Limited Liability Partnership

TAXATION OF LIMITED LIABILITY PARTNERSHIP
WESTERN INDIA REGIONAL COUNCIL OF ICAI
CA PARAS SAVLA

29 October 2011

LLP Driver
3

 The growth of the Indian economy and the role played by Indian
entrepreneurs as well as its technical and professional manpower has
been acknowledged internationally.
 Entrepreneurship, knowledge and risk capital combine to provide a
further impetus to India's economic growth.
 In an increasingly litigious market environment, the prospect of being a
member of a partnership firm with unlimited personal liability is, to say
the least, risky and unattractive.
 In this background, a need has been felt for a new corporate form that
would provide an alternative to the traditional partnership, with unlimited
personal liability on the one hand, and, the statute‐based governance
structure of the limited liability company on the other, in order to enable
professional expertise and entrepreneurial initiative to combine, organize
and operate in flexible, innovative and efficient manner.

LLP Income-tax Implications 29 October, 2011

Legislative Background
4

 Abid Hussain Committee (1997)
 Naresh Chandra Committee on regulation of private companies and
partnerships (2003) & (2005)
 JJ Irani Committee on New Company Law (2005)
 Department of Company Affairs Concept paper on LLP (2005)
 LLP Bill, 2006 (also covers tax provisions)
 LLP Act, 2008 introduced and passed by Parliament in December 2008
(tax provisions excluded)
 Notification issued making law effective from March 31, 2009
 However some of the provisions were made effective latter


International Scenario
5

 United States of America (US)
 Concept of LLP has its origin in 1991 (Texas statute)
 Now adopted by almost every state in the US
 Each State has separate State Laws
 Other “hybrid” entities: LPs, LLCs
 United Kingdom (UK)
 LLP Act, 2000
 Incorporated entity for legal purposes
 Singapore
 LLP Act, 2005: Similar to the UK legislation
 Indian LLP largely based on UK and Singapore LLP statutes


LLP ‐ Key Features
6

 Hybrid form of business entity combining advantages of partners firm &
corporate entity
 Body corporate under Companies Act, exception provided for professional LLP
 Separate legal entity
 Liability of partners limited baring certain circumstances
 Perpetual succession
 Minimum 2 partners & no restrictions on higher side
 Change in partners does not impact LLP’s existence, rights or liabilities
 Partners are agent of LLP and not of other partners
 Limited documentation as compared to company
 Various tax advantages as compared to firm & company


7 LLP Income‐tax implications

LLP is a Firm
8

 S. 2(23) “firm” and “partnership” shall mean, firm and partnership as
defined under Indian Partnership Act, 1932 and shall also include within
its ambit LLP as defined in the Limited Liability Partnership Act, 2008.
 Implications
 LLP shall be treated separate taxable entity (person) – ‘Firm’
 All the provisions of IT Act as applicable to firm shall be applicable to LLP
 Foreign LLP
 Not a LLP as per Indian LLP Act, hence would not be treated as firm
 May be treated as company u/s 2(17)(ii) as a foreign body corporate


LLP Partner
9

 Partner shall mean partner as per Indian Partnership Act, 1932 and
shall include minor admitted for the benefit of the firm and partner of
the Limited Liability Partnership Act, 2008
 Implication
 All the provisions (except tax liability) as applicable to partners of firm
would also be applicable to partners of LLP


Residential Status
10

 Tax Resident of India unless control & management of its affairs is situated
wholly outside India (S.6(2))
 In other words it would be treated as resident even if control &
management of affairs is partly situated in India.


Residential Status:Few Expressions
11

 Expressions: ‘control and management’, ‘affairs’, ‘situated’, ‘wholly’‐
 ‘control and management’ signifies controlling and directive power, ‘the head
and brain’ as it is sometimes called and means de facto control and
management and not merely the right or power to control and manage.
 ‘affairs’ must mean affairs which are relevant for the purpose of the Income‐
tax Act and which have some relation to income
 ‘situated’ implies the functioning of such power at a particular place with
some degree of permanence,
 ‘wholly’ would seem to recognise the possibility of the seat of such power
being divided between two distinct and separated places.
 CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC),
 CIT v. V.V.R.N.M. Subbiah Chettiar [1947] 15 ITR 502 (Mad.) & [1951] 19 ITR
168 (SC),
 B R Naik v CIT [1945] 13 ITR 124 (Bom).


Consequences of LLP being treated as
firm
12

 S. 184 – to treat LLP as ‘partnership firm assessed as such’
 LLP is evidence by instrument of LLP,
 Individual shares of partner determinate from the instrument of LLP,
 Submission of certified copy instrument of LLP
 In the year of creation and in every year where amendment has made
 Implication under e‐filling of tax returns?
 Non‐submission of certified copy of partnership along with return of income is a
procedural default which can be cured during the course of assessment
proceedings ‐ New Ajanta Road Lines v ITO [2002] 254 ITR (AT) 85 (Jab.)
 LLP firm shall be assessed as AOP
 In case of failure to comply with the provisions of S. 184 or
 Ex parte assessment u/s. 144 ie best judgment assessment
 In the event of non compliant of S. 184 or triggering of provisions of S. 144,
interest and salary, remuneration paid to the partners will not be deductible
while computing income of LLP, interest remuneration not taxable in the
hands of partners.


Interest on partners capital
13

 S. 36(1)(iii) ‐ Interest
 Capital contribution of partners are capital borrowed for the purposes of
business or profession and for allowance of deduction of interest payments,
requirement of s. 36(1)(iii) need to fulfill.
 Ref Munjal Sales Corp v CIT [2008] 298 ITR 298 (SC)

 S. 40(b)(iv) – Restriction on payment of interest to partners
 LLP agreement to provide allowance of such interest to partner
 Maximum rate of interest is capped at12% p.a.
 Interest to be calculated on capital balance after reducing withdrawals
 Ref Architectural Associates v ACIT [2005] 277 ITR (AT) 35
 Increase in credit balance of account due to revaluation of assets
 Ref ACIT v Sant Shoe Stores [2004] 88 ITD 524 (Cha), ITO v Amar Garage
[2004] I SOT 331 (Kol)


Interest on partners capital
14

 S. 36(1)(iii) v/s 40(b)
 S.40(b) is corollary to section 30 to 38 and not a standalone independent
section
 S.40(b)(iv) only restricts the deductibility which is to be decided u/s 36(1)(iii)


Remuneration to working partner
15

 S. 40(b)(v) – Restriction on payment of remunerations to working partners
 Mode of calculation the remuneration amount to be specified in the
instrument of LLP
 Maximum remuneration linked to percentage of book profit
 Working partner can be designated partner as well as non designated partner
 Provisions of S. 40(b) special provisions relating to payment to partners would
prevail over general provisions of S 40A
 Ref Syntholab Chemicals and Research v ACIT [2008] 172 Taxman 38 (Mum.) (Mag.)
 Designated Partner v/s Working partner
 Remuneration to nominee who acts as a designated partner
 Whether such nominee is partner?
 S.40(b)(v) v/s S. 37(1)


Presumptive taxation
16

 Income‐tax Act provides
 Certain types of income earned by resident SME, can be offered to tax on
presumptive basis.
 Certain business operations of non‐resident may also offer income on
presumptive basis
 In case income is offered on presumptive basis assessee is exempt from
compliance procedures eg maintenance of books of accounts
 Resident LLP wef AY 2011‐12 is not allowed to offer income on
presumptive basis u/s 44AD (as amended).
 Upto AY 2010‐11 no such specific provisions
 No such restriction u/s 44AE


Presumptive taxation
17

 Non‐resident LLP can offer income to tax in specified incomes / profits
and gains of
 Shipping business u/s 44B,
 Exploration of mineral oil u/s 44BB,
 Operation of aircraft u/s 44BBA


Losses – Change in constitution of LLP
18

 S. 78 of ITA – Restriction for carry forward and set off of losses in the case
of change in constitution of firm on retirement or death of partner
 Implication
 Not entitled to carry forward & set of loss – proportionate to the share of a
retired or deceased partner
 Restriction not applicable
 To unabsorbed depreciation
 Change in constitution due to admission of partner or change in profit sharing
ratio.
 Unlike S. 79 no protection of losses in case of inheritance


Tax Advantages
19

 Single tier entity level taxation ie LLP is taxed at the rate of 30.90% on its
profits.
 Surcharge not applicable
 Distribution of profit
 Share of profit in the hands of partner is exempt S. 10(2A)
 Not subject to dividend distribution tax @ 16.995% (S. 115‐O)
 Loans to partners or the entity where such partner is interested would not be
chargeable to tax as deemed dividend [S. 2(22)(e)] unlike companies in which
public is not substantially interested.
 Explanation to S. 73 not applicable
 S. 2(24)(iv) ‐ Benefit/perquisite in the hands of director/ specified person
not applicable
 Share of profit not subject to MAT in the hands of company partner
 Consequences of S. 14A implications needs to be evaluated on expenses
incurred by partner


Tax Disadvantages
20

 LLP may not
 Qualify for certain deduction / entitled for simplified tax regime
 S. 35D – Amortisation of certain preliminary expenses
 S. 35DD – expenditure in respect of amalgamation / demerger
 S35(2AB) – weighted deduction
 Tax neutrality on amalgamation / demerger
 S. 80‐IA(4) – deduction on profits Infrastructure projects
 In case of expenses whether same be covered u/s 37(1) under general
principles of commercial expediency?
 Entitle for deduction at lower rate
 S. 80‐IB, company is entitled for deduction @ 30% where as firm is
entitled for deduction @ 25%


Tax Disadvantages
21

 Whether post conversion entitled to continue for deduction
 No similar provision for conversion like those of S. 10AA(5), 80 IB(12) for
amalgamation or demerger
 Part IX conversion Tech Books Electronics Services (P) Ltd v ACIT [2006] 100
ITD 125 (Del.)
 Ref CIT v Gaekwar Foam & Rubber Co Ltd [1959] 35 ITR 662, CIT v Devson
Ltd [1975] 98 ITR 311 ( J & K), circular F No. 15/563‐IT(AT) dt 13‐12‐1963


Alternate Minimum Tax
22

 LLP Profit not subject to Minimum Alternate Tax u/s. 115JB
 In order to hoard erosion of tax base of LLP, Alternate Minimum Tax (AMT)
has been introduced on LLP.
 LLP profits are subject to AMT u/s 115JC @ 18 ½ % w.e.f. AY 2012‐13
 AMT is levied only on profits entitle for exemption u/s 10AA or part C of
Chapter VI‐A eg 80‐IA, 80‐IB, 80‐IC, 80‐ID 80‐IE, 80JJA, 80LA, 80Q
 Implications
 LLPs engaged in infrastructural projects or having units in SEZ would be
liable to pay tax
 LLPs who are formed as a intermediary holding entities, earning passive
income like capital gains, dividend (whether exempt or taxable) are also not
affected
 Not all profits are subject to AMT


Alternate Minimum Tax
23

 Computation of book profits is not complication as that under 115JB
 Credit of AMT is allowed for carry forward upto 10 years and to be set off
against normal tax liability.
 Education cess & higher secondary cess is not allowed to be carried
forward u/s 115JD
 LLP is liable to pay advance and upon failure to pay advance tax it would
be liable to pay interest u/s 23B & 234C.


Computation of AMT
24

LLP engaged in development of housing projects
Computation of Income under normal provision of Act
Particulars Year 1 Year 2 Year 3
Gross Total income 1,000 1100 1400
Deduction u/s 80-IB(10) 700 500 400
Total income 300 600 1000
Tax @ 30% 90 180 300
E. Cess @ 3% 3 5 9
Total Tax 93 185 309

Computation of Adjusted total Income
Total Income 300 600 1000
Add: Deduction under Chapter VIA-C ie 80IB(10) & 10AA 700 500 400
Adjusted total Income 1,000 1100 1400
Alternate Minimum Tax @ 18½ % 185 204 259
Education Cess @ 3% 6 6 8
Total 191 210 267


Computation of AMT
25

Computation of tax
Normal Tax (a) 90 180 300
Alternate Minimum Tax (b) 185 204 259
Higher of (a) or (b) 185 204 300
Tax Due (including Education Cess) 191 210 309
Less Tax credit utilised NIL NIL 78
Tax Payable 191 210 231

Total Tax credit available for utilisation NIL 95 119
(95+24)
Tax Credit utilised NIL NIL 41
(Normal tax – AMT) excluding Education Cess (300-259)
Tax credit allowed to be carried forward 95 24 78
(185-90) (204-180) (119-41)


Partner’s Contribution to LLP
26

 S. 45(3) – Contribution / transfer of assets by partner to firm
 Taxable in the year in which transfer took place
 Full value of consideration shall mean amount recorded in books
 Such contribution need not be fair value
 LLP Act S. 32 – provides that partner can contribute tangible / intangible /
movable / immovable property, or other benefits to LLP including money,
promissory notes, other agreements to contribute cash or property, and
contracts for services performed or to be performed.
 Monetary value of contribution of each partner shall be accounted for &
disclosed in accounts of LLP.
 LLP Rule 23 provides such contribution by the partner shall be valued by a
practising Chartered Accountant or Cost Accountant or a Government
approved valuer.


Partner’s Contribution to LLP
27

 Difficulty in valuation
 The determination of the cost in terms of money may be difficult but is
nonetheless of a money value and the best valuation possible must be made ‐
A.R. Krishnamurthy v CIT [1989] 43 Taxman 30 (SC)
 Valuation is not an exact science. Mathematical certainty is not demanded,
nor indeed is it possible ‐ Viscount Simon in Gold Coast Selection Trust Ltd. v.
Humphrey (Inspector of Taxes) [1949] 17 ITR (Suppl.) 19 (HL)


Issues
28

 Immovable property
 Implications of Sec 45(3) & 50C
 Shares
 Implications of Sec 45(3) & 56(2)(viia)

 Service Contract
 Whether capital receipts?
 Year of taxability?
 Deduction in the hands of firm and allowance of depreciation
 In case of contract for more than a year – can receipt of contribution staggered
over number of years?
 In case of NR applicability of Transfer pricing provisions
 Ref. Canoro Resources 313 ITR 2 (AAR)


Distribution of Assets by LLP
29

 S. 45(4) – Distribution of capital assets by firm to partner on dissolution of
firm or otherwise
 Chargeable to tax in the year in which transfer took place
 Fair value of the asset on the date of transfer took place would be full value of
consideration
 S.63 of LLP Act provides for winding up of an LLP
 Distribution of assets of the LLP on wound up provision of S.45(4) could be
triggered.
 Capital gain on dissolution, would be chargeable to tax in the year of
distribution of asset and not the year of dissolution
 Ref CIT v Vijayalakshmi Metal Industries [2003] 132 Taxman 49 (Mad.)
 Discontinuation of business after dissolution difference between market value
of stock and cost of stock could be taxed as business income
 Ref ALA Firm v CIT [1991] 189 ITR 285; Sakthi Trading Co v CIT 250 ITR 871 (SC)


Assignment of partner’s interest
30

 S. 42 LLP Act ‐ Partner can assign its economic interest as per the terms of
LLP agreement ‐
 Rights to share profits /losses of LLP
 Right to receive distribution

 Transfer of economic interest does not leads to ‐
 Transferor’s disassociation or
 Dissolution or winding up of LLP

 Non‐economic interests viz. management rights, access to information of
LLP cannot be transferred
 Whether such interest is capital asset?
 Whether any gains chargeable to tax?
 Ref N A Mody v CIT 162 ITR 420 (Bom), A K Sharfuddin v CIT 39 ITR 333 (Mad.)


Assignment of partner’s interest
31

 Whether right to share profit/loss and/or assets of LLP on dissolution is no
cost asset?
 Whether such assignment tantamount change in constitution u/s 78 of
ITA?
 Taxability of share of profits / assets on dissolution in the hands of
assignee
 Assignment of interest vis‐à‐vis sub‐partnership
 Principles of diversion of income by overriding title v/s application of income as
applicable to assignment
 Ref CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 (SC), Murlidhar Himatsingka v. CIT
(1966) 62 ITR 323 (SC)
 Appropriate drafting of agreement is crucial
 Assignment of economic interest can be used as an effective tax planning
tool.


Retirement of partner
32

 Whether provisions of S. 45(4) triggers on retirement in the hands of
firm?
 Ref A.N Naik & Associates 265 ITR 346(Bom)
 Amount received by retiring partner in excess of capital whether non
chargeable capital receipt?
 Ref Mohanbhai Pamabhai 165 ITR 166 (SC); Tribhuvandas G Patel 236 ITR 515 (SC)
 Amount received on assignment of rights
 Ref N. A. Mody – 162 ITR 420 (Bom)


Partners liability for LLPs tax
33

 S. 188A (applicable to all firms), every partner and legal representative of
the deceased are jointly and severally liable along with the firm, for the
amount of tax, penalty or other sum payable by the firm on its
assessment. However S 188A is not applicable to the LLP.
 S.167C applicable to LLP introduced on the lines of S. 179 i.e. liability of
directors of private limited company.
 Where any tax is due from a LLP in respect of any income of any previous
year or from any other person in respect of any previous year during
which such other person was a LLP cannot be recovered, then, every
person who was a partner of the LLP at any time during the relevant
previous year shall be jointly and severally be liable for the payment of
such tax unless he proves that the non‐recovery cannot be attributed to
any gross neglect, misfeasance or breach of duty on his part in relation to
the affairs of LLP.
 S. 188A v/s S.167C
 Conflict between general provisions v/s specific provisions, specific provisions
prevails ref CIT v Shahzada Nand & Sons [1966] 60 ITR 392 (SC)

Return of Income
34

 ITR 5 as applicable to firms would be applicable for LLP returns too.
 S. 140 (cd) provides designated partner is a person competent to sign and
verify the return of tax.
 If such designated partner, due to unavoidable reasons is unable to sign the
return or if there is no designated partner, it may be signed by any other
partner.


Wealth Tax
35

 LLP not taxable as entity for wealth tax
 However wealth tax may be levied on the taxable assets of firm in the
hands of partners.
 Wealth tax at 1% of net wealth is payable on specified assets (i.e.
wealth) exceeding Rs 30 lacks
 Wealth tax is levied inter alia on individual and company; company
does not include an Indian LLP


Conversion of entities to LLP
37

 S. 55, 56 & 57 and Schedules second, third & forth of LLP Act allows
conversion of partnership firm, private company and unlisted public
company to LLP
 No specific and explicit tax neutrality provision for conversion of such
entities to LLP (except conversion of company to LLP), contained in ITA
 LLP Act provides vesting of assets held by other entities with LLP on its
conversion


Conversion of firm to LLP
38

 No specific tax neutrality provisions
 Para 5.6 of CBDT explanatory Circular 5/2010 dated 3rd June, 2010 states:
 An LLP and a general partnership is being treated as equivalent (except
for recovery purposes) as per income‐tax provisions, the conversion
from a general partnership firm to an LLP will have no tax implications,
 If the rights and obligations of the partners remain the same after
conversion and
 if there is no transfer of any asset or liability after conversion.
 If there is a violation of these conditions, the provisions of S. 45 shall
apply.
 Circular not binding on tax payer
 Circular not binding on tax authorities in case contrary to provisions of
laws


Questions Uunrequited
39

 Period of rights / obligation to remain constant?
 Implication on change in constitution due to operation of law?
 Lock‐in‐period for non transfer of any asset or liability post conversion?
 Restriction on transfer of assets to whom?
 Lock‐in‐period of holding of assets?
 Assets & liabilities includes fixed as well as circulating assets?
 Though the status of LLP and firm is same, whether assessment of firm
(pre conversion) and LLP (post conversion) would one or two different
assessments?
 Carry forward and set off of losses of existing partnership firm in the
hands of LLP?
 Hindustan Aeronautics [149 ITR 795] in the context of amalgamation prior to
insertion of section 72; Amin Machinery Pvt Ltd 299 ITR 140 (AT) (Ahd), Part
IX conversion.


Questions Uunrequited
40

 Continuity of tax incentives
 No similar provision for conversion like those of S. 10AA(5), 80 IB(12) for
amalgamation or demerger
 Part IX conversion Tech Books Electronics Services (P) Ltd v ACIT [2006] 100
ITD 125 (Del.)
 Ref CIT v Gaekwar Foam & Rubber Co Ltd [1959] 35 ITR 662, CIT v Devson
Ltd [1975] 98 ITR 311 ( J & K), circular F No. 15/563‐IT(AT) dt 13‐12‐1963


41 Conversion of unlisted company into LLP

Conversion of Company to LLP
42

 Tax neutrality provisions for conversion of private companies or unlisted
public companies has been embedded into IT Act by Finance Act 2010
 Group of sections incorporated giving stringent set of conditions to be
complied for claiming tax neutrality at the time of conversion (S. 47(xiib))
 Whether all conditions are cumulative and need to be complied
 Consequences in case any one of them not complied at the time of
conversion
 Ref ITO v V K Jain Securities (P) Ltd [2009] 32 SOT 72 (Del.)
 If conditions not complied, capital gain would be taxable in the hands of
transferor or transferee
 Ref Prakash Electric co v ITO [2008] 22 SOT 382 (Bang.)
 Exemption for capital gains (long term or short term) and not business
income
 Whether whole business is a capital assess?

Transfer of all Assets & Liabilities
43

 All assets & liabilities immediately prior to conversion becomes the assets
and liabilities of LLP
 This is in contrast to the words used in S 47(xii) “all assets & liabilities……
relating to business”
 Hence non‐business assets also needs to be transferred
 Assets as on which date need to transferred?
 Date of making application or
 Date of grant of certificate
 Ref S 58(1)/(4) of LLP Act
 Costs in the hands of LLP
 Whether cost step‐up allowed?
 S 43(6) Explanation 2C


All Shareholders to be Partner
44

 All shareholders immediately before conversion to become partners in the
LLP
 All shareholders irrespective of their nature should become partner
 Shares held by
 Minor through its guardian
 Karta on behalf of HUF

 LLP Act does not provides for partner in representative
 Capital reorganisation may be required prior to conversion


Capital contribution in PSR
45

 Shareholders capital contributions and PSR in LLP should be in same
proportion as the shareholding in the company
 Contribution means as envisaged in S. 32 & 33 of LLP Act and may
exclude any reserves or balance in profit/loss account
 Proportion indicates ratio of the shares held by that shareholders to
total capital of company
 Implications in case of different classes of capital viz. equity & preference
 Different views
 Equity & preference shareholders to become partner (where both capitals added)
 Preference shareholders not being a participating in event of dissolution should be
excluded
 Each class of shares to be valued and capital contribution & PSR should be on the basis
of collective values, where equity & preference capital is equalise
 Differential voting rights shares, Convertible instruments or right to
participate in equity in future such as ESOPs, warrants etc

Capital contribution in PSR (Cont.)
46

 Restrictions not applicable to
 Distribution of assets of the LLP upon dissolution / retirement
 Can it be different than shareholding pattern
 Sharing of losses
 Sharing of losses may be different from profit sharing ratio
 Ref S. 42(1) of LLP Act refers to profits & losses


Consideration flowing to Partner
47

 No other consideration or benefit, directly or indirectly, in any form, other
than contribution in capital of LLP and share in profit is received by
shareholders
 Consideration or benefits refer at the time of conversion or even thereafter
 Benefit means advantage, profit, gain, interest, use whatever contributes
to promote prosperity or add value to property.
 Ref Advance Law Lexxicon by P. Ramanathan Aiyer Vol 1 p 508; CIT v Smt
Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj)
 Implications
 Shareholder having credit loan balance – Part in capital & part in loan
 Shareholder grant license to use property for license fees, use of firms assets
 Interest on capital contribution or remuneration to partner
 “Directly or indirectly” covers benefit by a person other than shareholders
esp. received by such person for his own use and benefit?

No change in PSR
48

 Aggregate profit sharing ratio (PSR) in LLP should not be less than 50% at
any time during the period of 5 years from date of conversion
 PSR of individual partner v/s all partners at the time of conversion
 Issues
 Date of reckoning period of 5 years
 Shareholding ceasing to be partner upon death or insolvency
 Absence of safeguarding provisions similar to S. 79(a)
 Intentions of such lock in period
 Voluntary transfer v/s change due to operation of law
 Inter se transfers and admission of new partner
 Change in PSR even for single day
 Assignment of partners interest, losses sharing ratio

Turnover of Company
49

 Total Sales, turnover or gross receipts in business of the company in any
of 3 previous years preceding previous year should not exceed Rs 60 lacs
 Sales turnover or gross receipts in business, non business receipts not
to be considered
 Turnover as per LLP Rules – Form 11
 Import of terms meaning u/s 44AB
 Exempt receipts eg dividend, sale of shares
 Reimbursement eg receipts of CHA
 Limit to be reckoned till date of conversion (broken previous year) or
upto the previous year prior to conversion?
 Company is in existence for period of less than 3 years?
 Planning exercise – business reorganisation


Non distribution of accumulated profit
50

 No amount to be paid either directly or indirectly to any partner out of
accumulated profits standing in the accounts of the company for the period of 3
years from date of conversion
 Accumulated profit not defined
 Current years profits till date conversion to be included or excluded
 Assessed profits is not significant
 Capitalised profits
 Distinction between words of s 2(22)
 “out of balance of accumulated profits” v/s “to the extent company
possesses accumulated profits”
 Whether words “directly & indirectly” reduces significance of words “out
of accumulated profits”
 Ref CIT v Keshavlal Lallubhai Patel [1965] 55 ITR 637 (SC)
 Distribution to current partners or future partners


Other amendments
51

 Depreciation 5th proviso to S 32 – apportionment of depreciation
 Amortisation of VRS expenditure s.35DDA
 Actual cost of asset in case of conversion S 43(6) Explanation 2C
 Carry forward of accumulated losses / unabsorbed depreciation S. 72A
 Capital losses not entitle for carry forward upon conversion
 Whether fresh lease of life is available for carry forward


Shareholders taxability
52

 S. 47(xiib) also provides that any transfer of shares held by shareholders in
the company involved in conversion of LLP will not be regarded as transfer
on fulfilment of specified conditions
 Applicable to both Equity & Preference Shares
 Further S 49(2AAA) provided cost of share in LLP is same as cost of share
or shares in company
 No amendment in s 2(42A) defining short term capital assets – period of
holding of interest in LLP period of holding of shares in company will all be
reckoned.
 Implication in case specified conditions not fulfilled?


Non tax neutral conversion
53

 If conditions of S 47(xiib) not fulfilled
 Implication
 Vesting of assets on operation of law
 CIT v Texspin Engg & Mfg Works [2003] 263 ITR 345
 LKS Gold House P. Ltd v LKS Gold Palace [2004] Comp. Cas. 896 (Mad.)
 Well Pack Packaging v DCIT 130 taxman 215 (Ahd,) (Mag.)
 Difference between words of S. 575 of Companies Act 1956 and LLP
Act
 ‘Pass to and vest in the company’ v/s ‘transferred to and shall vest in the LLP’
 S 47A(4)
 Applicable only if
 Specified conditions violated post conversion and not applicable at the time of
conversion
 Exemption claimed u/s 45 and not otherwise


Conversion of LLP to firm
54

 No explicit provisions under LLP or any other laws for Conversion LLP to
any other business entity
 In order to convert into any other form of entity such LLP may be required
to wound up and assets to be distributed in the hands of partner who
may form another entity.
 No tax neutrality provision on conversion of LLP to such other business
entities


Lets Talk


Concluding remarks
56

 LLP being an agile entity is certainly be a
winner as compared to any other form of
organisation.
 However, LLP an entity would not fly unless
and until Central and State Government,
Regulators amend the respective laws,
regulation to recognise LLP as new form of
business organisation and erase the ambiguity
that may arise due to the lack of specification
and clarity on both tax and regulatory front.
 Every year tinkering tax provisions and not
providing clarity on other regulatory policies
would only create chaos and ambiguity. It
would ultimately frustrate the larger objective
of the Government in establishing preferred
alternative business vehicles.


Thank You
57

This Presentation provides certain general information existing as at the time of production. This Presentation does not purport
to identify all the issues or developments pursuant to the subject matter of presentation. Accordingly, this presentation should
neither be regarded as comprehensive nor sufficient for the purposes of decision‐making. The information provided is not, nor
is it intended to be an advice on any matter and should not be relied on as such. Professional advice should be sought before
taking action on any of the information contained in it.


Limited Liability Partnership

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