k. gopal rao & company for bangalore branch of sirc of icai · overview, mdf & taxation....

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Limited Liability Partnerships

A presentation by

M/s. K. GOPAL RAO & Company, Chartered Accountants, Chennai

For Bangalore Branch of SIRC of ICAI

Limited Liability PartnershipOverview, MDF & Taxation

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K.GOPAL RAO & CO, Chennai Bangalore Branch of SIRC of ICAI CA. GOPAL KRISHNA RAJU

Disclaimer

• These are my personal views and cannot be construed to be the

views of the SIRC or K. GOPAL RAO & Co., Chartered Accountants

• No representation or warranties are made by the SIRC with regard to

this presentation

• These views do not and shall not be considered as professional

advice

• This presentation should not be reproduced in part or in whole, in

any manner or form, without my or SIRC‟s written permission


Agenda

1. Overview

2. Three phases of change

3. Corporate form vs. MDF through LLP

4. Capacity Building & Challenges

5. Tax aspects

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Agenda 1:

Overview of LLP


Under the MCA umbrella – Allied legislations

i. The Chartered Accountants Act, 1949

ii. The Cost and Works Accountants Act, 1959

iii. The Company Secretaries Act, 1980

iv. The Partnership Act, 1932

v. The Societies Registration Act, 1860

vi. The Companies (Donations to National Funds) Act, 1951

vii. The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969

viii. The Competition Act, 2002 as amended by Competition (Amendment) Act,

2009

ix. The Limited Liability Partnership (LLP) Act, 2008.

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www.llp.gov.in

• A corporate business vehicle that enables professional

expertise and entrepreneurial initiative to combine and

operate in flexible, innovative and efficient manner, providing

benefits of limited liability while allowing its members the

flexibility for organizing their internal structure as a partnership.


Facts & Credits about Indian LLP

International practice - LLP is the standard for professional

practice.

Primary purpose is to convert Existing firms to LLP

Till 2009 there was lack of clarity on taxation aspects, that is

cleared now to certain extent.

More than 2100 LLPs are formed so far from 31st MAY 2009

MCAs observation - Eastern Region is lagging behind in

promoting LLP

ICAI‟s focus vs. MCAs focus (macro perspective)

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Debits of LLP

• Very high Penalty (almost 10 times compared with

Companies Act, 1956)

• Limited recognition by professional bodies (ICAI,

ICSI, ICWAI) so far in their statute as on date….

• Loss of secrecy of information (since available for

public)

• Limited public awareness

• Centralized at New Delhi


Concept of LLP

• LLP contains elements of both ‘a corporate structure’ as well as ‘a

partnership firm structure’. LLP is called a hybrid between a company

and a partnership.

• The LLP can continue its existence irrespective of changes in partners. It is

capable of entering into contracts and holding property in its own name.

• The LLP is a separate legal entity, is liable to the full extent of its assets

but liability of the partners is limited to their agreed contribution in the

LLP.

• No restriction on number of partners. Just imagine a firm having 500 or

2000 partners

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ORIGIN...Countries where LLP form is available

• The LLP structure is available in countries like UK, USA,

Gulf countries, Australia & Singapore.

• On the advice of experts who have studied LLP legislations

in various countries, the LLP Act is broadly based on UK

LLP Act 2000 and Singapore LLP Act 2005.

• Both these Acts allow creation of LLPs in a body corporate

form i.e. as a separate legal entity, separate from its

partners/members.


LLP & “Traditional partnership firm”

• Under “traditional partnership firm”, every partner is liable, jointly

with all the other partners and also severally for all acts of the firm

done while he is a partner.

• Under LLP structure, liability of the partner is limited to his

agreed contribution. Further, no partner is liable on account of the

independent or un-authorized acts of other partners, thus allowing

individual partners shielded from joint liability created by

another partner‟s wrongful acts or misconduct.

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167C of Income Tax Act

• Section 167C has been introduced in the IT Act, which makes every

partner of a LLP jointly and severally liable for the taxes to be paid by

the LLP for the period during which he was a partner, unless the non-

recovery of taxes cannot be attributed to gross neglect, misfeasance

or breach of duty on his part. The aforesaid is irrespective of any

contrary provision in the LLP Act.

• Although this section appears to be in conflict with the scheme of the LLP

Act, which does not make the partners personally liable for the liabilities

of the firm, it seems to be in line with existing provisions of section 179 of

the IT Act, which cast a similar liability on the Directors of a private

company in liquidation.


Compulsory Insurance

• It must be pointed out that a very important aspect of LLP

laws across the world is the provision for compulsory

insurance.

• Compulsory Insurance is required to protect the interests of

persons claiming against the LLP and to ensure that they

receive what is due.

• Provisions for compulsory insurance can be found in most

LLP laws.

• The State of West Virginia in the US requires LLPs to carry

liability insurance of at least one million dollars.

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Compulsory Insurance

• Liability insurance is generally designed to cover different kinds of

omissions, negligence, wrongful acts, malpractices and misconduct

for which liability is otherwise limited.

• Insurance companies in UK provide professional indemnity

insurance to cover all reasonable costs incurred in the defence or

settlement of claims arising from the above, as long as they are

accidental or unintentional acts.

• As a proverb states: “to get something, one must give something”.

• It is certainly rational that, to receive the benefit of limited liability,

firms must be asked to compulsorily insure themselves.


Is LLP applicable to specific professional

services regulated by law?

• LLP Vision: Framework should not be restricted to

professional services alone - recommended by

Naresh Chandra Committee.

• Accordingly, the LLP Act does not restrict the

benefit of LLP structure to certain classes of

professionals only.

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Recommendations saw the daylight after 36 years

• Bhat Committee (1972);

• Naik Committee (1992);

• Expert Committee on Development of Small Sector Enterprises

headed by Sh. Abid Hussain in 1997 and

• Study Group on Development of Small Sector Enterprises (SSEs)

headed by Dr. S P Gupta (2001).

• Committee on Regulation of Private Companies and Partnerships

headed by Sh. Naresh Chandra (2003)

• The Committee on New Company Law (Dr. J.J. Irani Committee)

(2005)


Likely users/beneficiaries of LLP

• Persons providing services of any kind

• Enterprises in new knowledge and technology based fields

where the corporate form is not suited.

• For professionals such as Chartered Accountants (CAs),

Cost and Works Accountants (CWAs), Company

Secretaries (CSs) and Advocates, etc.

• Venture capital funds where risk capital combines with

knowledge and expertise

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Likely users/beneficiaries of LLP…

• Professionals and enterprises engaged in any

scientific, technical or artistic discipline, for any

activity relating to research production, design and

provision of services.

• Small Sector Enterprises (including Micro, Small

and Medium Enterprises)

• Producer Companies in Handloom, Handicrafts

sector.


LLP for Charitable or other

not for profit objectives

• No.

• The essential requirement for setting LLP is

„carrying on a lawful business with a view to

profit’.

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Provisions of Indian Partnership Act, 1932

would be applicable to LLPs

• No, not applicable


Why LLP? Instead of amending

Companies Act or Partnership Act

• Firms/enterprises engaged in biotech, information

technology, Intellectual property and other knowledge

based sectors find traditional partnerships unsuitable

because of full joint and several liability.

• The traditional partnerships are also considered

unsuitable for multi-disciplinary combinations

comprising a large number of partners, seeking a

flexible working environment but with limited liability.

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SIRC – ICAI – Members Statistics

Total number of members as on 6th August 2010 = 37,499

Members Male Female Total

Full Time COP 13,963 1,525 15,488

Part Time COP 1,688 283 1,971

Not Holding COP 15,996 4,044 20,040

Total 31,647 5,852 37,499


SIRC – ICAI – Firm’s Statistics

Firms Numbers

Proprietary Firms 4,565

Partnership Firms 2,766

2 Partners 1,629

3 Partners 541

4 Partners 243

5 Partners 106

6 Partners 69

7 Partners 49

8 Partners 39

9 Partners 32

10 Partners 25

> 10 Partners 33

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Agenda 2:

3 phases of change


Three Phases of change in CA Act

• Before 2006 CA Act

• Post 2006 amendment i.e. 2006 to 2010

• Post 2010 proposed amendment pending as bill in

parliament.

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Before 2006…

• Restrictions

• Compulsions

• Perimeter fenced


2006 amendment onwards…till date

• Relaxation

• Perimeter fenced but orbit enlarged

• 2006 amendment & council decision as on

01.10.2006

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Proposed amendment in 2010…

• No perimeter (but will it be fenced or gated…?)

• Professional opportunities for members multifarious…

• Networked professional firms will emerge…

• Small and medium practitioners will be challenged by

consolidating firms (proprietor firms and partnership

firms viz. 2 or 3 partners)

Agenda 3:

Multi Disciplinary Firms

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MDF - Multidisciplinary Firms

• Ethical barrier imposed under the Chartered

Accountants Act, 1949 (till 2006)

• The scenario has changed, enabling the formation

of Multidisciplinary Firm (MDF), thanks to the

Chartered Accountants Amendment Act, 2006


Ethical Barrier

• The First Schedule of the Chartered Accountants

Act, 1949, under

• Item (2)

• Item (3)

• Item (4) and

• Item (5)

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Ethical Barrier…removed but…questions left unanswered?

• Clause (2) of Part I considers that paying or allowing any share,

commission or brokerage in the fees or profits to any person

other than a member of the ICAI.

• Clause (3) treats accepting any part of the profits of the

professional work.

• Further, Clause (4) prohibits entering into partnership with any

person other than a Chartered Accountant in practice.

• Clause (5) considers as professional misconduct the securing of

any professional work through the services of a person not

qualified to be his partner.


MDF

• The Chartered Accountants Amendment Act, 2006 has

modified the position to enable members of ICAI not only

to transact with a non-member, but also to enter into

partnership and share profits.

• It is clear that the objective, as far as MDF is concerned, is

to allow only members of such professional bodies

which have been constituted under a statute, to be eligible

to become partners.

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Super SIX (council recommendation for MDF)

1) Company Secretary, member, ICSI, established under the Company

Secretaries Act, 1980;

2) Cost Accountant, member, ICWAI established under the Cost and

Works Accountants Act, 1959;

3) Advocate, member, Bar Council of India established under the

Advocates Act, 1961;

4) Engineer, member, The Institute of Engineers, or Engineering from a

university established by law or an institution recognised by law;

5) Architect, member, IIA established under the Architects Act, 1972; and

6) Actuary, member, IAI, established under the Actuaries Act, 2006.

How about Engineers and MBAs?

• In addition thereto, for the purposes of items (2), (3) and (5) of

Part I of the First Schedule to the Act, persons qualified in

India as:

• BE: Bachelor in Engineering from a university established by law or

an institution recognised by law;

• B.Tech: Bachelor in Technology from a university established by

law or an institution recognised by law; and

• MBA: Master in Business Administration from universities

established by law or technical institutions recognised by AICTE.

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Amendment in CA Bill 2010

(ii) in sub-section (2),—

(a) after the words “chartered accountants in practice”, the words

“or in partnership with members of such other recognised

professions as may be prescribed” shall be inserted;

(b) in the Explanation, for the words “a firm of such chartered

accountants”, the words “a firm of such chartered accountants or firm

consisting of one or more chartered accountant and members of any

other professional body having prescribed qualifications” shall be

substituted.

MDF…

• It is clear that the objective, as far as MDF is concerned,

is to allow only members of such professional bodies

which have been constituted under a statute, to be

eligible to become partners.

• As and when the recommendation of the Council is

approved by the Government and notified, Chartered

Accountants will be in a position to enter into

partnerships with Company Secretaries, Cost

Accountants, Engineers, Architects, Advocates and

Actuaries. - Let’s Wait!

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MDF…

• Thus, the ethical barrier hitherto existing will get relaxed to

that extent.

• Similar relaxation may be granted later by amendment to

Regulations as and when the Council considers members of

some other discipline as eligible for admission into the MDF.

• Further, as and when ICAI enters into Mutual Recognition

Agreement (MRA) with any professional body or institution

situated outside India, by virtue of S. 29(2) of the Chartered

Accountants Act, 1949, members of ICAI will be in a position to

enter into partnership even with members of such

bodies/institutions {viz. MRA with CPA Australia}


Chartered Accountants (Amendment) Bill, 2010

• In order to enable members to practice through a new business

vehicle i.e. LLP, consequential amendments in the Chartered

Accountants Act, 1949, arising out of the LLP Act, 2008

became necessary.

• Accordingly, the inputs of the Institute were called for and also

submitted to the Central Government in relation to the

amendments that were considered appropriate, followed by

oral discussions, specific to the consequential amendments,

arising out of LLP Act, 2008.

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CA (Amendment) Bill, 2010…PS Committee…

• The CG introduced in RS on 28th April, 2010 the

Chartered Accountants (Amendment) Bill, 2010, along

with two other Bills namely, the Cost and Works

Accountants (Amendment) Bill, 2010 and the

Company Secretaries (Amendment) Bill, 2010

pertaining to the sister Institutes.

• The RS, on consideration, referred the Bill to the

Parliamentary Standing Committee on Finance for

its examination.


CA (Amendment) Bill, 2010…ICWAI to

ICMAI/ICAI…

• Note: The CWA (Amendment) Bill, 2010 contained a

proposal regarding change of its name from the Cost

and Works Accountants of India (ICWAI) to the Cost

and Management Accountants of India (ICMAI), which

in no way whatsoever relates to the amendments

necessitated by the LLP Act.

• Proposed: ICWAI to ICAI (Institute of Cost Accountants

of India)

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Before the PS Committee

• Our Institute was invited to make its submission before the

said Parliamentary Standing Committee on 7th July, 2010

and accordingly, suitable presentation/submissions were

made by our President along with the Vice President, and

the Chairman of the CL&CG Committee,

• While submitting our viewpoints on the proposed

amendments, arising out of the LLP Act, we have also

expressed our concerns over the proposal for change of

name of ICWAI to ICMAI. We are actively following up on

the matter.

Agenda 4:

Capacity Building and Challenges

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Terms of Reference of CCBCAF & SMP

• COMMITTEE FOR CAPACITY BUILDING OF CA

FIRMS AND SMALL & MEDIUM PRACTITIONERS

• To promote Corporate Form of Practice and Multi-

Disciplinary profession by way of encouraging

collaboration amongst the professionals/experts in the

relevant fields and facilitating multi-disciplinary

partnership and limited liability partnership.


Methods of Capacity Building

• To promote Corporate Form of Practice and

• To promote Multi-Disciplinary profession by way of

encouraging collaboration amongst the

professionals/experts in the relevant fields and

facilitating multi-disciplinary partnership and limited

liability partnership.

• To promote Merger

• To promote Networking

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Practice in corporate form

• Empowering the members to face the emerging challenges in

the service sector as well as to equip them for the opportunities

in the non-audit service area

• The Council decided to allow members in practice to hold the

office of MD, WTD or Manager of a company.

• Restriction: Engaged exclusively in rendering Management

Consultancy and Other Services permitted by the Council in

pursuant to Section 2(2)(iv) of the Chartered Accountants Act,

1949 and complies with the conditions(s).


Practice in corporate form…management

consultancy

• The members can retain full time COP besides being the MD,

WTD or Manager of such Management Consultancy Company.

• There will be no restriction on the quantum of the equity

holding of the members, either individually and/or along with

the relatives, in such Company.

• Such members shall be regarded as being in full-time

practice and therefore can continue to do attest function either

in individual capacity or in Proprietorship/Partnership firm.

• They are also entitled to train articled assistants.

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Name of MC Company

• The Management Consultancy Company shall have a distinct name which shall be

approved by the Institute – Application in Form „G‟.

• The name of Management Consultancy Company may indicate the area of

„Management Consultancy & Other Services‟ permitted by the Council from time to

time.

• Regulation 190 shall be applicable to the name of the Management Consultancy

Company.

• However, even if a name is provided and subsequently it is found that the same is

undesirable then, the said name can be withdrawn at any time by the Institute.

• The provisions in respect of name of companies as prescribed in the Companies Act,

1956 shall be applicable in letter and spirit.

• The MC Company shall neither be permitted to advertise nor to use logo.


Guidelines of ICAI

• Management Consultancy Company means a Company which

complies with the Guidelines for Practice in Corporate Form

issued by the Institute.

• Exception: The expression "Management Consultancy and

other Services" shall not include the function of statutory or

periodical audit, tax (both direct taxes and indirect taxes)

representation or advice concerning tax matters or acting as

liquidator, trustee, executor, administrator, arbitrator or

receiver, but shall include the following:

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Management Consultancy and Other Services

i. Financial management planning and financial policy

determination.

ii. Capital structure planning and advice regarding raising finance.

iii. Working capital management.

iv. Preparing project reports and feasibility studies.

v. Preparing cash budget, cash flow statements, profitability

statements, statements of sources and application of funds etc.

vi. Budgeting including capital budgets and revenue budgets.

vii. Inventory management, material handling and storage.

viii. Market research and demand studies.

ix. Price-fixation and other management decision making.


• Management accounting systems, cost control and value analysis.

• Control methods and management information and reporting.

• Personnel recruitment and selection, Setting up executive incentive plans,

wage incentive plans, etc.

• Management and operational audits.

• Valuation of shares and business and advice regarding amalgamation,

merger and acquisition.

• Business Policy, corporate planning, organisation development, growth

and diversification.

• Organisation structure and behaviour, development of human resources

including design and conduct of training programmes, work study, job-

description, job evaluation and evaluation of work loads.

• Systems analysis and design, and computer related services including

selection of hardware and development of software in all areas of services

which can otherwise be rendered by a Chartered Accountant in practice

and also to carry out any other professional services relating to EDP.

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Acting as advisor or consultant to an issue, including such matters as: —

• Drafting of prospectus and memorandum containing salient features of

prospectus. Drafting and filing of listing agreement and completing formalities

with Stock Exchanges, Registrar of Companies and SEBI.

• Preparation of publicity budget, advice regarding arrangements for selection of (i)

ad-media, (ii) centres for holding conferences of brokers, investors, etc., (iii)

bankers to issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and

the underwriting arrangement, distribution of publicity and issue material including

application form, prospectus and brochure and deciding on the quantum of issue

material (In doing so, the relevant provisions of the Code of Ethics must be kept

in mind).

• Advice regarding selection of various agencies connected with issue, namely

Registrars to Issue, printers and advertising agencies.

• Advice on the post issue activities, e.g., follow up steps which include listing of

instruments and despatch of certificates and refunds, with the various agencies

connected with the work.

Explanation: For removal of doubts, it is hereby clarified that the activities of

broking, underwriting and portfolio management are not permitted.


• Investment counseling in respect of securities [as defined in the Securities

Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing

so, the relevant provisions of the Code of Ethics must be kept in mind).

• Acting as registrar to an issue and for transfer of shares/other securities. (In

doing so, the relevant provisions of the Code of Ethics must be kept in mind).

• Quality Audit.

• Environment Audit.

• Energy Audit.

• Acting as Recovery Consultant in the Banking Sector.

• Insurance Financial Advisory Services under the Insurance Regulatory &

Development Authority Act, 1999, including Insurance Brokerage.

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Firms…LLP…Corporate….?

• Proprietorship Firms or Individuals

• Partnership Firms

• LLP (only Chartered Accountants as partners holding COP)

• Company (only Chartered Accountants as directors holding

COP)

• LLP (CAs + Members of recognised professional bodies)…?

• Corporate (CAs + Members of recognised professional bodies)…?


MDF…

• On the other hand, if a partnership firm was constituted to be the

SPV, a Chartered Accountant could not be a partner with non-

members and he had to secure the services of non-members only

as employees or retainers even in that firm.

• An MDF is intended to provide a better mechanism to get over

these practical difficulties, so that a Chartered Accountant in

practice can enter into partnership with professionals in other

disciplines.

• Thus, the choice emerges between corporate practice or an MDF

in consultancy management services. Simplicity in terms of

procedural requirements may attract small and medium

practitioners (SMPs) to opt for MDF than for a corporate status.

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MDF…

• Again, the volume of funds required and methodology preferred

for pooling of monetary resources may be deciding factors to

choose between a corporate entity and an MDF.

• Yet another crucial factor to be borne in mind is that an MDF

can engage itself in both core and non-core areas, whereas in

corporate form, exclusive areas like statutory auditing

cannot be undertaken. S. 25 of the Chartered Accountants Act,

1949, makes it clear that no company shall practise as Chartered

Accountants.


Amendment of section 25 vide CA Amendment Bill, 2010

3. In section 25 of the principal Act, in sub-section (1), the

following Explanation shall be inserted, namely:—

'Explanation.—For the removal of doubts, it is hereby declared

that the "company" shall include any limited liability partnership

which has company as its partner for the purposes of this

section.'.

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Challenges…

• For instance, the minimum number of CA’s as partners .

• For instance, name and description of the firm could be an

issue.

• Attestation of different work (Company Audit / Cost Audit /

Secretarial Audit)…? Can an LLP do all this under one

roof?

• If at all disciplinary action should be taken then against

which member and by which Institute (ICAI / ICWAI / ICSI)

such action will be taken.


Challenges

• MDF as a concept can pose many issues and

challenges in the course of implementation, which need

to be carefully addressed and solutions to be spelt out.

• Norms and principles are expected to be laid down in

due course by the Council of the ICAI for clarity in

operation of MDF and for resolving conflicts that may

arise in practical situations.

• Let‟s wait and watch…

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Agenda 5:

Taxation


Unique features

• Income Tax Rates – 30% + 3% (even for Non-Resident

LLPs)

• PAN – 4th Character will be „F‟

• Wealth Tax Applicability - ? (should it be treated as

company for wealth tax liability) – Issue unresolved

• No Corporate Dividend Tax – No CDT

• No Minimum Alternate Tax – No MAT

• 2(22)(e) – Not applicable

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Remuneration, Interest and Profit Sharing

• LLP enjoys both the advantages of a private limited company

and also a partnership.

• Similarly, as compared to partnership, for LLP conditions for

claiming deduction of remuneration paid to partners of LLP

would be as per section 40(b).

• Interest and profit sharing ratio should be defined in the

agreement evidencing the LLP in order to claim deduction

from the profits of LLP.


Recent Amendments in Finance Bill, 2010

• Finance Act, 2009, introduced several provisions in the Act

to treat LLP as a partnership firm for the tax purposes in all

respects.

• The Finance Bill, 2010, takes the process of amendment

further, primarily for small companies having turnover of

Rs. 60.00 lacs or less, by amending sections 32, 35DDA,

43, 47, 47A, 49, 72A and section 115JAA, primarily aimed

at providing tax neutrality for conversion of the private

limited companies and unlisted public companies into LLP.

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Section 47 (xiiib)

• By introducing clause (xiiib) in section 47, it is proposed that the

transfer of assets on conversion of a company (private or

unlisted public company) into a LLP in accordance with section

56 and 57 of the LLP Act, 2008 shall not be considered as

transfer for capital gains purposes u/s. 45 of the Act.

• No capital gain therefore would accrue to the company upon

transfer of assets from company to the LLP, despite the fact that

the assets of the company would become the assets of the LLP

by virtue of section 58 (4)(b) of the LLP Act, 2008.


Tax Neutrality

i. all the assets and liabilities of the company immediately before the

conversion become the assets and liabilities of the LLP;

ii. all the shareholders of the company immediately before the conversion

become the partners of the LLP and their capital contribution and

profit sharing ratio in the LLP are in the same proportion as their

shareholding in the company on the date of conversion;

iii. 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 LLP;

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Tax Neutrality

iv. the aggregate of the profit sharing ratio of the shareholders of the

company in the LLP shall not be less than 50% at any time

during the period of five years from the date of conversion;

v. the total sales, turnover or gross receipts in 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

vi. 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 a period of three years

from the date of conversion.


Cumulative conditions

• The conditions mentioned above are cumulative

and each condition is required to be satisfied.

• Non-fulfilment of any one condition would render

the transaction as transfer of assets and taxable

as profits and gains of the successor LLP

chargeable to tax in the previous year in which the

requirements are not complied with.

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47A(4)

• If the conditions stipulated are not complied with,

the capital gains not charged to tax in the hands

of the company shall be deemed to be the

profits and gains of the successor LLP

chargeable to tax by virtue of newly inserted sub

section 4 in Section 47A, for the previous year in

which the requirements are not complied with.


COA & WDV

• The cost of acquisition of various assets acquired

by the LLP upon conversion will be the cost of

acquisition of these assets in the hands of the

company prior to conversion and the written down

value of the block of asset shall be the written

down value of the block of asset for the company

as on the date of conversion.

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COA (LLP) = WDV (Company)

• 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.

• Amendments is also made in section 49(1) to provide 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.


Section 32

• 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.

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72A(6A)…behold let’s use it positively

• Section 72A, is proposed to be amended to allow carry

forward and set off of accumulated loss and unabsorbed

depreciation allowance in the hands of the company upon

conversion.

• Such accumulated loss and unabsorbed depreciation will

be treated as the loss and depreciation of the year in

which such conversion takes place and accordingly,

fresh period of 8 years will be available for set off of loss

in the hands of LLP upon conversion.


Non-eligibility for MAT Credit in case of

conversion from Company to LLP

• Under the Finance Bill, 2010, extensive provisions

are made for providing tax neutrality to conversion

of a private limited company or unlisted public

company to Limited Liability Partnership (LLP).

• However, the provisions of section 115JAA

granting credit for MAT paid shall not apply upon

conversion into LLP.

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• Credit in respect of tax paid by a company under section

115JB is allowed only to such company under section

115JAA.

• It is proposed to clarify that the tax credit under section

115JAA shall not be allowed to the successor LLP.




• Credit in respect of tax paid by a company under section

115JB is allowed only to such company under section

115JAA.

• It is proposed to clarify that the tax credit under section

115JAA shall not be allowed to the successor LLP.

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Agenda 4:

Post Budget Memorandum


Clause 18 – Insertion of clause (xiiib)

in section 47

• It may be noted that the exclusion applies only to the

company and not to the shareholders.

• Under section 55 read with Schedules 3 and 4 of the

Limited Liability Partnership Act, the company will be

deemed to have been liquidated on its conversion into an

LLP.

• Consequently, the provisions of section 46(2) and

section 2(22)(c) levying tax on the shareholder on

distribution of assets on liquidation of the company

would become applicable.

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Clause 18 – Insertion of clause (xiiib)

in section 47

• In order to provide exemption in the hands of

shareholders on conversion of a company into a

LLP, the words “Notwithstanding anything

contained in section 46(2)” may be added at the

beginning of clause (xiiib) of section 47.


Benefit to be extended

• The benefit of exemption/deduction available to the

predecessor-company under sections 10A, 10AA,

10B, 10C, 35A, 35AB, 35D, 35DD, 80-IA, 80-IB, 80-

IC, 80- ID, 80-IE etc. may be allowed to successor-

LLP, on such conversion, for the unexpired period.

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Equity Shareholders only

• Clause (b) of the proviso to section 47(xiiib) may be

amended to substitute “equity shareholders” in the

place of “shareholders”.

• Excluding preference shareholders


Disqualified partners for exclusion

• In clause (d) of the proviso to section 47(xiiib), it

may be provided that shortfall from the prescribed

percentage of 50%, resulting consequent to death

or disqualification of a partner, may be permitted.

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Increase sought for 60 lakhs limit

• The limit under clause (e) of the proviso to section

47(xiiib) should be suitably enhanced so that more

closely held family companies are encouraged to

avail the benefit of conversion to LLP.


Inclusion of conversion of Firm into LLP

• The conversion of a firm into a LLP should be

included in the list of transactions not considered

as a transfer under section 47.

9/13/2010

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Agenda 6:

Disclosure, Audit and Filing Requirements


Maintenance and Filing of Accounts

• An LLP shall be under obligation to maintain annual

accounts reflecting true and fair view of its state of

affairs.

• A “Statement of Accounts and Solvency” in

prescribed form shall be filed by every LLP with the

Registrar every year.

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Audit Mandatory like companies?

• The accounts of every LLP shall be audited in accordance

with Rule 24 of LLP, Rules 2009.

• No Audit - whose turnover does not exceed, in any financial

year, 40 lakh rupees, or whose contribution does not exceed

25 lakh rupees, is not required to get its accounts audited.

• However, if the partners of such limited liability partnership

decide to get the accounts of such LLP audited, the accounts

shall be audited only in accordance with such rule.


Annual Return

• Every LLP would be required to file annual return in

Form 11 with ROC within 60 days of closer of financial

year.

• The annual return will be available for public inspection

on payment of prescribed fees to Registrar.

9/13/2010

45

Reflections ?

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