Gautam Nayak Chartered Accountant Taxation of LLPs (including conversion into LLP) DTC of ICAI...

Gautam Nayak

Chartered Accountant

Taxation of LLPs(including conversion into LLP)DTC of ICAI National Tax Convention, Pune

4th July 2015

2CNK

What is a Limited Liability Partnership (LLP)?

o Hybrid between a partnership firm and a companyo Is a body corporateo Considered as ‘Firm’ for taxation purposeso Limits liability of partners to the extent of their contribution

barring certain circumstanceso Various tax advantages as compared to a companyo Governed by LLP Act 2008 and LLP Rules 2009o Body Corporateo Separate legal existenceo Perpetual successiono Limited liability of Partnerso Partners are agent of LLP and not other partners

3CNK

Who Can Be A Partner ?

o Minimum two partnerso No limit on number of partnerso Individual and/or Body Corporateo Company, LLP

o HUF, Trust, or Partnership Firm ?o Circular No. 13/2013 dated 02.07.2013 – HUF not individual/body corporate

– cannot be a partnero Karta, Trustee, Partner?

o Minor or its guardian ?

4CNK

Capital Contributiono Should every partner contribute to the capital ?

o Capital Contribution Ratio vis-à-vis Profit Sharing Ratio

o Contribution may be in the form of tangible, intangible, movable or immovable property or other benefits – s.32 of LLP Acto Monetary value of contribution of each partner to be accounted for &

disclosed in accounts of LLP in prescribed manner

o Rule 23 - Disclosure in the books of accountso Contribution to be accounted for & disclosed with nature of contribution &

amounto Contribution of property or benefits or by way of agreement or contract for

services to be valued by practicing CA/Cost Accountant/approved valuer - whether necessarily market value?

5CNK

Accounts And Audit

o Accrual or Cash method of accountingo ICDS not applicable if cash method followed

o Rule 24(1) and Rule 24(2) - Accounting Recordso Normal books of account

o Statement of account and solvency for a financial year to be filed within 6 months from the year end

o Statement of Assets and Liabilitieso Statement of income and expenditureo Certification by Auditor

o Compulsory audit if turnover exceeds Rs. 40 lakhs or if total contribution exceeds Rs. 25 lakhs

o Auditors to be appointed by Designated Partners

6CNK

Direct Tax Implications

o Tax treatment of LLPs to be same as that of ‘Partnership Firms’

o S. 2(23) of the I T Act, 1961 – firm and partner to include ‘LLP’ and its ‘Partners’

o Partners share of profit will be exempt [s. 10(2A) of the IT Act]o Whether exemption available for share in profit of HUF partner?

o Designated Partners shall sign the Income Tax Return

o Joint and several liability for payment of taxes

7CNK

Direct Tax Implications…contd

o Remuneration to partners allowable as deduction under s. 40(b) subject to following limits

o Deduction of interest paid to partners o Authorization by LLP agreemento 12%o Partner in representative capacity – expln 1 to s.40(b) – not to be

considered as paid to partnero Rate of Tax – 30.90 % or 33.99%o Remuneration and Interest received by Partners of LLP –

Taxable under s. 28(v)

Slab of Book Profit Remuneration Allowable

On first Rs. 3 lacs or in case of loss

Rs. 1.5 lacs or 90% of book profits, whichever is higher

On balance of book profit 60% of book profits

8CNK


o Share of profit exempt u/s.10(2A)

o In case of a company being a partner in LLP – share of profits can be reduced for computing book profits u/s. 115JB

o No TDS u/s. 192 from remuneration paid to partner

o No TDS u/s.194A from interest paid to partner

o No TDS or DDT on profits distributed by LLP to partners

o Non resident partner – TDS u/s. 195 for payments made towards interest and remuneration paid

9CNK


o s.45(3) – Introduction of capital asset by partner into LLP

o S.45(4) – Distribution of capital assets by LLP on dissolution or otherwise

o S.78(1) – C/f of losses in case of retirement or death of partner

o S.115JC – Alternate Minimum Tax

o S.184 – Filing certified copy of LLP agreement

10CNK

Conversion Of Firm To LLP – Tax Implications

o S.55 rw Second Schedule to LLP Acto Partners of LLP to only comprise partners of firm and no one

elseo On & from date of registration specified in certificate of

registration:o LLP comes into existence o all property vested in the firm, all assets, interests, rights,

privileges, liabilities, obligations relating to the firm & the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance, act or deed

o Firm deemed to be dissolved

11CNK


o Whether automatic vesting by operation of law – whether transferor & transferee?

o Continues to remain a partnership firm under Income Tax Acto Carry forward of AMT Credit?o Whether same PAN continues?

12CNK


o Explanatory Memorandum to Finance (No.2) Bill 2009:“As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 shall apply.”

oCBDT Circular No 5 dated 3.6.2010“As an LLP and a general partnership is being treated as equivalent (except for

recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 shall apply”

13CNK

Conversion Of Company Into LLP

o S.56/57 & Third/Fourth Schedule - Conversion of Private company or unlisted Company to LLP

o All shareholders become partners & no one elseo No security interest in assets subsisting o On & from the date of registration specified in certificate of registration:o LLP shall come into existenceo All property vested in the co, all assets, interests, rights, privileges,

liabilities, obligations relating to the co and whole of undertaking of co shall be transferred to and shall vest in the LLP without further assurance, act or deed

o Co shall be deemed to be dissolved

14CNK

Conversion Of Company Into LLP – Exemption

o Specific exemption – s. 47(xiiib) – conditions:o All assets & liabilities of Co. are taken over by LLPo All shareholders of Co. become partners of LLPo Their Capital Contribution & PSR in LLP are in same proportion as

their shareholding in Co.o Shareholders of co. do not receive any consideration on conversion

other than share in Profit & Capital Contribution in LLPo Total of PSR of Shareholders of Co., in LLP should not fall below

50% for 5 consecutive years from conversion dateo Total sales, Turnover or Gross Receipts of Co. should not have

exceeded Rs.60 lakhs in any of 3 years preceding year of conversiono Partners are not paid any amount from accumulated profits of Co.

for 3 years from conversion date

15CNK

Conversion Of Company Into LLP - Exemption

o If any of above conditions are not satisfied subsequently, such conversion shall be chargeable to tax in hands of successor LLP/shareholder in year of non-compliance – s.47A(4)o Deemed to be profits & gains chargeable to tax – whether as capital

gains?o “Profits & gains arising from transfer of such capital asset not

charged u/s 45”

16CNK


o All assets & liabilities of Co. are taken over by LLPo Not only assets & Liabilities reflected in Balance Sheeto Intangible assets also – problem for tenancy rights?

o All shareholders of Co. become partners of LLPo Whether even preference shareholders to become partners?o Only on conversion – subsequent admission/retirement permissible

o Their Capital Contribution & PSR in LLP are in same proportion as their shareholding in Co.

o PSR has to be in ratio of shareholdingo Whether preference share capital to be considered?o Whether fixed share of profits to be considered as part of PSR?o Only at time of conversion – subsequent changes permissible

17CNK


o Shareholders of co. do not receive any consideration on conversion other than share in Profit & Capital Contribution in LLP

o Loan accounts?o Royalty on future sales/profits?o Remuneration & Interest on Capital?

o Total of PSR of Shareholders of Co., in LLP should not fall below 50% for 5 consecutive years from conversion date

o To be seen in aggregate – inter se adjustment permissibleo Shareholder can retire from LLPo Can shareholder assign his share of profit – continues to remain a

partner vis-à-vis firm

18CNK


o Total sales, Turnover or Gross Receipts in the business of Co. should not have exceeded Rs.60 lakhs in any of 3 years preceding year of conversion

o Whether interest, dividends, rents form part of total turnover or gross receipts?

o For investment co?o For property holding co – SC decision in Chennai Propertieso Whether turnover of merging co to be also considered if merger in

last 3 years or in same year?

19CNK


o Partners are not paid any amount directly or indirectly from accumulated profits of Co. for 3 years from conversion date

o Keep aside accumulated profits – only current remuneration, interest and share of profits to be drawn

o Meaning of “accumulated profits” o Share premium, revaluation reserve?

o No prohibition on withdrawal of capital

20CNK


o Aravali Polymers LLP v JCIT 65 SOT 11 (Kol)(URO)o Co converted into LLP – reserves & surplus of Rs.3.06 crore on date

of conversion (12.8.2010)o After conversion (12.10.2010), LLP sold listed investments (made by

co) for Rs.53.56 crore – claimed taxable @ 10%o Rs.49.3 crore post-tax gain o Gave interest-free loans of Rs.50 crore to partners in PSRo Part of loans paid out of reserves & surplus of erstwhile co –

violation of clause (f) of s.47(xiiib)o Capital Gains on conversion to be liable to tax in year of loan u/s

47A(6A) – same as year of conversion – conversion not exempt transfer u/s 47

o LLP taxable as successor of predecessor co

21CNK

Conversion Of Company Into LLP - Issues

o If the conditions are not satisfied, capital gains not exempt o Applicability of ratio of Bombay High Court in CIT v. Texspin

Engineering & Manufacturing Works 263 ITR 345 ?o What would be the consideration for the transfer for co?o Whether deemed dividend u/s 2(22)(e)?o Would capital gains arise in hands of shareholders – exchange of

shares for capital? Is amount credited to capital account of partners consideration?

o Separate PAN – two separate returns in year of conversion

22CNK

Conversion Of Company Into LLP – Other Tax Aspects

o Depreciation in year of succession – 6th proviso to s.32(1) – proportionate depreciation as if no conversion taken place

o Amortisation of VRS Expenditure – s.35DDA(4A)o If deduction u/s 35AD to co (capital based incentive), actual cost

nil to LLP – expln 13 to s.43(1)o Actual cost of block of assets to LLP shall be wdv to co on date of

conversion - expln (2C) to s.43(6)o Actual cost to LLP – cost to previous owner (co) – s.49(1)(iii)o Cost of rights of partner in LLP on conversion from co – cost of

shares of co immediately before conversion – s.49(2AAA)

23CNK

Conversion Of Company Into LLP – Other Tax Aspects

o S. 72A(6A) – accumulated losses and unabsorbed depreciation of company deemed to be loss and depreciation of LLP for purposes of previous year in which business reorganization effectedo 8 year period from year following year of conversiono What losses get carried forward?o What if s.47(xiiib) conditions violated after set off of loss?

o Lapsing of MAT Credit – s.115JAA(7)

24CNK

Conversion Of LLP Into Company

o Under s.366 – 374 of Companies Act, 2013 – Part I of Chapter XXI o S.368 - All property, movable & immovable (including actionable claims),

belonging to or vested in a co at the date of its regn in pursuance of this Part, shall, on such regn, pass to and vest in the co as incorporated under this Act for all the estate and interest of the co therein

o S.366(1) - For purposes of this Part, word “co” includes any partnership firm, LLP, co-op. society, society or any other business entity formed under any other law for the time being in force which applies for regn under this Act

o No specific exemption availableo Can benefit of s. 47(xiii) be availed ?o Application of principle laid down in Texspin’s caseo 2 parties to transfero Consideration accruing to transferoro Statutory vesting not as a result of transfer

o Can benefit of s. 72A(6) be availed ?

25CNK

o Section 45(3) – transfer of capital asset by partner to firm chargeable in year in which transfer takes place and amount recorded as value of capital asset deemed to be full value of consideration

o S. 32 of LLP Act rwr 23(2) – whether necessary to introduce at market value

o Applicability of s.50C where asset is immovable propertyo S.45(3) and s.50C both deem full value of considerationo Whether deeming fiction on a deeming fictiono Applicability of s.56(2)(viia) where asset is shares of a closely held

co

Introduction of Asset into LLP

26CNK

Assignment Of Share In LLP By Partner

o Right to transfer / assign rights to share profits/losses and to receive distributions in LLP – s.42 of LLP Act

o Transfer permissible either wholly or in parto Transfer does not cause disassociation of partner or dissolution & winding upo Assignee not entitled to participate in mgt or conduct of activities of LLP or

access information concerning transactions of the LLP

o Would such transfer amount to ‘retirement’?o Would such assignment amount to ‘transfer’?o Would such assignment attract capital gains tax?o What would be cost of acquisition?

o Assignment of Share in Profits without Assignment of Capitalo Transfer of income without transfer of assets – s.60 – income taxable in

hands of transferor

27CNK


o Can assignee claim exemption u/s 10(2A) for the share of profits from LLP?

o In the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm

o Radha Krishna Jalan v. CIT 294 ITR 28 (Gau)o From CIT v. Sunil J. Kinariwala 259 ITR 10 (SC), following principles relating

to diversion of share of income of a partner at source by overriding title emerge

o (1)A sub-partnership is a partnership within a partnership in respect of the share of a partner in the main partnership. Formation of a sub-partnership does not affect the position of the partner in the main partnership though its character changes vis-a-vis the sub-partnership and the income-tax authorities.

o (2)Superior Title of sub-partnership diverts at source the share income of concerned partner in main partnership before it becomes income of the partners.

28CNK


o (3)Assessment of a share of income of a partnership in the hands of a partner has to be apportioned as per the provisions of Act - thereafter, income-tax authorities are required to determine whether it would be assessed in the hands of that partner or in the hands of the sub-partnership.

o (4)Diversion of income of a partner in the main partnership at source to the sub-partnership by overriding obligation created by the sub-partnership converts the income of a partner into the income of the sub-partnership, thus, vesting an enforceable right upon the sub-partnership to claim a share in the profits accrued to or received by the partner.

o (5)The right to receive profits and pay losses become the asset of the sub-partnership. [Para 21]

o Diversion of income by overriding title to sub-partnership confers upon it the attributes of a partner insofar as it relates to such income for the purpose of Income-tax Act irrespective of provisions of Indian Partnership Act.

29CNK


o A sub-partnership has been recognized in India and registered as a partnership firm under Income-tax Act though the term has not been defined in the Indian Partnership Act.

o A partnership firm cannot become a partner in another partnership firm for the purpose of Indian Partnership Act, since a firm is not a person under this Act and is, therefore, not eligible to enter into an agreement.

o The position is otherwise insofar the Income-tax Act is concerned. In Income-tax Act, ‘person’ has been defined in section 2(31) to include a firm also.

o Anomalous situation in case a sub-partnership is not deemed to be a partner in respect of assessment of its income diverted from a partner in main partnership by overriding title.

o Wef 1-4-1993, income of a partnership subject to tax in hands of firm. Share of a partner exempted under section 10(2A). If benefit of section 10(2A) denied in case of diversion, would nullify basic scheme of Act, since income of partner once taxed in hands of partnership again liable to tax in hands of sub-partnership - contrary to legislative scheme.

30CNK

o Section 62 – Amalgamation or Reconstruction of LLPso With approval of NCLTo NCLT may make provision for transfer to transferee LLP of whole or any part

of undertaking, property or liabilities of any transferor LLP

o Whether exempt transfer u/s 47?o No specific exemptiono Whether slump sale u/s 50B?o S.2(42C) – “slump sale” means the transfer of one or more undertakings as

a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales

Merger of LLPs

31CNK

Recovery Of Tax

o S. 188A - every person who was a partner of a firm during a previous year is jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm

o S. 167C - where the tax due from the LLP in respect of income of any previous year cannot be recovered, in such a case, every person, who is a partner of the LLP at any time during the relevant previous year, shall be jointly and severally liable for the payment of such tax, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP.

o S. 188A vs. 167 C

Gautam Nayak Chartered Accountant Taxation of LLPs (including conversion into LLP) DTC of ICAI...

Documents

Transcript of Gautam Nayak Chartered Accountant Taxation of LLPs (including conversion into LLP) DTC of ICAI...