The Companies Act 2013 requires companies to follow many compliances throughout the year. Comparatively there are less compliance burden for an Limited Liability Partnership (LLP) and hence businesses prefer an LLP over a private limited company. Also, LLPs receive the status of a body corporate and a separate legal entity from its partners and will have perpetual succession.
The LLP Act allows private companies to convert into an LLP provided that there is no security interest in its assets and partners of the LLP comprise of shareholders of the company. Let’s discuss the tax benefits available on conversion of a Company to an LLP.

No Capital Gains and No Capital Gain Tax

As per Section 47(xiiib), no capital gains shall arise on the following transfer:
1. any transfer of a capital asset or intangible asset by a private company to a LLP or
2. any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a LLP in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008

The capital gains will be exempt on compliance of following conditions:
a. all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP
b. 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
c. 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
d. 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 5 years from the date of conversion
e. the total sales, turnover or gross receipts in the business of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed 60 lakh rupees
f. the total value of the assets as appearing in the books of account of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed 5 crore rupees and
g. 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 3 years from the date of conversion.

Section 49(1)- Cost with reference to certain modes of Acquisition
When the capital asset became property of the LLP by way of transaction referred to in clause (xiiib) of sec 47, then the cost of acquisition of the capital asset shall be deemed to be the cost for the previous owner and the assessee.

Section 2(42A)- Period of holding
For determining the nature of capital gains in the hands of the LLP, the period for which the asset was held by the previous owner (company) shall also be considered.

Sec 47A-Withdrawal of sec 47 exemption in certain cases

When the above conditions in sec 47(xiiib) are not complied with, the amount of capital gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under sec 45 by virtue of conditions laid down in the said proviso shall be deemed to be the capital gains chargeable to tax of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with.

No requirement of MAT provisions
In case of conversion of a Company into an LLP under the LLP Act 2008, the provision of sec 115JAA shall not apply to the successor LLP. Therefore, the MAT credit available in the hands of the company shall not be allowed to the LLP.

Audit is not mandatory
The company must mandatorily get their accounts audited whereas an LLP gets its books audited only if the turnover in a financial year exceeds Rs 40 lakhs or the capital contribution exceeds Rs 25 lakhs.

Sec 72A- Set Off and Carry forward of losses
Where there has been a re-organization of business, whereby, a company is succeeded by a LLP fulfilling the conditions laid down in sec 47(xiiib), then notwithstanding anything in any other provision of this Act, the Accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor LLP of the previous year in which conversion was affected and other provisions of the IT Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
However, if any of the six conditions (proviso to sec47are not complied with, the set off of loss or allowance of depreciation made in any previous year by the successor LLP, shall be deemed to be the income of the LLP chargeable to tax in the year in which such conditions are not complied with.
Key Notes:
1. “Accumulated loss” means so much of the loss of the company before conversion into LLP, under the head “Profit and Gains of business or profession” (not speculation business loss) which such predecessor company would have been entitled to carry forward and set off under sec 72 if the conversion had not taken place.
2. “Unabsorbed depreciation” means so much of the allowance for depreciation of the company before conversion into an LLP, which remains to be allowed and which would have been allowed to the company, under the provision of this Act, if the conversion had not taken place.
Example 1
Conversion of company to LLP takes place on 1-4-2019 and the company has carried forward losses and depreciation as under:
Business loss of Assessment year 2014-15 Rs 400,000
Depreciation of Assessment year 2014-15 Rs 600,000
Now, the loss of Rs 400,000 and Rs600,000 is deemed as loss and depreciation of LLP of Previous year 31-3-2020. The loss can be carried forward up to Assessment year 2028-29. The depreciation can be carried forward indefinitely.

Example 2
Company XYZ Pvt Ltd converted to XYZ LLP on 1-4-2019.
Before Conversion

Balance Sheet of XYZ Pvt Ltd
As on 31-3-2019

Company transfers all the liabilities to the LLP at their book value on 1-4-2019.

After Conversion

Balance Sheet of XYZ LLP

Analysis
1. There will be no capital gains in the hands of the company on transfer of assets to the LLP. Section 50C is not attracted on transfer of land since capital gains on sale of land are exempt under sec 47(xiiib). Even if the circle rate of land is Rs 75 lakhs, no capital gains shall be taxable.
2. There will be no capital gains in the hands of the shareholders when they receive capital in the LLP in lieu of their shares in the company. The transfer is exempt under sec 47(xiiib)
3. To satisfy the conditions of section 47(xiiib):
a. All assets and liabilities of the company should be transferred to LLP
b. (i) All the shareholders (equity and preference) become the partners of the LLP
(ii)Their capital contribution should be in the same proportion as their shareholding (equity as well as preference) in the company on date of conversion.

(iii) The partners profit sharing in the LLP should be in the same proportion as their shareholding in the Company. Therefore, the profit-sharing ratio of the partners should be:

c. Partners do not receive any consideration except share of profit in the LLP and capital contribution in LLP
d. The profit-sharing ratio of X, Y, Z, U & V in LLP shall not fall below 50% up to 31-03-2024
e. The sale of the company in FY 31-03-2019, FY 31-03-2018 and FY 31-03-2017 should not exceed Rs 60,00,000
f. The reserve balance appearing in the company books shall be transferred as reserve and surplus in the LLP books. Out of the Reserves and Surplus of Rs 8,00,000, nothing should be paid to the partners X, Y, Z, U & V up to 31-03-2022.
g. The total value of assets appearing in the books of the company in any of three previous years preceding the previous year in which the conversion takes place does not exceed Rs five crores.

Example 3
Company PQ Pvt Ltd converted to PQ LLP on 1-4-2019.
Before Conversion

Balance Sheet of PQ Pvt Ltd
As on 31-3-19

Company transfers all the assets and liabilities to the LLP at the below value on 1-4-2019.

After Conversion Balance Sheet of PQ LLP

Analysis
1. The assets are transferred at the market value and the profit on sale of assets of Rs 94,00,000 is transferred to Reserves and Surplus by the company.
2. PGBP of Rs1,00,000 on sale of stock in trade is taxable in hands of the company.
3. The exemption under sec 47(xiiib) shall not be available to PQ Pvt Ltd since the total value of assets appearing in the books of the company before conversion takes place exceeds Rs five crores.
4. There will be capital gains in the hands of the company on transfer of assets to the LLP. Section 50C is attracted on transfer of land. The stamp duty value of the land shall be considered for calculating capital gains.
5. PQ Pvt Ltd shall be liable to pay the Capital Gain Tax. The transfer of capital asset is to be done at the market rate and accordingly capital gain is to be calculated. The private limited company which is a transferor must pay the capital gain tax on such transfer.
6. The shares in the hands of the shareholders of the PQ private limited will be converted as capital of the LLP. The shareholder will surrender the shares and acquire capital in the LLP. The shareholder must pay tax on the capital gain arising to him from such transfer. The Value of capital is the consideration for the transfer of shares. The cost of share is the amount paid by such share holder at the time of purchase of shares.
7. In the books of the LLP, the assets and liabilities will appear in the value at which it was transferred at the time of conversion.

Summary
1. All assets and liabilities of the company should be transferred to LLP. It is not necessary that transfer should take place at book value
2. If section 47(xiiib) exemption is availed, all the capital gains, whether short term or long term, are exempt. Even the STCG on transfer of depreciable asset under section 50 are exempt.
3. All the shareholders should be partners in LLP. Exemption is not available even if a single equity or preference shareholder does not become a partner of LLP
4. Profit on sale of Stock-in-trade shall be taxable in hands of company if it is sold at higher than its cost price.
5. New Partner may be added in LLP. The only condition is that the aggregate profit-sharing ratio of the shareholders in the LLP should not fall below 50% at any time during 5 years after conversion.

Disclaimer:“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”