Post my article on Conversion of Company into LLP, I was asked lot of question on the tax implication after conversion. I have made an attempt to explain here some provisions related to that. Hope I clarify some doubts.

Following shall not be regarded as “transfer”, therefore, no capital gain shall arise on the following:

Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership

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.

Exemption shall be available only if the conversion satisfies all the below mentioned conditions:-

According to proviso to section 47(xiiib), the conversion of Private Limited Companies and Unlisted Public Companies into LLP is not taxable subject to following conditions:

(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; (i.e you can take new partners in the LLP, but all the previous shareholders who became partners in LLP share should remain at least 51% for 5 years from 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; and

(f) 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.

(g) 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; (Amendment as per Finance Bill 2016)

However, there are some discrepancies

Point No (e) which says about Total sales, turnover or gross receipts in the business of the Company which means if the company is into textile business, then sales, turnover and receipts of only that business. However if a company is receiving any other income from any other source then it will not be his business income as his business was into textile. As per my understanding if the turnover from textile if 59 lac and is having other miscellaneous income of Rs 5 Lacs, his total receipts would be of 64 lacs, but business receipts of only Rs 59 Lacs. So the criteria is still fulfilled.

The Exemption is available only to the Capital assets an intangible assets.

Point No (g) which says total value of assets. The term value is not defined   which can be book value or fair market value which will be debateable. However as per my understanding since it is specified as value appearing in books of accounts, it should be taken at book value.

Point No (f) which says non distribution of accumulated profits for 3 years.  However, if a company has already distributed bonus shares by capitalising the reserves, then the question won’t arise. Hence there is a loop hole

Sec 50D was introduced  which says that fair market value of assets is to be taken as full value of consideration if capital gain arises on conversion.

The capital gains shall be computed as given in section 48 according to which capital gain shall be computed by deducting cost of acquisition and expenditure from full value of consideration

There are lot of issues as both the entities are one and the same. However, for transfer there has to be two entities. In this case, only the form of entity is changing i.e from Company t LLP, where there will be no existence in future of Company.

Cost of acquisition of the asset: Shall be deemed to be the cost of acquisition of predecessor company

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. Hence long term and short term will depend on the total holding period from the date of buying.

Please refer all the relevant section, rules, notifications, amendments as applicable. The Author is not responsible for any losses incurred.

Content is purely for knowledge sharing. Author can be reached at caswetamakwana@gmail.com or 9819244185.

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4 responses to “Taxation On Conversion Of Company Into LLP”

  1. MUDIT AGRAWAL says:

    What will be the taxability if on conversion of Co. to LLP, the stock in trade in Pvt Ltd. Company is transferred to LLP.

  2. CA Vinod Singhania says:

    There is no option to claim exemption or not to claim exemption. However, there may be a case where exemption would not be available for the treason that one or more conditions of section 47(xiiib) are not fulfilled. In that case the liability to pay capital gain tax shall be that of the Company/ transferor. This shall be provided for before conversion and the this shall be one of the liability transferred to the LLP.

    • Abhisekh says:

      Dear Sir,

      In case conditions u/s 47(xiib) are not satisfied, then whether capital gains would be taxed on the market value of assets (including Land & Building and Shares) transferred to LLP or the actual value at which the assets are transferred?

      Further, whether shareholders of the Company (whose rights are extinguished), would be liable to capital gains tax if 47(xiib) conditions are not satisfied?

  3. Hemant Kud says:

    If Private Company is converted into LLP without claiming exemption u/s 47 then please guide
    1. who is liable to pay tax , Shareholder or LLP .
    2. Sale consideration would be at Market value or Book Value
    Please provide complete explanation on the same

    Thanks

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