Question And Answer
Subject: When a firm is converted in to Limited Liability partnership (LLP) whether exemption is provided u/s 56(2)(x) of the Act .?
Querist: Aloke Bajoria
Answered by:
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Date: May 15, 2021
Query asked by Aloke Bajoria

An LLP is proposed to be converted into a Pvt. Ltd. company. The said conversion is exempt u/s 47(xiii) in the hands of the firm. However no separate exemption is provided u/s 56(2)(x).

Therefore, despite the economic interest of the shareholder (being the erstwhile partner) remains same in the Pvt. Ltd. Co. vis-a-vis LLP, would the shareholder be taxed u/s 56(2)(x). The Fair Value of equity shares received by the shareholder (as derived u/r 11UA less balance in the partner’s capital account could be bought to tax u/s 56(2)(x).

Further, the new Company is merged with another company whereby the amalgamated entity will have shareholders holding more than 50% stake in the amalgamated company who were partners in the erstwhile LLP holding 100% stake of the LLP. Therefore will this merger come within the mischief of 47A and exemption u/s 47(xiii) stands denied.


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Answer given by

Section 47A(3) deals with the consequence of the provisio to Section 47(xiii) not being complied with. The said proviso to Section 47(xiii) does not impose any conditions upon the future event post conversion upon the company. Therefore a view can be taken that this merger may not come under the mischief of Section 47A as Section 47A(1) applies only to Section 47 clause (iv) and (v) and not clause (xiii). As for the applicability of 56(2)(x) is concerned, the issue is contentious with the statute not providing for any exemption for the conversion not regarded as a transfer by Section 47(xiii) and no judgements being available on the same. A technical view could always be taken versus the view that Section 56(2)(x) is an anti-abuse provision and that the said conversion would not fall within the mischief that Section 56(2)(x) seeks to curtail. That being said, it would depend upon the details of the transaction itself and an opinion can be formed only upon a perusal of documents. As this question has been answered for educational purposes, you are requested to obtain proper legal advice based upon the facts and circumstances of your case by a tax professional of your choice.

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