You are on page 1of 25

CA.

Ashish Goyal
Advocate
 Capital Gains
 Stock in trade
 Set-off and carry forward of losses
 Depreciation and other incentives
 MAT & MAT Credit
 Other points to remember
 Planning
 Section 47(xiiib)
On date of conversion
1. All assets and liabilities of company immediately
before conversion become assets and liabilities
of LLP
2. All shareholders of company immediately before
conversion become partners of LLP
3. Their capital contribution and profit sharing
ratio in LLP are in same proportion as their
shareholding in company.
4. Shareholders of company do not receive any
consideration/ benefit (directly or indirectly) in
LLP
Preceding 3 PYs.
 Total sales/ turnover/ gross receipts in the
business of company in any of 3 Preceding
PYs <= 60 lakhs.
(seems turnover of business revenue)
 Total book value of assets of company in any
3 preceding PYs <= 500 lakhs
Subsequent years
 5 years - Aggregate profit sharing ratio of
shareholders in LLP shall not be less than 50%
 3 years – no amount is paid, either directly or
indirectly, to any partner out of balance of
accumulated profit standing in accounts of
company on date of conversion

Similar exemption for shareholder for transfer


of membership in favour of LLP
 Deferment of tax
◦ Holding period shall be of company and LLP
◦ Cost of acquisition shall be taken of earlier owner
[Company/ shareholder]

Exempt HP = Co. + LLP


Company LLP
COA = Company
 Section 47A (4)
 “any conditions” not complied
 “amount of profits or gains from transfer of
such capital assets”
 “shall be deemed to be profits of successor
LLP/ shareholder, as the case may be”
 “in the year in which requirements of said
proviso are not complied”
 Two situations

 Accumulated profits “paid” shareholder


◦ Even loan would be “paid”?
Aravali Polymers (Trib. Kol.)
◦ Whether that component taxable or full taxable.

 50% profit sharing ratio not maintained


 Full Value of Consideration

 Cost of LLP in such cases


 Where a company was converted into LLP, in
view of fact that subsequent to conversion
loan was given to partners who were directors
in erstwhile company in their profit sharing
ratio out of reserves and surplus of erstwhile
company, there was violation of proviso (f) of
section 47(xiib) and, therefore, benefit of
provisions of section 47(xiiib) was not
available to assessee-firm
 Transaction involving conversion of a
company to LLP as contemplated in section
47(xiiib) is 'transfer’.

 However, on cumulative satisfaction of


conditions (a) to (f) of proviso to section
47(xiiib) would not be chargeable to 'capital
gains' u/s. 45.
 Where upon conversion of a company into
LLP, entire undertaking of erstwhile company
got vested into LLP, book value was to be
regarded as full value of consideration for
purpose of computation of capital gains u/s.
48

 One argument is about section 50B/ 50D.


Section 170 – Due to non-fulfilment of
conditions on date of transfer itself, tax
would not leviable in hands of LLP.

However, same would be subject to liability of


LLP (as a successor entity) u/s. 170.
 No exemption in respect of stock.

 Stock shall be transferred at market rate.

 Section 43C would not apply on successor


company

 Section 43CA would apply.


 Following losses of Company shall be allowed
to be carried forward by LLP
◦ Non-speculation business loss
◦ Unabsorbed depreciation
 This is only when section 47(xiiib) complied.
 Loss shall be allowed afresh for subsequent
years
 Non-compliance of section 47(xiiib) – setoff
allowed earlier becomes taxable.
 Depreciation in year on reoganisation shall be
split on number of days.

 The cost of successor shall be the WDV of


Company. [Expln 2C to section 43(6)]

 Revaluation advantage not available.

 No effect if provision u/s. 47A(4) applies.


[Expln 1 to section 43(6) may apply]
 MAT will not apply on LLP. One big advantage

 AMT will apply, but only in respect of Tax


holiday provisions. Many timing differences
eliminated.

 MAT credit of Company not available to LLP


on conversion by virtue of specific section
115JAA(7).
 Deduction u/s. 80IAC for new eligible start-
up is also available for LLP.
 Eligible start-up would cover following
business
◦ innovation, development or improvement of
products or processes or services or a scalable
business model with a high potential of
employment generation or wealth creation;
 Deduction for 3 AYs.
 AMT would apply.
 Section 167C

 Liability of partners is joint and several for


tax, interest, penalty etc unless he proves
that non-recovery cannot be attributed to his

◦ Gross-neglect, Misfeasance; or Breach of duty
 New PAN required

 Notice on Company for earlier proceedings/


section 170. [See next slide]

 Change in partners
◦ Section 187-188.
◦ Section 78

 Section 44AD – still not applicable


 Rate of Tax of Firm

 Share of profit in firm - 10(2A)


Re-assessment notice issued in name of
erstwhile company despite company ceasing
to exist as it had been converted into LLP
would not invalidate re-assessment
proceedings as wrong name mentioned in
said notice was merely a clerical error which
could be corrected u/s. 292B
 Section 50CA
◦ Land in LLP, partners change.
◦ Section 50CA would not apply.

 Section 2(22)(e)
◦ Loan or advance can be given to partners
◦ No restriction under any law.

 Section 40(b) – Salary and interest


 Cost of forming LLP
 Cost of transfering Brand Name, Patent, Trade
Mark

 Loss of credit of MAT


 No carry forward of other losses
 If conditions not fulfilled
◦ No carry forward of business loss/ unabsorbed
depreciation
◦ Capital gains tax.