LLP Audit Applicability: Section 34(4) and Interpretational Insights

In this article, I will be dealing with the provision of applicability of audit in Limited Liability Partnership Act, 2008 and an interpretational issue in the provision. The interpretation is author’s personal views.

Which section deals with applicability of LLP Audit?

Section 34(4) of LLP Act, 2008

Which rules deals with applicability of LLP Audit?

Rule 24(8) of LLP Rules, 2009

Extract of Rule 24(8) and first proviso:

Plain reading and Gramatical interpretation (i.e. Literal construction)

Rule 24(8), starts with saying that every LLP shall be audited and it carved out exemptions by inserting provisos.

As per first proviso, an LLP whose turnover OR contribution does not exceed the limit shall not be required to get audited.

Please note that the word used in the proviso is “or”. That means if either turnover OR contribution does not exceed the limit, that LLP shall not be required to get audited.

That is, only if both turnover AND contribution exceeds the limit, they need to be audited.

Does this interpretation sounds correct?

As per plain reading of the provisions, only if both turnover AND contribution exceeds the limit, they need to be audited.

So take this example (1) An LLP is having a turnover of Rs 1.50 Crore and its contribution is Rs 50 lakhs. Here both turnover and contribution exceeded the limit. So they have to get their accounts audited. No doubt.

Take another example (2) An LLP is having a turnover of Rs 200 Crore and its contribution is Rs 20 lakhs only. Here contribution has not exceeded the limit. So as per plain reading of the provisions, the LLP need not get audited.

A Rs 200 crore turnover LLP which is far bigger than a LLP mentioned in example 1, need not get audited? This is what provision says? Does it sound correct? Can anyone digest? Please read on.

Need of interpretation of statue and the importance of purposive construction  

The law has to be interpreted in such a way that it can be properly implemented.

The need of interpretation arises because any language, including English, is not precise. Each word and sentence has different shades of meaning. Also in the present era, there are hasty legislations and sometimes draftsmen paid little attention to express law in clear and unambiguous language. It is therefore necessary to interpret the statute to find out true meaning and true intention of legislature.

Normally the courts will have to follow the rules of literal construction. But when the application of literal construction of the words leads to absurdity, inconsistency, irrational or absolutely unjust, literal interpretation cannot be followed.

Object of the law must be kept in mind while interpreting statutes. Grammar cannot control the interpretation of statute.

Hence as per purposive construction, the author is of the opinion that the word “OR” in proviso to rule 24(8), has to interpreted as “AND” and hence if any one ie the turnover or contribution breaks the limit, audit has to be conducted. Then only the intention of law will get implemented. Otherwise even LLP as mentioned in example 2 will easily get away from audit, which does not seems to be the intention of law.

Small LLP

Limited Liability Partnership (Amendment) Act, 2021, w.e.f. 1-4-2022 has inserted a new definition for small limited liability partnership.

Section 2(ta) defines Small LLP as follows

Here the word used is “AND”. So an LLP qualifies to be a small LLP only if both contribution and turnover is below the limit.

Rule of Harmonious interpretation

This rule states that statue has to be read as a whole and interpretation consistent with other provisions in the Act should be adopted. Efforts should be made to reconcile different provisions of the same Act.

With the insert of definition of Small LLP, it is now clear that only when both turnover and contribution are below the limit, they only would qualify to be a small LLP. It is the same limit which is mentioned in audit applicability provision also. On combined reading of both audit applicability provision and small LLP definition, it looks like that the draftsmen intended to exclude only Small LLP from the purview of audit.

An example of change & clarificatory nature of change

There are lot of judgments where in it was held that “or” should be read as “and” and vice versa to give effect to intention and purpose of legislature.

As per 2(85) of Companies Act, 2013 in its original enactment, a small company means a company, where its paid up capital OR turnover does not exceed the specified limit. The word “or” created confusion and later on by the Companies (Removal of Difficulties) Order, 2015, w.e.f. 13-2-2015, the word “or” was replaced with word “and”.

Whether this kind of amendment has retrospective effect? Generally this kind of amendment is clarificatory or declaratory in nature to clear misunderstanding, avoid ambiguity and clarify the intention and hence it has retrospective effect.

Penalty for not conducting LLP audit

Section 34(6) of LLP Act

So penalty is

On LLP: Rs 25,000 – Rs 5 lakhs

On every DPs: Rs 10,000 – Rs 1 lakh

Suggestion

The Government may bring necessary clarification or amendment in this matter to remove doubts.

The author can be reached at sivaraman004@gmail.com