The Budget 2009-10 has introduced the provisions regarding taxation aspect of the newly introduced form of business Limited Liability Partnership. As per the Budget 2009-10 a limited liability partnership (LLP) will be taxed on the same lines as partnership firms — this would mean taxation of profit in the hands of the entity; the partners will be exempted.
Change in Definition of Firm, Partner & Partnership
The Budget 2009-10 has amended the definition of Firm and Partners in the following manner:
Taxation aspect of Limited Liability Partnership
Eligibility (section 184):
In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria
LLP can claim the following deductions:-
When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.
Steps for Computation of taxable income of a LLP:-
Assessment of Partners of LLP
Section 10(2A) Section 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.
The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax.
This Explanation provides that the salary, bonus or commission received by a partner from his LLP will not be treated as salary. This Explanation implies that the provision of tax deduction at source for salary (section 192) will not be attracted to the remuneration received by the partner from the LLP.
- Treatment of remuneration and interest to a partner as business income : Clause (v) of section 28
Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be chargeable to income-tax as profits and gains of business. The proviso clarifies that where the remuneration, interest, etc., is in excess of the ceiling fixed under the new section 40(b) and is disallowed in part for that reason then the income under the head referred to in section 28(v) shall be adjusted to the extent of the amount not so allowed to be deducted.
Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For example, if a partner borrows money to make his capital contribution to the LLP and he is paid interest on his capital contribution, the amount of such interest will be taxed under the head “Profits and gains of business or profession”, but the interest paid by him on the borrowed money will have to allowed as a deduction. If the whole or a part of salary/interest is not allowed as deduction in the hands of the LLP, than the whole or that part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners the entire remuneration/ interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is chargeable to tax.
Section 40(b) is a disallowance provision and disallows remuneration, interest, etc., received by the partners from the firm provided the same exceeds the ceiling prescribed in the same provision. It also specifies as to how the matter of deductibility of interest and remuneration is to be dealt with where a partner is a partner in representative capacity.
The Explanation 3 defines the term “book profit” which is relevant for computing the upper ceiling of remuneration payable to all the working partners put together. The Explanation 4 defines “working partners” who alone are made entitled to remuneration if the deductibility of the related amount in the hands of the LLP is not to be barred by section 40(b).
Limits of Remuneration to Partners:
The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of LLP, the limits of remuneration as proposed by budget are outlined below:
|On First Rs 3,00,000 of book profit or in case of loss||Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more|
|On the balance of book profit||at the rate of 60%|