Company to LLP: losses, MAT credit, recovery and the 2025 Act

The costs of converting that are quantifiable in advance are mostly not capital gains at all, and they are the ones left out of the conversion papers.

Accumulated business loss does not travel to the limited liability partnership, because section 72A(6A) is conditioned on compliance and section 78(2) bars it independently. The minimum alternate tax credit lapses whether or not the conditions are met. The written down value does not carry across. For a loss making company or one that has paid tax on book profit for years, those three are larger than any charge on the conversion itself.

This Part deals with them, with the one significant thing that does survive, and with how the demand actually arrives: the year of charge and limitation, the company’s last return, a notice issued to a company that has ceased to exist, who pays when the company has gone, the successor’s own first year, penalty, and the counterparts under the Income-tax Act, 2025. Part 1 deals with eligibility and the charge, Part 2 with the company’s computation, Part 3 with the shareholder and with breach after a valid conversion.

Key points

• Accumulated business loss does not carry over, and on that there is no argument. Whether unabsorbed depreciation travels independently under section 32(2) is an argument nobody has run.
• Brought forward business loss cannot be set off against a capital gain charged on the conversion, because section 72(1)(i) confines it to the profits and gains of a business. It can absorb the profit on stock in trade.
• The minimum alternate tax credit lapses outright under section 115JAA(7), with no condition attached. For a company that has paid on book profit for years that is often the largest single cost, and the answer is to create the gap and use the credit in a pre conversion year.
• Explanation 2C to section 43(6) does not carry the written down value across on a non-compliant conversion, and nothing else does. The sixth proviso to section 32(1) does survive, because it covers a succession under section 170 as well.
• The section 80-IA deduction can survive, because the bar in section 80-IA(12A) is confined to amalgamation and demerger. It is not free: the conversion swaps minimum alternate tax at fifteen per cent for alternate minimum tax at eighteen and a half, with no threshold for a limited liability partnership.
• Section 149 was substituted with effect from 1 September 2024 and most commentary still states the superseded scheme. The limits are now three years and three months, extending to five years and three months on the fifty lakh rupee threshold.
• A notice to a company that has ceased to exist is a nullity and section 292B does not cure it, but Mahagun Realtors is a serious answer where the Department was never told of the conversion, so the objection has to be taken in the first reply and in writing.
• Section 270AA was recast with effect from 1 March 2026. Immunity is now available even in a misreporting case on payment of an additional hundred per cent in lieu of the penalty, the only absolute bar being proceedings under Chapter XXII.

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
• Part 3: the shareholder’s charge, and breach after a valid conversion
• Part 4: what is lost, procedure and the 2025 Act (you are here)

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.

Accumulated losses: the carry forward that does not happen

Section 72A(6A) is the provision that allows the losses of the predecessor company to become the losses of the successor limited liability partnership. Celerity Power sets it out in full, including its proviso:

(6A) Where there has been reorganisation of business whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly:

Provided that if any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in which such conditions are not complied with.

The sub-section is conditioned on compliance in its own opening words. It applies where the company “is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47”. Where those conditions are not fulfilled, the sub-section never operates.

And the position is worse than the mere absence of an enabling provision, which is how it is usually put. Section 78(2) affirmatively bars it: where a person carrying on a business has been succeeded in that capacity by another otherwise than by inheritance, nothing in the Chapter entitles any person other than the one who incurred the loss to carry it forward and set it off against his income. A conversion is a succession otherwise than by inheritance. So the limited liability partnership is met by a prohibition, not by a gap, and the argument that the absence of section 72A(6A) leaves the general provisions intact has to get past section 78(2) first.

That is not the end of it, and two answers should be recorded because the first is this series’ own. First, section 78(2) sits in Chapter VI and governs the carry forward and set off of loss. Unabsorbed depreciation does not travel under Chapter VI at all: section 32(2) is in Chapter IV and works by adding the unabsorbed allowance to the following year’s allowance and deeming it part of it. On that reading section 78(2) is no answer to the section 32(2) argument taken below, and the two points do not collide. Second, section 72A(6A) carries a non obstante clause, placed mid-sentence rather than at the opening, overriding anything contained in any other provision of the Act; it operates only where the clause (xiiib) conditions are fulfilled, so it gives a failed conversion nothing, but its presence shows that Parliament legislated specifically for this succession rather than leaving it to section 78(2), which tells against reading section 78(2) as the provision that governs it. The prohibition stands as to accumulated business loss. It does not dispose of the rest.

In Celerity Power the amount at stake was Rs. 5,79,93,084. The assessee argued that it did not need section 72A(6A) at all, because section 58(4) of the Limited Liability Partnership Act contains a non obstante clause vesting all property, assets, interests, rights, privileges, liabilities and obligations of the company in the limited liability partnership without further assurance, and the right to carry forward losses was among them. The Tribunal rejected it:

sub-section (4) of Sec. 58 of the Limited Liability Partnership Act, 2008 is only in context of the tangible and intangible property, interests, rights etc., and has nothing to do with the ‘carry forward’ of losses, which is the creature of a specific statute in the form of the Income-tax Act, 1961. We are of the considered view that Sec. 72A(6A) which entitles a LLP to ‘carry forward’ the losses of the erstwhile private limited company, is in clear and loud terms preconditioned by a statutory requirement that the assessee should have complied with the conditions of the proviso to clause (xiiib) of section 47.

and fortified that from the Memorandum explaining the Finance Act, 2010, which proposed “to allow carry forward and set-off of business loss and unabsorbed depreciation to the successor LLP which fulfils the above mentioned conditions”. The cross objection was dismissed and the Commissioner (Appeals), who had declined the carry forward, was upheld.

Two consequences, both of which should be quantified before a conversion rather than discovered after one.

The first is that the company’s accumulated business loss does not travel to the limited liability partnership on a non-compliant conversion. It does not transfer, there is no other provision that moves it, and on that much there is no argument. Unabsorbed depreciation is usually said to go the same way, but it stands on a different footing and is taken separately below. For a company carrying substantial losses this is frequently a larger number than any capital gains exposure.

The second concerns the proviso, which has not been judicially considered, and is taken after three distinctions the section is usually read past.

First, unabsorbed depreciation is not the same thing as business loss. Section 32(2) provides that an unabsorbed allowance is added to the depreciation allowance of the following year and deemed to be part of it, indefinitely, subject only to sections 72(2) and 73(3); it makes no reference to section 72A at all. So there is an argument, never run so far as can be traced, that unabsorbed depreciation travels with the block under section 32(2) and Explanation 2C rather than under section 72A(6A), and does not need the clause (xiiib) conditions at all. Celerity Power dealt with the claim as one under section 72A(6A), which is how it was argued.

Second, section 72A(6A) covers accumulated business loss and unabsorbed depreciation and nothing else. Capital loss under section 74, speculation loss under section 73 and loss under the head house property are outside it altogether, so they do not travel to the limited liability partnership even on a fully compliant conversion. That is a sharper point than the one usually made, and it is certain.

Third, the company’s own losses remain available in the company’s own final assessment, but not without limit, and the limit is where the planning point lies. Brought forward business loss may be set off under section 72(1)(i) only against the profits and gains of a business, so it cannot absorb a capital gain charged on the conversion at all; what it can absorb is the section 28 profit on stock in trade, which is business income. A current year business loss can be set off against the capital gain, under section 71(2). And unabsorbed depreciation, which section 32(2) adds to and deems part of the following year’s allowance, is available against income under any head, capital gains included. So a loss making company facing a large section 50 or section 50C gain gets relief against that gain only to the extent of its current year business loss and its unabsorbed depreciation; the brought forward business loss, usually the larger figure, cannot touch it. Saying the losses are “lost” still overstates the position, but what survives is considerably narrower than it looks, and the arithmetic should be done before the conversion rather than after.

The proviso, then. It operates on route two: where the conditions were met, the losses did transfer, set off was taken, and a condition is then breached. The set off already made becomes the income of the limited liability partnership in the year of breach. Note what it deems: the set off made, not the loss carried forward. On its terms the claw back is of relief actually taken, so unutilised brought forward loss that has not been set off against anything appears to fall outside the deeming and merely ceases to be available. That reading is textual and has not been tested.

The minimum alternate tax credit, written off in silence

Section 115JAA(7) provides that where a private company or unlisted public company is converted into a limited liability partnership under the Limited Liability Partnership Act, 2008, the provisions of the section shall not apply to the successor limited liability partnership.

There is no condition attached. Unlike the carry forward of losses, which is available where section 47(xiiib) is complied with and denied where it is not, the minimum alternate tax credit does not survive conversion in any circumstances. A compliant conversion loses it. A non-compliant conversion loses it. The credit does not transfer and the limited liability partnership cannot use it, because the section that would have allowed the set off is disapplied to it altogether.

No decision on the provision could be located. That is not the same as saying the point is unarguable, and two arguments have simply never been run. The first is that section 115JAA(7) disapplies the section to the successor limited liability partnership and says nothing about the predecessor company’s own entitlement in its own final assessment, so there is a case for setting the credit off against the company’s liability for the conversion year, including against any gain charged on the conversion itself. The second is the section 58(4) vesting argument, which Celerity Power rejected for losses on the footing that carry forward is the creature of a specific statute, but which has never been tested on a tax credit. Neither argument is strong on the text. Both are worth taking where the credit is large, because nothing is lost by taking them.

For a company that has paid tax on book profit for several years while its normal computation produced little or nothing, the credit is often the largest single cost of converting, and it is invisible in the conversion documents. It also produces an uncomfortable asymmetry with the alternate minimum tax regime: a firm or limited liability partnership that pays alternate minimum tax under section 115JC earns credit under section 115JD, so the successor entity has a credit mechanism of its own going forward, but the predecessor company’s accumulated credit is extinguished on the way in.

One further point belongs here, because it is the mirror image. The article has been concerned with the credit, but the company also has a liability for its stub period, and section 115JB can bite on the book profit of that period. Where assets are written up on conversion and the surplus is routed through the statement of profit and loss, the company can find itself paying minimum alternate tax on the very revaluation that destroys its computation defence under section 45. That is an argument for not revaluing, and it is independent of the capital gains analysis.

The planning answer, where there is time, is to use the credit before converting rather than to convert and hope. That is incomplete as usually given, because using the credit requires the normal tax to exceed the tax on book profit, which for a company whose normal computation has been producing little is precisely what has not been happening. The step is to create the gap deliberately in a pre conversion year, by accelerating income or deferring a deduction, rather than to wait for it to appear. It is not available to a company that has already opted into section 115BAA, which cannot have minimum alternate tax credit to use. The Board’s own reasoning in a different context supports the approach: paragraph 5.2.1 of Circular No. 29/2019 of 2 October 2019, dealing with a company holding minimum alternate tax credit that wished to opt into section 115BAA, records the suggestion that such a company may use the credit against regular tax first and exercise the option afterwards, there being no time limit for exercising it. The same logic applies to a conversion that can wait.

Depreciation, written down value, and the gap that opens on failure

Explanation 2C to section 43(6) provides that where a private company or unlisted public company is succeeded by a limited liability partnership and the conditions in the proviso to clause (xiiib) of section 47 are satisfied, the actual cost of the block of assets in the case of the successor is the written down value of the block in the case of the predecessor on the date of conversion. The sixth proviso to section 32(1), the one beginning “Provided also that the aggregate deduction, in respect of depreciation”, caps the aggregate depreciation of predecessor and successor at what it would have been without the succession and apportions it between them “in the ratio of the number of days for which the assets were used by them”.

The two provisions do different jobs. Explanation 2C fixes the successor’s opening figure. The sixth proviso rations the year’s allowance between the two entities. And they are differently conditioned, which is where the gap opens.

Explanation 2C applies only where the conditions are satisfied. On a non-compliant conversion it does not apply, and nothing else carries the written down value across. What then is the limited liability partnership’s actual cost? Three answers are available and none has been decided.

The Department’s answer is that section 43(1) applies in the ordinary way and, since the assets were acquired for no monetary consideration, Explanation 3 to section 43(1) 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. That is a power to reduce, not a general rule, and it requires a finding of purpose.

The assessee’s first answer is that the cost is the book value at which the assets vested, consistently with the treatment of the same figure as the full value of consideration on the company’s side in Celerity Power and ISC Specialty Chemicals, which Part 2 works through. Symmetry supports it: if book value is the consideration received by the transferor, it is the cost incurred by the transferee.

The assessee’s second answer, where the gain has actually been charged, is stronger still. If an amount has been brought to tax as the company’s capital gain on the transfer, the value adopted for that purpose should become the successor’s cost, because otherwise the same appreciation is taxed once on transfer and then again through reduced depreciation. There is no provision that says so in terms, which is the difficulty, but the principle is orthodox.

The sixth proviso is on a different footing and probably survives. It applies to a succession referred to in clause (xiii), clause (xiiib) or clause (xiv) of section 47 “or section 170”. Section 170 applies to any succession to a business, compliant or not, so the apportionment by days of use continues to operate even where clause (xiiib) has failed. An Assessing Officer who allows the predecessor and successor a full year’s depreciation each, or who denies the successor any depreciation at all, is wrong either way.

One drafting warning for anyone citing that proviso: its ordinal has moved. It entered as the fourth proviso in 1996, was substituted in 1999, and was substituted again by section 8 of the Finance Act, 2010 to add clause (xiiib), which that amending section describes as “the fifth proviso”. It is the sixth today. Cite it by its opening words, not by its number.

What survives: section 80-IA and the smaller carry overs

Not everything is lost, and the most valuable survival has gone almost unreported.

Celerity Power was a power generation business claiming deduction under section 80-IA. The Assessing Officer declined the claim because Form 10CCB had not been filed with the return. The Commissioner (Appeals) admitted the audit report as additional evidence and allowed the claim on merits, holding that the benefit of section 80-IA attaches to the undertaking and not to its owner, so that as long as the identity of the undertaking remains, the deduction is available for the residual term to the successor entity. He relied on the Board’s letter F. No. 15/5/63 (A-1), issued in the context of section 84, the predecessor of section 80J and of the present section 80-IA. And he held that the embargo in section 80-IA(12A), which from 1 April 2007 restricted a successor’s entitlement, applies only to an amalgamated or demerged company “and not in a case where a private limited company was converted into a LLP”.

The Tribunal agreed with him on every limb and dismissed the revenue’s ground. It also held, following CIT v. Medicaps Ltd. (2010) 323 ITR 554 (MP), CIT v. Gujarat Oil and Allied Industries (1993) 201 ITR 325 (Guj) and CIT v. Jaideep Industries (1989) 180 ITR 81 (P&H), that the filing of an audit report is procedural and directory and may be filed at the appellate stage, and, following Smt. Prabhavati S. Shah v. CIT (1998) 231 ITR 1 (Bom), that the Commissioner (Appeals) was right to admit it under section 250(4) read with rule 46A(1)(b) and (c).

Two points of real value come out of that, and both need a limit stated with them.

The first is that the section 80-IA deduction need not be a casualty of conversion, because section 80-IA(12A) switches off sub-section (12) only for an enterprise or undertaking transferred in a scheme of amalgamation or demerger on or after 1 April 2007. But Celerity Power was a power generating undertaking, which falls under section 80-IA(4)(iv) and carries no condition about who owns it. An infrastructure facility under section 80-IA(4)(i) is different: sub-clause (a) requires the enterprise to be owned by a company registered in India or by a consortium of such companies, or by an authority, board, corporation or other body established under a Central or State Act. A limited liability partnership is none of those, so for an infrastructure facility the ownership condition defeats the successor whatever section 80-IA(12A) says. The proposition that the deduction survives is sound for clause (iv) undertakings and must not be generalised.

A third qualification takes back a good deal of the first, and the commentary never mentions it. A company claiming a section 80-IA deduction paid minimum alternate tax under section 115JB at fifteen per cent of book profit, that rate coming from the proviso for assessment years from 2020-21. A limited liability partnership claiming the same deduction is liable to alternate minimum tax under section 115JC at eighteen and a half per cent of adjusted total income, and the twenty lakh rupee floor in section 115JEE(2) is confined to an individual, a Hindu undivided family, an association of persons, a body of individuals and an artificial juridical person, so it does not protect a limited liability partnership at any level of income. The conversion therefore swaps a fifteen per cent charge for an eighteen and a half per cent one, forfeits the accumulated minimum alternate tax credit outright under section 115JAA(7), and starts earning credit afresh under section 115JD, carried forward not beyond the fifteenth year. Three things qualify that in turn. The bases differ, book profit against adjusted total income, so it is not a pure rate swap. Surcharge and cess ride on both. And the company could not have escaped the charge by opting into section 115BAA, because section 115BAA(2) denies Chapter VI-A deductions other than sections 80JJAA and 80M, so the section 80-IA claim and the concessional rate were never available together. The survival is real and valuable. It is not free.

Two further qualifications. The reasoning that the benefit attaches to the undertaking rather than its owner came from the Commissioner (Appeals), and the Tribunal agreed with it, but the revenue’s ground before the Tribunal assailed only the Form 10CCB point, so the proposition was adopted rather than contested. And the Department’s answer, when it is run, will be that sub-section (12) was the statutory bridge by which a successor inherited the deduction at all, that it was switched off for transfers from 1 April 2007, and that the 1963 Board letter under section 84 on which the Commissioner (Appeals) relied cannot survive that change.

The second point is that the failure to file Form 10CCB with the return is curable at the appellate stage, which is of general application well beyond conversions. It has to be read against the contrary line treating prescribed form and time conditions as mandatory, of which section 80AC is the strongest example.

Section 35DDA(4A), inserted by section 11 of the Finance Act, 2010 in the same package, carries the unamortised balance of voluntary retirement expenditure to the successor limited liability partnership where a company is succeeded by it in a business reorganisation. Like section 72A(6A) it is conditioned, so it fails with the clause; it is a small item but it belongs on the checklist. Unabsorbed capital expenditure on scientific research under section 35, unamortised preliminary expenses under section 35D and unamortised licence fees under section 35ABB raise the same question and are each conditioned or not on their own terms, so each has to be read rather than assumed. And a company that had opted into the concessional rate in section 115BAA loses that option on conversion for the obvious reason that there is no longer a company; whether the limited liability partnership is better or worse off on rates is the comparison that usually prompts the conversion in the first place.

Section 49(2AAA), inserted by section 20(b) of the same Finance Act, provides that where a capital asset is the rights of a partner referred to in section 42 of the Limited Liability Partnership Act, 2008 which became the property of the assessee on conversion, the cost of acquisition of the asset is the cost of acquisition to him of the shares in the predecessor company immediately before conversion. It is the companion of section 49(1)(iii)(e) and matters on a later disposal of the partner’s interest. Note the drafting history, because it is easy to get wrong: section 20(a) of the Finance Act, 2010 did not insert sub-clause (e) of section 49(1)(iii); it substituted words so as to bring clause (xiiib) within an existing sub-clause (e), which is original to the 1961 Act and was already being amended in 1967.

One compliance obligation survives with the section 80-IA claim and is routinely dropped in the first year of the new entity. A limited liability partnership continuing that claim stays within section 92BA so far as its clauses keyed to section 80-IA are concerned: clause (iii) covers a transfer of goods or services referred to in section 80-IA(8), clause (iv) a business transaction referred to in section 80-IA(10), and clause (v) any transaction under another Chapter VI-A section or section 10AA to which those sub-sections apply. Note that clause (i), the domestic related party expenditure limb that older commentary still cites, was omitted with effect from 1 April 2017, and that the gateway is an aggregate value of specified domestic transactions exceeding twenty crore rupees in the previous year. Where the gateway is crossed, inter unit transfers have to be priced at arm’s length and the accountant’s report in Form No. 3CEB furnished under section 92E read with rule 10E, and that has to be set up in the limited liability partnership for its first part year. Separately, where a shareholder is a non resident associated enterprise, the extinguishment of its shares on the conversion is a transaction with an associated enterprise capable of being an international transaction, which the non resident discussion in Part 3 does not reach.

The year of charge, and how the demand actually arrives

On route one, where the clause was never available, the charge is in the year of conversion. On route two, where it was available and was later breached, section 47A(4) fixes it as “the previous year in which the requirements of the said proviso are not complied with”, which may be several years later. Getting this right is not a technicality: it decides which assessment is open, which limitation applies, and whether the Department is in time at all.

The practical significance is that this subject reaches most practitioners as a reassessment. A conversion is not a reportable event that announces itself; the Department finds it later, from the return of the limited liability partnership, from the annual information statement, from a scrutiny of the company’s last return, or from the registrar’s records. By the time a notice issues, the year of conversion is often several years behind.

That is the posture of both of the only High Court matters that touch this clause, and neither decided anything on its merits. In BHK Trading LLP v. ACIT, W.P. No. 9154 of 2023, the Madras High Court, C. Saravanan J., dismissed a writ on 17 November 2023, and the judgment’s own references are to section 47(xiv) rather than to clause (xiiib). It is therefore of no assistance on clause (xiiib) and is noted here only so that a search result is not mistaken for authority on it. In Hetal Mayurkumar Patel v. ACIT, R/Special Civil Application No. 5623 of 2022, the Gujarat High Court, Karia and Trivedi JJ., quashed a notice under section 148 on 17 June 2025 as a “mere change of opinion by referring to section 47(xiiib)(e)”. The assessee there was a shareholder rather than the limited liability partnership, which fits the two limb structure, and the challenge succeeded on reassessment principles with the merits untouched.

Two things follow for a file that is already under notice. First, the reassessment grounds are live and are often stronger than the merits: change of opinion where the conversion was disclosed and examined, the absence of information within the meaning of the post 2021 scheme, and the ordinary requirements of the section 148A procedure. Hetal Mayurkumar Patel is a Gujarat authority on precisely that footing and is worth having in front of the Assessing Officer early. Second, the identity of the assessee matters at the notice stage, because a notice to the limited liability partnership in respect of the company’s gain has to be justified through section 170, and a notice to the limited liability partnership in respect of the shareholder’s gain cannot be justified at all.

Two further consequences of a late charge are routinely larger than the tax. Interest under section 234B runs from the beginning of the assessment year on the shortfall in advance tax, and on a charge discovered five years later it can approach the tax itself; section 234C, subject to its proviso for capital gains, deals with the instalments. Interest under section 220(2) then runs on the demand. On route two there is a respectable argument that section 234B cannot run from the beginning of an assessment year in which the deeming event had not yet occurred, since the liability did not exist when the instalments fell due, but it has not been tested on these facts.

Limitation is worth working out early. Section 149 was substituted by Act No. 15 of 2024 with effect from 1 September 2024, and most commentary still states the superseded scheme. As it now stands, a notice is available within three years and three months from the end of the relevant assessment year in any case, and beyond that, up to five years and three months, only where the Assessing Officer has in his possession books of account or other documents or evidence related to any asset or expenditure or transaction or entries which show that the income chargeable to tax which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more. Two changes matter on these files. The ten year outer limit of the earlier scheme has gone. And the threshold is no longer confined to escaped income represented in the form of an asset or of expenditure in relation to an event or occasion; the evidence may relate to any asset, expenditure, transaction or entries, which is wider and easier for the Department to satisfy on a conversion. The section has been recast more than once and must be read as it stood on the date of the notice; it is worked through at section 149. Where the company level gain is nil on the book value reasoning taken in Part 2, there may be no escaped income at the company’s end at all, which is an answer to a late notice on that limb even if the shareholder’s limb is a different matter.

The company’s last return, and a notice issued to a company that no longer exists

The procedural questions arrive before the substantive ones and are easy to get wrong.

Before the mechanics, one point that is scattered through this series and is better gathered. The stub period is a previous year in its own right. It is not a part year for any purpose that matters: the rates, the surcharge thresholds and the audit thresholds all apply to it on its own figures with no proportionate relief, the company and the limited liability partnership are both assessed for the same assessment year, which is what the sixth proviso apportionment discussed above is about, and the company’s advance tax instalments and the section 234C proviso for capital gains have to be worked on the stub figures. And where the stub period straddles 23 July 2024, transactions in it fall on either side of the new capital gains regime, so the company’s earlier disposals and the conversion itself may be computed differently; the date of conversion fixes the regime for the conversion itself, for both the company’s charge and the shareholders’.

There is also a provision that is routinely missed and that can undo the whole transaction. Where an assessee creates a charge on or parts with possession of any asset during the pendency of any proceeding under the Act, or after its completion but before the service of notice under rule 2 of the Second Schedule, that charge or transfer is void as against any claim in respect of tax or any other sum payable by the assessee. That is section 281, and a conversion is the clearest case of parting with possession of every asset at once: the vesting is for no monetary consideration and the company has notice of its own pending proceedings, so neither limb of the exception, adequate consideration without notice, is available. The safe course is an application for the previous permission of the Assessing Officer, for which the Board prescribed a procedure in Circular No. 4/2011 dated 19 July 2011, using Form I.T.N.S. 281 and filed at least thirty days before the proposed transaction. The gateway in section 281(2) is low: the section applies where the tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets transferred exceed ten thousand rupees in value.

A return has to be filed for that stub period. It is verified under section 140, which raises the practical question of who signs for an entity that has ceased to exist; in practice it is signed by a person who was a director immediately before conversion, and the designated partners of the limited liability partnership take over the correspondence. On the return mechanics that sit alongside section 170 see section 170A and the modified return. The permanent account number of the company is surrendered, and three consequences follow that cost real money if they are not dealt with at the conversion rather than afterwards. Advance tax and self assessment tax paid under the company’s number cannot be moved to the limited liability partnership’s, and can only be claimed in the company’s stub period return, so a stub return that is never filed forfeits that credit outright. Credit for tax deducted at source against the company’s number after the conversion is claimed by the limited liability partnership under section 199(3) read with rule 37BA(2), which requires the deductee to file a declaration with the deductor and the deductor to report the deduction in the other person’s name in its statement, so every significant deductor has to be written to at the conversion; a correction statement filed two years later is a much harder thing to obtain. And a refund due to the company is paid against the company’s number, which no longer operates, so the bank mandate has to be settled before the surrender.

The cross-reference to section 170A and the modified return is given above for completeness only. That route is not in fact available on a conversion, for the reason taken later in this section: “business reorganisation” for section 170A means amalgamation, demerger or merger.

Withholding needs its own attention and is routinely missed. The company’s tax deduction account number has to be dealt with and its returns for the stub period filed; the limited liability partnership inherits liability for the company’s pre conversion defaults through section 58(4) of the Limited Liability Partnership Act and section 170; certificates under section 197 issued to the company lapse with it; and credits for tax deducted will continue to appear against the company’s surrendered permanent account number in Form 26AS for some time, which has to be reconciled so that the credit is not lost between the two entities.

The point that matters most is jurisdictional. On conversion under section 58 of the Limited Liability Partnership Act the company ceases to exist. A notice issued to, or an assessment made in the name of, an entity that has ceased to exist is a nullity on the line of authority culminating in the Supreme Court’s decision on amalgamation in PCIT v. Maruti Suzuki India Ltd, Civil Appeal No. 5409 of 2019, decided on 25 July 2019, (2019) 416 ITR 613 (SC), which is worked through in assessment on a non-existent entity, and that defect is not curable under section 292B. The Department has three answers. The first is section 170(2), which allows the assessment to be made on the successor where the predecessor cannot be found, and the question then is whether a company dissolved on a conversion of which the Department had notice “cannot be found” within the meaning of the sub-section, or whether that phrase is addressed to a different mischief. The second is PCIT v. Mahagun Realtors (P) Ltd, (2022) 443 ITR 194 (SC), where the Supreme Court distinguished Maruti Suzuki and sustained an assessment in the amalgamating company’s name because the amalgamation had not been brought to the officer’s notice and the entity had conducted itself as subsisting. That is a serious answer on a conversion the Department was never told of, and the assessee’s reply is that a conversion is a matter of public record on the registrar’s file and that the surrender of the permanent account number is itself notice.

The third answer is one the Department will reach for and which on the better view does not work. Section 170(2A), inserted by section 54 of the Finance Act, 2022 with effect from 1 April 2022, deems an assessment, reassessment or other proceeding made or initiated on the predecessor during the pendency of a succession to have been made or initiated on the successor. The assessee’s answer is in the sub-section’s own Explanation, which defines pendency as the period from the date of filing of the application for the succession before the High Court or tribunal, or the date of admission of an application for corporate insolvency resolution by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016, to the date of the order. A conversion under section 56 or section 57 of the Limited Liability Partnership Act involves no such application, so there is no pendency, and nothing for the sub-section to operate on. The definition of business reorganisation in the Explanation to section 170A, confined to amalgamation, demerger or merger, points the same way, although it is expressed to apply for the purposes of that section and section 170(2A) does not use the expression at all, so it is corroborative rather than decisive.

The Revenue’s reading should not be waved away, because it is textual. Sub-section (2A) speaks of a predecessor and a successor in the language of section 170(1), which reaches any succession to a business by whatever means, and its Explanation defines only the window of pendency rather than the class of succession capable of being pending. On that reading the sub-section is general and the Explanation merely tells you when the window opens where a court or tribunal is involved. The better view is that section 170(2A) does not reach a conversion under the Limited Liability Partnership Act, but the point is undecided and should be argued rather than asserted. Where the Assessing Officer has issued the notice in the company’s name and quoted its surrendered permanent account number, the jurisdictional objection is still the first point to take, before the merits.

Who pays: recovery after the company has gone

If a demand is raised on the company limb, the company is not there to pay it, and the article would be incomplete if it stopped at the charge.

Four routes exist and they are cumulative rather than alternative. Section 170(3) provides that where a sum assessed on the predecessor cannot be recovered, the Assessing Officer records a finding to that effect and the successor becomes liable, with a right of recovery over against the predecessor. Section 179 makes the directors of a private company jointly and severally liable for tax that cannot be recovered from it, subject to the defence of no gross neglect, misfeasance or breach of duty; its operative words are keyed to non recovery and not to liquidation, so it reaches a converted company on the text. Section 167C does the same for the partners of a limited liability partnership, and its Explanation extends “tax due” to penalty, interest and any other sum; note that it reaches tax due from a limited liability partnership, so on the company limb it operates only at a second stage, once section 170(3) has made the sum payable by the limited liability partnership. And section 58(4) of the Limited Liability Partnership Act itself transfers the liabilities and obligations of the company to the limited liability partnership, which is the civil law route to the same destination.

Celerity Power read section 58(4) narrowly, as being about property, interests and rights and having nothing to do with the carry forward of losses. That reading cuts both ways: if the sub-section does not carry a tax attribute across, the Department will say it plainly does carry liabilities, which is what its words say.

Two practical points sit alongside the recovery routes. The appeal against an assessment on the company has to be filed, and it has to be filed in the company’s name by a person who was a director immediately before conversion, with the conversion documents annexed; filing it in the limited liability partnership’s own name invites an objection to maintainability and, worse, concedes the jurisdictional point discussed above. And the stay application belongs to whoever the demand has been raised on, so where section 170(3) has shifted it to the limited liability partnership, the limited liability partnership applies, on its own financial position and not the company’s. A demand against a company that no longer exists is in practice recovered by attaching the limited liability partnership’s bank account, so the stay has to be in place before that happens rather than after.

The limited liability partnership’s own first year

Two of the successor’s own obligations are fatal rather than inconvenient if they are missed, and both are settled by the limited liability partnership agreement rather than by anything in the conversion.

Remuneration and interest to partners are deductible only within section 40(b), and only where the payment is authorised by and in accordance with the terms of the partnership deed. Sub-clause (iii) of section 40(b) disallows remuneration or interest which is authorised by the deed but relates to a period before the date of the deed, for which the payment was not authorised, and an earlier deed cannot reach back before its own date either. So the limited liability partnership agreement has to authorise remuneration and interest with effect from the date of conversion, in terms, and it has to do so when it is executed. Interest above twelve per cent simple is disallowed in any event, and remuneration is capped by the book profit slabs, whose current figures should be taken from the Act rather than from commentary.

Section 184(2) then requires a certified copy of the instrument of partnership to accompany the return for the previous year relevant to the first assessment year in which assessment as a firm is claimed, and section 184(4) requires a certified copy of the revised instrument for any year in which the constitution or the shares change. The consequence of failure is in section 185: no deduction at all by way of interest, salary, bonus, commission or remuneration to a partner. Note that the relief in the proviso to section 28(v), under which a disallowed sum is not taxed in the partner’s hands, is keyed to a disallowance under section 40(b) and not to section 185, so it does not follow automatically from a section 185 disallowance; that asymmetry is worth avoiding rather than arguing about. Section 184(5) is a separate consequence where the failure attracts section 144. A limited liability partnership is a firm for these purposes, because section 2(23) says so.

Beyond that: the limited liability partnership’s own first return is for a part year, and its tax audit threshold is tested on that part year’s turnover.

Penalty, and the argument against it

A reader facing a notice will look for this before anything else in the article.

Section 270A charges fifty per cent of the tax payable on under reported income, and two hundred per cent where the under reporting is in consequence of misreporting within section 270A(9). The difference is the whole of the exposure, and the Department’s instinct on a conversion that was not reported at all is to allege misreporting.

The assessee has two answers. The first is section 270A(6)(a), which takes out of under reported income any amount for which the assessee offers an explanation that the Assessing Officer or the appellate authority is satisfied is bona fide, all material facts having been disclosed. A conversion that was disclosed in the accounts and in the registrar’s filings, with a considered position taken on clause (xiiib) supported by the Tribunal decisions discussed here, is the paradigm of a bona fide explanation, and that is before the separate argument that a position supported by the only authority in point cannot be misreporting. The second is section 270AA, and the rule about it that most commentary still states is no longer the law. Until recently immunity was unavailable where penalty proceedings had been initiated under section 270A(9), so a misreporting allegation shut the door. Sub-sections (1) to (3) of section 270AA were substituted, and a new sub-section (3A) inserted, by Act No. 4 of 2026 with effect from 1 March 2026, and that exclusion has gone. Sub-sections (4) to (6), which govern the order on the application and the bar on appeal once immunity is granted, were not touched. Under the substituted scheme immunity requires the tax and interest on the assessment to be paid within the period specified in the notice of demand and, where penalty has been levied or is leviable in the circumstances referred to in section 270A(9), the payment in addition of additional income-tax amounting to one hundred per cent of the amount of tax payable on the under reported income in lieu of such penalty, with no appeal filed against those orders and an application made within one month from the end of the month in which they are received. New sub-section (3A) provides that no immunity or waiver is to be granted where any proceedings have been initiated under Chapter XXII, which is now the only absolute bar. So the choice on a misreporting notice is no longer between appealing and nothing; it is between appealing and paying one hundred per cent rather than facing two hundred.

On route two there is a further and more fundamental argument: where the income arises only because a later deeming provision has operated, it is hard to say that the assessee under reported anything in the year of conversion, and the under reporting, if any, is of the breach year.

The Income-tax Act, 2025: section 70(1)(ze) and what moved

For a tax year beginning on or after 1 April 2026 the analysis runs through the new Act, and the architecture survives substantially intact, with changes of wording that matter and are taken at the end of this section.

The exemption is section 70(1)(ze). The conditions are renumbered (i) to (vii), so references to clauses (a) to (f) and (ea) have no counterpart in the new numbering and a submission that uses the old letters for a new year will not match the statute. The definitions that sat in the Explanation to clause (xiiib) are in section 70(2), Table serial number 8. The withdrawal provision is section 71(3).

Section 72A(6A) becomes section 116(10), and its proviso is promoted into a free standing sub-section, section 116(11). The substance is unchanged: the carry forward is conditioned on the section 70(1)(ze) conditions being fulfilled, and the set off already made is clawed back in the year of non compliance.

Section 115JAA(7) becomes section 206(1)(r), and here the drafting is narrower than it first appears. It disapplies clauses (m) to (p) of section 206(1) to the successor limited liability partnership, not the whole of section 206(1). Those are the clauses that carry the company’s minimum alternate tax credit. The effect is the same write off, expressed more precisely.

Explanation 2C to section 43(6) becomes section 41(5). The sixth proviso to section 32(1) becomes section 33(5), with clauses (a), (b) and (c), and it apportions “on pro rata basis based on number of days for which assets were used”. Section 49(1)(iii)(e) becomes section 73(1), Table serial number 1(f). The holding period rule in Explanation 1(i)(b) to section 2(42A) becomes section 2(101)(c)(B)(I), which includes the period for which the asset was held by “the previous owner referred to in section 73(1) (Table: Sl. No. 1)”. Sections 66(18)(d) and 66(37)(d) define “predecessor entity” and “successor entity” to include the section 70(1)(ze) conversion.

The addition is in section 73(1), Table serial number 5. It gives the cost of acquisition of the partner’s rights under section 42 of the Limited Liability Partnership Act as the cost of the shares immediately before conversion. That is the counterpart of section 49(2AAA), but the drafting is free standing rather than tucked into a sub-section. The substance of that rule is not new; what is new is where it sits.

Two differences in section 71(3) itself matter more than the renumbering, and both cut against arguments made in Part 1. It deems the amount chargeable “under the head ‘Capital gains’”, which removes the first of Aravali’s two reasons, the point that section 47A(4) deems profits and gains and not capital gains. And it drops the words “as the case may be”, which are the words doing the allocating work between the company side and the share side charges in the 1961 provision. A submission built on either point has no purchase on a tax year governed by the new Act. Note also that section 71(3) cross-refers to “section 70(ze)” where sections 41(5), 73 and 116 all say “section 70(1)(ze)”; quote the cross-reference as printed.

Two differences of expression are worth noting because they will be argued. Condition (iii), the counterpart of clause (c), drops the words “in any form or manner”, which in the 1961 clause widened the prohibition on consideration or benefit. Whether that narrows the condition or merely tidies it is open. And the new Act speaks of a “tax year” where the old speaks of a “previous year”, which matters for the year of charge language carried into section 71(3).

The open questions on losses, procedure and recovery

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.

7. Is an assessment void where the company has ceased to exist? For the assessee: the Maruti Suzuki line, and section 292B does not cure a nullity, nor does section 292BB, which cures defects in service and not the absence of a person to serve. For the Revenue: section 170(2) permits assessment on the successor where the predecessor cannot be found, and a dissolved company cannot be found; and Mahagun Realtors sustained an assessment in the amalgamating company’s name where the amalgamation had not been brought to the officer’s notice and the entity had conducted itself as subsisting, which is a real answer on a conversion the Department was never told of. The assessee’s reply is that a conversion is on the registrar’s public file and the surrender of the permanent account number is itself notice, so Mahagun Realtors is confined to concealment. Whether section 170(2) covers a company whose dissolution the Department knew of is undecided, and so is whether section 170(2A) reaches a conversion at all.

10. Is unutilised brought forward loss clawed back under the proviso to section 72A(6A), or only set off actually taken? For the assessee: the proviso deems “the set off of loss or allowance of depreciation made in any previous year” to be income, which presupposes a set off. For the Revenue: the purpose is to restore the position as if the carry forward had never been available. Textually the assessee is better placed, but purposive construction cuts the other way and the point is undecided.

11. Does unabsorbed depreciation travel under section 32(2) independently of section 72A(6A)? For the assessee: section 32(2) deems the unabsorbed allowance part of the following year’s allowance and refers to section 72A nowhere. For the Revenue: section 72A(6A) is the specific provision for a business reorganisation and the specific governs the general. Argued as a section 72A(6A) claim in Celerity Power and lost on that footing; the section 32(2) route was not run.

19. Does section 170(2A) reach a conversion? For the assessee: the Explanation defines pendency by reference to an application before a High Court or tribunal or an admission under the insolvency code, and a conversion under the Limited Liability Partnership Act involves neither. For the Revenue: the sub-section speaks of a predecessor and a successor in the language of section 170(1), which reaches any succession to a business, and the Explanation fixes the window rather than the class of succession. The better view favours the assessee, but the point is undecided.

20. Can interest under section 234B run from the start of an assessment year in which the deeming event had not occurred? For the assessee: on route two the liability did not exist when the instalments fell due, so there was no shortfall to charge interest on. For the Revenue: section 234B is mechanical, computes on the assessed tax of the year in which the income is deemed to arise, and contains no exception for a deeming provision. Untested on these facts.

On a live file

Where the conversion has already happened and nothing was reported. This is the commonest posture. Consider an updated return under section 139(8A), the time limit for which was raised to forty eight months from the end of the relevant assessment year with effect from 1 April 2025, weighed against the penalty position, since a voluntary correction is the strongest material for a bona fide explanation under section 270A(6)(a). Check the bars first, because on these facts they often close the window. An updated return cannot be a return of loss, cannot have the effect of decreasing the total tax liability determined on the earlier return, and cannot result in or increase a refund. It is barred for the year of a search under section 132, a requisition under section 132A or a survey under section 133A other than sub-section (2A), and for every earlier year. It is barred where an assessment, reassessment, recomputation or revision is pending or completed. And under a third proviso inserted with effect from 1 April 2025 it is barred where a show cause notice under section 148A was issued after thirty six months from the end of the relevant assessment year, unless an order under section 148A(3) holds it is not a fit case. Reconstruct the book value position from the accounts as they stood at conversion before anything else, because that evidence is what the defence rests on.

On a notice. Take the jurisdictional points first, and take them in the first reply and in writing. Do not file a return or a submission on the merits in the company’s name while the objection is outstanding, because the Department’s answer will be Mahagun Realtors and that answer is built on the assessee’s own conduct. If the notice is in the name of the company, it has ceased to exist and section 292B does not cure a nullity; if it is on the limited liability partnership for the company’s gain, it has to be justified through section 170; if it is on the limited liability partnership for the shareholders’ gain, it cannot be justified at all. Where it is under section 148, take the reassessment grounds next, including limitation and the fifty lakh rupee threshold in section 149, which the Department cannot cross where the company level escaped income is nil; Hetal Mayurkumar Patel is a Gujarat decision quashing such a notice as a change of opinion, though change of opinion presupposes a prior examination and does not help where the conversion was never looked at. Then establish which route the Assessing Officer is on and hold him to it, taking the Aravali and Celerity Power point on section 47A(4), while remembering that winning it relocates the charge to the conversion year rather than defeating it, which may not be what the client wants if that year is closed and the breach year is open. Run the computation argument with the accounts that prove vesting at book value, and run it in the form Part 2 sets out. Deal with section 50D and section 56(2)(x), both taken in Part 2, before the Department raises them. And check any penalty notice against section 270AA as substituted with effect from 1 March 2026, under which immunity is available even in a misreporting case on payment of an additional one hundred per cent in lieu of the penalty, the only absolute bar being prosecution under Chapter XXII.

Concordance

Income-tax Act, 1961	Income-tax Act, 2025
Section 47(xiiib), conditions (a) to (f) with (ea)	Section 70(1)(ze), conditions (i) to (vii); definitions in section 70(2), Table serial 8
Section 47A(4)	Section 71(3)
Section 72A(6A)	Section 116(10)
Proviso to section 72A(6A)	Section 116(11)
Section 115JAA(7)	Section 206(1)(r), disapplying clauses (m) to (p)
Explanation 2C to section 43(6)	Section 41(5)
Sixth proviso to section 32(1)	Section 33(5), clauses (a) to (c)
Section 49(1)(iii)(e)	Section 73(1), Table serial 1(f)
Section 49(2AAA)	Section 73(1), Table serial 5
Explanation 1(i)(b) to section 2(42A)	Section 2(101)(c)(B)(I)
Section 35DDA(4A)	Section 52, with section 52(7)(c)(iv)
Section 9B	Section 8
Section 45(4)	Section 67(10)
Section 50D	Section 80
Section 50C	Section 78
Section 43CA	Section 53
Section 50	Section 74
Section 55(2)(b)	Section 90(9)
Section 78(2)	Section 119(2)
Section 170A	Section 314
Section 2(22)(e)	Section 2(40)(e)
Section 234C	Section 425, with the capital gains proviso at section 425(4)
Section 56(2)(x)	Section 92(2)(m)
Section 46	Section 68
Section 80-IA	Section 138
Section 112	Section 197
Section 179	Section 323
Section 167C	Section 331
Section 270A	Section 439
Section 270AA	Section 440
Section 139(8A)	Section 263(6)
Section 32(2)	Section 33(11)
Section 2(47)	Section 2(109)
Section 45	Section 67
Section 170	Section 313
Section 54F	Section 86
Section 54EC	Section 85
Section 71	Section 109, with section 71(1) and 71(2) merged into section 109(1)
Section 72(1)(i)	Section 112(1)(i)
Section 115JB, the charge	Section 206(1)
Section 149	Section 282
Section 234B	Section 424
Section 220(2)	Section 411(3)
Section 50B	Section 77
Section 48	Section 72
Section 49(4)	Section 73(1), Table serial 17
Section 55(2)(a)	Section 90(3)
Sections 2(22)(a) and 2(22)(c)	Sections 2(40)(a) and 2(40)(c)
Sections 115JC, 115JD and 115JEE	Section 206(2), merged with the minimum alternate tax provisions in section 206

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Previous: Part 3: the shareholder’s charge, and breach after a valid conversion.

This article is Part 4 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.