conversion of firm into LLP

[ketanvyas1975]

is conversion of firm into LLP is tax free in respect of capital gain or taxable? please advise

[caabhisheksonthalia]

is exempt but certain provisions are there

[BHAVESH PATEL]

There is no provision under Income Tax Act to specifically provide that Conversion of a Partnership into LLP does not amount to transfer

However explanatory memorandum to Finance Bill 2009 provides that the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation 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 provision of capital gain will apply.

Therefore in the normal parlance, conversion of a partnership into LLP will have no tax implications as there is no transfer of assets to a third party on conversion of partnership firm to LLP.

[camanojgupta]

The Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 2009 explained the scheme for taxation of LLPs in India as under :
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.
the legislature does not want to charge capital gain tax on conversion of firm into LLP. But the Finance (No. 2) Act, 2009 has carried out no amendment in section 47 so as to provide for tax free transition of firm into LLP. It is opined by many that in the absence of substantive law the transition may not be tax free.
CA MANOJ GUPTA
JODHPUR
09828510543

[caabhisheksonthalia]

47(xiiib)any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 (6 of 2009)55:

Provided that—

 (a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

 (b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

 (c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

 (d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

 (e) the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and

 (f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

Explanation.—For the purposes of this clause, the expressions "private company" and "unlisted public company" shall have the meanings56 respectively assigned to them in the Limited Liability Partnership Act, 2008 (6 of 2009);]


BUT PROVISION AS



Conversion of a Partnership Firm into an LLP:

No specific tax shelter has been incorporated under Income-tax Act for conversion of firm into LLP. However Memorandum explaining the provisions of the Finance (No. 2) Bill 2009 provides that General Partnership and LLP is treated as equivalent (except for recovery purposes) for Income-tax purpose. The Explanatory Memorandum, also stated, that conversion of a General Partnership Firm to an LLP will have no tax implications if

        a)the rights and obligations of partners remain the same after conversion and

        b)there is no transfer of any Asset or Liability after conversion.

    If the above conditions are violated, the provision of Capital gains specified in section 45 shall apply. However above clarification is ambiguous and may create various issues.

[ketanvyas1975]

thank you very much friends for your time and valuable feed back. I had raised the query for the same reason of ambiguity in the matter. It looks that what was intended at the time of budget has not been made explicit in the statute. This has lead to the debatable position. Let us look at the issue from another angle.

Conversion of firm into joint Stock company under part IX of Companies Act, 1956 is exempt from capital gain tax by virtue of courts' rulings though the same has not been explicitely provided in the statute. The courts have taken the view that in case of such coversion, there is a statutory vesting of assets and liabilities and there is no simaltaneous existance of transferor and transferee which is otherwise there in every case and therefore no capital gain arises. Can this legal proposition equally apply to the case of conversion of firm into LLP when there is no explicit provision in the statute? Please give your views.

[camanojgupta]

U ARE ABSOLUTELY RIGHT KETAN. IF PROVISIONS OF SECTION 55 AND 58 OF LLP ACT AND SECOND SCHEDULE TO LLP ACT, 2008 ARE  FOLLOWED AND IF FOLLOWING CONDITIONS ARE SATISFIED TAX FREE TRANSITION OF FIRM INTO LLP CAN BE ACHIEVED
1. when a firm is treated as LLP under that Schedule it will be a case similar transmission SO SECTION 45(1) AND 45(4) WILL NOT BE APPLICABLE.
2. ON CONVERSION INTO LLP there would be no dissolution of firm and no distribution of capital assets to partners. SO SECTION 45(4) WILL NOT APPLY
3. the value of assets of the firm shall not be enhanced at the time of conversion
ALL ABOVE CONDITIONS ARE SUPPORTED BY CASE LAW DECIDED UNDER SECTION 45(4) DEALING WITH CONVERSION OF FIRM INTO COMPANY UNDER PART IX OF THE COMPANIES ACT
CA MANOJ GUPTA
JODHUR
09828510543