The concept of limited liability partnership came into existence by the introduction of the Limited Liability Act, 2008. LLP enjoys both the advantages of a private limited company and also a partnership. Similarly, as compared to partnership, for LLP conditions for claiming deduction of remuneration paid to partners of LLP would be as per section 40(b). Interest and profit sharing ratio should be defined in the agreement evidencing the LLP in order to claim deduction from the profits of LLP.
Finance Act, 2009, introduced several provisions in the Act to treat LLP as a partnership firm for the tax purposes in all respects.
The Finance Bill, 2010, takes the process of amendment further, primarily for small companies having turnover of Rs. 60.00 lacs or less, by amending sections 32, 35DDA, 43, 47, 47A, 49, 72A and section 115JAA , primarily aimed at providing tax neutrality for conversion of the private limited companies and unlisted public companies into LLP.
Section 47 of the Act deals with transactions not regarded as transfer. Under the existing provisions there was no provision dealing with conversion of a company into a LLP. By introducing clause (xiiib) in section 47, it is proposed that the transfer of assets on conversion of a company (private or unlisted public company) into a LLP in accordance with section 56 and 57 of the LLP Act, 2008 shall not be considered as transfer for capital gains purposes u/s. 45 of the Act. No capital gain therefore would accrue to the company upon transfer of assets from company to the LLP, despite the fact that the assets of the company would become the assets of the LLP by virtue of section 58 (4)(b) of the LLP Act, 2008.
The tax neutrality is subject to the following conditions:
(i) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP;
(ii) all the shareholders of the company immediately before the conversion become the partners of the LLP and their capital contribution and profit
sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion;
(iii) 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 LLP;
(iv) the aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than 50 % at any time during the period of five years from the date of coversion;
(v) 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 sixty lakh rupees; and
(vi) 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 conditions mentioned above are cumulative and each condition is required to be satisfied. Non-fulfillment of any one condition would render the transaction as transfer of assets and taxable as profits and gains of the successor LLP chargeable to tax in the previous year in which the requirements are not complied with.
The cost of acquisition of various assets acquired by the LLP upon conversion will be the cost of acquisition of these assets in the hands of the company prior to conversion and the written down value of the block of asset shall be the written down value of the block of asset for the company as on the date of conversion.
Section 72A, is proposed to be amended to allow carry forward and set off of accumulated loss and unabsorbed depreciation allowance in the hands of the company upon conversion. It is further provided that such accumulated loss and unabsorbed depreciation will be treated as the loss and depreciation of the year in which such conversion takes place and accordingly, fresh period of 8 years will be available for set off of loss in the hands of LLP upon conversion.
Specific provisions have been made for allowing the deduction u/s. 35DDA for the VRS expenses incurred by the Company prior to conversion for the balance period in the hands of the firm upon conversion.
In the scheme of conversion of the Company into the LLP, the shares held by the shareholders of the Company will get extinguished and will be substituted by balance in their respective capital accounts. Unlike cases of amalgamation and demergers, the proposed amendment does not clarify the position of tax neutrality in the hands of the shareholders and that continues to be an open question. It is recommended that the said issue is clarified.
Non-eligibility for MAT Credit in case of conversion from Company to LLP
Under the Finance Bill, 2010, extensive provisions are made for providing tax neutrality to conversion of a private limited company or unlisted public company to Limited Liability Partnership (LLP). However, the provisions of section 115 JAA granting credit for MAT paid shall not apply upon conversion into LLP.