Repercussions of non-compliance with the specified conditions on the LLP

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According to section 47A of the LLP Act, 2008, if any of the stated conditions under the proviso to Section 47(iii-b) that have been provided above, all profits or gains generating out of the transfer of capital assets or intangible assets will not be charged to tax at the time of such transfer, will be deemed to be the profits and gains generating on the transfer of such capital asset or intangible assets. 

The same would be chargeable to tax in the successor’s hand having LLP registration in India during the foregoing year in that desideratum, as stated under the provision to section 47 (iii-b) if there are not abided by.

Section 45’s provisions would be applicable to that year if such transfer has already been taken in that specified year.

Hence, capital gains on the transfer of the capital assets, intangible assets would be calculated according to section 48’s provisions of the income tax act, 1961.

In such scenarios, the acquisition of assets and the time span of possession of assets by the company’s predecessor would be considered the expense of acquisition and time span of possession in the LLP’s hands.

Consideration of the sale should be the book value of assets as it is in the company’s books of accounts instantaneously before such transfer as the same is taken into the firm’s books of accounts, due to the only one change in the business entity’s constitution but not in the business operations.

In the case of Mumbai ITAT of ACIT vs. Celerity power LLP (ITA 3637/MUM/2015) has noted that the memorandum explicating the financial act of 2010 offers that to convert a private company or an unlisted public company into an LLP will be liable to pay taxes such as capital gain tax. Along with that, set off of losses and carry forward and unabsorbed depreciation will not be permitted in the LLP successor’s hands.

Nonetheless, there is compliance with stated conditions; the same will not be taken as a transfer for the purpose of section 45 of the income tax act, as to given below;

– Total turnover, sales, gross receipts do not go beyond Rs. 60 lacs in the last three foregoing years.

– Shareholders will have to become the LLP’s partners by the act of adding a new partner in LLP in accordance with their shareholding in the company.

– Partners will not receive any consideration except share in the capital contribution and profits of the LLP.

– Aggregate profit-sharing ratio of the company’s all shareholders in the LLP’s successor should not be more than 50 percent at any time during five years after the conversion.

– Company’s all assets and liabilities should become that of LLP’s successor. 

– Company’s collected profit has not been dispersed among the partners for a period of three years after such conversion.

If all the aforementioned conditions are being met, then the transaction will not be taken as a transfer. Thus, no capital gain has to be paid on the transfer of assets. Additionally, unabsorbed depreciation and brought forward losses are permitted to be adjusted and carried forward against LLP’s successor’s profits.

Aggregate depreciation permitted to the LLP should not go beyond that permitted to the company has there been no such conversion.

Block of assets’ actual costs in the LLP’s hands is the WDV (written down value) of the same as on the conversion date shown in the company’s books of accounts. 

LLP’s successor’s cost of acquisition of assets would be considered that of the predecessor company.

Nonetheless, a paid tax credit under section 115JB will be allowed to the company and not to the LLP’s successor.

The above-mentioned amendments have been put into place from AYs beginning on or after the 1st of April, 2011. 

Thus, in the above-stated case of ITAT ruled that as one of the necessary conditions is not being met, it made the conversion result into the transfer. The capital gains resulted from that would be chargeable in the predecessor’s hands. As the predecessor being the company undertaken by the LLP, the same can be chargeable to tax in the LLP successor’s hands as stated in section 170(2) of the income tax act.

The consideration of sale and expense of acquisition are both the same, and the capital gain is zero; hence, as per section 48, the calculation of the capital gain becomes impractical.