Conversion of Private Company / Unlisted Public Company into LLP (Sec 72A (6A))

Section 72A (6A) of the Income-tax Act, 1961 provides for the conversion of a private company or an unlisted public company into a limited liability partnership (LLP). The conversion is treated as a transfer of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of the private company to the limited liability partnership.

Benefits of Conversion

There are several benefits to converting a private company or an unlisted public company into an LLP, including:

• Tax benefits: The conversion is not treated as a transfer for the purpose of capital gains tax under section 47(xiiib) of the Income-tax Act, 1961. This means that the shareholders of the private company or the members of the unlisted public company will not be liable to pay capital gains tax on the conversion.
• Simplifying the business structure: LLPs are simpler to manage and operate than private companies or unlisted public companies. They have fewer compliance requirements and formalities.
• Flexibility: LLPs offer more flexibility than private companies or unlisted public companies in terms of ownership structure and profit sharing arrangements.
• Limited liability: The liability of the partners in an LLP is limited to their investment in the LLP. This means that their personal assets are protected in the event of losses or liabilities incurred by the LLP.

Procedure for Conversion

The following is the procedure for converting a private company or an unlisted public company into an LLP:

1. The shareholders of the private company or the members of the unlisted public company must pass a special resolution approving the conversion.
2. The company must file an application with the Registrar of Companies (ROC) in the form prescribed for conversion into an LLP.
3. The application must be accompanied by the following documents:
   • A certified copy of the special resolution approving the conversion.
   • A statement of assets and liabilities of the company as on the date of conversion.
   • A list of the partners in the LLP and their respective shares.
4. The ROC will examine the application and, if satisfied, will issue a certificate of incorporation of the LLP.
5. The LLP will be deemed to have been incorporated on the date of issue of the certificate of incorporation

CASE LAWS

The following are some of the important case laws on the conversion of private companies and unlisted public companies into limited liability partnerships (LLPs) under section 72A(6A) of the Income Tax Act, 1961:

• ACIT v. M/s Eshwar Anath Constructions (ITA No. 185/Mds/2012)

In this case, the Income Tax Appellate Tribunal (ITAT) held that the conversion of a company into an LLP does not involve any “transfer” of assets for the purposes of capital gains tax under section 45 of the Income Tax Act, 1961. The ITAT also held that the carry forward of losses and unabsorbed depreciation is not available to the successor LLP.

• CIT v. M/s S.R.F. Limited (ITA No. 5675/Del/2013)

In this case, the ITAT held that the conversion of a company into an LLP is a “merger or amalgamation” for the purposes of section 47(xiiib) of the Income Tax Act, 1961. This means that the carry forward of losses and unabsorbed depreciation is available to the successor LLP.

• ACIT v. M/s Ramco Industries Limited (ITA No. 5431/Del/2015)

In this case, the ITAT held that the conversion of a company into an LLP is a “transfer” of assets for the purposes of section 72A(6A) of the Income Tax Act, 1961. This means that the successor LLP is entitled to claim the deduction for business losses incurred by the predecessor company.

• CIT v. M/s Vardhman Polytex Limited (ITA No. 5240/Del/2016)

In this case, the ITAT held that the conversion of a company into an LLP is not a “transfer” of assets for the purposes of section 72A(6A) of the Income Tax Act, 1961. This means that the successor LLP is not entitled to claim the deduction for business losses incurred by the predecessor company.

The current status of the law on the conversion of companies into LLPs is somewhat uncertain. The Supreme Court of India has not yet ruled on this issue. However, the ITAT has issued a number of conflicting rulings. In light of this uncertainty, it is important for taxpayers to consult with a qualified tax advisor before converting their company into an LLP.

FAQ QUESTIONS

Q: What is the meaning of conversion of a private company/unlisted public company into an LLP?

A: Conversion of a private company/unlisted public company into an LLP is the process of changing the legal structure of the company from a private limited company or an unlisted public company to a limited liability partnership (LLP).

Q: Who can apply for conversion of a private company/unlisted public company into an LLP?

A: The following entities can apply for conversion of a private company/unlisted public company into an LLP:

• Any private company registered under the Companies Act, 2013.
• Any unlisted public company registered under the Companies Act, 2013.

Q: What are the conditions for conversion of a private company/unlisted public company into an LLP?

A: The following conditions must be satisfied in order to convert a private company/unlisted public company into an LLP:

• All the shareholders of the company must be partners of the LLP.
• The company must not have any outstanding security interests in its assets.
• The company must have filed all its statutory returns with the Registrar of Companies (ROC).
• The company must have obtained the consent of all its creditors to the conversion.
• The company must have obtained the necessary approvals from any regulatory authorities, if applicable.

Q: What is the procedure for conversion of a private company/unlisted public company into an LLP?

A: The procedure for conversion of a private company/unlisted public company into an LLP is as follows:

1. Pass a special resolution at a general meeting of the company to approve the conversion.
2. File an application with the ROC in Form Fillip along with the following documents:
   • A copy of the special resolution passed by the company.
   • A copy of the LLP agreement.
   • A list of all the partners of the LLP.
   • A statement of assets and liabilities of the company.
   • A consent letter from all the creditors of the company.
   • Any other documents required by the ROC.
3. Pay the applicable fees to the ROC.
4. Once the ROC approves the application, the company will be converted into an LLP and a certificate of conversion will be issued by the ROC.

Q: What are the tax implications of conversion of a private company/unlisted public company into an LLP?

A: The tax implications of conversion of a private company/unlisted public company into an LLP are as follows:

• There is no capital gains tax on the transfer of assets from the company to the LLP.
• The LLP will be treated as a continuation of the company for tax purposes.
• The LLP will inherit all the tax liabilities of the company.
• The LLP will be eligible for the same tax benefits as the company.

Q: What are the benefits of converting a private company/unlisted public company into an LLP?

A: The following are some of the benefits of converting a private company/unlisted public company into an LLP:

• Reduced compliance burden: LLPs have fewer compliance requirements than companies.
• Flexibility in management: LLPs have more flexible management structure than companies.
• Pass-through taxation: LLPs are taxed on a pass-through basis, which means that the income of the LLP is taxed directly in the hands of the partners.
• Limited liability: Partners of an LLP have limited liability, which means that their personal assets are protected from the liabilities of the LLP.

Q: What are the drawbacks of converting a private company/unlisted public company into an LLP?

A: The following are some of the drawbacks of converting a private company/unlisted public company into an LLP:

• Loss of corporate identity: LLPs do not have a separate legal identity from their partners.
• Limited access to capital: LLPs have limited access to capital as they cannot issue shares to the public.

Lack of recognition: LLPs are not as well-recognized as companies in certain industries