Limited Liability Partnership

TAXATION OF LIMITED LIABILITY PARTNERSHIPWESTERN INDIA REGIONAL COUNCIL OF ICAI

CA PARAS SAVLA

29 October 2011

Background2

LLP Driver

The growth of the Indian economy and the role played by Indianentrepreneurs as well as its technical and professional manpower hasbeen acknowledged internationally.

Entrepreneurship, knowledge and risk capital combine to provide afurther 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 thatwould provide an alternative to the traditional partnership, with unlimitedpersonal liability on the one hand, and, the statute‐based governancestructure of the limited liability company on the other, in order to enableprofessional expertise and entrepreneurial initiative to combine, organizeand operate in flexible, innovative and efficient manner.

LLP Income-tax Implications

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29 October, 2011

Legislative Background

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


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29 October, 2011

International Scenario

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


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29 October, 2011

LLP ‐ Key Features

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


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29 October, 2011

LLP Income‐tax implications7

LLP is a Firm S. 2(23) “firm” and “partnership” shall mean, firm and partnership as

defined under Indian Partnership Act, 1932 and shall also include withinits 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


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29 October, 2011

LLP Partner Partner shall mean partner as per Indian Partnership Act, 1932 and

shall include minor admitted for the benefit of the firm and partner ofthe 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


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29 October, 2011

Residential Status

Tax Resident of India unless control & management of its affairs is situatedwholly 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.


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29 October, 2011

Residential Status:Few Expressions

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 andmanagement 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 withsome degree of permanence,

‘wholly’ would seem to recognise the possibility of the seat of such powerbeing 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 ITR168 (SC),

B R Naik v CIT [1945] 13 ITR 124 (Bom).


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29 October, 2011

Consequences of LLP being treated as firm 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 assessmentproceedings ‐ 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 deductiblewhile computing income of LLP, interest remuneration not taxable in thehands of partners.


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29 October, 2011

Interest on partners capital

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)


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29 October, 2011

Interest on partners capital

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)


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29 October, 2011

Remuneration to working partner

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)


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29 October, 2011

Presumptive taxation

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 onpresumptive basis u/s 44AD (as amended). Upto AY 2010‐11 no such specific provisions

No such restriction u/s 44AE


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Presumptive taxation

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


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Losses – Change in constitution of LLP

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


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29 October, 2011

Tax Advantages

Single tier entity level taxation ie LLP is taxed at the rate of 30.90% on itsprofits. 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 whichpublic 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 expensesincurred by partner


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29 October, 2011

Tax Disadvantages

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%


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29 October, 2011

Tax Disadvantages

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


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29 October, 2011

Alternate Minimum Tax

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 ofChapter 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 notaffected

Not all profits are subject to AMT


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29 October, 2011

Alternate Minimum Tax

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 carriedforward u/s 115JD

LLP is liable to pay advance and upon failure to pay advance tax it wouldbe liable to pay interest u/s 23B & 234C.


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29 October, 2011

Computation of AMT

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

Computation of Adjusted total Income

Particulars Year 1 Year 2 Year 3

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

LLP engaged in development of housing projects


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Computation of AMT

Computation of tax

Particulars Year 1 Year 2 Year 3Normal Tax (a) 90 180 300Alternate Minimum Tax (b) 185 204 259Higher of (a) or (b) 185 204 300Tax Due (including Education Cess) 191 210 309Less Tax credit utilised NIL NIL 78Tax Payable 191 210 231

Particulars Year 1 Year 2 Year 3

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)


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Partner’s Contribution to LLP

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, andcontracts 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 apractising Chartered Accountant or Cost Accountant or a Governmentapproved valuer.


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Partner’s Contribution to LLP

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)


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Issues

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 staggeredover number of years?

In case of NR applicability of Transfer pricing provisions Ref. Canoro Resources 313 ITR 2 (AAR)


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Distribution of Assets by LLP

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)


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Assignment of partner’s interest

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.)


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29 October, 2011

Assignment of partner’s interest

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 ofITA?

Taxability of share of profits / assets on dissolution in the hands ofassignee 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.


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Retirement of partner

Whether provisions of S. 45(4) triggers on retirement in the hands offirm? Ref A.N Naik & Associates 265 ITR 346(Bom)

Amount received by retiring partner in excess of capital whether nonchargeable 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)


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29 October, 2011

Partners liability for LLPs tax

S. 188A (applicable to all firms), every partner and legal representative ofthe deceased are jointly and severally liable along with the firm, for theamount of tax, penalty or other sum payable by the firm on itsassessment. However S 188A is not applicable to the LLP.

S.167C applicable to LLP introduced on the lines of S. 179 i.e. liability ofdirectors of private limited company.

Where any tax is due from a LLP in respect of any income of any previousyear or from any other person in respect of any previous year duringwhich such other person was a LLP cannot be recovered, then, everyperson who was a partner of the LLP at any time during the relevantprevious year shall be jointly and severally be liable for the payment ofsuch tax unless he proves that the non‐recovery cannot be attributed toany gross neglect, misfeasance or breach of duty on his part in relation tothe 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)LLP Income-tax Implications

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29 October, 2011

Return of Income

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 otherpartner.


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Wealth Tax 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


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Conversion to LLP36

Conversion of entities to LLP

S. 55, 56 & 57 and Schedules second, third & forth of LLP Act allowsconversion of partnership firm, private company and unlisted publiccompany to LLP

No specific and explicit tax neutrality provision for conversion of suchentities to LLP (except conversion of company to LLP), contained in ITA

LLP Act provides vesting of assets held by other entities with LLP on itsconversion


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29 October, 2011

Conversion of firm to LLP

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 conversionfrom a general partnership firm to an LLP will have no tax implications, If the rights and obligations of the partners remain the same afterconversion 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


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29 October, 2011

Questions Uunrequited

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 differentassessments?

Carry forward and set off of losses of existing partnership firm in thehands 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.


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Questions Uunrequited

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


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Conversion of unlisted company into LLP41

Conversion of Company to LLP

Tax neutrality provisions for conversion of private companies or unlistedpublic companies has been embedded into IT Act by Finance Act 2010

Group of sections incorporated giving stringent set of conditions to becomplied 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 oftransferor or transferee Ref Prakash Electric co v ITO [2008] 22 SOT 382 (Bang.)

Exemption for capital gains (long term or short term) and not businessincome Whether whole business is a capital assess?


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Transfer of all Assets & Liabilities

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


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All Shareholders to be Partner

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


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Capital contribution in PSR

Shareholders capital contributions and PSR in LLP should be in sameproportion as the shareholding in the company

Contribution means as envisaged in S. 32 & 33 of LLP Act and mayexclude any reserves or balance in profit/loss account

Proportion indicates ratio of the shares held by that shareholders tototal 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

29 October, 2011LLP Income-tax Implications

45

Capital contribution in PSR (Cont.)

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


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29 October, 2011

Consideration flowing to Partner

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?


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No change in PSR

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 ratioLLP Income-tax Implications

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Turnover of Company

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


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Non distribution of accumulated profit

No amount to be paid either directly or indirectly to any partner out ofaccumulated profits standing in the accounts of the company for the period of 3years 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


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Other amendments

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


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Shareholders taxability

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?


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Non tax neutral conversion

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


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Conversion of LLP to firm

No explicit provisions under LLP or any other laws for Conversion LLP toany other business entity

In order to convert into any other form of entity such LLP may be requiredto wound up and assets to be distributed in the hands of partner whomay form another entity.

No tax neutrality provision on conversion of LLP to such other businessentities


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Lets Talk

29 October, 2011LLP Income-tax Implications

Concluding remarks

LLP being an agile entity is certainly be awinner as compared to any other form oforganisation.

However, LLP an entity would not fly unlessand until Central and State Government,Regulators amend the respective laws,regulation to recognise LLP as new form ofbusiness organisation and erase the ambiguitythat may arise due to the lack of specificationand clarity on both tax and regulatory front.

Every year tinkering tax provisions and notproviding clarity on other regulatory policieswould only create chaos and ambiguity. Itwould ultimately frustrate the larger objectiveof the Government in establishing preferredalternative business vehicles.


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Thank You

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 shouldneither 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.


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Limited Liability Partnership

Documents

Transcript of Limited Liability Partnership