Introduction

The changing global scenario, globalisation of similar tax norms, Income Recognition Standards, led to evolvement of business structures in India. A need to provide for a new corporate form of business ownership which could be an alternative to the traditional partnership gave rise to concept of the limited liability partnership. LLP is a corporate business format that has combined features of partnership and a separate legal entity. The Compliance Matters are lower compared to Companies. This has made LLP a popular medium to run businesses in India.

What is an LLP?

A Limited Liability Partnership is an amalgamation of a company and a partnership which incorporates the favorable features of both. This form of business model has been available in countries such as US, UK, Singapore, Australia etc. for a long time. In India, the Limited Liability Partnership Act, 2008 was notified on 31st March 2009. This structure has become quite popular since its inception in SMEs, professional service companies and any small business that may aim at reducing its tax and compliance liabilities. The flexibility of the LLP structure and its unique appeal has helped many entrepreneurs take advantage of its structure and provisions and make it the first choice of a Start up. LLPs bridge the gap between sole proprietorships and partnership firms under the Indian Partnership Act, 1932 and companies under the Companies Act of 2013.

Who can be a Partner?

Any individual or body corporate may be a partner in a limited liability partnership, provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force; he is an undischarged insolvent; or he has applied to be adjudicated as an insolvent and his application is pending.

Requirement Of Partners:

Every limited liability partnership shall have at least two partners. If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during that period. Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners. The term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.

Liabilities of designated partners.

A designated partner shall be responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the limited liability partnership agreement; and liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

Incorporation of limited liability partnership

Procedure:

1. Obtain Designated Partners Identification Number (DPIN).

2. Obtain Digital Signature Certificate of all proposed LLP Partners/Designated Partners.

3. Obtain Reservation of name by payment of fees.

4. Incorporation of LLP, once name is reserved by payment of registration charges based on capital contribution in LLP.

5. On submission of complete documents the Registrar after satisfying himself about compliance with relevant provisions of the LLP Act will register the LLP, maximum within 14 days of filing of incorporation documents will issue a certificate of incorporation.

Implications on Conversion of Company into LLP

The LLP Act contains enabling provisions for companies incorporated under companies act to convert to LLP. The following shall not be regarded as “transfer” for the purpose of Capital Gain Taxation u/s 47(xiiib) of Income Tax Act, 1961, therefore, no capital gain shall arise on: Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008:

Provided —

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

(b)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;

(c)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;

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

(e)the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees;

(f)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 five crore rupees; and

(g)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.

The above exemption is limited to capital assets and not any other assets like inventory. The limit on turnover is to restrict the tax benefit of this clause to smaller entities which will render a big section of companies willing to convert as ineligible. Size of assets is an additional parameter to judge the eligibility of the company to claim benefit. Reserves are a safeguard against misuse by a company to escape Dividend Distribution Tax since a LLP is not liable to DDT.

Withdrawal of exemption u/s 47A:

Where any of the conditions specified above are not complied with, exemption from capital gains shall not be available. The conditions should be satisfied at the time of conversion. Additionally, condition d and f should be satisfied for respective period specified therein. On non compliance of condition d or f, post benefit availing u/s 47(xiiib) at the time of conversion, benefit availed shall be charged to tax in the manner specified below:-

  • Capital Gains exempted of the predecessor company will become income of LLP by way of capital gain in the year in which non-compliance takes place, and
  • Capital Gains exempted of the shareholder of the predecessor company on transfer of shares at the time of conversion shall become income by way of capital gain in the year in which non-compliance takes place.

Relevant Points:-

  • Cost of acquisition of the asset : Shall be deemed to be the cost of acquisition of predecessor company
  • Cost of Improvement: Any cost incurred on improvement of the assets by Predecessor Company and LLP shall be the cost of improvement.
  • Period of holding of asset: As per Section 2(42A)(b), for the purpose of determining period of holding of capital asset for determining nature of capital gain, period for which the asset was held by predecessor company shall be included.

Audit requirements:

Any LLP whose turnover does not exceed 40 lakh rupees in any financial year or whose contribution does not exceed 25 lakh rupees, is not mandatorily required to get its accounts audited. If these limits are crossed for an LLP, it must get its account mandatorily audited. Any limited liability partnership which fails to comply with the provisions of this section shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

Annual Filing Requirements

i) E Form – Statement of Solvency

ii) E Form – Annual Return

If the limited liability partnership contravenes the provisions of this section, the designated partner of such limited liability partnership shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

Registration Benefits of LLP:

On registration, a limited liability partnership shall, by its name, be capable of suing and being sued, acquiring, owning, holding and developing or disposing of property, whether movable or immovable, tangible or intangible; having a common seal, if it decides to have one; and doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

Points to note in connection with LLP formation:

  • Minimum 2 designated partners are required.
  • Contribution of LLP should be same as that of the Paid up share capital of the Company before conversion.
  • Directors of the Company become the designated partners of LLP after conversion. If shareholders do not wish to be the partners in LLP, they should transfer the shares before conversion or else they become the partners in LLP by default. Any new person can become partner/designated partner at the time of conversion with the approval of the existing members.
  • If all the shareholders of the Company become partners in LLP, then the ratio of paid up share capital of the shareholders is the ratio of contribution of the Partners in LLP. No change in the ratio.
  • It may be noted that it has been clarified by the Ministry of Corporate Affairs that a HUF or its Karta cannot become partner or designated partner in LLP.

Points To Note For Conversion Of Company Into LLP

  • In case of conversion of Private Limited Company into LLP, all the shareholders of the Company to be partners in the LLP. No one else can be partner in LLP
  • Also there will be no security interest subsisting or in force at the time of application in the assets of the Company.
  • Every Designated Partner is required to obtain a DIN from the Central Government.
  • All the E-FORMS which are required for the purpose of incorporating the LLP are filed electronically through the medium of Internet; it is not possible to sign them manually. Therefore, for the purpose of signing these forms, the Designated Partner of the proposed LLP needs to obtain a Digital Signature Certificate.
  • Whether up to date Income-tax return is filed under the Income-tax Act, 1961.
  • Whether any prosecution initiated against or show cause notice received by the company for alleged offences under the Companies Act, 1956.
  • Whether any proceeding by or against the company is pending in any Court or Tribunal or any other Authority.
  • Whether any conviction, ruling, order, judgment of any Court, Tribunal or other authority in favour of or against the company is subsisting.
  • Whether any clearance, approval or permission for conversion of the company into limited liability partnership is required from anybody/ authority.
  • .t is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to filed on incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the conversion into LLP.

Drafting of LLP Agreement

LLP agreement has to be drafted line with LLP Act. It is not mandatory to file LLP agreement at the time of registration and same can be file within 30 days. Designated partners are responsible for doing all acts, matters and things that are required to be done for complying with the provisions of the LLP act. They are liable to all penalties imposed on the LLP. So it is very important to draft LLP agreement with professional help.

The following clauses are important to be incorporated in agreement:

1. Name, Object and Register Office of LLP

2. The initial Contribution of the LLP by Partners

3. Methodology of valuation of Non Monetary contribution

4. The net profits or losses sharing ratios
5. Detail of Designated Partners

6. Interest payable on Capital Loan prescribed u/s. 40(b) of the Income-tax Act, 1961

7. Remuneration payable to the working partners or as prescribed u/s. 40(b) of the Income-tax Act, 1961

8. Mode of operation of Bank Accounts

9. Maintenance of Book of Accounts

10. Indemnity clause

11. Goodwill clause

12. Appointment of arbitrator

13. Rights and Duties of Partners

14. Rights and Duties of Designated Partners

15. Procedure for change in name

16. Procedure to appoint Auditor

17. Admission of New Partner

18. Meeting

19. Cessation of Existing Partners

20. Winding up of LLP

21. Extent of Liability of LLP

22. Amendments of LLP

23. Liability of Partners in LLP

24. Ancillary or other business carried over by LLP

Comparison between Private Limited and LLP

  • A privately limited is a form of business which enjoys a widespread acceptance and recognition in the world. LLP’s has become popular since they offer the benefits of a private limited company and addresses the downsides of a partnership business.
  • LLP’s have proven to significantly economical to start and maintain compared to a private limited.
  • Both the forms of organizations, separate the ownership of the founders or directors of the company. Each of the forms has its own legal existence and a company common seal. Both the companies cease to exist forever unless, and otherwise the promoters of the company or competent authorities decide to close the business.
  • Regarding the closure of a private limited form of company is technically more challenging and time-consuming as compared to LLP. A private limited company is registered under the Companies Act, 2013. LLP is registered under the Limited Liability Partnership Act, 2008.
  • Private limited companies are more flexible regarding ownership of the enterprise due to easy transfer of shares as compared to LLP. Since shareholders do not participate in the management of the business, the shareholders and the management are distinguished. In the LLP format, there is no clear distinction between the owners and the management. The LLP partners hold the ownership of the company along with the power to manage it.
  • An LLP doesn’t have to audit its books of accounts if the revenue is less than 40 Lakhs or capital contribution is less than 25 Lakhs. On the other hand, a private limited company has to audit its books of accounts annually.
  • LLP forms are much simpler from taxation purposes since there are only two forms of tax applicable, income tax and alternative minimum tax. However, a private limited company has to pay a tax of the earning of the company, dividend distribution tax, and alternate minimum tax. Thus the tax benefits of LLP over Company are more beneficial for the enterprises.
  • Due to wider acceptability private limited companies have it is easier to raise funding and offer employee stock options to attract talent to the company.
  • A Private Limited Company is defined as a voluntary association of at least two members and not more than two hundred members. LLP may have unlimited members. Like LLP they have a perpetual succession and have limited liability. However, the shares held by the members are not freely transferable, and if a transfer is allowed, that should be between the existing members of the company.
  • Loan to partner is not taxable in LLP, whereas loan to director is taxable in company as deemed dividend.
  • There is no minimum capital requirement in case of LLP whereas capital requirement is ther in case of company.

Registered office and address for communication

The Limited Liability Partnership Act provides that any document may be served on LLP or a Designated Partner by sending it by mail or by any other method to the registered office and any other specifically declared address by the LLP for the purpose in the form and manner prescribed in the rules. Thus, the LLP will have the option to declare another address, other than head office to obtain statutory notices/letters etc. by submitting necessary information to Registrar of Companies.

LLPs for a Particular Object:

It is possible for LLPs to provide suitable clauses in LLP agreement to fix time limits for the duration of the LLP. After the realization of the objectives of the venture, the LLP could either be wound up or the provisions for striking off of the name of the LLPs can be used, instead of the winding up provisions.

Mergers & Amalgamations

The provisions of Compromise, arrangement or reconstruction of LLPs are available which makes it possible to merge two or more LLPs, just like a company or between LLPs and a Private Company.

Winding up of Limited Liability Partnership

The winding up of a limited liability partnership may be either Voluntary or by the Tribunal and limited liability partnership, so wound up may be dissolved.

A limited liability partnership may be wound up by the Tribunal,—

  • if the limited liability partnership decides that limited liability partnership be wound up by the Tribunal;
  • if, for a period of more than six months, the number of partners of the limited liability partnership is reduced below two;
  • if the limited liability partnership has acted against the interests of the sovereignty and integrity of India, the security of the State or public order;
  • if the limited liability partnership has made a default in filing with the Registrar the Statement of Account and Solvency or annual return for any five consecutive financial years; or
  • if the Tribunal is of the opinion that it is just and equitable that the limited liability partnership be wound up.

The following points should also be noted and understood along with the conditions above:
i) The petition or an application for winding up of an LLP could be filed with the tribunal by the LLP itself or by any of its partner(s) or creditor(s) or by the Registrar or by Central Government or by a person authorized by Central Government.

ii) It shall be deemed that winding up of the LLP has commenced from the time of the presentation of its petition to the tribunal.

iii) The tribunal is empowered with the special powers that can be exercised by the Tribunal as per his discretion on presentation of petition. Once the petition for winding up of the LLP, has been received by the Tribunal, it fixes a date for its hearing and issues notice to the LLP to appear and justify its position. The Tribunal shall also give a public notice in order to inform everybody, particularly, the creditors and the partners, about winding up so that their concerns or objections could also be considered. Then, on the specified date, after taking into consideration the concerns of all the parties and circumstances of the case, the Tribunal (within ninety days from the date on which petition was presented), may – dismiss the petition or make an interim order or direct to revive or rehabilitate the LLP or appoint a liquidator as provisional liquidator till the final order or pass an order to windup the LLP.

iv) Once the Tribunal passes and communicates the Winding up order to the firm, the following consequences will follow.

a) The petitioner and the LLP shall ensure that a certified copy of the winding up order has been filed with the ROC so that the Registrar could notify the fact in the Official Gazette.

b) The winding up order serves as a notice of discharge to all the employees and officers of the concerned Limited Liability Partnership.

c) No suit or legal proceedings can be commenced against the LLP without the leave of the court. Even a suit, which is pending against the LLP at the date of winding up order, cannot be preceded unless the permission of Tribunal is obtained.

Voluntary Winding up

Partners of the LLP, after consenting among them, agree to wind up its affairs and activities. And adopt the following procedure to windup the limited liability partnership. If the firm is not solvent the partners cannot start the process of winding up the firm. They also need to have creditors’ consent/approval for winding up the firm. And many more formalities have to be complied with for winding up the business.

Process:

i) Passing of Resolution by at least three fourth of total numbers of partners pass such a resolution and file a copy of it with the Registrar within the next 30 days. It shall be deemed that the winding up has commenced from the time of the passing of such resolution.

ii) Declaration of solvency by designated partners which shall be verified by an affidavit, that their LLP is solvent and will be able to fully settle the debts out of proceeds realized from the sale of assets within a time period of one year starting from the date when winding up commenced. This declaration along with the Statement of Assets and Liabilities and Assets Valuation Report prepared by an independent valuer shall be submitted with the Registrar of Companies (ROC) within 15 days of passing of the winding up resolution.

iii) Approval of Creditors – The LLP shall intimate to its creditors, the estimated amount that it owes to each of these parties and shall give them an offer to approve and accept the claims. They shall be given a 30days time to accord their approval in respect of voluntary winding up or acceptance of the offer made to them. Consent of at least 2/3 in value of creditors is required for winding up.The LLP shall file the decision of the creditors with the ROC within 15 days of receipt of their consent.

iv) Publication of Resolution – On passing of resolution demanding voluntary winding and approval of the creditors the LLP shall within 14 days of receipts of creditors consent give a public notice about its resolution. For this purpose, it shall place an advertisement concerning this matter in the local newspaper of the district where the principal office or registered office of the LLP is situated.

v) Appointment of Liquidator – An official known as LLP liquidator is appointed from the panel maintained by the Central Government within 30 days of filing of consent of creditors. Once the LLP liquidator gets appointed, all the powers of the designated partners as well as that of other partners shall cease. Further notice of such appointment of the LLP Liquidators shall also be given to the Registrar.

Duties of LLP Liquidator:

1. Perform such functions and duties as may be prescribed under the Act or Rules,

2. Maintain books of accounts in the proper manner,

3. Settle the list of creditors and partners,

4. Pay off the liabilities of the LLP and adjust the rights of the partners among themselves,

5. Observe due care and diligence while discharging his duties,

6. Give a quarterly report on the progress of winding up of the LLP to the partners and creditors in the prescribed form & manner,

7. Get the accounts of the LLP audited.

8. Preparation of Final Report by the Liquidator concerning the winding up accounts and explanations in the prescribed format. Thereafter, he/she shall seek the approval of the partners and the creditors, as the case may be, with regard to the said report and accounts in the meeting with the partners and creditors. Further, all the above mentioned documents shall be filed with the ROC within 15 days of the approval by the partners /creditors.

vi) Passing of Dissolution Order – If the tribunal is satisfied that the process of winding up has been duly followed, it shall pass the dissolution order within 60 days of the receipt of the application. The liquidator is required to file a final copy of the dissolution order of LLP with the Registrar of Companies, who shall then get this fact notified in the Official Gazette.

Dissolution of LLP & Taxability

Winding up is different from dissolution. Winding up is a process which culminates into dissolution. During the period, when winding up commences till the dissolution takes place, the legal entity of LLP remains and so, such LLP can be sued. But on dissolution, the LLP loses its existence because its name is struck off from the register of LLPs and therefore, it is not possible to sue the LLP.

Declaring the LLP as Defunct-

In case the LLP wants to close down its business or where it is not carrying on any business operations, it can make an application to the Registrar of Companies for declaring the company as defunct and removing the name of the LLP from its register of LLP’s.

1. An application for Striking off the name of the LLP to ROC with the consent of all partners.

2. The Registrar shall publish a notice on its website as to the content of the application for a period of one month for the notice of the general public.

3. Application submitted to be supported by Indemnity Bonds to indemnify any person legally claiming after the LLP to be striked off. Duly sworn Affidavits declaring all the information provided and statements given to be true, from all partners to also be provided.

4. Application filed to be supported by approvals or No Objection Certificates from concerned Regulatory Authorities with which the LLP is registered.

5. The Registrar, having sufficient cause to believe that the limited liability partnership has any asset or liability, satisfy himself that sufficient provision has been made for the realization of all amount due to the limited liability partnership and for the payment or discharge of its liabilities and obligations by the limited liability partnership within a reasonable time and, if necessary, obtain necessary undertakings from the designated partner or partner or other persons in charge of the management of the limited liability partnership.

6. On the expiry of period of one month, the Registrar may, by an order, unless cause to the contrary is shown by the limited liability partnership, strike its name off the register, and shall publish notice thereof in the Official Gazette hence LLP shall stand dissolved.

Dissolution Requirements:

There should have been no liability existing or obligation subsisted on part of LLP and its partners. There should be no litigation pending for or against LLP. The assets of the limited liability partnership shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the limited liability partnership from the register. Liability of the Designated Partners subsists even after dissolution of LLP for payment of any legal dues to its creditors and other persons as if the LLP has not been dissolved.

TAXABILITY:

Up to the assessment year 1987-88 distribution of assets on dissolution of firm was not subjected to capital gains taxation. As a matter of fact Sec. 47(ii) specifically provided that it will not be considered to be a transfer. In Malabar Fisheries Co. vs. CIT (1979) 120-ITR-49(SC), the Supreme Court held that distribution of assets among partners on dissolution does not involve transfer as it is only because of pre-existing rights. This settled position was upset by introduction of Sec. 45(4) and deletion of Sec. 47(ii) with effect from 1-4-1988 i.e., A.Y. 1988-89 onwards. The reasons for the introduction of the new Section and for disturbing the settled position is explained by Circular No. 495, dated 22-9-1987, vide para 24.3. It was felt that the route of dissolution was used in a scheme of tax avoidance, which enabled the participants of the scheme to transfer assets from one hand to another hand without payment of legitimate tax.

The profits or gains are deemed to have arisen in the previous year in which the transfer takes place. The identification of the year of transfer becomes an issue in cases where the year of distribution happens to be different than the year of dissolution. The term ‘distribution’ is a legal and accounting concept which has given rise to a debate as to whether the Section will apply in a case where all the assets are taken away by one of the partners. An issue also has arisen as to whether the sale of capital assets to a partner could be treated as distribution of assets or not. A doubt has arisen about the entity in whose hands the deemed capital gain could be taxable, i.e., whether the gain would be taxed in the hands of the firm or in the hands of the group of partners as the firm has been dissolved and ceases to continue.
Relevant Sections:

Sec. 45(4) of the Income-tax Act provides for taxation of the deemed capital gains arising on distribution of capital assets in the course of dissolution. The essential requirement for attracting this provision is that there is a dissolution, and that in the course of such dissolution, capital assets are distributed.

The said Sec. 45(4) reads as under:

“The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place, and for the purposes of S. 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as result of the transfer.”

Ordinarily, capital gains arise on transfer of a capital asset. ‘Transfer is considered to be ‘sine qua non’ of capital gains. The term ‘transfer’ is defined by Sec. 2(47) of the Act, which reads as under :

“ ‘transfer’, in relation to a capital asset, includes: the sale, exchange or relinquishment of the asset; or the extinguishments of any rights therein; or the compulsory acquisition thereof under any law; or in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in Sec. 53A of the Transfer of Property Act, 1882 (4 of 1882); or any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of, any immovable property;

Explanation : For the purposes of sub-clauses (v) and (vi), ‘immovable property’ shall have the same meaning as in clause (Id) of the Sec. 269UA”.

From a bare reading of the above provisions, it is seen that the distribution of capital asset in the course of dissolution is not specifically included in the definition of the term ‘transfer’. Instead, a direct charge is sought to be created by introducing a deeming fiction in the form of Sec. 45(4) for bringing to tax the deemed capital gains on such distribution. It is this act of by passing the provision of Sec. 2(47) by the Legislature that has become the subject matter of an interesting controversy where under a possibility of rendering Sec. 45(4) nugatory is being debated.

One view of the matter is that Sec. 45(4) is a charging Section that brings in an effective charge in the circumstances provided therein, independent of Sec. 2(47). This view is supported by the decisions of the Karnataka and the Goa Bench of the Bombay High Court. The other view of the matter holds that without a specific amendment in Sec. 2(47) amending the definition of ‘transfer’, Sec. 45(4) has no independent application. This view is supported by a decision of the Madhya Pradesh High Court.

Analysis:

In cases of firms consisting of more than two partners, the death or insolvency of a partner would result in dissolution of the firm as per the provisions of the said Act. However, there would be no dissolution in a case where the partners have agreed to continue the partnership and the business even after death or insolvency, on certain terms and conditions. On compliance of such terms, the firm will be said to have continued. In such cases, there is a consensus of opinion that the provisions of Sec. 45(4) will not apply.

Cases which create real difficulty are the cases of partnership consisting of two partners only. It is in such cases that a difficulty arises, where one of the partners dies or is declared insolvent or retires. In such cases, the firm shall stand automatically dissolved on death or insolvency or on retirement by operation of the law. In such cases of severe hardships, the recent decision of the Madras High Court in the case of CIT v. Vijaya Metal Industries, 256 ITR 540, provides a major breakthrough. In that case, the assessee partnership consisted of two partners, which was dissolved on death of one of the partners. The business of the partnership firm was continued by the surviving partner with the assets of the partnership firm. The Income-tax Department applied the provisions of Sec. 45(4) and brought to tax the deemed capital gain by holding that the transfer took place on dissolution of the firm. The Tribunal held that though the dissolution of firm took place by operation of law, it was not followed by transfer of capital assets by way of distribution of such assets. The Madras High Court confirmed the decision of the Tribunal.

The decision in the case of Vijaya Metal Industries provides a much needed relief. With this, one thing is certain that the dissolution by itself will not result in distribution of assets of the firm. The distribution will take place only on taking of a positive action by the parties concerned for distributing the assets. Till such time, the assets may be treated as jointly held by the parties. This by itself is a big relief for the assessees who are caught unaware. It is also certain that it is possible to defer the year of taxation to the year in which the distribution takes place. This will enable an assessee to comprehend the impact of Sec. 45(4) and plan for the same. In view of the above, a new possibility has emerged where under the surviving partner can successfully join hands with the legal heirs of the deceased partner, in partnership and continue the business with the assets of the erstwhile firm. In such a case, the above-referred decision will help in contending that the assets of the erstwhile firm are not distributed amongst the parties entitled to it and till such time no liability to tax by virtue of Sec. 45(4) will arise.

Foreign limited liability partnerships:

The Central Government may make rules for provisions in relation to establishment of place of business by foreign limited liability partnerships within India and carrying on their business therein by applying or incorporating, with such modifications, as appear appropriate, the provisions of the Companies Act, 1956 or such regulatory mechanism with such composition as may be prescribed.

Compromise, or arrangement of limited liability partnerships:

Where a compromise or arrangement is proposed— between a limited liability partnership and its creditors; or between a limited liability partnership and its partners, the Tribunal may, on the application of the limited liability partnership or of any creditor or partner of the limited liability partnership, or, in the case of a limited liability partnership which is being wound up, of the liquidator, order a meeting of the creditors or of the partners, as the case may be, to be called, held and conducted in such manner as may be prescribed or as the Tribunal directs. If a majority representing three-fourths in value of the creditors, or partners, as the case may be, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Tribunal, by order be binding on all the creditors or all the partners, as the case may be, and also on the limited liability partnership, or in the case of a limited liability partnership which is being wound up, on the liquidator and contributories of the limited liability partnership . No order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the limited liability partnership or any other person by whom an application has been made has disclosed to the Tribunal, by affidavit or otherwise, all material facts relating to the limited liability partnership, including the latest financial position of the limited liability partnership and the pendency of any investigation proceedings in relation to the limited liability partnership. An order made by the Tribunal under shall be filed by the limited liability partnership with the Registrar within thirty days after making such an order and shall have effect only after it is so filed. If default is made, the limited liability partnership, and every designated partner of the limited liability partnership shall be punishable with fine which may extend to one lakh rupees. The Tribunal may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the limited liability partnership on such terms as the Tribunal thinks fit, until the application is finally disposed of.

Payment of Additional Fees:

Any document or return required to be filed or registered under this Act with the Registrar, if, is not filed or registered in time provided therein, may be filed or registered after that time up to a period of three hundred days from the date within which it should have been filed, on payment of additional fee of one hundred rupees for every day of such delay in addition to any fee as is payable for filing of such document or return.Provided that such document or return may, without prejudice to any other action or liability under this Act, also be filed after such period of three hundred days on payment of fee and additional fee specified in this section.

Business transactions of partner with limited liability partnership

A partner may lend money to and transact other business with the limited liability partnership and has the same rights and obligations with respect to the loan or other transactions as a person who is not a partner.

Conclusion:

Owing to flexibility in its arrangement and operation, it is expected that LLPs would also be a suitable vehicle for small enterprises and for investment by venture capitalists.

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