| Question And Answer | |
|---|---|
| Subject: | Conversion of company into LLP, applicability of sections 50C and 50CA.? |
| Category: | Income-Tax |
| Querist: | Ravi aiftp |
| Answered by: | Chartered Accountant ., Mr . H. N. Motiwalla |
| Tags: | applicability of sections 50C and 50CA, Conversion of company into LLP |
| Date: | January 16, 2024 |
ABC Private Limited has annual turnover of more than Rs. 60 Lakhs in last 3 preceding financial years and wants to convert into LLP. The assets and liabilities of the company will be recorded at book value in the books of LLP. The Board of Directors (BOD) of ABC Private Limited seek following clarifications:
(a) Examine the tax implications in the hands of the company.
(b) Applicability of section 50C and Section 50CA if assets of ABC Private Limited includes immovable property and securities held as capital asset,
(c) Whether there will be any tax implication in the hands of shareholders if there are good amount of accumulated profit in the company?
(a) From the query it is clear that annual turnover of ABC Pvt. Ltd is more than Rs. 60/- lakhs . Hence benefit of exemption u/s. 47(xiiib) is not available. So when ABC Pvt. Ltd converts into LLP, it would liable to tax under section 45 of the Act.
(b) If there is any immovable property being land or building or both, then, S. 50C would apply. Similarly, if ABC Pvt. Ltd sold any securities, then, section 50CA would be applicable. So, on conversion section 58 of the Limited Liability Partnership Act 2008 would be applicable, as Cl. 1(b) of the Third Schedule to LLP Act defines the meaning of term ‘convert’ which would read as under:
“Convert” in relation to a private company converting into Limited Liability Partnership means a transfer of the property, assets, interests, right, privileges, liabilities, obligation and the undertaking of the private company to Limited Liability Partnership in accordance with this schedule”
Thus it is not vesting of the assets but transferring the assets and therefore decisions in CIT v. Texspin Engg & Mfg works [263 ITR 345 (Bom) would not be applicable and the company would liable to pay tax on capital gains.
(c) Once the company is liable to pay tax u/s. 45 of the Act, restrictions u/s. 47 (xiiib) are not applicable. Therefore, the erstwhile shareholders can withdraw the amount out of accumulated profits, after conversion into LLP.
Source : AIFTP Journal December 23