a business or profession out of the definition of a block of assets in section 2(11) and out of the definition of intangible assets in Explanation 3 to section 32(1), with effect from 1 April 2021, so no depreciation is available on goodwill, purchased or self-generated. The usual commercial reason for recognising goodwill on a reorganisation has gone, while the tax cost of recognising it has not. And recognition of self-generated goodwill or other self generated assets is the specific trigger, under section 45(4) read with rule 8AB, for a charge when a partner later withdraws against the credit it produced.
What the limited liability partnership starts with
The successor’s opening position is dealt with in pieces across the statute and is worth consolidating, because a conversion creates a set of figures that will be argued about for years afterwards and nobody writes them down at the time.
| Class of asset | Cost in the limited liability partnership’s hands | Period of holding | Keyed to clause (xiiib)? |
|---|---|---|---|
| Depreciable block | No provision carries the written down value across. Explanation 2C does not apply, so the three competing answers set out in Part 4 are in play, subject to Explanation 3 to section 43(1) | Not relevant; depreciation is on the block | Yes, which is why it fails |
| Other capital assets | Section 49(1)(iii)(e): the previous owner’s cost. If that sub-clause fails with the clause, there is no cost provision, and the fallback is the book value at which the asset vested, on the symmetry argument taken in Part 4 | Explanation 1(i)(b) to section 2(42A): includes the previous owner’s period. If it fails with the clause, the period runs from conversion, which turns a long held asset short term in the successor’s hands | Yes, both are keyed to the clause (xiiib) transfer, so both are at risk |
| Stock in trade | No provision at all. The cost is the figure at which the stock was taken into the books. Section 43C does not reach a conversion, and where section 43CA has deemed a higher consideration at the company’s end nothing makes that figure the successor’s cost | Not relevant | No, and no provision either way |
| Goodwill and other intangibles | The value recognised in the opening books, if any; nil if none is recognised. No depreciation is available on goodwill from 1 April 2021 in any event | Not relevant | No |
| A capital asset charged to the limited liability partnership under section 56(2)(x) | Section 49(4): the value taken into account for that clause, for capital gains only and not as actual cost for depreciation | From the date of receipt | No |
| The partner’s own rights under section 42 of the Limited Liability Partnership Act | Section 49(2AAA): the cost of his shares immediately before conversion | Not expressly provided for | No. Keyed to the conversion rather than to the clause, which is a stronger position than section 49(1)(iii)(e) two rows above |
Two consequences follow for a non-compliant conversion. The successor is exposed on the asset side, because the provisions that would have given it a cost and a holding period are the conditioned ones, while the provision that protects the partner personally is not. And where the company has actually been charged on the transfer, there is no provision anywhere that turns the amount charged into the successor’s cost, a gap Part 4 returns to on the depreciable block. Section 49(4) does that only for a charge on the limited liability partnership itself under section 56(2)(x), and only for capital gains. That is a gap the assessee should press and the Department should expect to meet.
The open questions on the company’s computation
No court has decided the merits of section 47(xiiib) or section 47A(4), so nothing below is settled. What follows is the state of the argument on each point, with the Revenue’s case put as it would be run. The questions keep the numbering they carry across the whole article, so the sequence here is not consecutive, and the list is not closed.
3. Book value or market value as the full value of consideration? For the assessee: Texspin, George Henderson and Gillanders Arbuthnot, applied in Celerity Power and followed in ISC Specialty Chemicals, and Aravali’s holding that nothing in the Act deems a sale price. For the Revenue: section 50D supplies fair market value where consideration is unascertainable, and the premise collapses wherever the accounts do not vest at book value or where book value and original cost differ. Decided twice on book value findings of fact; the section 50D answer has never been put to a Bench.
4. Does section 56(2)(x) charge the limited liability partnership on the difference? For the Revenue: the first proviso excludes sixteen clauses of section 47 and clause (xiiib) is not one of them, and a nil gain at the company’s end is evidence that property passed for less than its fair market value. For the assessee: what vests is an undertaking rather than property of a specified kind, the consideration is the partnership interest conferred on the shareholders, and the clause is aimed at gratuitous transfers rather than at a statutory vesting in which the same people own the same business throughout. No authority either way, and the most serious unlitigated risk in the subject.
5. Does the machinery argument work on the share limb as well? For the assessee: no price was bargained for the extinguished shares, so on the same reasoning there is no full value of consideration. For the Revenue: the consideration is the value of the rights under section 42 of the Limited Liability Partnership Act, which is determinable, and if it is not then section 50D supplies fair market value, which is likely to be worse for the shareholder than the credit actually taken. Not argued in Padmaja, where both sides assumed a chargeable gain.
8. What is the limited liability partnership’s actual cost of depreciable assets when the clause fails? Explanation 2C does not apply, and the three competing answers are set out in Part 4. For the Revenue: section 43(1) applies in the ordinary way and Explanation 3 lets the Assessing Officer determine the actual cost, with the previous approval of the Joint Commissioner, where the main purpose of the transfer was a reduction of liability by claiming depreciation on an enhanced cost. For the assessee: the cost is the book value at which the assets vested, consistently with that figure being treated as the consideration on the company’s side, and where an amount has actually been charged to tax the value so charged must become the successor’s cost or the same appreciation is taxed twice. No authority either way.
9. What is the limited liability partnership’s cost and period of holding of non depreciable assets? For the assessee: section 49(1)(iii)(e) gives the previous owner’s cost and Explanation 1(i)(b) to section 2(42A) gives his holding period. For the Revenue: both are keyed to the clause (xiiib) transfer and, on the article’s own reasoning that conditioned provisions fail with the clause, should fail with it too, which would make the asset short term in the successor’s hands. The asymmetry usually relied on, that section 49(1)(iii)(e) is not expressly conditioned while Explanation 2C is, does not survive inspection: the sub-clause is keyed to “such transfer as is referred to in clause (xiiib) of section 47”, so on the text the Revenue has the better of it. Section 49(2AAA), which gives the partner the cost of his shares, is on stronger ground because it is keyed to the conversion rather than to the clause. The question has never been tested.
16. Do sections 50C, 43CA and 50 operate at all where no consideration is attributable to the individual asset? For the assessee: each provision needs a consideration for the particular asset in order to work, and the finding in Celerity Power is that no separate consideration is attributable to individual assets on a statutory vesting of an undertaking; on land there is also no instrument and arguably no value assessable by the stamp valuation authority in respect of such transfer. For the Revenue: the word “assessable” was inserted into section 50C for precisely the transfer that is never registered; an assessee relying on book value as the consideration cannot deny that the same books give a figure for each asset; and the three provisions are deeming provisions that operate by force of statute. No authority either way, and on a real estate or manufacturing balance sheet this question decides the case.
On a live file
At conversion. Vest the assets and liabilities at book value and record that this is what was done, because the computation defence depends on that fact and on nothing else. Do not credit partners’ capital accounts with more than the book figures, and make sure the capital contribution stated in the limited liability partnership agreement and in the registrar’s forms matches, because a higher figure on a public record destroys the defence before it is made. Identify and ring fence the accumulated profit standing in the company’s accounts at the date of conversion so that later payments can be traced to post conversion profits. Where any proceeding is pending, apply for the previous permission of the Assessing Officer under section 281 at least thirty days ahead, in Form I.T.N.S. 281, because without it the vesting is void as against a tax claim. Deal with any employee option pool before the conversion and not after, knowing that an exercise shortly beforehand makes that employee’s gain short term. And prepare, on the day, the reconciliation between the company’s audited closing balance sheet and the partners’ opening credits, because that document is the answer to the section 68 addition that will otherwise be made three years later. File the company’s return for the stub period, settle who verifies it under section 140, and keep the board and valuation papers. Be aware that a conversion structured to produce a nil gain is the kind of arrangement an officer may test under Chapter X-A, and that the answer is the commercial purpose of converting, which should be documented at the time rather than reconstructed later. The first answer, though, is the threshold: rule 10U(1)(a) takes an arrangement outside Chapter X-A where the tax benefit arising in the aggregate to all the parties in the relevant year does not exceed three crore rupees, and rule 10U(1)(d) and (2) confine the Chapter to tax benefits obtained on or after 1 April 2017 and exclude income from the transfer of investments made before that date. On most conversions the threshold ends the enquiry, and the Approving Panel machinery in section 144BA is never reached.
Two mitigations for the two charges should be settled at this stage rather than argued later. There is no provision stepping up the shareholder’s cost by an amount charged at the company’s level, so on a conversion at revalued figures the same appreciation is charged twice over with no relief anywhere; the answer is not to revalue, and the reason to say so is this one rather than the computation defence. And where a charge at the company’s level is expected, provide for that tax in the company’s closing balance sheet before the conversion, so that the reserves credited to the partners’ capital accounts are net of it. The provision has to be an actual liability in the company’s final accounts, which then passes to the limited liability partnership with everything else under clause (a) and section 58(4), and it reduces the net worth credited to the partners. So the figure has to be computed before the accounts are closed. It cannot be inserted afterwards, and a provision that turns out to be too low cannot be topped up later without a fresh credit somewhere. That is the only part of the double charge that can be removed by drafting.
Concordance for the provisions in this Part
| Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|
| Section 50C | Section 78 |
| Section 43CA | Section 53 |
| Section 50 | Section 74 |
| Section 50D | Section 80 |
| Section 56(2)(x) | Section 92(2)(m) |
| Section 49(1)(iii)(e) | Section 73(1), Table serial 1(f) |
| Section 49(2AAA) | Section 73(1), Table serial 5 |
| Explanation 2C to section 43(6) | Section 41(5) |
| Explanation 1(i)(b) to section 2(42A) | Section 2(101)(c)(B)(I) |
| Sixth proviso to section 32(1) | Section 33(5), clauses (a) to (c) |
| Section 48 | Section 72 |
| Section 49(4) | Section 73(1), Table serial 17 |
| Section 55(2)(a) | Section 90(3) |
Previous: Part 1: is it a transfer, and does section 47A(4) apply. Next: Part 3: the shareholder’s charge, and breach after a valid conversion.
This article is Part 2 of four on the conversion of a private company into a limited liability partnership where section 47(xiiib) is not satisfied. It states the position on the date shown above and is written for general guidance. It is not advice on any particular conversion. Every decision directly on section 47(xiiib) and section 47A(4) discussed here is a Tribunal decision, where the position can change. Figures and dates taken from the orders are noted where the orders themselves are inconsistent.
This note is general commentary on the law as at 27 October 2026 and is not advice on any matter. The position in a particular case depends on its own facts.