Budget 2010-11Conversion of a private limited company or unlisted company to a LLP (LIMITED LIABILITY PARTNERSHIP)

The Finance (No. 2) Act, 2009 provided for the taxation of LLPs in the Income-tax Act on the same lines  as  applicable  to  partnership  firms. Section  56  and  section  57  of  the  LLP  Act, 2008  allow conversion of  a  private  company or an unlisted  public company (hereafter referred as company) into an LLP. Under the existing provisions of Income-tax Act, conversion of a company into an LLP has  definite tax implications. Transfer of assets  on conversion attracts  levy of capital  gains  tax.
Similarly, carry forward of losses and of unabsorbed depreciation is not available to the successor LLP. It is proposed that the transfer of assets on conversion of a company into an LLP in  accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008 shall not be regarded as a transfer for the purposes of capital gains tax under section 45, subject to certain conditions.
These conditions are as follows:
(i)    the  total  sales, turnover  or  gross  receipts in  business  of  the  company do  not exceed Rs. 60,00,000 in any of the three preceding previous years;
(ii)    the  shareholders  of  the  company become  partners of  the  LLP in  the  same proportion  as their shareholding in the company;
(iii) no  consideration  other  than  share  in  profit  and  capital  contribution  in  the  LLP  arises  to partners;
(iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50 per cent of the profits of the LLP for a period of 5 years from the date of conversion;
(v)    all assets and liabilities of the company become the assets and liabilities of the LLP; and (vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion.
It is also proposed to allow carry forward and set-off of business loss and unabsorbed depreciation to the successor LLP which fulfils the above mentioned conditions.
It is also proposed that if the conditions stipulated above are not complied with, the benefit availed by the company shall be deemed to be the profits and gains of the successor LLP chargeable to tax for the previous year in which the requirements are not complied with.
It  is  also  proposed  that  the  aggregate  depreciation  allowable  to  the  predecessor  company  and successor LLP shall not exceed, in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not taken place.
It is further proposed that the actual cost of the block of assets in the case of the successor LLP shall be the written down value of the block of assets as in the case of the predecessor company on the date of conversion.
It is also  provided that the cost of  acquisition of the capital asset for  the  successor LLP shall be  deemed to be the cost for which the predecessor company acquired it.
It is proposed to that the tax credit under section 115JAA shall not  be  allowed to the successor LLP.
These amendments are proposed to take effect from the Assessment Year 2011-2012.