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TAXATION 1080

Taxation of Limited Liability Partnership

Limited Liability Partnership (LLP) and general partnership is being treated as equivalent (except for recovery
purposes) in the Income-tax Act, 1961. As opposed to a corporate entity, distribution made by an LLP to its
partners is tax exempt i.e. there is no dividend distribution tax on distribution to partners and further, an LLP
is not subject to Minimum Alternate Tax. The Finance Bill, 2010 has proposed the much awaited provisions
with respect to tax treatment on conversion of existing private companies and unlisted public companies into
LLPs. Introduction of a tax regime will provide a road of certainty in relation to the tax cost associated with
carrying the business via the LLP mode. However, further clarifications and suitable amendments to the Act
are desired to remove the cloud of uncertainty in relation to certain issues. Read on to know more.
Limited Liability Partnership (LLP) is the date of publication in the official
a buzz word today in India. However, it gazette itself and rest of the rules were
is not a new concept but an international made effective from 31-5-2009.
wine in an Indian bottle. LLP Law is Limited Liability Partnership Rules,
prevalent in many countries like UK, 2010 were published in the official
Japan, Canada, USA, Germany, etc. gazette on 11-1-2010 and were made
effective from 15-1-2010.
Limited Liability Partnership
Act Taxation of LLP
Limited Liability Partnership Act, 2008 LLP is a hybrid form of business having
was published in the official gazette the colours of both, General Partnership
on 9th January, 2009, but it was made and Company. It provides the benefits
effective in parts. Initially some of the of limited liability but allows its members
provisions were made effective on 31st the flexibility of organising their internal
March, 2009. Afterwards most of the structure as partnership based on a
provisions which were left were made mutually arrived agreement. As soon
effective from 31st May, 2009. However, as the Limited Liability Partnership Act
there are still some provisions left got the legal consent, the need for a
which are to be notified so as to make clear cut tax regime in respect of the
them effective. income of the LLP was essential to give
certainty in all respects of conducting
Limited Liability Partnership business via this mode of business.
Rules Finance Act, 2009 substituted
Limited Liability Partnership Rules, the definition of firm, partner and
CA. Aadesh Kumar Agrawal
(The author is a member of the Institute. 2009 were published in the official partnership given under Section 2(23)
He can be reached at eboard@icai.org) gazette on 1-4-2009. Rules 1 to 31, of the Income Tax Act as under:-
34 to 37 and 41 came into force from ‘(i) “firm” shall have the meaning

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assigned to it in the Indian payment. Maximum rate of interest be converted into LLP following the
Partnership Act, 1932 (9 of 1932), allowable is 12 per cent per annum. provisions given under Section 58
and shall include a limited liability Section 40(b) was amended by the and Fourth Schedule to the Act.
partnership as defined in the Finance Act, 2009 so as to provide However, there are no provisions
Limited Liability Partnership Act, uniform limit of remuneration for both available in Limited Liability Partnership
2008 (6 of 2009); professional and non professional firms Act to reconvert back into a partnership
(ii) “partner” shall have the meaning for simplicity and administrative ease. or a company from LLP. In such a case,
assigned to it in the Indian The revised limits of remuneration are the decision has to be well evaluated
Partnership Act, 1932 (9 of 1932), as under: realising that there is no “u turn”
and shall include,— On the first R3 lakh of R1,50,000 or 90 per available down the road.
(a) any person who, being a book profit or in case cent of Book Profit
of a loss whichever is more
minor, has been admitted to the On the balance of Book 60 per cent
Conversion of Partnership
benefits of partnership; and Profit into LLP: Tax Implications
(b) a partner of a limited liability As per definition given under Income-
partnership as defined in the Taxation of Partners tax Act, 1961 Firm includes LLP.
Limited Liability Partnership Act, Profit of LLP credited to the accounts Therefore, conversion of Firm into
2008 (6 of 2009); of the partners shall be exempt to tax LLP will be conversion to itself i.e. no
(iii) “partnership” shall have the under Section 10(2A) in the hands change (nothing happened) in the eyes
meaning assigned to it in the of partners to avoid double taxation. of Income Tax Law, subject to right and
Indian Partnership Act, 1932 (9 of However, remuneration and interest obligations of the partners remain the
1932), and shall include a limited paid by the LLP to its partners shall be same after conversion and if there is
liability partnership as defined in taxable in the hands of partners up to no transfer of any asset or liability after
the Limited Liability Partnership Act, which deduction has been claimed by conversion. Explanatory Memorandum
2008 (6 of 2009); the LLP under Section 40(b) under the of the Union Budget 2009-10 clarifies
By the above amendments it head “Profits and gains of business as follows:-
was clarified that LLP shall be taxed or profession”. However, any amount “As an LLP and a general partnership
at par with general partnership i.e. exceeding the limit specified under is being treated as equivalent (except
taxation in the hands of the entity and Section 40(b) paid by LLP to its partner for recovery purposes) in the Act, the
exemption from tax in the hands of its shall be taxable in the hands of LLP conversion from a general partnership
partners. Accordingly, all the provisions and therefore, not chargeable to tax in firm to an LLP will have no tax
of the Income-tax Act, 1961 which the hands of partners. implications if the rights and obligations
are applicable on firm, partner and of the partners remain the same after
partnership shall also be applicable on Forms of Business By certain
LLP, partner of LLP and Limited Liability Convertible into LLP amendments it
Partnership unless otherwise provided Following forms of business can be was clarified that
in the Act. Therefore, LLP shall pay converted into LLP: LLP shall be taxed at par with
tax @ 30.09 per cent (30% + 3% • Partnership firm, in pursuant to general partnership i.e. taxation
education cess) on its profit earned Section 55 of Limited Liability in the hands of the entity and
during any previous year. Since the LLPs Partnership Act, 2008, can be exemption from tax in the hands
have been treated at par with the general converted into LLP following the of its partners. Accordingly, all
partnership, the provisions of Minimum provisions given under Section 58 the provisions of the Income
Alternate Tax and Dividend Distribution and Second Schedule to the Act. Tax Act which are applicable on
Tax will not be applicable for LLP. • Private company, in pursuant to firm, partner and partnership
Section 56 of Limited Liability shall also be applicable on LLP,
Remuneration and Interest Partnership Act, 2008, can be partner of LLP and Limited
to Partners converted into LLP following the Liability Partnership unless
LLP shall be eligible to claim provisions given under Section 58 otherwise provided in the Act.
remuneration and interest paid to its and Third Schedule to the Act. Therefore, LLP shall pay tax
partners up to the permissible limit • Unlisted public company, in @ 30.09 percent (30% + 3%
given under section 40(b) subject to pursuant to Section 57 of Limited education cess) on its profit ear-
LLP Agreement authorises such Liability Partnership Act, 2008, can ned during any previous year.

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TAXATION 1082

conversion and if there is no transfer of in the same proportion as their companies to be converted into LLP.
any asset or liability after conversion. If shareholding in the company on Since there is a liability to pay dividend
there is a violation of these conditions, the date of conversion; distribution tax @ 16.995 per cent for
the provisions of Section 45 shall 3. The shareholders of the company the company on declaration/payment/
apply.” do not receive any consideration distribution of dividend out of its
Therefore, there will be no capital or benefit, directly or indirectly, in current or accumulated profit, therefore,
gain on conversion of firm into LLP any form or manner, other than by sixth condition restricts the partners
either in the hands of firm or in the way of share in profit and capital of LLP to distribute its accumulated
hands of partners. All the provisions of contribution in the LLP; profit standing on the date of conversion
the Income-tax Act, 1961 shall continue 4. The aggregate of the profit sharing in the accounts of the company to
to apply on LLP as they would have ratio of the shareholders of the avoid the conversion only for saving
applied on firm as if no conversion had company in the LLP shall not be dividend distribution tax.
taken place. less than 50 per cent, at any time However, issuing bonus shares to
during the period of five years from equity shareholders is not dividend as
Conversion of Private or the date of conversion; per definition given under Section 2(22)
Unlisted Public Company 5. The total sales, turnover or gross and thus out of the ambit of dividend
into LLP: Tax Implications receipts in business of the company distribution tax. Therefore, if before
Income Tax Law was silent about the in any of the three previous years conversion, company issues bonus
tax implications, on conversion of preceding the previous year in shares to its equity shareholders out of
Private Company or Unlisted Public which the conversion takes place its accumulated profit by capitalising
Company (hereinafter referred to as does not exceed R60 lakh; and its whole profit and on the next
company) into LLP. The Finance Bill, 6. No amount is paid, either directly day it converts itself into LLP, then,
2010 has proposed to make provisions or indirectly, to any partner out of shareholders (prospective partners)
for the same. Proposed provisions are balance of accumulated profit shall get their part of accumulated
as under:- standing in the accounts of the profit to the credit of their capital
A. Transfer of Asset shall not be company on the date of conversion account as contribution in LLP without
regarded as transfer for a period of three years from the any tax implication which is not the
Section 47 of the Income-tax Act date of conversion. intention of Law. Hence sixth condition
has been proposed to be amended Above mentioned six conditions introduced by Finance Bill, 2010 needs
so as to include new clause (xiiib). are cumulative and each one of them reconsideration.
As per proposed Section 47 (xiiib), has to be satisfied to claim exemption. B. Withdrawal of Exemption
any transfer of a capital asset or The first four conditions are on the New sub section 4 to Section 47A
intangible asset by a company to a same line as provided for conversion has been proposed to be inserted by
LLP as a result of conversion of the of firm/AOP/BOI into company in the Finance Bill, 2010 so as to provide
company into LLP in accordance Section 47(xiii). Fifth condition seems that:
with the provisions of Section to be added to discourage the big • Capital gain not previously charged
56 or Section 57 of the Limited If before conversion, under Section 45 due to fulfillment
Liability Partnership Act shall not company issues of six conditions laid down in the
be regarded as transfer if and bonus shares to proviso to Section 47(xiiib) shall be
only if following six conditions are its equity shareholders out deemed to be the profits and gains
satisfied [given in the proviso to of its accumulated profit by of the successor LLP if any of the
proposed Section 47(xiiib)]:- capitalising its whole profit and conditions laid down in the proviso
1. All the assets and liabilities of the on the next day it converts itself to Section 47(xiiib) are violated.
company immediately before the into LLP, then, shareholders • Such income shall be chargeable
conversion become the assets (prospective partners) shall get to tax in the previous year in which
and liabilities of the LLP; their part of accumulated profit the requirements of the said
2. All the shareholders of the company to the credit of their capital proviso are violated.
immediately before the conversion account as contribution in LLP • It is not clear from the language of
become the partners of the LLP without any tax implication proposed Section 47A(4) as to the
and their capital contribution and which is not the intention of head under which such income
profit sharing ratio in the LLP are Law. would be taxed. However, having

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regard to the placement of Section E. Cost of Block transferred on A new sub section
47A(4) in the provisions relating to conversion (4A) to Section 35DDA
taxation of capital gains, it appears New Explanation 2C to Section has been proposed to
that it would be treated as capital 43(6) has been proposed to be be inserted by Finance Bill, 2010
gains. inserted by the Finance Bill, 2010 so as providing that, if a company is
C. Amortisation of expenditure to provide that, where in any previous converted into LLP satisfying the
incurred under Voluntary Retirement year, any block of assets has been six conditions laid down in the
Scheme (VRS) transferred by a company to LLP on its proviso to Section 47(xiiib), then,
Section 35DDA(1) provides conversion, satisfying the six conditions provisions of Section 35DDA
deduction of the total amount, laid down in the proviso to Section shall apply to the successor LLP
paid by an assessee under VRS to 47(xiiib), then, the actual cost of the as they would have applied
an employee, in five equal annual block of assets in the case of LLP shall to the said company as if
installments commencing from the be the written down value of the block reorganisation of business had
previous year in which such amount is of assets on the date of conversion in not taken place.
paid by the assessee. the case of the said company. to set off and carry forward of loss
A new sub section (4A) to Section F. Cost of Acquisition and allowance for depreciation shall
35DDA has been proposed to be Section 49(1)(iii)(e) has been apply accordingly. Meaning thereby
inserted by the Finance Bill, 2010 proposed to be amended by the LLP can carry forward such business
providing that, if a company is con- Finance Bill, 2010 so as to provide that, loss for the fresh period of eight years
verted into LLP satisfying the six where a LLP acquires capital asset under Section 72 of the Income-tax Act
conditions laid down in the proviso satisfying the six conditions laid down and unabsorbed depreciation can be
to Section 47(xiiib), then, provisions in the proviso to Section 47(xiiib), then, carried forward for the indefinite period
of Section 35DDA shall apply to the the cost of acquisition of such asset for under Section 32(2) by the successor
successor LLP as they would have LLP shall be deemed to be the cost for LLP.
applied to the said company as if which the previous owner (company) of However, if any of the six conditions
reorganisation of business had not the property acquired it, as increased laid down in the proviso to section
taken place. Thus the deduction shall by the cost of any improvement of 47(xiiib) is violated subsequently,
be available for the remaining period to the assets incurred or borne by the the set off of loss or allowance of
the LLP. previous owner or the successor LLP, depreciation made in any previous
Sub section (5) to Section 35DDA as the case may be. year in the hands of the successor LLP,
has also been proposed to be shall be deemed to be the income of
amended by Finance Bill, 2010 so as G. Carry Forward of Business Loss the LLP chargeable to tax in the year in
to provide that, no deduction under and Unabsorbed Depreciation which such violation has taken place.
Section 35DDA shall be allowed to the A new sub section 6A to Section H. MAT Credit shall Lapse
said company for the previous year 72A has been proposed to be inserted, A new sub section 7 to Section
in which such conversion has taken in consequent to which clause (a) and 115JAA has been proposed to be
place. (b) of Section 72A(7) has also been inserted by the Finance Bill, 2010 so as
D. Actual cost of any capital asset of proposed to be amended by the to provide that, if there is a conversion
specified business referred under Finance Bill, 2010 so as to provide that, of a company into LLP irrespective of
Section 35AD if there is a conversion of company into the fact it satisfies the six conditions
Explanation 13 to Section 43(1) LLP satisfying the six conditions laid laid down in the proviso to Section
has been proposed to be amended down in the proviso to Section 47(xiiib), 47(xiiib), MAT credit available to the
by Finance Bill, 2010 so as to provide then, accumulated business loss (not predecessor company shall lapse and
that, the actual cost of any capital asset being a loss sustained in a speculation the LLP cannot enjoy the benefit of the
on which deduction has been allowed business) and unabsorbed depreciation same.
or is allowable to the assessee under of the predecessor company, shall be I. Taxation of Shareholders
Section 35AD, shall be treated as NIL, if deemed to be the loss or allowance On conversion of company into LLP
the capital asset is acquired or received of depreciation of the successor LLP the shares held by the shareholders
on conversion of company into LLP for the purpose of the previous year of the company will get extinguished
satisfying the six conditions laid down in which such conversion has taken and will be substituted by balance
in the proviso to Section 47(xiiib). place and other provisions relating in their respective capital accounts.

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TAXATION 1084

As per definition given under Section was a LLP. under Income-tax Act, 1961 are only
2(47) of Income Tax Act, transfer in In such case, every person who with respect to companies. There are
relation to a capital asset, includes, was a partner of the LLP at any time detailed provisions under Income-tax
the extinguishment of any rights during the relevant previous year, Act, 1961 about the tax implications,
thereon and thus chargeable to tax shall be jointly and severally liable for if amalgamation or demerger of
under Section 45. But unlike cases the payment of such tax unless he companies takes place. Transfer of
of amalgamation and demerger, the proves that the non-recovery cannot capital asset by the amalgamating
proposed amendments do not clarify be attributed to any gross neglect, company or demerged company
the position of tax neutrality in the misfeasance or breach of duty on his to the amalgamated company or
hands of the shareholders and still is part in relation to the affairs of the LLP. resulting company as the case may
an open question. Section 167C supersedes the be, is not considered as transfer hence
Limited Liability Partnership Act, 2008. does not attract capital gain subject to
Who to Sign the Return Although this Section appears to be in fulfillment of certain conditions given
Section 140 has been amended by the conflict with the scheme of the Limited under Section 47. On the other hand,
Finance Act, 2009 so as to provide that, Liability Partnership Act, 2008, which transfer of shares in the amalgamating
in the case of a LLP, return of income can does not make the partners personally company or demerged company as
be signed by the designated partner liable for the liabilities of the LLP, it seems the case may be, by the shareholders,
thereof, or where for any unavoidable to be in line with existing provisions of does not tantamount to transfer subject
reason such designated partner is not Section 179 of the Income-tax Act, which to fulfillment of certain conditions given
able to sign and verify the return, or cast a similar liability on the Directors of under Section 47.
where there is no designated partner a private company in liquidation. However, there are no such
as such, by any partner thereof. provisions for LLPs. It is recommended
Liability of Partners in Presumptive Taxation to amend the definitions of amalga-
Liquidation Scheme under Section 44AD mation and demerger given under
A new Section 167C has been The existing provisions of the Income Tax Act so as to cover the
inserted by the Finance Act, 2009 so Income-tax Act, 1961 provide an option amalgamation and demerger of LLP
as to provide the provisions regarding to the assessee for taxation of income too or to provide separate provisions
liability of partners to pay tax in the on presumptive basis in the case of for the same.
case of liquidation of LLP. It provides construction business, income from
that where any tax due and cannot be goods carriages and business of retail Conclusion
recovered from- trade under Section 44AD, 44AE and Taxation scheme for LLP has been
1. LLP in respect of any income of 44AF respectively. However, a LLP can prescribed on the same lines as
any previous year, or enjoy presumptive taxation scheme currently applicable for Partnership
2. Any other person in respect of only up to assessment year 2011- Firms (except for recovery purposes),
any income of any previous year 12, except that provided in Section and all the provisions of the Income-
during which such other person 44AE. As Section 44AD has been tax Act applicable to Firm apply to LLP
The existing made inapplicable on LLP and Section also unless otherwise provided in the
provisions of the 44AF has been made inoperative Act. There are specific provisions in
Income-tax Act, 1961 from assessment year 2011-12 by the Income Tax Act for the tax implications
provide an option to the Finance Act, 2009. on conversion of private company
assessee for taxation of income or unlisted public company into LLP.
on presumptive basis in the Amalgamation of LLP Despite some clarity being provided by
case of construction business, There are certain provisions under the Income-tax Act, 1961 and Finance
income from goods carriages and Limited Liability Partnership Act, 2008 Bill, 2010 there are still certain issues
business of retail trade under in pursuant to which LLP can opt for like tax implications on amalgamation
Section 44AD, 44AE and 44AF amalgamation or demerger, etc. The or demerger of LLP, taxation of
respectively. However, a LLP words amalgamation and demerger shareholders upon acquiring an
can enjoy presumptive taxation have been defined in Income-tax Act, interest in the LLP as a result of
scheme only up to assessment 1961 itself under Clause (1B) and (19AA) conversion of company into LLP, etc.
year 2011-12, except that to Section 2 respectively. Definitions of which require clarifications to remove
provided in Section 44AE. amalgamation and demerger given the uncertainties. n

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