Conversion of Firm into LLP - Analysis and Tax implications

Tax Analysis: Conversion of Firm into LLP:

Tax implications of conversion:

CBDT Circular 5/2010 dated 3 June 2010:

5.6 As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of those condition, the provisions of section 45 shall apply.

No specific amendment in Section 47 of the Act for conversion of firm.

Process of statutory vesting akin to conversion of firm to company under part IX of the Companies Act.

Conversion of Firm into LLP (Chapter X read with Schedule II)

 Pre-condition of conversion:

Firm as defined in Indian Partnership Act may convert

Partners of LLP into which the firm is to be converted should comprise of all the partners of the firm and no one else.

Judicial views on conversion of firm to company under Part IX

• No ‘transfer’ by firm in absence of simultaneous existence of two parties
• No consideration received by the firm or partners as a result of transfer.
• Principle continues to govern conversion of LLP; recognized in CBDT circular
• Section 45(4) of IT Act not applicable to conversion; vesting of property different from ‘transfer by way of distribution’ in s.45(4) of the IT Act.