Company to LLP when section 47(xiiib) fails: is it even a transfer?

A private limited company converts into a limited liability partnership. Its turnover in one of the three preceding years was more than sixty lakh rupees, or the assets in its books were worth more than five crore rupees. On either count section 47(xiiib) was never available, and the conversion is a transfer.

What follows is not one tax question but two, and they land in different hands. The company has transferred its capital assets to the limited liability partnership. The shareholders have transferred their shares. Section 47(xiiib) exempted both; when it fails, both fall back into section 45.

This Part deals with the questions that come before any computation: what the clause actually exempts, why most conversions were outside it from the start, whether a conversion is a transfer at all, whether section 47A(4) can be invoked where no exemption was ever claimed, and in whose hands the company side gain falls. The computation itself is in Part 2, the shareholder’s charge and breach after a valid conversion in Part 3, and what is lost together with procedure and recovery in Part 4.

Key points

• Section 47(xiiib) exempts two transfers, the company’s transfer of its capital and intangible assets and the shareholder’s transfer of his shares. Both are lost together, and most writing on the subject stops at the first.
• There are seven conditions, lettered (a), (b), (c), (d), (e), (ea) and (f). Commentary that lists six has missed clause (ea), the five crore rupee asset ceiling inserted by the Finance Act, 2016.
• The turnover ceiling of sixty lakh rupees and the asset ceiling of five crore rupees mean that few private company conversions of any size qualified. Failure is the ordinary case.
• Where the clause was never available, section 47A(4) does not apply at all, on the better view and on two Tribunal decisions. It withdraws a benefit earlier availed and is not a test of eligibility in the year of claim, although a third decision applied it on exactly those facts without engaging the reasoning put to it.
• Winning that point relocates the charge to the year of conversion rather than defeating it, which may not be what the client wants if that year is closed and the breach year is open; the limitation consequences are in Part 4.
• The argument that a conversion is not a transfer at all has been run twice and lost twice. The defences that have actually succeeded attack the computation, which is Part 2.
• Two gateways in the Limited Liability Partnership Act come before any tax question: no security interest subsisting in the company’s assets when the application is made, and partners comprising all the shareholders and no one else.
• No High Court and no Supreme Court has decided the merits of section 47(xiiib) or section 47A(4). Every decision directly in point is a Tribunal decision, and none of them binds an officer anywhere.

The four parts of this article

• Part 1: is it a transfer, and does section 47A(4) apply (you are here)
• 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

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 below, and all five are introduced in this Part. 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.

Two transfers, not one: what section 47(xiiib) actually exempts

The clause is usually read as if it were about the company. It is not, or not only. Its opening words, set out in full in Aravali Polymers LLP v. JCIT, cover:

Any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 (6 of 2009).

Two limbs, joined by “or”. The first is the company parting with its assets. The second is the shareholder parting with his shares, his rights in the company being extinguished and replaced by rights in a partnership. They are separate transfers of separate assets by separate persons, and section 47(xiiib) exempts them on the same conditions. Both are transfers within section 2(47) once the clause fails.

The consequence of that structure is the single most important practical point in this subject. When the conditions fail, both exemptions fail together, and the two charges have to be worked out separately: the company’s gain on its assets, and each shareholder’s gain on his shares. The amounts are usually very different, because the cost bases are very different. The company’s assets carry their written down and book values; the shareholder’s shares carry whatever he subscribed at incorporation.

Section 47A(4), the withdrawal provision, keeps the same two limbs in view. It speaks of the profits or gains arising from the transfer of “such capital asset or intangible assets or share or shares” being deemed the income “of the successor limited liability partnership or the shareholder of the predecessor company, as the case may be”. The phrase “as the case may be” is doing real work: it allocates the company-side gain to one assessee and the share-side gain to another. It does not charge the same amount twice.

The seven conditions, and the one most commentary leaves out

The conditions sit in a proviso to the clause and are lettered, and each is taken condition by condition in the companion article on the section 47(xiiib) conditions themselves. As the provision stood when Aravali was decided, they ran from (a) to (f):

(a) All the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

(b) All the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

(c) The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

(d) The aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

(e) The total sales, turnover or gross receipts in the business of the company in any of the tree previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and

(f) No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period three years from the date of conversion.

The misprints are the Tribunal’s reproduction, not ours: “tree previous years” for “three previous years” in clause (e), and “a period three years” for “a period of three years” in clause (f).

That list is now incomplete, and this is where a good deal of published commentary goes wrong. Section 28(B)(II) of the Finance Act, 2016 inserted a further condition with effect from 1 April 2017, and it did so between (e) and (f) rather than at the end:

(ea) the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees; and

The same amendment moved the conjunction. Before 2016 the word “and” closed clause (e); it now closes clause (ea). So the current list is (a), (b), (c), (d), (e), (ea), (f): seven conditions, not six, and the letter of the asset ceiling is (ea), not (f). Anyone drafting a reply to a show cause notice, or reading a notice that cites “clause (f)” for an asset threshold, needs that lettering to be right.

Two further points of drafting are worth noticing because they decide cases. The opening words say “section 56 or section 57” of the Limited Liability Partnership Act, not “and”. And the Explanation to the clause does not define “private company” and “unlisted public company” by reference to the Companies Act; it assigns them the meanings in the Limited Liability Partnership Act, 2008.

It is also worth recording that clause (xiiib) was inserted by section 18 of the Finance Act, 2010 with effect from 1 April 2011, and that the same Finance Act built the entire surrounding machinery in one go. Section 19 inserted section 47A(4). Section 22(a) inserted section 72A(6A). Section 29 inserted section 115JAA(7). Section 13(b) inserted Explanation 2C to section 43(6). Section 8 brought clause (xiiib) into the depreciation apportionment proviso in section 32(1). Section 20(a) brought it into section 49(1)(iii)(e) and section 20(b) inserted section 49(2AAA). Section 11 inserted section 35DDA(4A). All of them take effect from 1 April 2011. When one limb of that package fails, the question is always what happens to the other eight.

Why failure is the ordinary case

Read the two ceilings together and the scope of the clause becomes clear. Turnover in any of the three preceding previous years must not exceed sixty lakh rupees. The value of the assets in the books, on the same three year test, must not exceed five crore rupees. Both are tested at the company’s level, before conversion, and both are breached by a single bad year anywhere in the look back period.

A company with sixty lakh rupees of turnover is not usually a company anyone spends money converting. The clause, as drafted, is available to the dormant, the newly formed and the very small. Every operating business of any size is outside it.

That is not a criticism of the policy; it is a statement about what the practitioner will actually meet. The question “have we complied with section 47(xiiib)” is, in most real conversions, answered before it is asked. The useful questions are the ones that follow: what is charged, on whom, in which year, and what is lost besides.

This also explains a pattern in the reported decisions, and it is a stark one. All four of the Tribunal decisions on the charge are cases where the company was never eligible. Aravali is sometimes read as a breach case because the Tribunal found clause (f) violated, but it held in terms that the conditions failed in the year of conversion itself, so the clause was never available. There is no decided case anywhere on a breach after a valid claim. Everything said about that route, here and in Parts 3 and 4, is reasoning from the text, and the reader should treat it as such.

Route one and route two: never eligible, or eligible then breached

The distinction runs through everything that follows, and conflating the two is the most common error in this area.

Route one, never eligible. One or more conditions is unsatisfied at the moment of conversion, typically clause (e) or clause (ea). The clause never applied. The transfer is a transfer, in the year of conversion, and the charge arises under section 45 in the ordinary way. Nothing is “withdrawn”, because nothing was ever given.

Route two, eligible then breached. The conditions were satisfied at conversion and the exemption was claimed and allowed. Later, within five years, the aggregate profit sharing ratio of the erstwhile shareholders falls below fifty per cent, breaching clause (d). Or within three years an amount is paid out of accumulated profits, breaching clause (f). Section 47A(4) then deems the gain that was not charged to be chargeable, in the previous year in which the condition was not complied with.

Three things differ between the routes. The year of charge: the year of conversion on route one, the year of breach on route two. The assessee: on route one the transferor of each asset, the company for its assets and the shareholder for his shares, while on route two section 47A(4) names “the successor limited liability partnership or the shareholder of the predecessor company, as the case may be”, which on its face moves the asset side charge from the company to the limited liability partnership. That difference is not cosmetic and nobody has litigated it. And the arguments: the no transfer argument and the machinery argument, the latter being the computation defence that Part 2 works through, live most naturally on route one, while on route two the dispute is about the trigger, although the quantum has to be worked out for the first time in the breach year, since on route two no amount was charged or computed at the time of conversion.

The reason the distinction matters so much in practice is that the Department routinely invokes section 47A(4) on route one facts. It is the provision with the word “withdrawal” in its heading, and an officer who has concluded that the conditions are not met reaches for it. The Tribunal has now said twice, clearly, that this is wrong.

Section 47A(4) does not apply when the clause was never available

Two decisions hold that it does not, and both should be introduced here, because the article returns to them throughout.

ACIT v. Celerity Power LLP, ITA No. 3637/Mum/2015 with Cross Objection No. 2/Mum/2016, is a Mumbai Bench of G.S. Pannu VP and Ravish Sood JM, order by Sood JM, heard on 6 September 2018 and pronounced on 16 November 2018. The revenue’s appeal was dismissed and the cross objections partly allowed. A note for anyone citing it: the cause title prints assessment year 2011-12, but the body of the order says 2010-11 at paragraph 1 and again at paragraph 20, and the section 143(3) order under appeal is dated 19 March 2014, so the body is the reliable guide.

Aravali Polymers LLP v. JCIT, ITA No. 718/Kol/2014, is a Kolkata Bench of Shamim Yahya AM and George Mathan JM, order by George Mathan JM, heard on 25 June 2014 and pronounced on 27 June 2014 for assessment year 2011-12. The appeal was partly allowed for statistical purposes. It came first in time and is dealt with first here.

Aravali Polymers Pvt. Ltd. converted into a limited liability partnership with effect from 12 August 2010. It held 31,84,807 shares of East India Hotels Ltd., which passed to the firm, and it carried reserves and surplus which the order gives as Rs. 3,06,65,298 in its findings and as Rs. 3,06,31,969 in its narration of the facts. The firm then sold East India Hotels shares for Rs. 53,56,69,888, paid capital gains tax on that sale, and was left with about Rs. 49.3 crore. It advanced Rs. 50 crore to its partners as interest free loans, in the same ratio as profit sharing. The order’s figures do not all reconcile, and anyone citing it should notice that: the quantity sold is given as 31,84,807 shares in one place and 3,00,000 in another, and the Rs. 50 crore of loans exceeds both the stated residue and, more to the point, the accumulated profit standing at the date of conversion. Nothing in the reasoning turns on the arithmetic, but the mismatch with the opening balance frozen at the date of conversion is worth reading against the clause (f) analysis in Part 3.

The Assessing Officer treated the loans as a payment out of accumulated profits, held clauses (c) and (f) breached, and invoked section 47A(4) to charge the gain on the East India Hotels shares.

On clause (c) the Tribunal held for the assessee, and the reasoning is useful well beyond its facts:

A reading of the said proviso (c) gives a meaning that both the Company and the Limited Liability Partnership must exist for the shareholders of the Company to receive any consideration. Admittedly, in the present case, the Company does not exist after conversion. Therefore, the question of a violation of Proviso (c) to Section 47(xiiib) does not exist.

Clause (c), on that reasoning, is spent at the moment of conversion. It can be breached by what is agreed and paid as part of the conversion itself, but not by anything the limited liability partnership does afterwards, because by then there are no longer shareholders of a company to receive anything. An assessment that charges a post conversion payment as a breach of clause (c) is charging under the wrong condition.

Two cautions before that is relied on. The finding was not necessary to the result, since the Tribunal went on to hold that the clause was never available at all and that the charge arose under section 45 regardless, so it is obiter and has never been tested. And the Revenue’s answer is a serious one: clause (c) identifies the persons by their status immediately before conversion, so reading it as spent allows the condition to be circumvented entirely by paying the day after conversion, and leaves the words “directly or indirectly, in any form or manner” with very little to do.

On clause (f) the Tribunal held against the assessee. The loans were interest free, were paid in profit sharing ratio, and came out of the reserves that had been the company’s accumulated profit, so “the amount has been given directly to the partners out of the balance of the accumulated profits standing in the accounts of the Company on the date of conversion”. Clause (f) was breached.

Then came the question that decides the point. Having found a breach, did section 47A(4) apply? The Tribunal said no, and gave two reasons.

The first is textual. Section 47A(4) deems the amount to be “the profits and gains chargeable to tax of the successor limited liability partnership”. As the Tribunal put it, “The words are not ‘be deemed to be capital gains chargeable’.” The deeming is of profits and gains, not of capital gains, which matters when the Department tries to use the sub-section as a computation provision. The point is double edged and should be used with care: if what is deemed is profits and gains and not capital gains, the Revenue can say with equal force that the computation constraints in section 48, on which the assessee’s whole machinery argument depends, do not govern the deemed amount at all.

The second is structural, and is the holding:

This meaning that the provisions of section 47(xiiib) were already available to the assessee and the proviso thereunder that to have been violated. In the present case, the assessment year under appeal is the year on which the conversion took place and in that year itself, the conditions prescribed for the benefit of section 47(xiiib) were not complied with and consequently the provisions of section 47(xiiib) were not available to the assessee, then where is the non-compliance of the proviso to section 47(xiiib) to attract 47A(4). It is in such circumstances that section 45 comes into play as section 47(xiiib) itself is not applicable to the assessee.

The crux, as the Tribunal summarised it at the end of the order, was that the assessee had not complied with the proviso, that the benefit of section 47(xiiib) was therefore not available, that “As the assessee did not have the benefit of section 47(xiiib), the provision of section 47A(4) does not apply”, and that the capital gains on the transfer of the assets “in the hands of M/s. Aravali Polymers Pvt. Ltd.” to the firm fell to be computed under section 45, for which purpose the issue was restored to the Assessing Officer.

Note what that does and does not decide. It identifies the company as the transferor of the assets, which is the first limb of the clause. It does not decide in whose hands the resulting gain is assessable: the appellant before the Tribunal was the limited liability partnership, the addition was not deleted, and the computation was restored to the Assessing Officer in the limited liability partnership’s own appeal. The authority on the hands question is Celerity Power, not Aravali. Note too the direction on computation, which is the second half of the Aravali holding:

In the computation of capital gains, nowhere in the Act is there provision, more so in section 45, for deeming the sale price in the case of equity shares. The value at which the shares or the assets of the Company Aravali Polymers Pvt. Ltd. was taken over by the Limited Liability Partnership firm, would be the sale price and the cost of acquisition thereof is to be as per books of the erstwhile Company.

So: no market value, no deeming, take over value as consideration, book cost as cost. The Assessing Officer was directed to take the sale consideration at the figure at which the assets had been taken over. The order prints that date as 12.10.2010 at this point, where the conversion date given three times elsewhere in the same order is 12.08.2010; the later date is an evident slip.

One drafting curiosity in Aravali worth knowing if the order is cited: the Tribunal’s own recital of the facts describes the conversion as having been effected “as per the provisions of sections 56 & 58 of the Companies Act, 2008”. There is no Companies Act, 2008, and section 47(xiiib) refers to section 56 or section 57 of the Limited Liability Partnership Act, 2008. The error is in the recital, not in the reasoning.

Is the conversion a transfer at all?

Before any of the computation questions arise, the assessee has a threshold argument: that a conversion under the Limited Liability Partnership Act is a statutory vesting, not a transfer, so section 45 is not engaged at all and section 47(xiiib) is simply irrelevant to a company that cannot meet its conditions.

The argument has a respectable foundation. Section 58(4) of the Limited Liability Partnership Act, 2008 provides that on conversion, and notwithstanding anything in any other law, all tangible and intangible property vested in the company, all assets, interests, rights, privileges, liabilities and obligations relating to the company, are transferred to and vest in the limited liability partnership without further assurance, act or deed. Nothing is conveyed. Nobody executes anything. The company simply ceases and the limited liability partnership stands in its place.

The leading authority relied on is CIT v. Texspin Engg. & Mfg. Works, a Division Bench of the Bombay High Court of Kapadia and Devadhar JJ, judgment delivered by Kapadia J on 5 March 2003, [2003] 263 ITR 345 (Bom), on the conversion of a firm into a company under Part IX of the Companies Act, 1956. The Court held that the vesting was statutory, that it was “not consequent or incidental to a transfer”, that there was no conveyance executable in favour of the limited company, and, on the computation side, that the expression “full value of the consideration” in section 48 does not mean the market value of the asset transferred.

The difficulty is that the Tribunal has twice declined to carry Texspin across to a company to limited liability partnership conversion. In Celerity Power the Bench concluded that conversion of a company into a limited liability partnership “is differently placed as in comparison to succession of a partnership firm by a company under Part IX of the Companies Act, 1956”, and said in terms that it was unable to subscribe to the contention that on conversion into the limited liability partnership no transfer of capital assets was involved. The cross objection raising the point was dismissed.

ISC Specialty Chemicals took the same course and went further, dealing squarely with the Limited Liability Partnership Act point. The assessee had relied heavily on decisions under that Act and on CIT v. Umicore Finance Luxemborg [2017] 244 Taxman 43 (Bombay), which was an appeal from a ruling of the Authority for Advance Rulings, and which it put as holding that despite non fulfilment of the conditions of section 47(xiii) the conversion of a firm into a company did not amount to a transfer at all, and on CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC) on distribution by a liquidator. That reading of Umicore is the assessee’s, not the ratio: Celerity Power records that the Authority for Advance Rulings in that matter expressly declined to express a final opinion on whether registration under Part IX involved a transfer of capital assets, and concluded only that no profit or gain arose. The Tribunal was unmoved:

No doubt, the LLP Act does not consider the conversion of a company into an LLP to be a transfer at the threshold. However, while considering such transactions under the Income Tax Act, one must take into account all relevant provisions as per Income Tax Act.

It then recorded, in terms, that it rejected the arguments raised against the view taken in Celerity Power.

The assessee’s answer to all this is the one the legislature itself gave. The Memorandum explaining the Finance Bill, 2010 proceeded on the footing that conversion of a company into a limited liability partnership had definite tax implications and that the transfer of assets on conversion attracted capital gains tax, which is why the exemption was thought necessary. ISC Specialty Chemicals set that reasoning out and adopted it: before clause (xiiib) was inserted, a transfer of a capital asset by a company to a limited liability partnership, or of shares by a shareholder on such a conversion, “was a transfer, to which provisions of section 45 regarding charging of capital gains tax were applicable”.

That is a complete answer on the law as it stands, and the honest position to take on a live file is this. The no transfer argument is available, it is not frivolous, and Texspin and Umicore support it by analogy. But it has been run twice before the Tribunal on precisely these facts and rejected both times, once after full argument. A defence built on it alone is a defence resting on persuading a Bench to depart from two coordinate decisions. The arguments that have actually succeeded are the ones that accept the transfer and attack the computation.

The inconsistency inside ISC Specialty Chemicals

ISC Specialty Chemicals LLP v. ITO, ITA No. 457/Mum/2025, is a Mumbai Bench of Beena Pillai JM and Girish Agrawal AM, order by Pillai JM, heard on 5 March 2025 and pronounced on 28 May 2025, for assessment year 2018-19. The addition in issue was Rs. 14,58,72,150 under section 45, and the breach was of clause (ea): the value of the assets in the erstwhile company’s books in the three preceding previous years exceeded five crore rupees. It is, in other words, a route one case, and the year under appeal was the year of conversion.

The assessee’s grounds 2 and 3 took the Aravali point directly, and took it by name. The written submission recorded in the order reads:

Section 47A applies to withdraw any exemption claimed u/s 47 of the Act. The same is clear from the title of the section. The same is also clear from section 47A(4) which states that amount of profits or gains not charged u/s 45 by virtue of conditions laid down in the said proviso. In the present, undisputedly, no benefit has been claimed u/s 47 by the company or LLP, therefore, this section would not have any application.

and added that the Mumbai Tribunal’s decision in Celerity Power, [2019] 174 ITD 433, was “in favour of the assessee (in para 14)”.

The Tribunal dismissed those grounds. Having set out section 47A in the order, it held:

It is thus clear that the assessee loses its benefit of exemption as per section 47A(4) of the Act, and the conversion would amount to a ‘transfer’, exigible to capital gains tax under the provisions of section 45.

and then, immediately afterwards:

The Ld.DR though relied on the decision of coordinate bench of this Tribunal, in case of ACIT vs. Celerity Power LLP (supra), is not of any assistance to the revenue based on the discussions mentioned above.

So the Bench applied section 47A(4) on facts where the exemption had never been claimed, which is what Aravali and Celerity Power both say cannot be done, and it did so without engaging the reasoning in Celerity Power paragraph 14 that the assessee had put before it by paragraph number. Earlier in the same order, at paragraph 4.5, it had said that the view in Celerity Power “aligns with the amended provisions of the Act” and that it rejected the arguments advanced against that view. One further oddity should be noted by anyone citing the order: the passage set out above attributes reliance on Celerity Power to the Departmental Representative, although it was the assessee who had cited it, and cited it in the assessee’s favour.

Then the order turns to computation, and follows Celerity to the letter. It reproduces Celerity paragraphs 16 and 17 in full, and concludes:

We do not find any reason to deviate from the above view. Respectfully following the above we are of the opinion that 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 even in the present case of the assessee.

Grounds 4 and 5 were allowed, grounds 6 to 8 became academic, and the appeal was partly allowed. The assessee won.

Two conclusions follow, and they should be kept apart. The first is that ISC Specialty Chemicals departs from Celerity Power on section 47A(4) and follows it on computation, in the same judgment, without acknowledging the first of those two things. That is a real inconsistency on the face of the order, not an inference from a headnote. The second is that the departure made no difference to the outcome: because the computation failed, the route by which the charge was said to arise did not matter on those facts.

For a practitioner the practical reading is therefore more useful than the doctrinal one. If the Assessing Officer invokes section 47A(4) on a route one conversion, there are now two decisions saying he cannot and one saying he can, and the one saying he can did not need to decide it. The argument is worth taking, because it controls the year of charge and the identity of the assessee, and those can matter enormously even where the quantum ends at nil. But a defence should not be staked on it alone when the computation argument is available and has succeeded twice, with a third decision pointing the same way.

In whose hands: the company, the successor, or the shareholder

Three decisions, three answers, and they are reconcilable only if the two limbs of the clause are kept apart.

Aravali directed that the capital gains “in respect of the transfer of the assets in the hands of M/s. Aravali Polymers Pvt. Ltd. to the appellant firm Aravali Polymers LLP” be computed under section 45. The transferor of the assets is the company, so the gain on the asset limb is the company’s.

Celerity Power reached the same destination by a different route. Having held that section 47A(4) could not be invoked, the Bench asked whether the gain could nonetheless be assessed in the limited liability partnership’s own hands and answered no: under section 45 read with section 5 the gain is chargeable in the hands of the transferor as its income of the year of transfer, so capital gains arising on conversion “could not have been principally brought to tax under Sec. 45 as ‘Capital gains’ in the hands of the assessee LLP”. The limited liability partnership’s exposure is derivative. Under section 170(1)(b) the successor is assessed in respect of the income of the previous year after the date of succession, but section 170(2) provides that where the predecessor cannot be found the assessment of the income of the year up to the date of succession, and of the preceding year, is made on the successor in the like manner and to the same extent as it would have been made on the predecessor. So the limited liability partnership answers as successor under section 170, not as the person who made the gain.

The Revenue’s best textual answer to that is the Explanation to section 170, which provides that for the purposes of the section “income” includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession. On the Department’s reading that is a provision written for exactly this situation and it brings the conversion gain within the successor’s assessment directly. The assessee’s answer is that the gain here is on capital assets and on shares, not a gain on the transfer of the business as such, and that the Explanation cannot convert a successor’s derivative liability into a primary charge on a person who was not the transferor. The point is undecided and it is the real battleground on the hands question.

That distinction is not academic. It decides which entity’s return the gain belongs in, which entity’s assessment can be reopened, and whether an addition made in the limited liability partnership’s own assessment, under its own permanent account number, is sustainable at all. The assessee in ISC Specialty Chemicals took exactly that point in its ground 10, that the addition was bad because it had been made in the limited liability partnership’s permanent account number “and not as successor in interest of erstwhile company”. The ground was not reached, because the computation argument disposed of the appeal, so the point remains open and available.

Padmaja Rajesh Harve supplies the third answer, on the other limb. There the Tribunal held that the conversion “has triggered the taxability of capital gain in the hands of the shareholders who were holding the share of the erstwhile company”. That is the share limb, and the shareholder is its transferor.

So the structure is: company taxed on its assets, with the limited liability partnership answerable as successor under section 170; shareholder taxed on his shares. The same conversion, two charges, two assessees. No decision suggests the same gain is taxed twice, and nothing in them supports the common assumption that a finding of nil gain at company level disposes of the subject. The assessee’s answer, where both charges are pressed, is that on a stepped up conversion the company is charged on the appreciation in its assets while the shareholder is charged on reserves that represent the same appreciation, which is economic double taxation of one gain; the Revenue’s answer is that they are different assets in different hands and the Act charges each transferor on what he transferred. Neither has been argued.

The open questions on eligibility, the charge and section 47A(4)

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.

1. Does section 47A(4) apply where the exemption was never claimed? For the assessee: the heading is “Withdrawal of exemption in certain cases”, the sub-section speaks of gains “not charged under section 45 by virtue of conditions laid down in the said proviso”, and Aravali and Celerity Power both hold there must be an exemption to withdraw. For the Revenue: the trigger is conditions “not complied with”, which covers conditions never met; section 47 operates by force of statute and is not “claimed” at all, so the claimed or not claimed distinction is the assessee’s construct; a marginal heading cannot cut down plain words; and clauses (d) and (f) are post conversion conditions whose breach can only ever be reached through section 47A(4), which shows the sub-section was designed as the route for all non compliance. Two Tribunal decisions one way, one the other, and the one the other way did not need to decide it.

2. Is a conversion a transfer at all? For the assessee: statutory vesting under section 58(4) of the Limited Liability Partnership Act, Texspin, and the assessee’s reading of Umicore on the analogous clause (xiii). For the Revenue: Celerity Power and ISC Specialty Chemicals both say the position differs from a Part IX succession, and the Memorandum to the Finance Bill, 2010 proceeds on the footing that conversion attracted capital gains tax before the clause was inserted. Decided against the assessee twice, once after full argument.

6. In whose hands does the company side gain fall? For the assessee: Celerity Power holds it cannot be assessed on the limited liability partnership under section 45 read with section 5, because the transferor is the company, and the limited liability partnership answers only through section 170. For the Revenue: the Explanation to section 170 includes within “income” any gain accruing from the transfer of the business as a result of the succession, and on route two section 47A(4) names the successor limited liability partnership expressly. Aravali identified the transferor without deciding the hands question.

14. Does clause (ea) look to gross or net assets? For the Revenue: the words are “the total value of the assets as appearing in the books of account”, which points to gross book assets without deduction of liabilities, and the clause says nothing about net worth. For the assessee: a threshold provision aimed at the size of the enterprise should be read as measuring what the enterprise is worth, not what sits on one side of its balance sheet. Raised as a ground in ISC Specialty Chemicals and allowed on other reasoning, so still undetermined.

15. Is capital gain within “total sales, turnover or gross receipts” for clause (e)? For the assessee: a Delhi Bench held it is not, in AVA Landmark LLP, ITA No. 7233/Del/2018, 23 August 2022, on the footing that the Assessing Officer had expanded the meaning of turnover. For the Revenue: “gross receipts” is wider than turnover and a receipt credited in the statement of profit and loss is within it, and that is a single Bench decision on the revenue’s own appeal. The question recurs for a company whose only large receipt in the look back period was a one off disposal.

On a live file

Before converting. Two gateway conditions in the Limited Liability Partnership Act come before any tax question, and the first of them ends more files than section 47(xiiib) does. Under paragraph 2(2)(a) of the Third Schedule a private company may apply to convert only if there is no security interest in its assets subsisting or in force at the time of the application, so a company with a subsisting bank charge cannot convert until the charge is released. Under paragraph 2(2)(b) the partners of the limited liability partnership must comprise all the shareholders of the company and no one else. Then test clauses (e) and (ea) on all three preceding previous years, on gross book assets; in most cases that ends the section 47(xiiib) enquiry. Then quantify what is actually at risk, in this order, each head being worked through in the Part shown. Accumulated business loss, which does not travel and is barred independently by section 78(2); unabsorbed depreciation, which probably does not travel either, though the section 32(2) argument has never been run; capital, speculation and house property losses, which do not travel even on a compliant conversion; and minimum alternate tax credit, which is lost in every case (Part 4). The shareholders’ capital gains on their shares, computed on original cost, or on fair market value as at 1 April 2001 under section 55(2)(b) for shares acquired before that date, at twelve and a half per cent with no indexation for a transfer on or after 23 July 2024 (Part 3). The profit on stock in trade, which is outside the clause altogether; the section 56(2)(x) risk in the limited liability partnership’s hands; and only then the company’s gain on its capital assets, which on a book value conversion is nil only where no deeming provision reaches the asset, section 50C deeming the stamp duty value of land or building and section 50 computing on the written down value of a depreciable block (Part 2). Check whether the undertaking has a section 80-IA claim and which sub-clause of section 80-IA(4) it falls under, because an infrastructure facility fails the ownership condition in any event. If there is accumulated minimum alternate tax credit of any size, use it before converting. And set all of this against why the conversion is wanted at all, which is usually the rate and the freedom to distribute; the comparison, which Part 2 sets out on the rates, not the list of hazards, is the advice.

Consider the alternatives. A slump sale under section 50B, a fresh limited liability partnership with the business transferred to it, or simply leaving the company in place are each on the table, and so is striking the company off and distributing, which is taxed differently again through section 2(22)(c) and section 46(2). The right answer is whichever has the lowest total cost across the heads listed above, and that cannot be known without computing them.

Two sets of consequences sit outside this series by design and should be taken separately rather than assumed away. On goods and services tax, the transfer of a going concern is a Nil rated supply of services, under serial number 2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017 and its integrated tax counterpart, so the conversion itself carries no output liability; but the company’s unutilised input tax credit transfers to the limited liability partnership only through section 18(3) of the Central Goods and Services Tax Act, 2017 read with rule 41, which requires Form GST ITC-02 to be filed by the transferor with a chartered accountant’s or cost accountant’s certificate that the transaction was made with a specific provision for the transfer of liabilities, and then accepted by the transferee on the portal. It is not automatic, and an unaccepted ITC-02 is a straightforward loss of the credit. On stamp duty and registration, although section 58(4) vests the property without any conveyance, the stamp and registration treatment of that vesting is a State question, and mutation of immovable property together with the consents of lenders and lessors are practical conditions of the conversion whatever the tax answer is.

One warning belongs with that comparison, because it is the question clients ask only afterwards: the route back is not symmetrical. An existing limited liability partnership can register as a company under section 366 of the Companies Act, 2013 read with the Companies (Authorised to Register) Rules, 2014. No clause of section 47 names that direction expressly. Clause (xiiib) runs one way only, from company to limited liability partnership. What there is to argue is section 47(xiii), which exempts the transfer of a capital asset by a firm to a company on the succession of the firm by a company, on its own conditions in clauses (a) to (e), including that the partners hold not less than fifty per cent of the voting power for five years and receive no consideration other than shares. Because section 2(23)(i) defines “firm” to include a limited liability partnership, clause (xiii) is on its face capable of reaching a section 366 registration, and the carry forward route in section 72A(6) is keyed to the same clause. Whether a section 366 registration is a “succession of the firm by a company” within clause (xiii) has not been decided on these facts, though Texspin analysed a statutory conversion of a firm into a company against that very clause. So the position to state is not that the way back is taxed, but that it depends on an untested application of a different clause with different conditions, which is a thinner thing to rely on than the clause being left behind. A conversion undertaken to reach the limited liability partnership rate should be treated as hard to reverse.

Concordance for the provisions in this Part

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 2(47)	Section 2(109)
Section 45	Section 67
Section 170	Section 313
Section 170A	Section 314
Section 46	Section 68
Section 50B	Section 77

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Next: Part 2: what the company is charged on.

This article is Part 1 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.