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1 TAXATION OF LLP CA CHANDRASHEKHAR V. CHITALE

2 TOPICS COVERED 1. LLP BASICS FOR INCOME TAX LAW 2. WHY LLP? 3. ASSESSMENT OF LLP 4. CONVERSION INTO LLP & TAXATION 5. DTC, SUM UP

3 L LLP BASICS for INCOME TAX LAW

4 TAX IS ON PERSON & RESIDENCE PERSON is defined under the Income tax Act, 1961 Section 2(31) person includes (i)., (ii).., (iii), (iv) Firm, (v) Association of persons or Body of individuals, whether incorporated or not, (vi), (vii)..

5 SECTION 2(23)(i) Firm firm shall mean firm as defined under Indian Partnership Act, 1932 and shall also include within its ambit LLP as defined in in the Limited Liability Partnership Act, 2008.

6 SECTION 2(23)(iii) (iii) partnership shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009);

7 Implications: SECTION 2(23)(i) LLP shall be treated separate taxable entity. All provisions of IT Act applicable to Firm are applicable to LLP.

8 Implications: Foreign LLP SECTION 2(23)(i) Not a LLP as per Indian LLP Act, hence would not be treated as firm. May be treated as Company u/s 2(17)(ii) as a foreign body corporate.

9 SECTION 2(23)(ii) partner shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include, (a) any person who, being a minor, has been admitted to the benefits of partnership; and (b) a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009)

10 SECTION 2(23)(ii) Implications: All the provision (except tax liability) as applicable to partners of firm would also applicable to partner of LLP

11 Residential Status Tax Resident of India unless control and management of affairs is situated wholly outside India [S.6(2)] It would be treated as resident even if control and management of affairs is partly situated in India. Meaning of : control and management', affairs, situated and wholly

12 Residential Status control and management controlling and directive power, the head and brain as it is called. Means de facto control and management and not merely the right or power to control and manage. affairs must mean affairs which are relevant to the purpose of business

13 Residential Status situated implies the functioning of such power at a particular place with some degree of performance, wholly would seem to recognise the possibility of the seat of such power being divided between two distinct and separated places.

14 Case Law: Residential Status CIT v. Nandlal Gandlal [1960] 40 ITR 1 (SC), CIT V. V.V.R.N.M. Subbiah Chettiar [1947] 15 ITR 502 (Mad.) & [1951] 19 ITR 168 (SC), B R Naik V. CIT [1945] 13 ITR 124 (Bom.)

15 TAX RATE Income Tax Assessed as Firm: 30% Education Cess : 2% + 1% Effective Rate : 30.90% Wealth Tax LLP not taxable as entity for wealth tax Partner charged on LLP s share

16 L WHY LLP?

17 LLP V. PARTNERSHIP NO DIFFERENCE IN TAXATION ADVANTAGES STEAM FROM GENERAL LAW ISSUE - CAN MINOR BE A PARTNER?

18 LLP V. PROPRIETORSHIP TAX RATE: LLP - No Threshold Limit - Flat Rate of Tax ADVANTAGES STEAM FROM GENERAL LAW

19 LLP V. COMPANY TAX ADVANTAGES: 1. No Dividend Distribution Tax 2. No MAT Under Section 115JB 3. No Deemed Dividend u/s 2(22)(e) COMPANY LAW: 1. Can accept Unsecured Loans 2. Can withdraw funds

20 L ASSESSMENT 0f LLP

21 S. 140 (cd) : Signatory to LLP return Designated partner is a person competent to sign and verify the return of tax. If designated partner, due to unavoidable reasons is unable to sign the return or if there is no designated partner, it may be signed by any other partner

22 LLP - Assessment as Firm S. 184 LLP assessed as partnership firm assessed as such if (i) LLP is evidence by instrument (ii) Instrument states shares of partners Certified copy of LLP Deed Submission (a) In the year of creation (b) In every year of amendment

23 Non Compliance of Sec. 184 If provisions of Section 184 are not complied, then : For LLP - No deduction for (i) Partner s salary, (ii) Interest on Capital For Partners Salary and Interest Not taxable

24 Assessment u/s Sec. 144 If LLP is assessed u/s 144, then : For LLP - No deduction for (i) Partner s salary, (ii) Interest on Capital For Partners Salary and Interest Not taxable

25 PARTNER S REMUNERATION PAYMENT TO WORKING PARTNERS Partner Working V. Designated Working partner can be designated partner as well as non designated partner

26 PARTNER S REMUNERATION Provisions S 40A Ref. Syntholab Chemicals & Research v ACIT[2008] 172 Taxman 38 (Mum.) (Mag.) Remuneration to nominee who act as a designated partner Whether such nominee is partner? S. 40(b)(v) v/s S.37 (1)

27 Interest on partners capital S.36(1)(iii) Interest Capital contribution of partners are capital borrowed for the purposes of business and profession and for allowance of deduction of interest payments, requirement of s.36(1)(iii) need to fulfill Ref. Munjal Sales corp. vs CIT [2008] 298 ITR 298 (SC)

28 Interest on partners capital S.40(b)(iv) Restrictions LLP agreement to provide allowance of such interest to partner Maximum interest rate - 12% p.a. simple Interest on capital balance after reducing withdrawals Ref. Architectural Associates v. A CIT [2005] 277 ITR (AT) 35.

29 Interest on partners capital Increase in credit balance of bank account due to revaluation of assets Ref ACIT v Sant Shoe Store [2004] 88 ITD 524 (Cha), ITO v. Amar Garage[2004] I SOT 331 (Kol) S. 36(1)(iii) v/s 40(b) S. 40(b) is collolry to section 30 to 38 S. 40(b)(iv) only restricts the deductibility

30 Issues Implication under e filling of tax returns? Non submission of certified copy of partnership along with return of income is a procedural default which can be cured during the course of assessment proceedings New Ajantha Road Lines v. ITO [2002] 254 ITR (AT) 85 (Jab.)

31 Presumptive taxation Income-tax Act provides Certain types of income earned by resident SME can be offered to tax on presumptive basis. Certain business operation of non-resident may also offer income on presumptive basis. In case income is offered on presumptive basis assessee is exempt from fulfilling certain requirements of IT Act eg maintenance of books of accounts

32 Presumptive taxation Resident LLP with effect from is not allowed to offer income on presumptive basis u/s 44AD, S.44AE Non resident LLP can offer income to tax in specified incomes / profits or gains of Shipping Business u/s 44B Exploration of mineral oil u/s 44BB, Operation of aircraft u/s 44BBA

33 L Transactions With Partners

34 Partner s Contribution to LLP S. 45(3) Contribution of assets by partner Taxable in the year of transfer Consideration = amount recorded in books LLP Act S. 32 provides that partner can contribute tangible/ intangible/ movable/ immovable property, contract for services, etc. Value of contribution of each partner shall be accounted for and disclosed in accounts of LLP.

35 Partner s Contribution to LLP * Rules 23 Contribution by partner be valued by Practcing CA or CWA or a Govt. approved Valuer * Determination of cost in terms of money - may be difficult but is not impossible A. R. Kurshnamurthy v CIT 43 Taxman 30 (SC) Valuation is not an exact science. Mathematical certainty is not demanded, nor is it possible Viscount Simon in Gold Coast Selection Trust Ltd. V. Humphrey (Inspector of Taxes) 17 ITR (suppl) 19 HL

36 Distribution of Assets by LLP S. 45(4) Distribution of capital asset by firm to partner on dissolution of firm or otherwise Chargeable to tax in the year of transfer Consideration : FMV of Asset on date of transfer S. 63 of LLP Act - Winding up of an LLP Distribution of assets of the LLP on wound up provision

37 DISSOLUTION S.45(4) could be triggered. Capital gain on dissolution, would be chargeable to tax in the year of distribution of asset and not the year of dissolution Ref. CIT v. VIjayalakshmi Metal Industries [2003] 132 Taxman 49(Mad.) Discontinuation of business - difference between FMV of stock and cost could be taxed as business income. ALA Firm v CIT 189 ITR 285 Sakhti Trading Co v CIT 250 ITR 871 (SC)

38 Assignment / Transfer of interest by partner S.42 LLP Act partner can assign economic interest/ rights to share profits of LLP, receive distribution as per the terms of LLP agreement Non economic interest viz. management rights, access to information of LLP cannot be transferred Such interest is capital asset Any gain on transfer - chargeable to tax N A Mody v CIT 162 ITR 420 (Bom.) A K Sharfuddin v CIT 39 ITR 333 (Mad.) Principles of diversion of income by overriding title v/s

39 Assignment / Transfer of interest by partner Diversion of income by overriding title v/s Application of income CIT v. Sunil J. Kinariwala 26 Taxman 161 SC) Implication on carry forward & set off of losses incurred by firm need to be evaluated

40 Losses Change LLP Constitution S. 78 Restriction for carry forward and set off of losses in the case of change in constitution of firm on retirement of partner due to resignation or death Implication Not entitle to carry forward & set off loss proportionate to the share of retired or deceased partner Inapplicable to Unabsorbed Depreciation Change in constitution - Admission of partner or change in profit sharing ratio?

41 L CONVERSION into LLP & TAXATION

42 TAX NEUTRAL Conversions of private or unlisted public co Tax neutral - Finance Act, 2010 Conditions to be complied for claiming tax neutrality at the time of conversion Whether all conditions are cumulative and need to be complied?

43 CONDITION No amount to be paid either directly or indirectly to any partner out of accumulated profits standing in the accounts of the company for the period of 3 years from the date of conversion Accumulated profit not defined Current years profits till date conversion include or excluded

44 BENEFITS CONTINUE Depreciation 5 th proviso to S.32 apportionment of depreciation Amortisation of VRS expenditure s. 35DDA Actual cost of asset in case of conversion S 43(6) Explanation 2 C Carry forward of accumulated losses / unabsorbed depreciation S.72 A

45 Shareholders taxability S. 47 (xiib) also provides that any transfer of shares held by shareholders in the company involved in conversion of LLP will not to be regarded as transfer of fulfillment of specified conditions Applicable to both Equity and Preference shares Further s 49 (2AAA) provided cost of share in LLP period of holding of shares in company will all be reckoned Implication in case specified conditions not fulfilled?

46 Conversion of LLP No explicit provisions under LLP Act or Other law for conversion LLP to other business entity In order to convert into any other form of entity such LLP may be required to wound up And assets to be distributed in the hands of partner who may form another entity No tax neutrality provisions on conversions of LLP to such other business entities

47 L LLP TAXATION SUM UP

48 LLP affords Administrative simplicity Operational flexibility and Tax advantages Therefore, coming decade will see this entity flooding business scean

49 Thank you!

50 Any questions?