TAXATION ASPECT FOR LLP IN BUDGET

[Mr. M. GOVINDARAJAN]

Limited Liability Partnership Act, 2008 ('Act' for short) was enacted for the formation of limited liability of the partners which will be much helpful for the professionals. The Finance Act (No.2) Act, 2009 for the taxation of Limited Liability Partnership ('LLP' for short) in the Income Tax Act, 1961 on the same lines as applicable to partnership firms.

Sec. 56 of the Act provides that a private company may convert into a LLP in accordance with the provisions of the Chapter X of the Act and the third schedule. Sec. 57 of the Act provides that an unlisted public company may convert into a LLP in accordance with the provisions of the Chapter X of the Act and the Fourth Schedule. The existing provisions of the Income Tax Act have definite tax applications in respect of a conversion of a company into an LLP. Transfer of assets on conversion attracts levy of capital gains tax and also carry forward of losses and of unabsorbed depreciation is not available to the successor LLP.

The Hon'ble Finance Minister in his budget speech indicated that he had provided for the taxation of the newly introduced LLP on the same lines as exists for a general partnership firm. To facilitate the conversion of small companies into LLP, he proposed that this would not be subject to capital gains tax. For this purpose the amendments have been made in Finance Bill, 2010. In this article the details of amendments on LLPs is to be discussed.

Sec. 32 of the Income Tax Act 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. Clause 8 of the Finance Bill seeks to amend section 32. It is proposed to make a reference of clause (xiiib) in the fifth proviso to Sec. 32(1) to provide that in case of succession of a private company or unlisted public company by LLP, the aggregate depreciation allowable shall not exceed, in any previous year, the deduction calculated at the prescribed rate as if no succession has taken place.

Sec. 35DDA of the Income Tax Act provides that where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employer at the time of his voluntary retirement under any scheme, one fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous and the balance shall be deducted in equal installments for each of the four immediately succeeding previous years. Clause 11(a) proposes to amend Sec. 35DDA by inserting sub section (4A) to provide that in case of succession of a private company or unlisted public company by a LLP, the provisions of the said section shall apply to the successor LLP as they would have applied to the predecessor company. Clause 11(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.

Section 43 of the Income Tax Act deals with definitions of certain terms relevant to income from profits and gains of business or profession. Explanation 13 to Section 43(1) provides 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 specified circumstances. Clause 13(a) of the Finance Bill proposes 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 LLP, 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 LLP. Clause 13(b) proposes to amend clause (6) of the aforesaid section by inserting a new Explanation 2C to the said clause so as to provide that in case of succession of private company or unlisted public company by LLP, the actual cost of the block of assets in case of successor LLP shall be the written down value of the block of assets as in the case of the predecessor on the date of conversion.

Section 47 of the Income Tax Act provides that certain transactions are not regarded as transfer for the purpose of section 45 of the Income Tax Act. Clause 18 of the Finance Bill proposes to insert a new clause (xiiib) in section 47 which provides 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 LPP in accordance with the provisions of section 56 or 57 of the Act. It is also proposed to insert a proviso to the said clause which provides that-

* all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP;

* 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;

* 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;

* the aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than fifty per cent, at any time during the period of five years from the date of conversion;

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

* 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.

Section 47A of the Income Tax deals with exemption in certain cases. Clause 19 of the Finance bill seeks to amend the said section so as to insert a new sub section (4) to provide 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 LLP on succession shall be deemed to the profits or gains chargeable to tax of the successor LLP for the previous year in which the conditions stipulated in the proviso to clause (xiiib) of Section 47 are not complied with.

Section 49 of the Income Tax provides that in certain circumstances the cost of acquisition of the assets shall be deemed to be the cost for which he previous owner of the asset acquired it. Clause 20(a) of the Finance Bill proposes to amend sub clause (e) of clause (iii) of sub section (1) of 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 LLP, the cost of acquisition of the assets for the successor LLP shall be deemed to be the cost for which the predecessor company acquired it.

Section 49(4) provides that where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under Section 56(2)(vii), the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii). Clause 20(b) proposes to amend the aforesaid sub section to provide that the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purpose of Section 56(2)(viia).

Section 72A of the Income Tax Act deals with carrying forward and setting off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger etc., Clause 22(a) proposes to insert a new sub section (6A) which provides that in case of succession of business, whereby, a private company or unlisted public company is succeeded by a LLP fulfilling the conditions laid down in the proviso (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 LLP for the previous year in which business reorganization 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 Sec. 47(xiiib) are not complied with, the set off loss or allowance of depreciation which had been allowed shall be deemed to be the income chargeable to tax of the successor LLP for the previous year in which the conditions stipulated in proviso to Sec. 47(xiiib) are not complied with.

Clause 22(b) of the Finance Bill proposes to substitute Sec. 72A(7)(a) and Sec. 72A(7)(b) to redefine the expressions 'accumulated loss' and 'unabsorbed depreciation'. The expression '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 LLP 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.

The expression '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 LLP 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 reorganization of business or conversion or amalgamation or demerger had not taken place.

Section 115JAA of the Income Tax Act provides that where any amount of tax is paid under Section 115JB(1) by a company for any assessment year beginning on or after 1.4.2006 credit in respect of tax so paid shall be allowed to it in accordance with the provisions of section 115JAA. Clause 29 of the Finance Bill proposes to insert a sub section (7) in the said section to provide that the provisions of Section 115 JAA shall not apply to a LLP which has been converted from a private company or unlisted public company under the LLP Act.

The above amendments will be brought into effect as detailed below:

CLAUSE	DATE OF EFFECT	ASSESSMENT YEAR
Clause 8	01.04.2011	2011-12
Clause 11	01.04.2011	2011-12
Clause 13	01.04.2011	2011-12
Clause 18	01.04.2011	2011-12
Clause 19	01.04.2011	2011-12
Clause 20(a)	01.04.2011	2011-12
Clause 20(b)	01.06.2011	2011-12
Clause 22	01.04.2011	2011-12
Clause 29	01.04.2011	2011-12