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. Presently LLP is subject to tax @ 30%. There will be no change in this tax rate.
Section 47 – Transactions not regarded as transfer
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.
A new clause (xiiib) is to be inserted in section 47 to provide that any transfer of a capital asset or intangible asset by a company shall not be treated as transfer under section 45 where a private company or unlisted public company is converted into a limited liability partnership in accordance with the provisions of section 56 or 57 of the Limited Liability Partnership Act, 2008, subject to fulfillment of certain conditions as under:
(i) the total sales, turnover or gross receipts in business of the company do not exceed sixty lakh rupees in any of the three preceding previous years;
(ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company;
(iii) no consideration other than share in profit and capital contribution in the LLP arises to partners;
(iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion;
(v) all assets and liabilities of the company become the assets and liabilities of the LLP; and
(vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion.
Comments
No provisions is incorporated relating to transfer in case of compromise, arrangement, reconstruction, and amalgamation of LLPs u/s 47. Hence, Amalgamation of Two LLPs which happens in the same manner as that of companies may be a taxable transfer. Section 55 of the LLP Act, provides for conversion of Firm to LLP. No provision is incorporated u/s 47 dealing with the same as it appears that as a firm u/s 2(23) includes LLP, Conversion of firm to LLP would make no difference under the Income-tax Act. Without prejudice, the conversion of firm into LLP is only transformation similar to conclusion of firm into company under Part IX of the Companies Act, 1956 and hence the same may not be taxable in view of decision of Bombay High Court in CIT vs. Texspin Engineering & Manufacturing Works (2003) 263 ITR 345 (Bom.).
Section 47A – Withdrawal of exemption in certain cases
Amendment
New sub-section (4) is inserted in section 47A which provides that where any of the conditions stipulated in the proviso to clause (xiiib) of section 47 are not complied with, the amount of profits or gains arising from the transfer of capital assets by the predecessor private company or unlisted public company to the successor limited liability partnership on succession shall be deemed to be the profits or gains chargeable to tax of the successor limited liability partnership for the previous year in which the conditions stipulated in the proviso to clause (xiiib) of section 47 are not complied with.
Section 49 – cost with reference to certain modes of acquisition
Earlier Provision
The Earlier provisions contained in the aforesaid section provide that in certain circumstances the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the asset acquired it.
Amendment
Sub-clause (a) proposes to amend sub-clause (e) of clause (iii) of sub-section (1) of the section 49 so as to make a reference of clause (xiiib) of section 47 in the said sub-clause (e) to provide that in case of succession of a private company or unlisted public company by a limited liability partnership, the cost of acquisition of the assets for the successor limited liability partnership shall be deemed to be the cost for which the predecessor company acquired it.
Comments
The Mumbai Special Bench in case of DCIT vs. Manjula Shah ITA No. 7315/M/2007 has held that in case of transfer u/s 49 indexation shall be allowed from the date when the asset is first held by the previous owner and not from the date when the assessee becomes the owner.
Section 32 – Depreciation
Earlier Provision
The Earlier provisions contained in the aforesaid section provide that the aggregate depreciation allowable to the predecessor and successor business entities in case of succession or amalgamation shall not exceed in any previous year the deduction allowable at prescribed rates as if the succession or amalgamation had not taken place and such deduction shall be apportioned between the two entities in the ratio of the number of days for which the assets were used by them.
Amendment
It is provided to make a reference of clause (xiiib) in the fifth proviso to sub-section (1) of the section 32 to provide that in case of succession of a private company or unlisted public company by limited liability partnership, the aggregate depreciation allowable to the predecessor company and the successor limited liability partnership shall not exceed, in any previous year, the deduction calculated at the prescribed rate as if no succession has taken place.
Section 35DDA : Amortisation of expenditure incurred under voluntary retirement scheme
Earlier Provisions
The Earlier provisions contained in the aforesaid section provide that where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of his voluntary retirement under any scheme of voluntary retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance shall be deducted in equal installments for each of the four immediately succeeding previous years.
Amendment
Sub-clause (a) proposes to amend the aforesaid section so as to insert a new sub-section (4A) to provide that in case of succession of a private company or unlisted public company by a limited liability partnership, the provisions of the said section shall apply to the successor limited liability partnership as they would have applied to the predecessor company. Sub-clause (b) proposes to amend sub-section (5) of the aforesaid section to provide that in case of such conversion, no deduction under the said section shall be allowed to the predecessor company in the previous year in which the conversion takes place.
Comments
No amendment is made in section 35DD for amortization of expenses on amalgamation of LLP. In CIT vs. Bombay Dyeing & manufacturing Co. Ltd. (1996) 219 ITR 521 (SC) prior to introduction of section 35DD it was held that expenses incurred on amalgamation were allowable as revenue expenses. Hence entire expenses will be allowed in case of amalgamation of LLP and there will be no amortization.
Section 43: Definitions of certain terms relevant to income from profits and gains of business or profession
Earlier Provision
The Earlier provisions contained in Explanation 13 to clause (1) of the aforesaid section provide that the actual cost of any capital asset on which deduction has been allowed or is allowable under section 35AD shall be treated as ‘Nil’ in the event of capital asset being acquired or received by any of the mode as stated in clause (b) sub-clause (iii).
Amendment
It is provided to make a reference of clause (xiiib) of section 47 in sub-clause (iii) of clause (b) of the said Explanation, to provide that in case of succession of a private company or unlisted public company by a limited liability partnership, the actual cost of capital assets on which deduction has been allowed under section 35AD to the predecessor company shall be taken as ‘nil’ in case of the successor limited liability partnership.
It is also provided to amend clause (6) of the aforesaid section by inserting a new Explanation 2C to the said clause (6) so as to provide that in case of succession of private company or unlisted public company by limited liability partnership, the actual cost of the block of assets in case of successor limited liability partnership shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion.
Section 72A : Provisions relating to carry forward and setoff of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger etc.
Amendment
A new sub-section (6A) is inserted in section 72A which provides that in case of succession 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, notwithstanding anything contained in any other provisions of the Act, the accumulated loss and the unabsorbed depreciation of the predecessor company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the successor limited liability partnership for the previous year in which business reorganisation was effected and the other provisions of the Act relating to set off and carry forward loss and allowance for depreciation shall apply accordingly. However, if the conditions stipulated in the proviso to clause (xiiib) of section 47 are not complied with, the set off of loss or allowance of depreciation which had been allowed shall be deemed to be the income chargeable to tax of the successor limited liability partnership for the previous year in which the conditions stipulated in the proviso to clause (xiiib) of section 47 are not complied with.
It is also amended to substitute the said clauses (a) and (b) to redefine the expressions as under:–
(a) “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 reorganization of business or conversion or amalgamation or demerger had not taken place;
(b) “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.
Section 115JAA : Tax credit in respect of tax paid on deemed income relating to certain companies.
Earlier Provision
The Earlier provisions contained in the aforesaid section provide that where any amount of tax is paid under sub-section (1) of section 115JB by a company for any assessment year beginning on or after 1st April, 2006, credit in respect of tax so paid shall be allowed to it in accordance with the provisions of section 115JAA.
Amendment
It is amended to insert a new sub-section (7) in the said section to provide that the provisions of section 115JAA shall not apply to a limited liability partnership which has been converted from a private company or unlisted public company under the Limited Liability Partnership.
