s.47(xiiib) — Conversion of a private company into an LLP not regarded as a transfer

Currently operative

Inserted by section 18 of the Finance Act, 2010 with effect from 1 April 2011, originally with conditions (a) to (f). Clause (ea), the five crore rupee asset ceiling, was inserted by section 28(B)(II) of the Finance Act, 2016 with effect from 1 April 2017, and the same amendment moved the conjunction "and" from the end of clause (e) to the end of clause (ea). The counterpart in the Income-tax Act, 2025 is section 70(1)(ze), with the conditions renumbered (i) to (vii) and the definitions in section 70(2), Table serial number 8.

Income-tax Act, 1961

s.47(xiiib)

Income-tax Act, 2025

s.70(1)(ze)

In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.

In short

Clause (xiiib) of section 47 of the Income-tax Act, 1961 provides that nothing in section 45 shall apply to any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership, or to 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. Two limbs, joined by "or": the clause exempts the company's transfer of its assets and, separately, the shareholder's transfer of his shares, so on failure both fall back into section 45 in different hands. The proviso carries seven conditions, lettered (a), (b), (c), (d), (e), (ea) and (f), and commentary that lists six has missed clause (ea). Clause (a) requires all the assets and liabilities of the company to become those of the limited liability partnership; clause (b) requires all the shareholders to become partners with capital contribution and profit sharing ratio in the same proportion as their shareholding; clause (c) bars any consideration or benefit, directly or indirectly, in any form or manner, other than a share in profit and capital contribution; clause (d) requires the aggregate profit sharing ratio of the erstwhile shareholders not to fall below fifty per cent at any time during five years; clause (e) requires total sales, turnover or gross receipts not to exceed sixty lakh rupees in any of the three previous years preceding the conversion; clause (ea) requires the total value of the assets as appearing in the books, on the same three year test, not to exceed five crore rupees; and clause (f) bars any payment, directly or indirectly, to any partner out of the balance of accumulated profit standing in the company's accounts on the date of conversion for three years. The Explanation takes "private company" and "unlisted public company" from the Limited Liability Partnership Act and not from the Companies Act.

What the provision does

Disapplies section 45 to both limbs of a qualifying conversion, and carries a package of conditioned provisions inserted by the same Finance Act: section 72A(6A) for accumulated loss, Explanation 2C to section 43(6) for the written down value, and section 49(1)(iii)(e) for the successor's cost. It does not exempt stock in trade, which is outside the clause whether or not the conditions are met and is taxed as business profit; it does not protect the minimum alternate tax credit, which lapses under section 115JAA(7) in every case; and it is not among the clauses excluded by the first proviso to section 56(2)(x).

Threshold questions

Was the conversion effected under section 56 or section 57 of the Limited Liability Partnership Act, 2008, the clause saying 'or' and not 'and'
Did total sales, turnover or gross receipts exceed sixty lakh rupees in any one of the three previous years preceding the year of conversion
Did the total value of the assets as appearing in the books exceed five crore rupees on the same three year test, which is clause (ea) and not clause (f)
Did all the shareholders become partners with capital contribution and profit sharing ratio in the same proportion as their shareholding, tested at conversion
Has the aggregate profit sharing ratio of the erstwhile shareholders stayed at fifty per cent or more at every moment in the five years since
Has any amount been paid to any partner out of the accumulated profit standing in the company's accounts on the date of conversion within three years

The recurring disputes.

Is a conversion a transfer at all

The assessee's argument is that section 58(4) of the Limited Liability Partnership Act vests the whole undertaking in the limited liability partnership by operation of law with no conveyance and no transferee act, which is the reasoning of the Bombay High Court in CIT v. Texspin Engg. and Mfg. Works on a Part IX conversion of a firm into a company. The Tribunal has rejected it twice. ACIT v. Celerity Power LLP held that a company to limited liability partnership conversion is differently placed from a Part IX succession and declined to follow Texspin, and ISC Specialty Chemicals LLP v. ITO accepted that the Limited Liability Partnership Act does not treat conversion as a transfer at the threshold but held that all relevant provisions of the Income-tax Act must be taken into account. The Revenue adds that the Memorandum to the Finance Bill, 2010 proceeds on the footing that a conversion attracted capital gains tax before the clause was inserted, which would be unnecessary if there were no transfer. No High Court has decided the question on this clause, so the argument remains available; it has simply lost twice, once after full argument, and the defences that have actually succeeded attack the computation instead.

Whether clause (ea) looks to gross or net assets

The words are "the total value of the assets as appearing in the books of account", which points to gross book assets with no deduction of liabilities, and the clause says nothing about net worth; on that reading a company with five crore rupees of assets funded by four crore rupees of debt is outside the clause. The assessee's answer is that a threshold provision aimed at the size of the enterprise should be read as measuring what the enterprise is worth rather than what sits on one side of its balance sheet, and that a gross reading makes the ceiling turn on gearing. The point was raised as a ground in ISC Specialty Chemicals LLP v. ITO and the appeal was allowed on other reasoning, so it remains undetermined. Until it is decided the safe course is to test the clause on gross book assets, because that is the reading the words most naturally bear and the one an officer will take.

Whether capital gain falls within total sales, turnover or gross receipts

For clause (e) the question recurs for a company whose only large receipt in the look back period was a one off disposal. A Delhi Bench held in AVA Landmark LLP that a capital gain is not within the expression, on the footing that the Assessing Officer had expanded the meaning of turnover beyond what the words bear. The Revenue's answer is that "gross receipts" is deliberately wider than turnover, that anything credited in the statement of profit and loss is within it, and that AVA Landmark is a single Bench decision on the revenue's own appeal and binds nobody. The practical consequence of each reading is large: on the assessee's reading a dormant company that sold one property remains eligible, and on the Revenue's it does not.

Whether eligibility is elective, so that the conditions bind only a claimant

Padmaja Rajesh Harve v. ACIT held that since neither the company nor the limited liability partnership had claimed any benefit under clause (xiiib), the condition in clause (f) requiring the reserves to be maintained for three years did not apply. That is the Aravali and Celerity logic applied to a condition rather than to section 47A(4), and it is the answer to an officer who says reserves may not be touched for three years after any conversion. The Revenue's answer, which is not frivolous, is that section 47 operates by force of statute and is not claimed at all, so where the conditions were in fact satisfied the bar applies whether or not anybody described it as a claim. On facts like Padmaja's, where clauses (e) and (ea) failed on the figures, that answer has nothing to bite on; on facts where the conditions were met and nobody said so in the return, it is a real argument. The proposition was in any event stated in a case where no clause (f) breach was alleged, so it decided nothing.

Frequently asked.

How many conditions are there, and which one is usually missed

Seven, lettered (a), (b), (c), (d), (e), (ea) and (f). The one usually missed is clause (ea), the ceiling of five crore rupees on the total value of the assets appearing in the books, inserted by the Finance Act, 2016 with effect from 1 April 2017. Commentary that lists six conditions predates it or has overlooked it, and a notice that cites "clause (f)" for an asset threshold has the lettering wrong. Both ceilings are tested in any of the three previous years preceding the year of conversion, so a single bad year anywhere in the look back period breaches them.

Which transfers does the clause exempt

Two, not one, and this is the structural point most writing on the subject leaves out. The first limb is the company parting with its capital and intangible 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, exempted on the same conditions, so when the clause fails both fall back into section 45 and are charged in different hands. The company's gain is often nil on a book value vesting; the shareholder's rarely is, because his cost is usually nominal.

What happens to stock in trade on a conversion

It is outside the clause altogether, whether or not the conditions are met, because the clause exempts the transfer of a capital asset or intangible asset and inventory is neither. The profit falls under section 28 and is computed in the ordinary way, so the computation reasoning built on sections 45, 48 and 49 has nothing to say about it. Where the stock is land or building or both, section 43CA deems the stamp duty value to be the consideration, subject to the tolerance in the first proviso to section 43CA(1). For a trader, a manufacturer with substantial finished goods or a real estate company, that is where most of the balance sheet sits.

Does the Limited Liability Partnership Act impose conditions of its own

Yes, and the first of them ends more files than section 47(xiiib) does. Paragraph 2(2)(a) of the Third Schedule permits a private company to 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. Paragraph 2(2)(b) requires the partners of the limited liability partnership to comprise all the shareholders of the company and no one else, which an employee option pool or a trust on the register can defeat, since the Act admits only an individual or a body corporate as a partner.