Conversion of partnership firm into LLP is exempt from capital gain?

Opinion: 

This is one of the most common question by the person having partnership firm who wish to convert it into LLP.

LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation 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 these conditions, the provision of capital gain will apply.

Capital Gain on conversion of Company into LLP:

As per Section 47 of the Income Tax Act, 1961 any transaction concerning transfer of a capital asset or intangible asset by a Private Company or unlisted Public Company to a Limited Liability Partnership as a result of conversion of the company into a Limited Liability Partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 would be exempted from the provision of Capital Gain Tax, only if the following conditions are satisfied.

All the assets and liabilities of the Company immediately before the conversion shall become the assets and liabilities of the limited liability partnership;

All the shareholders of the Company immediately before the conversion shall become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in LLP should remain in the same proportion as their shareholding in the company on the date of conversion;

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 limited liability partnership;

The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

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;

The total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees and

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.

However in case of non compliance of any of the conditions provided as aforesaid, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains chargeable to tax of the successor limited liability partnership for the previous year in which the requirements of the said proviso are not complied with.

Carry forward and set off of accumulated loss and unabsorbed depreciation allowance, on conversion into LLP:

In case of reorganization of business by way of conversion of a Private Company or unlisted Public Company to Limited Liability Partnership, which fulfills the conditions laid down in the proviso to clause (xiiib) of section 47 of the Income Tax Act 1961, 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 limited liability partnership for the purpose of the previous year in which business reorganization was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.