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Assessment of Limited Liability Partnership (LLP)

1. Taxation of Limited Liability Partnership (LLP) 

 

The Limited Liability Partnership Act, 2008 has come into effect in 2009. 

 

Taxation of Limited Liability Partnership (LLP) shall be on the same lines as the taxation scheme  currently prevalent for general partnerships, i.e. taxation in the hands of the entity and exemption from  tax in the hands of its partners 

 

Section 2(23) of the Income-tax Act, 1961 provides as under: 

 

(i) "firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall  include a limited liability partnership as defined in the Limited Liability Partnership Act,  2008;

 

(ii) "partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall  include,— 

 

(a) any person who, being a minor, has been admitted to the benefits of partnership; and 

 

(b) a partner of a limited liability partnership as defined in the Limited Liability Partnership  Act, 2008; 

 

(iii) "partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and  shall include a limited liability partnership as defined in the Limited Liability Partnership  Act, 2008. 

 

Thus, a "limited liability partnership" and a general partnership will be accorded the same tax  treatment. 

 

2.   Signing of Income-Tax Return of LLP [Section 140]:

 

The LLP Act provides for nomination of  "designated partners" who have been given greater responsibility. The designated partner shall sign the  income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able  to sign and verify the return or where there is no designated partner as such, any partner shall sign the  return. 

 

3.   Recovery of Tax of LLP [Section 167C]:

 

Like section 179 which is applicable for a private  limited company, section 167C provides that notwithstanding anything contained in the Limited  Liability Partnership Act, 2008, where any tax due from a limited liability partnership in respect of any  income of any previous year or from any other person in respect of any income of any previous year  during which such other person was a limited liability partnership cannot be recovered, in such case,  every person who was a partner of the limited liability partnership at any time during the relevant  previous year, shall be jointly and severally 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 the limited liability partnership. 

 

As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act,  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 section 45 shall apply. 

 

Remuneration to partners shall be the same as for partners of other firms. 

 

4.   Transfer of Capital Asset or Intangible Asset by a Private Limited Company or a Non Listed  Company to Limited Liability Partnership shall not be regarded as a Transfer.

 

Correspondently,  any Transfer of a Share or Shares held in a Company by a Shareholder shall also not be treated as  a Transfer on conversion of the above company to a Limited Liability Partnership [Section  47(xiiib)] 

 

The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the  same lines as applicable to partnership firms. Section 56 and section 57 of the Limited Liability  Partnership Act, 2008 allow conversion of a private company or an unlisted public company (hereafter  referred as company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a  company into an LLP has definite tax implications. Transfer of assets on conversion attracts levy of  capital gains tax. Similarly, carry forward of losses and of unabsorbed depreciation is not available to  the successor LLP. 

 

The Act has inserted clause (xiiib) to section 47 to provide that 

 

(a)          the transfer of a capital asset or intangible asset by a private limited company or a non listed  company, or 

 

(b)          any transfer of a share or shares held in the company by a shareholder  on conversion of a private limited company or an unlisted company to a Limited Liability Partnership  in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain  conditions. These conditions are as follows: 

 

(i)            all the assets and liabilities of the company immediately before the conversion become the  assets and liabilities of the limited liability partnership; 

 

(ii)           all the shareholders of the company immediately before the conversion become the partners  of the limited liability partnership and their capital contribution and profit sharing ratio in the  limited liability partnership are in the same proportion as their shareholding in the company  on the date of conversion; 

 

(iii)          the shareholders of the company do not receive any consideration or benefit, directly or  indirectly, in any form or manner, other than by way of share in profit and capital  contribution in the limited liability partnership; 

 

(iv)          the aggregate of the profit sharing ratio of the shareholders of the company in the limited  liability partnership shall not be less than 50% at any time during the period of five years  from the date of conversion; 

 

(v)           the total sales, turnover or gross receipts in business of the company in any of the three  previous years preceding the previous year in which the conversion takes place does not  exceed ₹60,00,000; 

 

(vi)          the total value of the assets as appearing in the books of account of the company in any of the  three previous years preceding the previous year in which the conversion takes place does not  exceed ₹5 crore; and 

 

(vii)        no amount is paid, either directly or indirectly, to any partner out of balance of accumulated  profit standing in the accounts of the company on the date of conversion for a period of three  years from the date of conversion. 

 

5.   Special provisions applicable in case of conversion of a Private Limited Company or a Non-Listed Company into Limited Liability Partnership (LLP)

 

(1)       Depreciation to be allowed proportionately in the year of conversion [First proviso to  section 32(1)] 

 

The Act has amended fifth proviso to section 32(1) to provide that the aggregate depreciation  allowable to the predecessor company and successor LLP shall not exceed, in any previous year, the  depreciation calculated at the prescribed rates as if the conversion had not taken place. In other words,  deprecation shall be allowed to the predecessor company and successor LLP in the proportion of a  number of days the assets are used by the predecessor and successor assessee. 

 

(2) Successor LLP will be allowed deduction of payment under Voluntary Retirement  Scheme for the unexpired period [Section 35DDA(4A)] 

 

Where there has been reorganisation of business, whereby a private company or unlisted public  company is succeeded by a limited liability partnership fulfilling the conditions laid down in the  proviso to clause (xiiib) of section 47, the provisions of section 35DDA shall, as far as may be, apply  to the successor limited liability partnership, as they would have applied to the said company, if  reorganisation of business had not taken place. 

 

(3) Cost of acquisition of the asset in case the predecessor company has claimed deduction  under section 35AD [Explanation 13 to section 43(1) amended] 

 

It is provided that the cost of acquisition of the capital asset for the successor LLP, in case the  predecessor company has claimed deduction under section 35AD, shall be nil. 

 

(4) Actual cost of the block of assets in the case of the successor LLP [Explanation 2C in  section 43(6) inserted] 

 

The actual cost of the block of assets in the case of the successor LLP shall be the written down  value of the block of assets as in the case of the predecessor company on the date of conversion.

 

(5) Successor LLP and share holder of the predecessor company liable for capital gains if  prescribed conditions not satisfied in any subsequent year [Section 47A(4)] 

 

Where any of the conditions laid down in proviso to section 47(xiiib) are not complied with, in  any subsequent assessment year the consequences shall be as under: 

 

(a)          the amount of profits or gains arising from the transfer of such capital asset or intangible asset  not charged under section 45 by virtue of conditions laid down in the said proviso shall be  deemed to be the profits and gains chargeable to tax of the successor limited liability  partnership for the previous year in which the requirements of the said proviso are not  complied with. 

 

(b)          the amount of profits or gains arising from the transfer of share was shares not charged under  section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the  profits and gains chargeable to tax of the share holder of the predecessor company for the  previous year in which the requirements of the said proviso are not complied with. 

 

(6) Cost of capital asset to LLP shall be the cost to be previous owner [Section 49(1)] 

 

The cost of asset in the hands of the LLP in the case of conversion of a private limited company or  an unlisted company shall be the cost to the previous owner. 

 

(7) Cost of the right of partner referred to in section 42 of the Limited Liability Partnership  Act, 2008 on conversion of company to Limited Liability Partnership [Section 49(2AAA)] 

 

Where the capital asset being rights of a partner referred to in section 42 of the Limited Liability  Partnership Act, 2008 became the property of the assessee on conversion as referred to in clause (xiiib)  of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of  the share or shares in the company immediately before its conversion. 

 

Section 42 of the Limited Liability Partnership Act, 2008 provides as under: 

 

Partner's transferable interest [Section 42] 

 

(1)          The rights of a partner to a share of the profits and losses of the limited liability partnership and to  receive distributions in accordance with the limited liability partnership agreement are transferable either  wholly or in part. 

 

(2)          The transfer of any right by any partner pursuant to sub-section (1) does not by itself cause the  disassociation of the partner or a dissolution and winding up of the limited liability partnership. 

 

(3)          The transfer of right pursuant to this section does not, by itself, entitle the transferee or assignee to  participate in the management or conduct of the activities of the limited liability partnership, or access  information concerning the transactions of the limited liability partnership. 

 

6. Carry Forward and Set-Off of Losses in Case of Limited Liability Partnership (LLP) [Section 72A(6A)] 

 

The Act has allowed carry forward and set-off of accumulated loss and unabsorbed depreciation  to the successor LLP which fulfils the above mentioned conditions. 

 

The accumulated loss and the unabsorbed depreciation of the predecessor company, shall be  deemed to be the loss or allowance for depreciation of the successor limited liability partnership for  the purpose of the previous year in which business reorganisation was effected and other provisions of  this Act relating to set off and carry forward of loss and allowance for depreciation shall apply  accordingly. In other words, accumulated loss shall be allowed for fresh 8 years and unabsorbed  depreciation will be allowed to be carried forward indefinitely. 

 

However, if any of the conditions laid down in the proviso of section 47(xiiib) are not complied  with, the set off of loss or allowance of depreciation made in any previous year in the hands of the  successor limited liability partnership, shall be deemed to be the income of the limited liability  partnership chargeable to tax in the year in which such conditions are not complied with. 

 

Meaning of Accumulated Loss:

 

"Accumulated loss" means so much of the loss of the predecessor  firm or the proprietary concern or the private company or unlisted public company before conversion  into limited liability partnership or the amalgamating company or the demerged company, as the case  may be, under the head "Profits and gains of business or profession" (not being a loss sustained in a  speculation business) which such predecessor firm or the proprietary concern or the company or  amalgamating company or demerged company, would have been entitled to carry forward and set off  under the provisions of section 72 if the reorganisation of business or conversion or amalgamation or  demerger had not taken place. 

 

Meaning of Unabsorbed Depreciation:

 

"Unabsorbed depreciation" means so much of the  allowance for depreciation of the predecessor firm or the proprietary concern or the private company  or unlisted public company before conversion into limited liability partnership or the amalgamating  company or the demerged company, as the case may be, which remains to be allowed and which  would have been allowed to the predecessor firm or the proprietary concern or the company or  amalgamating company or demerged company, as the case may be, under the provisions of this Act, if  the reorganisation of business or conversion or amalgamation or demerger had not taken place. 

 

7.   MAT Credit of Predecessor Company will lapse [Section 115JAA] shall not be  allowed to the successor LLP.

 

Credit in respect of tax paid by a company under section 115JB is allowed only to such company  under section 115JAA. It has been clarified that the tax credit under section 115JAA shall not be  allowed to the successor LLP.

 

8. Alternate Minimum Tax (AMT) applicable to LLP and on all persons other than companies [Section 115JC to 115JF  Chapter XII-BA] 

 

AMT, which was hitherto applicable to LLP only, has been made applicable to all assessees other  than a company. 

 

Where the regular income-tax payable for a previous year by a person (other than a company) is  less than the alternate minimum tax payable for such previous year, the adjusted total income shall be  deemed to be the total income of such person and he shall be liable to pay income-tax on such total  income at the rate of 18.5%. [Section 115JC(1)] 

 

AMT to be reduced in case of a unit located in an International Financial Services Centre [W.e.f.  A.Y. 2019-20]

 

In case of a unit located in an International Financial Service Center, the alternate minimum tax  under section 115JC shall be charged @ 9% instead of 18.5%. 

 

Report from an Chartered Accountant [Section 115JC(3)]:

 

Every person to whom this section applies shall  obtain a report, in such form as may be prescribed, from an Chartered Accountant, certifying that the adjusted  total income and the alternate minimum tax have been computed in accordance with the provisions of  this Chapter and furnish such report on or before the due date of furnishing of return of income under  section 139(1). 

 

(a) As per section 115JC(2), "adjusted total income" shall be the total income before giving effect to  provisions of this Chapter i.e. Chapter XII-BA as increased by: 

 

(i) the deductions claimed, if any, under sections 80-IA to 80RRB other than section 80P included  in Chapter VI-A, 

 

(ii) deduction claimed, if any, under section 10AA, and 

 

(iii) deduction claimed, if any, under section 35AD as reduced by the amount of depreciation  allowable in accordance with the provisions of section 32 as if no deduction under section 35AD  was allowed in respect of the assets on which the deduction under that section is claimed. 

 

(b) "Alternate minimum tax:" shall be the amount of tax computed on adjusted total income at a rate of  18.5%; [Section 115JF(b)] 

 

(c) "Regular income-tax" shall be the income-tax payable for a previous year by a person other than a  company on his total income in accordance with the provisions of the Act other than the provisions of  Chapter XII-BA. [Section 115JF(d)]

 

(A)   To whom Alternate Minimum Tax (AMT) shall be applicable [Section 115JEE(1)] 

 

The provisions of AMT shall apply to a person who has claimed any deduction under: 

 

(a)           under sections 80-IA to 80RRB other than section 80P; or 

 

(b)          section 10AA;

 

(c) section 35AD. 

 

(B)   Tax Credit for AMT:

 

Section 115JD provides the credit for tax (tax credit) paid by a person on  account of AMT under Chapter XII-BA shall be allowed to the extent of the excess of the AMT paid  over the regular income-tax. This tax credit shall be allowed to be carried forward up to the 15  assessment year immediately succeeding the assessment year for which such credit becomes  allowable. It shall be allowed to be set off for an assessment year in which the regular income-tax  exceeds the AMT to the extent of the excess of the regular income-tax over the AMT.

 

No interest shall be payable on tax credit allowed under section 115JD.

 

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