The ICAI is pleased to note that its suggestion relating to exemption of capital gains in the hands of shareholders consequent to conversion of a company into a LLP, has found favour with the Government. It is also heartening to note that one out of the three amendments made while passing the Finance Bill, 2010 was in accordance with the suggestion given in the Post-Budget Memorandum, 2010 submitted by the Direct Taxes Committee of ICAI. One of the other two proposals is an extension of relief granted unilaterally by the Honourable Finance Minister.

 
In point no.2(a) of the Post-Budget Memorandum 2010 submitted on 31st March, 2010, the ICAI had observed that though as per section 47(xiiib), conversion of a company into an LLP is exempt from tax subject to fulfilment of certain conditions specified therein, tax liability would be attracted in the hands of shareholders since the provisions of section 46(2) and 2(22)(c) would become applicable consequent to the deemed liquidation of the company on its conversion into a LLP.

Therefore, it was suggested that when the account of the shareholder is credited in the books of the LLP on such conversion, the provisions of section 46(2) and section 2(22)(c) levying tax on the shareholder on distribution of assets on liquidation of a company should not apply.

 
This suggestion of ICAI has been considered while passing the Finance Bill, 2010 and has been effected by amending section 47(xiiib) to provide that any transfer of a share or shares held in a company by a shareholder as a result of conversion of the company into a LLP would also not be considered as a transfer for levy of capital gains tax.
 
Please click below to download the Amendments to the Finance Bill, 2010.

http://www.icai.org/resource_file/19175announ10401.pdf