BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Special Provisions Applicable to Limited Liability Partnership (LLP)

(A) Transfer of capital asset or intangible asset by a private limited company or a non listed company to Limited Liability Partnership (LLP) 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:

all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
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;
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;
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;
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 Rs. 60,00,000;

(ea) 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 Rs. 5 crore; and
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.

Assessment of 'Firm' under Income Tax Act.-CONTENT

(B) Special provisions applicable in case of conversion of a Private Limited Company or a Nonlisted company into 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.

(8) Carry forward and set-off of losses [Section 72A(6A)]

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

(9) MAT credit of predecessor company will lapse [Section 115JAA]

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.