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In India, LLP is the most emerging way of doing business. In this mode of business, the liability of the partners is limited. Every partner in the LLP is acting as an agent of the LLP, not of other partners. All the rights of the partners in the LLP to shares all posses and profits are transferable wither in part or in whole.
The LLP Act, 2008 has provided a provision for converting a private company into an LLP. The Income-tax Act 1961[1] has further inserted and amended the provisions relating to the conversion. Whenever there is a transaction relating to the transfer from one person to another, in that case, the transferor has to pay the capital gain tax. Section 47(xiiib) has been inserted in the by amending the income tax act.
Table of Contents
According to section 47 (xiiib) the following shall not regard as transfer:
Any transfer of the intangible assets or the capital assets by an unlisted company or private company to a Limited Liability Partnership.
Further, any transfer of shares held by the company’s shareholder as a consequence of that conversion of private company into an LLP.
According to the proviso under section 47 (xiiib) the conversion of the private companies into a Limited Liability Partnership is not taxable if it fulfils the below mention conditions:
Transfer of capital assets:
If the condition above mentioned is violated, the transfer related to the capital assets must be done at the market rate and similarly the capital gain must be calculated.
Transfer of Other Assets:
All the other assets including current assets, stock in trade etc should be transferred at the prevailing market value and the applicable tax to be paid.
Impact on the Share Holders
The entire shares are in the hand of shareholders of the private company will be converted into LLP’s capital. The shareholders will further surrender the shares and LLP capital is acquired.
The list of interpretations is vast related to the transfer of the company into a Limited Liability Partnership. Simultaneously, the shareholders who are transferring the shares and the other person who is receiving it are the same. Hence, there will be no payment of the capital gain made to the shareholder because no one can make a profit just by selling to himself.
These are the following companies that cannot be converted into LLP
It is very simple to recognise the cost of the acquisition of the asset; it shall be estimated to the cost of the acquisition of the precursor company.
As per Section 2(42A)(b), the reason to determine the period of holding capital assets for determining the nature of the capital gain is the time period for which the total assets was held by the predecessor company shall be included. Hence, the short term and long term will completely dependent on the total holding period of the company from the date of buying.
Read our article:Government Approval under Foreign Direct Investment (FDI) In India
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