LLP under Income Tax Act

LLP under Income Tax Act

India’s Limited Liability Partnership Act 2008 introduced a new business structure. The year when LLP Act was presented, there was an absence of clearance on its taxability. The issue at hand was whether or not LLPs will be taxed in the same manner as domestic corporations or partnerships.

The Finance Act (No 2) of 2009 made changes to section 2(23) of the Income Tax Act. As a result the phrase firm now includes LLP. Partner includes LLP partner and partnership now include LLP as defined by the LLP Act of 2008. Also, it can acquire LLP registration in Coimbatore.

As a result of this amendment, LLP became a popular type of business because it made it easy to set up and withdraw funds from a capital account also providing partners with the security of limited liability like a company.

In addition, LLPs are exempt from DDT (Dividend Distribution Tax) making them a popular form, of the company beginning in 2009. LLPs which had LLP registration in Coimbatore are preferred by new Small and medium-sized businesses due to their efficiency and lower compliance costs than companies.

Insertion of section 47(xiiib) in IT Act

The existing private limited that has planned to convert into LLP and can get LLP registration in Coimbatore was the focus of the taxation issue. A new clause (xiiib) was added to section 47 of the Income Tax Act.

This is done to implement the taxation of LLP conversions of such companies. Section 47(xiiib) provides that subject to the following conditions, the conversion of a private limited company and unlisted public company into an LLP is exempt from taxation.

(a) The limited liability partnership which had LLP registration in Coimbatore acquires all of the company's assets and liabilities immediately before the conversion;

b) On the day of the conversion, all of the company's shareholders become partners in the limited liability partnership, and their capital contribution and profit-sharing ratio in the limited liability partnership is equal to their shareholding in the company on that day;

c) Other than a share in the limited liability partnership's profits that had LLP registration in Coimbatore and a capital contribution, the company's shareholders receive no other form of compensation or benefit, either directly or indirectly.

d) During the five years following the date of conversion, the total profit-sharing ratio of the company's shareholders in the limited liability partnership cannot be less than fifty per cent;

e) in any of the three years immediately preceding the year in which the conversion takes place, the company's total sales, turnover, or gross receipts did not exceed sixty lakh rupees; and

(f) for three years following the date of conversion, no amount is paid to any partner, either directly or indirectly, out of the balance of accumulated profit in the company's accounts on that date.

The conditions that guarantee the continuation of the same business by the same shareholders are included in the aforementioned list.

Possible litigation on section 47(xiiib) of the IT Act

The additional conditions (e) and (f) are intended, respectively, to control DDT evasion and limit the tax benefit of this clause to smaller entities. Anyway, statement (e) specifically may prompt a duty case. The term "total sales, turnover, or gross receipts in the business of the company" does not refer to the company's income; rather, it refers to the company's revenue and receipts.

For example, there is a business that is not a real estate company but has some real estate on its balance sheet and earns a lot of rent, more than sixty lakh rupees per year. The organization has stopped its business activities and lease payment is the main pay of the organization.

The question is whether or not this company will be able to take advantage of this clause's tax break.

The company will be eligible for a tax break under this clause even if it has a substantial income because it is not a real estate company and rent income does not count as sales, turnover, or receipts for the business.

The company's dividend or interest income from investments can also be treated as other income that does not count toward the company's turnover or sales or gross receipts from the business.

Additionally, the purpose of clause (f), which limits the distribution of accumulated profits, is to prevent DDT evasion.

A private limited company, for instance, currently has a significant amount of retained earnings on its balance sheet. There will be nothing left in the company's accumulated profits if the company issues shares by capitalizing retained earnings before LLP conversion.

The company becomes an LLP and can have LLP registration in Coimbatore, and the share capital becomes the capital of the partners.

The accomplices of the LLP pull out sums against their capital records. The question is whether this withdrawal will prevent said LLP that had LLP registration in Coimbatore from receiving a tax benefit under section 47(xiiib).

A company's accumulated profits as of the date of conversion cannot be withdrawn for three years, as stated in clause (f). Since retained earnings were capitalized before conversion, the company's balance sheet did not contain any accumulated profits on the date of conversion.

However, the tax authorities may even decide to label this arrangement as a colourable method of withholding tax benefits.

Taxing the conversion of the company into LLP

In general, whether or not to tax the act of converting one type of entity into another is itself a contentious issue. Two factors must be present for capital gain: Asset and transfer of capital. The further transfer also requires two essential components, namely Counterparty and party.

In the event of a conversion, neither the party nor the counterparty ever existed together. As a result, the argument that there is no transfer can also be made.

As a result, the idea of requiring conditions to provide a tax benefit upon conversion to ensure the continuity of the business and its owners is widely accepted.

However, providing the benefit based on the entity's size will undoubtedly result in tax litigation.

Thus getting LLP registration in Coimbatore is inevitable.

For further details please click here:

https://www.earnlogic.in/llp-registration-in-coimbatore.php

Rs jagadeesh an Seo Associate working for Earnlogic.