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Advanced Tax - Laws and Practice

Limited Liability Partnerships
 Taxation of LLP in India
A brief overview
• Indian tax law recognizes following entities as ‘taxable persons
– Company, Partnership firm, Association of Persons/Body of Individuals
• Finance (No 2) Act, 2009 (FA 2009) Amendment -
LLP to be taxed on the same basis as a “general partnership” (firm)
– ‘Firm’ definition amended to include a LLP
– Partner’ definition includes a partner of a LLP
– ‘Partnership’ includes an LLP
• Implications of taxation as firm
– LLP is subject to tax in respect of its income
– Share from income of LLP is exempt in hands of partners
• Residential status of LLP determined based on “control and manage
ment” test
– LLP resident in India even if control & management of its affairs is
partly in India
A practical question on taxation of LLP
Computation of total income MNO Corporation LLP for the A.Y.2016-17
Computation of loss of specified business of setting up and operating a cold
chain facility for P.Y.2014-15 relevant to Assessment Year 2015-16

(2) The specified business of setting up and operating a cold chain facility would be eligible
for weighted deduction@150% of the capital expenditure, if the operations are
commenced on or after 1.4.2012 [Section 35AD(1A)]. In this case, since the operations
have commenced on 1.4.2014, the specified business qualifies for weighted deduction @
150% of capital expenditure.
(3) Expenditure of capital nature would, however, not include any expenditure incurred on
acquisition of land [Section 35AD(8)(f)]. Therefore, in this case, only cost of Rs. 50 lakhs
on construction of building and machinery installed would qualify for deduction under
section 35AD, assuming that such expenditure has been capitalized in the books of
account as on 1.4.2014 (being the date of commencement of operations), since the same
was incurred prior to commencement of operations [Proviso to section 35AD(1)].
(4) Section 78(1) does not permit carry forward of losses pertaining to the share of a
retired or deceased partner. Therefore, in this case, since one of the four partners have
retired on 31.3.2015, his share of loss (Rs. 3,75,000, being ¼th of Rs.15 lakh) for the
previous year 2014-15 (A.Y.2015-16) cannot be carried forward to the previous year 2015-
16 (A.Y.2016-17).
 Computation of profit from textile manufacturing
business

6. Loss of specified business can be carried forward indefinitely for set-off only against profits of any specified business.
Therefore, it becomes necessary to segregate the income of Rs. 42.75 lakhs computed under the head “Profits and gains
of business or profession”, so that brought forward loss from specified business relating to P.Y.2014-15 can be set-off
against profits of specified business of the P.Y.2015-16.
For this purpose, while computing profits of textile manufacturing business included in the business income of Rs. 42.75
lakhs, the depreciation as per books of account has to be added back and the depreciation as per the Income-tax Act,
1961 has to be reduced from the net profit of Rs. 10.25 lakhs pertaining to textile business, since the depreciation
adjustments clearly relate to textile business.
There is no effect of adjustment of partners‟ remuneration, since the entire remuneration which has been added back is
allowable as the same is within the limits as per section 40(b)(v).
It is only the interest on capital amounting to Rs. 3 lakhs (which has been added back while computing business income)
which has to be apportioned between textile manufacturing business and specified business.
The solution has been worked out apportioning the interest on capital in the ratio of 1:2 between textile manufacturing
and specified business, being the ratio of the net profit of these two businesses as per profit and loss account. The
solution can also be worked out by apportioning interest on capital on any other logical basis.
Calculation of total income
Advantages of being taxed as a ‘firm’
• No DDT on its profit distributions
• Reconstitution of partnership – No impact
on carry forward of losses
• No deemed dividend taxation
• Remuneration paid to working partners
deductible expenditure
• Interest on capital contribution deductible
expenditure
• No MAT – LLPs taxable under AMT
 Disadvantages of being taxed as a
‘firm’
Incentives under Income-tax Act, 1961 Company LLP

•200% weighted deduction on expenditure on in-

house scientific Research
Yes No

Investment linked tax deduction for laying / operating cross- Yes No

country natural gas or crude or petroleum oil pipeline network

Profit linked tax deduction for developing, operating and Yes No

maintaining “infrastructure facility”, business of ship, hotel*
Tax neutral amalgamation / demerger of Companies possible Yes No

Expenditure on amalgamation / demerger of Companies to be Yes No

amortised in 5 years

Carry forward of unabsorbed losses allowed in case of Yes No

amalgamation / demerger of Companies meeting specified
Conditions
 Other tax implications
• Sale of LLP interest
– LLP interest to be regarded as a ‘capital asset’
– Capital gains tax on transfer
• Contribution to LLP
– Capital gains payable by the partner on transfer of ‘capital asset’
– Value recorded in the books of LLP will be sale consideration
• Distribution to Partners
– Treated as generating taxable capital gains in the hands of the
LLP
– FMV of property deemed to be sale consideration
• Associated Enterprise
– 10% or more interest in LLP
 Conversion to LLP
• The Finance Act 2010 provided for tax neutrality
on conversion of a private company or unlisted public company to a LLP
– in the hands of company on transfer of a capital asset or intangible asset
– in the hands of shareholder on transfer of shares
of private company or unlisted public company
• Transfer of capital assets on transfer exempt subject to the following conditions
– Turnover/Total sales/gross receipts < INR 60 lakhs
– No payment to partners from accumulated profits for 3 years
– No consideration to the partners except profit and share capital contribution
– Shareholding to be equal to profit sharing ratio
– Transfer of all assets and liabilities to LLP
– 50% of LLP profits to erstwhile shareholders for 5 years
• For details refer to article: http://taxguru.in/income-tax/income-tax-
implications-conversion-company-llp.html
 Summary
• LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f
assessment year 2010-11
• Profit will be taxed in the hands of the LLP and not in the hands of the partners.
• Remuneration to partners will be taxed as “Income from Business & Profession”.
• No capital gain on conversion of partnership firms into LLP.
• Designated Partners will be liable to sign and file the Income Tax return.
• LLP shall not be eligible for presumptive taxation.
• Capital Gain on conversion of Company into LLP will be exempt from tax, if
prescribed conditions are complied with.
• On conversion, the successor LLP , will be allowed to carry forward and set off of
accumulated loss and unabsorbed depreciation allowance
• On conversion, the successor LLP will be allowed to amortize the expenditure
incurred under voluntary retirement scheme
• On conversion, the successor LLP will not be allowed to take the credit of MAT paid
by the predecessor company.
ALTERNATE MINIMUM TAX
 Introduction
• The concept of Minimum Alternate Tax (MAT) is applicable
only to companies and not to any other assessee.
• Due to introduction of Limited Liability Partnership (LLP)
Act, 2008 and easy allowability of conversion of a private
company into an LLP, many companies started converting
themselves into an LLP to avoid applicability of MAT
provisions.
• In order to counteract with such situation a need arose to
introduce MAT provision for LLPs also.
• Accordingly, Chapter XII-BA ‘Alternate Minimum Tax (AMT)’
was introduced by Finance Act, 2011 w.e.f. A.Y. 2012-13,
applicable for LLP, on the lines of MAT.
 Section 115JC:
• Income Tax payable by every Limited Liability
Partnership (LLP) shall be higher of the following
two:-
• Regular Income Tax payable on regular income as
per Income Tax Act provisions + Surcharge (if
applicable) + Education Cess @ 3%
Or
• 18.5 % of Adjusted Total Income +Surcharge (if
applicable) + Education Cess @ 3% (called as
‘Alternate Minimum Tax – AMT’)
 Adjusted Total Income
• According to Section 115JC(2), ‘Adjusted Total Income’ means the total income, before giving effect to this chapter, increased by the
following two:-
– Deductions claimed under Chapter – VI-A: AMT will apply to the assesses claiming profit linked deductions Part C of Chapter VI-A
i.e. under section 80-IA to 80RRB and under section 10AA. However, deduction under section 80P shall not be added back. Also
Deduction under section 80C to 80GGC, 80U and 80TTA shall not be added back
– Under the Act, the investment linked deductions have been provided in place of profit linked deductions. These profit linked
deductions are subject to alternate minimum tax (AMT). Accordingly, with a view to include the investment linked deduction
claimed under section 35AD in computing adjusted total income for the purpose of calculating alternate minimum tax, it is
proposed to amend the section so as to provide that total income shall be increased by the deduction claimed under section
35AD for purpose of computation of adjusted total income. The amount of depreciation allowable under section 32 shall,
however, be reduced in computing the adjusted total income.
• Example:
• Total income : Rs. 60
• Deduction claimed under Chapter VI-A : Rs. 40
• Deduction claimed under section 35AD on a capital asset : Rs. 100

• Computation of adjusted total income for the purposes of AMT

• Total income : Rs. 60
• Addition:
• (i) deduction under Chapter VI-A (on non-specified business) Rs. 40
• (ii) deduction under section 35AD (on specified business) Rs. 100
• Less: depreciation under section 32 Rs. 15
: Rs. 85
• Adjusted total income under section 115JC : Rs. 185
• These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and
subsequent assessment years.
Report of a Chartered Accountant
• Every LLP to which section 115JC applies, shall
be required to obtain a report of a Chartered
Accountant certifying the correct computation
of Adjusted Total Income and Alternate
Minimum Tax and furnish such report on or
before the due date of filing RoI given u/s
139(1).
 Credit of AMT
• Excess of AMT paid by LLP over and above the
Regular Tax payable shall be allowed as a
Credit, which can be carried forward for the
next ten consecutive years from the end of the
year in which such credit arose and can be set
off against excess of Regular Tax payable
above and over AMT in those 10 successive
years.
 Notes:
• If AMT credit is not availed off in the next ten consecutive
years, then it shall lapse.
• No interest will be allowed to the assessee on the amount
of such credit.
• If the amount of Regular Income Tax payable or the amount
of AMT undergoes any changes, due to an order of any
assessment / reassessment or order of any higher authority
in an appeal or otherwise, then the amount of AMT Credit
shall also undergo changes accordingly.
• Credit can be set off only in the year in which the Regular
Tax payable exceeds the AMT and can be set off only to the
extent of the amount of excess of Regular Income Tax over
and above the amount of AMT.
 Review Question
• Examine the following statement in the context of provisions contained in the Act
relevant for the previous year ended on 31.03.2016:
• The provisions of AMT are applicable to all assesses other than the companies.
• Answer
• The statement is correct / incorrect (See Note given below)
• The provisions of AMT are applicable to all persons claiming profit linked
deductions (i.e., deductions under any section (other than section 80P) in Chapter
VIA under the heading “C – Deductions in respect of certain incomes” or section
10AA or under section 35AD). The provisions of AMT would be applicable to an
individual, HUF, AOP, BOI, whether incorporated or not, or artificial juridical
person.
• However, it will be applicable only if the adjusted total income of such persons
exceeds Rs. 20 lakh.
• Note – The statement can be viewed as correct since AMT applies to all assessees,
other than companies. It can be viewed as incorrect since AMT is not applicable to
all assessees per se, but only to those assessees claiming profit linked deductions.
 Review Question
• ABC LLP, a limited liability partnership in India is engaged in
development of software and providing IT enabled services through
two units, one of which is located in a notified Special Economic
Zone (SEZ) in Chennai (commenced from 01.04.2011). The
particulars relating to previous year 2015-16 furnished by the
assessee are as follows:
• Total Turnover: SEZ unit Rs. 120 lakhs and the other unit Rs.100
lakhs
• Export Turnover: SEZ unit Rs.100 lakhs and the other unit Rs. 60
lakhs
• Profit: SEZ unit Rs. 48 lakhs and the other unit Rs. 42 lakhs.
• The assessee has no other income during the year.
(i) Compute tax payable by ABC LLP for the Assessment Year 2016-17.
(ii) Will the amount of tax payable change, if ABC LLP is an overseas
entity?
Solution
Solution contd..
 Solution contd..
• Since the tax payable as per the normal provisions of the
Act is less than the alternate minimum tax payable, the
adjusted total income shall be deemed to be the total
income of ABC LLP and the tax payable for A.Y. 2016-17
shall be Rs.17.1495 lakh.
• Tax credit of Rs. 1.6995 lakhs (Rs. 17.1495 – Rs. 15.45) for
Alternate Minimum Tax can be carried forward for set off
against income tax payable up to a maximum of 10
assessment years .
• (ii) The provisions of alternate minimum tax would also be
applicable to an overseas LLP. Hence, the tax liability would
remain the same even where ABC LLP is an overseas entity.
Review Question
 Solution
• As per section 80AC, while computing the total income of
an assessee of a previous year (P.Y.2015-16, in this case)
relevant to any assessment year (A.Y.2016-17, in this case),
any deduction is admissible, inter alia, under section 80-
IA, such deduction shall not be allowed unless it furnishes
a return of income for such assessment year on or before
the due date specified in section 139(1).
• Since the turnover of the partnership firm has exceeded
Rs.100 lacs in the previous year 2015-16, it would be
subject to audit under section 44AB, in which case the due
date of filing its return of income for A.Y.2016-17 would be
30th September, 2016 as per section 139(1).
Solution contd..
 Calculation of AMT

Since the regular income-tax payable by the firm is less than the alternate
minimum tax payable, the adjusted total income shall be deemed to be the
total income of the firm for P.Y.2015-16 and it shall be liable to pay income-
tax on such total income@18.5% [Section 115JC(1)]. Therefore, the tax
payable for the A.Y.2016-17 would be Rs. 64.02 lacs.
AMT Credit
 Computation of total income and tax liability of
M/s. Victory Polyfibres for A.Y.2016-17
(where the firm files its return of income on 7th December 2016)
Practical solution regarding obtaining
clarifications
• The practical solution regarding obtaining clarifications would be to file
the return of income under section 139(1) on or before the due date
30.9.2016 and claim deduction under section 80-IB. In such a case, the
firm can claim deduction of Rs. 200 lacs under section 80-IB.
• Thereafter, consequent to the clarifications obtained, if any change is
required, it can file a revised return under section 139(5) within 31.3.2018
(i.e., within one year from the end of A.Y.2015-16) which would replace
the original return filed under section 139(1). A return filed under section
139(1) [i.e., on or before the due date of filing return of income] can only
be revised under section 139(5). A belated return filed under section
139(4) cannot be revised.
• If the firm files the return of income under section 139(1) on or before
30.9.2016, its tax liability would stand reduced to Rs.62.88 lacs, as against
Rs.101.97 lacs to be paid if return is furnished after due date. Further, it
would also be eligible for tax credit for alternate minimum tax under
section 115JD to the extent of Rs. 31.98 lacs. Therefore, the firm is advised
to file its return of income on or before 30.9.2016.
 Review Question
• PQR LLP has a profit of Rs.500 lacs after
charging interest on capital for P amounting to
Rs. 10 lacs calculated at 15% p.a. as per the
agreement, but before considering
remuneration to partners. What is the
maximum admissible amount of remuneration
to partners assuming all the partners are
working partners and remuneration is
authorized by the LLP instrument?
Solution
 December 2015 Question O/S
• Explain the provisions of charging 'alternate minimum tax' and its rationale.
• The concept of Alternate Minimum Tax (AMT) was introduced from the
assessment year 2012-13 with respect to Limited Liability Partnership and then
extended to cover all persons other than a company. It is covered under section
115JC of Income Tax Act, 1961.
• According to the provisions of Alternate Minimum Tax, where the regular income
tax payable for a previous year is less than the alternate minimum tax payable for
such previous year then the adjusted total income shall deemed to be the total
income of the assessee for such previous year and the assessee shall be liable to
pay income tax on such adjusted total income @ 18.5% plus education & SHEC @
3%.
• The ‘Adjusted Total Income’ is defined under Section 115JC(2). The excess tax paid;
over and above the tax on total income, due to AMT shall be claimed as tax credit
during the period of 10 Assessment Years immediately succeeding the current
Assessment Year. The AMT provision has been introduced in order to widen the tax
base vis-à-vis profit linked deductions.
 Dec-15 Question O/S
• Rajan has an income of Rs. 65 lakh computed
under the head 'profits and gains from business
or profession' during the previous year 2014-15.
• One of his businesses is eligible for claiming
deduction @ 100% of the profits under section
80-IB. The computed profit from such business is
Rs. 30 lakh.
• Compute the tax payable by Rajan, assuming that
he has no other income during the previous year
2014-15 relevant for the assessment year 2015-
16.
Solution
 Dec-15 Question O/S
• What is the actual cost of block of assets in the hands of a successor limited liability partnership (LLP) when
a private limited company or unlisted public limited company is converted into an LLP ?
• As per explanation to section 43 of the Income Tax Act, 1961, where in any previous year, in case of
conversion of private limited company to a limited liability partnership, any block of assets is transferred
by a private limited company or unlisted public limited company to a limited liability partnership, the
actual cost of the block of assets shall be the written down value of the block of assets as in the case of
the said company on the date of conversion of the company into the limited liability partnership provided
the following conditions as specified in the proviso to clause (xiiib) of section 47 are satisfied:-
– (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 upto a 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 upto a period of three years
from the date of conversion.
 June-16 question
• An individual having gross total income of more
than 20 lakh is liable to pay alternate minimum
tax.
• The basic exemption limit for a limited liability
partnership for the assessment year 2016-17 is —
– (a) 2,00,000
– (b) 2,50,000
– (c) 3,00,000
– (d) Nil.