s.47A(4) — Withdrawal of the exemption on a company to LLP conversion

Currently operative

Inserted by section 19 of the Finance Act, 2010 with effect from 1 April 2011, in the same package as clause (xiiib). The counterpart in the Income-tax Act, 2025 is section 71(3), which differs in two ways that matter: it deems the amount chargeable under the head "Capital gains", and it drops the words "as the case may be".

Income-tax Act, 1961

s.47A(4)

Income-tax Act, 2025

s.71(3)

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

In short

Sub-section (4) of section 47A of the Income-tax Act, 1961 provides that where any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under section 45 by virtue of the conditions laid down in that proviso shall be deemed to be the profits and gains chargeable to tax of the successor limited liability partnership or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of that proviso are not complied with. Three features decide cases. The charge falls in the year of non-compliance and not the year of conversion, which is what makes the sub-section matter for limitation. The words "as the case may be" allocate the asset side gain to one assessee and the share side gain to another, so the sub-section does not charge the same amount twice, and on its face it moves the asset side charge from the company, which no longer exists, to the limited liability partnership. And the amount deemed chargeable is the amount "not charged under section 45 by virtue of" the conditions, which presupposes that something was not charged because the conditions were satisfied. Only clause (d) and clause (f) can be broken after the event; clauses (a), (b), (c), (e) and (ea) are tested at conversion, so their failure means the clause was never available. Section 72A(6A) carries its own proviso in parallel terms, clawing back the set off of loss or allowance of depreciation already made.

What the provision does

Revokes an exemption already given, fixing the year of charge as the year of breach and naming the successor limited liability partnership or the shareholder as the assessee. It does not create a charge where the clause was never available, on the better view and on two Tribunal decisions, because there is then nothing that was "not charged by virtue of" the conditions; it does not supply any machinery for computing the amount in the breach year, which has to be worked out for the first time then; and it says nothing about depreciation, amortisation or deductions already taken in the intervening years.

Threshold questions

Was the exemption under clause (xiiib) in fact available and allowed, so that there is an exemption to withdraw
Which condition is said to be broken, and is it one capable of being broken after the conversion, that is clause (d) or clause (f)
In which previous year did the non-compliance occur, since that and not the year of conversion is the year of charge
Which limb is the officer invoking, the asset side or the share side, the sub-section allocating them to different assessees
Has the officer instead assessed the year of conversion, which is route one and is governed by section 45 and not by this sub-section
Is the year of conversion closed and the breach year open, or the reverse, because winning the point relocates the charge rather than defeating it

The recurring disputes.

Whether the sub-section applies where the exemption was never claimed

On the better view it does not, and this controls both the year of charge and the identity of the assessee. Aravali Polymers LLP v. JCIT held that the provisions of clause (xiiib) must have been "already available to the assessee" and asked where the non-compliance was to be found when the conditions had failed in the year of conversion itself. ACIT v. Celerity Power LLP held the same, that the sub-section could come into play only for revoking an exemption earlier availed. Against that, ISC Specialty Chemicals LLP v. ITO held that the assessee loses its benefit of exemption as per section 47A(4) on facts where no exemption had been claimed, without engaging the Celerity reasoning that had been put to it by paragraph number; because the computation argument disposed of the appeal anyway, the point did not have to be decided. The Revenue's textual case is that the trigger is conditions "not complied with", which covers conditions never met, that section 47 operates by force of statute and is not claimed at all, that a marginal heading cannot cut down plain words, and that clauses (d) and (f) can only ever be reached through this sub-section. Two Tribunal decisions one way, one the other, and no High Court.

In whose hands the asset side gain falls

The sub-section 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 on route two. On route one there is no such deeming, and Celerity Power held that the gain cannot be brought to tax in the limited liability partnership's own hands under section 45 read with section 5, because the limited liability partnership is not the transferor; it answers only as a successor under section 170, and for the pre-conversion period only through section 170(2) where the predecessor cannot be found. The Revenue's answer is that the Explanation to section 170 brings within "income" any gain accruing from the transfer of the business as a result of the succession. The difference between the two routes on this point is not cosmetic and nobody has litigated it.

What is computed in the breach year, and on which figures

Nothing in the sub-section says. The assessee's position is that the charge is on the gain that was not charged at conversion, so the figures and the period of holding are those at conversion and the rate regime is the one then in force. The Revenue's position is that the income is deemed to arise in the breach year, so that year's regime applies, which matters a great deal now that the capital gains regime changed on 23 July 2024. Nor is it settled whether the shareholder limb revives along with the company limb or only the limb the deeming names, what happens to depreciation already claimed on a written down value carried across under Explanation 2C, or whether a limited liability partnership charged because of its partners' acts has any recourse against them. There is also a respectable argument that interest under section 234B cannot run from the beginning of an assessment year in which the deeming event had not yet occurred. None of this has been litigated.

Whether a breach brought about by operation of law is a breach

Clause (d) says the aggregate profit sharing ratio shall not be less than fifty per cent at any time during five years, without qualification as to how it came to be less, and nothing in section 47A(4) requires volition. So on the text a partner's death, an insolvency, or a court order redistributing a share appears to trigger the charge. The assessee's answer is that a condition directed at the continuity of ownership cannot sensibly be broken by an event nobody chose, and that a construction producing a tax charge on the death of a partner should be avoided. There is no clarification from the Board and no decision either way, which leaves succession planning in a converted limited liability partnership exposed to a risk nobody prices.

Frequently asked.

Does the sub-section apply where the conditions failed at the conversion itself

On two Tribunal decisions, no. It withdraws an exemption, so there has to be one to withdraw, and where clause (e) or clause (ea) failed on the figures nothing was ever exempt. The charge in that case arises under section 45 in the ordinary way, in the year of conversion, on the transferor of each asset. A third decision applied the sub-section on exactly those facts without engaging the contrary reasoning, but it did not need to decide the point because the appeal succeeded on computation. Winning the argument relocates the charge rather than defeating it, which is not always what the client wants.

Which conditions can actually be broken after the conversion

Clause (d), the fifty per cent profit sharing floor for five years, and clause (f), the three year bar on paying out accumulated profits. Clause (d) is broken by things nobody connects with tax: admitting an outside investor, a partner retiring or dying if the vacated share passes outside the original group, or gifting a profit share to the next generation for succession reasons. Clause (b) is sometimes put in this list wrongly: it is tested at conversion, so a disproportionate allotment discovered years later shows the conversion was never eligible rather than that a valid one was breached, and the charge is then in the year of conversion.

What changes under the Income-tax Act, 2025

The counterpart is section 71(3), and two differences cut against arguments made on the 1961 provision. It deems the amount chargeable "under the head 'Capital gains'", which removes the argument that section 47A(4) deems profits and gains rather than capital gains. And it drops the words "as the case may be", which are the words allocating the charge between the company side and the share side, so a submission built on that allocation 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.