The Limited Liability Partnership (LLP) is one the popular mode of doing the business in India. The LLP Act has provided to convert a private limited company to LLP. The Income tax Act 1961 also has been amended by inserting the provisions related to such conversion. When there is transfer, from one person to another person, the transferor has to pay the capital Gain Tax. The income Tax Act has amended by inserting Section 47(xiiib) which does not amount to transfer. The private limited company which is a transferor and the LLP which is transferee has to comply with the certain conditions as per that section.
Background
A
limited liability partnership (LLP) is an advantageous form of business in
comparison to a company inter alia for the following reasons:
§ LLP is subjected to
lower restrictions and compliances compared to a company.
§ LLP is not subjected to
income-tax on withdrawal of profits by its partners unlike shareholders of a
company.
§ Minimum alternate tax
levied on accounting profit of companies is not applicable to LLPs not claiming
any tax holiday.
§ As against this, like
shareholders of a company, partners of LLP are subject to limited liability.
Based
on these benefits, the LLP form of business became popular and a number of
existing companies thought of converting themselves into an LLP.
Text of section 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):
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;
(ea) the total value of the assets
as appearing in the books of account of the company in any of the three
previous years preceding the previous year in which the conversion takes place
does not exceed five crore 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 meanings respectively assigned to them in the Limited Liability
Partnership Act, 2008 (6 of2009).”
Clause (xiiib) of section 47 of the Income Tax Act, 1961 provides that the transfer of a capital asset or intangible asset to LLP or
any transfer of share or shares held in the company by a shareholder on
conversion of a private company or unlisted company into an LLP in accordance
with sections 56 and 57 of the Limited Liability Partnership Act, 2008 shall
not be regarded as a transfer for the purposes of capital gains tax, subject to
the following conditions stipulated by the proviso to section 47(xiiib), which
inter-alia, include a condition that the company’s gross receipts, turnover or
total sales in any of the preceding three years did not exceed 60 lakhs up to
assessment year 2016- 17.
With effect from assessment year
2017-18, the value of the total assets in the books of accounts of the company
in any of the three previous years preceding the previous year in which the
conversion takes place, should not exceed 5 crores. In other
words, one has to satisfy the following conditions:-
Conditions for claiming
exemption under section 47(viiib)
Exemption shall be available only if the
conversion satisfies all the below mentioned conditions.
(1) All the shareholders of the company
immediately before the conversion become the partners of the limited liability partnership
[clause (a) of the proviso
to section 47(xiiib)]
All the shareholders of the
company immediately before the conversion should become partners of the LLP.
Their capital contribution and profit sharing ratio should be in the same
proportion as their shareholding in the company as on the date of the
conversion. It seems that the expression “all the shareholders” will cover all
shareholders - equity shareholders as well as preference shareholders.
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.
In Rameshwarlal
Sanwarmal v. CIT (1980) 122 ITR 1 (SC), the Supreme
Court held that the word “shareholder” can only mean a registered shareholder.
A beneficial owner of shares whose name does not appear in the register of
shareholders cannot be said to be a “shareholder”.
(2) Shareholders
not to receive any consideration or benefit other than profit share and capital
contribution in LLP [clause (b) of the proviso to section 47(xiiib)]
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.
(3) Aggregate of the profit sharing ratio of the shareholders of the company in the limited liability
partnership shall not be less than 50% at any time during the period of five
years from the date of conversion [clause (c) of the proviso to section 47(xiiib)]
The aggregate of the
profit-sharing ratio of the erstwhile shareholders of the company in the LLP
shall not be less than 50 per cent of the profits of the LLP during the period
of 5 years from the date of conversion. The inter se PSR should be the same as
the proportion of their shareholding on the date of conversion. If this is
violated any time before the expiry of 5 years from the date of conversion, the
capital gains on transfer of assets in conversion shall be charged to tax in
the hands of the successor LLP under sub-section (4) of section 47A in the
previous year in which this condition is violated. Also, capital gains not
earlier taxed in the hands of erstwhile shareholders (who became partners) on
account of exchange of shares in the company for interest in LLP shall be
taxable.
(4) All assets and liabilities immediately before
conversion become assets and liabilities of LLP [clause (d) of the
proviso to section 47(xiiib)]
All the assets and liabilities of the
company immediately before the conversion become the assets and liabilities of
the limited liability partnership.
(5) 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 Rs.
60 lakhs [clause (e) of the proviso to section 47(xiiib)]
The total sales, turnover or gross receipts in
business of the company (private company/unlisted public company) should not
exceed sixty lakh rupees in any of the three previous years preceding the
previous year in which conversion takes place. This condition seems to be that
tax benefits should be available only for conversion of small companies into
LLPs.
If this condition is not satisfied, then,
according to section 47A(4), the amount of capital gains arising from the
transfer of such capital asset or intangible asset or share or shares not
charged under section 45 by virtue of the said conditions shall be deemed to be
taxable capital gains of the successor LLP or the shareholders of the
predecessor company, as the case may be, in the previous year in which such
non-compliance takes place.
(6) Total
value of assets of company in any of the 3 preceding years should not exceed
Rs. 5 crores [Clause (ea) of the proviso to section 47(xiiib)]
Clause
(ea) of the proviso provides that the total value of the assets as
appearing in the books of account of the company in any of the three previous
years immediately preceding the previous year in which the conversion takes
place. should not exceed Rs. 5 crores
(7) No payment to any partner out of the
accumulated profits of the company as on the date of conversion for a period of
3 years [clause (f) of the proviso to section 47(xiiib)]
Section 47(xiiib) of the
Act does not define ‘accumulated profits’. So, this term should be understood
in its accounting sense. Accumulated profits of the company whether lying in
reserves or the profit and loss account. This condition means that the
accumulated profits which are lying in reserve or in the profit and loss
(surplus) balance as on date of conversion should not be distributed to any
partner or transferred to their capital accounts until 3 years from date of
conversion.
Consequences if Section
47(xiiib) is violated:
(i) Transfer of capital Assets:
If
the conditions are violated, the transfer of capital asset is to be done at the
market rate and accordingly capital gain is to be calculated. The private
limited company which is a transferor has to pay the capital gain tax on such
transfer.
(ii) Transfer of Other Assets :-
The
other assets like, stock in trade, current asset etc is also transferred at the
market value and the applicable taxes is to be paid.
(iii) Impact on Share Holders if
section 47(xiiib) is violated
The
shares in the hands of the shareholders of the private limited company will be
converted as capital of the LLP. The shareholder will surrender the shares and
acquire capital in the LLP. The shareholder has to pay tax on the capital gain
arising to him from such transfer. The Value of capital is the
consideration for the transfer of shares. The cost of share is the amount paid
by such share holder at the time of purchase of shares. The receipt of bonus
share will not have any cost since it is out of the reserves of the company.
(iv) Withdrawal of exemption in certain cases [Section 47A]
Where any of the conditions specified
above are not complied with, exemption from capital gains shall not be
available. The conditions should be satisfied at the time of conversion.
Additionally, condition 4 and 6 should
be satisfied for respective period specified therein. Where benefit Is taken
under section 47(xiiib) at the time of conversion, and subsequently there is
non-compliance of requirement 4 or 6 (supra), benefit availed shall be charged
to tax in the manner specified below :-
(1) Capital Gains exempted of the
predecessor company will become income of LLP
by way of capital gain in the year in which non-compliance takes place,
and
(2) Capital Gains exempted of the
shareholder of the predecessor company on
transfer of shares at the time of conversion shall become income by way
of capital
gain in the year in which non-compliance takes place
Date of conversion of unlisted Public Company/Private Company into LLP
The date of conversion is the date of registration mentioned in the certificate
of conversion issued by Registrar of Company in Form 19 of the LLP Rules, 2009.
The expression “the previous year in which conversion takes place” refers to
the previous year in which the date of conversion falls.
‘Total sales’, ‘turnover’ and ‘gross receipts’
The terms ‘total sales’, ‘turnover’ and ‘gross
receipts’ are not defined in clause (xiiib) of section 47 nor in any other
provision of the Act. The Rajasthan High Court considered these terms in
Bajrang Oil Mills v. ITO (2007) 163 Taxman 154 (in the context of section 44AB
of the Act) and held as under :
§
The
three expressions used by the legislation, the total "sales",
“turnover” or “gross receipts”, in the ordinary sense, refer to the volume of
the business to which it relates and which is/are carried on by the assessee.
§
The
expression ‘total’ qualifies all the other three expressions, viz., ‘sales’,
'turnover' and 'gross receipts'.
§
Total
sales indicate the aggregate price of the sales of commodities carried out by
the assessee as a trading business. Obviously, it would not include such
transfer of immovable or movable property by way of investment.
§
Where
the assessee is not merely selling the movable commodities, but relating to
other trading activities, e.g., where assessee is a land developer and he is
engaged in business of acquiring land developing it and selling houses or
purchasing or is indulged in leasing business or is indulged in stock market so
on and so forth, the expression “turnover” is made out to denote receipts from
such activities.
§
There
may be third or residuary category which may not be termed properly a trading
activity yet it is carrying on as business activity like job works for others,
without himself being the manufacturer and selling such manufactured goods, or
running a motor service garage, for the receipts of such business can aptly be
termed as receipts of firm.
§
“Gross
receipts” refers to revenue receipts only and do not include capital receipts
and certainly not the receipts which are not relatable to business and may fall
under the expression income to be subjected to tax as income from sources other
than profits or gains from business, profession or vocation.
The guidance given by ICAI in determining
turnover, sales and gross receipts in the context of section 44AB will be
useful here also. [See ICAI’s Guidance Note on Tax Audit (Revised 2005
edition)].
Period of holding of asset
As per Section 2(42A)(b), for the purpose of determining
period of holding of capital asset for determining nature of capital gain,
period for which the asset was held by predecessor company shall be included.
Successor LLP will be allowed deduction of payment under Voluntary
Retirement Scheme for the unexpired period [Section 35DDA(4A)]
Where there has been
reorganisation of business, whereby a private company or unlisted public
company is succeeded by a limited liability partnership fulfilling the
conditions laid down in the proviso to clause (xiiib) of section 47, the
provisions of section 35DDA shall, as far as may be, apply to the successor
limited liability partnership, as they would have applied to the said company,
if reorganisation of business had not taken place.
|
Cost of acquisition of the asset in case the predecessor company has
claimed deduction under section 35AD [Explanation 13 to section 43(1)] It
is provided that the cost of acquisition of the capital asset for the
successor LLP, in case the predecessor company has claimed deduction under
section 35AD, shall be nil. |
|
Actual cost of the block of assets in the case of the successor LLP
[Explanation 2C in section 43(6) inserted] The
actual cost of the block of assets in the case of the successor LLP shall be
the written down value of the block of assets as in the case of the
predecessor company on the date of conversion. Successor LLP and share holder of the predecessor company liable for
capital gains if prescribed conditions not satisfied in any subsequent year
[Section 47A(4)] Where
any of the conditions laid down in proviso to section 47(xiiib) are not
complied with, in any subsequent assessment year the consequences shall be as
under: (a) the amount of profits or gains arising from the transfer of such
capital asset or intangible asset not charged under section 45 by virtue of
conditions laid down in the said proviso shall be deemed to be the profits
and gains chargeable to tax of the successor limited liability partnership
for the previous year in which the requirements of the said proviso are not
complied with. (b) the amount of profits or gains arising from the transfer of share
was shares not charged under section 45 by virtue of conditions laid down in
the said proviso shall be deemed to be the profits and gains chargeable to
tax of the share holder of the predecessor company for the previous year in
which the requirements of the said proviso are not complied with. Cost of capital asset to LLP shall be the cost to be previous owner
[Section 49(1)] The
cost of asset in the hands of the LLP in the case of conversion of a private
limited company or an unlisted company shall be the cost to the previous
owner. |
Cost of the right of partner referred to in section 42 of the Limited Liability Partnership Act, 2008 on conversion of company to Limited Liability Partnership [Section 49(2AAA)]
Where the capital asset
being rights of a partner referred to in section 42 of the Limited Liability
Partnership Act, 2008 became the property of the assessee on conversion as
referred to in clause (xiiib) of section 47, the cost of acquisition of the
asset shall be deemed to be the cost of acquisition to him of the share or
shares in the company immediately before its conversion.
Set-Off and Carry-Forward of losses [Section
72A(6A)]
As per section 72A (6A), accumulated loss under
head business/profession (Except speculative loss) and the unabsorbed
depreciation of the predecessor company, shall be deemed to be the loss or
allowance for depreciation of the successor LLP of the year in which conversion
takes place.
In other words, accumulated loss shall be allowed for fresh 8 years and
unabsorbed depreciation will be allowed to be carried forward indefinitely.
However, if any of the conditions laid down in the proviso of section
47(xiiib) are not complied with, the set off of loss or allowance of
depreciation made in any previous year in the hands of the successor limited
liability partnership, shall be deemed to be the income of the limited
liability partnership chargeable to tax in the year in which such conditions
are not complied with.
MAT credit of predecessor company will lapse [Section 115JAA]
Credit in respect of tax
paid by a company under section 115JB is allowed only to such company under
section 115JAA. It has been clarified that the tax credit under section 115JAA in the hands of the predecessor company shall not be allowed to the
successor LLP.
Depreciation to be allowed proportionately in the year of conversion between
the Company and LLP [Sixth proviso to section 32(1)]
As per Sixth proviso
to section 32(1), depreciation of the year in which conversion took place,
shall be apportioned between the predecessor company and succeeding LLP in the
ratio of number of days for which assets were used by them. Sixth proviso to section 32(1) provides that the aggregate depreciation
allowable to the predecessor company and successor LLP shall not exceed, in any
previous year, the depreciation calculated at the prescribed rates as if the
conversion had not taken place. In other words, deprecation shall be allowed to
the predecessor company and successor LLP in the proportion of a number of days
the assets are used by the predecessor and successor assessee.
Successor LLP will be allowed deduction of payment under Voluntary Retirement Scheme for the unexpired period [Section 35DDA(4A)]
Where there has been
reorganisation of business, whereby a private company or unlisted public
company is succeeded by a limited liability partnership fulfilling the
conditions laid down in the proviso to clause (xiiib) of section 47, the
provisions of section 35DDA shall, as far as may be, apply to the successor
limited liability partnership, as they would have applied to the said company,
if reorganisation of business had not taken place.
Where on conversion of a company, in which applicant company was holding shares, into a Limited Liability Partnership (LLP) under LLP Act equity shares held by applicant in said company converted into partnership interest in LLP, same is transfer within meaning of section 2(47) and, therefore, profit or gain arising in hands of applicant shareholder would be chargeable to capital gains tax in year of conversion of company into LLP
Conversion
of company into LLP - Inclusive definition of transfer in section 2(47)
certainly covers extinguishment of shareholder's interest on conversion of
company into LLP in its ambit. Applicant company is a tax resident of U.K. It
had a wholly owned Indian subsidiary DIPL India. Out of total 40,80,000 equity
shares issued by DIPL India, 40,79,998 equity shares were held by applicant and
balance two equity shares were held by one DUKL in capacity of nominee of applicant.
DIPL India proposed to be converted into a Limited Liability Partnership (LLP)
under LLP Act - On conversion of DIPL India into LLP, equity shares held by
applicant in it would be converted into partnership interest in LLP. Applicant
sought advance ruling as to applicability of capital gains tax in hands of
applicant shareholder of DIPL India on its conversion from company into LLP. Conversion
of equity shares held by applicant shareholder in DIPL India into partnership
interest in LLP is transfer within meaning of section 2(47), therefore, profit
or gain arising in hands of assessee shareholder on such conversion would be
chargeable to capital gains tax in year of conversion of company into LLP. On
conversion of DIPL India into DIPL LLP, computation provision under section 48
would be workable and capable of being implemented for working out capital
gains arising in hands of applicant shareholder. Even if value of partner's
interest in LLP is equal to value of shareholder’s interest in company, it would
give rise to taxable capital gain in hands of applicant shareholder. – [Domino
Printing Science Plc., In re (2021)
433 ITR 215 : 124 taxmann.com 187 (AAR - New Delhi)]
Withdrawal of exemption - Conversion of
firm into LLP - Provision will apply only for purpose of
withdrawing an exemption earlier availed by an assessee and not for
determination of exemption under section 47(xiiib) of the Act
Provision of Section 47A(4) will
apply only for purpose of withdrawing an exemption earlier availed by an
assessee and could not have been applied for determining whether the assessee
is not eligible for claim of exemption under section 47(xiiib) in year of
raising of such claim itself. (Related Assessment Year 2010-11) - [ACIT v. Celerity Power LLP (2018)
174 ITD 433 : 100 taxmann.com 129 (ITAT Mumbai)]
Transaction involving conversion of a private limited company or unlisted public company to a LLP as contemplated in section 47(xiiib) is ‘transfer’, however, same on cumulative satisfaction of conditions (a) to (f) of proviso to section 47(xiiib) would not be chargeable to 'capital gains' under section 45 - Section 47A(4) comes into play only for purpose of withdrawing an exemption earlier availed by an assessee under section 47(xiiib) - Capital gains involved in transfer of capital assets on conversion of private limited company to assessee LLP, de hors applicability of section 47A(4), would be subject to liability of assessee LLP (as a successor entity) under section 170 - Where upon conversion of a private limited company into assessee-LLP entire undertaking of erstwhile company got vested into assessee-LLP, book value was to be regarded as full value of consideration for purpose of computation of capital gains under section 48 - Assessee had failed to satisfy conditions laid down in proviso to clause (xiiib) of section 47, Commissioner (Appeals), rightly declined ‘carry forward’ of losses of erstwhile company by assessee LLP
Transaction involving conversion of
a private limited company or unlisted public company to a LLP as contemplated
in section 47(xiiib) would though be a ‘transfer’, however, same on cumulative
satisfaction of conditions (a) to (f) of proviso to section 47(xiiib) would not
be chargeable to 'capital gains' under section 45. Section 47A(4) comes into
play only for purpose of withdrawing an exemption earlier availed by an
assessee under section 47(xiiib) and could not have been pressed into service
for concluding that assessee LLP was not eligible for claim of exemption under
section 47(xiiib) in year of raising of such claim itself. Though, capital
gains, if any, involved in transfer of capital assets on conversion of private
limited company to assessee LLP, de hors applicability of section 47A(4), would
not be liable to be assessed in hands of assessee LLP as per section 45 read
with section 5, however, same would be subject to liability of assessee LLP (as
a successor entity) under section 170. Where upon conversion of a private
limited company into assessee-LLP entire undertaking of erstwhile company got
vested into assessee LLP, no separate cost other than ‘book value’ would be
attributable to individual assets and liabilities, hence such ‘book value’ could
only be regarded as ‘full value of consideration’ for purpose of computation of
capital gain under section 48. As per section 49(1)(iii), where capital assets
become property of assessee by succession, inheritance or devolution, cost of
acquisition of assets shall be deemed to be cost for which previous owner of
property had acquired same. Section
72A(6A) which entitles a LLP to ‘carry forward’ losses of erstwhile private
limited company, is in clear and loud terms preconditioned by a statutory
requirement that assessee LLP should have complied with conditions of proviso
to clause (xiiib) of section 47. Thus, where assessee had failed to satisfy
conditions laid down in proviso to clause (xiiib) of section 47, Commissioner
(Appeals), had rightly declined ‘carry forward’ of losses of erstwhile company
by assessee LLP. [In favour of assessee] (Related Assessment year : 2010-11) – [ACIT
v. Celerity Power LLP (2018)
174 ITD 433 : 100 taxmann.com 129 (ITAT Mumbai)]
High Court holds if shaves not
allotted by end of the previous year in which succession takes place, section
47(xiii)(b) is violated and exemption from capital gains can be withdrawn
Section 47(xiii)(b) of the Act does
not prescribe the time limit for allotment of shares by the company to the
erstwhile partners of the firm. The Karnataka High Court has held that the
allotment should be completed by the end of the relevant previous year in which
the succession takes place. In the absence of such issue of shares, there is a
violation of the condition and capital gains should be liable to tax by virtue
of section 47A(3) read with section 47(xiiib) of the Act. The condition under
section 47(xiii)(b) should be satisfied only at the time of succession and not
at any time thereafter (Related Assessment year: 2000-01) - [CIT v. Prakash
Electric Company & Anr. - Date of Judgement : 23.07.2018 (Karn)]
A private limited company, namely
company ‘A’ was converted into a Limited Liability Partnership. Company ‘A’ held shares of ‘E’ Ltd. which
were transferred to assessee-firm. ‘A’ also had certain reserves and surplus on
date of conversion into assessee-firm. Assessee-firm sold those shares and paid
capital gains tax on same. Assessee gave interest free loans to its partners
from reserves and surplus which included amount of capital gain earned from
sale of shares - Loans was given to partners who were directors of erstwhile
company in same ratio as that of profit sharing - Whether since loan was paid
out of reserves and surplus of erstwhile company which, in fact, represented
accumulated profit standing in accounts of erstwhile company, there was
violation of proviso (f) of section 47(xiiib) and, therefore, benefit of
provisions of section 47(xiiib) was not available to assessee-firm. Since
assessee did not have benefit of section 47(xiiib) provisions of section 47A(4)
did not apply. In aforesaid circumstances, capital gains in respect of transfer
of assets in hands of ‘A’ Ltd. to assessee-firm was to be computed under
section 45 for which purpose, issue was to be restored to file of Assessing
Officer. [Partly in favour of revenue/Matter remanded] (Related Assessment year
: 2011-12) – [Aravali Polymers LLP v. JCIT, Kolkata (2014) 65 SOT 11 : 47
taxmann.com 335 (ITAT Kolkata)]
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