Conversion of Firm into LLP

[ddshah]

The conversion of Company to LLP is exempt under certain conditions. The LLP is also regarded as Firm for the purposes of IT Act. Is the conversion of firm to LLP exempt?

One possible view could be yes. This is because, the term 'convert'has been defined under the 2nd Schedule of LLP Act as transfer ofproperties, assets, interest, rights, privileges, liabilities, obligations andundertakings of the firm to the Limited Liability Partnership.  This definition largely signifies the transformation of a firm into different entity which is not the case with LLP for the purpose of IT Act.

Further, the firm and LLP both are enjoying the status of firm under IT Act. There is no specific provision for exemption from firm to company whereas the conversion of company to LLP is exempt. The provisions of conversion of firm to LLP under the LLP Act has no implication as although under LLP Act, the conversion results in change in entity, but under IT Act, it does not result in change in status. The conversion of firm to LLP merely results in the change in the rights vis a vis the partners while the nature of entity under IT Act remains same. Hence, it can be said that there is no transfer of the capital asset.

Looking it differently, the transfer as per LLP Act amounts to transfer of entire undertaking lock stock barrel. Hence, it is a case of slump sale which does not result in any profit. Hence, even on the said count, it not result in taxable income.

What are the view of the members?